Fool’s errand with fallacies in administrative essentiality checking

This is my second article on some topics discussed by my panel on “transparency” and in other sessions at the Patents in Telecoms and the Internet of Things conference in London recently. My first article, also published here, was on how value and royalty costs in standards and SEPs are passed along the supply chain to consumers.

The European Commission’s proposed essentiality checking and patent counting at the EUIPO is troubling. While parties are entitled to present whatever methods and studies they wish to imply Standard Essential Patent (SEP) portfolio strength in licensing negotiations or to the courts in litigation, the proposed registry with mandatory essentiality checking on random samples of patents will give a false sense of security on the applicability, accuracy and reliability of such checks, measures and any royalty charges derived from them. Essentiality determinations and patent counts provide a poor and unproven gauge of patent portfolio strength. Methods fail a key integrity test for any evaluation or measurement system because results are not reproducible. Despite the EUIPO being ordained the official authority on determining patent essentiality, its checking will be as contestable technically as for private evaluators and their studies that already check essentiality, count patents and invariably disagree with each other. Nevertheless, even though determinations are non-binding they will have significant sway with the courts.

A European Parliament press release issued following a January 2024 Legal Affairs Committee vote to adopt “New rules to promote standard-setting innovation in new technologies” states that “in 5G almost 85% of the standard essential patents are in fact non-essential. The new essentiality test will stop the occurrence of over-declaration”.

Some studies do indeed indicate essentiality rates of only 15% (i.e. 100%-85% = 15%) or even less in some cases—which might well be correct—but there is no evidence to support the latter contention that checking will improve the declaration behaviour of patent owners. There is no shame or sanction for over-declaration. Bias in essentiality checking—that is most severe at such low essentiality rates—means that the effects of over-declaration can only be somewhat moderated by checking. Over-declaration can never be anywhere near eliminated. The bias incentivises over-declaration despite checking. Rather than stopping over-declaration, institutionalized checking by the EUIPO will likely motivate patent owners to game the system by declaring even more patents of dubious essentiality.

Essentiality is subjective and only one among various factors affecting patent strength

Patent strength is a function of validity, infringement and technical contribution, as well as essentiality to the standards. While some parts of standards go unimplemented, are rarely used, become obsolete or are peripheral to where standards provide most innovative value, other parts are fundamental to very significant improvements with new technologies such as 5G. For example, various radio access network technology improvements have increased network speeds and capacities one hundred thousand-fold (e.g. from 10 kbps to 1 Gbps) since the introduction of 2G data in the mid-1990s.

Some characteristics can be objectively, reliably and reproducibly checked, others cannot. Patent essentiality and validity are matters of judgment where different assessors will often disagree about what are ostensibly yes-no decisions. As stated by the judges’ decisions in Unwired Planet v Huawei and TCL v Ericsson, respectively:

“Based on my assessment of both experts, I am sure the disagreement represents cases in which reasonable people can differ.” (Paragraph 335.)

“Given the somewhat subjective nature of these determinations, ‘disagreements’ is probably a more accurate label than ‘error.’" (Footnote 16.)

By way of analogy: on the one hand, selections of beauty pageant and international song contest winners are also subjective tasks that can be swayed by judges’ predilections and do not have reproducible results with different assessors; on the other hand, and in marked contrast to all the above, checks such as the UK’s annual car roadworthiness MOT test is highly objective and reproducible. Two different test centres would reliably come up with the same pass-fail result for the same car after verifying that brakes work, turn indicators flash, and measuring that tyre tread depth is sufficient, among other checks.

Determining true essentiality is made more difficult by the fact that patent counters have very different objectives to those agreed by consensus in Standard Setting Organizations. ETSI merely wants to ensure standards such as 5G are not blocked by demanding patent owners declare whether they believe a patent might be or might become essential. ETSI never checks essentiality and does not want to do so. Essentiality declarations such as those in ETSI’s IPR database were never intended to be used for royalty rate determinations in Fair, Reasonable and Non-Discriminatory (FRAND) licensing, as sought by the Commission with the EUIPO’s registry and additional steps of essentiality checking and patent counting.

Only the courts can definitively determine which patents are truly essential, which are not invalid and valuate portfolios. Cases in litigation illustrate how uncertain everything is and how expert opinions differ. The challenges in assessing essentiality were extensively discussed at the conference. Issues include interpretation of patent claims and that the scope of these can be entwined with validity. Prosecution history can be pertinent in making determinations. As patents are amended to cover the standard they can include what has been contributed to the standard by others. With many patents being found invalid by the courts, validity should not be ignored on the path to determining value, as it is in the Commission’s proposed checking. Validity can be the most significant factor affecting SEP value.

In FRAND litigation, highly experienced top minds including judges, experts and those representing the parties spend many months at multi-million dollar costs evaluating and deliberating—with various disagreements on essentiality and validity of litigated patents prior to judgment—even though typically only a few patents are examined.

If all that work including analysis of claim charts and patent prosecution histories is actually required to do a proper job on only a few patents, how can we trust the accuracy of the EUIPO’s experts examining orders of magnitude more patents and whose determinations ignore the crucial issue of validity? While the courts tend only to have the resources to do the required assessments on no more than a handful of patents in each case, there are many tens of thousands of patents and patent families declared essential to standards such as 5G. It is unsurprising that the UK courts have tended to reject patent counting as a means of determining FRAND royalties, except in some cases as a cross-check for determinations primarily based on comparable licensing agreements.

Unscalable checking

One proposed way dealing with the insurmountable task of checking all a standard’s declared patents is to check only random samples of them. The hope is that it would be possible to check a manageably small number of them very thoroughly and accurately. Consensus is that accuracy can best be achieved with the preparation and use of claim charts.

However, there are several problems with this approach, as illustrated in my empirical research in 2021 and 2022:

• Even when claim charts are used to assist in determining essentiality, different assessors still disagree widely in their determinations with agreement on only around 83% of them. That’s not as good as it might seem when one considers that different assessors can be expected to agree on precisely 50% of them if one assessor was making determinations randomly based on the flip of a coin. If two assessors disagree in their determinations, at least one of them must be wrong. However, if two different assessors are in agreement, that does not mean the determination is correct.
  
  
• Inaccurate determinations cause a substantial upward systematic bias in essentiality rates derived after checking. My empirical research shows that the proportion of false positive essentiality determinations will greatly outnumber false negatives at essentiality rates of 15% or less.
  
  
• Sample sizes need to be large (e.g. >1,000) if true essentiality rates are at 15% or below and if, for example, accuracy within ± 15% at the 95% confidence level is required. Sampling error as a proportion of true essentiality rate increases at lower and lower levels of true essentiality.
  
  
• Sampled patents cannot be appealed and reassessed without destroying the integrity of the sample. For example, if one in ten patents is sampled the determination has a 10x effect implied in the entire population count. With inevitable selection bias in appealed patents, “corrected” determinations will have a distorted and magnified effect implied in the overall population.
  
  
• However, it would be to deny justice not to allow some kind of appeals procedure on determinations made by a public authority. This issue could weigh heavily in FRAND dispute litigation.
  
  
• It’s very costly. Ericsson testified in TCL v Ericsson that it took 50 man-hours per patent to prepare claim charts.

