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.

One-stop-shopping with segmented offerings is most appealing for SEP licensing in IoT including 5G

In various industries including pharmaceuticals, where a product is typically protected by only a few patents, if intellectual property is licensed at all, licensing tends to be atomized: company-by company for individual patents or small portfolios, and nation-by-nation rather than globally in many cases.

In marked contrast, patent pooling is increasingly attractive for licensing cellular technologies with emerging IoT including 5G because it can provide greater transparency, predictability, and various efficiencies such as lower transaction costs at scale in standard-essential patent (SEP) licensing with multiple dimensions and complexities including:

• Scores of patent jurisdictions, but with a handful of these most significant by far;¹
• Hundreds of patent owners, while most SEPs are owned by a very small proportion of these;²
• Thousands of implementers, with the vast majority of these in IoT outside of the cellular industry vertical;³ and
• Hundreds of thousands of patents declared essential to the cellular standards, while large proportions of these are not actually essential.⁴

No more than a dozen or so patent owners have significantly or profitably operated their own licensing programs to monetize SEPs in cellular,⁵ and even fewer have in other technologies such as video codecs where patent pooling has predominated for many years.⁶

While the number of jurisdictions and patent owners has not increased substantially for cellular SEPs in recent years, the number of prospective implementers is increasing enormously, as is the number of SEPs. Patent pooling enables those new implementers to be most effectively licensed by all SEP owners.

One size does not fit all implementers

Whereas cellular technologies were once all implemented by a relatively small number of OEMs and in only a few different types of device, including cellphones and PCs, in IoT there are a very wide and expanding array of applications from sensors and humble products such as meters to very complex and costly apparatus such as self-driving cars, surgical instruments and industrial equipment. Market verticals are also numerous including manufacturing, mining, agriculture, smart grids, smart cities and smart homes. Licensing across all this diversity requires wide distribution and range in licensing packages, segmented to suit different implementations, including various licensing price points reflecting the significantly different values derived from the SEPs by implementers and their customers in some applications versus others. 

Benefits for all licensors

The inherently larger scale in patent pooling than in bilateral licensing makes this all more cost effective for both licensors and licensees in IoT.

Some major cellular SEP owners— including Ericsson, InterDigital, Nokia and Qualcomm—significantly monetize their patents by licensing cellular device OEMs directly. Others who are also major device implementers—including Huawei, LG and Samsung—significantly reduce or eliminate their device licensing costs through cross-licensing, also directly, with other cellular device OEMs. Many more cellular SEP owners have too few SEPs to profitably support their own cash-royalty generating licensing programs. Instead, while some license their video-codec SEPs through patent pooling, others’ cellular SEPs have largely remained dormant, for “defensive” purposes.

For decades now, cellular patent pools—including those for 3G, administered by Via Licensing and SISVEL subsidiary 3G Licensing SA, and for 4G, administered by SISVEL and Via Licensing—all failed to make any significant impact versus bilateral licensing, and, as I predicted in 2010, had no prospect of doing so.

However, the outlook for patent pooling in cellular technologies improved dramatically when Avanci entered the market in 2016 with its 2G/3G/4G licensing platform focused exclusively on IoT, with licensing and charges based on end-devices and the SEP value conferred to them. While none of the major cellular SEP owners—including all the companies named above—joined any pools that were seeking to license all types of device including mobile phones, all four of those significant SEP monetizers named above agreed to pool their cellular SEPs for IoT licensing through Avanci along with 35 other licensors. While various assessors disagreed about the relative positions of individual SEP owners, they broadly agreed that those four companies collectively accounted for most SEPs.

Patent pooling enables those companies with existing programs also to reach a far larger range of licensees than previously with their own licensing programs, and, for SEP owners without licensing programs, it enables them to be able to monetize their patents at all. The smaller licensors particularly benefit from various economies of scale and cost efficiencies, including distribution (i.e. in licensing “sales” and marketing), in operations and administration because they have lower licensing revenue potential. For example, assessing patent essentiality and relative value among SEP owners is expensive and can be contentious. Costly litigation is more likely required to ensure payment of royalties outside of pooling arrangements.

