SEPs and the next industrial revolution
The licensing of patents that dominates the mobile sector is now being used across a far wider range of industries. This is providing rights holders and implementers with plenty of opportunities, but also many challenges
We are standing on the verge of the next technology revolution – one of standardised technologies. For some of us, connectivity is already here. Many of us already enjoy some of the advantages of living in a smart, connected home or have cars with self-driving features and keyless entry. The revolution will continue in these areas and expand, from transforming how we consume energy to introducing less downtime and more runtime in factories. A whole new spectrum of products and services will be interconnected and interoperable, altering how we interact, work and communicate with the world around us.
For consumers, there is the pressure to keep up with new advances in tech, while IP professionals and technical standards experts face the ever-growing challenge of ensuring that they have the necessary assets to hold their own in the next tech revolution. This means aligning patent portfolios to protect innovations and proactively engaging in continuous strategic portfolio development with regard to SEPs (eg, licensing, acquisitions, joining patent pools and simply understanding the competition). Further, IP professionals across all industry verticals must rethink how they develop, evaluate and analyse their own portfolios and the competition. For years the comms industry has managed patents strategically as assets to be cross-licensed, pooled, acquired, sold, auctioned and litigated in international courts, while other more traditional industries tend to lack experience in managing patents, particularly SEPs.
The next industrial revolution will see the convergence of technology as connectivity technologies are gradually integrated into mechanical products. For example, while the importance of connectivity modules in cars may currently be small, experts believe that the connected vehicles of the future will shift consumer focus from the automobile itself to the broader issue of transportation. This move will heavily rely on standardised and often patented connectivity standards, which are developed in open, consensus-based, standards-development organisations (SDOs).
However, open standards such as 4G, 5G, WiFi (802.11), Bluetooth, near field communication (NFC) and radio frequency identification, among others, are subject to SEPs. The questions of how and by whom new connectivity-based revenue sources will be generated and monetised are some of the most critical issues facing the automotive industry today. The answers to these are particularly challenging due to the convergence of information and communication tech actors in the traditional automotive value chain, which has created a clash of cultures over intellectual property, business models and value distribution.
This tech revolution will not only disrupt business models around connected devices but also make us reconsider how we deal with intellectual property. While market leaders in the telecoms space are experienced in negotiating and licensing patented and standardised connectivity technology, other industries are largely unprepared. Most industries will come to rely on – at least to a certain extent – implementing patented connectivity standards. This may have an impact on the IP strategies of licensees doing so, as well as for SEP owners, who will need to offer licensing programmes for different verticals and applications across industries. Here, patents are being more frequently used as assets to negotiate the shared use of intellectual property (eg, through a FRAND licence) rather than for more traditional defensive purposes. This will also change the standards development landscape, as new players from the auto industry, consumer electronics, manufacturing industry and even medical or energy sector increasingly participate in developing connectivity standards to align with the needs of the application in each market.
Connectivity and the role of standards development
The next industrial revolution will rely on stable, real-time communication that allows the constant exchange of massive amounts of data. Tech standards will be fundamental to this, as they specify a common language so that different technologies and their components can interact. While patents are intended to provide incentives for R&D investment, standards serve as a common platform for innovative products to function. Patenting and standardisation thus promote innovation jointly, but in very different ways.
The aim of standardisation is to disseminate and gain access to technologies. Standardised technologies can be adapted worldwide to enable innovative solutions to come together on a common platform. This is in contrast to patents, which grant the rights holder a temporary monopoly on the technology in order to prevent third-party use.
In view of antitrust laws, licensing a patent, the claims of which are essential to a standard, is considered to be an isolated market. Since a patented, standardised technology cannot be used without infringing the patent, the patent owner holds a monopoly position for this technology. If a company participates in the development of a technology standard, it must commit to offering mandatory licences for these patents.
