SEPs and the next industrial revolution

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.

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).

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).

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.

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.

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.

Smart factory

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.

Smart energy

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.

Smart home

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 healthcare

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.