Removing roadblocks to efficient licensing

Pooling is logical, efficient, beneficial to SEP owners and implementers, and widely favored in some instances (i.e. for video codecs generally and for cellular in IoT). A recent business review letter (BRL) on the matter of Avanci’s proposed new 5G licensing platform for IoT, from the U.S. Department of Justice’s Antitrust Division, notes that the Department had ‘long recognized that patent pools can “provide procompetitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation.”’

Nevertheless, there remain impediments to SEP licensing in general that threaten to prevent patent owners reaping their just rewards and that impair potential advantages in patent pooling. While the following contentions are not all fully resolved to final appeal in all major jurisdictions, obstructions to well-established licensing and valuation methods are being removed and some trends that are hostile to SEP owners are reversing:

• End-device licensing. While SEP technologies are significantly implemented in baseband modem chips, patented cellular capabilities reach extensively beyond these components into modules and across entire devices. By licensing at the end-device level, all patents can be included in a single agreement. Nevertheless, there is significant dispute between many licensors who insist on licensing end-devices and some implementers who want to license at the chip or module level. Challenges to well-established and extensive end-product licensing practices have been made under antitrust laws, as well as in contract and patent laws. In FTC v. Qualcomm, the US Ninth Circuit Court of Appeals has recently rejected all antitrust-based claims including exclusive dealing: “Qualcomm is under no antitrust duty to license rival chip suppliers.” The aforementioned BRL also recognizes considerable efficiencies in licensing vehicles and notes that the Department of Justice’s Antitrust Guidelines state that field-of-use restrictions, such as licensing at the end-product level, can be procompetitive.⁷
• End-device-based royalty rate determination. Relatedly to the above, there has also been significant litigation to undermine the well-established and predominant method of basing royalty charges on the value in end products, and, instead, determine royalties based on the, so-called, smallest-saleable patent practicing unit. However, the Ninth Circuit Court of Appeals has also ruled in FTC v. Qualcomm that that there is no obligation for patent owners to calculate royalties on that alternative basis, even if a chip can be deemed to be the SSPPU in any implementation. ‘No court has held that the SSPPU concept is a per se rule for “reasonable royalty” calculations; instead, the concept is used as a tool in jury cases to minimize potential jury confusion when the jury is weighing complex expert testimony about patent damages.’ No jury was ever involved in FTC v. Qualcomm litigation, nor is one ever involved in determining royalties in normal business operations outside of court. The German Mannheim court in Nokia v Daimler has found that Nokia’s [end-product-based] automotive licensing offer was fair, but that neither Daimler nor its supplier Continental “were seriously willing or prepared to conclude a license agreement with the applicant on [fair and reasonable] terms.” The Department of Justice also notes in its BRL of Avanci’s proposed 5G IoT licensing program that there are a variety of ways to value the patented technology and stated that it believes parties should be given flexibility to license in a manner that best rewards and encourages innovation.⁸
  The value delivered by these cellular SEP technologies substantially exceeds chip implementer design and fabrication costs in many cases. Licensing at the chip level, and calculating royalties on this basis would tend to drive royalties down to values in the most basic implementations (e.g. a “connected” lightbulb) and undervalue patents in high value end-devices (e.g. connected cars with cellular V2X capabilities). The result would be economically inefficient and dysfunctional with reduced incentives for SEP owners to contribute their technologies to the standards. Chip-based licensing would result in more uniform charging which could be too costly for low-value applications or under-compensate for inclusion of SEPs in high-value applications.
• Global licensing. While numerous technology products, including those containing cellular SEPs, are global with manufacturing and sales including many nations, and with thousands of global patent licenses agreed and underpinned by many billions of dollars of royalty payments made over many years, some implementers have held out from taking such licenses by arguing that national courts do not have extra-territorial jurisdiction. However, The UK Supreme Court’s recent appeal judgment in Unwired Planet v Huawei and Conversant v Huawei and ZTE rules that the English Court has power to grant an injunction in respect of UK national patents unless the implementer enters a global license of a multinational patent portfolio, and to determine the terms of that license. The UKSC recognizes that national courts determine validity and infringement of national patents but the ETSI IPR policy—as is applicable to cellular SEP licensing— empowers a national court to determine FRAND rates and terms. There was no UK lower-court determination of validity or infringement for foreign patents. Implementers remain free to challenge patents at the national level and seek a reduction in royalties should that be successful for significant technologies. Worldwide licensing is the norm, is supported by the ETSI IPR FRAND agreement, and is not precluded by national courts. There is no international forum for appeal, and so it is only national courts that can deal with disputes about worldwide licensing.

