It’s all coming together

For Asian tech corporates, convergence is presenting previously unknown legal risks and opportunities for collaboration. New entrants will have to be canny to survive in this increasingly complex business environment

There is nothing new about convergence – the process by which technologies from a wide range of fields come together in complex systems. Aircraft wing designs in the 1910s and advances in sewing machines in the 1850s led to litigation battles and prompted the emergence of non-practising entities (NPEs) and the first patent pools. More recently, the Society of Automotive Engineers has hosted a conference on the subject in Detroit for the last 10 years; while in electronics, the meeting of previously discrete technologies was a major catalyst for the patent wars which raged in the smartphone supply chain during the mid-2000s.

However, the trend now appears to be accelerating. Today, companies are rushing to add connectivity and computing power to more and more everyday products. While some manifestations, such as internet-connected toasters, may appear frivolous, others such as driverless cars have the potential to radically change the way we live. The upshot is that IP managers everywhere need to prepare for an exponentially expanding range of IP risks.

Asia is home to some of the world’s most influential tech incumbents – which are driving advances in connected technologies – as well as a slew of dynamic young companies keen to grab a share of the market and cultivate their own tech ecosystems. While many of these are too new to remember the worst of the patent wars involving mobile phones and software, they have all heard the stories and are growing increasingly worried about the risk of a new wave – especially as patent assertion in China (including by NPEs) looks set to increase.

Yet while companies voice their fears of NPE threats to their business, the M&A and IP transactions markets reveal that they are increasingly collaborating with competitors in potentially fruitful ways. If patents end up playing a decisive role in the Internet of Things (IoT) environment, relatively new market entrants from China will face big hurdles. However, some are betting that their status as convergence-native businesses could give them a significant edge.

Su Jing
President of Baidu Public Policy Research Institute and senior director of patent affairs, Baidu

Risk factors

One of the key concerns about the IoT is that companies in a wider variety of industries could be drawn into patent conflicts with NPEs. As businesses develop products further away from their core innovative offerings, they risk infringing patents in tech areas with which their IP teams may be less familiar. At the same time, disquiet over NPE activity is mounting across every sector in China. WiLAN’s recent suit against Sony marked the first assertion in the country by a licensing entity – while the defendant in this case hails from Japan, many local companies are worried that Chinese firms will become targets before long. Amy Xu, chief patent and technology counsel for Alibaba, says that industry needs to pay close attention to recent court decisions. “A big increase in damages in China would be very attractive for trolls,” she points out. Xu predicts that the gravest consequence of this trend could be a mass exodus of high-tech manufacturing from China.

Paul Lin
Vice president for IP strategy, Xiaomi

But others suggest that domestic companies may be protected from assertion activity by China’s unique commercial environment. Baidu’s senior director of patent affairs, Su Jing, tells IAM: “We consider NPE activity very difficult to carry out in China. National conditions, cultural factors and many other issues are at play.” Jing explains that Baidu pays extremely close attention to NPE activity – according to its observations, those trying to make trouble in China have so far had little success. For now, the country remains a major manufacturing centre for all manner of IoT-linked electronics. However, all companies – not just local ones – need to watch developments there closely.

    Hiroshi Kawana
    IP department general manager, KDDI

    “By consolidating many technologies in a single product, you consolidate certain risks,” points out Xiaomi’s vice president for IP strategy, Paul Lin. “I don’t think the NPE problem is unique in that context – it’s always going to be there.” For the Beijing-based smartphone company, there are three rules when it comes to managing IP risk for its core handheld products:

    • Employ effective contract management in its supply chain to ensure that IP coverage is sufficient;
    • Make the right strategic bets to source the right portfolios; and
    • Strike smart, carefully thought-out deals.

    One of the many convergence-driven collaborations to emerge in 2016 was between Toyota and KDDI, which agreed to develop a global communications platform to be rolled out in all of the automaker’s new models by 2020. The Japanese telecom’s IP department general manager, Hiroshi Kawana, explains that the initiative could expose his firm to new risks: “We will provide connected cars all over the world – it’s a big project with big revenue, so patent research will be very important.” Kawana says that he views the auto industry as “very dangerous” from an assertion perspective, with risks on the increase.

