Thursday 29 December 2016

The Internet of Things: U.S. Copyright Office Releases Report on Software Enabled Products

In December of 2016, the U.S. Copyright Office released a 94-page Report on Software Enabled Consumer Products [Report].  The Report is in response to a request for analysis from members of the Senate Judiciary Committee concerning current copyright law and the ubiquitous nature of software.  Notably, the U.S. Copyright Office believes that, at least in the context of copyright law, that there is not a need for new legislation.  The U.S. Copyright Office appears to believe that current flexibilities in the law can accommodate technological change.  In particular, the Report, in part, “examines how software-enabled consumer products can be resold, repaired or improved, researched for security flaws, or made to interoperate with other products or software.”  The Report concludes that:

The Office’s study did not reveal evidence that consumers have been prevented from reselling or otherwise disposing of their software-enabled consumer products.  The Office does not see a current need for legislative change relating to resale, so long as courts properly apply the first-sale right embodied in section 109 of the Copyright Act.  

The Office recognizes the value of allowing the public to freely repair defective consumer products and tinker with products to improve their function.  But establishing a new statutory framework explicitly permitting repair and tinkering does not appear to be necessary at this time.  Properly understood, existing copyright law doctrines—including the idea/expression dichotomy, fair use, merger, scènes à faire, and section 117—should continue to facilitate these types of activities.

Similarly, the Office recognizes the value of allowing the public to engage in good-faith security research of software-enabled consumer products.  Again, however, statutory changes (at least outside the context of the anticircumvention provisions in section 1201) do not appear to be necessary at present.  Existing copyright law doctrines should protect this legitimate activity.

The Office recognizes the significance of preserving the ability to develop products and services that can interoperate with software-enabled consumer products, and the related goal of preserving competition in the marketplace.  While a new statutory framework might help reduce some uncertainty in this area, such action does not appear to be necessary at this time.  Again, faithful application of existing copyright law doctrines can preserve the twin principles of interoperability and competition.

Interestingly, the Copyright Office reviewed licensing practices, particularly resale, and concluded that:

The Office’s study found that, in certain circumstances, such as resale, there is only limited evidence regarding real-world restrictions.  Accordingly, the Office believes that the question of ownership versus licensing, while very important, is one that can be resolved with the proper application of existing case law. 

The Copyright Office further stated that in the context of resale:

Some commenters made the claim that—even if manufacturers of software-enabled products do not currently impose restrictions on resale as part of software licensing agreements—they may do so in the future in an attempt to eliminate secondary markets for software-enabled products.  The Copyright Office agrees that if license agreements in the future interfere with consumers’ ability to resell or otherwise dispose of their software-enabled products, such a practice would be a concern worthy of legislative attention.  One possible solution is YODA, mentioned above, a bill that several commenters supported as a good starting point to resolve concerns regarding the resale or transfer of software-enabled consumer products.  At the same time, there may be reasons to think that this issue is unlikely to arise, including that market forces—such as the efforts of consumer advocacy groups to shed light on abusive practices—are a barrier to engaging in behavior of this sort.

Facebook to Scoop (?) New Ideas in Partnership with Leading Research Universities

In an intriguing post, co-Blogger Neil Wilkof recently discussed how essentially elite firms may be beating the competition.  In a recent article on Reuters titled “Facebook Forges Agreement with 17 Universities to Streamline Research,” Dustin Volz discusses how Facebook has entered into partnerships (which includes unstated funding) with 17 major research institutions, including Harvard, Stanford and MIT, for the opportunity to work together on forthcoming research.  The article is a little light on details concerning the agreements.  As I described Steve Blank's discussion in an earlier post, some firms have placed outposts in technology innovation hotbeds to track new cutting edge developments and companies.  For sure, the nimble survive and those who are not do not—see Kodak.  However, Facebook may be strategically moving one step forward by starting at the source of some of the new major developments.  This arguably gives Facebook the “first” opportunity to scoop up new research and ideas as they develop in leading research universities.  Is this a good thing or a bad thing for innovation and importantly competition? 

The Reuters article states that:

The agreement between Facebook's Building 8 and the universities comes as the social media company seeks to find new revenue streams in virtual reality and artificial intelligence, after the company signaled last month it had begun to hit some advertising growth limits on its network of 1.8 billion monthly active users.

Research partnerships between universities and companies typically take nine to 12 months to facilitate, but the new agreement will allow for collaboration on new ideas within weeks, said Regina Dugan, who joined the company in April to run the new Building 8 unit.

Dugan did not provide specifics to explain how the partnership will promote a quicker pace of research, but traditional negotiations between universities and companies can often take several months.

