Where is 5G communications technology IP coming from?

As I explained in IP Finance last week, following President Trump's blocking of Broadcom’s hostile bid to acquire Qualcomm, by remaining independent the cellular technology leader will be able to maintain its long-term commitment to high levels of R&D investment (at 23 percent of sales recently), most significantly including that in 5G communications standard-essential IP.

Use Cases for 5G International Mobile Telecommunications

5G is strategically important to the entire mobile ecosystem and to many nations for economic as well as for national security reasons.  The 5G standard will support many complementary technologies and market developments. Total estimated value is $12.3 trillion in 2035.

5G is a new standard that significantly embodies cumulative technology developments from previous cellular standards including 3G UMTS and 4G LTE. Many more innovative new technologies will also be added to 5G over the next decade or so. 

Transformation and growth with 5G

Mobile communications has improved in leaps and bounds since the introduction of analog phones in the early 1980s. After cellular was only significantly used for voice calling for a couple of decades, network traffic from voice was surpassed by data communications in 2009 with demand for the latter at least doubling every 18 months ever since. This is no mean feat. It resulted from major investments in technology R&D as well as in network facilities and new devices.

Exponential growth in mobile data

With the first commercial 5G deployments from around 2019, the new standard promises to be transformative and facilitate further growth with:

• Enhanced mobile broadband—even more of the above, with higher speeds and increased capacity to support that and additional users
• Ultra-reliable and low-latency communications for applications such as self-driving cars
• Massive Machine Type Communication in the Internet of Things (IoT) to connect tens of billions of sensors and other devices worldwide

While market opportunities are wide ranging and will include numerous technologies, they are most significantly underpinned by the mobile communications technologies developed and contributed to the 5G standard, including IP protected by standard-essential patents.

Building on the shoulders of giants

5G is substantially based upon previous cellular technologies. For example, whereas previous advances from 1G to 2G, from 2G to 3G and from 3G to 4G where largely defined by a totally new “air interface”, both 4G LTE and 5G “New Radio” are predominantly based on OFDMA wireless technology. 5G is also capitalizing on many other technologies that were already introduced in previous standards. Examples include QAM modulation, MIMO space division multiplexing and multi-carrier aggregation technologies. This short paper of mine explains in greater depth how seminal and foundational technologies are initially contributed to the standards and are then also very valuably reused in later standards. As standardization progresses, many more companies get involved in the process, including some who supplement these foundational technologies with additional contributions of varied worth.

As declarations begin to be made—of patents that owners believe are essential to the 5G standard—it will soon become apparent that a clear majority of these will have already have been declared essential to previous standards including various 3G standards and 4G LTE. Technology-IP leaders in 3G and 4G will therefore also tend be the leaders in 5G.

It is still very early for 5G SEP declarations because declarations are usually made several months after the setting of standards. The first standardization of 5G was not until December 2017 in 3GPP Release 15.[1]

Following this initial 5G standard release, there is substantial additional and ongoing development work including trials, debugging, development of commercial products and the introduction many new technical features and performance improvements.

Leading cellular technology innovators, among others, will continue to make new contributions to the standards in 5G, including additional technologies that are being introduced in later releases of the 5G standard, as also illustrated in this Qualcomm blog posting.

Quality trumps quantity in SEPs

The value of standard-essential technologies is largely a function of patent quality—particularly including seminal and foundational contributions—rather than of the raw numbers of patents filed, issued or declared essential to the standards. Nevertheless, significant attention is paid to these metrics, and on the numbers of technical contributions to standard setting organizations because these figures are easy to count and promote in the media, in licensing negotiations and in court litigation.

However, SEP declarations and the number of technical contributions companies make to the standard-setting process can easily be inflated by those who seek to “game the system.” Declarations of patents that owners believe might be essential or might become essential to the standards are not policed or verified by SSOs. Their IPR databases were set up to identify patents and their owners, not for the purposes of apportioning SEP value or FRAND royalty rates. As I have indicated previously in IP Finance, patent counting is inaccurate and unreliable even when third parties make essentiality checks.