What the Commission is seeking to concoct at the EUIPO will produce yet more patent counting studies, somewhat like what PA Consulting has been producing regularly for years and that several other firms have published from time to time. PA’s studies are widely used because others use and seemingly take heed of their results—not because they are proven to be accurate and reliable, because it is impossible to prove that. Here’s what Justice Smith had to say in the Optis v. Apple judgment:

“So, as with validity – but for different reasons – making a judgement about levels of essentiality in the stack is unreliable and unsafe.

My conclusion is that – accepting entirely that PA Consulting seeks to do a careful job – for the purposes of a judicial determination of what is fact, the PA Consulting/Optis approach to determining Stack size (or the figure for the denominator) is not to be relied upon.

I accept that were a reliable qualitative assessment to be possible, that might well be preferable. But an unreliable qualitative assessment – especially where even the magnitude of the error is unknown – is not (in my judgement) an acceptable metric to use when seeking to answer the FRAND Question.

I cannot use the PA Consulting data as a metric in answering the FRAND Question.”

Patent counting is simplistic

Even checking both essentiality and validity is woefully insufficient in determining patent value. It’s widely recognized that different patents vary in value enormously—by orders of magnitude from virtually worthless to some real gems. The significance of a patent’s technical contribution to a standard and value in implementation can vary from being seldom used or of marginal worth to being fundamental functionality that might enable major cost savings or increases in customer utility or revenues to be generated. Convenience aside, there is, therefore, no basis for assuming that portfolio value is in proportion to any kind of patent count (i.e. of declared, found essential or found not invalid patents). On the contrary, some patent owners likely have a much larger proportion or number of gems than others. However, even approximately how much more is an unanswered empirical question.

Ministry of Patent Counting and Red Tape

The Commission’s proposals for registering, checking and counting patents, among other demands in the proposed legislation, is also in conflict with the stated objectives of European leaders.

French and German leaders Emmanuel Macron and Olaf Scholz recently co-wrote an op-ed in the Financial Times setting out some laudable objectives:

“With an ambitious industrial policy, we can enable the development and rollout of key technologies of tomorrow, such as AI, quantum technologies, space, 5G/6G, biotechnologies, net zero technologies, mobility and chemicals.

We call for strengthening the EU’s technological capabilities by promoting cutting-edge research and innovation and necessary infrastructures.

We call for an ambitious bureaucracy reduction agenda to deliver on simpler and faster administrative procedures and cutting bureaucratic burdens for businesses of all sizes. We welcome the European Commission’s initiative to reduce reporting obligations for our companies by 25 per cent.” (hyperlink added)

The Commission’s proposed demands for patent registration at the EUIPO, together with preparation and submission of additional information such as patent claim charts will substantially increase administrative burdens for European companies such as Ericsson and Nokia that remain dependent on SEP licensing income. These new burdens will cause friction, delays and diminution in the well established, highly effective and self-sustaining innovation loop in which licensing fees are used to fund further R&D, leading to the creation of yet more valuable new technologies.

Better to have scarce and costly technical experts innovating and prosecuting their own patents, or designing and testing new products, rather than tying up hundreds of them generating additional information for checkers and in doing the checking—at patent owners and at the EUIPO, respectively.

Transparency about what?

There was consensus at the conference that greater transparency could help with FRAND licensing for SEPs. However, rather than burdening licensees with voluminous disclosures on patent claims and with delays while conciliators deliberate about aggregate royalties and technical experts check patents for essentiality, it would be better to have licensors and licensees disclose more about actual licensing. This should include terms in licensing agreements and information on licensed trade including volumes and prices. If parties are unwilling to make such information public, then it could be disclosed to a confidential repository with limited access, information anonymised and other safeguards. Let’s find out more about what’s happening already and rely on that, rather than trying to make things up with top-down rate setting.

In Q&A under the Chatham House Rule, I asked another panel whether a modicum of accuracy and reliability can be achieved in essentiality checking to determine patent portfolio strength. Bad news — no. Good news — it’s probably not necessary because most licences get agreed, regardless.

While I believe it would be best for the Commission to abandon is proposed checking and rate setting, if it does proceed it should consider recommendations about how to do that competently and with recognition of limitations, as explained in my publications cited with hyperlinks in this article.


Keith Mallinson, founder of WiseHarbor, has more than 25 years of experience in the telecommunications industry as a research analyst, consultant and testifying expert witness.

Measuring value and royalty costs in standards and SEPs passed along the value chain to consumers

An economist in the audience asked my panel on “transparency” at the Patents in Telecoms and the Internet of Things conference in London recently about achieving this by demanding detailed company financial disclosures. This is my first of two articles on topics in my wheelhouse that were addressed at this superlative biennial event. 

Rough judgments

Companies are generally unwilling to reveal such accounting figures that would help show how royalty costs are passed on and where profits are generated. Furthermore, some major value transfers are non-monetary and would not show up in these measures. Nevertheless, it is possible to surmise where most economic value is generated, captured or passed through, and where royalty costs are passed on in supply chains to customers.

Aggregate royalties paid of around five percent of handset revenues are very modest in comparison to total value in standards and the consumer welfare derived by several billion people using devices such as smartphones for many useful purposes.

Most of the value created in technology standards such as 4G and 5G is passed through to consumers. How much and where the rest of it is harvested across the supply chain and in the broader ecosystem is more complex and subtle.

Royalties paid and passed on can have a significant bearing on the financial performance of individual companies where competitors are paying and absorbing different amounts.

My analysis here includes some unashamedly qualitative assessments, as well as my usual quantitative support. But first, some definitions and background.

Economic pie sharing

Economists describe value created, for example, from technology innovation, as a total “surplus” that’s divided between producers and consumers. Producer surplus is obtained where the price received is higher than the minimum at which the producer is willing to sell. Consumer surplus is where the price paid is lower than the maximum the consumer is willing to pay. However, in the real world, it’s more complicated than this binary split with various different players in the ecosystem benefiting from standards such as 4G and 5G including standard-essential patents (SEPs).

Those who derive value from standards including SEPs, and share the total surplus include patent licensors, device OEMs, device ODMs (i.e. contract manufacturers), network equipment OEMs,  MNOs and MVNOs (i.e. physical and virtual mobile network operators), Big Tech Internet platforms and software publishers as well as end-users. Suppliers that generate no more than their cost of capital might be regarded as not capturing surplus, but superior returns and deficient returns can be generated in various ways. Reasons that possibly explain weak or strong profitability include (in)efficiency and other business activities. For example, Apple is by far the most profitable smartphone OEM and has accounted for between 70 percent and 80 percent of total handset profits over many years because it has a lot going for it. It is a more specific empirical question to what extent its superior returns result from it paying less than economic value or harvesting surplus in other ways in use of the cellular standards including SEPs.

Upstream creation, downstream consumption

Communications standards such as 4G and 5G are enormously valuable overall. This is resoundingly indicated by more than five billion mobile phone users (i.e. unique subscribers) and with rapid uptake of new standards. In addition to using mobile devices for calling and text messaging, with the vast majority of devices now being smartphones these are the primary or only means of accessing the Internet for most of these people. For a large and increasing proportion of them, these devices are also the dominant means of receiving news, sharing photos, paying for purchases, navigating and even watching video.