However, in order to prevent a patent owner from demanding monopoly prices, licensing is subject to FRAND conditions. In recent years, the different views on licensing under FRAND have increasingly led to court disputes and have been the subject of lively debates between patent owners and licensees, as well as political decision makers and regulatory authorities. Most disputes discuss how to define royalties that are reasonable to both the patent owner and the licensee. Despite these ongoing arguments, patented standards such as 3G, 4G, 5G, WiFi (802.11) and AVC/HEVC have been adopted worldwide and are highly successful.
Market leaders in the telecoms industry strategically align standards development with R&D efforts, patent prosecution processes, portfolio development, patent licensing and patent transaction practices. Here, engineers work very closely with standards developers to continuously submit the latest technical advances in contributions to the standard body working groups and report back to internal patent boards any invention worth patenting beforehand. The early filing of provisional applications allows standards developers to protect contributions before they are submitted. These contributions – when approved by the working group – are means to integrating patented inventions into the final standards specification.
The prosecution process further allows a delay in the grant decision by amending patent claims, therefore aligning claim language to standards’ technical sections. Here, applicants typically keep filings open until there is greater certainty about the outcome of the standardisation process. Once the standards have been adopted by the market, patent owners can set up licensing programmes and approach standards implementors for royalties. Large patent owners in the telecoms industry tend to have experienced licensing teams that negotiate cross-licensing deals with standards implementors around the world.
While licensors and licensees can usually agree on a FRAND rate, some cases result in litigation. In the past few years, the smartphone wars have dominated litigation across the globe, with SEPs at the heart of activity. More recently, SEP owners have brought litigation in Europe, the United States and Japan against automobile manufacturers or suppliers for the use of 3G and 4G SEPs in cars. While large SEP owners have experience in enforcing and licensing their assets, they also pursue other forms of monetisation. SEPs may be acquired by patent assertion entities (PAEs) – NPEs that specialise in the acquisition and enforcement of patents. In other cases, SEPs are sold to market entrants (eg, new smartphone manufactures that enter the market and need SEPs for cross-licensing negotiations). The integration and highly professional organisation of R&D efforts, standards development, patent prosecution, patent licensing, litigation and transaction business shows how crucial it is for market leaders in the telecoms industry to own and monetise SEPs – because participation in standards development is an expensive and highly risky investment.
In order to measure the recent trends in standards development, IPlytics counted the number of standard contributions submitted yearly. While standards contributions differ in their impact on innovation and are not intended to provide ownership of the standard, analysing these contributions is a useful way to assess the involvement and investment of companies in the development of connectivity standards, assuming that companies with the greatest influence on a connectivity standard will also have the strongest SEP portfolios in the future. The development of these standards is carried out among consortia (eg, 3GPP, the Institute of Electrical and Electronics Engineers (IEEE) or joined technical committees).
These kinds of consortia are contribution-based, which means that member companies can submit technical proposals for inclusion in the standard, which are put to a vote. However, these contributions are followed by suggestions for improvement, which are voted on again until members reach a consensus on an agreed and approved standard specification. The final specifications have therefore been reviewed by hundreds of global experts, who usually work for companies that are competitors in the market. Standards consortia are therefore both collaborative and highly competitive. Further, it requires considerable research and investment to make technically meaningful and convincing contributions. Companies can only gain credibility in standards consortia by regularly participating and developing the best specifications, which allows them to bring their own developed and (sometimes) patented technologies into the standard. The counting and analysis of submitted contributions thus demonstrates how much share and influence companies have in standards development.
The 3GPP consortium, which is responsible for the standards development for 2G, 3G, 4G and 5G, publishes all contributions from its members and specifies exactly which companies have submitted them. The data also shows in which 3GPP subgroup they were submitted and whether they were approved by all sub-group members (technical specification group members and working group members).
Next, the IPlytics platform database was used to search and analyse 3GPP contributions. Figure 1 shows all standards contributions submitted to the different technology generations over the past five years. The number of yearly submitted contributions has sharply increased, which can be linked to the start of the development of the 5G standard in late 2015. The growing number of contributions confirms that the 5G standard will be more complex than earlier generations (eg, 3G and 4G) and may also be subject to more SEPs.