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[1] 3GPP is the stand setting organization responsible for all the major mobile communications standards including 2G GSM, 3G UMTS, 4G LTE and 5G.

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.

UK - Autumn Statement and IP tax

The devil will no doubt follow in the Finance Bill detail, but the heads up on IP tax points from the Chancellor's statement is:

Fiscal:
- the new (post-1 July 2016) patent box rules are to be updated by adding provisions to deal with cost sharing arrangements so that companies using these are not advantaged/disadvantaged when it comes to calculating the R&D fraction

- 'new spending' of £4.7 billion between 2017 and 2021 to enhance the UK’s position as a world leader in science and innovation (whatever that means …), apparently to be rolled out as £425m in 2017-18, £820m in 2018-19, £1.5bn in 2019-2020, and £2bn in 2020-2021. This is apparently direct funding (grants) into an Industry Strategy Challenge Fund, to be modelled on the USA's Defense Advanced Research Projects Agency programme, as well as allocating funding more generally.

- £0.7 billion to support the market to roll out full-fibre connections and future 5G communications

Non-fiscal:
- review tax environment for R&D to build on the R&D Expenditure Credit for large companies 'to make the UK an even more competitive place to do R&D'
- more Science & Innovation Audits

UK Spending Review & IP

Crickets - by Billy Hathorn

The UK Spending Review happened today – also known as the Autumn Statement – basically it's an update on the economic state of the nation in the UK and a staging post for economic, tax, etc announcements.

In past years, the Spending Review (or whatever it was known as in that particular year, the name changes) has brought us things like the patent box, R&D relief, and so on.

This year … crickets, from a tax perspective. Nothing much, really (a small change on entering into the intangibles tax regime for corporate partners).

There's some spending announcements though (with the usual caveat that it's a bit hard to tell what's new money and what's been announced before):

• £5bn in health R&D, including £50m in antimicrobial resistance research; 
• £150m to launch a Dementia Institute (presumably to do R&D);
• investing £6.9bn in capital (capital what?) to ensure that the UK remains a world leader in science and research, and protecting the current £4.7bn research funding "in real terms" for the same purpose - but note that £6.9bn includes the £150m for the Dementia Institute;
• investing £250m in a nuclear R&D programme (looks like it will be mostly for small modular reactor development, and focussed on spending in the North of England);
• protecting funding for the arts in real cash terms for 5 years;
• the £1bn Ross Fund investing in R&D in drugs, vaccines, diagnostics and treatments for infectious diseases – patterned with the Bill & Melinda Gates Foundation, so not all of that £1bn is coming out of UK pockets;
• playing a leading role in international research efforts to reduce the costs of low carbon energy (no £ information indicated, though);
• a new entity called "Research UK", based on the Paul Nurse review recommendations. This will work across (not with? maybe just poor wording …) the Research Councils to promote a strategic approach to science funding. Innovate UK will be integrated into Research UK. The Research Excellence Framework will be reviewed.

[ETA 26/11/15 – the Innovate UK grants are to be replaced by loans, according to a press release from BIS, which doesn't have more detail on the point]

The Review also notes that scientific R&D has grown by 21.3% and architecture and engineering activities by 38.8% (possibly since the beginning of 2010, although that's not entirely clear, and neither is it clear what metric they are measuring – employment numbers? capital expenditure? revenue expenditure?).

Stats for the curious: "research" is mentioned 46 times, "science" 35 times, and "technology" 30 times in the policy paper (PDF).

R&D tax credits for SMEs - help the government get it right (or at least better)

Heads up - HMRC is consulting improvements to the radically underclaimed R&D tax credits for SMEs.

They're looking at how to promote awareness of the credits, the design and understanding of the rules, and - most importantly in my view, the new advance assurance process. One of the main stumbling blocks to claiming the R&D credit has been uncertainty about what does and doesn't qualify: most people seem to assume you need to be doing something that involved a long and complicated chemical name, but it's much wider than that. The advance assurance process is intended to enable SMEs to get confirmation that their R&D qualifies ahead of time, rather than putting a claim in and hoping for the best.

