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In SEP/FRAND licensing discussions and business boards the dialogue usually revolves across the intricate steadiness between SEP holders and implementers, with a main give attention to the innovation sharing and compensation between them. The final thought is that the innovation cycle begins with SEP holders investing in R&D and sharing new know-how with SEP implementers, and concludes when SEP holders are awarded cheap compensation that enables them to additional spend money on analysis. All through this cycle, SEPs function the medium.
Whereas this course of incentivises extra innovation, stressing the significance of the innovation cycle alone might restrict the main focus of SEP holders and implementers to only a portion of the broader ecosystem – which might result in pointless friction. It might even encourage each side to have interaction in a confrontational zero-sum recreation, hindering them from cultivating and increasing the ecosystem collectively.
To domesticate a extra inclusive method it’s key to step again and acknowledge all the numerous stakeholders – which lengthen past innovators and implementers. Shoppers, legislators and policymakers are all essential elements of a sustainable ecosystem, with customers notably very important. Whereas the business celebrates technological developments and patent portfolios, it’s important to maintain sight of whom these improvements ought to in the end serve.
An summary of the IP ecosystem
Shoppers deserve equal significance in all enterprise fashions, as it’s they who in the end admire the worth of innovation – normally within the type of merchandise – and pay for it. This fee is what permits implementers to broaden the dimensions of implementation and permits innovators to recoup compensation from their preliminary funding for additional innovation funding. With customers included, an IP ecosystem can really take form.
Determine 1. IP Ecosystem Overview
A sustainable and affluent IP ecosystem not solely advantages innovators and implementers but in addition prioritises client satisfaction. This cycle begins with innovation, is adopted by implementers’ efforts to convey the services or products to market, and culminates in customers paying to expertise the worth of the innovation. A portion of this sum goes to the innovators within the type of royalties, which permits them to proceed creating. This fosters a steady cycle of innovation and client satisfaction; any disruption to this cycle jeopardises the pursuits of all stakeholders, so it’s essential to keep up its integrity.
This course of capabilities easily as long as customers admire the worth of innovation and are prepared – and may afford – to pay for the enhancements that it brings to services or products. In a really perfect world, customers select to pay for services or products based mostly on their private notion of its worth. Solely by receiving such a fee can implementers and innovators respectively maintain manufacturing and additional innovation. On this sense, these events ought to work collectively to maximise client satisfaction and diligently preserve the IP ecosystem.
Additional, analyzing the ecosystem via the lens of client perspective can make clear what impacts its sustainability and the way innovators and implementers ought to behave to be able to preserve and broaden it. Due to this fact, a number of non-exclusive views ought to be thought-about in SEP licensing.
Shoppers’ willingness to pay
Client preferences and financial elements are always evolving and these considerably impression willingness to pay for brand spanking new applied sciences. For instance, though the proportion of 5G smartphones has elevated slowly over previous few years, the entire cell phone market typically is closely saturated. The introduction of 5G telephones has not prevented the worldwide cell phone market from dropping since 2019.
Determine 2 highlights the variety of world smartphone shipments, which has been dropping since 2019. This development aligns with the truth that customers have a comparatively low willingness to pay for upgrades and as a substitute are prolonging the improve cycle. There are a number of causes behind this, together with:
- macroeconomic downturns as a result of pandemic;
- regional conflicts; and
- geopolitical tensions.
Moreover, the rollout of 5G networks has not been as aggressive as initially deliberate. Even in international locations with in depth 5G-network deployment, an absence of compelling 5G purposes has resulted in lots of customers being reluctant to improve from 4G smartphones because the 4G information pace is adequate for many, if not all, every day wants. In line with GSMA’s “The Cellular Financial system 2023” report, 5G adoption will solely attain 17% in 2024.
Determine 2. International smartphone shipments (million items)
In some sense, willingness to pay for a know-how – or a part of it – is carefully linked to the pricing of services or products.