    Jayson Pankin
    CEO, Autoharvest

    Keith Bergelt
    CEO, Open Invention Network

    Jialin Li
    IP manager, BYD

    This potential for IP assertion seems to be prompting new approaches to risk management across the industry, especially in Asia. The last year was a landmark for the License on Transfer (LOT) Network – whose members pledge that any time they transfer a patent to an NPE, they will grant a licence to all of their fellow members – which has nearly doubled its membership since Ford became the first automaker to sign up in late 2015; a steady stream of Asian competitors followed, including Hyundai, Kia, Subaru, Mazda, Nissan and Honda, as well as General Motors and Daimler.

    However, while key Japanese and Korean players appear to have embraced LOT’s value proposition, Chinese firms have been notable by their absence. Although Lenovo, which is well known for its vocal public stance against NPEs, became the first Chinese member in 2016, other major domestic tech players have not followed suit. One reason for this may be that they foresee major risks ahead ‒ predominantly in China and perhaps in other emerging markets. Another might be that, as relative newcomers, they prefer to keep their options open when it comes to transferring IP assets.

    Of course, defensive aggregators and other alliances can never completely eliminate risk. To further shore up their positions, those Chinese companies rushing headlong into converged industries are thus investing heavily in their IP teams and other legal resources. IoT newcomer LeEco is a good example. Founded around an online content streaming platform comparable to Netflix, the company has sought to branch into such fields as automobiles, smartphones, televisions, virtual reality and film production, in the hope of creating a comprehensive ecosystem for Chinese consumers. While it has sometimes flown close to the sun in terms of cash in hand, the company has already pulled off major acquisitions – including smartphone maker Coolpad and US television manufacturer Vizio.

    Though the young company has little in the way of self-developed IP assets, it appears to have devoted significant resources to bringing in top IP talent to mitigate the risk posed by its scant patent coverage. In June 2016 it hired Joshua McGuire – who had served as Google’s senior patent counsel responsible for Android and mobile phone strategy since 2009 – as general counsel for North America. It was apparently not an ideal fit, as McGuire left after just four months. LeEco subsequently announced a strategic cooperative agreement with former US Court of Appeals Chief Judge Randall Rader. Both moves are a clear sign of the company’s belief that top global expertise can help it catch up or at least survive in the complex IP environments in which it operates. It remains to be seen whether that gamble will pay off.

    Peace and pools

    However, while many companies are taking steps to defend again increased NPE activity, there are those who see convergence as a potentially stabilising development. The latest wave of technology convergence underlines the truism that no one company can own all the relevant patents and have total freedom to operate in any given space. Companies thus need to collaborate with other innovators across a wide range of tech areas. Some corporate actors hope that this trend will help to produce a business environment where operating companies engage in less patent conflict.

    “As more and more companies are working together to try to create this connected world, no single company can control all the intellectual property in one industry,” Lin points out. “Most companies realise that the collateral damage is very high if they initiate IP battles against others; so rather than being hostile, operating companies understand it’s better to keep the peace with each other and compete on product. They also realise that they need to source technology from other companies in order to make their own products more complete in terms of functionality or more competitive in terms of better features.”

    As the number of connected devices explodes and more and different types of companies enter the electronics space, some are convinced that the basic patent licensing paradigm needs to change. Bilateral licensing negotiations will need to involve a huge number of players, some of which have not previously been part of the licensing ecosystem. Licensors in particular do not want the IoT’s emergence to generate another round of fractious deadlocks and costly litigation. Avanci – the IoT licensing initiative launched in 2016 by many of the top wireless standard-essential patent (SEP) licensors – reflects a new interest in the old idea of patent pools. While Huawei is a notable absentee, ZTE has joined the organisation’s first pool, which is focused on connected vehicles and smart meters. The Chinese telecom giant is not only a major owner of cellular SEPs, but also a new entrant in the auto world – it purchased a Chinese bus manufacturer in December, pledging to invest $2 billion in the hope of becoming a “top-five maker of commercial vehicles” within the next five years.

