The past and future of standards development and licensing

My retirement as chief licensing officer has given me an opportunity to reflect on the changes that I have witnessed in two decades at InterDigital and more than three decades in both the broader wireless industry and its licensing component.

I talk about these as though they are separate things, but in reality they are two parts of the same stream: the advancement of core technology and the value derived from that advancement. To think about them in those terms, intertwined and inseparable, provides a useful framework for both evaluating the past and planning for the future. On this journey, the themes that unite the past and the future are convergence and then expansion.

Convergence

I have enjoyed a front-row seat to the evolution of the wireless industry and its progression from the early analogue systems to various flavours of 2G (CDMA, GSM), 3G (CDMA2000, UMTS) and the rollout of LTE systems: an alphabet soup of technologies and innovations, all moving forward, all converging, until finally LTE emerged as “one ring to rule them all,” as Tolkien would say. That convergence has been one of the great legacies of standards development and has created enormous business opportunity throughout the ecosystem. With the world on a single standard, any company that can develop a relevant product can immediately access a global market – and it can do so based on technology that has been co-developed by all the major research contributors, is guaranteed to work and is powerful enough to free the company to design as it sees fit.

The iPhone is a fantastic example of this. Apple’s new operating system not only introduced its game-changing easy-to-use interface, it also created an entirely new business in application development. Apple arguably changed the industry more than any company before it, and in doing so became the first trillion-dollar company – today it is still one of the world’s top-valued businesses. Yet Apple’s first iPhones ran only a modified Safari browser to better render websites with limited connectivity speed. The phones sold poorly. When Apple advertised its second smartphone, the iPhone 3G, the tagline was: “The iPhone you’ve been waiting for.” It is clear that these successful product launches would not have been possible without the backbone of standards-based cellular connectivity.

The app-based model quickly spread and, with the addition of Google’s Android operating system, other device manufacturers began introducing similar products. If anything, it was Apple’s app-based business model, mirrored by Android, and the form factor of the new smartphone that drove the adoption of LTE. The smartphone is a screen; the signature service for LTE is enabling mobile broadband for video – a match made in heaven. On cue, 3GPP standards-based LTE technology began to be deployed globally and the path to convergence was complete. The world converged on both a single standard and a single – in retrospect seemingly unavoidable but truly revolutionary – device type.

The introduction of the iPhone and subsequent smartphone market segment facilitated another industry sea change: the average price for handset devices reversed a decade-long downwards trend and started to increase. Most companies that license SEPs recognised the need for reasonable limits on product royalties and caps on royalty amounts gained meaning – but it was impossible to dispute the value of connectivity to the device.

Expansion

LTE ushered the telecoms industry into this decade and, with convergence complete, the stage was set for expansion. More than merely enabling the smartphone, LTE opened the door for the mobile economy. For the first time, watching videos on a phone not only seemed possible but began to feel natural. Today we use our phones to complete financial transactions, control internet-connected devices in our homes and stay connected to our communities through a plethora of social networking platforms – businesses that would not be nearly as successful, much less possible, without the foundation of LTE networks. We have witnessed platforms that do little more than combine features of a mobile device into a single offering transform into incredibly valuable companies. And the trend continues.

But now expansion is entering a new phase. As less expensive data-centric modems became more available, new market opportunities for machine-to-machine communications, including what is now known as the Internet of Things (IoT), began to emerge. While there are many ways to connect mobile devices to the Internet, cellular technologies offer a critical means of connectivity for many device types that would otherwise be difficult or impossible to connect with other wireless technologies. The ecosystem developed standards with stripped down requirements to meet this need and new chipsets were then built on these standards. The release of the narrowband IoT (NB-IoT) and an evolution of LTE-M standards have enabled the optimisation of costs and performance based on specific market requirements.

The present day

This brings us to today. As 5G networks begin to roll out with the promise of further optimising our device use and virtual experiences, we must remember that standards and the standardisation process have been integral to this technological evolution. Without global standards, there would be no economies of scale associated with a multi-billion-device-per-year market, while the technological breakthroughs that we enjoy today would be out of reach for many consumers around the world. Most importantly, without standards, barriers to market entry would be impenetrable. If anything, open and fairly licensed access to standards-based technology eliminates barriers to entry, as witnessed by the meteoric market rise of Oppo, Vivo and Xiaomi – companies that did not exist a decade ago.