Extending SEP licensing reach for IoT through patent pooling

The ways in which cellular SEPs are licensed are expanding as these technologies are increasingly being implemented in many more devices than mobile handsets, tablets and PCs. While bilateral licensing is not going away any time soon, and will always remain an option due to antitrust concerns that would arise if one or even several patent pools were the only means of licensing, patent pooling or similar platform-based licensing is increasingly attractive in IoT including 5G. This is because the numbers of implementers and applications is increasing dramatically outside the cellular industry vertical, and because the value that IoT can provide significantly varies from case to case, accordingly. Patent pools have the scale to be able to offer one-stop-shopping to implementers with most or all of the SEPs they need to license, and with royalty charges that are proportionate to the value they derive from the sophisticated cellular technologies they use, such as upcoming ultra-reliable and low-latency communications in 5G.

While bilateral licensing is most likely to continue to predominate among the technology developers and implementers within the cellular industry, the Avanci licensing platform —initially focusing on connected vehicles and smart meters with charges (e.g. up to $15 per vehicle for 3G & 4G) based on value in those devices and applications—is beating a new path in cellular technology licensing. This is attractive in IoT, including 5G, in a way that has already proven successful for all devices in video codec standard technology licensing.

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Endnotes

¹While it is not cost effective or necessary to patent in all jurisdictions, effective IP protection for products manufactured or sold in several or many nations also requires patenting in multiple jurisdictions including US, China, Europe and Japan.

²Net of duplicates, I estimated 265 different companies had declared patents as essential to 3GPP standards in the ETSI IPR database by May 2019. While patent counting is not an accurate or reliable of method of comparing SEPs among different patent owners, as illustrated by wide disparities in various studies’ patent essentiality assessment results, these studies far less controversially all show that most SEPs are owned by fewer than 10 companies.

³While, according to Strategy Analytics, 37 OEMs accounted for 83% of cellular handset shipments in 2018, the GSM Suppliers Association had identified, already by August 2020 (less than 18 months from 5G’s inception), 93 vendors who had announced 401 available or forthcoming 5G devices including 18 different “form factors” among these. While GSA’s figures include various end-devices, they also include intermediate products including modules and vehicle onboard units which are increasingly being incorporated in plethora of additional end-devices (e.g. cars) by many different OEMs serving their respective vertical markets. For example, licensing platform Avanci, with 39 licensors, has licensed 14 vehicle manufacturers. There are also many OEMs in other verticals, including healthcare, industrial automation and asset tracking. For example, 36,000 Bluetooth Special Interest Group members including manufacturers and others in numerous vertical sectors all cross-licence their SEPs for the Bluetooth standard under a royalty-free pooling arrangement.

⁴While 332,511 patents had been declared essential to 3GPP standards in the ETSI IPR database by September 2020, studies claim that many of these are not actually essential.

⁵A total of 56 companies, including patent pools and patent-assertion entities, were identified as prospectively generating cellular SEP royalties, with 5 “Leaders” and 16 other public companies accounting for more than 90% of these, in A New Dataset on Mobile Phone Patent License Royalties, by Haber, Galetovic and Zaretzki, 2H 2017.

⁶The vast majority of video codec SEPs are licensed to thousands of licensees through only a few patent pools including those administered by MPEG LA, HEVC Advance and Velos Media.

⁷The BRL states at page 18: ‘Here, the efficiencies from the proposed field of use appear to be considerable and are likely to outweigh the potential competitive harm caused by limiting the scope of the Standard [Patent Licensing Agreement] to connected vehicles. The Antitrust Guidelines for the Licensing of Intellectual Property make clear that field-of-use restrictions can be procompetitive because they allow the licensor “to exploit [its patents]as efficiently and effectively as possible” and that they may “increase the licensor’s incentive to license.”’ (Citations omitted.)