Some of the surplus created by standard-technology developers is retained or used to subsidize product business in network equipment or devices; but most of it flows to consumers within a few years of new technologies becoming commercially available. In between, a few major OEMs are likely retaining significant surplus. However; most OEMs and ODMs that are paying their dues in patent licensing fees are probably not keeping much of the surplus at all. Various Over-The-Top (OTT) players are taking significant value indirectly—in competition with MNOs and in information exchange barter trading with consumers, as explained below.

Fruits of competition and dominance

Vigorous competition bringing innovation and rapidly-declining quality-adjusted prices has delivered exceptional growth in new higher-performance services and network traffic growth. By the mid-2000s, unsubsidized new mobile phones could be purchased in most nations for under $50 and for as little as $20 in developing nations. By 2010, around half the world’s population had a mobile phone. Now, for example, there are plenty of 4G Android smartphone models on sale in India in the price range of RS5,000 to RS10,000 ($55 to $110) that include at least 4GB of RAM, front and rear cameras and 6 inch or larger displays that can stream video and deliver location-based services. Consumer surplus is clearly high in use of these, despite the relatively low willingness or ability to pay much higher prices in nations with modest income-per-capita such as India.

Meanwhile, the prices of high-end smartphones have increased. For example, many consumers happily pay more than $1,000 for various iPhone and Android models. Apple thus appears to be deriving significant producer surplus. While much of that arises from its strong brand, favored designs and manufacturing cost control, it also seems likely that a significant proportion of that is from standards-based technologies, after its payment of SEP royalties. It’s notable from recent FRAND decisions in the UK (i.e. in Interdigital v. Lenovo and Optis v. Apple) that large OEMs—such as Apple, Samsung, Xiaomi and Huawei—paying royalties in large lump sums up-front spend relatively low amounts per unit, and as percentages of unit selling prices, in comparison to many smaller OEMs paying running royalties. The larger OEMs are evidently receiving deep discounts of up to 80% for volume and prepayment.

In comparison to Apple and Samsung, most handset OEMs are in a rather more commoditized (i.e. less product-differentiated) and price-competitive market segment. Marginal costs also tend to be passed on to customers in the latter, but with little scope to increase prices much above costs no matter what goodies become available (to all) in the standards. The contract manufacturer ODMs also operate on thin margins. While owing their existence to the new technologies that fuel handset market growth and replacement, most manufacturers do not appear to be making exceptional profits in doing so.

Even some major OEMs have failed financially in the face of competition, regardless of ever-improving and increasingly valuable standards. It’s notable that despite Nokia being the handset market leader commanding the vast majority of the sector’s profits in the 2000s, and with peak financial performance around 2008, the firm’s floundering smartphone business at the beginnings of the 4G era was divested to Microsoft in 2014 and then subsequently closed with declining sales a couple of years later. With LG’s market share falling from 9% to 2% during the 2010s, it stopped selling smartphones in 2021.

All being things equal, one would expect costs including royalties to be fully passed on by suppliers in their prices. One would also expect that prices could be elevated little more—despite standard-technologies creating more total surplus than is paid for them in royalties—due to fierce downstream price competition among OEMs. Given the many competing suppliers at the commodity end of the market, one way a supplier might retain substantial supplier surplus would be if that company was avoiding royalty payments (e.g. through hold-out) while its competitors were incurring those costs and passing them on to customers. Alternatively, if that supplier was the only one, or if few are, paying such royalties, it might be unable to fully pass-on such costs to its customers without diminishing its sales volumes and market share.

Quid pro quos

MNOs and MVNOs do not pay directly to use the standards or SEP technologies that have kept them competitive in generating their service revenues. Instead, MNOs pay for new standards-based technologies in their network equipment purchases that are licensed with payment of patent fees by the manufacturers. MNOs and MVNOs commonly subsidize consumer purchases of new handsets that also employ these manufacturer-licensed technologies.

The fortunes of MNOs worldwide vary significantly: however, with a few exceptions such as US market leaders AT&T, Verizon and T-Mobile in recent years, profitability is generally modest or meagre. For example, Vodafone and 3 in the UK are hoping their proposed merger will improve lacklustre financial performance in competition with two other MNOs.

While some MNOs may have been able to capture some of the economic surplus in 4G and 5G, it seems that the MNOs and MVNOs overall are not major hoarders of surplus. Instead, consumers benefit, for example, by getting more and more data for around the same expenditure as for much less data previously. While global MNO revenues have been rather flat over many recent years, MNOs are supplying exponential network traffic growth of 1,000x over fifteen years since 2010. Fierce competition among operators is causing all the cost-per-gigabyte reductions and increased value MNOs receive from technological improvements to be passed through downstream to consumers with an unrewardingly constant unitary elasticity in the market demand curve.

In contrast, Big Tech Internet platforms are making money hand over fist in comparison to most MNOs, even though surging mobile data now accounts for almost 60% of all Internet traffic. Google (Android, Google Play Store, YouTube), Meta (Facebook, Instagram, WhatsApp) and Apple (iOS and App Store) are indirectly appropriating some of the surplus generated by standards and SEPs. For example, as WhatsApp is free for end-users, it cannibalizes the higher profits mobile operators could otherwise make on picture messaging, international calls and roaming calls. Even though consumers pay for mobile data so they can use this app, MNOs’ supplier surplus is diminished by these substitution effects. And, there’s is no free lunch for consumers: the Faustian bargain in using WhatsApp is in allowing Meta to access personal phone contact information. Consumer surplus is thus diminished and Meta’s supplier surplus is increased by this payment made in-kind.

Big Tech is also taking significant slices of the surplus from OEMs. For example, when you browser search or ask Siri for an Internet search on your iPhone it uses Google’s search engine. Payments by Google to Apple, to be the default search engine on iPhones, reportedly accounts for 14 to 21 per cent of Apple’s profits.  Payments were expected to be between $18 billion and $20 billion annually by 2021. That’s not all economic surplus from the value of communications standards and SEPs, but a significant proportion of it surely is given that Google, like Meta, also harvests value from consumers’ personal information including use—such as location—of mobile devices.

And, what about the SEP licensors who also develop the standards in the first place? Some of them are probably obtaining some producer surplus and using it to support their complementary product businesses in communications processor chips, network equipment and devices. Nevertheless, with aggregate royalties paid only around five percent of handset revenues, a much lower percentage when also including MNO and mobile OTT revenues and declining over the last decade, the remaining surplus passed through downstream in a vibrant and innovative ecosystem where almost everyone now is a major consumer is much, much more.

Keith Mallinson, founder of WiseHarbor, has more than 25 years of experience in the telecommunications industry as a research analyst, consultant and testifying expert witness.

Gaming the System: A Scatter-Gun Approach to 5G Declarations

While it is already widely believed that “over-declaration” of standard essentiality is due to large and excessive numbers of patents being filed in patent offices and declared to Standard Setting Organizations (SSOs), my new quantitative research suggests that over-declaration is also being pursued with claims that individual patents read on multiple Technical Specifications.

