FRAND Realities
SEPs and FRAND
https://www.financialexpress.com/opinion/telecom-sector-patent-owners-entitled-to-royalties/359229/ August 27, 2016 Several Standard Essential Patent (SEP) owners believe that there is no basis for the claim from potential licensees that the royalty burden is too high, as the Indian mobile phone market keeps ever expanding both in terms of value and size, and at the same time the value of devices keeps going down. These statements are flawed as they mistake/or conflate cause with effect. As has been recorded elsewhere in different studies (BSNL, Ficci, etc.), the phenomenal growth in the Indian telecom industry was predominantly aided by the meteoric rise in wireless subscribers, which encouraged mobile handset manufacturers to enter the market and to cater to the growing demand. These statements are flawed as they mistake/or conflate cause with effect. As has been recorded elsewhere in different studies (BSNL, Ficci, etc.), the phenomenal growth in the Indian telecom industry was predominantly aided by the meteoric rise in wireless subscribers, which encouraged mobile handset manufacturers to enter the market and to cater to the growing demand. Historically, Indian handset brands grew because they catered to a specific demand-supply gap. At a point in the last decade (2010 onwards), traders realised that mobile phones were cheap in China and could be sold in India. India did not have, and At a point in the last decade (2010 onwards), traders realised that mobile phones were cheap in China and could be sold in India. India did not have, and still has no manufacturing capability to produce a phone domestically. What these traders did was to take advantage of the arbitrage. The phones were branded, and thus we saw the emergence of several What these traders did was to take advantage of the arbitrage. The phones were branded, and thus we saw the emergence of several home grown brands. There is no technological input being made by the Indian traders with the exception of stating the final bill of material (<$100, etc.). Consumers benefitted as different importers tried to outdo each other in terms of giving a value to the consumers. As time passed, the margin of the importer was squeezed—by increasing import duties, and entry of Chinese brands in the Indian market. Today, the mobile phone market sees 2-3% margin on turnover. This is wafer thin and very few players would survive the intense competition. There is no technological input being made by the Indian traders with the exception of stating the final bill of material (<$100, etc.). Consumers benefitted as different importers tried to outdo each other in terms of giving a value to the consumers. As time passed, the margin of the importer was squeezed—by increasing import duties, and entry of Chinese brands in the Indian market. Today, the mobile phone market sees 2-3% margin on turnover. This is wafer thin and very few players would survive the intense competition. This is wafer thin and very few players would survive the intense competition. It is no one’s case that the SEP owners are not entitled to royalties—however the issue is that the royalty demand must be commensurate with the contribution. Here, SEP owners claim that they deserve royalty on the end-product and brands opposing this state that royalty is payable on chipset basis. It is, therefore, important to note where exactly SEPs go Here, SEP owners claim that they deserve royalty on the end-product and brands opposing this state that royalty is payable on chipset basis. It is, therefore, important to note where exactly SEPs go It is, therefore, important to note where exactly SEPs go in a device to ensure that SEP owner is properly remunerated. SEP owners claim they are entitled a Fair, Reasonable, and Non Discriminatory (FRAND) royalty on the end product. However, as noted by various judicial pronouncements in the US and elsewhere, the Entire Market Value (EMV) rule (claims on end-product value) is applicable if, and only if, the demand for the product is driven by the patent. For SEPs, US courts have consistently ruled that royalty is payable on the smallest For SEPs, US courts have consistently ruled that royalty is payable on the smallest saleable patent practicing unit/the part imparting standardised functionality to a device or the chipset. The chipset in turn is made on the basis of test protocols/conformance tests. Standard bodies prescribe check lists that a device must follow to comply with standard specifications. The test protocols, although based on standard specifications, are totally different than the specification as test protocols provide a final result or parameter that devices must comply with. In other words, specifications prescribed by say, the ETSI, do not specify the circuitry of the chip, but rather describe the manner in which a device must interact with other devices in an interconnected system. The test protocols, although based on standard specifications, are totally different than the specification as test protocols provide a final result or parameter that devices must comply with. In other words, specifications prescribed by say, the ETSI, do not specify the circuitry of the chip, but rather describe the manner in which a device must interact with other devices in an interconnected system. In other words, specifications prescribed by say, the ETSI, do not specify the circuitry of the chip, but rather describe the manner in which a device must interact with other devices in an interconnected system. Proponents of licensing at end device levels (hereafter unwilling licensors) claim that ‘separate components cannot respond to and interact with a cellular network, and thus cannot conform to any cellular standard. This is an incorrect statement. A keyboard can be swapped with a display, a higher memory This is an incorrect statement. A keyboard can be swapped with a display, a higher memory configuration and camera module can be swapped with a different one, as they are not being tested. What is being tested in the protocol conformance suite is whether the communication part (chipset) works as intended. It is interconnectivity among devices that is being tested, and for which the standard was laid down in the first place. As is explained by a large SEP owner, detailed specifications where there are SEPs lead to a test phase, where there are no SEPs involved. What is being tested in the protocol conformance suite is whether the communication part (chipset) works as intended. It is interconnectivity among devices that is being tested, and for which the standard was laid down in the first place. As is explained by a large SEP owner, detailed specifications where there are SEPs lead to a test phase, where there are no SEPs involved. It is interconnectivity among devices that is being tested, and for which the standard was laid down in the first place. As is explained by a large SEP owner, detailed specifications where there are SEPs lead to a test phase, where there are no SEPs involved. As is explained by a large SEP owner, detailed specifications where there are SEPs lead to a test phase, where there are no SEPs involved. To reiterate, standards have a role only in the interconnection of devices, not the design of the device itself. If two people communicate (whether by a call, text or data) using If two people communicate (whether by a call, text or data) using cellular network, standardisation is involved only in what leaves a device, not what stays back. And this is why it need not matter which manufacturer or importer provides the devices, but only that the value of the RF baseband processor. In this regard, unwilling licensors demanding royalty on end product do not realise that the demand is against the principles of standard setting organisation (SSO). The SSO created the standard for wider adoption and provided a guaranteed market to the developers of the standard specification. In this sense, companies involved in standard setting are insulated from the vagaries of the market as they compete for the market where there is no competition. By levying a charge on the end product, the very purpose for which the SSO was created is defeated. There is another reason that unwilling licensors must temper their demands immediately as it is a symbiotic relationship and a fragile ecosystem. The mobile device brands can sustain only a limited amount of unjustified demands. It would take only a couple of irrational demands to put an importer out of business. Hence, care should be taken to ensure that the host is able to survive and contribute to the success of the standard by ensuring its wider adoption.