Friday 23 December 2016

Association of University Technology Managers Releases FY 2015 Highlights Report

The Association of University Technology Managers (AUTM) has released a Highlights report concerning its FY2015 annual survey.  The results of the survey are promising.  For example, there was a 15% increase from the prior year of licenses and options executed.  An almost 15% increase in new patent applications filed.  Over an 11% increase in the number of start-ups created.  And, a 5% increase in both research expenditures and invention disclosures.  I am not too excited about using patent applications and grants as a metric for technology transfer success, but the licenses, options, number of startups and research expenditures is positive.  Moreover, the supposed increase in using consultancy agreements and licensed know-how divorced from patents by technology transfer offices may point to even more actual technology transfer happening from university to the private sector.  (I am assuming the reported licenses and options are associated with patents.) 

The Highlights further states that 879 new products have been introduced to the market and $28 billion “in net sales from new products” has been realized.  Interestingly, 785 of the 1,012 startups were formed in the research institution's home state.  Importantly, $2.5 billion in licensing income was collected which is 28.4% more than the prior year.  It would be interesting to see that $2.5 billion number broken down by patent and product/service (for a critique of using revenue generated as a metric of technology transfer success, see here).  AUTM notes that 3.8 million jobs have been created as well as 153 new drugs and vaccines on the market “because of the Bayh-Dole Act.”  There was about a 65% response rate to the survey—202 of 308 institutions participated. 

Thursday 22 December 2016

Call for IP valuation experts

Jackie McGuire, at Coller IP, has informed us that she and Martin Brassell, at Inngot, are undertaking a study of the IP valuation market for the UK Intellectual Property Office, including the structure of the IP valuation market, motivations and barriers to engagement, and best practice in different contexts.

Jackie notes that prior studies for the Intellectual Property Office have established that the majority of UK business investment, and business value, now lies in intangible rather than fixed, tangible assets. Despite this, companies do not always value their IP or take steps to protect the value that it underpins. The study builds on the report from the European Commission Expert Working Group on IP Valuation and Banking on IP. The results will be used to inform UK policy and to develop solutions to promote the wider adoption of IP and intangible asset valuation.

All discussions on this study are using the Chatham House Rule. They will use the information received, and with permission, reference the company’s participation in a published report. While they would welcome the opportunity to use specific case studies, they will not link the personal identity of those interviewed or that of the company with specific comments or findings, without prior approval.

Please contact or by 15th January 2017.

Monday 19 December 2016

"The winner takes it all" (or at least most), productivity and frontier companies: how does IP fit in?

The Economist magazine recently discussed (“The great divergence’, November 12th) an (unnamed) research report carried out by three researchers at OECD (Dan Andrews, Chiara Criscuolo and Peter Gal), which suggests that the Schumpeterian notion of “creative destruction” may be stuck in neutral. Leading companies seem more and more to be enjoying a continuing lead in their industries, with less and less challenges from scrappy newcomers.

In particular, the report found a major distinction in productivity between the top 5% companies surveyed. These so-called “frontier” companies show productivity gains of 2.6% per year, while the remaining 95% have managed only 0.6% productivity gains. The difference in productivity is even more stark when comes to services: 3.6% for the frontier companies as compared to only 0.4% for the stragglers. Two major themes relating to IP emerge from The Economist article: (i) the role of patents and know-how; and (ii) the transmission mechanism for innovation.

The role of patents and know-how—Regarding patents, the report states that frontier companies “[u]nsurprisingly …are ahead of the pack in technological terms, and they make much intensive use of patents.” No more explanation is provided, which is a shame, because the statement as provided is not entirely clear. How does one measure “intensive use of patents”; is it a quantitative or qualitative analysis? Is it really the case that a major indicium that distinguishes between the frontier companies and the laggards is patent activity? One need only think of the large patent portfolios that were sold several years ago by failing companies such as Kodak and Nortel. It is a pity that the article does not elaborate.

Of equal interest is the role of know-how. The article writes that “…frontier firms (the 5%) have each discovered their own secret sauce”, going on to describe the know-how that has enabled companies such as 3G Capital (a successful, Brazilian-based private equity firm), Amazon, and BMW to dominate. The linkages between the patent position and the development of special know-how tailored to each of these companies’ activities suggest that the two work in tandem.

If so, even the most sophisticated patent analytics may be missing a crucial component in seeking to explain the success of technology-based companies. What may be needed is a metric measuring the contribution of know-how, which can then be applied together with patent analytics to provide a more robust picture of the IP position of these companies, and whether any generalizable insights can be obtained.

The transmission mechanism for innovation-- Here, the article focuses on how technology spreads horizontally between companies that are members of the top 5% as well as vertically within a given economy. The suggestion is made that with respect to frontier companies—
“…technological innovations from the frontier are spreading more rapidly across countries than they are within them. The gap between an elite British firm and an elite Chinese firm is narrowing even as the gap between an elite British firm and its laggardly compatriots is expanding.”
The upshot is that—
“…technological diffusion has stalled: cutting-edge ideas are not spreading through the economy in the way that they used to, leaving productivity-improving ideas stuck at the frontier.”
The result is what has been termed a “winner takes all (or at least most)” position in the relevant market. Schumpeterian notions of “creative destruction” are less likely to apply because not only do the frontier companies better exploit their patent/know-how mix, but they are able to attract the most talented persons in their industry. In such a scenario, continuing incumbency as an industry leader becomes more of the norm.

