Patent licensing – House of cards.

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Standard Essential Patents not at risk of value collapse.

  • The ongoing fight between Google (Motorola) and Microsoft is at risk of setting a legal precedent that could collapse the value of standard essential patents (SEPs).
  • This particular fight was started by Motorola which sued Microsoft for infringement of its MPEG4 (h.264) and WiFi SEPs in PCs.
  • Microsoft counter-sued with a federal suit alleging that Motorola had failed to live up to its FRAND (see below) obligations when it came to licensing its SEPs.
  • Because SEPs are always included within a standard, anyone who makes a product that uses that technology invariably infringes that IPR.
  • To prevent patent holders exploiting the situation, IP that is included in a standard must be licenced on Fair, Reasonable And Non –Discriminatory terms (FRAND).
  • Motorola was seeking a $22.50 from every mid-range laptop that makes use of its patents which with an ASP of $700, is a royalty rate of 3.2%.
  • Microsoft pays a group of 29 companies just $0.02 per laptop to use their pool of 2,300 patents and so it is not difficult to see how Microsoft could make a case for a breach of FRAND.
  • For the first time, the court attempted to determine an appropriate royalty, concluding that Microsoft should pay Motorola $1.8m per year rather than the $4bn Motorola had asked for.
  • Motorola appealed this ruling and it is this appeal that goes before a court in San Francisco today.
  • If the ruling is upheld it will set a very dangerous precedent for all future SEP negotiations as patents are almost impossible to value with royalty payments being almost entirely based on history and precedent.
  • I suspect that the court’s method is deeply flawed in at least one way which is that it is very likely that the court has assumed that all SEPs within a standard are equal in terms of their importance.
  • However, the reality is very different.
  • Patents may look the same but the value of one patent can be hundreds of millions of dollars while an entire pool of similar patents can be virtually worthless.
  • This fact is obvious when look at the patent pools or any association that licences groups of patents for a single fee which is then shares out.
  • These are almost always made up of the weakest patents because the nature of any program dis-incentivises a holder of a strong patent from joining the pool.
  • Qualcomm, Ericsson, Nokia and Motorola have never contributed their wireless SEP patents to a pool because they know their patents are strong and that they can earn higher returns on their own.
  • Historically, the patent holders also manufactured the products meaning that everyone existed under cross licence (much lower royalty) creating a reasonably balanced status quo.
  • However, with the rise of Apple, Samsung and the Chinese this is no longer the case and this is why there is huge pressure from manufacturers to reduce the cost of SEP licensing.
  • Consequently, I think that SEP pricing will continue to fall over time but is unlikely to suffer a big collapse from this court case.
  • This is because I think that the court’s method is fundamentally flawed and suspect that it will not be upheld on appeal meaning that the house of cards that is SEP pricing will stand to fight another day.

 

Apple vs. MCX – Current of change

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Apple Pay is the victim of a much bigger conflict.

  • It looks like mobile based payments are at last about to see some traction, catalysed by Apple Pay, but already the battle lines are being drawn
  • CVS and Rite Aid, the number 2 and 3 pharmacy chains in the US have both decided withdraw support for Apple Pay and Google Wallet despite having all the hardware already installed that is needed to support it.
  • Users have already used Apple Pay in both pharmacies since the system launched as it generally works with all retail NFC systems despite neither being a launch partner for Apple Pay.
  • Both companies have decided to switch off support for NFC based payments entirely, I suspect at the request of MCX.
  • MCX is the Merchant Customer Exchange which is an alliance of retailers who have got together to create an alternative to Visa and MasterCard for the processing of consumer purchases.
  • Each time a consumer pays with a card, the retailer pays a fee to have the transaction processed and this has a meaningful impact on the wafer thin margins of the retailers.
  • This is a constant problem for the retailers and they are very keen to find an alternative where there is a much lower fee just to cover the real cost of the transaction.
  • MCX has created its own mobile based payments system called CurrentC and there is a preference that consumers use that.
  • CurrentC is a system that has been clearly designed to meet the needs of the retailer to the detriment of the user experience.
  • Consequently, using CurrentC is more cumbersome than paying with a credit card and I think that consumers will refuse to use it.
  • By contrast, Apple Pay is fast and easy but it uses the established processing infrastructure.
  • This means that if Apple Pay becomes a standard method of payment in the US, the retailers will be even more locked into paying away a big portion of their profits for payments processing.
  • However, Walgreens which is the biggest pharmacy in the US, has embraced Apple Pay with many users reporting success.
  • The crunch will come if users start going to Walgreens rather than CVS or Rite Aid for their pharmacy products due to this issue.
  • Should this come to pass than CVS and Rite Aid will have no choice but to return to supporting the NFC-based mobile payment systems.
  • If MCX is smart, it will quickly move its payment processing infrastructure to support Apple Pay because then it can achieve its own aims while keeping the consumers happy.
  • Unfortunately, I suspect that there are all sorts of vested interests that will keep this from happening putting the success of MCX at risk.
  • The consumer is king and there will always be alternative’s where he can use whatever payment system he desires.
  • The sooner MCX realises that the financial well-being of its members depends on happy consumers, the better its chance of breaking Visa and MasterCard’s stranglehold on payments processing.

Apple Pay – Kickstarter

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Apple Pay might just kick start the opportunity for everyone. 