    Any successful licensing initiative around the IoT will likely need China’s major licensors on board. “If the patents in that technology area are very scattered, it discourages people from taking a licence,” Lin explains. “This is because they still cannot manage IP risk even if they pay the pool.” However, such an initiative would also need to be able to present a convincing case to the Chinese licensees which will be pumping out products across the various IoT domains. “The way a pool does licensing in China has to be transparent and consistent,” argues Lin, adding: “Everyone has a different opinion, but I think the way to judge is to look at a cost structure that’s sustainable from the product company’s point of view.”

    Within China, interest is growing in a different type of patent pooling, which appears to be aimed more at opening up technologies than at licensing out for revenue. In late 2015, internet search provider Baidu formed a pool for voice recognition technology, reportedly deciding that patents would be opened up to members for free. The group’s diverse membership reflects its focus on the IoT and other converged technologies: automaker BAIC, appliance manufacturer Haier, chipmaker BOE and e-commerce platform JD.com are members, while ZTE originally joined, but later left. Jing explains that the pool is about much more than intellectual property: “Patents are a bridge that helps facilitate cooperation among members on the technical and product sides. By applying Baidu’s voice recognition technology, all members of the alliance cooperate and can put out a better end product for consumers.” Like previous companies that have opened up their patent portfolios, Baidu not only wants to avoid costly patent conflict, but also to encourage the adoption of its technology.

    Jayson Pankin, CEO of Autoharvest, views the emergence of new patent pools as part of a trend whereby intellectual property is becoming more an enabler for collaboration and less a tool for exclusion: “I think when you see patent pools, it’s also a code word for a common club membership; and importantly, those club members can perhaps talk together about the evolution of the product on a pre-competitive basis.”

    One notable aspect of Baidu’s pooling initiative is that so far it involves Chinese companies only. Given the language issues involved in voice recognition technology, it might make sense to have a technology specifically designed for the Chinese market. However, this narrow focus also raises the question of whether the IoT is developing along a separate path in China compared with the rest of the world. That has been the case in the traditional internet industry – in which Baidu, Tencent and Alibaba are the major players – for a variety of reasons, notably China’s tightly regulated online space. However, in other areas, such as automobiles, the outlook appears to be more international. It is certainly telling that Baidu has built a 100-person driverless car development team in Silicon Valley and received regulatory approval to test such vehicles in California.

    Figure 1. IP alliance for voice recognition technology founded by Baidu

    Figure 2. Communications platform for connected cars being co-developed by Toyota and KDDI

    Source: KDDI

    It seems clear that the IoT space can greatly benefit from increased standardisation. Keith Bergelt of the Open Invention Network (OIN) has spent the past several years attempting to convince companies to adopt an open source platform for connected cars based on the Linux system, Automotive Grade Linux. Bergelt points to Huawei as one company whose leadership is “deeply committed to open source” and Xiaomi as another that is “actively looking at open source”. However, beyond those two, he suggests that Chinese companies are not rushing into anything. “We’re not there with broad participation, but it’s important that we see more,” he says. “From an innovation standpoint, we are lesser because we don’t have creative and talented people from Chinese companies in the uniform way that we have them in North America and Europe.” This creates a risk that the overall project may be less innovative than it might otherwise be.

    Lin has a different view on the idea that China risks being isolated from the global dynamics of the IoT and other tech development. On the gap between western and Chinese internet companies, he insists: “It’s not the technology itself; it’s more about how you understand the consumer.” Although Chinese companies have a more sophisticated understanding of Chinese consumers, the technology that they use to reach them is largely similar to that of their western peers. Lin does not see this disconnect as a barrier to IoT development in China – “In terms of underlying technology, they will be the same and aligned with international standards” – although he concedes that the content and software are significantly different.

