Winston
Churchill once said you can always count on Americans to do the
right thing — after they have tried everything else.
At last, American authorities are also beginning to do the right
thing for owners of standard-essential patents. Under the previous
administration of President Barack Obama, America’s agencies did the wrong
thing by seriously undermining standard-essential patents in various ways. For
example, this existentially threatened the independence of Qualcomm, which
relies substantially on its patent-licensing business to fund long-term R&D
including that in upcoming 5G mobile communications. Thankfully, President
Donald Trump’s administration has recognised the important need to support, not
undermine, the nation’s technology innovators, and uphold their patent rights,
as enshrined in the US Constitution.
President Trump’s blocking of Broadcom’s attempted hostile acquisition
of Qualcomm brought allegations of protectionism and some discontent among
shareholders; but no such intervention would ever have been called for if
Qualcomm’s licensing business model had not been so wantonly attacked at home
and abroad by antitrust actions including large fines and by royalty payments being
withheld by Apple. This all took significant toll on the firm’s stock price. US
agencies and major companies from various nations were widely complicit in the
onslaught. In the absence of all that skulduggery, Qualcomm’s stock price would
never have been within Broadcom’s acquisition reach.
Countermeasures
required
The presidential intervention prompted the writing of several business
newspaper leaders on matters of industrial policy, national security and merger
control in the IP-rich technology sector, including 5G communications. While the
order was made ostensibly for reasons of national security, protectionism is pejoratively
alleged. Either way, the legitimate concern was that the prospective change of
ownership and control would curtail Qualcomm’s long-term R&D investments – from
high levels of 20-25 percent of sales over many years – jeopardizing its technology
leadership and strong position versus China including its national champion Huawei.
Even before President Trump's order, the US
Treasury's Committee on Foreign Investment in the United States (CFIUS)
had already expressed concerns about the transaction in a letter addressed to Broadcom and Qualcomm lawyers.
The
Financial Times recognizes ‘Qualcomm is no ordinary company. In
an era when mobile technology is ingrained in every kind of economic activity,
it develops key intellectual property underlying wireless communication. All
mobile networks are built on standards developed with Qualcomm’s leadership. In
a sense, Qualcomm’s technology touches all the data on all mobile devices,
everywhere. Most people may not know it, but the company is as ubiquitous as
the air.’
However, Chinese competitors benefit
from strong industrial policies, private or state ownership and government
subsidies which enable them to be more patient and less risk averse about
obtaining returns on R&D investments.
As noted in IP
Finance, with recent figures from the EPO, Huawei (China) is
now the top patent applicant in Europe. Also with focus on mobile
communications technologies, Qualcomm and Ericsson are in fifth and tenth
positions respectively. Patent counts are only part of the story where patent quality
is most important, but these numbers at least provide an indication of the
desire and intent of the Chinese to surpass their western competitors in IP ownership.
The
Economist identifies the ascendancy of China. ‘“DESIGNED by Apple
in California. Assembled in China”
.
For the past decade the words embossed on the back of iPhones have served as
shorthand for the technological bargain between the world’s two biggest
economies: America supplies the brains and China the brawn.
Not any more. China’s world-class tech giants, Alibaba and Tencent, have
market values of around $500bn, rivalling Facebook’s. China has the largest
online-payments market. Its equipment is being exported across the world. It
has the fastest supercomputer. It is building the world’s most lavish quantum-computing
research centre. Its forthcoming satellite-navigation system will compete with
America’s GPS by 2020.’
National
security makes national champions
If a trade war is emerging in the technology sector,
under the pretext of protecting national security it not the US that fired the
first salvo.
Due to Chinese national security including the
Great
Firewall of China with censorship restrictions, the Internet’s over-the-top
services markets have been balkanised in China. Chinese leaders Alibaba
(e-commerce), Tencent (social networking),
Baidu (79%
of Chinese search) and others have preempted or displaced the
global leaders such as Facebook and Google.
Competition for Qualcomm—in mobile communications chips and
technology licensing— is in the most open of global of marketplaces where
technology development and standardization is mainly undertaken by a few and
then offered freely, but not gratis, for implementation and use by all comers.
China has
explicit industrial strategy for innovation and manufacture in this and other
industrial sectors: it uses various measures including antitrust enforcement in
support of that and to the advantage of Chinese companies. For example, it
allegedly forces foreign companies to surrender their IP to obtain Chinese market
access.
According
the Wall Street Journal, a White House official said that the harm
to the US from this is $48 billion. In order to settle an antitrust dispute
with the NDRC,
Qualcomm paid
a $975 million fine and reduced its patent-licensing charges in China.
The Trump administration is now threatening
tariffs on $60 billion of imports and tighter restrictions on acquisitions and
technology transfers. One objective is to stem the purported intellectual property
theft.
The US and other western nations have lacked coherent industrial
policy for the technology sector, while antitrust policy and enforcement has
also been inconsistent and has undermined IP. It was high time to start doing
something that would underpin America’s technology and IP leadership, rather
that erode it as had occurred for SEPs under the previous administration with President
Obama.
How to make America great again in SEPs
The need is to uphold patent rights everywhere rather than for national
trade protectionism which will provoke harmful tit-for-tat retaliation.
As I have
shown elsewhere, US tech titans including Alphabet, Apple, Facebook and Netflix
have done very well for themselves, including strong revenue growth over the
last few years, based on low-cost communications platforms providing
exponential growth in data consumption. However, revenues for network
operators, network equipment providers and patent licensors have been flat.
Notwithstanding the above, under the previous presidential
administration, and against the interests of patent-rights holders:
- The FTC issued a complaint against Qualcomm’s chip
sales and licensing practices in the final hours of the Obama administration despite
significant dissent.
- President
Obama vetoed an ITC exclusion order against some old iPhone models, in
litigation between Samsung and Apple, ostensibly for reasons of public interest.
- The Department of Justice blessed, with a
business review letter, patent-policy
changes at IEEE in 2015 that put concerted pressure on all SEP holders to change
the way patents are licensed and that make injunctions more difficult to obtain.
Patent licensing charges are allegedly harmful because these
supposedly must be passed on to end consumers in higher device prices. However,
the only American handset OEM is Apple. It prices its products at high levels
the market will bear, resulting in stellar profit margins, rather than pricing based
on its costs. While
Apple stopped
royalty payments to Qualcomm in the first quarter of 2017, according to Strategy
Analytics, average iPhone prices rose 6.3 percent from $645 in 2016 to $686 in
2017.
IAM blogger,
Richard
Lloyd wrote: ‘If Trump really wants to protect Qualcomm’s long-term prospects
perhaps he should get on the phone to Apple.’ The President should also ensure
the FTC’s action against Qualcomm is withdrawn. That might similarly discourage
other agencies around the world from diminishing the rights of SEP owners
wherever they reside.