Some declare patents essential to multiple Technical Specifications

Participants in technology standard standard-setting, such as in 3^rd Generation Partnership Project (3GPP) Working Groups, are obliged to declare their patents that they believe might be or might become essential to technology standards such as 5G. For example, the Intellectual Property Rights (IPR) policy of 3GPP partner ETSI requires declarations to ensure that standards are not blocked by IPR being unavailable. Declaration practices differ among participating companies, but with all of them reasonably declaring some patents that would never actually be found standard essential if tried in litigation by courts of law.

More and more patents

However, with the increasing use of patent counts as a measure of companies’ respective patent strengths, for example in determining royalties, it is widely believed that some technology developers puff up their positions with numerous declarations in excess of what is reasonably required to protect their IPR, shield them from assertions of anticompetitive behaviour such as patent ambush and provide the commitments required by IPR policies. Over-declaration is thus commonly understood to be the filing and declaring of large and increasing numbers of low quality patents that would never be found essential in litigation. Accordingly, there has been an exponential increase in patent declarations. Rapidly approaching 80,000 patent families have been declared to ETSI including various communications standards.

With over-declaration, raw patent counts and checked-essential patent counts exaggerate patent strength. There is no essentiality checking in standard setting, such as by 3GPP or ETSI. While essentiality checking is undertaken by some specialist firms, my previous research shows that this does a poor job in correcting the inflated relative positions of companies that over-declare. Systemic bias prevails because essentiality checking is far from perfectly accurate. False positive determinations (i.e. where a patent is found essential when it is not truly essential) tend to exceed false negative determinations. And, the lower the true essentiality rate (i.e. the percentage of declared patents that are truly essential), the more bias there will be.

Throw everything at the wall and see what sticks

In addition to inflating patent counts by flooding IPR databases with increasing numbers of declared patents, my new research paper—based on patent declaration and standards data collected and processed by Dolcera—indicates that some companies are also declaring individual patents to multiple different Technical Specifications. While most major declarers declare their patents to an average of no more than 2.5 Technical Specifications, some companies declare essentiality to more than twice as many, and with individual patents declared to as many as 12 or even 18 different Technical Specifications. However, essentiality is based on whether a patent reads on any Technical Specification, not on how many of the latter are referenced.

As human and automated checks have to assess each declared patent’s essentiality against every Technical Specification referenced, the more of those that are referenced the higher the probability of false positive determinations while the probability of false negative determinations cannot increase even to partially offset the above. Assessing any additional Technical Specification can, therefore, only increase the possibility that a patent is found essential. This means that the systemic bias inflating essentiality rates found in checking will be higher than if declarations for each patent were more diligently focused on only one or two Technical Specifications. Costs also increase with the expanded workload in checking more Technical Specifications.

My full new research paper analysing patent essentiality declarations to multiple Technical Specifications can be downloaded here and from SSRN.

USPTO Finds No One Country or Firm "Winning" 5G Tech Race

The United States Patent and Trademark Office has released a report titled, “Patenting Activity Among 5G Developers.”  Notably, the USPTO Report states:

In recent years, many studies have attempted to identify a single global leader in 5G technologies. Because it is difficult to directly determine which company owns the most patent-protected technologies used in 5G networks, existing studies have examined company activity in 5G standardization work and patents and patent applications declared potentially essential to 5G standards.

This report provides a broader perspective by examining more than one data set and by recognizing the variances in significance that patents have to a sophisticated technical standard, such as 5G.

Specifically, the report examines which companies have fled for more patents at the USPTO in four technologies that have seen the most patenting activity among declared patent flings: Management of Local Wireless Resources, Multiple Use of Transmission Path, Radio Transmission Systems, and Information Error Detection or Error Correction in Transmission Systems. This approach narrows the focus to patent flings on technologies central to 5G innovation. In addition to measuring patenting activity in these four technologies, the report also examines certain patent fling attributes associated with greater value. By analyzing the question of the 5G patenting activity from a variety of perspectives, the USPTO has generated a rich set of results that are arguably more informative of 5G competitiveness than prior studies.

The USPTO’s examination shows that six 5G companies consistently competed in patenting activity: Ericsson, Huawei, LG, Nokia, Qualcomm, and Samsung. According to the data generated for the report, no single firm dominates 5G innovation at present.

In summary, the results suggest that there remains ongoing competition among these six 5G companies in patenting activity notwithstanding media claims that a single firm may lead. Given the complexity of the results, caution is recommended when reviewing media claims of 5G dominance.

The Report also notes some key takeaways:

• Unique among studies on 5G patenting activity, this report examines both (1) overall global 5G patenting trends, and (2) patent flings and value indicators in the four most patented 5G-related technologies. • Based on the report’s analysis of patenting activity, the six most active 5G companies are Ericsson, Huawei, LG, Nokia, Qualcomm, and Samsung. • The findings of the report call into question claims that any single firm or country is “winning.”

The report is available, here. 

Right-pricing cellular patent licensing in 4G and 5G connected vehicles

Bountiful connectivity apps in vehicles

While litigation is bogging down the licensing of cellular standard essential patents (SEPs) in vehicles with disputes about where in the production supply chain licensing may or must occur—from chip, to module, to telematic control unit (TCU), to entire vehicle—this is also delaying payment of Fair, Reasonable and Non-Discriminatory (FRAND) royalty charges in these cases and causing confusion about licensing value. This is a pity because clarity is in everyone’s urgent interest.

Well-established mobile phone licensing benchmarks conservatively imply a total value of at least around $30 per vehicle for patents essential to the 2G, 3G and 4G standards.

Great expectations for IoT hinge on cellular technology

There is strong consensus and enthusiasm in government, business and among commentators about the Internet of Things, with its multi-trillion dollar market potential. While financial and other benefits will be reaped by many vendors and users in various different industries, as well as by consumers, several generations of patented technologies developed largely by companies within the telecommunications industry over many years—up to and including newly introduced 5G—are enabling this major opportunity.

Despite cellular technologies being developed by and hitherto implemented largely among a relatively limited group of telecommunications industry OEMs producing cellular products—most significantly mobile phones as well as mobile network equipment—the variety and numbers of prospective technology implementers in IoT are far greater. While SEP licensing is well established for mobile phones and base stations—with thousands of agreements since the 1990s worth many billions of dollars every year—the industry is still in the throes of establishing the basis and pricing for use of these technologies in various different IoT applications including cars, domestic appliances, industrial robots and remote meters.

This article conservatively estimates total FRAND charges for licensing all cellular SEPs in vehicles, based on value derived therefrom and reflecting some recent court judgements on FRAND charges in other devices including smartphones. 

How to charge?

Since the early days of the 2G mobile phone industry, SEP owners most often licensed their cellular patents at royalty rates calculated as a percentage of phones’ average wholesale (i.e. unsubsidized) selling prices. One reason for this is that OEMs anticipated the subsequent downward trend in mobile phone prices, which fell dramatically following the introduction of digital cellular with 2G in the early 1990s. OEMs did not want to be locked into fixed dollar-per-unit (“DPU”) royalty charges that would increase in percentage terms as manufacturing costs were rapidly declining.

While royalties for 2G/3G/4G cellular connectivity in a mobile phone have usually continued to be charged as a percentage of the end-product selling price, the value established there—when stated as an equivalent DPU figure—is a key consideration. As average mobile phone prices increased with the widespread adoption of 3G smartphones from the late 2000s and 4G smartphones several years later, SEP licensors have, in many cases, at the behest of OEMs, “capped” percentage-based royalties to maximum DPU figures to ensure royalties paid do not exceed the value of additional features deemed less dependent on cellular connectivity. 

