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Ericsson continues its push to reform 5G and IoT patent licensing

Ericsson has set out a simple approach to 5G patent licensing, in a bid to avoid the litigation and high prices which have dogged the 4G era. The Swedish company, despite its stated aim of increasing its revenues from its significant store of IPR, is publicly setting out a 5G licensing price list, capping royalties at $5 per phone at the high end, down to $2.50 for cheaper models.

This is certainly not the first attempt to place a ceiling on patent royalties, and it may well be just the latest in a string of failed bids to shake up the system of charging for mobile IPR.

In the early days of LTE, there were high hopes that the new technology would usher in a new approach to patent licensing, to replace the secretive bilateral agreements which have characterized the mobile industry and have raised significant barriers to entry for non-IPR holders. Instead, no fewer than three patent pools were set up and failed; and a stream of litigation ensued between major mobile vendors, some of them focused on alleged failures to honor the Frand (fair reasonable and non-discriminatory) rules for licensing standards-essential patents (SEP).

The rows go back well before 4G too. In the 1980s, when GSM was being standardized, its standards body failed to get a free and open licensing system adopted by handset makers, which instead gave limited support to ETSI’s Frand definitions, but largely continued to negotiate bilateral cross-licensing deals with one another, and more punitive agreements with non-IPR holders, whose royalty costs were 10-15% higher than those of the big patent owners.

While the acceptance of Frand has increased over the years, and new licensing norms have crept into the mobile world courtesy of WiFi, open source and MPEG technologies, the bilateral system has survived to a great extent. It has been an increasing burden on vendors as handset margins have fallen, and will be unworkable in the Internet of Things, with its huge quantities of very low cost items. But the litigation continues, and it is not clear how the situation will be resolved.

Ericsson is seeking to drive the reform of the system, no doubt preferring to control this process than be forced to accept a framework initiated by Google or an open source organization. In February 2016 it introduced a patent marketplace for Industrial IoT products, and in October it proposed its Avanci patent pool, also geared mainly to the IoT. It signed up Qualcomm – usually the strongest bastion of the old school approach, but now increasingly battered by antitrust probes – but not Apple or Nokia, highlighting the problem with any pool that is driven by a particular vendor, which raises political barriers to others joining.

Ericsson’s latest attempt to drive a new royalties framework is focused on simplifying a secretive and over-complex system, increasing cost certainties for vendors and operators, and making lawsuits less likely. Ericsson says this will be necessary to build device makers’ confidence in 5G and stimulate the market. And transparency would protect everyone from accusations of over-charging or anti-Frand behavior, it argues.

Ericsson’s chief intellectual property officer, Gustav Brismark, told Bloomberg that he hopes that, by revealing prices, a benchmark will be set for patent holders and licensees, which will make negotiations clearer and easier.

He clearly believes that Ericsson’s significant contributions to cellular SEP makes it well-placed to define the benchmark. “If we are the company that has provided the most technology, no one should set a higher rate, but we can only control our price,” he said.
The company has had its share of patent litigation recently, including a multiyear tussle with Apple, which was settled at the end of last year. It is currently in dispute with TCL of China over royalty rates. Ericsson spends $5bn a year on R&D.

However, Ericsson’s price list only refers to SEP and that highlights one of the issues of 4G and 5G devices – they include a host of technologies, many of which may potentially be subject to licensing fees and lawsuits. The standards-based modem is a smaller and smaller part of the total cost of a smartphone or other high end device.

Here, then, the old ways are likely to be protected for as long as possible, especially as vendors with IPR seek new revenues as hardware markets slow down. But the IoT is another matter. Closed, secretive systems which were stretched to breaking point by cheap handsets will be broken completely by billions of sensor modules and a wide range of industrial stakeholders. As if to highlight the fact the world had changed, Qualcomm, to whom patent pools are anathema, agreed to join Ericsson’s Avanci last year.

Avanci is a virtual licensing platform which Ericsson aims to establish as a dominant ‘independent’ mechanism for coordinating IPR across many areas of IoT standards, as they relate to connected devices for vertical markets. It positions it as a way to address the fragmentation of patent holdings which will exist across the many and varied IPR holders in the industrial IoT.

But if we are looking for a bright new dawn of open licensing deals, transparent royalties and broad pools, we will almost certainly be disappointed. After all, the companies behind Avanci, to use that example, are all traditional mobile players with significant patent portfolios to protect and monetize.

However, the participation of Google and the web players, with their love of open source, and the sheer variety of IPR involved in the IoT, will make it impossible for any clique to achieve the closed-doors power of the current cellular industry patents system. So the companies which thrived in that world need to adapt their behavior – before anyone else steals their thunder.

So there are all kinds of ironies about Ericsson, one of the bastions of the mobile industry’s traditional structure, setting itself up as the guardian of new generation licensing processes. But the firm increasingly wants to place itself at the center of the IoT web, offering services and coordination between many different segments, and its licensing initiatives are just another example of that.

The initial Avanci supporters were Qualcomm and InterDigital, both stalwarts of the 3GPP standards and patents, plus ZTE, which announced last week that it topped the world rankings for new telecoms patents, and Dutch operator KPN.

Ericsson’s IPR licensing accounted for SEK14.4bn (around $1.68bn) in 2015 revenues, a fraction of Ericsson’s total net sales of SEK246.9bn (around $28.8bn at today’s exchange rates, but nearer $30bn at the time) and its operating income of SEK 21.8bn ($2.54bn). However, back in 2011, the IPR figure stood at SEK 6.2bn ($720m), so it has effectively doubled IPR revenue in four years, at a time when its core businesses are under pressure.

In a market of commoditization and tough competition, IPR, software, and services need to be Ericsson’s focus, and using the likes of Avanci to ensure that its patents remain integral to IoT deployments will help guarantee revenues, as well as influence over future platform directions. And if it can achieve a widely accepted single-licence solution to help companies navigate the legal minefield of cellular patents, continuing IPR power for the Swedish giant may be a small price to pay.

But there’s the rub of course – to achieve its goals, the pool needs to attract a wide range of companies whose patented inventions are feeding into connected devices, not just the traditional makers of modems and surrounding cellular technologies. It has already been seen, in smartphones, that the falling prices of devices cannot sustain a system where every component has a separate royalty, and this will be even more true in the IoT. If Avanci is focused narrowly on 3GPP-type technologies, while GE, for instance, or Ford Motor has a separate patent pool for their area of the IPR landscape, chaos will ensue, or at least a royalty burden which is impossible for makers of tiny modules priced at a few dollars or less.

There are two flies in Ericsson’s ointment. Much of the IoT will not be mobile and therefore will often not require cellular, relying instead on fixed links or wireless in unlicensed spectrum. In these areas, different IPR systems and leaders prevail.

The other is China, where a great deal of IoT and 5G R&D is being conducted. It is encouraging that ZTE is supporting Avanci, but we can expect Chinese authorities, and its large ecosystem of device and chip vendors, to harness the IoT to try to rewrite the rules of a technology game which has traditionally left them over-reliant on western inventions and IPR.

China and South Korea have been proposing antitrust policies which would require vendors to license their patents and technologies more openly and at lower cost, if they wish to trade in these two markets. Both are too important to ignore – China for its sheer size and the number of manufacturers and operators it houses; Korea for its advanced technology base and the weight of Samsung and LG. And where China goes, others follow, with Brazil and India said to be considering similar actions to reduce reliance on western companies’ technologies, and the licensing fees paid to them, while safeguarding against unfair business practices by major IPR players.

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