3G Intellectual Property Licensing Under Fire
(11/29/99, 9:52 a.m. ET)
By Junko Yoshida, EE Times
Proponents of third-generation (3G) cellular
telephony are settingup an independent
company to oversee intellectual property
claims for 3Gtechnology.
But the move is already drawing fire from some
observers who say the effort lacks the clout of a full
patent pool or licensing agency.
Starting in March 2000, the 3G Patent Platform, set up
by the Universal Mobile Telecommunications System
(UMTS) group shepherding 3G standards, will assume
its role as "a single-door entry for evaluating, certifying,
and licensing 3G technology," said Serge Raes,
secretary of the UMTS Intellectual Property
Association, Paris. The group plans to hand off much of
that work to an independent agency.
But some intellectual property experts bidding for the
independent agency job say 3G needs a more
structured approach than what UMTS is planning, both
to ensure that all patent holders participate and to ease
the process of collecting royalties.
The debate comes as the industry grapples with how
best to handle patent claims from multiple companies on
technologies destined for wide deployment.
Independent consultants -- largely attorneys and
accounting firms -- are assuming what appears to be a
growing role in areas such as licensing administration,
patent evaluation, and royalties collection.
Indeed, hiring outside experts to sort through the
tangled web of intellectual property rights essential to
emerging standards has become a trend. A group of
consumer and computer companies, including Apple,
Compaq, Sony, Matsushita, and Toshiba, have just
handed responsibility for implementing a joint licensing
program for IEEE 1394 to an independent agency
called 1394la, newly formed within the MPEG LA,
itself a pioneer in the field of patent pooling. Almost
every other cross-industry spec set in recent years --
including DVD, various copy-protection schemes, and
the Digital Video Broadcast standard -- also rely on
patent pooling.
Legal and technology experts agree there is no single
formula that ensures success for high-tech intellectual
property licensing. However, the 3G Patent Platform is
viewed as a particularly high-stakes project that faces
the huge challenge of getting key intellectual property
holders to sign on to the one-stop shopping concept.
One major player, CDMA pioneer Qualcomm, has
dug in its heels in opposition to any of the proposed 3G
patent arrangements.
In this climate, the 3G Patent Platform appears to be
following an uncharted path. It will be set up as a new,
nonprofit company called NewCo that is "neither a
patent pool nor a licensing agency," said Raes of the
UMTS IP association. Rather, the group will oversee
the task of licensing administration and patent
evaluation, which it plans to outsource.
"The outsourcing is planned in order to ensure
independent evaluation and certification process by
expert evaluators," Raes said.
Unlike most other such agencies, NewCo will steer
clear of such business activities as pooling patents and
collecting royalties. Under the 3G Patent Platform
scheme, the licensees will pay royalties directly to the
companies holding the corresponding licenses. Patent
holders and licensees are free to negotiate deals to meet
their business requirements. All licenses, whether
obtained through the 3G Patent Platform or by separate
negotiation, are made between the patent holder and
the licensees.
In this way, the 3G Patent Platform aims to create a
voluntary, industry-led process that simplifies intellectual
property rights and cuts the cost of patents, in hopes of
gaining a bigger market for the platform. According to
industry sources, a lesson was learned from GSM
phones. Today, 20 percent of the cost of a
second-generation GSM handset pays for intellectual
property rights because of the lack of a joint licensing
program.
Under the proposed 3G Patent Platform, from the first
granting of a license through subsequent 3G patent
processes, all licensees will pay the same standard
royalty rate, subject to the maximum cumulative royalty
rate, a setup designed to "provide a pragmatic answer
to an industrywide concern," Raes said.
Some experts outside the UMTS, however, have
questioned whether a hands-off, nonprofit structure like
NewCo can work. The 3G Patent Platform still needs
to attract some key players to its camp. Further, even
after going through the 3G Patent Platform processes,
individual companies will retain the dirty job of royalties
collection. Some have warned that the 3G Patent
Platform's licensing mechanism may be a recipe for
failure.
"The way some of the basic responsibilities are
structured by the 3G Patent Platform makes me wonder
whether it can be successful," said Larry Horn, vice
president of licensing and business development at
MPEG LA, who nevertheless plans to bid for the 3G
job. "It strikes me that the 3G proposal
underappreciates the value of marketing and
salesmanship required to get more [intellectual
property] holders signed on for licensing, and the
hands-on job of collecting royalties from licensees."
