Back in November I made a call for input regarding cases in which standard-essential patent (SEP) holders displayed the kind of behavior vis-à-vis the PC industry that we see from certain wireless patent holders with respect to smartphones and cars.
I mentioned one such example: Motorola Mobility's demand that Microsoft pay a 2.25% royalty on the end product, explicitly defined as a computer (not the Windows operating system), for implementing a video codec standard in Windows. Motorola abandoned that position in the course of litigation, but a demand letter taking that insane position had entered the public record before.
In response to my call for input, only a few other examples have been reported to me, and they confirm that it's basically just patent trolls and companies who for whatever reason behave like trolls:
The other such case I previously reported on is In re Innovatio: Innovatio "sued numerous coffee shops, hotels, restaurants, supermarkets, large retailers, transportation companies, and other commercial users of wireless internet technology located throughout the United States." So it was a case of a patent troll going against commercial end users, though the patents in question were implemented in a WiFi chip. While Innovatio wanted an average royalty of $3.39 per access point, the district court awarded less than ten cents per WiFi chip.
Alcatel-Lucent, which was later acquired by Nokia, sued PC makers Dell and Gateway, though the component at issue was Microsoft Windows: the MP3 standard was implemented in Windows. Microsoft intervened and ultimately resolved the issue.
Finally, Ericsson v. D-Link. Ericsson took the position that it was not required to offer a FRAND license to 802.11 chip makers (e.g., Intel, Broadcom, Qualcomm Atheros) because their products did not "fully" comply with 802.11n (only an end product could fully comply according to Ericsson's position, which is what we nowadays hear from Nokia in connection with cars). According to Ericsson, the 802.11n chips alone were not "fully compliant" with the 802.11n standard and therefore not entitled to a FRAND offer.
Furthermore, there was testimony that in 1997-99, Lucent proposed their technology to the IEEE and suggested that their royalty should be 5% of the entire end product (not of the 802.11 component).
Those cases aside, it has always been the norm in the PC industry that patents are licensed at the ocmponent level, and that component makers are free to sell to any PC maker, any hardware distributor, any retailer, or any end user. There aren't just wireless standards. Codec standards were already mentioned above. But there's a variety of other standards such as graphics adapter standards (VGA etc.), PC bus standards, local area network standards, and random access memory standards.
No one in the PC industry--apart from rare exceptions such as the ones stated further above--ever argued that their patents on memory chips or on display standards all of a sudden became more valuable because of some added value or technological progress in other areas. No one said memory chip patents were worth more only because of a faster CPU--or a larger monitor.
The primary reason for this is simply that most PC components have been and continue to be sold not only to PC makers like Dell but also as separate parts through retailers. You can buy all PC parts separately and assemble your own PC at home; you can also add memory chips or replace a graphics adapter with a better one. That applies to desktop PCs. With portable computers it doesn't work like that. But the PC industry started with desktops, and any differences in how/where/by whom the pieces are put together never had an impact on licensing.
There are some striking parallels between cars and PCs: highly modular products. Nokia argues that it should get a per-unit SEP royalty from Daimler that is several times higher than what it gets from smartphone makers (even though end users typically use their smartphone for many more hours per day than the cellular communications functionality of their cars)--and its arguments comes down to saying that SEPs have always (which is not even true, as there are notable exceptions) been licensed at the end-product level in the smartphone industry. But that doesn't mean it makes sense for smartphones. It's circular logic to claim that a demand is resaonable because some people have been making it for some time.
A smartphone--or the comparable functionality of a car--is internally just as modular as a PC. It's just not possible to go and buy a case from this vendor, a graphics chip from another, and memory from yet another. All of that has practical reasons that are unrelated to the way standards are implemented, and the way SEPs should be licensed.
Making patents in one field of technology more expensive based on the value of everything else that's in the device (even if one can't practically "plug and play" or self-assemble like in the PC segment) is economically unsustainable. And it's easy to explain why: let's focus on only five of the many components of a smartphone:
W for "wireless connectivity" (which in reality is more diverse: cellular, WiFi, Bluetooth, NFC...)
P for "processor (CPU)"
M for "memory"
O for "operating system" (though there's also a multitude of apps)
D for "display"
So cellular SEPs are part of W. That W component can be found in a cheap phone ("dumbphone"), in a high-end smartphone, or in a car. A car is not even the limit: it could be an airplane or it could be installed in a building. W always does the same; should there be a difference in terms of what features of a standard are actually used, then there might be price differentiation, but no one has provided a real-world example and cars certainly don't use any features of those standards that a smartphone wouldn't use as well.
Now let's assume we have the SEP holders in the W area demand an extra $20 not because of an increase in the value of the W part in its own right, but because of everything else around it.
On that same basis, anyone holding SEPs on memory standards, display standards, the standards implemented by an operating system (such as video codecs), or standards closely related to the CPU (such as data bus standards) could also demand more money just based on all the other components, including but not limited to the wireless part.
SEP holders of the W kind would want 10% of W+P+M+O+D. If the OEM acceded to those demands instead of insisting on a reasonable royalty based on the value of the relevant component, the price would have to be raised to maintain the same level of profitability (or any profitability at all). SEP holders of the P, M, O, and D kinds would then also want higher royalties. Each and every time the OEM accepts this, and increases the price of the end product accordingly, you get another round of successive rate increases. That's economic mayhem with prices spiraling to the sky.
If each of the five categories of SEP holders wanted 5% of the end-product price, it would mean 25% in total. So at some point--sustainable or not--the spiral would stop. But it would never stop if everyone argued "use-based pricing" as long as technology improves here, there, and everywhere, or gets incorporated into a bigger end product. Theoretically, the fact that a single (unless totally negligible) app becomes available on an app store could trigger a round of "use-based" price increases across all fields of technology.
In this simplified hypothetical example, we're talking about only a smartphone. But a car is way more multifunctional than a smartphone, which further exacerbates the problem I just described.
The only solution is to license patents in the supply chain, and to use the smallest salable patent-practicing unit (SSPPU) for the royalty base. That doesn't mean that the ways in which a given technology--such as wireless connectivity--actually gets used don't matter. But in the market for PC components, graphics cards didn't become more expensive only because a software company released a new word processor that offered some exciting functionality. A word processor without a screen won't work; but the screen is still just a screen, regardless of the incremental functionality of a word processor. Those who make the screens (or hold patents essential to screen-related standards such as video cable standards) must content themselves with the fact that the incremental functionality achieved by others generates additional sales. Incremental volume is a benefit. That sounds simple, and it actually is--because otherwise, with "use-based pricing," you get the spiral I described further above unless technological development grinds to a halt, which might just happen in that case.
In the PC space, modularity wasn't merely an architectural, technological reality. The way those components were sold and optionally assembled by anybody made it easy to see. But that doesn't mean that other technology stacks aren't modular, too. The modular commercial model of the PC industry is the (only) appropriate one for smartphones and connected cars.
Share with other professionals via LinkedIn:
