Intellectual Property and WCDMA
By Eric Ransdell, Wed Jun 26 00:00:00 GMT 2002

What a tangled web the world of IPR can weave.


Imagine if the concept of intellectual property had been around when cars were invented. If every bolt, fender and mirror had not been considered a material object to be mass produced, but a new technology that would generate a royalty for its owners every time another car rolled off the assembly line. And for every one of the thousands of parts that go into a car, automobile manufacturers would have to negotiate a bilateral agreement with the inventors of each part.

Sometimes these would be rather straightforward arrangements. But often they would involve much more complex issues than licensing the product in question. For example, a tire manufacturer will only allow its tires to be used on highways that it also has an interest in building. Or a manufacturer of car radios will only allow its products to tune into stations that its parent company owns. If this were the case, would there ever have been such a thing as the "Automobile Revolution"? Or would people still be riding non-patented horses today?

When it comes to 3G technologies, the issue of intellectual property rights (IPR) is one of the thorniest and most complex issues in the history of the telecommunications industry. It is not an issue that has the capacity to derail the worldwide rollout of 3G, which, given the astronomical sums most operators have paid for their spectrum licenses, is now all but inevitable. But it does have the capacity to thwart innovation and inhibit competition in a space whose very survival is dependent upon those factors.

In May, Nokia proposed an industry-wide 5 percent royalty cap for WCDMA, the technology that is emerging as a global standard for 3G networks. Nokia's rationale was that a WCDMA royalty cap would spur further growth in the wireless industry, help create open standards and support sustainable competitive business practices for players of all sizes.

While it may seem self-serving for a company that manufactures WCDMA base stations and handsets to float a proposal that would reduce the IPR royalties it will ultimately have to pay, as the company pointed out in its press statement: "Nokia is the number one IPR holder in the WCDMA standard and technology, with more than 25% of the essential patents registered so far with the European Telecommunications Standards Institute (ETSI), Association of Radio Industries and Businesses (ARIB), and Telecommunications Technology Committee (TTC) standardization bodies."

"We are willing to adjust our licensing to other parties to that 5 percent rate because it is our intention to set an example," says Ilkka Rahnasto, Nokia's director of IPR licensing. "We are actively encouraging industry to invest in wideband CDMA and we feel that the issue of IPR royalties is one element that we can help organize in order for WCDMA to be successful and to be adopted."

Rahnasto claims that the proposal is garnering support within the industry. But some of the biggest players remain skeptical. Qualcomm, the San Diego-based corporation that owns almost all of the IPR behind CDMA2000, the competing 3G standard, flatly rejected the 5 percent royalty cap. "Their proposal appears to be very self-serving to benefit the equipment manufacturers and not the companies who develop the technologies and hold the intellectual property," Qualcomm spokesperson Christine Trimble told InternetNews. Qualcomm failed to respond to interview requests for this article. Motorola, which owns many WCDMA patents, declined to comment. "As a matter of company policy, Motorola does not provide comment on news from its competitors," spokesperson Sue Frederick said in an email to TheFeature.com.

So the jury remains out on whether the Nokia proposal can work, particularly without the support of some of the biggest players in the industry. What remains certain, however, is that 3G IPR is a problem of gargantuan proportions. To get an idea of how big of a problem, consider this: According to Nokia's research of public records, some 40 companies claim to have more than 700 essential patents for WCDMA.

Who Owns What?


Brian Kearsey, director of the Paris-based 3G Patent Platform, an independent industry group that is attempting to implement a voluntary arrangement for the cost-effective management and administration of essential patents, believes those numbers are much too low. "Only about 18 companies have been shown to own essential patents for GSM," he explains. "Whereas for 3G the figure is estimated to be at least five times that number. In addition, there appears to be several thousand granted patents relating to 3G technologies with others evidently in the pipeline. What all this represents is a paradigm shift in the magnitude of the patent-handling situation."