⁸The BRL states at page 20: ‘There are “a variety of ways” parties might value patented technology, including setting royalties based on end-product revenue. The essential cellular SEPs licensed here are subject to FRAND commitments. Avanci represents that its current rates for the 4G Platform are FRAND and reflect input from both licensors and licensees, and that Avanci intends its 5G rates also to be FRAND. There is no single correct way to calculate a reasonable royalty in the FRAND context. Each standards-essential patent holder will have to decide whether the Avanci Platform comports with its own FRAND commitments. Standards implementors can enforce the commitments in contract proceedings if there are disputes. The Department believes parties should be given flexibility to license in a manner, consistent with these commitments, that best rewards and encourages innovation.’ (Citations omitted.)

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This article 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.

Cellular inventions trigger avalanche of activities among companies

Major innovations in cellular technologies arise largely from the substantial Research and Development (R&D) investments and inventions of relatively few companies, followed by widespread collaborations including many more in the process of standard setting.

Inventor inspiration triggers avalanche of activities

The disproportionately large amounts of value created by those with most of the inspiration and perspiration in technology development are not reflected in simplistic and often-inflated metrics that are increasingly being used in patent-licensing rate apportionments, including by the courts in Fair, Reasonable and Non-Discriminatory (FRAND) licensing disputes. These metrics include the numbers of contributions to the standards and the numbers of patents declared-essential or cursorily judged to be essential to the standards. Thousands of negotiated and executed licensing agreements, including cross-licenses, with various terms in addition to royalty rates—all underpinned by billions of dollars paid annually over many years—much better reflect how patent-protected value is generated and exchanged.

Device manufacturers, network operators, over-the-top (OTT) service providers and end users derive enormous value from extensive and easily-available technologies in published standards from Standard-Setting Organizations (SSOs). That is evident from the huge success of cellular including an extensive market entry in supply and widespread adoption.  With significant and increasing division of labor between the few who invent and develop Standard-Essential Patent (SEP) technologies and the many who implement these in manufactures, the formers are increasingly dependent on licensing income—based on their shares of value created and exchanged rather than on simplistic metrics such as numbers of contributions to SSOs or SEP counts—to make adequate financial returns and justify reinvestment in further technology R&D.

Standard-essential technology development lifecycle

New cellular and other standardized-technology innovations proceed in three overlapping and entwined stages:

1. Conception and invention—typically by a small number of luminaries in no more than a handful of companies
2. Technology development—by many experts in a relatively small number of companies
3. Standard setting—with numerous companies participating in technology evaluation and selection, most of whom do little or no standard-essential technology development work themselves outside the SSO.

Creating, developing and then incorporating innovative cellular communications technologies in standards is a massive endeavor that expands significantly as it proceeds. It involves increasing numbers of companies as it progresses from conception through to the adoption of new technologies in Technical Specifications at 3GPP and in the standards with its seven regional partners, most significantly including the European Telecommunications Standards Institute (ETSI). Any assessment of how much value is contributed and by whom to standard-essential technologies, including 3G WCDMA or HSDPA, 4G LTE and 5G cellular, must consider the entire process including Stages 1 and 2, not only what is most visible and measurable in standard-setting activities, such as contributions or meeting attendance, at Stage 3.

The large R&D investments and resulting value generated in the first and second stages of innovation, identified above, are not always apparent because the work there is largely hidden from the public or might only be recognized by specialists. In contrast, the popular but simplistic use of publicly-available SSO activity metrics in Stage 3, such as counting the numbers of technical contributions to 3GPP Working Groups (WGs) as a proxy for a company’s share of innovation in standards, can significantly understate the value provided by inventors and pioneers while inflating that of companies who join the bandwagon of an emerging success later on — for example, in the Study Item (SI) and Work Item (WI) phases of standard setting at 3GPP.

Most of the activities logged in the public records of 3GPP are the mere tip of the iceberg in terms of the total amount of development work undertaken, including that outside this SSO, with even more extensive other activities submerged from public view. Activities including in WGs and other meetings at 3GPP are publicly visible because “TDoc” technical contribution documents, meeting attendance records and other information are all available publicly online. But this represents only a small proportion of total effort and rather less still of technical effort or innovation, which most significantly also includes company R&D outside this SSO. 