Figure 1. Submitted standards contributions
The IPlytics database was then utilised to analyse the number of declared patents associated with 2G, 3G, 4G and 5G. Figure 2 demonstrates the number of declared patent families by year of declaration and technology generation. The data reveals that the total number of patent declarations has increased dramatically since 2015 and will probably continue to do so in the next few years as the 5G standard is still being developed. Since 2018, most patent families have been declared to 5G specifications. Readers should keep in mind that the figure counts re-declared families for each standard generation; in other words, a patent family declared as 4G and 5G is counted twice – once for each standard generation. Both figures confirm that the number of declared patents as well as the number of standard contributions has risen greatly. This suggests that cellular communication standards advance quickly, become more complex and are subject to more SEPs at the same time.
Figure 2. 2G to 5G-related patent declarations over time
It is not only 4G and 5G standards that will shape the future of connectivity standards, but also wireless technologies, such as WiFi 5 (802.11ac) and WiFi 6 (802.11ax) ratified in September 2019 and soon also WiFi 7 (802.11be). Again, IPlytics analysed the number of submitted standards contributions for these wireless technologies over time. Figure 3 shows that the WiFi 5 standards development peaked in 2011, then decreased and closed in 2014. WiFi 6 standards development started right after, where submissions have risen significantly and then decrease when the development of WiFi 7 started in 2018. The number of contributions again confirms that in the wireless technology space, the number of contributions from one generation to another is on the increase, much like 3G, 4G and 5G (compare Figures 1 and 2).
Figure 3. Submitted standards contributions to WiFi standards generation
Beyond the smartphone industry – SEPs in the auto sector
The auto industry could be one of the first sectors to rely on connectivity standards, such as 4G, 5G or WiFi (eg, 802.11p wireless access in vehicular environments (WAVE)), which connect a vehicle to other automobiles, devices, buildings, traffic lights and roadsides. The transport sector as a whole will make use of connectivity for dynamic traffic management, intelligent parking and infrastructure to support the integration of autonomous vehicles into road traffic. While fully autonomous vehicles are likely to evolve over several stages, manufacturers are already implementing autonomous functions (eg, speed control and lane departure warning). Currently, automotive connectivity is mostly used for automatic emergency calls (eg, eCall), smartphone signal enhancements, telematics and navigation. However, in the future, vehicles will rely more on connectivity technologies to be able to navigate complex traffic situations. Much like the mobile phone industry’s transition from feature phones to smartphones over the past 10 years, the creation of new business models as platforms and market participants reassessment of profit distribution between companies, we will most likely see similar shifts within the automotive industry soon.
However, the integration of patented and standardised connectivity systems poses serious economic risks for vehicle manufacturers and suppliers. Licensing fees for SEPs in mobile standards (ie, 3G, 4G and soon 5G), can easily amount to hundreds of millions of dollars per year. Also, licensing practices in the automotive industry differ significantly from those in the communications industry. Patents in the automotive industry are usually licensed vertically. A tier 1 supplier rarely receives royalties from an original equipment manufacturer (OEM). In licensing negotiations, royalties between tier 1 suppliers and OEMs are usually based on a single component that has been improved by an invention. Patent licensing costs have therefore had little impact on vehicle prices. In contrast, patent licensing in the communications industry in some cases considers the net sales price of the end product and is therefore directed at OEMs. Accordingly, licence fees are significantly higher compared to manufacturers who do not have a patent portfolio for cross-licensing.
So why is the auto industry not developing connectivity technologies for cars? Auto manufacturers traditionally have a very different approach to standards development, with standards setting mostly associated with setting either de facto standards within the manufacturers’ production lines or ratifying safety standards set by legislation. Standards development for connectivity goes beyond the ratification of a commonly agreed process or safety level and can be described as the joint development of sophisticated technologies. Companies meet in standards-setting working groups and present their innovative technology proposals for selection and incorporation in highly complex standardised systems.
