The issue of FRAND licensing terms is critical for all IT companies involved in a standardization process but it is also a headache for competition authorities. As Mario Mariniello, Chief Competition Economist team member of EC's Directorate General for Competition, recently highlighted in an article published in OUP's Journal of Competition Law and Economics (JCLE) entitled "Fair, Reasonable and Non-discriminatory (FRAND) Terms: A Challenge for Competition Authorities", the adoption of a technology standard can raise competition concerns when the owner of the chosen technology abuses of the additional market power gained through standardization. FRAND terms can therefore be seen as a corrective device seeking a balance of interests between the licensor, who is entitled to the incremental rent "that arises from standardization with respect to the next best alternative", and the licensees, who can be considered as "locked-in" (that is forced to adopt the chosen standard).
In this article, Mario Mariniello highlights the fact that "FRAND commitments involve an incomplete contract between licensors and licensees", their implementation will therefore be necessarily controversial. From an antitrust perspective FRAND commitments are very ambiguous because there is no commonly accepted method to assess their violation. The author therefore proposes a four-pronged screening-test to assess if such a violation has occured:
If the four following conditions criteria are met:
(1) ex-ante, a credible alternative to the adopted technology exists;
(2) ex-ante, prospective licensees cannot reasonably anticipate the licensor’s ex-post requests;
(3) ex-post, the licensor requests worse licensing conditions than ex-ante; and
(4) ex-post, the licensee is locked into the technology,
then a FRAND violation could have occurred and a competition authority needs to investigate and decide whether the terms and conditions of the defendant are fair, reasonable and non-discriminatory, which involves "an objective valuation of the royalty rate that patent holder would have been to charge if the standard did not increase its market power, subject to the broader context of the license contract."
An access to this very interesting analysis can be found here.
Thursday, November 24, 2011
While on the subject of INTIPSA ...
 |
| Finding a new CIPO is the nearest thing many people get to big game hunting ... |
"Peter Spours from Tom Tom and Andrew Sant from Crown Holdings will be reflecting on their experiences and career paths in IP and discussing the future of the Chief Intellectual Property Officer role".This webinar takes place next Wednesday, 30 November, at 15:00 GMT. Further details and registration are available via the INTIPSA website at www.intipsa.com
Wednesday, November 23, 2011
INTIPSA: one year on
To put the record straight, IP Finance has written about INTIPSA. Almost exactly one year ago we published this post which alerted to readers to the intended formation of INTIPSA and to the LinkedIn group which preceded it.
INTIPSA now has a busy website, a handsome logo and great prospects for the future. This weblog wishes it the best of luck and looks forward to its contributions to the well-being of IP business strategy.
Facts, figures and fun with FRAND: the seminar
 |
| When GSM stood for "grandma's sewing machine" ... |
Panellists Enrico Bonadio (City Law School), Dan Hermele (Qualcomm) and Richard Vary (Nokia) threw in a number of further ingredients and we had a chance to debate the question whether the Dutch courts' approach to the resolution of infringement/refusal to license issues, as illustrated by the recent spat between Samsung and Apple, was the best way of encouraging the litigants to negotiate their own settlement.
IP Finance's expectations were dashed when the number of chairs laid out for those attending proved insufficient since -- quite remarkably -- virtually every one of the statistically-likely "no-shows" actually turned up, even though there were other exciting events in town on the same day.
IP Finance thanks Olswang LLP for once again providing a venue and refreshments. IP Finance also thanks Keith for all his hard work in preparing and delivering a most entertaining and informative paper: you can access his slides as a pdf file here.
Monday, November 21, 2011
IP Strategist testifies in Leveson Inquiry today
Yesterday famous actor Hugh Grant gave evidence in the Leveson Inquiry. Today it is the turn of IP Strategist Mary-Ellen Field. If you ever wondered how IP licensing attracted the attention of News Of World then her evidence should be enlightening. But it is more than that - it is the story of how the reputation and health of professional business person and consultant is ruined by over zealous press seeking a story about her famous client. It could happen to you.
For a previous post and some background please click here.
For a previous post and some background please click here.
Thursday, November 17, 2011
Latest tax news from Malta
"Copyright & IP royalty exemptionAnne Fairpo covered Malta's tax exemption for patent royalties on IP Finance in April 2010, here.