Hypothetical case examine
In a hypothetical scenario, a shelf lock can solely be unlocked 1,000 instances earlier than sporting out – however customers usually need a lock that’s able to unlocking 1 million instances earlier than it wants changing. Producer A invents a lock that may unlock 10 million instances, whereas Producer B invents a lock able to unlocking 1 billion instances. With regards to pricing the product, it could be unwise for Producer B to cost its lock larger than that of Producer A. If customers are unwilling to pay for the additional hundreds of thousands of unlocks, the development of the Producer B’s lock has no advantages over that of its competitor.
The identical financial tenet applies to the pricing of royalty charges.
Within the context of 5G, customers’ willingness to pay ought to be thought-about when deciding the royalty fee, as this can be a direct indication of the worth that customers understand within the know-how for smartphones. For instance, within the Chongqing Intermediate Folks’s Court docket’s choice in Oppo v Nokia, the court docket selected a 5G royalty fee vary of 4.341% to five.273%. To succeed in this conclusion, the court docket accepted an financial mannequin that factored in customers’ willingness to pay for 5G smartphones.
There are greater than 60,000 declared 5G patent households in whole and the quantity continues rising – considerably greater than these within the 4G customary – which is partially as a result of subject of over-declaration. One other essential purpose is that the 5G customary contains applied sciences in vertical areas, such because the IoT. There are additionally loads of optionally available options which are topic to implementation by implementers. If a vertical-area know-how or an optionally available function isn’t utilized by customers, it’s unreasonable to ask them to pay for it. Due to this fact, innovators and implementers ought to be certain that royalty charges don’t consider vertical-area know-how or unused optionally available options – in any other case, customers will find yourself paying for an additional portion of the royalty that they need to not fairly pay.
Eradicating pointless prices for customers
The general royalty that’s paid by implementers and borne by customers varies proportionally with the variety of improvements in sure services or products. For instance, with smartphones embodying increasingly improvements proactively or passively, the overall royalty will be vital.
Nothing illustrates this higher than the video codec house. Earlier than the standardisation of HEVC know-how, implementers (ie, smartphone producers and on-line video-streaming service suppliers) primarily used its predecessor, AVC know-how. By paying for smartphones, customers compensated innovators for AVC know-how as it’s incessantly utilized in these merchandise.
Nevertheless, as innovators for HEVC know-how had differing opinions on royalty charges, the HEVC licensing panorama fragmented. Three patent swimming pools had been fashioned, with a number of particular person innovator firms unattached to any of them, and the overall royalty stack for HEVC grew to become considerably excessive after including these all up. The fragmented panorama severely impeded HEVC know-how deployment available on the market and led to investments in various and competing codec applied sciences.
In the present day, it seems that AVC remains to be the first codec, whereas a number of different aggressive codecs and successive codecs (eg, VP9, AV1, HEVC and VVC) coexist. This poses a heavy monetary burden not solely to video-streaming service suppliers, but in addition to smartphone producers, as smartphones want to have the ability to help nearly all of those video codec applied sciences. Regardless of customers’ low-to-no utilization fee of some video codec applied sciences throughout a smartphone’s lifespan, producers nonetheless must pay for – and customers bear the price of – royalties for all of them. Had HEVC innovators adopted go well with with AVC know-how, there ought to have primarily been one video codec, with customers paying just for the one video codec know-how that they use incessantly.
Representing client voices
When putting a steadiness between hold-up and hold-out behaviours, delicacy is required to forestall both from damaging the ecosystem. Maintain-out behaviour from implementers drains the incentives and monetary functionality to foster additional innovation. Equally, patent hold-up from innovators spells hassle for innovation, leading to a triple-loss state of affairs. First, implementers would possibly chorus from integrating improvements into services or products because of exorbitant royalty charges, which might result in a aggressive drawback or perhaps a monetary deficit. Second and third, as a consequence of delisting such improvements from services or products, customers miss out on the advantages that these creations provide and innovators fail to recoup cheap compensation for his or her preliminary funding. Consequently, they lack funds for future innovation. For that reason, innovators and implementers should collaborate to keep up a sustainable IP ecosystem.