    Effect on deals market

    From the perspective of the deals market, the interesting thing about IoT-driven convergence is the range of companies involved. While the smartphone is a product of convergence and involves technologies that broadly fall under the umbrella of electronics (ie, telecommunications, semiconductors, displays, speakers and cameras), the IoT could potentially involve everything from makers of vehicles and home appliances to producers of shoes or lightbulbs. This broad spread makes it extremely difficult for any one company to have a patent portfolio which protects every part of its business. “We did a study and found that to effectively manage IP risk for a smartphone, the portfolio must be balanced between operating system and app software, user interface, wireless, display, semiconductors etc,” says Lin. “But there’s not one company on the planet that has that kind of well-balanced portfolio, let alone a six-year-old business like Xiaomi.”

    Pankin argues that in the auto industry, “intellectual property is being co-developed, licensed in and acquired at an accelerated rate. The growth of Silicon Valley as a technology source and as an outpost for R&D centres has escalated dramatically. As an IP manager, that’s a source of both competition and of invention.”

    For companies that find themselves selling products in new technology areas due to convergence, or that are new to the scene altogether, licensing in patents or technologies can provide freedom to operate while options for external acquisitions or internal portfolio building are explored. The case of Xiaomi – which used a licensing deal with Microsoft to acquire 1,500 patent assets – illustrates how licensing talks can be extremely useful for multiple ends. Lin stresses that the important thing is not just to make deals, but to make smart deals. “If you just try to pay your way out, the costs could be so heavy that they drive you down and you’re wiped out. How to thrive in this very complex landscape requires a lot of thought and constant adjustment of your own execution plan”. This also involves continual reassessment: “Lots of people have not paid attention to how technology shifts have impacted their licensing strategy.”

    Patent acquisition is still very much a priority for Chinese companies ‒ not only through outright patent assignments, but also through investments and M&A activity. LeEco’s controlling investment in patent-rich domestic competitor Coolpad and Midea’s takeover of a 6,000 patent portfolio as part of an M&A deal with Toshiba are examples over the past year from convergence-affected industries. In Pankin’s view, transactions that open up the possibility for technology collaboration and know-how acquisition are smarter than pure patent plays: “Intellectual property is more effectively used as a business development tool than as a legal tool. The opportunity cost of non-product development activities is very high. You get much more by having your highly trained team focused on the next product, not defending the last product.”

    Lin counters that for fast-growing concerns such as Xiaomi, external patent acquisitions are a crucial way to close the gap. And when it comes to the IoT, there can be real value in pure patent buys: “There are some essential wireless technologies that have already been invented by someone else, but are needed whether you’re making a car or an IoT product. Even in the 5G era, you’ll still be using 3G and 4G networks in IoT products, so you need to own some piece of the design to be viable.”

    For others, the move into new lines of business will be protected by business partnerships and in-house innovation rather than portfolio acquisitions. As KDDI pursues its auto-focused partnership with Toyota, the company says it is also shifting its focus to the IoT, mobile payments and e-commerce as its core telecoms business stagnates. Kawana argues that despite these ventures into new business areas, the company’s policy of neither selling patents nor buying them from third parties means that it will have to rely on extensive patent landscape analysis and indigenous innovation.

    One of the strongest recent trends has been a wave of M&A activity that appears to be driven by convergence, particularly between tech companies and automotive companies. The highest-profile example is probably Samsung’s $8 billion cash purchase of Harman. As IAM readers will be aware, the target company not only is a leader in automotive entertainment, but also has a top in-house IP function led by Alyssa Harvey-Dawson. However, as Figure 3 shows, the alliances that have evolved between car companies and those focused on big data form a particularly tangled web in China. Although some tie-ups have already borne fruit – Alibaba and state-owned automaker SAIC unveiled an internet car in July – most are in the very early stages, with many having been finalised only in 2016. So the real significance – in both IP and business terms – of ZTE’s hook-up with BYD, Baidu’s joint investment with Ford in Velodyne Lidar and Audi’s series of agreements with China’s major internet companies remains to be seen.

    Figure 3. A selection of auto-related partnerships, investments and acquisitions in Asia

    Jing sheds some light on the part that the IP team plays in the company’s relationships with Audi, Ford and other partners: “Our role is to make collaboration by both sides even more smooth and successful. The IP team is not only protecting our own achievements, but also using patents as a bridge to advance cooperation between various partners.” She adds that they work together with partners’ IP teams to investigate the patent landscape and hammer out strict stipulations governing IP ownership on both sides.