The causal direction of this relationship is not entirely clear, i.e., do more talented people lead to a continued stream of better patents and know-how, or is it the reverse, or are they merely coincident factors in connection with productivity and market dominance? Of perhaps greater concern is the suggestion that useful IP, particularly patents, will be increasingly the purview of only the top layer of companies, with less and less vertical transmission within the relevant industry. When leavened together with unique know-how, this combination gives rise to the increasingly expressed concern that IP, particularly patents, are more an instrument for maintaining market power than a facilitator of broad-based innovation.

Thursday 8 December 2016

China Sends a Message: Invest in Me

In recent posts (here and here), I have discussed China’s increased protection of intellectual property rights.  Recently, Ian Harvey, the chair of the IP Center Advisory Board at Tsinghua University x Lab in Beijing, sent me his excellent paper on China’s IP law.  Notably, his paper outlines how China’s enforcement of intellectual property has improved and does not deserve its past reputation.  Powerpoint slides relating to his paper are available, here

Recently, China’s Supreme People’s Court issued a ruling recognizing Michael Jordan’s rights to his name in Chinese characters.  This decision sends a powerful message both in China and outside China that intellectual property rights will be respected.  Importantly, this is the enforcement of IP rights that were arguably not secured by Michael Jordan in China and there are strong reliance interests by the Chinese company.  I believe the symbolic importance of this decision cannot be overstated.  Interestingly, there are more reports concerning venture capital moving from the United States to Europe and China because of recent developments in U.S. intellectual property law, such as the Alice decision. What will be Donald Trump's reaction?  For more on the decision, please see the New York Times article, Michael Jordan Owns Right to His Name in Chinese Characters, Too, Court Rules

EU Competition Commissioner Vestager is Wrong to Claim Smartphone Royalties are Excessive and Unjustified

I would like to introduce you to guest blogger Trevor Soames, a leading Brussels based antitrust lawyer with extensive experience of major high tech and IP-related investigations and litigation, having represented several major corporations in various cases over the years including Qualcomm, Nokia, Samsung and Microsoft.

The Competition Directorate of the European Commission (DG Comp) has, over the years, become increasingly interested and active in the field of SEPs. 

In a series of cases it has investigated a variety of potential competition law issues arising from the FRAND commitment, including allegations of patent ambush in Rambus, the transfer of FRAND commitments in IPCom, the risk of supposed “hold up” resulting from SEP holders seeking injunctive relief in Samsung, and in Motorola, here, and here. In addition, the European Commission investigated Qualcomm between 2005 and 2009 for, inter alia, alleged excessive pricing regarding its FRAND-committed SEPs. However, the case was terminated by the Commission when the four outstanding complaints were voluntarily withdrawn.

On 21 November 2016, the European Competition Commissioner, Margarethe Vestager, delivered a speech which indicated that the she intended to use the competition law tools at her disposal to deal more aggressively with excessive pricing cases.  She claimed smartphone royalties could be unjustifaibly high. I have already blogged, here, about her use of a defective aggregate royalty figure in support of her claims in this speech.

The following article by written by Trevor, and based on what he posted, here, comments generally on her speech, the policy issues that it raises and the wrongful identification of SEPs as being a supposed example of excessive pricing: 

"The Opening of the Door: is Excessive Pricing Control under Article 102 TFEU coming back into vogue

Commentary on Commissioner Vestager’s speech
Trevor Soames

Commissioner Vestager’s speech deliveredat Chillin’ Competition on 21 November 2016 entitled “Protecting consumers from exploitation,” spent much time discussing the application of Article 102 TFEU to excessive pricing.  A video of the speech is available on the Chillin’ Competition website, here, together with the Q&A in which the Commissioner said that she is taking a door which was almost closed and opening it a little.  The Q&A is at 14.50, my comment and question at 16.30 and the Commissioner’s response thereafter.

This short note provides a brief commentary on the subject of excessive pricing, European Commission enforcement policy, the examples cited by the Commissioner and what all this may mean for the application of Article 102 TFEU.

Excessive pricing control under Article 102 TFEU has been a fraught subject ever since the United Brands judgment of the CJEU. For our US cousins, the very idea that antitrust law could apply to excessive pricing must seem more than passing strange.  The Supreme Court made its views on the subject very clear in Justice Scalia’s Trinko opinion where he argued that the "mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices – at least for a short period – is what attracts 'business acumen' in the first place; it induces risk taking that produces innovation and economic growth”.