It is extremely dangerous to commoditise these innovation and technological advancements. The pace of innovation can only continue if its value can be realised by the true innovators. We need only reflect on the past decade and the world of possibilities stemming from the device in the palm of your hand to understand the value of these innovations.

What would our lives be without wireless technology? As we imagine the unfolding matrix of IoT implementations, we must also consider the ways in which connected devices can help humanity. In another decade or two, we will look back on this time and wonder how we were able to survive with the seemingly archaic devices and services that we depend on today – but only if we continue to foster an environment that rewards true innovation.

A new age in licensing

To expand on the industry trend of convergence, I will start with my conclusion, which I hold to be simple, practical and true: licensing supports market access and technological innovation. We have heard every theory, every elaborate conception and every nuanced legal argument for why device-level licensing cannot work and how it represents an existential threat to our industry. Yet if this method of licensing, which is now three decades old, is truly harming our industry, the evidence is difficult to find.

While the practice of licensing cellular SEPs to the end-user device (ie, handsets in the cellular handset market) is well established in our industry, it is under constant attack. And as cellular technology finds its way into new industries and vertical applications, and new IoT devices emerge, this licensing method is being tested further. It is only if we can acknowledge the value of cellular connectivity, and where that value is realised, that we can determine a fair price to license the technology that makes it possible.

It is a futile exercise to license at points in the value chain where the standardised technology is only embedded in a component, as its value is not realised because the technology cannot be fully utilised in that form. As we shift the discussion towards licensing cellular-connected IoT devices, this is a key principle in understanding the efforts of the cellular research community and SEP licensing industry to make this process as fair and reasonable as ever.

It is always difficult to predict the future, but with the IoT we at least have a sense of its value boundaries. At one end we have smart automobiles and, at the other, smart meters. Let us focus for now on the smart automobile market sector and explore how its principles can apply to smart meters and everything in between.

Smart, connected cars that include cellular connectivity technology will fully utilise all mobility capabilities to complete functions such as delivering real-time, high-quality streaming entertainment to passengers, sending critical information to automobile manufacturers to help them improve product safety and performance, and potentially serving as a critical component to make self-driving autonomous vehicles and services such as transportation on demand a reality.

The challenge in IoT licensing

Still, there are factors that make the auto industry very different from the handset market. It is worth painting a high-level, albeit simplified, picture of a typical supply chain for the telematic control unit (TCU) communication module that is integrated into a smart car. It is in this TCU component that the cellular connectivity module is located.

Cellular chipset ⟶ cellular module ⟶ TCU ⟶ automobile

Typically, automobile manufacturers sign purchase agreements with TCU providers such as Bosch, Continental, Hitachi, Denso, Delphi and Infineon.

Auto manufacturers may insist on indemnification from their suppliers to protect against patent infringement claims related to components used in their cars. They claim that their suppliers should know the technology used in their components and are thus better positioned to determine the need for a licence. While this is true, there should at least be a shared appreciation for what the indemnification is worth and the value that the end device will deliver to both the car manufacturer and the customer.

Some TCU companies choose to manage this risk by either getting their own suppliers to indemnify them or else taking on the risk to secure their business. In the context of this discussion, a so-called ‘naked’ indemnification is one in which a company knows there are real risks associated with patent assertions but make little or no effort to secure the rights to the patent to cover those risks.

Many TCU manufacturers source their wireless connectivity modules from companies such as Gemalto, Telit, Huawei, LG Innotek, Samsung and uBlox. The existence of indemnification clauses between these companies is less certain, although they can be found in some instances. The same pattern exists further downstream in the value chain, as module manufacturers either accept the risk associated with a naked indemnification or, in some cases, make an effort to secure some of the licences that they know they must take to minimise the risk associated with indemnification.

The problem

The problem should be obvious. Patent owners want recognition of the value that their patent brings to the market and the best place in the value chain to achieve this is where the benefit and value is realised. I am confident that any patent owner would license anywhere in the value chain if it felt that the value it received in exchange for the licence adequately compensated it for the value of the invention when it is ultimately realised.

