Part I: Goldilocks, “Just Right” and Standards Essential Patent licenses
This is the start of a multi-part tale of Innovation. Of Invention. Of Conflict. Of resolution and of progress.
This is the story of WHY our Smartphones work everywhere, doing things closer to science fiction of the 60’s or 70’s than anyone would have believed.
It’s the tale around the inherent conflict between innovators & inventors that CREATE new stuff, patent their inventions, and implementors that leverage and deploy those inventions.
Most of all, however, this is about the process that converts these inventions and patents into money. A LOT OF MONEY. Millions, tens of millions, and sometimes BILLIONS of dollars. Why? Because your smartphone would be a paperweight without these innovations and patents.
These millions and billions are the cash flows from the contentious intellectual property DEALS that power, fund, and enable the innovation cycles that drive the products and services we use daily. Deals that are ultimately done when two parties, with very different objectives, surrounded by a cast of characters with different objectives and motivations, actually get to the end of the process and SIGN a deal.
This is the FIRST chapter, surfacing the Wireless Standards process, what a Standard Essential Patent is (SEP), and WHY there are huge global disputes around wireless patent portfolios of SEP’s.
The next three chapters will be 2) The Cast of Characters, 3) Pancakes and Pyramids, the role of the “Stack”, 4) The Sausage Making and Resolution. Those will come later.
Goldilocks and the Standards Essential Patent Deal Process
So, logically, to kick off wireless patents, we need to begin with the story of Goldilocks and the Three Bears. Once upon a time there were three bears. The story of Goldilocks is a near timeless tale of finding a “just right” solution to a problem. Which, unfortunately, is more challenging in “real life” than fairytales.
It’s a story of a young girl who is lost and hungry who has a problem that needs solving…she’s lost and hungry. So, she goes into a home of three bears. For some reason the bears are gone when she goes into their home, and there are three bowls of oatmeal porridge on the table. She samples the porridge in each bowl. One bowl of porridge is “too hot”, the other is “too cold”, and the third is “just right”, which is the one she eats. Problem solved. “Just Right”.
Let’s ignore why the kid felt she needed to break and enter into the Bear’s home, as this is a parable of finding a solution that is “just right”. That’s a rarity in life, porridge temperature, and licensing of Wireless Standards Essential Patents (SEP’s). For folks new to the acronym, SEP’s are the underlying innovations, inventions, and technologies that create the common global foundation for our 3G/4G and increasingly 5G wireless networks, applications, and devices.
Back to Goldilocks. In the story, each of the three bears have their own preferences of what is “just right” in relation to their porridge, the size of their chairs, and the comfort of their beds. Getting a bit metaphysical, there is NO objective reality that defines “just right”, it’s a PROCESS of the individual, the group, the company, and a myriad of other variables and circumstances.
Sometimes however, there are disagreements around what constitutes “just right”. Sometimes massive, expensive, multi-year disagreements.
Which naturally leads us to consider the countless lawsuits around Wireless Standards Essential Patents over the past decades, aggregate legal fees in the billions, and the endless distraction, acrimony and FUD (fear, uncertainty, and doubt) sown by all sides in the process. All of which are driven by a fundamental disagreement on what is “just right” in relation to the VALUE of SEP’s underlying our wireless devices, or more typically, PORTFOLIOS of SEPs.
Bottom line, however, is that ALL patents, are PROPERTY RIGHTS. This is true for a new product, chemical, pharmaceutical, or methods of shipping wireless bits of data through the air. In functional terms, patents are an ASSET, just like the rights to a song, a movie, or physical assets like owning a car or piece of art. In the United States, the Patent System was established in the US Constitution, even before there was a Bill of Rights!
By definition, a Standards Essential Patent (or portfolios of thousands of SEPs or more) that is part of an accepted wireless standard has VALUE, with the BIG question being: “How much is that patent, that portfolio WORTH?”, and how are two sides, Innovator (folks/companies that invent) and Implementer (folks/companies that use the invention) of that patent portfolio going to agree on a MONETARY or NON-MONETARY value? Why is that VALUE important? Because individuals and companies have spent immense amounts of time and treasure, immense amounts of leading edge R&D, creating these innovations…many, many years in advance of any standard.
That’s what I’m gonna try to walk though. It’s going to take some time. And alot of words.
First, who am I to do this? I’m not an attorney, never even played one on TV. However, I HAVE been part of great teams and I am named on several patents including this one on distributing advertisements to a range of devices. Sorry.
I’m not an inventor in the same sense as many of the insanely brilliant and creative engineers I’ve been privileged to know in my career. I’ve read patents, but most patent claims and claim charts would not be something that I could interpret or judge. That’s for the engineers and attorneys.
I have been around this stuff a long time, since 1994, and have experienced the transition from analog wireless to “2G”, 2G to 3G, 3G to 4G, and now 4G to 5G. First as an executive at Qualcomm, where I was a Senior Vice President, and later as a member of the Board of Directors (and stint as EVP, long story) at InterDigital, both companies integrally involved in this story.
