An arcane standards decision last year about the coding schemes used in 5G networks received little attention outside engineering circles. But it was a clear sign that Huawei, the Chinese equipment giant now threatened by hostile US forces, was determined to own the ingredients that make up the next-generation network technology, and assert its presence in a cozy patents club that has until now been dominated by Western firms.

The 3GPP, the standards group that presides over cellular technology, had already approved a coding scheme called LDPC (low density parity check), backed by US and Western firms. The Chinese, however, had favored an alternative called Polar Codes. In what seemed like a compromise to satisfy all international parties, the 3GPP ultimately took a "Solomon-like decision," in the words of one source close to the matter, to use LDPC in one part of 5G (the so-called data channel) and Polar Codes in another (the control channel).

It was a massive win for Huawei, which had built up a significant patents position in Polar Codes. Yet Huawei's scientists were not the original brains behind the technology. That honor went to a Turkish professor called Erdal Arikan, who previously sold Polar Codes to the Chinese vendor.

Huawei makes no attempt to hide this fact. In a press release published on its website last July, it hails Arikan as the "father of Polar Codes" and pictures him receiving an award from its founder, Ren Zhengfei (see below). Nor is there any suggestion Huawei has ripped off an inventor. Arikan would hardly be photographed next to a smiling Ren if he had not been well compensated for his intellectual property (IP) -- although the image and accompanying press release could be valuable to Huawei if Arikan ever decides he is owed more than he received.

Figure 1: Polar Bulls Ren Zhengfei, Huawei's founder (left), stands next to Professor Erdal Arikan, the man behind Polar Codes.

What the transaction shows is just how important ownership of cellular patents has become to Huawei in the 5G era. Arikan is understood to have courted other patent firms when he was trying to sell Polar Codes. But it was Huawei that eventually came through. And since buying the technology, Huawei has been effusive about its 5G value. "Polar codes are the world's first channel coding scheme to bring us up against the threshold of Shannon's limit [which dictates maximum data rates]," says the company.

The statement fits into a much broader business and public-relations campaign. Huawei's patents mission is not just about owning a bigger chunk of the technology; it is about holding the most vital ingredients -- or at least convincing the world that its patents are superior to anyone else's. Success could translate into billions of extra dollars in revenues.

Licensors and licensees
Years ago, before the iPhone revolution and the rise of Huawei, the patents club responsible for cellular technology comprised a much broader variety of players than it does today. Companies such as BlackBerry, Motorola, Sharp and Sony all had significant development teams that would make contributions to cellular standards.

Most of these companies also had one thing in common: a large devices business. This meant that when money changed hands in licensing fees those companies were receiving and paying out at the same time. They were not just the licensors that owned some of the technology but also the licensees that paid to use other parts of it. Often, the difference between what a company spent as a licensee and collected as a licensor was relatively small.

Consumer gadgetry has always been the source of revenues for the owners of cellular patents. In theory, a licensor could seek payments for the IP used in network equipment, too. But this rarely happens. Because royalties represent a percentage of sales, the returns on the network side would also be relatively small. Today's handset industry generates about $400 billion annually in revenues, while the mobile infrastructure market is worth between $25 billion and $30 billion, according to one estimate.

China's equipment vendors were barely visible in the international patents club when 3G was gaining ground. Instead, Chinese authorities were determined to build and popularize a homegrown 3G technology called TD-SCDMA. By quickly seeding this in markets where China had influence, they hoped to make TD-SCDMA a major global standard. The strategy carried over to the 4G era with a Chinese technology called TD-LTE, which uses a communications system called time division duplex (TDD), rather than the frequency division duplex (FDD) favored elsewhere. Chinese expertise in TDD technology stems from this push.

But attempts to make Chinese technologies the de facto global standards ultimately failed. And that forced China to come up with a new strategy for advancing its technological ambitions -- one based not on technology development in isolation but on trying to become the international standard's most influential player.

Next page: China joins the club

China joins the club
Fast forward some years and the standards development club is barely recognizable. As the cellular influence of BlackBerry, Motorola, Sharp and Sony has waned, so has their involvement in the latest generation of mobile technology. With countries now preparing to switch on 5G networks, just five or six companies are at the forefront of standards development. One of them is Huawei.

Recent data hints at the Chinese vendor's emergence as a major patents player on the international stage. In 2008, before any 4G networks had arrived, only 116 of the 2,693 patents filed in Europe for telecom and connectivity technologies belonged to Chinese companies, according to John Strand, a telecom consultant. By 2017, Chinese firms accounted for 1,478 of 3,717 patents, he says.

Huawei now claims to have one of the largest patent portfolios in the world. Of the 87,805 patents it holds, 44,434 were granted outside China, including 11,152 in the US, according to its just-published annual report for 2018. Ericsson, one of the other key players, lists just 49,000 patents in total.

Figure 2: Huawei's Licensing Muscle Source: Huawei.

What this data does not indicate is the relative importance of these various patents. How many of them fall into the category of "standard-essential" cellular patents remains unclear, and neither Ericsson nor Huawei provides further details. "We do not disclose the number of patent applications or granted patents in any other way than as a total," a spokesperson for Ericsson previously told Light Reading. When asked about Ericsson's 5G patents position, the spokesperson said: "It is much too early to talk about the number of granted patents for 5G. It takes years for patents to be granted and the 5G standard was set only six months ago." Huawei has not responded to a request for additional information.