Have a look at the consultation and think about commenting - the more people contribute, the better the chances of getting something workable for SMEs. Comments need to be with HMRC by midday on 27 February 2015

Nokia, BlackBerry left behind amid untold disruption of the smartphone revolution

As I was completing my previous IP Finance posting on alleged royalty stacking in smartphones, last week, it occurred to me I should also write more generally about the massive disruptions in the mobile phone industry resulting from technological changes, new business models and market entry by Apple with its iPhone and many others using the Android operating system. Former market leaders have fallen and consequently exited the market with handset division divestitures by Nokia, Ericsson and Motorola. Challengers are succeeding on the basis of highly-standardized and readily available hardware and software platforms. These are employed by all comers as if they were commodities, but are rich in IP including standard-essential and other technologies which are costly to develop. This is paid for downstream in a variety of ways including: merchant product prices for chips; patent licensing fees for standard-essential patents and the other patents needed to implement the radio communication protocols and various user features consumers expect all smartphones to have; and advertising and apps spending to Google in the case of Android. The following article on all this was first published in mobile industry trade publication FierceWireless Europe.

Nokia, BlackBerry left behind amid untold disruption of the smartphone revolution

It is remarkable how dramatically and rapidly the fortunes of so many mobile handset vendors have turned with the advance of smartphones. Their marketplace was transformed by Apple's iPhone starting in 2007 and a succession of Android-based smartphone newcomers since 2008.

This has greatly expanded the size of the handset market with global revenues doubling in the last six years, as consumers substitute more expensive smartphones for their feature phones and basic phones. Yet changes have devastated most of the leading incumbent handset vendors.

Former leaders Nokia, Ericsson and Motorola have exited by divesting their handset divisions, and BlackBerry has struggled to survive following its precipitous market share decline, as business models and competitive cost structures have changed. Samsung Electronics is the only incumbent that has really flourished, while LG Electronics has also advanced and HTC has wavered.

How the mighty have fallen

Strategic strengths became liabilities

Seemingly strong brands, product distribution, patent ownership, vertical and horizontal integration with chips, networks and manufacturing have been insufficient to ensure survival, let alone success. The market leavers once had these attributes in spades. For example, Nokia had it all with approaching 50 per cent market share in smartphones and 40 per cent in mobile phones in general up until 2007. It ranked highly in global consumer brand ratings, dominated distribution in Europe and in many other nations worldwide. A cumulative $60 billion spent on R&D funded one of the very strongest patent portfolios and it could exploit various synergies with its network equipment division and in-house baseband modem development capabilities.

Business models and the basis for success in smartphones and mobile phones in general have been revolutionized. Costly supporting and complementary operations soon become major burdens when incumbents were wrong-footed in the market and lost the cash flows required to support all that, while also needing to do things differently. Instead, low costs and much greater reliance on technologies from others are the keys to success for most of the many recent market entrants.

They are exploiting platforms which are open, widely available and cheap to adopt. Apple is something of an exception, having created much of its own ecosystem, but it is also entirely dependent on others for radio technologies and manufacturing. Samsung uniquely remains highly integrated, but also employs outside technology including Android and Qualcomm's baseband chips in many cases.

Challengers rising high

What made the smartphone revolution possible

Smartphones, or at least the precursor to what we regard as such today, have existed for more than decade with Nokia's Communicators from around the dawn of the new millennium and the first cellular BlackBerry in 2002. But these were only niche devices and network service constraints severely limited utility beyond messaging. A combination of many technological advances has made modern smartphones the enormous success they are today. These include much faster networks, as 4G LTE today is 1,000 times faster than 2G GPRS introduced around 2000; fast and yet low-powered application, graphic and digital signal processors; much improved display technology; revolutionary improvements in operating systems and user interfaces; better battery performance; and an extending ecosystem with apps stores and mobile-oriented content.