The tax exemption on royalties from qualifying patents introduced in 2010 has been extended to cover royalty income from works protected by copyright and other IP including books, film scripts, music and art".
LES offers cash awards in IP business plan competition for grad students
IP Finance doesn't know whether anything will come of the entries, but the 2012 International Graduate Student Business Plan Competition looks like a worthwhile cause. According to the information available:
"... the Licensing Executives Society Foundation, in cooperation with the Licensing Executives Society (U.S.A. and Canada) and the Licensing Executives Society International, officially kicked off registration for its 2012 International Graduate Student Business Plan Competition http://les2012.istart.org.Again this year, LES registration is being kicked off during Global Entrepreneurship Week (GEW), an annual initiative of the Ewing Marion Kauffman Foundation designed to help people explore their potential as self-starters and innovators. ...
In response to the world’s growing reliance on innovation, the LES Foundation is working to ready the next generation of IP and licensing professionals through mentorship and educational programs, like the Competition, that build intellectual property (IP) and licensing know-how. ...IP Finance hopes that there will be a good response from Europe to this call for innovative creativity. If you know anyone who might be able to take advantage of this initiative, please forward this post to them as soon as possible.
Starting today, graduate students, including MS/MBA/MD/JD/PhD and postdoctoral scholars, from across the globe are invited to register to participate in the 2012 LES Foundation Graduate Student Business Plan Competition, which uniquely focuses on business plans that include an overview of IP assets and describe how those assets will be managed and commercialized to achieve business goals.
This year, student teams will compete to win expenses-paid trips to the Final Round of Competition at the LES (USA & Canada) Spring Meeting in Boston, MA, May 15-17, where they will attend educational sessions, mingle with global IP leaders and compete for the $10,000 Grand Prize and valuable in-kind prizes or the $5,000 Global Award. Runner-up teams receive $1,000. Students receive comprehensive feedback throughout the process from IP business leaders who share valuable expertise earned in the trenches of businesses ranging from start-ups to Fortune 500 companies.
For more information on the 2012 Competition and the LES Foundation, click here".
Investec to fund civil litigation: what does this mean for IP?
"... Investec has no pre-defined lending criteria [well that's good, since most IP players have no pre-defined litigation criteria -- unless perhaps they are trolls], which means that it can provide fast decisions and competitively priced funding for commercial litigation. Each case is evaluated on its own merits and structured accordingly. The minimum funding is £250,000 [This doesn't necessarily bar loans to fund litigation in courts where costs awards are capped, though such a high minimum may tempt a potential claimant in England and Wales to opt for the more expensive Patents Court than the Patents County Court on order to justify the high minimum].It would be good to receive readers' comments.
Jonathan Harvey, Specialised Lending, Investec Specialist Private Bank said, “The cost of litigation in the UK can be prohibitive [For many businesses the cost of borrowing is also prohibitive ...]. Many clients have strong cases but in such uncertain times are not prepared to take on the cash flow risk associated with pursuing their case. This can represent a significant opportunity cost in terms of lost revenue for the law firm and damages for the client.
“Over recent months we’ve been approached by a growing number of law firms [not IP owners or prospective defendants?] looking for alternative ways to fund litigation in the commercial sector. This is partly driven by changes in the way law firms fund their own working capital and partly by claimants’ growing need for flexible finance. Based on the success of our pilot transactions mid-year, we anticipate significant demand.”
Investec’s specialist finance team works with law firms and their clients to find innovative and flexible ways to finance their cases. The availability of litigation funding can itself be a powerful asset in bringing about a negotiated settlement, rather than going to court [but can't the same be said about the lack of availability of litigation funding?].
... The Investec professional services team was set up in response to increased demand from managing partners at law firms who are considering financial support to make structural changes to their businesses as a result of the impending introduction of the Legal Services Act 2011".
Monday, November 14, 2011
Scaremongers, IP Rights, Standardised ICT and Public Policy
In this, the ninth in a series of articles by Keith Mallinson (WiseHarbor) on issues concerning technical standards and IP in the ICT sector, the author cautions against the making of unfounded assertions concerning the anticompetitive nature of intellectual property rights, particularly at that sensitive point at which private rights intersect with public policy:
Scaremongers Falsely Claim IP Rights Impede Adoption of Standardised ICT and Public Policy
It is a grave mistake for governments to manage competition in favour of particular business models by manipulating their procurement policies. Mandating royalty free standards will deter technological development, limit choice and increase customer costs elsewhere in the software lifecycle with implementation, operations and maintenance.