In this example, it is clear where the value is realised – by either the auto manufacturer or its customer. Passing the licensing responsibility to the end user (ie, the car buyer) makes no sense – rather, the auto manufacturer is the most logical licensing point. The dynamics described earlier help to outline why some players in the supply chain that actually realise the technology’s benefit feel that they should not have to pay for a licence. Instead, they push the licensing responsibility to a participant in the supply chain that cannot afford to pay the fair price, merely because it entered a contract without allocating any value to indemnity and thus leaving insufficient margins for a licence. The following is a typical chain of events:

• The licensor approaches the auto manufacturer to secure a licence for the use of its technology in a smart car.
• The auto manufacturer knows that it is indemnified by its TCU supplier.
• While the indemnification is not important to the licensor, which can still sue the auto manufacturer, it provides enough reason to push the auto manufacturer not to take a licence. In fact, some indemnification clauses require that auto manufacturers let their TCU supplier defend any claims made against them, lest the indemnification become non-effective.
• This essentially takes the decision to agree to a licence out of auto manufacturers’ hands. This does not always mean that all auto manufacturers will not take a licence; in fact, some have chosen to do so. But for every auto manufacturer that takes a licence, there are many more that fall back on indemnification and would rather see the decision determined in court.

The solution

For a clear problem, the solution too should be obvious. While negotiating licences with cellular SEP owners is something that the auto industry is not yet accustomed to, there should be no question of the value that this wireless technology brings to a smart automobile. Coordinating with dozens of cellular SEP holders can be daunting in its own right, while trying to ensure that one’s own perceived value is properly allocated across them adds to the complexity. That is where new approaches to licensing (eg, the Avanci licensing platform) make the most sense.

Initially formed with a few patent owners – including InterDigital – Avanci’s pricing structure was established through arm’s-length negotiations. The pioneering companies recognised that the new, nuanced value and supply chain issues of IoT licensing would make any other framework inefficient, not to mention the worst-case scenario of years-long court battles to determine value and price before achieving any real clarity.

Avanci has exceeded all initial expectations by providing even more value to the licensees without increasing the price. Since its launch in 2016, more than 35 patent owners, representing nearly 80% of all cellular SEPs, have joined the Avanci platform – an unprecedented feat in our industry.

While we can appreciate the dynamic between auto manufacturers and their suppliers, it is difficult to ignore the issues created by their approach. By demanding the lowest costs and indemnification, many auto manufacturers have enabled suppliers that knowingly disregard licence obligations to undercut those suppliers that obtain a licence to cover their risks, putting the latter at a comparative pricing disadvantage. Understanding that licensing is vital to bring value to their product, auto manufacturers should not just accept that some suppliers are willing to undercut others – instead, they should always verify that patent rights have been secured.

This is fundamentally about more than just price; it becomes about ethical sourcing. If a consumer gets a great deal on a TV from a recognised retailer, they have peace of mind knowing that they did a good thing. It is a very different story when the great TV deal comes from a nameless seller in a dark alley who takes only cash. In the case of smart autos, skilled purchasing departments know exactly how hardware costs will factor into the final price. The belief that suppliers can provide such critical components at a low margin, with little to no allocation for the patent licensing cost, is suspect at best, regardless of the manufacturer’s contract terms on indemnification.

The $15 licence

Despite the unique challenges of the IoT licensing ecosystem, these issues could be, and in many cases have been, resolved through Avanci for roughly $15 per LTE-enabled automobile – a price that a number of automakers have chosen to pay. This raises the question: Is $15 a fair price to implement technologies that will provide untold value to the customer and the manufacturer over the 10-year lifespan of a $37,000 car? Avanci’s representative membership certainly believes so.

At the other end of the IoT cellular technology value chain, Avanci also has a programme representing smart meters. While there are significant technical differences between smart autos and smart meters, there are two clear similarities. First, the value of the smart meter is realised in the application of the technology, not in the device. Second, smart meter supplier margins are incredibly tight. We are still at the start of this IoT journey and it remains to be seen whether businesses that deploy smart meters and other technologies will be willing to pay their suppliers a nominal fee to avoid future licensing claims or whether they will simply replicate the disputes that we have seen in the auto industry.

I will conclude by saying that, in both instances, the cellular research industry has done its part. SEP owners and the research community have come together to offer a simple, one-stop opportunity to acquit end-device manufacturers of essential licensing responsibilities at a modest cost that delivers increasing value. Technology innovators have done their part; it is now time for the markets implementing these critical technology solutions to do theirs.

The views expressed here are those of the author and do not reflect those of InterDigital.