Smartphone market entry barriers are now relatively low with standardized and openly available technology platforms. Smartphone vendors can capitalize on extensive published standards, market-leading merchant (i.e. off-the-shelf) chips and reference designs provided by these suppliers, and contract manufacturing. Addressable markets have grown to include hundreds of operators and several billions of consumers. Average selling prices, at around $275 for smartphones versus $175 for handsets in general, generate substantial revenues while strong downward pricing trends are maximizing smartphone penetration growth.

Just rewards

Handsome rewards including profits are available to those market leaders that can build a sustainable edge. According to Credit Suisse, handset manufacturer operating profits since 2007 have tripled to $51 billion on $326 billion revenues in 2013. Reportedly, these are overwhelmingly shared between Apple and Samsung, with others making small profits or losses.

Much of the costly R&D and standardization work required to create the platforms smartphone manufacturers employ is still being borne by network equipment vendors like the diversified former handset leaders above. These are increasingly dependent on technology licensing to help fund ongoing R&D. Similarly, specialized technology vendors such as Qualcomm and InterDigital have business models which are largely dependent on licensing fees. Microsoft also generates income this way as well, licensing its patents to Android device makers. In addition, Google, which provides the Android smartphone platform and its Play app store, generates income from these in various other ways including advertising charges.

It is incorrectly alleged that stacked royalty costs prevent the other smartphone manufacturers from making profits and cause other harms. Evidence does not show that high royalties are paid or that royalty charges undermine profits. Manufacturers that could negotiate the lowest royalty rates through cross licensing, due to owning most standard-essential and other patents, have taken the greatest competitive pounding by Apple, Samsung and various other new entrants selling Android devices. The former lost money because they had obsolete and uncompetitive strategies. Low profits for many newcomers are a function of the open and "commoditized" nature of the business with low barriers to entry, including the standardized and merchandized platforms everybody uses. This makes product differentiation and high-margin pricing difficult to achieve.

It is not possible to determine true profitability on handsets because many manufacturers are reluctant to disclose them, and businesses are mixed with the manufacture and sale of other products and services. Some manufacturers are still benefitting from being in both the handset and network equipment markets. For example, Huawei and ZTE have reported strong profit growth recently. This is due to the boom in LTE network investments, but smartphones are important complements to these companies. Rising star Xiaomi, with a low-cost, Internet-based distribution model, does not formally disclose profits but was reported last year as making a 10 per cent margin.

When Successful Innovation and IP Go in a Different Direction from Increased Domestic Employment

Ever since the onset of the Great Recession, the primary concern of most governments has been to accelerate domestic growth in a way that will increase employment. For example, there is no more anticipated economic data point than the US unemployment rate, published on the first Friday of each month. For the general public, the success or failure of many governments is the extent to which they can generate jobs in a sustained and substantial way. The primacy of economic growth, and its by-product —increased employment — threaten to place public discussion about IP in an awkward position. The reason is that there may no clear connection between enhanced innovation and IP activity and improved employment data. Instead, the benefits of cutting-edge IP may well be redounding primarily to the benefit of the few who are able to capitalize on the commercial success of their innovations, with little or no benefit to the overall employment situation. To the extent that this is true, arguments in favour of public support of IP rest on uncertain policy grounds.

Take a country like Israel, which is seen as an example of the use of effective public moneys for innovative research and development. A primary vehicle for this funding is the so-called Office of the Chief Scientist (known as the OCS), which extends financial support for innovative activity by recipient companies, here. The problem is that OCS funding requires that the intangible “Knowledge” for which read IP, very broadly defined) that is generated from such funding may not be transferred out of the country until the grants have been repaid to the OCS from commercialization of the Knowledge, unless a waiver can be obtained. Underlying this prohibition is the view that OCS funding is, at the end of the day, first and foremost intended to enhance local employment, whereby the commercial success of the company, except to the extent that it contributes to local employment, is a secondary consideration. How strongly this underlying policy is viewed can be seen from the fact that, under the strict letter of the Encouragement of Industrial Research and Development Law, the transfer of Knowledge in an unauthorized fashion might theoretically attract criminal penalties (although this blogger is not aware of any instance in which the criminal sanction has actually been brought to bear).