According to the European Commission’s Enterprise and Industry division, in its announcement for an upcoming conference to be held in conjunction with the European Patent Office, “[t]hroughout the world, public policies increasingly rely on innovative and interoperable ICT solutions to implement major projects for the benefit of society in domains such as eHealth, efficient energy use, cloud computing, integrated transport systems and smart grids.” Quite so, but the Commission troublingly frames the debate by presupposing, without identifying or attributing, “legitimate concerns when technologies covered by Intellectual Property rights (IPR) are included in the standards.” It falsely asserts that “the exclusive potential provided by those rights poses the danger that they could become an impediment to the implementation of the technologies and the realisation of the policy objectives”.
This blurb illustrates a continuing attack on IP rights and business models, including demands for royalty free licensing by the open source lobby. European Interoperability Framework version 2.0, published December 2010, ought to have settled the matter once and for all. It recommends thatIntellectual property rights related to the specification are licensed on [Fair, Reasonable and Non-Discriminatory] terms or on a royalty-free basis in a way that allows implementation in both proprietary and open source software.
I have purposely avoided use of the term “open standards” in this article. There are significant differences among standard-setting organisations on this most widely adopted term with respect to membership limitations, transparency, decision making and whether or not any royalties may be charged.
Software products represent a small proportion of ICT expenditures
Whereas there is a lot of fuss about the cost of proprietary software versus open source and “royalty free” alternatives, software products represent a very small proportion of total business and government IT spending. Exhibit 1, a chart from a leading industry analyst firm’s research report on “cloud” computing, shows that ICT market segments where open source software competes or combines with proprietary software products represent just 12.4% of $2.5 trillion total ICT expenditures including operating system software (1.0%), non-custom-built applications (6.7%) and middleware (4.7%). In comparison, IT services (11.6%) and outsourcing (9.8%) combined represent 21.5% of spending. Computer equipment represents 13.9%. The $2.5 trillion total appears to exclude very significant costs for internal staffing.
Exhibit 1 Source: Forrester Research
IP protection prevails in the most widely-implemented standards
IP rights provide the investment incentives required for innovation in numerous standards. Technologies used for mobile communications, audio and video encoding have flourished while employing thousands of standards-essential patents owned by hundreds of different patentees. These include the ETSI, 3GPP and 3GPP2 standards covering the world’s trillion dollar mobile communications sector with thousands of network operators and 5 billion mobile phones. The AVC/H.264 video standard has 29 essential patent owners licensing to more than 1,000 licensees, voluntarily through a patent pool, with devices, video programming and network services used extensively by virtually everybody. The essential IP for these technologies is beneficially accessed by product manufacturers on the basis of FRAND licensing. With the rapid developments in smartphones, DVD players, HD-camcorders, digital TV distribution and widescreen TVs in recent years, and with a plethora of suppliers, there is irrefutable evidence that the IP development and licensing conditions for essential and other IP is working well.
Whereas government and enterprise ICT systems have some different characteristics to the public communications networks, personal ICT products and services described above, the FRAND-based essential IP licensing is universally applicable and beneficial to licensors, licensees and end users. In addition to the above, standards bodies that allow the collection of reasonable royalties include ISO/IEC, IETF, ITU and CEN/CENELEC. Examples of successful ICT standards with widespread adoption from these organisations include standards for data and document exchange, web technologies and services, and virtually every telecommunications standard. In fact, FRAND-based licensing, with the option of charging royalties for essential IP, is the norm rather than the exception in standards-based ICT.
As society becomes increasingly digital at home, work and in government organisations, standardised ICT is pervading with extensive innovation through a variety of business models and without “impediment” from IP rights. Financial returns in ICT are legitimately made in wide variety of ways including licensing patents and software programs for royalties, hardware manufacture, customisation, systems integration, training, operations and maintenance. There is no good reason to favour or eliminate any particular business models on the basis of unidentified or unproven harm.