Similarly, DPU pricing is also applicable for other cellular-enabled “devices” including, for example, PCs and connected vehicles. There are also bountiful ways in which connectivity is exploited in these with various applications. However, a vehicle OEM, for example, would quite reasonably refuse to pay royalties for cellular SEPs that are calculated as a percentage of a vehicle’s cost or value in alloy wheels or leather seats. 

I have argued for many years against the proffered valuation methodology of basing royalties on a percentage of the sales price of a component or “smallest-saleable patent practicing unit (SSPPU)” and this approach has been soundly rejected by US and European courts.  The US Ninth Circuit Court of Appeals has ruled in Federal Trade Commission v. Qualcomm that “the district court’s analysis [relying on an SSPPU approach]is still fundamentally flawed. No court has held that the SSPPU concept is a per se rule for “reasonable royalty” calculations . . . .” Similarly, in Germany in Nokia v Daimler, the Mannheim court stated that the “royalty provided in [Daimler’s] counter-offer is not reasonable, as the reference value used in the top-down approach in the form of the average purchase price of [TCUs] is unsuitable. This reference value prevents [Nokia] from participating adequately . . . in use of the technology in the saleable end product.” (Unofficial translation.)

I am not commenting here on how aggregate royalties can or should be apportioned among SEP owners. Elsewhere, I have commented on the inaccuracies and other shortcoming in apportioning royalties based on the counts of declared-essential or judged-essential patents. 

Where to license?

While I and many others have also long argued it is also rather simpler and more efficient to license at the entire device level—as has always been the case in mobile phones—the Court of Appeals additionally ruled in the above that it is the patent licensor’s prerogative to license where it wishes. 

As discussed below, the value of cellular functionality to a connected vehicle is at least around $30 per unit, regardless of where licensing occurs in the production supply chain, and irrespective of the different formulae that could be used to calculate that figure with licensing at different stages in that supply chain. 

Valuation benchmarks

While there has never been consensus in the telecommunications industry that aggregate royalties for SEPs should be capped—with significant dissent by various licensors including Qualcomm—maximum aggregate figures proposed by some leading companies that declare many patents essential to cellular standards—when correctly interpreted and applied—provide at least some conservative valuation benchmarks. Court determinations of FRAND royalty rates for individual licensors—also as percentages of unsubsidized wholesale handset prices—in a few different cases have been based upon or cross-checked using such aggregate figures:

• 6% to 10% for LTE by Judge Selna in TCL v. Ericsson, which was subsequently overturned on appeal;
• 8.8% for LTE (i.e. 4G) by Justice Birss in Unwired Planet v. Huawei;
• 5% for 3G and 6% to 8% for 4G by the Shenzhen Intermediate Court in Huawei v. Samsung.

However, adjustments to the above are warranted because some source figures have been misinterpreted and incorrectly applied or alternative figures could have been reasonably selected as aggregate royalties in determining FRAND rates for the parties’ portfolios. 

Prior to Judge Selna’s judgement being entirely vacated on appeal, I showed he had muddled single-mode and multi-mode licensing rates in pages 5 to 7 of my critique of his “top-down” SEP royalty rate valuation analysis. As LTE was being first standardized in 2008, patent owner announcements from April that year proposed individual and aggregate single-mode LTE royalty rates. This was for like-for-like comparisons with claims of ”less onerous” licensing for rival 4G technology WiMAX at “much lower” rates and with patent pooling at a “predictable cost”. Only a couple of companies also mentioned their proposed multi-mode rates. It is only since then that Apple’s iPhones and Android-based smartphones have been multi-mode devices needing licensing of more than one generation of technology. The first of these smartphones, including even 3G, was not introduced until the second half of 2008. The aggregate rates Judge Selna used in deriving an aggregate FRAND rate of 6% to 8% (his judgement also cites a figure “not higher than 10%”), reflected only the value in LTE and not that in 2G and 3G. The correct figure for LTE handsets (i.e. multimode devices) with his methodology should, therefore, have been 11% to 15%, including an additional 5% for 3G, and conceivably more for the inclusion of 2G. 

Justice Birss also uses the “total royalty burden” in his FRAND rate determinations. He indicates, for a 4G multimode handset, “the aggregate implied by either party’s case (Huawei’s 13.3% and Unwired Planet’s 10.4%).” The average of these two figures is 11.9%. 

According to Strategy Analytics, the global wholesale average selling prices for LTE handsets (i.e. overwhelmingly multi-mode including 2G, 3G and 4G standards) were $270 in both 2018 and 2019. That equates to $29.70 to $40.50 per handset at multi-mode royalty rates of 11% and 15%, respectively.

While cellular SEP licensing revenues for Ericsson, InterDigital, Nokia and Qualcomm alone amount to many billions of dollars per year, that is overwhelmingly from mobile phone licensing with revenues understating value in cross licensing among these and other companies. For example, as Ericsson and Nokia used to have large handset device operations and still have major cellular network equipment businesses, licensing fees paid in cash among those and many other cellular industry companies significantly reflect netting off rather higher nominal charges. Major implementers—including Apple, Huawei, LG and Samsung with substantial market shares of device sales in recent years—tend to generate little or nothing in cash royalties for SEP licensing while they seek to minimize license fee outpayments through cross licensing. 

Licensing fees paid also understate value because many OEMs have remained unlicensed due to free-riding with patent “hold-out” and because some OEMs do not have licensing programs but own patents for defensive purposes. 

SEP value in vehicles versus smartphones

The value of SEP technology to vehicles is provided in various ways and applications to manufacturers, consumers and vehicle fleet operators. In some respects, this value exceeds the value that the same technology confers on a smartphones. As well as enabling in-vehicle information and entertainment systems, cellular technology:

• Connects all of a car’s occupants concurrently, while smartphones tend to be used by only one person;
• Enables remote vehicle diagnostics for maintenance, asset management tracking and route management in trucks; 
• Improves vehicle safety with C-V2X, for example, with collision avoidance alerts introduced in 4G: thus saving lives by reducing the numbers of millions dying and many more suffering from serious accidents on the roads worldwide each year; and
• Can continuously connect various third parties, including the vehicle OEM, insurance providers and fleet management service providers.

The value derived from the one-off licensing charges is also elevated in connected vehicles because these have longer working lives than smartphones.  Cars, for example, typically have 14-year lifespans before scrappage, versus seven years for mobile phones, while users in developed countries replace their phones about every 18 months.

The DPU value of cellular SEPs in vehicles is, therefore, at least comparable to that in smartphones.

Even more than a big smartphone on wheels

While there will continue to be a large proportion of costs and value in vehicles that has nothing to do with cellular capabilities, the proportion of that in information and communications technologies—significantly including cellular connectivity—is large and growing rapidly. As defined by industry analyst Markets and Markets, the global connected car market is expected to be worth $54 billion in 2020 and is projected to reach $166 billion by 2025—a compound annual growth rate of 25%. With sales of around 70 million light vehicles per year, that amounts to $600 per vehicle in 2020 rising to $2,400 per vehicle in 2025. It believes the connected truck market is also worth tens of billions of dollars per year. In addition, Markets and Markets circumscribes a separate global in-vehicle infotainment market which it projects to grow from $24.3 billion in 2019 to $54.8 billion by 2027—a compound annual growth rate of 10.7%.  Research shows that car manufacturers charge consumers from several hundred dollars to many thousands of dollars for connected car application “packages.”