Critics dispute the value of Huawei's IP in cellular, though. One source close to the matter, who preferred to remain anonymous, says there is an "unwritten understanding" within the 3GPP that no one company will be allowed to dominate a standard. Regardless of how many contributions it makes, Huawei is likely to end up with between 8% and 10% of the 5G standard, just like any other big player, he says.

Balancing the patent books
A dominant 5G position would translate into big financial gains for Huawei, and perhaps more so than it would for Ericsson, Nokia or Qualcomm, the other movers and shakers in 5G. The reason for that is simple: Huawei is the only one of these companies that still makes end-user devices, and therefore the only one that is both a licensor and a licensee of any significance.

In the case of a licensor such as Ericsson, royalties are collected from handset companies that use Ericsson patents. Because the Swedish vendor gave up its own consumer devices business years ago, very little money -- if anything -- flows in the opposite direction. The more Ericsson can charge, the more it makes from licensing. But the strength of rival patent portfolios is not a direct cost concern for Ericsson.

That is not true for Huawei. Like Ericsson, the Chinese company generates licensing revenues from companies that use Huawei patents. But unlike Ericsson, its handset business must pay other patent owners to use their technology. Huawei's licensing take is the difference between what it collects as a licensor and what it pays as a licensee. If it could dominate 5G patents, or charge higher fees than other patent owners, it would be able to minimize device costs, maximize revenues and grow its overall take.

The money at stake is not insignificant. Last year, Nokia made around €1.5 billion ($1.7 billion, at today's exchange rate) from patent and brand licensing. While Ericsson does not break out the figure, one source says a conservative estimate for annual revenues from patent licensing would be roughly $1.5 billion. Then there is Qualcomm, which recorded $5.2 billion in revenues at its licensing business in the 2018 fiscal year. The San Diego-based firm predicts that around 1.9 billion 3G, 4G and 5G devices will be shipped globally in 2019. Even if Nokia extracts just €3 ($3.36) in royalties per 5G device -- the cap it has promised to apply -- the future sales opportunity for the Finnish firm could be substantial.

Next page: The legal maze

The legal maze
Such published rates ignore the commercial and legal realities, though. Patent owners might reach bilateral agreement on rates, based on cross-licensing of technologies, after fraught negotiations between legal teams. Even the FRAND (fair, reasonable and non-discriminatory) licensing system used in the world of cellular standards does not mean a licensor must charge all licensees the same rate. Typically, a major player shipping huge volumes of devices would pay less per device than a smaller company. In setting higher rates than other patent companies, Qualcomm has argued that its technology is integral to the whole mobile data experience, and that it should be compensated accordingly. Some handset makers are notorious for dodging royalty payments to licensors, according to one source.

Litigation is now commonplace. It is also a weapon Huawei looks eager to wield as it flexes its growing patent muscle and as Chinese authorities build the legal apparatus that allows cases to be heard in China. In the past few months, Huawei has gone specifically after a cellular patents company called InterDigital, with headquarters in the US. Immediately after a patents agreement between the two companies expired on December 31, Huawei sued InterDigital in the Shenzhen Intermediate People's Court, alleging the US firm had broken a promise to license mobile patents on FRAND terms. Previously, the court in Shenzhen, where Huawei is headquartered, ruled that InterDigital's royalties should not exceed 0.019% of the sales price of each Huawei device.

Figure 3: Revenues in Last Fiscal Year ($B at Current Exchange Rates) Source: Companies.

Some promote arbitration as a means of resolving all patent disputes. The idea is that an international arbitrator, approved by the two parties in conflict, would reach a binding decision independently of the court system in any country. Advocates argue that standards bodies should include recourse to arbitration in FRAND commitments. But not everyone is convinced it is always the answer. Huawei is understood to have rejected arbitration during its recent clash with InterDigital.

The size and importance of the Chinese economy is a potential concern for any technology licensee as China continues to invest in its legal system. "China has recently set up some dedicated patent courts and is trying to establish itself as a country where you can litigate," said Pio Suh, the managing director of a cellular patents and advisory company called IPCom, during a previous conversation with Light Reading. In December, a Chinese court was said to have ordered a ban on some iPhone sales after Qualcomm accused Apple of patents violations. Such measures would effectively lock manufacturers out of the world's biggest market for consumer devices.

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Beyond the smartphone
Outside the legal maze, Huawei's 5G royalty rates are currently unclear. Last August, the Chinese vendor promised to attach lower rates to 5G than 4G patents, but a Huawei spokesperson says he is unaware of a "target figure" for 5G royalties. At the time of publication, he had not responded to a request for details of 4G rates.

Regardless of those details, licensing might become an even more lucrative business in the 5G era for the companies that control the technology. If connectivity is extended from billions of smartphones into tens of billions of other consumer and industrial gadgets, the revenue opportunity could be huge. Organizations from a variety of sectors might be drawn into legal battles with 5G patent owners. "Different industries coming into the market will have an impact on licensing because we'll be dealing with auto makers, medical equipment manufacturers and other industries unaware of IP licensing issues," said Pio Suh.

An ongoing dispute between Nokia and Daimler provides a glimpse of what may lie ahead. On March 30, the German carmaker was said to have complained to EU authorities about Nokia's licensing demands, after the Finnish firm reportedly accused Daimler of trying to "sidestep" a licensing agreement. At issue are mobile technologies used in automotive systems. "We want clarification on how essential patents for telecommunications standards are to be licensed in the automotive industry," Daimler said in a statement. As patent owners look hungrily outside the smartphone market, expect to read a lot more of the same.

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— Iain Morris, International Editor, Light Reading