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Qualcomm and the real story behind Mobile World Congress

Intellectual booty

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Analysis The story behind the story is always more interesting, somehow, than the story itself; and the story behind last week's Mobile World congress wasn't just the obvious stuff about backhaul capacity. Instead, people were mumbling furtively about piracy - intellectual piracy, that is. You know, like intellectual property, but acquired by devious means.

I asked Scott McGregor, CEO of Broadcom, what he thought of 2008 in the intellectual piracy arena. He said: "Patent enforcement has gone too far. It's time to see an adjustment in roll-forward royalties, where people have a business model predicated on charging royalties several times on the same component."

There will be some who will be startled by that. For Broadcom, widely perceived to be a major collector of intellectual property rights, to start criticising patent law, "is like a Mormon complaining about his wife's infidelity," commented one astonished delegate in Barcelona.

Jim Morrison, founder of start-up phone maker iMate, was the first to put his name to a comment on this subject in Barcelona. "This year is going to see meltdown in patent law in America," he said frankly.

His opinion is widely shared - that there are people who are laying claim to patents on the basis that "they thought of it one day in the bath". And this, he says trenchantly, is nonsense. "How can you have IP in something you've never built, just thought of? If you build something and design it, and prove it works, you can have IP. Build me something, show how it makes a difference!"

This isn't just a tough Scot entrepreneur expressing bolshie opinions - it's an industry player observing straws in the wind, and he's not alone in this. The problem is that royalties are being charged multiple times, and it's not perceived as either fair or sustainable.

A consultant who works with the Chinese mobile industry a lot (and who therefore absolutely is NOT going to let me publish his name) described a conversation with an unnamed company (which he led me to believe could well have been Huawei). He was asked to source some component which includes intellectual property which may (or may not) have belonged to Qualcomm. He was unable to help.

"Ah, well, we'll have to do something about that," said the Chinese corporate exec. "We are paying 25 per cent of the price of every product in royalties to Western businesses. It has to come down to at least ten per cent." Which is, of course, improbable, as my consultant friend observed to him. "We'll have to do something about it," repeated the angry entrepreneur.

"Are you suggesting you will stop paying royalties?"

"That is not my decision," said the exec. In other words, he knows someone who will make that decision.

America's IP owners are well aware of the friction. Even the most rapacious intellectual pirates are calling for reform of a system which is destroying any goodwill there ever may have been for patent holders.

McGregor again: "The problem is multiple charges for royalties. For example, if I sell you a device on which I hold a patent, you have to pay me royalties. But what if you sell that device onto someone else, who incorporates that component as part of something they sell on to a fourth party? Am I justified in chasing that someone else for royalties on something for which you've already paid, and then for their customer in turn?"

Obviously, not (he implied). "But that's the business model on which Qualcomm is founded. We own IP, but our business is founded on making great chips."

Morrison didn't need to name Qualcomm for his criticism to be obvious in its direction: "They're trying to make it cheaper for you to buy a licence than go through a court case; rather than pay a million in legal fees, buy a licence for a hundred thousand dollars," he summarised.

The threat of unilateral action from China isn't explicit - not yet. But America's legal fraternity appears to be aware that it exists. And to try to maintain that structure is (they think) killing the goose. No golden eggs from a royalty stream from around the world if people just go and invent their own technology specifically to avoid it; and even less income if the system simply collapses.

Morrison thinks it can. "The situation is that we will see Chinese companies push their own 3G technology into the infrastructure at a cost Western companies can't match. They can afford to do this."

Not everybody I spoke to thinks they can. "Maybe, for developing countries," was a dubious consensus, but there was no acceptance of the idea that America might be overrun by Chinese mobile technology.

Of course, in the end, the Chinese will rebuild the IP structure themselves - once they have their share of the new world created by intellectual piracy, it will become intellectual property again. As McGregor remembers from his time at Philips, that company got its start by ignoring patent law - right up to the point where it had enough IP of its own to start agitating for European-wide laws.

But for now, it looks like China has the American legal system scared enough to actually annoy Qualcomm. Whether it's scared enough to annoy Broadcom as well remains to be seen; but the threat is real, and is going to be taken seriously this year. ®

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