SSO work at 3GPP is the tip of the iceberg

Whereas standard setting is nominally a matter of selecting the best from among various contributions, in practice the process is far more subtle, complex and multifaceted. For example, most technical contributions that are ultimately approved, are subject to multiple revisions and resubmissions before standardization is completed. Building the required consensus for technology selection among SSO participants also significantly involves consideration of non-technical issues, such as companies’ business models and reputations, bilateral business agreements and nationality.  Even the approval of purely technical contributions can significantly reflect these other factors in many cases. This distorts the accuracy of contribution counts as a purported indicator of patentable inventive and innovative technology developed and incorporated in the standards by one company versus another.

Non-linearities in apportioning rates

Neither patent counting nor contribution counting can account for significant differences among patents, and among licensors and licensees. Most declared-essential patents are not actually essential. Even adjusting counts of these with third-party standard-essentiality assessments is problematic because it introduces additional inaccuracies including bias. SEPs are not all of equal value. The same proviso applies to judged-essential patents and to SSO contributions. Bargaining strength is not proportional to any of these counts and depends on other significant factors including R&D pipeline and technology roadmap, position or absence thereof in downstream product markets.

Many patent-licenses established bilaterally with numerous licensees and underpinned by billions of dollars in payments over many years reflect all these complexities and subtleties. Formulae used to diagnose existing licenses and apportion royalty rates elsewhere simplistically misrepresent these dynamics.

Nevertheless, both parties in the TCL v. Ericsson FRAND royalty rate-setting dispute agreed to use a simple algebraic formula with inverse proportionality (i.e. using only +, −, x and ÷) to “unpack” various existing SEP cross-licenses in the derivation of one-way licensing rates (see Decision, page 62). Variables include licensed sales, royalty rates, relative patent strength and balancing payments.

Presiding Judge Selna expressed “some reservations” about top-down royalty-rate apportionment methodology based on patent-counting proportionality in this litigation (see Decision, page 50); but he used it there, regardless, as his primary means of determining FRAND rates in his declaratory judgement.

Outstanding technology value in cellular standards

In a cellular marketplace worth trillions of dollars, with value and growth driven by recent technologies such as LTE Advanced, LTE-LAA and upcoming 5G, is it important to identify where and how much value is generated and exchanged in SEP technologies. Innovators’ rewards should be commensurate with that—as exemplified in numerous executed licenses— not based on simplistic counts of contributions to SSOs or patents.

The example of taking cellular technology into unlicensed spectrum with LTE-LAA is a pertinent case study in how and where value is created in standard development because this major innovation significantly involved various regulatory and commercial issues as well as matters concerning the incorporation of already-standardized and new technologies. This case study and these related issues are discussed in my full article. It can be downloaded, here.

All the above was originally published in cellular industry trade publication RCR Wireless on 29th June 2018.

Yet another article on the 10-year anniversary of the iPhone

An extra-terrestrial alien visiting Earth in 2007 and returning, now, one decade later, might, at first glance, notice little difference in smartphones between times. For example, most-recent iPhone models superficially appear very similar to their predecessors including the first iPhone model in 2007. The external designs have remained fundamentally much the same including thin form factors, rounded corners and relatively large displays (with multi-touch operation) in comparison to featurephones.

                                                    Spot the difference

iPhone (2007)

iPhone 8 (as rumoured July 2017)

However, superficial appearances are very misleading: technological capabilities in mobile phones have improved massively with numerous valuable innovations from various contributors over the last decade, as did capabilities over the preceding couple of decades since the introduction of the first cellular “bricks” in the mid 1980s.

Another major milestone in cellular technology developments towards 5G

Recent new technology deployments with Gigabit LTE at Telstra in Australia, Sprint in the US and EE in the UK highlight how much cellular communications technologies have improved since the introduction of mobile data services with circuit-switched and then packet-switched offerings from around 20 years ago. Peak and average user data speeds on cellular networks have increased by a factor of 10,000 over 20 years. By way of comparison, microprocessor performance doubling every couple of years, as predicted by Moore’s Law, has increased only one thousand-fold over that period. Cellular performance improvements are therefore quite spectacular given the vagaries of connecting through the ether up to hundreds of metres, as well as processing those signals in the confines of around one square centimetre of baseband processor silicon!

2016 iPhone 7 is 1,000 times faster than the 2007 model

Whereas Apple has done an outstanding job in improving its iPhones in various ways and in motivating its customers to upgrade to later models, it is significantly dependent on other companies for many technical innovations that it includes in its devices.