Royalty free does not mean cheaper
Open source and “royalty free” software is often more expensive than alternatives; with total costs including patent licensing (inside and outside the standards), hardware, integration, and support costs. Recent licensing agreements by Samsung and HTC -- who implement open source Android software on many of their smartphone -- are each reported to cost between $5 and $15 per handset. In addition, standards-essential IP is paid for or cross-licensed in virtually all phones, regardless of whether the operating system is proprietary or opens source. Government procurement edicts cannot circumvent these charges.
Open source software notoriously tends to require more integration than proprietary solutions. The latter tend to be more complete, packaged offerings that are less prone to the code base fragmentation --with forking in development tracks-- that have afflicted the software industry since UNIX in the 1980s as illustrated in Exhibit 2. Similarly, ongoing software maintenance tends to be more labour intensive for open source software users and their systems integrators.
Exhibit 2 Relationships among and evolution of UNIX-like operating systems Source: Wikipedia on “Unix-like”
There have been few thorough assessments on purported cost savings and other benefits with open source procurement policies by governments. Written here mostly verbatim as reported by the Guardian newspaper , an exception is the Dutch Audit Court which investigated "whether the phasing out of closed standards and the introduction of open source software would improve the operation of market forces and save costs for the government". Its March 2011 report entitled Open Standards and Open Source Software in Government "concluded amongst other things that the potential savings the government could [realise] by making more use of open source software were limited", and that the "switch to open source software...does not necessarily... lead to cost savings" at all.
The Audit Court reasoned that, although there are no licensing or acquisition fees generally associated with open source software, there are other significant and accumulative fees. These include those relating to software implementation, management updates and maintenance. Moreover, in some other instances the switch to open source may even lead to "destruction of capital because the kingdom has many current licence agreements". No wonder this newspaper article was also very critical of the UK’s lurch toward open source software requirements for public procurement.
Dutch analyst Victor De Pous has also analysed open source procurement in the context of government ICT procurement in the Netherlands. Among other conclusions, he states that “deciding which application to deploy solely based on cost savings or solely based on one preferred business model, is a too restrictive approach and will lead most likely to ineffective decisions with wide and long-time consequences.” It is rarely all or nothing with open source
Open source software is rarely just that alone. For example, in smartphones, Android has drifted away from its Linux base and licensees have adapted it with proprietary layers (including Samsung’s Pure Breeze, Motorola’s Motoblur, HTC’s Sense) in their attempts to differentiate themselves. In government and enterprise ICT the additional programming is lucrative custom work for service businesses such as IBM, HP, Accenture, CSC, Redhat and many others. However, this can make it rather more costly to customers than with the update and support fees on packaged software. This major conclusion was also drawn in a book entitled the Comingled Code. Its key findings are that both types of software are complementary and that total cost of ownership is not primarily software purchase cost. It bases its findings on extensive research including more than 2,300 companies and nearly 2,000 programmers, spread across 15 countries.
Damning reviews of UK government ICT projects clearly indicate escalating and excessive costs in customising and supporting systems. Those charges are predominantly derived from man hours of consultancy and custom programming, not from royalties on software products. The bugbears seem to be civil servants’ failings in negotiating and managing contracts, and runaway costs with the coterie of large systems integrators.
Open source may not be entirely royalty free
Open source licensing conditions can and often do bind software contributors and licensee users to royalty free conditions, but they cannot legally bind third parties outside of these agreements. If hardware or software implementations infringe the patent rights of others, then the latter are legally entitled to assert their patent rights. If the patent owners are members of a standards organisation and those rights are standards-essential, these owners will typically agree to license on a FRAND basis. There is generally no conflict between open source licensing and paying patent royalties to third parties. The most stringent open source licenses; such as GNU GPLv3—in which “patents cannot be used to render the program non-free”—is seldom used because of such conflicts. In cases where licensing prohibits patent fees, the only legal solution is for such software to be written to ensure it does not infringe any IP that has not also been specifically declared royalty free by its owner.
Standards-based patent royalties tend to be a relatively small proportion of total costs in ICT products, systems and services. For example, the aggregate royalties for patented radio technologies in mobile phones account for around 10%. The audio and video coder-decoder IP licensing costs around $4 per unit shipped. These fees are crucial to companies with upsteam licensing business models and can help defray R&D costs for vertically integrated companies. Other companies pay licensing fees in compensation for the innovative efforts of others.