The Denver-based MPEG LA is an independent
agency that has established a successful intellectual
property model for MPEG-2 video patent pooling. By
getting a clean bill of health from the U.S. Department
of Justice, which ruled in June 1997 that the agency is
not anti-competitive, MPEG LA is believed to have
shown the way for commercializing complex,
cross-industry standards.
The business models for MPEG LA and the 3G effort
are markedly different. Since 3G royalty payments are
arranged between licensees and licensors, no fee is
taken out of the royalty revenue. According to Raes,
the licensing administrator adds no value to the royalties
flow. Instead, the administrator keeps records of net
sales value declared by the licensees for each license
and per product category, he said.
In contrast, at MPEG LA, it is the licensing
administrator's responsibility to collect royalties and to
bring companies holding essential intellectual property
to the joint licensing program, Horn said. Because
MPEG LA earns its fee according to the amount of
money it successfully collects from technology users,
"we are financially more motivated to succeed in [patent
pooling]," Horn said.
Horn said MPEG LA and the new 1394la are using the
same fee structure. The licensing administrators get 10
percent of what they collect from licensees for collected
royalties up to $75 million annually. The cut drops as
annual royalties rise. For example, administrators get 5
percent for collected yearly royalties between $75
million and $250 million, and only 2.5 percent for
royalties above $250 million a year.
The business model for a 3G licensing administration is
still "a gray area," said Helene Jay, vice president of
licensing at Sipro Lab Telecom, Montreal, which is also
bidding on the 3G job. Jay said she expects the financial
gain from this job "will not be very big." Her company's
interest is not money, but "to get as much exposure as
possible," she said.
Others tendering bids for the 3G Patent Platform job
also debated the appropriate role of the licensing
administrator. The key issue, many said, is a matter of
control: How much power an industry group --
composed of patent holders and licensees -- should
keep to itself to act as mediator.
Some said the industry group should grant the
independent licensing administrator responsibility for
critical negotiations in pulling together a joint licensing
program. MPEG LA's Horn, for example, expressed
concern that the 3G folks might mistakenly limit the
licensing administrator to acting only as "a facilitator or a
coordinator" of licensing procedures.
Sipro's Jay said an independent licensing administrator
appointed by the 3G Patent Platform will not be
expected to mediate at all. For example, the
responsibility of recruiting Qualcomm, a critical holdout
from the 3G Patent Platform, will fall to a director
general of NewCo, she said.
However, Raes said that job will be shared by NewCo
and its administrator.
"Promotion of an innovative licensing scheme [and
attracting new members are] one of the tasks of the
licensing administrator, but also of the members of
NewCo," he said.
According to rules and conditions agreed upon by a
UMTS working group, a licensee becomes a member
of the 3G Patent Platform upon being granted a license,
and is required to accept the principle of reciprocity.
Members of the 3G Patent Platform will become voting
members of NewCo. The management of NewCo will
be delegated to a director general.
Brian Kearsey, president of the UMTS intellectual
property association, said a few months ago that "we
think we will cover 65 to 75 percent of the owners of
essential intellectual property rights. The alternative is a
free-for-all, as happened in GSM, with a multitude of
bilateral agreements." At that time, Kearsey said the
agency was still lobbying Qualcomm to sign on.
Having NewCo play the role of mediator may not be
the best strategy, somesaid because the job is best left
to a third party.
"Having an arm's-length relationship has a serious
advantage," Horn said. "Because we [at MPEG LA]
are in a neutral position both from competing fellow
[intellectual property] holders and from licensees, I
believe they trusted us more in negotiation."
Besides neutrality, licensing administrators need
expertise in licensing and technology, organizational
competence, and the ability to deal with agencies and
corporations in geographically diverse regions, Sipro's
Jay said. Riding on its success in putting together a
patent pool for G.729 voice compression, she said her
company can fill the bill.
"We believe the fact that we are a small company
works to our advantage," Jay said. "Everyone who has
dealt with us before knows exactly how we do
business."
The closing date for bidding to be the 3G Patent
Platform's licensing administrator is "still to be defined,"
Raes said. He added, however, that "all processes
should be completed and [a] contract signed at the time
NewCo is launched in spring 2000."
Those who participated in an initial bidders' conference
in London earlier this month include the U.K.
companies PA Consulting and BTG International,
Canada's McCarthy Tetrault, Germany's Cohausz &
Florak, France's Cabinet Patrice Vidon, and the U.S.
company Pricewaterhouse Coopers, along with Sipro
and MPEG LA.
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