Patent royalties make up a higher proportion of cellular device costs than in most other markets, so the IPR game has been a hard-fought and sometimes vicious one. At the start of 2015, various developments suggest that the playground bullies of the past will lose a lot of their power. Qualcomm is on the defensive in China, while the holders of fundamental mobile patents are hitting back against Apple.
As it becomes clear which firms really hold the crown jewels in LTE and beyond – with China and Korea taking major roles – that will hit Qualcomm, which has huge adjustments to make to its licensing model, to accommodate a world where China is the biggest device market.
But smartphone patents are not just about the modem any more. Equally important are higher layer technologies such as screens and user interface software. While usually not included in standards, this kind of IPR has been at the heart of the past few years’ waves of handset-related patent litigation. The new complexity of the smartphone allowed Apple to become a new bully. It sought to use its arsenal of hardware and software IPR for two purposes – to dilute the royalties power of the firms with major holdings in 3GPP standards-essential patents (SEP), an area where Apple has not invested; and to weaken the competitive position of Android and Samsung, by getting devices banned and generally undermining confidence in the Google platform.
The ability of both Qualcomm and Apple, in their respective fields of IPR, to dictate terms from rivals is now severely constrained. Apple still has lawsuits outstanding with Samsung, in particular, but it is being squeezed on two fronts – by a series of Google-initiated neutrality pacts which unite many important players against unnecessary litigation; and by its weakness in standards-essential IPR.
Google – which made a serious misjudgement in assuming it did not need to invest in mobile patents when it initiated the Android revolution – recovered itself by acquiring Motorola Mobility and other significant mobile IPR holders, and by supporting the legal efforts of key allies (and patent holders) like Samsung. In the later months of 2014, it also engaged in a series of non-aggression pacts with IPR heavyweights like Samsung, Cisco, Verizon and Ericsson, and even agreed to a limited truce with Apple.
Those pacts are important because their signatories commit to long term cross-licensing deals with very broad scope to cover future patents in many cases, reducing the likelihood of legal spats. When Verizon signed its deal with Google late last year, it portrayed it as a blow to trolls, which have been the other menace in the mobile world in recent years. The operator wrote in a blog post that the agreement would guard against the patent troll – “the Johnny-come-lately owner of a single patent can threaten an entire innovative ecosystem”.
By greatly reducing the risk of future litigation, these pacts remove one of the key arguments which Microsoft and Apple have used against Android – that the Google OS exposes its licensees to the risk of lawsuits. After agreements with Samsung in January 2014, followed by similar ones with Cisco and LG, Google is starting to counteract that argument. Samsung has signed similar agreements with Cisco and Ericsson, and others are going the same way, potentially creating a mesh of cross-deals between many of the mobile sector’s largest players, which could deter them from suing one another, as well as making it harder for outsiders like Apple, or for trolls, to attack.
However, this is not entirely an outbreak of harmony. Companies with strong SEP holdings are increasingly keen to improve their financial performance, in a world where product margins are tight, by exploiting their IPR more effectively. Giant SEP owners like Ericsson and Nokia traditionally derived limited revenue from licensing but used their patents mainly for bilateral cross-licensing deals which reduced their own costs, especially compared to rivals with no patents to trade. But now they are determined to increase their direct income – especially in the case of Nokia, which has sold its devices division and whose patents are housed in an autonomous business unit.
Apple is an obvious target, as one of the world’s largest mobile device vendors, but severely lacking in patents essential to 3GPP technologies. This was made clear in 2011, when it settled a two-year dispute with Nokia over patent licensing terms, a deal in which the Finnish firm triumphed, highlighting how the old handset guard might be declining in sales terms, but remained dominant in IPR. Reminiscent of that epic battle is a new fight between Apple and Ericsson, which have this week fired lawsuits at one another after two years of negotiations failed to resolve licensing terms for the Swedish giant’s huge portfolio of cellular patents.
Ericsson is claiming that Apple is infringing patents which are essential to cellular standards and therefore included in every 3G or 4G iDevice. Apple is countering with the same kind of arguments it has already used against Samsung and others – that if IPR does indeed constitute SEP, then Ericsson is over-charging, and failing to honor commitments that all SEP should be licensed under Frand (fair reasonable and non-discriminatory) terms.
Apple seems to be taking a belt-and-braces approach – as well as the Frand arguments, it also alleges that Ericsson’s patents are not essential to LTE standards, and that it doesn’t infringe on them anyway. It insists that, even if a court finds the IPR is fundamental to LTE, Ericsson must calculate its royalties as a percentage of the price of the chip (notably Qualcomm’s modem) not the whole device.