While marketing departments and the press look for eye-catching new features on specific device models that might surge demand for the latter, it is relentless standards development work with innovations and performance improvements in cellular technologies to increase speeds, network capacity and reduce power consumption that provide the crucial underpinnings for these ––particularly for HD, 4K or even 8K video that sends or receives very large volumes of data over the mobile networks.

Inspiration and perspiration

Development work for this including 4G and 5G technologies is largely undertaken by a hard core of several major technology-developing firms. Research on attendance records of all the 3GPP working group meetings between 2005 and 2014 reveals that a few highly-active firms are largely responsible for the technical developments in that standards development organisation. Over this period, a total of 3,452,040 man hours were spent in 825 working group meetings, mostly in the development of 3G and 4G standards. Distribution of contributions to 3GPP is highly skewed, with a few firms submitting the vast majority. For example, the top two percent of firms (i.e. 9 of them) are responsible for submitting 60 percent of all contributions. Furthermore, approximately one-third of all participating firms (i.e. 161 of them) have not submitted a single contribution to 3GPP.

However, most of the activity in the public records of standards development organisation 3GPP is the mere tip of the iceberg in terms of the total amount of development work undertaken, with even more extensive other activities submerged from public view.

As I noted in a report on innovation and intellectual property protection, it is a popular misconception that innovation is random or serendipitous. In fact, it takes many ideas to find a few initiatives worth experimenting with, which may then enable some to be identified that are worth investing in significantly and might ultimately lead to a winner or two with sufficient development effort and investment. This work is largely undertaken outside of SDO meetings.

The numbers of patents and patent applications declared to the ETSI IPR database as possibly being essential to these cellular standards are also very skewed. A small number of mostly the same companies as above account for a large proportion of patent declarations. When I last checked, seven companies including Ericsson, Huawei, Nokia, Qualcomm and Samsung accounted for 70 percent of the many thousands of patents declared in the period 2008 to mid 2015.

Value for money in cellular patent licensing

Licensing fees paid in the smartphone industry are substantially for standard-essential patents and in some cases for non-SEPs. Total patent licensing costs for Apple and other smartphone OEMs at around only a few percent of revenues are good value given the development efforts and performance improvements delivered by technology developers.

Licensing fees pale in comparison to the profits generated by Apple. The original iPhone was introduced in June 2007 at a price of $599 in the US. This and subsequent iPhone models have generated very large profit margins, as illustrated by the difference between retail prices and manufacturing costs.

Substantial mark ups and profits to Apple on iPhone

	2007	2011	2016
Model	iPhone	iPhone 4s	iPhone 7
Standard/technology	2G EDGE	3G HSPA	4G LTE- Advanced
Version (storage)	8GB	16GB	32GB
Full retail price*	$599.00	$649.00	$649.00
BoM cost*	$222.55	$178.82	$246.91
Markup ($)	$376.45	$470.18	$402.09
Markup (%)	169%	263%	163%

* Source: TechInsights/Portelligent

According to Strategy Analytics, Apple sold 231 million iPhones with an operating profit (i.e. after some other operational costs) averaging $239 per phone in 2015. That represents 36 percent of its $669 average selling price that year.

Following the introduction of a new model every year at gradually increasing prices, “the 10th anniversary iPhone, the next model, expected to be massively redesigned and packed with state-of-the-art technology, could sell for as much as $1,200 to $1,400, according to some estimates”.

Analysts also estimate patent licensing fees paid to Qualcomm average about $10 to $20 per iPhone. Apple has stated that Qualcomm charges it "at least five times more in payments than all the other cellular patent licensors we have agreements with combined."

On that basis, Apple is paying a total of between $12.50 and $25.00 per iPhone in fees for licensing from all cellular patent licensors. That is equal to between two percent and four percent of iPhone prices. Licensing fees as a percentage of consumers’ total cellular expenditures over a smartphone's approximate two-year service life, including operator service fees averaging around $40 per connection per month in the US, for example, are considerably lower.

Happy anniversaries

It is also ten years since I published my abovementioned report, noting as well that innovation can occur in many ways, with a variety of different business models and that fully vertically-integrated companies had become a rarity in technology industries. I stated that explicit recognition of value through licensing was increasing innovation, competition and customer choice with third-party supply of IP, in addition to that for components and manufacturing. That conclusion still holds.