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Mobile patents war shifts to email

Major IP landgrab

Application security programs and practises

Analysis In the enterprise technology world, we increasingly see large vendors donating at least a token sample of key patents to the open source process for free in order to accelerate uptake of their favored platforms. The same trend will undoubtedly come to mobile communications eventually, driven by the increasing interest in Linux, Java and other open or semi-open systems.

However, for now ownership of intellectual property remains critical to the balance of power among the vendors, and an increasingly important focus of the battles between them. When margins are falling on equipment and competition is rising, a strong patent store not only provides a very high margin revenue stream, but also a barrier to entry for would-be challengers with no such patents.

Thus the emphasis on royalty issues is intensifying as mobile vendors come under pressure, and is particularly marked in Europe, the region that has generated the greatest wealth from cellular services, and stands to lose the most to competition from the US and Asia. This was seen when a group of vendors, including European giants Nokia and Ericsson, grouped together to accuse Qualcomm, the most successful exploiter of mobile intellectual property, of anticompetitive practises, and to petition the European Union for support.

Then, last week, the major European operators joined the battle, with a group of cellcos, led by Vodafone, T-Mobile and Telefónica, calling on the European Commission to protect them and their customers from huge royalty bills.

They demanded an overhaul of how ETSI, the European standards maker, agrees standards, to avoid intellectual property traps where companies contribute technology to a standard and then later reveal patents and claw back huge royalties. This is a looming issue for broadband wireless, with nobody certain whether, and how, companies like Samsung may seek to derive revenue from their patents in emerging technologies like WiMAX and fast Wi-Fi.

According to a document leaked to the Financial Times, Vodafone and its allies suggest that IPR terms should be agreed before a standard is even set, and state: “Cumulative patent royalties or ‘patent stacking’ can raise the licence burden to an extent unbearable to our industry. IPR licence fees have become a commercial issue that is limiting the industry’s ability to continue to drive down costs. The issue has the potential to limit competition through direct and indirect impact on pricing.” The operators are acting against a backdrop of various battles – not just the Qualcomm battle but also the recent debacle of the Open Mobile Alliance’s standard for digital rights management, which produced an unexpectedly large license fee.#

Royalties in the handset cost

Mobile handset makers get hit with patent payments for processor technology, radio modulation schemes, codecs, storage designs, interfaces, development kits, Java, DRM and many others, all in a device that is made for between $100 and $400, and that needs to get far cheaper for poor nations. For handset makers like Nokia, with significant patent holdings, the figure is considerably less, and they also have a revenue stream to compensate for some of the pressure on phone margins. At some point, the giants will be unable to make the margins they require from basic handsets, no matter how efficient their supply chains and cost structures, but they will still be able to collect revenue on every phone sold by their low cost rivals from China and elsewhere.

In complex 3G, royalties are a greater slice of the cost of production than in earlier technologies, giving Nokia and other patent owners an even greater cost advantage – estimated at around 15% over rivals with no patents of their own. That could give Nokia a $30 buffer on a $250 handset, which can be used to maintain its margins or cut its prices to gain market share. This factor alone prompted Paul Sagawa of Sanford Bernstein recently to recommend buying Nokia shares, since most analysts have misunderstood the value of the intellectual property and the barriers it creates for challengers.

He estimates that patent holders – mainly Nokia, Ericsson and Qualcomm in W-CDMA – will trade rights and so will end up with a total royalty bill of 7% of costs or less. By contrast, a nonpatent holder could pay 25% of the wholesale price in GSM and W-CDMA royalties.

However, the royalty payments that are incurred are passed on to the operator in terms of higher overall handset costs. In addition, cellcos are frustrated because they want to buy more of their devices from second tier phonemakers, which tend to be more amenable to making heavily operator-defined models, but which, without the benefit of patents to trade, are less able to be flexible in their pricing than their larger competitors.

The group of operators wants to see ETSI rules on intellectual property rights tightened up or they say Europe risks losing the benefits of standardization. They suggest that intellectual property terms must be agreed before a standard is set, rather than after it, and want to see caps on maximum royalties, something that Nokia has made a lot of noise about, and has been rebuffed by Qualcomm. The proposal is also apparently being backed by Alcatel, Hutchison Europe, Orange, Portugal Telecom, RIM, SFR, Swisscom, TDC, Telecom Italia, Telenor and TeliaSonera.

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