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"In addition to market and legal considerations, consumer needs should not be ignored when dealing with the complex FRAND licensing of SEPs. Stakeholders should include consumers in licensing discussions to build a more inclusive, sustainable and thriving IP ecosystem that includes consumers. ”
Source: IPRdaily Chinese Network (iprdaily.cn)
Author: Wei Na Yu Cheng
In SEP FRAND licensing discussions and industry forums, the conversation usually revolves around the delicate balance between SEP rights holders and implementers, with the focus often on the sharing of innovation and reasonable compensation between the two. The general idea is that the starting point of the innovation cycle is that the SEP rights holder invests in R&D and shares the new technology with the SEP implementer, and the end point is that the SEP rights holder receives a fair remuneration, thus allowing for further investment research. SEP acts as an intermediary throughout the innovation cycle.
While the process can incentivize innovation, emphasizing only the importance of the innovation cycle may limit the horizon of SEP rights holders and implementers to the rest of the broader IP ecosystem, leading to unnecessary friction. Focusing solely on the innovation cycle could even lead the two sides into an adversarial zero-sum game, which would hinder the joint cultivation and development of the IP ecosystem.
In order to be able to look at the big picture and arrive at a more inclusive approach, the key is to take a step back and take into account all the different stakeholders, not just innovators and implementers. Consumers, legislators and policymakers are all key components of a sustainable IP ecosystem, and consumers are particularly important. While the industry values technological advancements and patent portfolios, it is more important to focus on the end audience of these innovations, namely consumers.
Overview of the IP ecosystem
Consumers should be given equal weight in all business models, as they are the ones who ultimately enjoy and pay for innovations (often by purchasing products and services that incorporate innovations). It is because of consumer purchases that implementers are able to scale up implementations and innovators are remunerated from their initial investment and used for further innovation investments. It is essential to build a complete IP ecosystem that takes consumers into account.
Figure 1.Overview of the IP ecosystem
A sustainable and thriving IP ecosystem should not only benefit innovators and implementers, but should also prioritize consumer satisfaction. The cycle of the IP ecosystem begins with investment in innovation, followed by implementers investing in production to transform innovation into products or services and bringing them to market, and finally enabling consumers to pay to enjoy the value of innovation. A portion of the revenue from sales goes to innovators in the form of licensing fees, enabling them to continue innovating. Between innovation and consumer satisfaction, a continuous cycle is formed and facilitated. Breaking the loop endangers the interests of all stakeholders, so it is essential to maintain its integrity.
The cycle will continue smoothly only if consumers appreciate the value of innovation, are subjectively willing to pay, and objectively have the ability to pay for the value that innovation brings to a product or service. Ideally, consumers choose to pay for a product or service based on their perceived value for it. Implementers and innovators can each maintain production and innovate further if the consumer pays. From this perspective, these stakeholders should work together to maximize consumer satisfaction and work to preserve the IP ecosystem.
In addition, looking at the IP ecosystem from a consumer's perspective allows us to understand the factors that affect its sustainability and what innovators and implementers can do to maintain and expand the IP ecosystem. Therefore, SEP licensing should take into account the following points (non-exhaustive).
Consumers' willingness to pay
Changing consumer preferences and economic factors have significantly influenced consumers' willingness to pay for new technologies. For example, while the share of 5G smartphones in overall mobile phone shipments has grown slowly over the past few years, the overall mobile phone market as a whole is severely saturated. Since 2019, the rollout of 5G phones has not saved the flagging global mobile phone market.
Figure 2 shows that global smartphone shipments have been declining since 2019. This trend reflects the relatively low willingness of consumers to pay for mobile phone upgrades, extending the replacement cycle. The reasons behind this phenomenon include:
· the macroeconomic recession caused by the pandemic;
· regional conflicts;
· Geopolitical tensions.
Figure 2: Global smartphone shipments (in millions)
In addition, the rollout of 5G networks around the world has not been as aggressive as initially anticipated. Even in countries where 5G networks are widely deployed, many consumers are reluctant to upgrade their 4G smartphones due to the lack of killer 5G applications. This is because even if 4G data speeds are not enough for all needs, they are more than enough for most daily needs. According to the GSMA's Mobile Economy 2023 report, 5G adoption will only reach 17% by 2024.