Head in the clouds thinking on royalty free with service-based usage and charging
Where public cloud computing is employed, as discussed in the Forrester Research report referred to above, the issue of software licensing models becomes opaque to enterprise and government customers. The question of open source and royalty free versus proprietary solutions in interoperability standards becomes much less relevant, if at all, when, by definition, public cloud computing substitutes remotely hosted services for hardware and software on the customer premises. When that occurs, every charge including that for use of underlying hardware and software, as well communications and technical support also become a service charge—just like software licensing fees, including up-front charges and running royalties.
Under these circumstances, the pertinent cost question is how much will governments save by moving their on-premises applications and processing loads (e.g., email and office productivity) to the cloud? Savings can be substantial from a variety of vendors including Google, Microsoft and Amazon. These are achieved through economies of scale that the cloud providers can offer and are nothing specifically to do with open source or open standards. Customers are oblivious to how, where and how much cloud-based services providers pay to build their infrastructure and this should not be their concern so long as the cloud services provide the technical capabilities, reliability, flexibility and costs that are most competitive – which they do.
Backpedalling
Royalty-free software proponents are simply trying to re-open an argument that was already settled. These issues were debated ad nauseam in with the definition of the term “openness” in the European Interoperability Framework version 2.0, which was finalized in December 2010. The Commission ultimately settled on a definition that embraced FRAND, with or without a royalty, as the right benchmark. This was in contrast to the EIFv1.0 which included a royalty free requirement. EIFv1 was just a recommendation by an expert group deep in the Commission. It had no official status; which explains why it was able to take such an extreme and untenable position. In contrast, EIFv2 is an official communication by the Commission. That makes it a binding policy document, rather than something that member states and the EC itself can ignore.
Impeding competition and choice
Suppliers and their customers in government and elsewhere should have freedom in software selection including open source, proprietary, premises-based and cloud-based usage. This includes implementations that need to be significantly standards-compliant for interoperability and for any other reasons.Mandating royalty free software in government procurement on the false premise that this is necessary to ensure interoperability or minimise costs is a red herring that will harm competition and choice. Current arrangements allowing FRAND or royalty free licensing for standards-based ICT have served us well in many spheres. Mandating royalty free would severely limit procurement options because countless popular ICT standards are not royalty free. Open source software implementations are in many cases subject to patent royalties for use of essential and other patented IP and such software is commonly comingled with proprietary code. Academic research and an extensive audit in the Netherlands shows that open source software does not necessarily save money and can cost more.
Even more troubling, is that rather than “levelling the playing field” for open source software developers, mandating royalty free open source software would actually be prejudicial to large and small vendors who would like to protect the IP they have developed and pursue licensing-based business models to generate royalties and cross-license for access to others’ IP. Public procurement policy should not also be the instrument to manipulate industrial policy for innovation, development and making money in the software industry. The adverse unintended consequences of such policies would be severe.
Friday, November 11, 2011
"Open Innovation: the Challenges and Solutions"
It would be too early to say that the bandwagon of open innovation is sweeping across Europe, but it is fair to say that business models based on open innovation rather than on self-sufficiency in innovation and the preservation of exclusivity in one's technology are finally gaining ground. Since they require less financial investment, they are less vulnerable to the availability of credit; and they have the potential to evolve into arrangements which are less formal than FRAND-based standards while at the same time retaining many of their benefits.
Thursday, November 10, 2011
"IP in Open Innovation – Barrier or Enabler?"
"When LES Benelux hosted the LES Pan European Conference in September 2008 in Amsterdam, the theme was “Open Innovation – The New Paradigm?” In the meantime, this model has become more widespread but has it been a success to the point where the question mark could be removed? This event explores how things have progressed, what is working and what is not with particular reference to IP.
As you will see from the speaker panel, this promises to be a very interesting day reflecting the views and experiences of different stakeholders. Prof. dr. Wim Vanhaverbeke will give the keynote presentation on “Open Innovation and its implication for IP management”, followed by Dr Esther van Zimmeren (CIR), Andre Clerix (IMEC), Benjamin Docquir (Simont Braun), Laure van Oudheusden (Philips) and Magali Poinot (IMI)".
You can access the invitation here and the registration form here
Wednesday, November 9, 2011
How Much Is a Sports Sponsorship Really Worth?