The European Commission, to its great credit, has exercised great restraint in applying Article 102 TFEU in this area.  A critical step in this process of increasing self-restraint was the adoption of the two Helsingborg complaint rejection decisions in 2014 which, unusually for such decisions, made a finding not merely that there was no Community interest in investigating the case further but rather, and more strongly, that there was “insufficient evidence to conclude that the prices charged…are unfair/excessive and thus constitute an abuse within the meaning of article 82 of the Treaty”. The decisions are worth (re-) reading, see this and this.

Since that time there have been very few cases of excessive pricing at EU level.  Except for a handful of exceptional cases, those which have been investigated as such have been terminated by the Commission without findings of infringement. 

The European Commission emphasised its cautious and restrained approach to the application of Article 102 TFEU to alleged excessive pricing in its written submission to the OECD of 7 October 2011. The paper provides a useful summary of its enforcement policy, the rationale behind its emphasis on exclusionary practices and the problems that would be encountered in taking on excessive pricing cases.  Given that this subject has raised its head again, re-reading this carefully written paper is well worthwhile.  The position was well summarised at para. 42, as follows:

“It seems that enforcement action against excessive prices has only been considered as a last resort, in markets where high prices and high profits do not have their usual signalling function to attract entry and expansion because of very high and long lasting barriers to entry and expansion. This recognises that even though in many markets prices may be temporarily high, due to a mismatch of demand and supply or the exercise of market power, it is preferable to give market forces the time to play out and entry and expansion to take place, thereby bringing prices back to more normal levels. We have not seen enforcement activity in such markets, recognising that it would be unwise to run the risk of taking a wrong decision and furthermore spend enforcement resources on solving a problem that would solve itself over time anyway. This is so even in markets characterised by sufficient entry barriers where there can be dominant firms. Of course, it may be that a dominant firm tries to prevent this process of entry and expansion taking place by artificially raising entry barriers. However, in such a situation it is more efficient for the competition authority to tackle the raising of these entry barriers directly since this will likely amount to an exclusionary abuse. If, however, the market is characterized by such entry barriers that it is unlikely that market forces over time will bring prices down, enforcement actions aimed directly against excessive prices may indeed be appropriate.”

We have seen, however, a greater willingness by some member states with less self-control than the Commission to develop cases in this area.  We have also seen other non-EU competition jurisdictions which look to the EU for inspiration in the area of dominance control seeking to utilise their domestic Article 102 equivalents to attack what they see as excessive pricing or unfair terms.  Some of these cases have been notorious in terms of the intellectual contortions and use (sometimes misuse) of EU case law relied on to reach their conclusions.

Although the Commissioner identified a few limits to the application of excessive pricing control, she gave a clear message.  Namely, that the European Commission is open for business in this area in a manner not seen for many years.  In response to my question, she confirmed that a door which had been almost closed has now been opened, at least to some degree.   She said “...we’re still bound to come across cases where competition hasn’t been enough to provide a real choice. Where dominant businesses are exploiting their customers, by charging excessive prices or imposing unfair terms”.  Rightly, she emphasised caution saying that “we have to be careful in the way we deal with those situations. Because sometimes, a company is dominant simply because it’s better than its competitors. And when that’s the case, it’s only fair that it should get the rewards of its efforts. But we also need to be careful that we don’t end up with competition authorities taking the place of the market. The last thing we should be doing is to set ourselves up as a regulator, deciding on the right price”.

However, “there can still be times when we need to intervene”.  In closing the Commissioner said that “we need to act carefully when we deal with excessive prices. The best defence against exploitation remains the ability to walk away. So, we can often protect consumers just by stopping powerful companies from driving their rivals out of the market.  But we still have the option of acting directly against excessive prices.  Because we have a responsibility to the public. And we should be willing to use every means we have to fulfil that responsibility”.

For me, it is those last two sentences that gave some cause for concern and indicated that the door was being opened, as was indeed confirmed.

Now, it is true, that the Commissioner stated that excessive pricing control should only be used where there is no ability for the customer/consumer to “walk away”. The product or service being charged for does not need to be an essential facility in the manner normally used, namely whether access to the deemed essential facility is denied to a competitor, or is granted only on discriminatory terms, but rather whether the customer/consumer has a choice (note that the Commissioner didn’t use the essential facility concept, the application of which has been limited after the Oscar Bronner case).  Furthermore, the Commissioner says that although there may be future cases where alleged excessive pricing may be investigated and, indeed, decided upon, the Commission would not be a price regulator and would not decide on “the right price”.  That is all very well and it sounds comforting, but what it really means is that the Commission would merely decide that the price charged was unlawful, explain the grounds on which it so held and no doubt order that the price be adjusted so that it was reasonable. Little guidance may be provided by the Commission as to what it considers reasonable in the particular circumstances and if the allegedly dominant company gets its pricing wrong, it will be fined for having failed to comply with the Commission’s order without being able to seek clarity from a Court.  So, although the Commission would indeed not “set” the price, its actions would undoubtedly change the pricing levels set and the impugned and allegedly company would need to be cautious. De facto the Commission will therefore be a price regulator, whatever it may claim.