In many regards it is a paradigm shift from bad to worse. Even though only 18 companies have been shown to hold essential GSM patents, the GSM IPR experience offers a preview of the nightmare that could come to pass with 3G. "There is an industry consensus that the arrangements for GSM licensing were unsatisfactory," says Kearsey. "They were regarded as unfair, complicated, time consuming, expensive and are judged to have created a barrier to trade for new entrants."

In a 1998 report to the European Commission, the International Telecommunication Standards User Group held that the GSM IPR licensing regime presented demonstrable barriers to market entry. Among ITSUG's chief complaints were the inability to acquire patent licenses in a timely manner; prohibitively high royalty rates; the enhanced bargaining position of companies holding the broadest patent portfolios; and the uncertainties of whether royalties had already been paid by companies downstream in the supply chain. And though the technology is now more than 10 years old, even today some vendors are still negotiating their GSM patent licenses

What's changed since the advent of GSM is the entire nature of the intellectual property game itself. Up until the mid- to late-1990s, a limited number of companies owned the necessary patents and licensing arrangements were negotiated in fairly straightforward bilateral agreements. The guiding idea was to allow companies the freedom to operate without fear of patent-infringement litigation. Today both companies and shareholders view IPR as a cornerstone of corporate strategy, a commercial weapon that can be deployed to maximize licensing revenues or secure market advantage.

Which is why 3G IPR presents such a morass of a problem. Because it promises to do so much - from streaming video to detecting presence on networks - it involves more intellectual property than any other technological standard in the history of telecommunications. And with no standardized or transparent method for licensing, the potential for 3G IPR being used to skew the market becomes that much greater. "Each essential patent holder will able to exclude an operator or manufacturer from the use of a 3G technology altogether by demanding unfair, unreasonable and discriminatory licensing conditions," explains Kearsey.

Complicating matters even further is the fact that no independent body verifies who owns which patents. Thus each company that wants to use 3G technology must verify on its own every one of the patents it must license - a process that can take years and is prohibitively expensive for smaller companies. Beyond that, it's a process that must be repeated hundreds if not thousands of times through bilateral agreements in every country rolling out a 3G network. If that situation weren't complex enough, companies sometimes claim to own essential patents when they actually don't in order to improve their negotiating positions.

Today's Concern


But most of these issues are considered potential problems that will have to be addressed further down the road. The immediate concern is the issue of royalties - a market that is estimated to be in the range of $100-150 billion over the next 10 to 12 years. With no body to verify who owns which patents and 40 companies currently claiming IPR that is essential to 3G, there is real potential for disaster. Many companies are already asking for a 1 percent royalty. With more than 100 companies potentially entering the fray, the IPR cost element for 3G products could reach 100 percent.

No one is suggesting that owners of 3G IPR not be paid for their innovations. As Kenneth Leung, chairman of Irwin Capital Ltd., a Hong Kong-based venture fund consulting and investment firm, points out: "If the return on royalty is restricted, then research and development spending will be reduced and this will certainly lead to less innovations in this business." Adds Nokia's Ilkka Rahnasto: "Innovators need to get their reward, but it's also vital that manufacturers and small companies are encouraged to invest in WCDMA market. There has to be a compromise between these two elements."

Despite initiatives such as Nokia's proposal for an WCDMA IPR royalty cap and the 3G Patent Platform, for the moment a compromise seems nowhere in sight. In the absence of such an agreement, the 3G playing field will remain tilted in favor of the giant corporations with deep pockets and legions of lawyers.

"The 3G market will see the evolution of a new value-added chain involving lots of new players and each of these players will need access to the essential patents in order to create a dynamic market," says Kearsey. "Unless the patent licensing regime is made open, transparent and accessible, new entrants will be deterred from entry by the cost and uncertainty of licensing patents. In addition, the new technology will develop slowly and with unnecessary expense as the existing companies negotiate and litigate over the access to essential patents."

Even if the 3G IPR status quo continues, there is little doubt that 3G is the inevitable next step for the wireless industry. But it does beg the question, given the bad experience with GSM, will 3G simply be a case of making the same mistakes twice?

Eric Ransdell is the former Silicon Valley Bureau Chief for US News and World Report magazine. Now living in Shanghai, he covers mobile technology in Asia.