Pushing against this clear nexus between the expenditure of public moneys, the creation of valuable IP/Knowledge, and increased domestic employment, as exemplified by OCS funding, is the exit ethos of the Israel start-up community. While it has become a bit hackneyed, the description of the country as “Start-Up Nation”, here, does capture the esteem in which is held a successful hi-tech exit (meaning that the company has been sold to a foreign purchaser or, less likely these days, has successfully floated its shares on a reputable stock exchange), replete with underlying IP and related innovative technology. However, from the point of view of government employment policy, a successful exit typically has, at best, only a modest effect on overall domestic employment. Even assuming that the company maintains an R&D facility in the country after the exit, the primary benefit of a successful exit are the millions, sometimes hundreds of millions of dollars, that go to the investors and founders. Thus, even if the likes of a Google maintains a local R&D facility as a result of the exit, the employment benefits redound to a select few, with the overall national employment situation being largely unaffected.

Israel is brought as an example because its circumstances so vividly underscore the proposition that the development of IP tends to go to the benefit of capital (read investors and founders) rather than labour. But it is hardly alone. Singapore is engaged in an impressive and aggressive push, supported by public funding, to strengthen the position of that island nation as a Global IP hub in Asia, here. As this blogger understands the initiative, underlying it is a concern for the overall employment position in the country. The experience in Israel should be a cautionary tale for Singapore.

Don’t get this blogger wrong: he is all in favour of IP, innovation and successful commercial exits based on them. To the extent that government funds can assist these developments, it is to be encouraged. However, there is palpable and increasing risk here. In an age where public budgets are increasingly scrutinized, a budget line for the support of innovation and R&D, where the benefit fails to redound to the public in the form of increased employment, carries with it a double risk. First, the decoupling of successful innovation and R&D from improved domestic employment threatens to decrease the amount of continued public funding of such activities. Even more ominously, this decoupling may threaten public support for robust IP protection, thereby throwing out the IP baby with the public funding bathwater in a way that this blogger would prefer not to contemplate.

President Obama’s Legacy: An “Innovation Deficit” or Greater Wealth (and wider distribution)?

When we look back at Obama’s presidency, my guess is that he will be known for several things.  He’ll be remembered for health care reform and as the President of “The Great Recession,” and maybe even the end of Osama Bin Laden (hopefully, also immigration reform).  I doubt that everyone will remember that he inherited the financial mess that was “The Great Recession.”  I also doubt he’ll be remembered for creating manufacturing hubs, the American Invents Act (except amongst patent lawyers), fighting “patent trolls,” and starting an initiative to research the human brain.  But, he could be remembered for creating the “Innovation Deficit.”  What is the “Innovation Deficit?”  Basically, it is low federal spending on education and specifically on research and development (R&D)  in light of increased spending on R&D by global competitors.

The U.S. budget for FY 2015 is being prepared and universities are worried (as we all should be).  Last week, 165 university presidents in the United States sent an open letter to President Obama and Congress urging continued strong funding for education, here.  The letter is part of an effort led by the Association of American Universities and the Association of Public and Land-Grant Universities, see www.innovationdeficit.org.  The website includes a fact sheet outlining the “Innovation Deficit.”  It states:

·         Over the last ten years, U.S. R&D expenditures as a share of economic output have remained nearly constant in the U.S., but have increased by nearly 50% in South Korea and nearly 90% in China. (Source: NSF S&E Indicators 2012, Figure O-3)

·         From 1996 to 2007, R&D expenditures in the U.S. grew by an average of 5.8% annually.  During the same time period, China’s average annual growth was 21.9%.  During the first year of the economic slowdown (2008-09), U.S. expenditures decreased slightly while China’s increased by 27%.  (Source: NSF Indicators Figure O-4 and Overview)

·         Between 2000 and 2008, the number of engineering doctorates awarded in China more than tripled to 15,000.  This compared to a total of 8,100 in the United States, of which only about 3,200 went to U.S. citizens and permanent residents.  (Source: NSF Indicators Figure O-10)

·         According to the OECD, government R&D spending between 2000 and 2009 increased by 250% in Korea and 330% in China; U.S. government R&D spending increased by about 45% during the same period.