However, in recent years, more and more auto companies (suppliers as well as OEMs) have started to participate in communication standards development meetings, such as the 3GPP SA1, SA2, SA6 and RAN1 working groups, which develop 4G and 5G standards specifications as well as in the intelligent transport systems (ITS) working groups. Further, the auto industry is active in the wireless communications standards development at IEEE (eg, working groups for 802.11p WAVE as well as working groups for 802.19 Auto SG – Wireless Automotive Coexistence SG).
Figure 4 demonstrates the number of standards contributions submitted by automotive companies over time. The overall number of standards contributions is increasing sharply, while a few companies such as Austrian telematics supplier Kapsch and the German auto manufacturing giant Volkswagen Group have been actively contributing in the past four years (see Figure 4). Continental, General Motors, Daimler, Renault and Volvo are also among the more active standards contributors from the auto industry (see Figure 5).
Figure 4. Submitted standards contribution to auto industry companies
Figure 5. Contribution rank to auto industry company
Submitting contributions to standards may not necessarily mean that these companies also file and declare SEPs. The IPlytics database was utilised to see whether companies from the auto industry have declared patents essential to connectivity standards. Table 1 lists patent declarations by Volkswagen AG, Robert Bosch GmbH, Denso Crop and Daimler to connectivity standards. The declared patents mostly relate to the European Telecommunications Standards Institute’s ITS standards. ITS includes telematics and all types of communication in vehicles, between vehicles (eg, car to car) and between vehicles and fixed locations (eg, car to infrastructure). The table counts decelerations as to unique patent applications, both granted and pending, as well as patent families as to the extended INPADOC definition.
Table 1. Number of declared 4G/5G patents and families per declaring company
Declared 4G/5G patents
Declared 4G/5G patent families
Huawei Technologies (CN)
Samsung Electronics (KR)
QUALCOMM Incorporated (US)
LG Electronics (KR)
Nokia incl Alcatel-Lucent (FI)
CATT Datang Mobile (CN)
Apple Inc (US)
NTT DOCOMO (JP)
Sharp Corporation (JP)
Guangdong Oppo (CN)
NEC Corporation (JP)
In comparison, Table 2 lists the top 15 patent-declaring companies for the patent-heavy 4G and 5G standards. Again, the IPlytics platform was used to count declarations as to unique patent applications, both pending and granted, as well as patent families (as per the extended INPADOC definition). Compared to the top 15 patent-declaring companies, which each declared several thousand patent families to 4G and 5G (see Table 2) the number of patents declared by the auto industry is still very small (see Table 1). These results suggest that the auto industry has started to participate in standards development – as evidenced by the increasing number of standards contributions (see Figure 4 and Figure 5) – to influence how technology standards relevant to connected cars are set, but yet has not filed many potential SEPs (see Table 1). Owning at least one SEP can be the entry ticket into pool programmes, giving car manufacturers a seat at the table, not only as licensees but also as minor licensors.
Table 2. Number of declared 4G/5G patents and families per auto industry company
Declared patent families
Robert Bosch GmbH
Beyond the smartphone world
The next industrial revolution will not only impact the auto industry but will spread to many more industrial verticals. Here we describe some of the first-use cases for connectivity standards.
The smart factory will be driven by disruptive technologies, such as AI-controlled robots, cloud-monitored machines, real-time sensors, automation technologies connected to the Cloud and augmented reality, all of which will use connectivity standards to enable communication between all physical parts of a factory. This will allow manufacturers to more efficiently capture and access much larger amounts of data at significantly higher speeds. New inventions are expected to be the future backbone of production and related services. Further, most automation is expected to be used for work that is considered to be inefficient, unsafe, impossible or tedious for humans and all processes that require human interaction could be handled remotely. Thus, connectivity will enable a higher level of accuracy and productivity beyond human capability.