It made these claims in a suit filed on January 12 in the US District Court for the Northern District of California, while Ericsson responded with its own legal action, placed in the US District Court for the Eastern District of Texas.
The industry has indeed moved towards chip-based, rather than device-based, royalties calculations, and regulators and governments have become increasingly determined to define and enforce Frand guidelines, with several companies – such as Samsung – being investigated for potential abuses by the European Commission. However, what constitutes Frand is not at all clear, and accusations of excessive or non-uniform charges have become a standard feature of licensing disputes in recent years.
In its countersuit, Ericsson insists that its patents are essential to the LTE standard and petitions the court to rule that its licensing policies, for its entire SEP portfolio, are fair. It claimed, perhaps disingenuously, that one reason for going to the law courts was to obtain an independent assessment of whether its licensing schemes do indeed comply with its Frand commitments.
Gustav Brismark, Ericsson’s VP of patent strategy, also told Telecoms.com that Apple’s claims over royalties only covered a small percentage of the patents portfolio involved. “The Apple complaint only contains a small subset of the patent portfolios that are at issue,” he said. “Meanwhile the lawsuit that Ericsson has initiated primarily asks the court do the assessment and come to the conclusion that Ericsson’s offer is indeed in line with our Frand commitment.”
“We’ve always been willing to pay a fair price to secure the rights to standards-essential patents covering technology in our products. Unfortunately, we have not been able to agree with Ericsson on a fair rate for their patents so, as a last resort, we are asking the courts for help,” Apple said in a statement.
“We believe it is reasonable to get fair compensation from companies benefitting from the development we have made over the course of the last 30 years,” retorted chief intellectual property officer Kasim Alfalahi.
Ericsson had a similar run-in with Samsung, which also accused the Swedish firm of inflating its licensing demands when renewal time came around. The companies settled that case a year ago, with a multibillion dollar agreement. However, Samsung would have had more to trade in IPR terms, so the Apple case may prove harder to resolve. And it certainly reflects the new licensing world, where the SEP giants are exploiting their assets more aggressively.
One of the unknown factors is how far the new IPR giants of the OFDM technologies – LTE, fast WiFi and beyond – will behave. Will Huawei, ZTE and LG seek to turn their growing piles of SEP into a direct revenue stream, or use them mainly as a bargaining chip and a source of influence over standards and technologies?
Whatever their strategies, it is clear that Qualcomm (and Ericsson, Nokia and Motorola/Google) will not be the dominant forces in the OFDM world that they were in GSM and CDMA-based technologies. Those patents will remain important for many years to come, of course – almost every handset will continue to have a 2G or 3G modem for a long time – but as a percentage, their importance will decline, especially as some start to expire. The 3GPP giants have been preparing for that for a long time, adjusting their expectations, and those of shareholders, while looking to amass IPR in 4G and 5G too. However, the picture will be more fragmented, and that’s only at modem level – when all the technologies that go into a 4G or ‘5G’ network and device are considered, the map of enforceable patents (even if not SEP) is a crowded one.
This affects Qualcomm more than anyone, partly because it had such a large share of CDMA-based SEP and partly because it made that IPR a fundamental part of its revenue and profit model, in a way that Ericsson and others did not. It has been adjusting to the new 4G picture very effectively for many years, and will remain a significant patent holder in the current and future wireless generations, including the internet of things, as seen in its intense R&D activities and its acquisition of IPR holders like Flarion.
What has thrown a spanner in the works of its master plan seems to be China, whose companies and government agencies are becoming more determined to assert their own patent power and reduce their payments of royalties to western firms, especially Qualcomm. This was anticipated, but the way China has stepped up its efforts in the past year was not, and Qualcomm is now on the defensive in an expected round of tough negotiations of the new deal with Chinese licensees.
That is already causing problems, since many of those customers, Qualcomm says, are withholding royalties payments until the issues are settled, hitting its immediate revenues. And for the past year, the Chinese National Development and Reform Commission has been conducting an anti-monopoly probe of Qualcomm, widely seen as a powerful bargaining tool for improving the terms it gets from the US vendor. This comes at a time when Qualcomm is in a weaker negotiating position than ever before, because for the first time it faces significant competition on the cellular modem front, so Chinese handset makers can go to Chinese and Taiwanese chip powerhouses like MediaTek and Spreadtrum. That does not protect those firms from Qualcomm’s royalties, but it does make the market as a whole less dependent on the San Diego firm’s technologies.
