Cellular technology pioneers are being marginalized with diminished
financial returns on their research and development investments while leaders
in devices and “over-the-top” services are flourishing. Calls to weaken the
basis of licensing standard-essential technologies are misplaced. There are no
indications of profiteering or harm caused by licensors. All evidence is to the
contrary.
Innovations in standards including technologies based on
standard-essential patents can be exploited in product and service
implementations by anyone. Undermining the value of SEPs will choke off vital
R&D investments along the path to “5G” and cause other harmful disruptions
to the mobile ecosystem, including reduced contributions to or withdrawals from
standard setting.
The innovation game
As I noted here a couple of months ago in a cellular industry trade publication I also write for, innovation in cellular and other supporting technologies as well as
in applications will be able to sustain the rate of smartphone improvements.
New technologies can also advance the “internet of things,” automotive and other
capabilities. And the financial rewards could be substantial. A European Commission study has identified a potential annual benefit to its member states
of 113 billion euro ($124 billion) annually as early as 2025, from deploying
5G, with trickle-down benefits from 5G investment totaling as much as 141
billion euro.
However, technology developments and
infrastructure demand large investments globally. According to a study report on the “mobile
revolution,” by the Boston Consulting Group in 2015, “to reap the economic benefit
of [5G] networks and beyond, mobile players will need to invest approximately
$4 trillion in R&D and capital expenditures by 2020.” BCG estimates mobile
players invested an aggregate of $1.8 trillion in capex and R&D from 2009
through 2013, and are expected to invest approximately $4 trillion between 2014
and 2020. While the bulk of this is capex by mobile operators, BCG also
estimates R&D technologies continue to accelerate, reaching almost $100
billion annually, and growing at a rate of 9% year-over-year since 2009.
R&D investments by their very nature can be very risky:
consequently, these rely on the possibility that adequate revenues might be
earned to compensate for these risks and the long time it takes to generate
these revenues. With short device lifecycles, returns on product R&D are relatively
quick and can be reasonably certain for market leaders with new models annually
in popular lines such as iPhone and Galaxy, notwithstanding the occasional
disaster like the incendiary Galaxy Note 7. Returns are significantly slower
and less certain in network equipment product developments, for example, with
big bets on once-per-decade generational changes including GSM, WCDMA/HSPA, LTE
and upcoming 5G.
In the case of the fundamental
technologies that contribute to these standards, lead times before any revenues
can be generated are even longer and risks are much greater. For example, less than 17% of contributions to Third
Generation Partnership Project standards have been approved for inclusion
in the standards. Many contributions are based on and preceded by many years of
R&D by individual companies before a technology is presented to any
standard-setting organization working group. Nevertheless, for those
technologies that are adopted the entire ecosystem including chip, device and
network equipment manufacturers, as well as network operators and OTT service
providers benefit from improved capabilities. In cellular, these have included
thousand-fold increases in data rates over little more than a decade, much
reduced latencies, higher network availability, high-definition voice, plunging
costs per gigabyte for operators and users, and so on.
Ecosystem disruptions
However, there is significant and increasing divergence between those who have largely borne the costs of developing the standard-essential technologies and those who benefit most financially from exploiting them. Whereas most of the developers of the standard-essential technology employed by all implementers used to be vertically integrated with mobile phone manufacturing, those companies including Qualcomm (2000), Alcatel (2005), Siemens (2005), Motorola (2012), Ericsson (2011) and Nokia (2014) have sold off their handset businesses. The sellers, including those that have merged, have continued with sales of network equipment or chips and patent licensing. Handset brand names Motorola and Alcatel have lived on under licensing arrangements with Lenovo and TCL, respectively.
Handset OEM market shares have therefore changed dramatically.
And many new entrants have appeared.
Meanwhile, the mobile devices market
has expanded enormously along with demand growth for data services. These are
the largest money makers in the mobile ecosystem, while use of OTT services including
Facebook, YouTube and Netflix has surged on mobile devices, and as mobile advertising revenues have grown
to nearly half of total internet advertising revenues.
However, there is significant and increasing divergence between those who have largely borne the costs of developing the standard-essential technologies and those who benefit most financially from exploiting them. Whereas most of the developers of the standard-essential technology employed by all implementers used to be vertically integrated with mobile phone manufacturing, those companies including Qualcomm (2000), Alcatel (2005), Siemens (2005), Motorola (2012), Ericsson (2011) and Nokia (2014) have sold off their handset businesses. The sellers, including those that have merged, have continued with sales of network equipment or chips and patent licensing. Handset brand names Motorola and Alcatel have lived on under licensing arrangements with Lenovo and TCL, respectively.
Handset OEM market shares have therefore changed dramatically.
And many new entrants have appeared.
Meanwhile, the mobile devices market
has expanded enormously along with demand growth for data services. These are
the largest money makers in the mobile ecosystem, while use of OTT services including
Facebook, YouTube and Netflix has surged on mobile devices, and as mobile advertising revenues have grown
to nearly half of total internet advertising revenues.
Collecting the rents
Revenues and profits in smartphones
are much larger than those generated by the leading five cellular SEP licensors
that derive most of their revenues from sales of network equipment or chips.
The difference is widening with a lackluster market in network equipment as LTE
orders taper off. For example, Ericsson recently issued a profit warning and its interim CEO Jan Frykhammar forecast the total mobile
infrastructure (RAN) market is set to fall by between 10% and 15% this year,
and by between 2% and 6% in 2017.