Let us turn (briefly) to the three examples of excessive pricing identified by the Commissioner, Gazprom, pharmaceuticals and Standard Essential Patents (SEPs):
  • Gazprom: this is not a pure excessive pricing case at all and seems a strange example to choose.  The Commission’s allegations revolve around a series of exclusionary behaviours, territorial restrictions and market partitioning including export bans, destination clauses and measures that prevent the cross-border flow of gas, the combination of which has resulted in higher gas prices and the segmentation of gas markets along national borders.
  • Pharmaceuticals: the Commissioner seemed to be focussed on a number of examples of off-patent drugs having been subject to significant price increases.  A notorious example was the 5,000% price increase implemented by Turing Pharmaceuticals and its CEO Martin Shkreli for Daraprim, a 62 year old medication. In addition there have been a number of NCA investigations as referred to by the Commissioner, including the recent Article 102 TFEU decision of the UK CMA regarding alleged excessive pricing for phenytoin sodium capsules (Pfizer/Flynn). These cases warrant a lengthier discussion than is possible in this note, but there are special circumstances at play in the pharmaceutical sector due to Government imposed price regulation that create a somewhat unique environment within which competition law operates.  One might have thought, along the lines of Justice Scalia’s reasoning in Trinko, that an off-patent drug which is subject to a substantial price increase would incentivise new entrants to generate competitive alternatives.  This would be consistent with para. 61 of the European Commission’s 2011 OECD paper where it stated that “enforcement against excessive prices is generally only contemplated in markets with an entrenched dominant position where entry and expansion of competitors cannot be expected to ensure effective competition in the foreseeable future, that is markets where high prices and high profits do not have their usual signalling function to attract entry and expansion.”
  • SEPs: this is yet another strange example to have been included in the Commissioner’s list as it relates to an alleged phenomenon (royalty stacking and hold-up) for which there is no evidence at all.  Unlike the Gazprom and pharmaceutical examples cited by the Commissioner, the claimed phenomenon is entirely hypothetical and there is no empirical evidence that shows or proves that it exists.  The speech claims that a recent study “shows that 120 dollars of the cost of each smartphone comes from paying royalties for the patents it contains.”  This is untrue.  The study cited by the Commissioner is based on a purely hypothetical analysis as its authors themselves said when they caveated the report by stating that “we estimate potential patent royalties in excess of $120 on a hypothetical $400 smartphone.” Even Professor Carl Shapiro, one of the leading proponents of the royalty stacking and hold up theory was unable in his 2015 IEEE paper to provide any such evidence, see the note I posted on this subject, here. There are multiple recent studies on this subject that elaborate on the utter and complete absence of any empirical evidence and, indeed, in the case of one important paper by Padilla and Llobet on “The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents” seeks to explain, in a rigorous manner, why royalty stacking is not observed in real, as opposed to hypothetical, life. In other words, the Commissioner’s SEP example of alleged excessive pricing is no example at all.

In conclusion, I cannot recall a Competition Commissioner’s speech on excessive pricing in recent times.  It was clearly delivered for a purpose and as the Commissioner confirmed it would seem that “a door which was almost closed” has now been opened “a little”.  But what does that mean?  Some of the statements made, as well as examples used, give cause for concern.  We will have to wait and see how this policy initiative develops, both at the Commission and at member state level.  My sense is that there is a greater potential for investigation and intervention in this area than for many years and a political willingness to go into territory only rarely entered into previously.

© Trevor Soames

Avocat au Barreau de Bruxelles
Solicitor-Advocate & Barrister"

Patently Faulty and Discredited Smartphone Licensing Cost Figure in Commissioner Vestager's Speech on Excessive Prices

It was irresponsible of European Competition Commissioner, Margrethe Vestager, to say in a speech about excessive prices last month that “[o]ne recent study shows that 120 dollars of the cost of each smartphone comes from paying royalties for the patents it contains.”

Commissioner Vestager is alleging that licensing prices for standard-essential patents are too high, and she would like them reduced. Nothing could be more important than having reliable support for her allegation. She did not provide this.