Sources indicate that China is demanding lower royalty rates for its vendors in return for agreeing a resolution to the antitrust investigation. The NDRC reportedly wants to base fees on the value of selected phone components, not the whole device – a direction in which the handset industry, prompted by Apple and others, is moving anyway, as noted above. This is likely to be inevitable in most markets, and Qualcomm will lack its old power to hold back the tide as it will no longer be the only credible source for certain critical components, as it has been in the past, especially in CDMA. However, the firm will play for time to adjust its business to the new realities.
The NDRC may also request that Qualcomm unbundles licensing agreements, charging fees for each patent rather than its usual practice of blanket deals which cover all its IPR. The US firm argues that this approach represents better value for money for most customers ,protects them from litigation, and saves the work of negotiating a separate contract for each new patent, but others say they end up paying for IPR they never use.
More uncertain is whether the NDRC is making any comments on unbundling licensing fees from chip sales, one of the most obscure and controversial aspects of Qualcomm’s business model. It insists the two are separate, and there is no preferential treatment for chip customers in terms of licensing deals, as some have alleged. However, the issues have been the subject of repeated accusations and some regulatory probes, including one ongoing in the US.
The same sources told Bloomberg that Qualcomm had proposed a higher fine, if it could keep its business model intact, but that was rejected. In the past five years, Qualcomm has collected $30.5bn in licensing fees, according to Bloomberg, and the move to component-based charges and individual royalties could reduce that by 10 times or more in some cases. Fines could reach a record $1bn, say some experts.
As well as fighting its corner with regulators and licensees, Qualcomm has been trying to gain a better position in China by investing in the country – to please the authorities and to tap into some of the growth and innovation in the local chip industry. Late last year it scored a PR point when it announced $40m of investment in four Chinese software and algorithm start-ups, and the China Walden Venture Investments fund. These are the first beneficiaries of the previously announced $150m China Venture fund.
The four firms chosen are 7Invensun, an eye-tracking solution provider; Chukong Technologies, a mobile entertainment platform provider; inPlug, a smart home device/platform solution provider; and Unisound, a voice recognition and processing technology provider. While the investments are small fry compared to China’s massive Semiconductor Fund, designed to make it almost self-sufficient in chips, they are important for perception, especially as Chinese entrepreneurs complain of the lack of venture capital in their country, making Walden an influential entity.
One important question is how important Chinese companies really are in mobile SEP? That will be especially significant if China gets its way and removes Qualcomm’s right to demand cross-licensing deals – ie in return for licensing its own IPR, its customers must also offer theirs, usually with no charge. At the end of 2013, Huawei had about 30,000 patents and ZTE 52,000 though those cover a wide range of technologies. In the latest league table of US technology patents granted, Chinese firms were absent from the top 10, though Korean and Japanese players remained strong. The top 10 was led, as it has been for 22 years, by IBM, followed by Samsung, Canon, Sony, Microsoft, Toshiba, Qualcomm, Google, LG and Panasonic. That indicates where technology (though not specifically mobile) R&D is occurring, but of course, many Chinese innovators will not register initially in the US.
In LTE, the two Chinese leaders, LG and Qualcomm have all been credited, by one metric or another, with being the leading SEP holder. This month, LG said it had been ranked number one by US patent consultancy TechIPm, which calculated the Korean firm had 29% of all SEP in LTE and LTE-A, followed by Samsung with 16% and Qualcomm with just 8%. The ways to estimate patents holdings are notoriously diverse, but such a ranking from a respected source highlights the scale of Qualcomm’s challenge. Google, via Motorola, was thought to have almost as much LTE SEP as Qualcomm, on 7%, the same as Nokia and InterDigital. In late 2011, another study, by Jefferies, also placed LG in the lead, though at that time Qualcomm was close behind (with 21% versus LG’s 23%).
Qualcomm has a strong track record in responding aggressively and effectively to the many challenges it has faced to its unique business model. China may prove its undoing, but more likely it will morph into a firm which continues to make massive income from its unquestioned superiority in R&D and patent acquisition. It may defocus on SEP and invest more heavily in non-essential but attractive and high value technologies. It will certainly lose a lot of its stranglehold, but that does not alter the fact that, to dominate in IPR, companies have to have exceptional brains and engineering, which Qualcomm still has. It will benefit the industry if the Chinese firms get to tap into that on a fair commercial basis, rather than Qualcomm becoming the focus of a stand-off which could be as destructive to mobile device innovation as the Apple-Android wars.