Economic rents, which are profits
exceeding the cost of capital, are increasingly accruing to leading device OEMs
and OTT service providers in the mobile ecosystem. Largely from exceptional
commercial success with dominance in mobile, Apple with iPhone and Alphabet
with Google’s Android have become the world’s two most valuable companies. Sales of iPhones
accounted for 60% of Apple’s revenues last quarter. Its service revenues in
mobile are in addition. A news release reporting Apple’s fiscal fourth quarter
earnings quoted its CEO, Tim Cook, as saying “we’re
thrilled with … the incredible momentum of our Services business, where revenue
grew 24% to set another all-time record.” Apple’s services revenues (including
Apple Pay, Apple Music, iTunes and its App Store) generated $24 billion
revenues in the year to September 2016. This substantially exceeds all cellular
SEP licensing fees paid, as indicated in the next section, even though Apple’s
user base from which it derives these revenues is only around 1 billion
devices, in comparison to 7 billion cellular devices connected worldwide. With
Android in 80% of smartphones, Google also profits most significantly from
mobile, also including apps, search and advertising. On a conference call with
investors this summer, Google CEO Sundar Pichai said “mobile is
the engine that drives us.”
Paying their dues
Companies that develop SEP technologies are highly dependent on
licensing revenues as well as their sales of network equipment or chips. SEP
licensing brings compensation from those who implement the standard-essential
technologies in their products to those who develop those technologies. The
widening disparity in revenues and profits between the smartphone device market
and those who significantly rely on cellular SEP licensing revenues limits the
ability of the latter to invest in technology development for standardization
and implementation ahead of the anticipated 5G launches from around 2020.
Cellular SEP licensing revenues at no more than around $20 billion are modest in comparison to and are being significantly outpaced by growth in other ecosystem revenues and costs. There are around $1 trillion dollars in operator service revenues. Total handset revenues have increased from $378 billion in 2013, to $439 billion in 2015, according to IDC.
The five leading mobile SEP licensors
that contributed around half the patents declared essential to 3GPP standards
collectively generated approximately $11 billion per annum in licensing fees
between 2013 and 2015. This accounts for more than half the $20 total billion (at most) paid to all licensors. Licensing fees have declined slightly as a percentage of handset
revenues.
Unholy intervention
Despite the stellar financial performance of the leading device OEMs and OTT players, there is mounting pressure to change consensus-based and established SEP-licensing practices, including by government intervention, which would further undermine the ability of cellular technology vendors to make an adequate return on their standard-essential technology investments through licensing. Measures such as making injunctions more difficult to obtain, enforcing licensing or calculating royalties at the chip level, as advocated by the so-called Fair Standards Alliance and as already implemented in the Institute of Electrical and Electronics Engineers new patent policy are all undermining SEP technology developers. Some antitrust authorities, including the U.S. Department of Justice, support such changes.
R&D investments and contributions to SSOs will be significantly reduced by measures to weaken SEP licensing. For example, proprietary and 3GPP-based technologies are vying with those based on IEEE standards for short-range communications in emerging next-generation IoT and automotive vehicle-to-x applications. Technology developers will shy away from participating in standard setting or investing at all where they cannot make sufficient returns on their investments.
The system of Fair Reasonable and Non-Discriminatory licensing in standard setting has worked extremely well with phenomenal innovation, extensive new market entry and significantly improving quality adjusted prices. There is no evidence of harm to competition or consumers. In the absence of that there is no basis to undermine the position of licensors in FRAND licensing, and particularly no justification for government agency interventions to force such change.
I originally published this article, here, in cellular industry trade publication RCR Wireless on November 16, 2016.
Cellular SEP licensing revenues at no more than around $20 billion are modest in comparison to and are being significantly outpaced by growth in other ecosystem revenues and costs. There are around $1 trillion dollars in operator service revenues. Total handset revenues have increased from $378 billion in 2013, to $439 billion in 2015, according to IDC.
The five leading mobile SEP licensors
that contributed around half the patents declared essential to 3GPP standards
collectively generated approximately $11 billion per annum in licensing fees
between 2013 and 2015. This accounts for more than half the $20 total billion (at most) paid to all licensors. Licensing fees have declined slightly as a percentage of handset
revenues.
Despite the stellar financial performance of the leading device OEMs and OTT players, there is mounting pressure to change consensus-based and established SEP-licensing practices, including by government intervention, which would further undermine the ability of cellular technology vendors to make an adequate return on their standard-essential technology investments through licensing. Measures such as making injunctions more difficult to obtain, enforcing licensing or calculating royalties at the chip level, as advocated by the so-called Fair Standards Alliance and as already implemented in the Institute of Electrical and Electronics Engineers new patent policy are all undermining SEP technology developers. Some antitrust authorities, including the U.S. Department of Justice, support such changes.
R&D investments and contributions to SSOs will be significantly reduced by measures to weaken SEP licensing. For example, proprietary and 3GPP-based technologies are vying with those based on IEEE standards for short-range communications in emerging next-generation IoT and automotive vehicle-to-x applications. Technology developers will shy away from participating in standard setting or investing at all where they cannot make sufficient returns on their investments.
The system of Fair Reasonable and Non-Discriminatory licensing in standard setting has worked extremely well with phenomenal innovation, extensive new market entry and significantly improving quality adjusted prices. There is no evidence of harm to competition or consumers. In the absence of that there is no basis to undermine the position of licensors in FRAND licensing, and particularly no justification for government agency interventions to force such change.
I originally published this article, here, in cellular industry trade publication RCR Wireless on November 16, 2016.
No comments:
Post a Comment