In consideration of all the above and the “maximum aggregate rates” relied upon by the judges, as discussed above, an aggregate SEP value of $30 to $40 per smartphones is also reasonably applicable per connected vehicle for multimode 2G/3G/4G licensing. While DPU royalties are explicitly not derived as a percentage of a vehicle’s cost or price, it is notably that the above figures correspond to less than 0.1 % of average selling prices for cars—at $37,800 in the US and $27,400 globally— two orders of magnitude higher than for LTE smartphones at $270 over the last couple of years. 

The future in 5G

As indicated above, the connected car market is expected to quadruple in size over the next five years, with additional growth in adjacent markets that are also dependent on cellular connectivity. As well as buoying average prices and stimulating new vehicle sales volumes, connected vehicle capabilities in cars and trucks—with Markets and Markets’ market definition, or with my broader market definition—will inevitably provide among the best opportunities for vehicle OEMs to differentiate their products and bolster profit margins. For example, capabilities including C-V2X are being enhanced in 5G over what is possible in 4G, with improvements such as enhanced positioning to enable increasingly autonomous and even self-driving vehicles. While market definitions include the cost or price of tech hardware and software, utility and value to consumers will grow as autonomous capabilities—provided by C-V2X, sensors and AI—save lives while relieving occupants from driving and enabling them to work, relax or sleep. 

While cost and value to manufacturers and consumers in connected vehicles is almost entirely still in 2G, 3G and 4G today, this will increasingly be in 5G with it expecting to dominate the flow of gross additional cellular connections (a leading indicator) and account for 31 percent of all established connections worldwide by 2025. That justifies significant additional royalties for 5G in vehicles, as some cellular SEP owners are already obtaining through the licensing of 5G smartphones and other devices.

One-stop-shopping is best in IoT

While bilateral licensing is possible in IoT including connected vehicles—as it is in mobile phones—the reduced transaction costs and other benefits inherent in platform-based licensing or patent pooling is highly attractive to both licensors and licensees in IoT, as I wrote in my previous article here very recently. While all the major cellular SEP owners have preferred to license bilaterally to the relatively small number of handset OEMs, most prefer now to license these SEPs into the numerous different vertical sectors in IoT through a platform or pool. For example, while there are differences in analysis and opinion about exactly what proportion of cellular SEPs Avanci represents, there is broad agreement that it, with its 39 licensors, has most of them. Avanci licenses all its 3G and 4G SEPs for $15 per connected vehicle—the price of a car wash—regardless of how many TCUs, modules or modem chips the vehicle contains.

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A similar article to this was originally published in RCR Wireless.

Keith Mallinson is a leading industry analyst, commercial consultant and testifying expert witness. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007.

How innovative, competitive and well adopted was 4G LTE in mobile communications— implications for outlook in 5G?

LTE's introduction a decade ago and its development as the definitive 4G mobile communications standard which predominates in smartphones is an outstanding accomplishment. Competition has served technology innovators, manufacturers, mobile network operators (MNOs), over-the-top service providers and end-users extremely well.  Markets have functioned and advanced superbly with a vibrant supply ecosystem and providing 4.1 billion LTE connections out of 9.4 billion in total worldwide. In the U.S., 63 percent of the nation’s 479 million mobile connections use LTE.

Despite overwhelming evidence of this extraordinary and widespread success, some allege that illegal and anticompetitive practices have caused significant harms including suppressed innovation, market exclusion and excessive pricing. While legal arguments and economic theories are extensively articulated by the parties and their amici in the U.S. Federal Trade Commission’s antitrust action against Qualcomm—with this case still on appeal following the Northern California District Court’s ruling against the latter—my analysis here focuses on market and economic facts and figures in innovation, competition and consumer welfare over the last decade with LTE. While there is no evidence of those negative effects, there is proof of commercial failure by the alleged principal injured party, Intel, due to its poor strategic judgment and inability to keep up with the exacting technical pace of a most fiercely competitive marketplace in smartphone chips.

Antitrust law is to ensure competitive processes are preserved, not that competitors are protected. High prices are not per se illegal because they provide incentive for increased competition, such as from new market entrants and lower-cost innovations. Suppliers that are inefficient in terms of costs, quality or speed-to-market versus competitors should not be protected from their failings.

Every new decade, a new G

A new generation of mobile technology is introduced approximately every 10 years. As the new decade turns, it is most opportune to assess how well LTE has exceeded all expectations, and what has made this possible, since its first introduction around the turn of the previous decade.  Were concerns about introduction of yet another new G—including the need to invest in a network overlay, more spectrum, replace devices and pay additional patent license fees—well founded or needless?

Many MNOs, particularly in Europe, were very disappointed with their transitions to 3G in the early 2000s, due to high spectrum costs and initially disappointing demand for new data services. Conversely, in the US, AT&T waited until availability of mobile broadband with HSDPA in 2005 and deployed this on its existing spectrum. With exclusivity over iPhones in the US, its network became overloaded and in dire need of capacity expansion by around the end of the decade.

The very first commercial launches of LTE were in Scandinavia by TeliaSonera in late 2009. Following several more launches in 2010, the new standard was most significantly established with its introduction by Verizon at the end of that year and by AT&T in 2011. Both of those MNOs largely deployed LTE initially in new spectrum at 700MHz. It provided great coverage, together with much improved data speeds and network capacity. That was just the beginning for LTE.

Consumer demand surges with smartphones and LTE

While press and consumer attention in the smartphone and mobile broadband revolution over the last decade or so is mostly with device original equipment manufacturers (OEMs) including Apple and Samsung, the increases in communications performance have largely been down to others in their technology development and through chip component and network equipment supply, together with network deployments by the MNOs.

While mobile broadband data initially grew from a low base at a fast rate using 3G technologies CDMA EV-DO and HSDPA from the mid 2000s—with most demand from PC data cards and dongles— that exponential trajectory has been maintained with data growth compounding at around 60 percent or more annually for the last decade.

Mobile broadband data consumption has grown enormously in recent years

This was significantly due to the rapid adoption of smartphones following the introduction of the iPhone 3G and the first Android operating system device in 2008. Smartphones embodied a variety of innovative new technologies including applications processing, displays and sensors. Improved communications with LTE, in conjunction with an increasing supply of licensed spectrum for mobile, were perfectly placed to accommodate demand growth. The first Android smartphone with LTE was launched in 2010 and Apple’s first LTE smartphone was the iPhone 5 in 2012. It took less than a decade for smartphones to overwhelmingly substitute for feature phones.

Smartphones predominate in U.S. handset purchases since 2011

Market dominance and concentration in supply

Other measures commonly used to assess economic efficiency in antitrust investigations also indicate that mobile technology markets are healthy and dynamic.

Some industries are inherently and necessarily highly concentrated. For example, Boeing and Airbus have a duopoly in supply of large commercial aircraft. The number of suppliers and the relative positions among them reflect industry economies of scale, barriers to entry, strategic focus and competitive strengths in execution with customers purchasing largely based on technical specifications, cost and delivery performance. Trends in market concentration over several years are very informative about how market competition is developing.

