Mobile Phone Manufacturers Seek To Control Rising IP Costs

By Tatum Anderson for Intellectual Property Watch

A proposal by some of the world’s largest mobile phone equipment manufacturers to limit royalty fees on a next-generation wireless technology is the latest in a series of initiatives to try and control spiralling intellectual property costs.

Alcatel-Lucent, Ericsson, NEC, NextWave Wireless, Nokia, Nokia Siemens Networks and Sony Ericsson announced earlier last week that they want a new framework for intellectual property. But crucially, they want combined royalty fees for a yet-to-be created technology called LTE to be less than 10 percent of the cost of a handset and under US$10 if embedded in laptops.

The announcement comes as mobile operators – who buy the equipment – complain that equipment costs are far too high as a direct result of rising intellectual property fees.

Fees have rocketed because as technologies advance, an increasing number of manufacturers collaborate to create them. When equipment, based on a standard technology created by industry, is sold, each manufacturer that contributed to it charges a royalty fee. When added up, this aggregate royalty fee can sometimes exceed a quarter of the total cost of the equipment, according to some estimates.

Since yet more manufacturers are involved in creating new technologies like LTE than older technologies, operators want to prevent IPR costs from rising further. Indeed, last week the CEO of one mobile operator group, Vodafone, was reported to have said that the company would not definitely sign up to one of these future technologies – LTE – until IP costs were sorted out.

So, the newest announcement tells operators that manufacturers are working to ensure that LTE will not be expensive. “That is the only way you can give reassurance to the market that IPR will be reasonable,” said Gustav Brismark, vice president of patent strategy at Ericsson, one of the manufacturers to have committed to the plan.

But the plan is preceded by a host of others also aimed at controlling IP that include the European Telecommunications Standards Institute (ETSI), a group that creates technology standards, and an alliance of mobile operators committed to working on future wireless technologies called the Next Generation Mobile Networks (NGMN) alliance.

And there are some striking similarities between the initiatives.

The manufacturers’ latest plan calls for more predictable and transparent IP pricing.

But ETSI tried to introduce predictability and transparency in 2005 by introducing rules to combat patent ambush, whereby certain manufacturers withhold information about their patents until the standard is agreed, and demand royalties unexpectedly. The rules now compel companies to declare upfront all the relevant patents they own.

Similarly, NGMN last year said that in conjunction with some of the world’s largest manufacturers – it too was establishing a framework for IP transparency and predictability. Its remit was to get equipment vendors to declare upfront not only how many patents they intend to charge royalties on, but costs too. The idea was to help operators understand exactly how much technology might cost.

There are also similarities between the latest news and another proposal, looked at within ETSI, that never made the light of day.

Under the latest plan, the companies want reasonable, maximum aggregate royalties based on the principle of proportionality. In other words, each IP holder receives a proportion of the total rate, depending on what proportion of the patents it contributed to the standard.

But an earlier proposal – called Minimum Change Optimum Impact (MCOI), submitted to ETSI by Ericsson, Motorola, and Nokia some years ago – also asked for aggregated reasonable rates and proportionality but fell afoul of the European Commission on competition grounds.

The Commission’s antitrust directorate sent a letter to ETSI in 2006 saying that proposals being discussed internally might end up contravening European Competition Law. The Commission stated: “A collective ex-ante royalty cap regime in combination with the royalty allocation mechanism does not appear to allow for price competition, since the price of each essential patent is fixed in advance.” ETSI later threw out the proposals, say lawyers.

Ericsson says, however, that the recent proposals should not run into problems experienced by ETSI. “It is true that this proposal has the components of aggregated royalties and proportionality common to what was earlier presented in ETSI, and we believe it to be fully in line with antitrust legislation,” he said. “The companies have merely suggested a framework with principles that should lead to a reasonable maximum but none of the price levels have been discussed or decided.”

Lawyers say collaborations among groups of companies are a tricky legal area. Ilya Kazi, a partner at patent and trade market attorneys Mathys & Squire said, “Competition law was designed to prevent cartels but it has the unintended consequence – it is a blunt instrument and also applies directly to collaborations between parties developing technology for perfectly laudable aims. It can’t distinguish between them.”

Given the similarities between several different plans, analysts and lawyers are perplexed about why the new initiative was not announced under the auspices of NGMN. After all, since the brush with the Commission there is now broad agreement that an engineering-based standards body like ETSI is not the appropriate forum for the type of commercial discussions discussed in the past, but many believe NGMN is.

Ericsson’s Brismark said the group, which has no name, decided to make an announcement independent of NGMN because several LTE patent holders wanted to commit publicly to lower prices. NGMN is essentially a mobile operator and not a patent-holder group. “This is an independent initiative from NGMN – the major patent holders of LTE are making this announcement,” he said. “We don’t see any conflict with continuing the work within NGMN.”

Tatum Anderson may be reached at info@ip-watch.ch.