In a sense, the willingness to pay for a technology (or part of it) is closely related to the pricing of the product or service.
Hypothetical case study
In a hypothetical case, a shelf lock will wear out and need to be replaced after 1,000 unlocks, but users usually expect to pick the lock 1 million times before replacing it. Manufacturer A invented a lock that unlocks 10 million times, while Manufacturer B invents a lock that unlocks 1 billion times. In terms of product pricing, it would be unwise for Manufacturer B to price the lock higher than Manufacturer A. If users are not willing to pay for tens of millions to hundreds of millions of additional locks, then Manufacturer B has no competitive advantage over its competitors.
The same economic principle applies to the pricing of royalty rates.
In the case of 5G technology, consumers' willingness to pay should be taken into account when determining the rate of patent royalties, as it is a direct reflection of the value that consumers perceive the technology to bring to smartphones. For example, in the judgment of the Chongqing Intermediate People's Court in the case of OPPO v. Nokia, the court ruled that the 5G patent license fee rate range was 4.341% to 5.273%. The court accepted an economic model that considers consumers' willingness to pay for 5G smartphones to reach this conclusion.
There are more than 60,000 declared patent families for 5G standards and the number continues to grow, far exceeding the number of patent claims for 4G standards, in part due to overfiling. Another key reason is that 5G standards include technologies in verticals such as the Internet of Things (IoT), as well as a number of optional features that are up to implementers to decide whether or not to implement them in a product or service. If consumers aren't using vertical technologies or optional features, it's unreasonable to ask consumers to pay for those unused technologies and features. Therefore, innovators and implementers should ensure that patent license fee rates do not cover unused vertical technologies and optional features. Otherwise, the consumer will end up bearing additional patent license fees that they should not have been responsible.
Cut unnecessary costs for consumers
The total patent license fee paid by the implementer and ultimately borne by the consumer varies proportionally to the number of innovations in a particular product or service. For example, as more and more innovations are actively or passively added to smartphones, the total patent license fee can be high.
This is best illustrated by the field of video codecs. Prior to the standardization of High Efficiency Video Coding (HEVC) technology, implementers (i.e., smartphone manufacturers and online video streaming service providers) primarily used their predecessor technology, Advanced Video Coding (AVC) technology. AVC technology is widely used in smartphones. Consumers indirectly pay AVC technology innovators by paying for smartphones.
However, the HEVC licensing landscape has become chaotic and fragmented due to the higher expectations of some HEVC technology innovators regarding patent licensing fees. Three patent unions were formed, and there were several innovative companies that did not join any of them. The sum of all patent royalties results in a significant increase in the total cumulative patent royalties of HEVC. The fragmented HEVC licensing environment has severely hindered the deployment of HEVC technology in the market and has led directly to industry investment in alternative and competing codec technologies.
To this day, AVC has proven to be the dominant video codec used in the industry, while several other competing codecs and subsequent codecs of the AVC standard, such as VP9, AV1, HEVC, and VVC, coexist with it. With smartphones needing to support almost all of these video codecs, this not only places a heavy financial burden on video streaming service providers, but also puts a heavy burden on smartphone manufacturers. Despite low or no consumer use of some video codecs over the life cycle of a smartphone, manufacturers still have to pay for it, and consumers ultimately bear the cost of patent licensing fees. If HEVC innovators had initially emulated the success of licensing AVC technology, HEVC is now likely to be the dominant video codec on the market, with consumers paying only for the only video codec technology they use regularly.
Representing the voice of the consumer
Striking a balance between "hold-up" and "hold-out" requires caution to prevent either from disrupting the IP ecosystem. Reverse hijacking of patents by implementers can deplete incentives and financial resources, hindering further innovation. Similarly, patent hijacking by innovators can cause problems for innovation, resulting in triple losses. First, implementers may avoid incorporating innovation into a product or service because of excessively high patent licensing fees, which can lead to competitive disadvantages or even financial deficits. The second and third points are that the failure to apply such innovation to a product or service prevents consumers from enjoying the benefits of innovation and prevents innovators from getting a fair return on their initial investment. This will eventually lead to them being unable to continue innovating due to lack of funding. Therefore, innovators and implementers must work together to maintain a sustainable IP ecosystem.