The supply of mobile handsets including smartphones has remained unconcentrated for many years because merchant supply of highly standardized components and open standards in cellular technologies have reduced barriers to market entry to low levels. In the 2000s, Nokia dominated with a vertically integrated supply chain, up to 40 percent market share in handsets and even higher in the high-end devices that were precursors to modern smartphones. Since smartphones became mainstream in the 2010s, there have been many new market entrant OEMs and the positions of some leading incumbents including Nokia and BlackBerry have collapsed due to competition.

Concentration is inevitably rather higher in digital baseband modem chips than in mobile phones, because supply is rather different than in handsets including much higher barriers to entry with R&D requirements and economies of scale in product design and production. While some modem chip vendors have exited the marketplace in the last decade, MediaTek’s share of LTE modem chip sales rose to 24 percent in 2016 before falling with significantly rising shares for vertically integrated suppliers Samsung and Huawei with its HiSilicon division. Large shifts in market share away from leaders and rapid reductions in concentration indicate intense competition.

The extent of concentration in supply can be quantified by reference to the Herfindahl-Hirschman Index, a widely accepted measure of market concentration in competition analysis. The HHI is calculated by summing the squared market shares of all firms in any given market. U.S. antitrust authorities generally classify markets into three types: Unconcentrated (HHI < 1,500), Moderately Concentrated (1,500 < HHI < 2,500), and Highly Concentrated (HHI > 2,500).

High concentration in LTE modem chip supply was very transient. Concentration in new market segments is likely to be high as the first few suppliers enter. Between 2013 to 2016, LTE modem chip supply concentration trended down to lower levels than in the 3G UMTS, 2G GSM/GPRS and 3G CDMA modem chip segments. LTE supply concentration has fallen to a Moderately Concentrated level and Qualcomm now accounts for less than 40 percent share. In contrast, UMTS (i.e. WCDMA/HSDPA) and GSM/GPRS/EDGE modem chip supply concentration has increased as MediaTek’s shares have grown to exceed 50 percent in each of these market segments while Qualcomm’s shares have diminished to only a few percent in UMTS and zero percent in GSM/GPRS/EDGE. While the FTC also alleges that Qualcomm has illegally dominated CDMA chip supply, since 2017 it is VIA Telecom (acquired by Intel in 2015) that has the highest share of this market segment and largely accounts for the high and increasing HHI in this market segment.

Market concentration in supply of baseband modem chips and handsets including smartphones

Qualcomm has excelled in bringing the latest advanced features to market most rapidly, as has MediaTek with mid-range, low-cost solutions and VIA Telecom has focused on CDMA.

A lot more bang for your buck

Meanwhile, consumer prices—measured in dollars or whatever currency prevails nationally per gigabyte of data—have fallen dramatically to a small fraction of levels around the turn of the last decade, as is evident in the US. This has been due to the low costs of LTE technology and fierce competition throughout the value chain.

Source: Qualcomm’s Opening Statement presentation, p29, at trial on April 16, 2019. In Re: Qualcomm litigation Case No. 3:17cv0108-GPC-MDD (S.D. Cal.)

“I skate to where the puck is going to be, not where it has been”—Wayne Gretzky

Surviving, let alone winning in industry sectors with rapid technological change and major investment requirements is not easy. Sound strategic and commercial judgment as well as a modicum of good luck are as important as technical competence. Intel’s various incoherent forays in cellular chips make a pertinent case study in strategic failure, not of abuse by a much smaller company.

Each generation of mobile technology is commonly portrayed and perceived—particularly in hindsight—as a single entity. However, with a new 3GPP standard release every year or two, LTE was first specified in Release 8 (2009) and then improved with increased functionality and performance six times before 5G was first standardized in Release 15. Whereas LTE and 4G are now universally regarded synonymous, it was only with Release 10 (2011) that LTE became compliant with International Telecommunication Union’s IMT Advanced specifications which are generally regarded as defining 4G. LTE Advanced Pro in Release 13 (2016) was another significant performance upgrade milestone.

Numerous technological improvements in LTE’s introduction and continuous development have increased spectral efficiency, spectrum reuse, data speeds, network capacity, reduced latency and also provided entirely new capabilities. Improvements include the OFDMA waveform, carrier aggregation, MIMO, advanced channel coding, higher order modulation, use of unlicensed spectrum and improved positioning technologies.

Standards setting organizations (SSOs) map out, for all to see, which new features will be introduced in each new standard release. That is very helpful for product developers, but so much resulting from the collaboration among SSO participants and appearing in the standards means chip and network equipment vendors are chasing multiple moving targets. The general direction of travel might seem obvious in hindsight, but fast pace and good judgment with selection and commitment to the most important improvements are essential. Some features turn out to be much more important than others. While device OEMs design and manufacture smartphones, it is largely the modem chip vendors and network equipment OEMs that have developed and supplied the technologies and products that implement or enable MNOs and users to benefit from latest standard-based improvements.

Leaders must not only be the fastest to invent and bring to market, they must also know where and when to place their big bets. Those that make the wrong call will suffer significant adverse consequences with exacting requirements from OEMs and their MNO customers.

Self-harm

While Intel its portrayed as the major injured party in the FTC’s case against Qualcomm, Intel failed in modems for several significant reasons at Apple and elsewhere, despite its deep pockets, position as a leading semiconductor chip designer and silicon fabricator. It even squandered the advantages of its incumbency as the sole modem chip supplier to Apple for iPhones and iPads from 2007 until 2011, while also being, in that period and continuing to be ever since, Apple’s sole supplier of CPUs for its Mac computers.

Intel failed to recognize the (mis)match between what it was pushing and what OEMs wanted.  It foreclosed itself from all but a relatively small proportion of the LTE modem chip market segment. Most smartphones include chips that integrate the baseband modem processor with an application processor that is based on the ARM instruction set and architecture. There was never a distinct “thin modem” market—in the sense of defining a relevant market for competition purposes. Modem suppliers need to address the entire market segment of modem supply—including thin and integrated modems—to be efficient in development and production of technologies and products. The proportion of thin versus integrated modems in smartphones has fallen from around 40 percent in 2011, when most smartphone OEMs were just getting started, to only teens of percent in the last few years.

Intel has offered no ARM-based application processor since it sold its XScale business to Marvell in 2006. It failed in its alternative strategy with attempts to get its “Intel Architecture-based [X.86] processors” adopted in smartphones and tablets. Its x.86-based Atom application processor was uncompetitive for many reasons including higher power consumption and its inferior supply ecosystem with higher costs for the associated components needed to support the chip. Intel fared poorly despite spending billions on subsidies in its attempts to build a mobile device beachhead in tablets. It never achieved any more than a small share of supply to tablet OEMs and no more than a trivial share of supply to smartphone OEMs.

Intel captured Apple, as Apple’s sole 3G modem supplier for iPhones, when Intel re-entered the market with its acquisition on Infineon’s cellular chip division in August 2010.  However, Infineon would have known by then— as Intel should have also known through its acquisition due diligence, if that had been carried out thoroughly and competently—that modem business was about to be lost with the upcoming February 2011 launch of an iPhone 4 model based on a Qualcomm chip. Intel’s other 3G thin modem customers included Samsung and Huawei that subsequently have significantly switched to vertically integrated supply. Apple aside, Intel’s share in LTE supply was never more than a percent or two. Bad luck or poor market intelligence, judgment and execution?