To the contrary, the quoted sentence is reprehensible for several reasons:
  • The $120 figure, equivalent to a 30 percent aggregate royalty rate on a $400 phone, is wide of the mark. Nobody is paying anywhere near as much. Actual figures paid are, on average, less than one sixth that figure, at under $20 or below 5 percent of total handset costs.
  • Her source is not cited. It is obvious to those who focus on smartphone licensing charges that she has plucked the figure from the much-criticized, here, and, here“Smartphone Royalty Stack” paper by Intel and Wilmer HaleWithout her including any reference to help listeners and readers find the study or those who rebut it, folk might take the greatly-inflated figure at face value.
  • The study is not recent and provides no fresh perspective. It was published two and a half years ago, in May 2014.
  • It misrepresents the study’s findings. Commissioner Vestager has either ignorantly and unwittingly or sinisterly disregarded how the study cunningly characterizes this $120 figure. That figure does not represent what is actually paid in cash or recorded in financial or management accounts as licensing revenue or licensing expense. It is a notional cost that is not adjusted for what is netted-off in cross-licensing. The study is weasel worded: “setting aside off-sets such as ‘payments’ made in the form of cross-licenses and patent exhaustion arising from licensed sales by component suppliers, we estimate potential patent royalties in excess of $120 on a hypothetical $400 smartphone” (underling added for emphasis). This is flawed economics, as well as misleading and disingenuous.
  • The study includes various additional systematic errors in its analysis including disregard for clear public evidence that much lower rates are being paid than those it includes in its calculations in most cases.
  • Despite seeking and receiving external inputs, the European Commission continues to ignore logical and facts-based assessments of aggregate royalty rates that are in marked disagreement with the study by Intel and Wilmer Hale. The Commission’s DG GROW ran a consultation on patents and standards commencing 2014. My initial estimate of 5 percent aggregate mobile phone royalties was included in my submission to that consultation in February 2015 (pages 21-22). That finding has been reinforced in my subsequent publications and validated by other reputable experts.

Lies, damn lies and misleading or defective analysis

The recent US presidential election and Brexit referendum campaigns were significantly blighted by use of defective or highly misleading “facts” and figures. This “post-truth politics” tactic is nothing new or unique to those seeking votes. It is particularly troubling that public officials are also so inclined to unquestioningly adopt certain figures and ignore others solely based on what supports policy positions, popular beliefs or prejudices, and with disregard for scientific and evidentiary principles in quantitative research.

My extensive analysis shows the Smartphone Royalty Stack paper’s 30 percent royalty rate was defective. In IP Finance, here, in September 2014, I explained how this study was flawed, and, here, in August 2015, I showed in detailed analysis that average aggregate royalty payments were at most around 5 percent and were probably substantially less on mobile phones overall, including smartphones that dominate that product category. The faulty “royalty-stacking” theory upon which this paper by Intel and Wilmer Hale is based, has also been debunked by others. Adding up all the licensors’ listed maximum royalty rates does not provide a suitable indication of royalty costs, let alone an accurate measure of what is actually being paid in licensing fees.

Two separate eminent academic authorities in economics, Criterion Economics and the Hoover Institution, have validated the methodology in my 2015 article in their recent publications since mid-2016. Both studies calculate the majority of royalties in exactly the same way as I have and are broadly in agreement with the results I derived by “following the money,” as authors of the latter study, Haber, Galetovic and Zaretzki, characterise it. They also agree with me that only net royalty payments, after cross-licensing, should be included in aggregate royalty amounts and rates.[1]  Gregory Sidak of Criterion Economics independently checked my assessments and compared these with his own, step-by-step. These studies find that aggregate royalties are approximately 3.3 percent (Hoover Institution) and 4.5 percent (Criterion Economics).

Aggregate Licensing Fee Estimates for Mobile Phones Including Smartphones
in Two Totally Different Ballparks (Applicable Year 2014 or 2015)
Some elements in my 2015 paper were extremely conservative. For example, whereas I used the asking prices of LTE patent pools to derive my estimate of annual royalty payments of less than $4bn (equivalent to 1 percent of aggregate royalties), I note that these pools still seem to have very few or no licensees, and so I conclude the actual figure was and remains much, much closer to zero than it is to $4bn.

Whereas these two recent studies also show that aggregate royalties are conservatively in the “ballpark” of around 5 percent or less, rather than at 30 percent as estimated by Intel and Wilmer Hale, these two recent studies build on my work and seek to estimate the aggregate royalty rate with greater precision while also maintaining a conservatively-high bias in estimates. There are some differences among studies with respect to inclusion of non-mobile SEPs and non-SEPs, feature phones and tablets. These have only secondary effects on overall results and the aggregate percentages estimated.

We have been here before

Other wildly-exaggerated and yet widely-quoted cost figures have included $83 billion in social costs and $29 billion in direct costs annually to patent infringement defendants for the alleged “patent troll” problem estimated by academics James Bessen and Michael Meuer in 2011 and 2012. Such figures were much contested for years and I, among others, was most critical of the adoption of such figures by public bodies including the White House in 2015.

A 2016 study on Patent Assertion Entities by the US Federal Trade Commission presents much lower and far more reliable figures. It found study PAEs generating a total of only $4 billion in licensing over the six-year study period from 2009 to 2014. This is equivalent to less than $700 million per annum. Whereas the FTC study is not exhaustive in scope, it is nevertheless quite broad including 22 responding and 2,500 affiliated entities with 327 of these engaged in “active assertion behaviour” and it appears to have captured a large proportion of PAE licensing transactions. The more than forty-fold difference between annual totals based on extensive documented evidence submitted to the FTC and the estimates in these other studies is irreconcilable.