    Figure 4. 2015 estimate of BYD’s patent portfolio

    Upstart advantage

    While convergence is affecting every global business, it appears that Chinese companies in particular are pursuing an all-of-the-above approach when it comes to optimising their IP strategies. There are a variety of possible reasons for this. Young companies may be better able to make big strategic changes; they may be more inclined to do so for competitive reasons; or they may have a clearer vision when it comes to the future business environment. It is too early to know whether they will succeed ‒ but despite their relative lack of IP assets, Chinese firms could turn technology convergence to their advantage.

    “We don’t have the legacy of having to change our mindset to go from an old industry into the new converged product category,” says Lin. “We were born into the converged product category… We are used to balancing design freedoms with a sustainable cost structure so we can compete.” The fact that IP teams and strategies are relatively young also seems to result in less institutional reluctance to try new or unconventional strategies.

    Arguably the biggest advantage in today’s data-driven tech market is a big user base. A significant group of companies are betting that loyal users of core products – whether Baidu’s search engine, Amazon’s e-commerce sites or Tencent’s social media platforms – will help them to get the data and the customers they need to make successful IoT products.

    Given their pedigree, many Chinese tech companies are also at the forefront of the effort to use big data for patent management. YP Jou, the top strategist responsible for Foxconn’s patent strategy, told IAM that Chinese firms have thus far led the way when it comes to creating so-called ‘Internet-plus-IP’ platforms, although he notes that these efforts “have only just begun to scratch the surface”. A Hong Kong company’s co-takeover of Thomson Reuters’ IP & Science unit and an investment round in service provider PatSnap by the investment firm run by Xiaomi’s CEO both attest to a rising demand for patent analytics in the region.

    Another trend is that companies are bringing in IP expertise specialised in a variety of different industries. “We are adjusting our patent strategy according to the direction of the company’s development,” explains BYD’s IP manager, Jialin Li, “including adding talent in different fields of technology.” Vertically integrated BYD is no stranger to big changes in business: its start as a battery manufacturer allowed it to make a big splash in the electric car market after it purchased a traditional automaker in 2003, and it now also has significant business in manufacturing consumer electronics and components. This pedigree is unusual among auto-led businesses and could bode well for success in the connected car era (BYD is partnering with ZTE on smart cars).

    Baidu believes that artificial intelligence (AI) is at the heart of the Internet’s future and sees its own core competence in this area as a significant edge. “In the talent pool, we are deploying more outstanding and qualified personnel to respond to AI technology’s rapid development,” Jing explains, elaborating on the group’s main IP goals. “We also want to use patents to facilitate top-to-bottom enterprise technology and product collaboration, so that AI can provide even better service.”

    Only time will tell whether China’s big tech enterprises will derive any advantage from their fresh approach and this latest flurry of transactional activity. Pankin believes that, at least in the auto industry, there is no major disconnect between how companies in different parts of the world are responding to convergence: “All of these companies are going down the same road together, which now embodies open innovation and pre-competitive collaboration, with the target of a total connected life.”

    Action plan

    The convergence of discrete technologies in complex consumer products such as connected cars and other IoT devices is shaping IP strategies across Asia:

    • Many IP risk managers worry that NPE assertion could affect a wider range of industries in a wider range of places, especially China. Defensive alliances such as the LOT Network have gained new members among East Asian automakers.
    • IP-based relationships between operating companies are arguably becoming more collaborative and less combative. New patent pooling initiatives have emerged both inside and outside China.
    • Companies that are entering new lines of business due to convergence are active players in the IP transactions market. Rather than pure patent buys, we are seeing a lot of hybrid deals and M&A tie-ups.
    • Chinese companies are betting that they can optimise their IP strategies for convergence despite, or perhaps because of, the fact that most have had a much later start to patent portfolio building than their overseas competitors.

    Jacob Schindler is IAM’s Asia-Pacific editor, based in Hong Kong


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