Seeking an ultra-FRAND rate is considered unfair to licensees, and recent jurisprudence has underscored this view. In Interdigital v Lenovo, Judge Mellor commented: "Overall, I have come to the conclusion that InterDigital does not behave as a bona fide licensor due to the constant pursuit of ultra-FRAND rates. Similarly, in Optis v. Apple, Judge Marcus Smith stated: "No implementer can sustain business if the rate claimed by Optis is paid."
This practice is also unfair to consumers. Innovators should avoid seeking ultra-FRAND rates and opportunistic behavior. Implementers should also responsibly resist over-FRAND rates, rather than accepting them irresponsibly, increasing the burden on consumers. Implementers should also consider affordability from the perspective of consumers, especially in developing countries and regions, and on the other hand, implementers should also maintain reasonable financial space in product pricing to encourage innovation. Implementers should provide fair and equitable remuneration to genuine innovators who claim reasonable patent royalties, thereby enabling further innovation.
This practice is also unfair to other innovators who seek fair remuneration for innovation. In the era of patents with open standards, it is impossible for one innovator to have all the inventions of a new technology. The pursuit of ultra-FRAND rates by one or more innovators will hinder the adoption and development of new technologies in the market and adversely affect other innovators seeking fair compensation.
Consumers' ability to pay
Financial capacity plays a key role in shaping the IP ecosystem. The level of economic development (e.g., household income) is often taken into account in the pricing process. Correspondingly, it is common practice to offer discounts on patent licensing fees to developing countries and regions, as reflected in many patent licensing programs with published rates. Such discounts have also been considered and accepted by court decisions around the world. For example, in Unwired Planet v. Huawei, Judge Birss noted that "these comparable licenses show that rates in China tend to be lower than in other parts of the world." The intensity coefficient of the relevant patent regions varies. I've found that FRAND licenses should use a 50% patent regional strength factor. In TCL v. Ericsson, Judge Selna provided the final FRAND rates, distinguishing between rates in the United States and the rest of the world. In addition, patent consortia (e.g., the VIA AAC Patent Pool) have set rates for Regions 1 and 2 to distinguish between different regions. As consumers in developing countries and regions are price-sensitive, these discounts facilitate technology diffusion in markets where there is insufficient penetration of innovative technologies, and benefit those who might not otherwise have the opportunity to own a smartphone at the same rate, enabling them to enjoy innovation and access knowledge and information using the mobile Internet, avoiding the competitive disadvantages of information asymmetry.
In this context, the key openness issues involved in FRAND negotiations are also relevant to consumers, such as:
· Whether you should consider a percentage rate based on the price of the product or a fixed unit amount;
· Whether the FRAND rate should take into account the profit margin of the product.
Regional perspective: consumer geography and patent coverage
Patent law is territorial in terms of its scope of application. It is well known that if an invention is not patented in a jurisdiction, consumers in that country and region do not have to pay for it. For patent portfolios with good global coverage, it makes sense to apply fair global rates. In the opposite case, SEP licensing should take into account the consumer's geographical and patent coverage.
In Unwired Planet v Huawei, Judge Birss presented a "table showing the number of SEPs claimed to be held by Unwired Planet worldwide" and stated that "in view of this table, the FRAND approach is to identify MM countries as those that claim to hold more than a certain number of SEPs, according to a certain standard". The specifics of how this factor can be more easily weighed may vary depending on the specific patent portfolio. To some extent, this also provides a more solid legal basis for patent licensors.
Key takeaway: Focus on consumer needs
In addition to market factors, expert opinions, and legal considerations must also be taken into account in dealing with the complex licensing of SEPs, but also the needs of consumers (directly or indirectly). Consumers are not just passive recipients of innovation, but also active participants, and their preferences and needs influence the direction of technological advancement. Consumers are the source of income for innovative technologies, the end users of innovative technologies, and the objects of joint services for innovators and implementers. Stakeholders should take consumers into account in licensing discussions to build a more inclusive, sustainable and thriving IP ecosystem that includes consumers.
Note: This article also contains contributions from Xu Ning, Xiao Feng, and Zhang Rongsen. The views expressed in the article are solely those of the author and do not necessarily represent the views or opinions of his employer.
About the Author
(Original title: Industry Perspective: Considering Consumers in FRAND Negotiations for Standard Essential Patents)
Source: IPRdaily Chinese Network (iprdaily.cn)
Author: Wei Na Yu Cheng
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