  • The size and brand power of Apple has enabled all of the participants in the complex payments chain to line up together.
  • With all participants signing-up to support the system, there is a good chance that the user experience will be as easy and as seamless as promised.
  • To date, mobile based payments has been a dream that has been hobbled by participants in the chain focusing on self-interest rather than the user experience.
  • As a result, the user experience has been poor, hobbled by security concerns with limited support by the banks and retailers.
  • Apple Pay is a proprietary system based on NFC that joins the links of the payment chain and quietly takes care of the security concerns.
  • The fingerprint reader on the iPhone 6 is the main authentication tool but also a secure element inside the iPhone 6 and 6+ takes it one stage further.
  • It is the combination of these two elements plus the support of the entire chain that might just make this work this time around.
  • Apple’s business model is centred on making its devices as desirable as possible which is the major driver of its industry leading handset margins.
  • Consequently, Apple Pay is not a technology that it is going to be licenced out to others, meaning that the market for this system will be limited to owners of iPhone 6 and beyond.
  • If a user wants to use Apple Pay, he will have to pay up for an iPhone.
  • RFM forecasts that in 2016E, iPhones will make up 13% of all the smartphones across the world.
  • Keeping Apple Pay to itself will allow Apple to maintain the exclusivity it needs for its profitability but it will be leaving 87% of the opportunity on the table for everyone else.
  • Many see the advent of Apple Pay as the harbinger of death for many companies that are trying to make it in mobile based payments but I think the opposite is true.
  • The cream of the market may well be skimmed off by Apple but its take-off will create a renewed impetus for the players that address the rump of the market to get their act together.
  • This is also a big endorsement of NFC which has struggled for traction due to fragmentation and a bad user experience.
  • NFC is now very likely to be a key enabler of mobile based payments which is good news for NXP Semiconductor which is the main manufacturer of chips and is the supplier to the iPhone 6 and 6+.
  • Apple Pay may just be the catalyst that finally allows users to leave their wallets at home but the endemic fragmentation that has crippled this segment must be addressed.
  • Apple’s market power has allowed it to address this issue in iOS but for everyone else there is a huge hill to climb.

IPR: Apple vs. Samsung – The weakness of essential (part v)

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It may seem unfair, but the White House has done the technology industry and the patent system a favour.

  • The White House’s decision to veto the ITC imposed trade injunction on Apple for infringement of Samsung’s patents comes as a big surprise.
  • Historically, it is almost unheard of for the White House to veto an ITC imposed injunction and I did not expect it to in this case.
  • I am certain that Samsung will be screaming that the White House has been biased against in favour of an American company but the White House has a good reason.
  • This reason for this is simple: Samsung sought and won injunctive relief on the back of Standard Essential Patents.
  • Standard Essential Patents are patents that must be infringed in order to implement a standard such as LTE of WCDMA.
  • Because the technology of a SEP is essential to make the technology function, not implementing that technology will cause the technology not to work.
  • This gives the holder of that technology great power as he can hold everyone else who is using that technology to ransom as without his patent, it won’t work.
  • This is why to be included in a technology standard; the holder of that patent must agree to license his technology in a free, reasonable and non-discriminatory manner (FRAND).
  • A SEP holder is also NOT supposed to seek injunctive relief as this is deemed to be a breach of the FRAND principle. (see here)
  • This is why the White House has vetoed this injunction and why I believe that has been right to do so.
  • This will set a substantial precedent as many other parties seeking injunctive relief for SEPs will probably now withdraw their applications.
  • While this is a big blow for Samsung in its campaign against Apple, it is a good development for the patent system.
  • Technology companies waste huge amounts of time and resources in fighting off patent assertions which are often made with SEPs as they are the easiest with which to show infringement.
  • Now that this route has been all but closed off, one can be hopeful that abuse of the patent system will now begin to decline.
  • This will effectively reduce the number of countries in the West which are friendly to SEP based injunctions to one (Germany) and this move could start to change things there too.
  • For Samsung, this is a big blow but it is just another round of the painfully expensive and pointless tit for tat that is its war against Apple.
  • At the end of the day I expect that Samsung and Apple will reach a settlement and in that settlement there is likely to be a net royalty stream from Samsung to Apple.
  • I believe that paying royalties to Apple would probably be cheaper than its current legal expenses.
  • This is not a real negative for Samsung, but it has negative implications for the lawyers, who to date, have been the only real winners from the endless litigation we have seen in the technology industry over the last several years.

 

LTE – Rough patches

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LTE has great promise but it is still very immature.

  • Everyone seems very excited by the prospect of LTE and how much it will add to the mobile experience.
  • However, just like last time, everyone has forgotten that it is a new technology and as such it is going to have teething problems.
  • The first and most pressing of which is handover.
  • LTE brings the number of totally different radio technologies co-existing to three. (OFDM (LTE), CDMA (3G) and TDMA (GSM))
  • To be effective, the basestation and the handset need to be able to flip between each of these three during both voice and data sessions without dropping the connection.
  • Furthermore they must be able to do with an array of equipment from different vendors.
  • To date seamless handovers between LTE and 3G have been reported but only between handsets and infrastructure made by the same vendor.
  • Telefonica has now claimed to be able to affect the handover with equipment from different vendors but only in its labs.
  • This was exactly the same with the 2G to 3G transition and because of this (among other things) it took much longer than expected for 3G to really take-off.
  • This time around, the experience from 3G should help 4G to mature more quickly, but there still going to be a lengthy period where 4G devices constantly drop calls as they switch from one radio to another.
  • They will also tend to gobble battery power significantly faster than 3G, much to the annoyance of users.
  • This will be construed as bad service and immature technology which, combined with the high prices being charged for the services, is likely to keep users at bay.
  • I am a big fan of LTE as it offers superb spectral efficiency and flexibility to efficiently offer all manner of services but it is going to take time before it is good and cheap enough for all and sundry.
  • As a result, I think that those expecting LTE to drive the next big explosion in mobile will be disappointed for a little while yet.