·         From 1987 to 2008, federal R&D investment grew at just 0.3 percent per year in inflation-adjusted dollars—much lower than its 4.9-percent average annual growth rate from 1953 to 1987—and ten times lower than the rate of GDP growth over that period.  (Source: http://www2.itif.org/2012-leadership-in-decline.pdf)

·         The United States spent up to 17 percent of discretionary spending on R&D during the 1960’s, in part due to the space program, which resulted in a great deal of spinoff innovation; in recent years, outlays have fallen to around 9 percent of the federal discretionary budget. (Source: http://innovationtaskforce.org/docs/Benchmarks%20-%202012.pdf)

·         In 2008, China awarded 1 million first university degrees in natural sciences and engineering, up from 280,000 in 2000. That same year, the total number of first university degrees in natural sciences and engineering awarded in South Korea, Taiwan, and Japan (330,000) exceeded the 248,000 earned by U.S. students, despite the considerably larger U.S. population. (Source: NSF Indicators p. O-7)

·         The proportion of U.S. Patent and Trademark Office patent grants given to U.S. entities declined from 55% in 1995 to less than half in 2010. (Source: NSF S&E Indicators 2012, Appendix Table 6-45)

·         The percentage of U.S. gross domestic expenditures on R&D funded by the government declined from  47.1% in 1981 to 33.4% in 2011. The U.S. trails nine OECD nations in this percentage. (Source: OECD)

These statistics paint a disturbing picture—especially if this trend continues.  And, if you examine the preview document prepared by the Association of University TechnologyManagers (AUTM) titled, “American Universities: Unsung Heroes of the Economic Recovery” (August 5, 2013) that may provide a clue to the solution to a slow growing economy, you may become even more concerned.  The AUTM document provides a glimpse at the upcoming Annual Licensing Survey that will be released in full in December of 2013.  The preview document states that:

Institutions responding to the survey reported $36.8 billion in net product sales from licensed technologies in fiscal year 2012. In addition, startup companies formed by 70 institutions employed 15,741 full-time employees. This was the second year in which AUTM asked questions specifically targeted at ascertaining the economic impact of academic technology transfer. 

"When people think about job creation, they don't typically think about universities, but the data show that universities substantially contribute to the creation of new jobs in this country," adds Flanigan.  

Highlights of the AUTM U.S. Licensing Activity Survey:  FY2012 include: 

22,150 total U.S. patent applications filed (+11.3%)[;] 14,224 new patent applications filed (+7.2%)[;] 5,145 issued U.S. patents (+9.5%)[;] 5,130 licenses executed (+4.7%)[;] 1,242 options executed (+7%)[;] 483 executed licenses containing equity (+16.1%)[;] Total license income: $2.6 billion (+6.8%)[;] 705 startup companies formed (+5.1%)[; and] 4,002 startups still operating as of the end of FY2012 (+1.9%).

Back in 2001 when President George W. Bush first took office, I remember reading an article about how his administration planned to cut federal spending on R&D.  I remember thinking someone needs to get educated about what is happening with federal R&D funding because they are going to make a big mistake (for many reasons).  Within a few weeks, the Bush Administration announced that they were not going to cut spending in that area.  I hope we find the Obama Administration pushing hard for more spending on R&D.  We need to "feed that Pig." 

Let’s assume that we do the right thing and "feed the Pig." Could the Obama Administration do more than just provide federal funding for R&D?  One idea that has been floated has been the creation of a federal system of universities, “India’s Bold Solution to the US College Crisis: Federal Universities.”  This is an intriguing idea that may inject some needed “umpf” into the U.S. university system for R&D.  Perhaps the federal universities could be built around specific technologies—places where innovation could quickly take place in a system that quite rationally does not change quickly.  As I blogged about before, perhaps something like the Cornell project in NYC, but without a lot of baggage.  Greater wealth—and maybe some help for wider distribution of it.  Something to think about.