Intel was too late in finding its voice

Having been ejected from Apple in 3G, Intel was very anxious to get back in there with LTE. But it failed to keep up with the pace of standard-based developments in LTE. Intel was late with LTE-Advanced (i.e. actual 4G) improvements and was at least two years late in being able to offer voice over LTE (VoLTE). LTE had no voice capability before VoLTE was standardized. Leading mobile operators—including AT&T and Verizon in the US—demand certain features in devices to exacting schedules.  For example, with major operators including T-Mobile US and Verizon launching VoLTE services by 2014, they were insisting on VoLTE in new phone models beforehand. This was significantly driven by their desires to seed the market for use of the new service and so that they could shut down older-generation networks, such Verizon’s 3G CDMA network by the end of 2019. Despite the above efforts, this date has slipped to 2020 to avoid leaving customers with phones that cannot make phone calls.

Many devices are used on networks for more than five years following new model introduction. Popular models are commonly sold for more than three years before being withdrawn from sale. For example, Verizon is still selling the iPhone 6s (2015) and Galaxy S7 (2016). The last of those sold are likely to be used for another few years before being retired.

It was not until 2016, with chip supply for launch of the iPhone 7 in September that year, that Intel could meet voice specification requirements of Apple and its MNO customers in LTE. In contrast, Metro PCS launched VoLTE with the LGE Connect 4G in January 2012 and VoLTE was incorporated in the iPhone 6 (September 2014). Qualcomm LTE modems were included in both devices.

What was he smoking?

In addition to strategic conflicts, Intel also suffered from delusions at the highest level. For example, despite Intel not being able even to do voice in LTE, in 2016, former Intel CEO Brian Krzanich proclaimed that Intel was the leader in 5G, including in modem technology. This was way off the mark. In fact, the main reason Intel exited modem supply, announced by replacement CEO Bob Swan in April 2019, and why Apple settled all its litigation with Qualcomm the very same day, was that Intel could not keep up the required pace and schedule in its 5G technology developments. Apple was clearly fearful it would not be ready to introduce 5G iPhone devices in 2020 without switching back to Qualcomm’s supply.

While the period of Qualcomm’s alleged misconduct is only to 2016, the FTC regurgitates the Court’s contention that Qualcomm will remain dominant in the transition to 5G, but without explicitly alleging any abuse there. Qualcomm has clearly competed on the merits in establishing itself as the leader in 5G modem chips. With a new air interface and addition of mmWave bands (i.e. with high-band frequencies at 24 GHz and abo)  its astute competitive strategy has included unmatched technology development in modems and acquisition in RF front-end components.

Voodoo economics II

The FTC’s most significant but hotly contested theory of harm, and that the district court has accepted, is that Qualcomm’s royalty charges to OEMs impose a “surcharge” on chip competitors that limits their ability to invest in R&D and makes them unable to compete on the merits such as in technical performance. Why the royalty charge is any different to any other necessary input cost—such as that for the display or battery components—is a mystery. OEMs are charged royalties non-discriminately regardless of modem supplier. According to the FTC’s allegations, and despite evidence to the contrary, Qualcomm’s royalty charges are excessive and are only paid because it supplies “must have” chips and has a “no license, no chips policy.”

That theory suggests that elimination of the alleged surcharge should enable a chip vendor to become competitive. However, Intel still failed despite that supposed relief. It commenced LTE modem chip supply to Apple for the iPhone 7 in 2016 and was the sole modem supplier to Apple for all subsequently launched models, including the iPhone X (2018) and iPhone 11 (2019). By April 2017, royalties paid to Qualcomm on Apple products, including those with Intel’s chips, had ceased and were not resumed until April 2019.

Rather than capitalizing on this window of opportunity, Intel failed on the merits, as indicated by its chip market exit, despite this non-payment of any royalties including the alleged surcharge to Qualcomm. While Intel’s dollar expenditures on R&D had been increased, R&D decreased as a percentage of its rising sales (i.e. including new sales of modems to Apple): $12.7 billion (21.4 percent) in 2016, $13.0 billion (20.8 percent) in 2017 and $13.5 (19.1 percent) in 2018. Based on the FTC’s economic theory, Intel supplying Apple should have had lower costs than other chip suppliers whose customers were still paying Qualcomm royalties. LTE modem chip market segment shares for Huawei (HiSilicon) and Samsung, that also buy Qualcomm chips and pay it licensing fees, have continued to increase since 2016.

Be careful what you wish for and be grateful for what you have

There will always be prophets of doom and self-serving interests who predict harms such as market failures if changes are not made. The kinds of accusation made by the FTC about Qualcomm in LTE echo those made against Qualcomm in UMTS, just before mobile broadband with HSDPA took off and before those charges were dropped  by the European antitrust authorities.

Prior to the introduction of LTE and for several years subsequently it was alleged that royalty stacking would make the technology prohibitively costly, particularly since LTE royalties would stack on those that had to be paid in multimode equipment including 2G and 3G.

A royalty stack never appeared in 3G and in never appeared in 4G. The only harms are the contentions over patent royalties that are costing a lot in legal fees and are enabling implementers including Apple and others to “efficiently infringe” by holding out from payment while enjoying the benefits of rich standard-based technologies.

As I explained here last month and previously, with patent licensing fees paid less than five percent of handset prices, such costs are dwarfed in comparison with the value that has been created with annual revenues of around half a trillion dollars in handsets, more than a trillion in operator services plus huge revenues to the over-the-top players that have flourished over the last decade in the smartphone and mobile broadband revolution with LTE.

Uber, Instagram, FaceTime and Netflix all launched in 2010 and have, among many other OTT providers, significantly benefitted from LTE’s mobile broadband capabilities. For example, Netflix has enjoyed a 4,000 percent stock rally with its streaming services significantly used on mobile devices. Smartphone OEMs have benefitted from these services because users want devices that can best access these services. Mobile operators benefit because they generate mobile broadband service revenues even from “free” services that are delivered on top. These services are transforming the way we work and play with daily hours of smartphone usage even exceeding TV watching.

Significant ongoing development has been required since introduction of LTE and the first 4G technologies. Whereas coverage and capacity were easily established with the deployment of additional spectrum at 2 GHz and below, there is nowhere near enough spectrum available there to satisfy escalating mobile broadband capacity demands. New technologies including Massive MIMO antenna arrays and HPUE to increase device uplink radio transmission performance in the latter LTE releases and in 5G are expanding capacity by better exploiting frequencies above 2 GHz. 5G has been designed to access mmWave bands with orders of magnitude more bandwidth than is accessible with previous generations of technology. All this, yet alone what is yet to come with URLCC and mMTC in the Internet of Things, would not be possible without major ongoing R&D investments. These should not be taken for granted—particularly in the race to establish and maintain global leadership and national security in 5G.

This article was originally published in RCR Wireless in a very similar form on 7th January 2020.

Keith Mallinson is a leading industry analyst, commercial consultant and testifying expert witness. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007.