One of the reasons I am writing this blog is to try to inject some sanity back into the ever more convoluted arguments being made to justify a handful of entities making "gazillions"[1] of dollars, Euros and sometimes Yuans, from licensing FRAND committed SEPs at the expense of companies that develop and sell useful products. Many of the arguments made by these SEP licensors are so removed from how things work in the real world that they seem ludicrous when applied to real world situations. That is why I use examples in my blog that people have more familiarity with - to try to bring some reasonableness back into the debate. Patent holders are arguing for, and in many cases have been granted, special rights which do not make sense when you look at how things operate in other, more usual situations.
This was brought to mind when I read a recent ipfray article.[2] At the end of the article, I noticed that it included a misleading summary of one of my postings (with no link to the posting so people could not readily compare what I had actually written with what the article said about what I had written).[3] I generally find tit for tat back and forths a waste of time but I did want to address some of what was said in the ipfray article.
The article argued that, contrary to my posting, use cases are not an issue because everyone in the same industry is charged the same. The example the ipfray article used was that Avanci charges Toyota and Lamborghini the same amount for a 4G license. I know that the author of the ipfray article is smarter than this and understands that this is not what I said about Avanci or about use cases.
What I actually said was that Avanci charges different industries different amounts for the same standard and that is not how things work in the real world. In the real-world, pet food (my example) and semiconductor chips (the first level implementation of cellular technology) are sold at approximately the same price to anyone who wants to buy them, regardless of “use case.”
There may be regional variations in cost, cost differences between different companies that sell the same product, and sometimes price reductions for volume purchases or negotiating prowess. But when you go into a store to purchase pet food (or a product that incorporates a cellular chip) you are not charged a different amount based on who you are. Nor are you quizzed about what you intend to do with the pet food or the product that implements the cellular standard and then charged differently for it based on your answer.
In contrast, Avanci charges as little as $3 for a 4G license for companies that use 4G in a smart meter and as much as $20 to use that same standard in a car (which is nearly an order of magnitude more). As I said in my other post, by introducing the concept of “use cases,” SEP holders have abandoned the real-world way of doing business in which purchasers are treated the same regardless of what they intend to do with a product.
The ipfray article tries to rationalize this abandonment of common-sense practices by arguing that “intellectual property just doesn’t work like physical components” and that because IP licensing “traditionally” has been different from chip pricing, it should always be different. But here’s the question – why? It does not make sense that the SEPs for a standard (let alone only some of the SEPs) are worth more than the fair market value of a working version of that standard. Why should we allow an entity that has created only a small piece of a standard reap more benefits than a company that makes a functional working version of that standard?
The article also claims that use-based royalties are acceptable because “car makers charge customers ongoing fees for cellular connectivity after the first two or three years, that is another revenue stream to be considered in the FRAND analysis.” This misunderstands the cellular ecosystem and the difference between a device that implements the standard and a service provider.[4] When a car company charges for connectivity, they are acting as service providers, e.g. users of the technology, not implementers. In other words, the car company's ongoing revenue stream from services is not income received from implementation of the standard but rather from the provision of access to a network or networks. And there are costs to providing connectivity services: car providers are themselves paying fees to network operators for access to those services.
Conversely, when a car company sells a connected car, it is selling a product that implements the cellular standard (albeit that is so far downstream from the original implementation as to be more akin to a user of the technology). And, like pet food and semiconductor chips, the price of a car may vary depending on factors unrelated to the cellular standard such as size, design, craftsmanship, reliability and performance. A Lamborghini costs more than a Toyota but not because of the way it implements the cellular standard. And whether a Toyota or a Lamborghini, the price of the car does not change based on whether the car is used as a work vehicle or a personal vehicle, whether it is driven 100 kms or 10,000 kms a year or whether it simply sits in a garage and is never used.
The ipfray article also claims that use cases are justified because: “If a car is used for 15 years while people replace phones after a couple of years, that is another factor.” This is such a non-sequitur that it is nearly incomprehensible. If each of the new phones is licensed, the SEP holder has received royalties for the car and for each of the replacement phones so no additional royalty would be owed. If the new phones are not licensed, it is unclear why the car company, which has not made, bought, used or sold the new phones, are somehow responsible for paying royalties on them. The fact that people buy new phones and use it with their old products does not change how much the old product is worth, or the amount of royalties that were reasonable to charge for the old product when it was sold.
This is another reason why use cases just do not make sense. At the extreme, like in this ipfray example, every new use of an existing product could be used to justify an additional royalty amount under a "use case" scenario. But, a car company does not get paid more money from the car owner when the car owner buys a new phone. Nor does a chipmaker make more money on its cellular chip if the purchaser decides to use that chip in a higher value product than originally intended. If we allowed later uses to justify higher royalties, the amount of the royalties could consume all of the revenue received for the product.
Net-net, none of these arguments justify charging different amounts for the same technology based on “use cases.” That is not how the real world operates and there is no reason that SEPs should be given special privileges in this regard.
[1] I literally was once involved in SEP negotiations in which, when I asked what the ballpark demand was, the other party said a “gazillion” dollars.
[2] Here’s the ipfray article: Intense lobbying activity around standard-essential patents breeds hyperbole, made-up issues, contradictions – ip fray
[3] Here’s my post that the ipfray article was “summarizing”: The Myth of "Use Cases" - LES SVC Part 2 (sepessentials.com)
[4] See my post The Cellular Multiverse (sepessentials.com) for an overview of those differences.