The energy sector faces many challenges, many of which can be solved with new standards-enabled connected services and applications. As energy networks become smarter, connectivity will support machine-type communications (MTC) to protect, control and regulate networks. The demand for electricity will continue to increase in the wake of electric mobility as the increasing number of smart meters can only be managed through a high capacity, high bandwidth, connected infrastructure. Further, real-time information on energy consumption at home, at work or in traffic will allow users to make adjustments for efficiency. Finally, intelligent connected systems will enable energy suppliers to balance and manage the demand for energy resources.
Also, at home there is a growing focus on connected solutions in daily living, such as smart climate control, lighting, beds, TV, smart kitchen devices and home security. Artificial intelligence powered user interfaces (UIs), including voice, gesture, and biometrics, will fuel the growth of smart home use cases over the next years. The variety of the home automation solutions are as complex as the landscape of relevant connectivity standard such as WiFi, 4G/5G, Bluetooth and many more.
Smart medical devices will improve many existing use cases, while creating new ones that are not covered by current technologies (eg, remote examinations and surgery). Due to lower latency and a higher capacity of technology standards, such as 5G or WiFi 6, healthcare systems will be able to offer intelligent remote monitoring for a higher number of patients. With high-performance technology standards, medical device users are increasingly confident that they can get the real-time data that they need and deliver high-quality care. Critical health services will be able to obtain instant information on a patient’s condition (eg, HD-quality images, access to medical records and direct interaction during remote surgery).
The next technology revolution and licensing SEPs
Most industry experts predict that licensing SEPs will be more complex for generations of new standards such as 5G or WiFi 6. First, because new standards have increasingly more complex technology components, which can be combined or used separately. Companies may, for example, implement different 5G modules depending on the specific 5G use or implementation (eg, a smartphone will use different 5G features from a car, refrigerator or medical device). As different specifications are subject to different SEPs, it will be a challenge in licensing negotiations to define which patents will be needed and thus licensed in the final standard implementation. Thus, patent owners will have to find efficient ways to set up licensing programmes for different uses. It will therefore be important to offer different pricing structures to accommodate this.
As the number of standards implementors will dramatically rise, one often-suggested solution is to group patents under a patent pool contract. The main rationale for patent pools is to solve some of the inefficiencies of licensing (eg, by saving transaction costs for both licensors and licensees). Considering that connectivity standards will be used across multiple industries by a much larger number of companies (compared to the smartphone industry), transaction costs will inevitably increase. The goal of patent pools is to simplify licensing by providing a single contract, thereby eliminating the discussion about patent quality as all patent pool members will have to agree and commit to the pool’s terms and conditions.
These terms and conditions define how royalties will be shared among patent owners, but also how licensees will access pooled patents. The success of a patent pool thus depends on the number and size of patent owners that join, as well as the licensees that take a licence. However, joining a patent pool can be a chicken and egg-type situation, as companies might be hesitant to join if no one else has. Even as a member of a patent pool, some inefficiencies in licensing may remain – especially when licensors do not agree to the terms and conditions of the pool licence, which can lead to litigation. Being a member of a patent pool but not being involved in the ongoing litigation of other members can create situations that are not always transparent and thus will not benefit the licensing strategy of all patent owners.
Avanci – considered a licensing platform or type of patent pool – offers as of July 2020 a flat fee price of $15 for the use of 4G (including 2G, 3G and eCall) in vehicles. Some car manufacturers, such as BMW, Seat, MAN, Volkswagen, Audi, Porsche, Volvo and other automotive OEMs have signed contracts with Avanci. So far Avanci offers a pool licence for 2G, 3G and 4G SEPs only. If, in the course of the 5G roll-out, cars become ‘smartphones on wheels’ then access to SEPs may become even more important. While patent pools may be one solution to solve the complexity of licensing, there will likely be different models of aggregation on both sides of the table – for example, patent pools to aggregate patent owners and defensive patent aggregators (eg, RPX or the Allied Security Trust), which gather companies to license patented technologies.
