Free and Fair Trade in IP would be Crushed by Compulsory Chip-based SEP Licensing

The Fair Standards Alliance  makes various demands in its “position paper.” Among these it states that a standard-essential patent license “should be available at any point in the value chain where the standard is implemented and that a fair, reasonable and non-discriminatory royalty should in most cases “be based on the smallest device that implements those patents, and additionally it should take into account the overall royalty that could be reasonably charged for all patents that are essential to that standard.”  Some of the FSA’s demands echo changes adopted last year by the IEEE in its revised patent policy. 

Such dramatic disruption to the basis of SEP licensing would most troublingly affect trade between commercial parties with highly unpredictable outcomes on the amounts actually paid. Whereas technology developers and others can still choose whether or not to participate in IEEE standards setting and can declare with a “negative Letter of Assurance” if they are unwilling to license on the basis of IEEE’s new patent policy, it is not clear how the FSA seeks prosecution of its demands. Compulsory licensing would undermine legal rights enshrined in patent law, eschew the consensus-based and voluntarily agreed patent policies of other standards development organizations while also overriding well-established and prevailing licensing practices.

FSA members including major technology companies Google, HP and Intel hold many patents and collectively spend billions of dollars on R&D, but would like lower charges for licensing SEPs because these tend to be owned by other companies. In a press release this summer, the FSA claims to be “the ‘voice of reason’ whereby we seek the right for all businesses to use standard essential patents under fair and transparent licensing terms.” The FSA’s Chairman Robert Pocknell added that “[w]e cannot and will not accept that Europe’s future economic growth is held hostage by a number of companies bent on endless litigation as a means to reap profit at everyone else’s expense.”

These are strong words but the FSA presents no evidence of harm to economic growth or of excessive payments and profits to patent owners. To the contrary, profits have significantly declined for the major SEP owners in the last year while royalty income has remained flat as a percentage of devices sales revenues.

Total Revenues and Operating Income Declined Substantially for Major SEP Licensors* in 2015

	2014		2015
millions	Revenue	Operating Income	Revenue	Operating Income
Alcatel-Lucent	$18,039	$208	$15,962	$798
Ericsson	$34,083	$2,513	$29,923	$2,642
InterDigital	$416	$169	$441	$209
Nokia	$16,101	$1,933	$13,976	$1,888
Qualcomm	$26,487	$7,375	$25,281	$5,593
Total	$95,126	$12,197	$85,584	$11,130
Annual growth in total			-10.0%	-8.8%

*These companies’ licensing revenues account for the majority of SEP licensing fees paid.

Licensing Revenue Rose In-Line with Increasing Mobile Phone Sales Revenues in 2015

	2014		2015
$ figures in millions	Licensing	Yield	Licensing	Yield
Alcatel-Lucent	$75	0.02%	$63	0.01%
Ericsson	$1,480	0.36%	$1,745	0.40%
InterDigital	$416	0.10%	$441	0.10%
Nokia	$791	0.19%	$1,145	0.26%
Qualcomm	$7,862	1.91%	$8,202	1.87%
Total	$10,625	2.58%	$11,596	2.64%
Annual growth in total			9.1%	0.06%

Yield = licensing revenues divided by total mobile phone industry revenues.

Total licensing fees paid are dwarfed by device revenues and profits. Industry analysts’ estimates for total mobile phone revenues include IDC’s of $438 billion for 2015. Total industry operating profits for smartphones have continued to grow by 17.6 percent from $53.4 billion in 2014 to $62.8 billion in 2015, according to Strategy Analytics.

With clarification of the European Commission’s position on SEP licensing in its settlements with Motorola and Samsung and with the CJEU Judgment on seeking SEP injunctions in Huawei versus ZTE,  the Commission’s competition agency is now focusing on other smartphone industry matters with its assessment that Apple failed to pay €13bn ($14.6 billion) in taxes on its European profits. Apple’s iPhone operating profits were $55.3 billion and the company’s total operating income was $71.2 billion globally in 2015.

Extended litigation, in various cases, is resulting from “efficient infringement” and the “patent holdout” tactics of free-riding implementers, not from profiteering patent owners.

The rest of my article, in full here, is based on some of my previously published analysis and focused on explaining why existing free-market licensing practices are fair, reasonable, non-discriminatory and well established. The royalty base and royalty rates are agreed bilaterally, not by regulatory fiat or based on silicon foundry costs. Existing licensing agreements reflect the fact that patent claims and corresponding value created relate to entire devices and beyond in communications systems. Forcing change to licensing terms would cause unpredictable disruption to arrangements that have worked very well and enabled new entrants such as Apple, numerous Asian OEMs and others to enter the SEP-intensive markets for smartphones and other devices and then grow to command significant market shares while owning little or nothing in SEPs themselves.