Patents Prizefight Pending: Clash of the Tech Titans

If research and development in the technology industry is a form of modern-day wizardry, then the patents that surround this innovation can sometimes look like the dark arts.

A number of players have controversially grown fat off the patent royalties they charge others. Patent trolls, as they are called, have been known to prey unforgivingly on companies using intellectual property of dubious actual value.

The case is far from clear-cut, however. Defenders of the patents system insist that it offers protection to organizations big and small, ensuring imitators cannot shamelessly rip off original innovation.

In the communications sector, a fight has broken out between some of the industry's power brokers. On one side stand network vendor Cisco Systems Inc. (Nasdaq: CSCO), search-engine behemoth Google (Nasdaq: GOOG) and chipmaker Intel Corp. (Nasdaq: INTC). Through a group called the FairStandards Alliance, those companies are lobbying hard for a reduction in the royalty rates for so-called "standards-essential" patents, says Patrick Donegan, a chief analyst at the Heavy Reading market research business.

Set up a year ago, the FairStandards Alliance says its aim is to "strengthen the voice … of companies which believe that the licensing of standards-essential patents must be done on a fair, reasonable and non-discriminatory basis." Other members include Telit and u-Blox AG , two European manufacturers of the modules used to support wireless connectivity, as well as some of the region's biggest carmakers.

Yet opposing the FairStandards Alliance is another lobby group with equally powerful supporters. IP Europe, as it is known, counts Ericsson AB (Nasdaq: ERIC), Nokia Corp. (NYSE: NOK) and Qualcomm Inc. (Nasdaq: QCOM) as key members. It similarly claims to be acting for the greater good, taking aim at "technology free-riders seeking to access inventions at low cost and relying on the R&D [research and development] efforts made by others."

For the companies in this group, much is at stake. Mobile phone chipmaker Qualcomm made $8.1 billion from licensing sales in its 2016 fiscal year. While that figure was down from $8.2 billion in 2015, Qualcomm's revenues from equipment and services are shrinking at a faster pace, dropping from $17.1 billion in 2015 to $15.5 billion in 2016. That decline is making intellectual property even more important to Qualcomm's business.

As for Nokia, one of the world's biggest makers of network equipment, its share price lost more than 17% of its value during the first week of February, after the terms of a new patents deal with Samsung Electronics Co. Ltd. (Korea: SEC) proved a disappointment to investors.

Could ongoing developments give one side in this patents dispute the upper hand?

FairStandards Alliance member Google and other web-scale Internet companies (or WICs) are certainly becoming bigger stakeholders in the patents system. Some were assigned a higher number of patents in 2015 than companies that have historically profited heavily from licensing, according to research carried out by Heavy Reading.

So while it rails against royalties, Google ranked fifth on the league table of companies granted the most patents by the US Patent and Trademark Office last year, coming just behind Qualcomm (but ahead of the chipmaker when a patents subsidiary called Google Technology Holdings is factored in). Amazon.com Inc. (Nasdaq: AMZN) rose from the number 50 spot in that table in 2014 to occupy the 26th place last year. "Firms are registering their own patents aggressively these days and striking cross-licensing deals with other WICs and with telecom players," says Donegan.

Table 1: USPTO Patents Granted in 2015

2015 rank 2014 rank Change Assignee name 2015 grants 2014 grants
1 1 0 IBM 7,355 7,534
2 2 0 Samsung Electronics 5,072 4,952
4 7 +3 Qualcomm 2,900 2,586
5 8 +3 Google 2,835 2,566
8 9 +1 LG Electronics 2,242 2,142
9 16 +7 Intel 2,048 1,578
10 979 NEW Microsoft Licensing Technology 1,956 1
11 11 0 Apple 1,938 2,003
14 12 -2 GE 1,757 1,859
20 18 -2 Ericsson 1,407 1,537
26 50 +24 Amazon 1,136 741
36 32 -4 Cisco 960 1,095
40 25 -15 AT&T Intellectual Property 885 1,307
44 48 +4 Huawei 800 775
51 52 +1 Alcatel-Lucent 710 700
55 54 -1 Verizon Patent & Licensing 653 673
78 5 -73 Microsoft 456 2,829
88 980 NEW Nokia Technologies 400 0
96 128 +32 Facebook 372 279
99 971 NEW Google Technology Holdings 360 9
Source: IFS Claims.

This does not, of course, mean those WIC patents were in any way "standards-essential," relevant to the communications sector or of particular value. Moreover, while vendors canvassed by Heavy Reading expect WICs to have a big influence on 5G, a next-generation mobile communications technology, they do not believe Google et al will make detailed contributions to 5G standards.

Even so, as WICs like Facebook and Microsoft Corp. (Nasdaq: MSFT) become increasingly active in the communications market, they seem likelier to side with the FairStandards Alliance than with IP Europe, reckons Donegan. "If they throw their weight behind it, the balance tips a lot," he said during a presentation at Light Reading's Executive Summit in Rome earlier this month.

Next page: 5G fracas

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iainmorris 12/14/2016 | 4:42:24 AM
Ericsson response Ericsson eventually got back to us and said (much like Cisco):

"At Ericsson, as you know, we are committed to the F/RAND system of licensing Standard Essential Patents, a system that has been widely used with excellent results within the ICT sector for over two decades.

"At the same time, Ericsson has partnerships and collaborations with companies from many different sectors, and no partnership or collaboration looks exactly alike. In the case of Cisco, the parties agreed to enter a licensing agreement for their respective patent portfolios, enabling unfettered joint innovation and providing certainty for customers of both organizations. As part of the joint Patent Cross License agreement, Ericsson will receive license fees from Cisco."
Mitch Wagner 12/13/2016 | 12:12:34 PM
Cisco Interesting to see Cisco and its partner Ericsson on opposite sides of this disupte. 

Also interesting to see Cisco both pursuing an intellectual property lawsuit against Arista and arguing for looser IP laws and regulations. 
msilbey 12/13/2016 | 10:08:06 AM
Hmmm Why does this feel like the tech equivalent of marketing's search engine optimization? Necessary, but unrelated to the actual value of the content. 

It also feels like a constant effort to game the system by claiming the best IP rights and asserting authority over their use. Obviously the issue is far more complicated than that. Investment in difficult R&D work should be rewarded. But there's also a piece that's about using the biggest and cleverest legal resources to siphon more money out of the ecosystem. 
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