Pursuing supra-FRAND charges is deemed unfair to licensees, some extent that has been highlighted in latest circumstances. In Lenovo v Interdigital, Justice Mellor commented: “General, nevertheless, I’m pushed to the conclusion that by constantly looking for supra-FRAND charges, InterDigital didn’t act as a prepared licensor.” Equally, in Optis v Apple, Justice Marcus Smith stated: “No implementer might keep in enterprise paying Optis’ charges.”
This observe can also be unfair to customers. Innovators ought to chorus from looking for supra-FRAND charges and performing opportunistically. Implementers ought to resist supra-FRAND charges responsibly, fairly than including to customers’ burden. They need to additionally take into account affordability from a client perspective – particularly in creating international locations – and reserve cheap monetary incentives for improvements in product pricing. Implementers ought to provide honest returns to innovators which have made real improvements and proposed cheap royalty charges to be able to allow additional creations to turn into a actuality.
This observe is unfair to innovators that pursue cheap compensation for his or her innovation as properly. In a thicket of many open requirements, a single innovator can possess all innovations for a brand new know-how. The act of a number of innovators pursuing supra-FRAND charges might impede the adoption and enlargement of the brand new know-how available in the market, and adversely have an effect on innovators, who pursue cheap compensation.
A client’s means to pay
Monetary capability performs a pivotal function in shaping the IP ecosystem. Financial improvement ranges (eg, resident earnings) are normally taken under consideration through the product pricing course of. Equally, reductions on royalty charges are provided for creating international locations, and these are sometimes present in licensing programmes with public royalty charges. These have been thought-about and accepted in court docket selections worldwide as properly. For instance, in Unwired Planet v Huawei, Judge Birss noted, “[t]he comparable licenses present that charges are sometimes decrease in China than for the remainder of the world. The relative issue varies. I discover {that a} FRAND license would use an element of fifty%”, whereas in TCL v Ericsson, Choose Selna offered a last FRAND fee with a differentiation between US and rest-of-the-world charges. Patent swimming pools (eg, the VIA AAC pool) have Area 1 and Area 2 fee setups to accommodate this. As customers in creating international locations are worth delicate, these reductions serve to proliferate know-how in underserved markets and attain individuals who would in any other case not have the chance to personal a smartphone and entry an abundance of data.
Below this umbrella, key open questions seen in lots of FRAND negotiations are additionally related to customers, resembling:
- whether or not share charges versus greenback quantity charges for a product ought to be thought-about; or
- whether or not the FRAND fee ought to be thought-about related to the revenue margin of the merchandise.
Geographical perspective: client location versus patent protection
Patent legal guidelines are nationwide in scope. It’s common information that if an invention doesn’t take pleasure in patent safety in a jurisdiction, customers in that nation don’t must pay for it. For patent portfolios with first rate world protection, a good world fee is justifiable. Nevertheless, when the other is true, SEP licensing ought to take customers’ geographical location and patent protection under consideration.
In Unwired planet v Huawei, Choose Birss introduced “a desk setting out the numbers of declared SEPs held by Unwired Planet all over the world”, after which said, “[b]earing in thoughts that desk, a FRAND method can be to set MM international locations for a given customary as these with greater than a sure variety of declared SEPs for that customary”. Relying on the portfolio, the small print of how this issue is extra conveniently taken under consideration can range. In a manner, this additionally offers stronger authorized standing for licensors as properly.
Key takeaways: empowering client voices
In navigating the complexities of SEP/FRAND licensing, it’s crucial to raise client voices (both immediately or not directly) alongside knowledgeable opinions and authorized concerns. Shoppers should not merely passive recipients of innovation – they’re energetic individuals, whose preferences and calls for form the trajectory of technological development. They’re the income origin for revolutionary know-how, the final word customers of revolutionary know-how and those that each innovators and implementers ought to work collectively to serve. By amplifying client views inside licensing discussions, stakeholders can foster a extra inclusive, sustainable, affluent and consumer-involved IP ecosystem.
This text additionally accommodates contributions from Ning Xu, Feng Xiao and Reggie Zhang. Opinions expressed within the article are solely authors’ private opinions and don’t specific the views or opinions of their employer.
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