With the 5G licensing cycle heating up, almost every day I read, see, and hear things that are way, way off base in regards to what ACTUALLY happens and what should be happening to more efficiently drive business agreements and license deals around Standard Essential Patents. And “more” efficient is about as good as we are going to get.
Second, I believe that the creation of Wireless Standards, the functioning of the Standardization and Licensing regime, as sloppy and inefficient as it may appear from the outside, has resulted in the largest collective impact on humanity since fire, the wheel, and fermentation. None of which needed a Standards body. While some folks might think all this arcane, for me, it’s really important to companies, nations, and our world.
- Almost 1.4 BILLION smartphones sold globally in 2020, and ALL can interact, use the same apps, conduct financial transactions, make phone calls, pretty much anywhere in the world. That’s the POWER of STANDARDIZATION.
- Over $1 TRILLION of revenue of the top technology companies. Also, global mobile application revenue is projected at almost $700 BILLION in 2021, with a continued high growth rate. (Source: Statista)
- TENS of TRILLIONS of dollars of Market Capitalization for Tech Companies, App Companies, and Telecommunications Companies. Not billions in this case. TRILLIONS of $$$.
- Apple. Apple’s market capitalization today is $2.4 TRILLION U.S. Dollars. Trillion. Apple’s stock price on September 22nd, 2021? $143/share. Apple’s stock price on June 29th, 2007, the day the first iPhone was announced? $4.36/share, split adjusted. Apple’s value in mid-2004 when Qualcomm and other companies were convincing Steve Jobs to do a phone? About $0.50/share. 280x increase in shareholder value.
Up to you, and your personal perspective on “Just Right” to evaluate how much of the value creation above is attributable to wireless standards.
However, integrate this figure into your brain. Patent License revenues for wireless phones, IN AGGREGATE, funding the R&D, Innovation, and Standards globally is estimated to be about $15-$20 billion a year, with this paper describing some dynamics.
$15-$20 billion of royalty revenue flows…enabling billions of smartphones and creating TRILLIONS in VALUE. Not a bad deal for the world.
SEP’s and FRAND and why “Just Right” is hard
The Smartphone in your hand, pocket, or purse works on any carrier and almost anywhere on the globe due to tens of billions of R&D spending and mind-boggling efforts by some of the brightest engineers on the planet. In the USA, China, Japan, South Korea, EU, UK, everywhere!
Over DECADES, they have worked collaboratively to develop the “Wireless Standards” we now know as “3G”, “4G”, and “5G” (and others). And believe or not, investment and research has already been happening FOR YEARS on innovations and technology that will ultimately be called “6G”.
These wireless standards are codified by groups such as ETSI, the European Technical Standards Institute, which has been the primary global driver for Telecommunications standards for the last several decades. NOTE, I keep on using the word “GLOBAL”. Early standards (think 1980’s or early 1990’s) did not fully standardize, harmonize, or coordinate features and capabilities across borders, regions, and sometimes cities. This is something we take for granted today, but is bogglingly complex to have standards actually adhered to and actualized on a global basis for BILLIONS of phones, on THOUSANDS of wireless networks, in HUNDREDS of countries.
These massively complex wireless standards contain many thousands of innovations that are “Disclosed” to the Standards Setting Organizations (SSO’s) like ETSI described above, by brilliant engineers from companies and organizations around the globe. Companies need to “Disclose” which innovations and inventions contributed to the SSO they intend to Patent, even though that innovation/standard might not be implemented in “live” networks or devices for many, many years to come. And if an essential innovation/invention ends up part of a completed Standard, it can turn into something called a Standards Essential Patent (SEP). Meaning that innovation is PART of the standard, and that every device and service using that standard will be touching that SEP.
Here is the actual language from the ETSI IPR Policy that defines these disclosures:
“Subject to Clause 4.2 below, each MEMBER shall use its reasonable endeavours, in particular during the development of a STANDARD or TECHNICAL SPECIFICATION where it participates, to inform ETSI of ESSENTIAL IPRs in a timely fashion. In particular, a MEMBER submitting a technical proposal for a STANDARD or TECHNICAL SPECIFICATION shall, on a bona fide basis, draw the attention of ETSI to any of that MEMBER’s IPR which might be ESSENTIAL if that proposal is adopted.”
In exchange for participating in the Standards Bodies, companies and other participating institutions need to agree that any SEP’s (see “ESSENTIAL” above!) that are part of a Future Standards that are contributed and are accepted into the Standard will be licensed on FRAND terms. What is FRAND? A commitment to license the contributed innovations/inventions to anyone on “Fair, Reasonable, And Non-Discriminatory” terms. I’m going to provide a few examples, as the term FRAND is often misconstrued in and around this process.
ETSI defines Intellectual Property Rights (IPR) as follows: ““IPR shall mean any intellectual property right conferred by statute law including applications therefor other than trademarks. For the avoidance of doubt rights relating to get-up, confidential information, trade secrets or the like are excluded from the definition of IPR”.