Outlook: The next tech revolution and challenges surrounding SEPs
While licensing SEPs in the smartphone industry is well understood and 5G licensing negotiations will be comparable to those of 3G or 4G, licensing SEPs will be more difficult to navigate outside of the smartphone industry. What is more, each sector will apply connectivity differently, so licensing mechanisms will need to become more flexible as there is no one-size-fits-all model that will work across all industry verticals. For example, linking a refrigerator to other home appliances might be a much simpler application of 4G/5G than installing 4G/5G-enabled security features in a car, which are crucial to avoiding road accidents. As such, a uniform licensing model will not work. Instead, the SEP royalties for the refrigerator will likely need to be lower than those for vehicles. Although flexibility is vital, the industry must also find mechanisms that allow companies to aggregate and package the licensing of SEPs to avoid licensing inefficiencies yielding lengthy negotiations or even patent litigation.
Many SEP owners feel that with regard to IoT applications, it is not feasible to discuss terms with each licensor individually. There must be an aggregated solution, which could be a patent pool or another mechanism to combine licensing efforts. Here, the challenge is the long tail of the market. Patented standards will be implemented in IoT applications and products, produced and shipped by tens of thousands of companies (sometimes small revenue ones; for example, a smart IoT start-up from Berlin with a €10 million revenue). Collecting royalties from numerous small companies will be inefficient if the royalty per company is too low.
Patent owners will either have to bundle resources to chase all small connectivity standards users or accept a certain number of free-riders that stay under the radar and use patented standards without paying royalties. Experts find it difficult to predict how standards such as 4G/5G or WiFi will be applied to various IoT use cases – it is likely that end users will be the ones to decide where standardised technologies will be used. A car manufacturer will only implement connectivity standards if the enabled features add value and the standardised technologies are supported by the infrastructure.
The situation may arise where 4G or 5G base stations are not yet available across all countries and regions, for instance, a smart car owner may well want to travel to regions where 4G/5G technologies are not yet in place. Further, discussions about the competing standards relevant for the auto industry – 802.11p (WAVE) and V2X 5G – will depend on the connectivity use cases of a car. Both standards have advantages and it remains to be seen which will be used more often. Competition on standards will also mean competition on price and thus on the royalties charged for SEPs.
While the telecoms industry and large SEP-owning companies in particular are experts in standards development and worldwide SEP filing and licensing, other sectors such as the auto industry, consumer electronics, industrial manufacturing, energy, medical-healthcare and many more have little knowledge about connectivity standards that are subject to SEPs. IP professionals in these sectors will need to gain more expertise around patents and standards to understand that by making use of technology advances around connectivity that they will need to implement patented standards and thus at some point will have to pay for royalties. Standard setting is not only about developing the core technology layer of communication but also about developing application layers. Here industry experts with domain knowledge across industries where connectivity matters, will need to consider participation in standards consortia such as 3GPP, IEEE and others in order to have a seat at the table where future technology decisions are made.
Licensing SEPs looks set to become a major challenge across all industries subject to connectivity. IP professionals as well as directors in standard development should bear in mind some key considerations:
- Future technologies that enable connectivity will increasingly rely on patented technology standards such as 4G and 5G, WiFi, NFC, RFID, Bluetooth and many more.
- The number of declared SEPs is constantly rising – IP decision makers should consider royalty costs and appropriate security payments in advance.
- IP professionals should not only consider information retrieved from patent filing data, but also monitor standardisation activities (eg, through standards contributions or declarations of SEPs to monitor market trends and competition).
- IP decision makers should bear in mind the dynamic market of SEPs, where patent assertion entities often acquire SEP portfolios to assert extensive royalty payments.
- Companies beyond the telecoms sector should pursue a common strategy for patenting and standards development to ensure that they are fully prepared for the next technology revolution.
- IP professionals need to be aware that while the market for 5G and other connectivity type technologies is fairly new, it is now time to be thinking about what the business will need two, five and 10 years in the future, and hand in hand with that, what the patent portfolio will need to support that. Be proactive, not reactive. Do not get left behind.