Patent Law – a blessing or curse for the mobile industry?

Patent Law – a blessing or curse for the mobile industry?

A monopoly is usually unacceptable in a market – except when it comes to Patents (and Copyright). Suddenly creaming off excessive profits from consumers and pushing competitors out of business becomes acceptable. It is the price consumers pay for innovation. It seems to work out best (in the long run) for consumers for most industries for most of the time. Mobile radio appears an exception. Companies are spending billions on either end of lawsuits, IPR royalties are costing consumers up to 25% on the cost of a mobile and Courts are denying consumers access to their choice of mobile as injunctions get issued banning sales. Small innovative companies cannot even afford to play in the mobile handset market. If the system is not working to the benefit of society – should the rules be changed? And by whom?

The core of the patent issue in the mobile industry is that a mobile phone is only of any benefit to anyone if it can communicate to every other phone in any part of the world and from anywhere a consumer wants to travel. It is what creates the mass mobile market. This demands a high degree of cooperation. Enter the miracle world of mobile standards making. “Miracle” is not too strong a word to use. Intense rivals in three quite different sectors of the industry have to agree on every last detail needed for a mobile to communicate with the network. The big network system suppliers (like Ericsson, Alcatel etc) have to cooperate over network standards. The mobile network operators (like Vodafone, France Telecom etc) have to cooperate over network implementation versions. The mobile handset suppliers (Apple, Samsung, Nokia etc) have to cooperate over essential mobile standard interfaces. Even more remarkable is that global mobile standards have held together now for over three generations of mobile technology (first GSM, then 3G and now LTE or 4G).

The heart of this success has been the European Telecommunications Standards Institute (ETSI) and its extension to the more global 3GPP. The origins of all the wars over patents trace back to the failure of ETSI to solve the issue of patents (and other intellectual property) in their standards in the late 1980’s.

ETSI were caught out in a fast changing world. Prior to ETSI most patents in telecommunications were held by the huge laboratories of the big telephone companies like Bell Labs in the US and CNET in France. The telephone companies freely gave their patents to their supply companies to make the kit needed to modernise their networks. There were less patents around in those days, so everyone generally knew when a new standard was based upon somebody patented technology. There was time for deals to be struck between the standards body and the patent owner of the chosen technology. The deal could be a royalty free licences (since if a big company had their technology chosen for a standard it gave them an early lead). Or more generally a licence would be given on fair and reasonable terms. In those days “fair and reasonable” usually meant around 2% of the selling price.

The world changed very suddenly in the 1980’s. First global patent protection was tightened up in world trade agreements. This was a US led industrial strategy to protect their industries from competition from low wage countries in the new global market. Second, new players entered the telecommunications market with quite aggressive business practices. The computer industry was an example of this with their “winner take all culture” based on technology supremacy. Motorola in particular shocked other members in ETSI with the aggression of their patent policies. European based companies got their fingers badly burnt in believing for too long that everybody would behave in a “fair and reasonable” way.

Another huge change was the astronomical rise in the number of patents being filed in the new digital technologies. With each filing came an 18 month period of secrecy where a patent could be filed and nobody could find this out. ETSI and other standards bodies were flying blind and at ever faster speeds. Enter “the patent trolls”. These were private speculators quietly buying up patents from Universities etc with the intent to ambush unwary manufacturers down the track.

All these changes left ETSI floundering around trying to find a solution. Around 1990 they almost did it through an agreement that 80% of ETSI members supported that would have produced the biggest patent cross-licensing agreement in the world. But if was wrecked under pressure from the US government on the one hand (protecting the interest of their Computer industry and Motorola) and an extraordinary obdurate bit of wishful thinking by Italy that everything should be entirely free of charge.

The ETSI Plan B was to fall back to a deliberately ill defined commitment that ETSI members who held patents in ETSI standard would licence them on Fair and Reasonable and Non-Discriminatory (FRAND) terms. What was “fair and reasonable” was left to commercial negotiation. The biggest flaw in the whole process is that by the time anyone found out that a patent owner’s idea of “fair and reasonable” was quite unreasonable – it was all too late to change the standard. Once networks had been rolled out and millions of new mobile were in the market – all that was left was a whole series of legal confrontations and Court battles. Another great shock was the sheer number of patents that got caught up in a mobile standard. One company might ask for a modest royalty of say 3% of sales but by the time another 7 holders of essential patents had all asked for exactly the same “reasonable” royalty the total has accumulated to a quite unreasonable 25% or so.

Apple has further changed the nature of the game by patenting shapes of mobiles and just about every feature of its compelling display interface. Had ETSI not had any rules in place then a company with patents in the essential radio technology in the standard could have bargained with Apple for access to aspects of its unique display interface. But the ETSI rules limit the extent to which this is possible – so the ETSI “FRAND” rules distort the normal industry practice of cross-licensing deals.

Then there is the transition from hardware to software dominance in the mobile industry. This is home turf for the computer industry. “Fair and reasonable” is a licencing term about as popular in the computer industry as Latin is in the local pub.

There is little likelihood of government policy makers going anywhere near something of this heat and complexity. The solution can only come from the industry itself. It requires the top handful of patent owners to decide that the Courts are not going to deliver any knock-out blows. Out of such an impasse ETSI, 3GPP or the ITU could have their chance to bring some order to patents in the mobile industry. These organisations need to be ready for it. My speculation is that a fresh approach might end the FRAND model and centre more on a “patent pool” that properly rewards those making the most investment in innovation. It would have to bind the parties not to seek Court orders to block competitor products but seek other means of reconciling differences of view. A carrot Governments could offer to help parties comes to a new deal is some statutory means of dealing with Troll patents caught up in formally recognised standards. The prize of a fresh agreement would be all that money going to the legal profession could be ploughed back into developing even better mobiles.

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