Post-“post-truth” please

Public officials should be more transparent about where the “facts” and figures they use to support their arguments and wishes come from. They should take the trouble to understand and not misrepresent their sources, even unwittingly. They should make the effort to consider opposing facts, figures and analyses. Some balance might help, but this should not be simply a case of reflecting differing or opposing positions without merit. Public authorities have a duty to find the truth of the matter with accurate and reliable figures, and present this in their public communications. Approximately correct might be fit for purpose and acceptable, whereas precisely wrong is no good at all. Scientific and evidentiary principles must apply.

For a broader critique of Commissioner Vestager’s entire speech, with respect to the competition law and policy issues it raises, I recommend you read this this article by Trevor Soames.

[1] See footnote 7: “we do not include the opportunity cost borne by a manufacturer that buys patents to prevent claims of infringement, or the opportunity cost borne by manufacturers who cross license their patents (in a cross licensing agreement firms may forego some or any royalty payment in exchange for access to another firm’s portfolio), or the membership subscriptions paid to defensive aggregators of patents. Such expenditures will increase a firm’s fixed costs. They will not, however, affect marginal costs of production, and thus not influence production and pricing decisions at the margin.”

OneTeam Collective: A New University Accelerator to Promote the Use of IP to Develop New Ventures

The National Football League Player’s Association [NFLPA] (American Football, that is) in the United States has announced a fascinating collaboration called “OneTeam Collective” between the NFLPA, NFL athletes, venture capitalists, and Harvard University, among others, in the form of something like an incubator.  Apparently, the gist of the idea is to allow easy licensing and exploitation of IP rights of NFL athletes by start-ups.  The NFLPA basically holds the IP rights of NFL players and now those rights will be available to early stage companies, as described in Tech Crunch in "NFL Players Association Is Launching An Accelerator to Trade IP Rights For Equity."  This raises a host of opportunities to utilize those IP rights in, perhaps, new ways. 

Here is a description of some of the aspects of the program:

The OneTeam Collective will consider business ventures and product ideas related to fan engagement, data analytics, performance and training, mobile fitness, sports nutrition, consumer products, fantasy sports, gaming, wearable technology, new media, as well as virtual and augmented reality.  

The OneTeam Collective will be the first program providing rights to sports-related intellectual property, highlighted by the NFLPA’s exclusive group licensing rights and unparalleled access to more than 2,000 current NFL players.  

The well-rounded founding portfolio will consist of KPCB and Madrona Venture Group providing consulting services and potential funding; Harvard Innovation Lab providing access to a campus environment focused on entrepreneurship for student-led events and competitions, such as hackathons; and Intel providing valuable input from a global innovative leader, as well as potential funding. LeadDog Marketing Group–an award-winning integrated, experiential marketing agency–will provide sports marketing and strategic planning resources. The Sports Innovation Lab will provide additional support to the OneTeam Collective and its portfolio companies. 

I do hope that the eventual funding from these ventures will inure to the benefit of the players.  The troubling stories concerning the physical and mental impact of concussions in the sport is a serious concern.  Moreover, the NFL has long been known as “Not For Long:” the average player has a very short career span and there is the very sad (developing) story concerning the recent death of Rashaan Salaam. The NFLPA press release seems to suggest that there could be many opportunities developed just from the close collaboration from the interested parties, perhaps even ventures that would need additional player endorsement. 
If this idea hasn’t been adopted in other countries, it looks like one to closely watch and perhaps emulate.  A potential underexploited resource—the IP—put in the position to be widely utilized for potential benefit of . . . hopefully the players.  The press release provides some hope:

Another unique element of the OneTeam Collective is its Athlete Advisory Board. These individuals will engage with founding partners and provide strategic input on portfolio companies and new prospects. Athletes will benefit by having the ability to directly interact with founding partners and portfolio companies, in order to establish a professional network, while also exploring business and career opportunities. The inaugural members of the board will consist of both active and former NFL players, including Kelvin Beachum, Mark Herzlich, Dhani Jones, Isaiah Kacyvenski, Ryan Nece, and Russell Okung. 

"Players, both past and present, have so much to offer - but never in a way like this," said former NFL Player and current Managing Partner of Qey Capital and Investor on CNBC's Adventure Capitalist Dhani Jones. "The OneTeam Collective is going to help develop and promote concepts and products that were previously just left to survive on their own. With this accelerator in place, and with players helping power it, companies can get off the ground and into people's lives. It's a great feeling to be involved in something of this magnitude."