The trick in being the sponsor of an event is finding one whose benefits are so overwhelming that the sponsor enjoys oversized benefits in being associated with it. On that basis, surely the sponsorship of the recent Chicago Marathon by the Bank of America would seem to fit this bill perfectly. After all, according to the media packet provided by the Bank of America, 45,000 runners were to take part in the race, with more than one million spectators lining 26 miles of Chicago streets as the runners pass through 29 neighbourhoods (nowhere else in the U.S. is the notion of discrete urban neighbourhoods more hallowed than in Chicago).
As a result, it is claimed, the Marathon will bring $171 million dollars redounding directly to the benefit of the city, with additional ripple effects further enlarging the supposed benefits of the event to the area. The problem is that this assessment may be wide of the mark. An article that appeared on the webez91.5 website ("Chicago marathon--bonanza or blip") here strenuously attempts to dispel these claimed benefits.
So how does one get to the amount of $171 million dollars being added to the coffers of Chicago and its environs? Follow the mathematics with me:
1. Of the 47,000 runners, 7,000 out from abroad, with another 19,000 runners from outside the Chicago area. That adds up to 26,000 runners in need of a hotel room, plus 4,000 additional rooms occupied by locals, with the result that 30,000 runners at an average price of $200 per room. That means $6 million in lodging revenues a night.
2. Direct spending--paraphernalia purchased by the runners and increased restaurant sales are expected to amount to $40 million.
3. Secondary effects, which the sponsors call "a trail of economic activity", adds another $100 million.
Add these amounts together and voila -- we reach the $171 million dollar amount. Such a sum would certainly bring tears of joy to new mayor of Chicago, Rahm Emanuel.
But all of this jock-driven ardour has been dampened by the revisionist estimates offered by University of Chicago professor Allen Sanderson, who studies the economic impact of sports (and who is a three-time runner of marathons). In his view, the true number is closer to $25 million, at most. It's all because of what Sanderson calls "leakage" effects. Here are a few examples: 1. Say a souvenir cap is sold for $20. Most of the value in that cap was captured by the manufacturer, most likely not located in Chicago and probably located in the Far East. The direct value of the cap to Chicago is the mark-up, which amounts to several dollars.
2. Say a visitor pays $200 a night (or more) for a hotel room. Most hotels are headquartered outside of Chicago, which means that a certain portion of that amount is likely forwarded to the headquarters.
3. There is a bit of a set-off effect with respect to the spectators themselves. Assuming that most of them are from the Chicago area, some or even many of them simply exchange expending monies at another local site in favour of the Marathon event. The net gain, therefore, may be minimal.
Should any of these revisionist calculations influence the decision of a sponsor, such as Bank of America, to serve as a sponsor for the event? My instincts tell me that the bank might be less interested, or simply not interested at all, to be connected with the Marathon if the much modest sum of $25 million more accurately reflects the contribution of the event to the local economy. Additionally, the cost to the bank of the sponsorship might be less if a lower valuation is given, negatively impacting on the sponsorship revenues of the City of Chicago for the event. In such a case, while it is not a lose-lose situation, it is certainly a greatly diminished version of the lofty figures being thrown about in the media.
Tuesday, November 8, 2011
Valuing IP in Smartphones and LTE
 |
| Is this where we'd still be without FRAND ...? |
In this context, attempt to value IP -- including those rights that stem from essential patent ownership “determinations” -- are subject to great uncertainties, inaccuracies and biases. Keith argues that negotiated licensing agreements can overcome these problems while reflecting significantly different positions among licensors and licensees. For example, Keith calculates that there's virtually no correlation between the results of two different studies purporting to determine essential patent ownership in LTE. Keith concludes that the oft-stated belief that smartphone IP litigation and licensing costs are stifling innovation and foreclosing market entry is a "popular and yet unproven and erroneous refrain". Far from supporting this position, such evidence as there is actually points to the opposite effect: licensing costs are modest; smartphone innovation is extensive and shows no signs of slowing with faster connections, more powerful processing and richer applications, mainly on account of FRAND-based licences.
For ease of reading, Keith's contribution (which is a good deal longer than usual and contains many tables and diagrams) can be accessed here as a PDF document.
Subscribe to:
Posts (Atom)