Or this definition from LawInsider “FRAND Obligation means obligations to license or grant non-assertion covenants on either royalty-free or fair, reasonable and non-discriminatory terms pursuant to the policies of a standards setting organization that relate to one or more claims of a Patent that is essential to a standard published by such a standards setting organization”
And more importantly, ETSI defines FRAND as: “Disclosure of Standard Essential Patents (SEP) holders are requested to provide an irrevocable undertaking in writing that they are prepared to grant irrevocable licenses on Fair, Reasonable and Non-Discriminatory (“FRAND”) terms and conditions”
This is where things get messy, sorta like in Goldilocks. Although some Courts and Governments have attempted to bound FRAND, there is NO DEFINITION for FRAND. It’s an amorphous ethereal concept where folks who do this stuff understand what FRAND is (kind of), but can’t fully define it in relation to what FRAND means for any specific or particular licensing transaction. Frand is FRAND.
The amorphousness of FRAND is is both a feature and bug in the system. The WHOLE IDEA is that FRAND is intended to get two parties across the table from one another and NEGOTIATE a deal for the value of a portfolio of SEP’s, as the process often goes awry.
Which becomes the basis for the DECADES of acrimonious legal battles surrounding Patents, SEP’s, Licensing, and FRAND for wireless SEP’s.
Back to Goldilocks. What is the proper temperature for porridge? Can a company, government or court define what temperature porridge Goldilocks should be eating? What is “just right” for porridge or patent value?
I spent decades working with both Qualcomm and InterDigital, two companies deep in participating in Standard Setting Organizations (SSO’s). Qualcomm with a massive portfolio, and InterDigital with a very large portfolio, both are material players in this discussion. BOTH companies, along with other players in the standards process make decisions to dedicate huge amounts of R&D resources and R&D dollars to develop technologies and capabilities that not obvious, are way out of easy sight, and WAY over the horizon, sometimes 6–8 years out or more.
These companies, and other perennial SEP creators such as Nokia, Ericsson, Samsung, Huawei and a myriad of others, everywhere on Earth, help define the Standards, contribute technology, with a desire to be appropriately compensated. That compensation can take many forms over time, including (but not limited to) generating future Licensing Revenues, partnering, helping their existing products, sale/trading of IP, or business leverage as defined (or not defined, as the case may be) by FRAND.
An abstract to a Stanford article on Standards has a great quote illustrating the complex realities:
“SSO intellectual property rules as a sort of messy private ordering, allowing companies to bargain in the shadow of patent law”.
“Messy private ordering”. “Bargain in the shadow of patent law”.
How’s that for describing a business model! Now think about this. Recently, I wrote an article on how the Smartphone ended up being called a “Smartphone”. In 1997, TEN YEARS before the iPhone, I used the term “ ‘Smart’ phone ” in a Qualcomm press release. At the time, others used different names/variations, well before the term “Smartphone” became the accepted name for a Smartphone.
Now think about being an engineer doing a contribution to a Standard, and working with other engineers and patent attorneys to write a PATENT around that contribution with hopes the contribution meets the technical bar her/his peers set for a given target technical capability, one that becomes part of the standard, and the patent now can be classified as an SEP.
So, you have innovators and inventors contributing what is “over the horizon” technology, and having to use PRECISE language that can hold up in a Court (or several Courts) years from now for a patent being filed today. This quote from an excellent IEEE Spectrum article on Kodak patents sums up the problem: “You can’t tell at the time of a patent grant precisely what it covers”, says Feldman of the University of California. “You’re using language that’s going to be compared to something that doesn’t exist at the time you write it” (Italics mine).
The two paragraphs above are in relation to invention and granting of ONE single patent. Now, how does a company (or COURT) evaluate an entity that is licensing tens, hundreds, thousands, or even more than 10,000 SEP patents? Patents that apply to not only the ‘latest’ technology standards, but encompass continued future use of EXISTING technology standards. I.E., as there is lots of noise around 5G standards (appropriately), our Smartphones and networks are still using and continually leverage inventions and innovations from 3G and 4G.
Yet SOMEHOW, two parties, the innovator and the implementor need to find a way to get to “Just Right” for portfolios of thousands or tens of thousands of SEP’s, covering multiple generations of wireless technology. SOMEHOW they need to get through the process and sign a DEAL.
So, what could go wrong? A lot! And it does. But somehow, for the most part, companies end up doing deals. Deals which over time, and in the aggregate, end up largely making sense in the context of “who gets what” for their inventions. The “messy private ordering” is inefficient, is often an incredibly stupid allocation of industry brainpower and dollars, but somehow gets there. However, it COULD potentially get there a lot faster and efficiently.
And that’s what we’re gonna cover going forward. To get there, I’m going to need to have you, the hopefully faithful reader, wait a bit until the next chapter of this tale, and hopefully FORWARD A LINK to this article to everyone you know!