Monday 5 December 2016

UK: Draft Finance Bill changes to patent box - including CSA interests

From today's draft Finance Bill overview:

"2.13. Patent Box: cost sharing for collaborative Research and Development (R&D)

As announced at Autumn Statement 2016, the government will legislate in Finance Bill 2017 to add specific provisions to the revised Patent Box rules introduced in Finance Act 2016, covering the case where R&D is undertaken collaboratively by 2 or more companies under a ‘cost sharing arrangement’ (CSA). The provisions will ensure that companies are neither penalised nor able to gain an advantage under these rules by organising their R&D in this way.
The new rules provide that:
  • where a company acquires an interest in or increases its interest in a CSA, an appropriate amount of the consideration paid counts as acquisition cost for the purpose of calculating the R&D fraction, to the extent any Intellectual Property (IP) assets are held within the CSA
  • where a company disposes of an interest or reduces its interest in a CSA, an appropriate amount of any consideration received is treated as IP income, to the extent any IP assets are held within the CSA
  • activity of participants in the CSA to develop IP or products is appropriately treated in the company’s R&D fraction
This has effect for accounting periods commencing on or after 1 April 2017. Draft legislation (provision 24) and a TIIN has been published on 5 December."
This should be filed under "not particularly surprising", it's been a gap in the legislation/guidance for some time.

Sunday 4 December 2016

Hotel branding: how peculiar sometimes!

As the major hotel brand owners consolidate, more and more brands identifying hotels of differing types of luxury and status (and therefore of
price?) are finding themselves under a single ownership roof. This poses special branding challenges, as the conglomerates seek the best way to maintain brand equity in the house mark while at the same time attempting to distinguish each of the separate branded hotels. This can lead to some interesting results. Let us consider two examples.

The first relates to a situation where the company is apparently prepared to tolerate actual confusion between two hotels, each owned by the same company. In connection with the 2015 International Trademark Association Annual Meeting in San Diego, this blogger made his way to what he thought was the Hotel Palomar. Upon arriving at the hotel and making some inquires, he was told: “Sir, you are at the wrong hotel. You don’t want the Hotel Solamar, you want the Hotel Palomar” (which is about a 10-minute walk away). I then continued: “How often does it happen that a person confuses one hotel with the other”? The answer, “From time to time, but we don’t really care, since both the Hotel Solamar and the Hotel Palomar belong to the same group, the Kimpton Hotels.” So, there it was—as a consumer I had been confused, but from the point of view of the trade mark owner, confusion was less of concern, it would seem, than the time and expense of rebranding one of the two hotels.

The second refers to a recent piece that appeared on entitled “Marriot and Starwood Reveal the Future of Their Luxury Brands”. As readers may recall, Marriott’s acquisition of Starwood will result in expanding Marriott’s brand holdings (at 19 brands, already the biggest in the world) to 30 brands. What does Marriott intend to do with these multiple brands? In an interview with Bloomberg, Tina Edmundson, the global brand officer of Marriott, set out her company’s branding strategy. The following points made in the interview are particularly noteworthy.

1. For the moment, all 30 brands will remain, even if the author of the piece, Nikki Ekstein, commented--“We remain skeptical about that in the long run.” Interestingly, Edmundson had previously worked for Starwood for 18 years prior to joining Marriott, so her connection with all 30 brands is long-standing and intimate.

2. When one hears the words “Marriott” and “luxury”, he or she will likely think in terms of Ritz-Carton, Ritz-Carlton Reserve, Bvgari, St. Regis, Edition, the Luxury Collection and JW Marriott, all of which are designated “luxury” by the company. But not all Marriott luxury hotels are equally “luxurious”, it would seem. Ritz-Carton, St. Regis, and JW Marriott will all be identified as “classic luxury”, with the other hotels will all be designated as “distinctive luxury”. The first category focuses on traditional and business travelers, while the second addresses patrons seeking a modern, boutique-y hotel experience.

3. Of particular interest will be how the Ritz-Carlton and St. Regis brands, which Ekstein likened in the piece to two boxers “occup[ying] opposite corners of the same boxing ring”, and which are “very similar in style and taste”, will move from competing over the same type of customer to sharing them. The company apparently will do so by segmenting luxury customers into two distinct categories—the Ritz-Carlton consumer is about “discovery”, while that of the St. Regis patron is about “status and connoisseurship”; the Ritz-Carlton “is about connecting people to places”, while the St. Regis “itself is the place where people want to see and be seen.” Will this work, or will the two hotel brands simply cannibalize each other’s customers? Obviously, Edmundson thinks that it will succeed.

Whatever one’s lodging preferences, from the IP and branding point of view, what Marriott has embarked on in seeking to maintain 30 different brands, including eight different “luxury” brands, seems to be uncharted branding waters. Indeed, the success of the company in doing so may shed light on the the extent to which consolidation in the hotel industry involving companies of this size can work side by side with successfully supporting multiple brands.

Monday 28 November 2016

Fair returns on R&D from SEP licensing with smartphone success and upcoming 5G

Patent licensing remains a flashpoint for mobile telecom as it moves towards a future of 5G and the Internet of Things (IoT)
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.
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.