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Monetization Strategy for Standard Essential Patents 4Q 2013

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TechIPm Research

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  • 1. Monetization Strategy for Standard Essential Patents 4Q. 2013 ©2013 TechIPm, LLC All Rights Reserved www.techipm.com
  • 2. FRAND Licensing Royalty Evaluation: Method 1 In Microsoft Co., v. Motorola, Inc., No. 2:10-cv-01823-JLR (W.D. WA), the court provided basic guidelines for assessing FRAND royalty for standard essential p atents (SEPs). The guidelines are based on the Georgia-Pacific analysis of the reasonable royalty modified for taking into account SSOs’ primary goals for adopting FRAND commitments. (Georgia-Pacific Corp. v. U.S. Plywood Corp. , 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970)). The court provided five primary goals for adopting FRAND commitments. The court, then, modified the Georgia-Pacific factors to account for the five primary goals for adopting FRAND commitments. The key modification to the Georgia-Pacific factors leads to the reasoning that a royalty in a patent pool for the specific SEPs at issue or comparable licensing transactions as a candidate for the royalty established through negotiation under FRAND commitments. Thus, the royalty rate in the patent pool may provide expected FRAND licensing revenue. ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 2
  • 3. *LTE Patent FRAND Licensing Revenue Via licensing’s LTE patent pool set the royalty rate as 3% for end user producuts (e.g. smartphones), 1% for data terminals (e.g. data cards), and 2% for Femtocell devices with volume discount up to 30%. According to GSA (Global mobile Suppliers Association) there were 87 manufacturers for 666 LTE-enabled user devices as of January 2013. LTE user devices are Modules, Tablets, Notebooks/netbooks, PC Cards, Smartphones, Routers, Femtocells, and USB dongles. According to LTE market research by Signals and Systems Telecom, LTE devices shipment in the world market will reach around 600 million units in 2016. Thus using the royalty about $2 per unit, 4G LTE patents FRAND licensing revenue is expected to be around $1.2 B per year in 2016 globally. Because the royalty per unit is not dependent on the number of holders of SEPs, one may calculate licensing revenue for each holder of SEPs proportional to its number of SEPs (e.g. http://techipm-innovationfrontline.blogs pot.com/2013/05/4g-lte-standard-essential-patent.html). ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 3
  • 4. Cf. LTE Royalty Rates for Bilateral Licensing -1 Qualcomm revealed that the company had put royalty rate at 3.25 % for LTE patent licensing. Nokia expects Nokia’s rate for devices that deploy LTE as the only wireless communication standard to be in a range of 1.5 % from the sales price of an end-user device. To avoid unfavorable effects of royalty stacking, Nokia will not charge royalties higher than 2.0 % from the sales price of an end-user device for IPR that is essential to wireless communication standards irrespective of the number of wireless standards deployed in such a device. Ericsson said all of its LTE agreements will be made according to Ericsson's proportional share of the standard IPR that relates to the relevant product category. Ericsson likewise honors the same industry practice by ensuring a maximum cumulative rate on LTE technology not exceeding a single-digit rate. Ericsson´s fair royalty rate for LTE is therefore expected to be around 1.5 % for handsets. ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 4
  • 5. Cf. LTE Royalty Rates for Bilateral Licensing -2 Huawei believes it will hold 15-20% of all essential patents relate to LTE standard, therefore, a royalty rate with some flexibility, but not to exceed 1.5 % , is expected. ZTE will license its LTE essential patents for mobile communication terminals with a maximum 1 % from the sales price of an end-user device. However, ZTE will not be restrained to this amount, if ZTE is involved in any licensing negotiations. While in multi-mode terminals, ZTE will follow similar principle in setting the royalty rate for LTE essential patents, which will be determined in bilateral negotiation. Motorola expects that its essential patent royalty rate for LTE systems and equipment (e.g. infrastructure and subscriber handsets) will be approximately 2.25 %. ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 5
  • 6. FRAND Licensing Royalty Evaluation: Method 2 Another court’s guidelines for assessing FRAND royalty for SEPs can be found in In re INNOVATIO IP VENTURES, LLC, No. 1:11-cv-09308 (N.D. Ill. 2013), Dkt. No. 975. The INNOVATIO IP VENTURES court calculated FRAND royalty (cap) of WiFi SEPs as (average profit margin to the contribution of patentee’s SEPs) x (net profit of relating products) x (pro rata share of patentee’s SEPs to the total number of WiFi SEPs providing similar contribution to the profit). Similar calculation can also lead to the FRAND royalty (cap) for 3G and 4G LTE smartphone SEPs. ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 6
  • 7. *Samsung’s SEP Strategy against Apple Samsung recently appealed to CAFC for ITC’s ruling of non-infringement regarding its HSUPA standard essential patent (SEP) – US7486644. US7486644 and US7706348 are the two SEPs that Samsung alleged that Apple’s products infringed them. Even if ITC finally determined that Apple’s products (iPhone 4 (AT&T models); iPhone 3GS; (AT&T models); iPhone 3 (AT&T models); iPad 3G (AT&T models); and iPad 2 3G (AT&T models)) infringe the asserted claims (claims 75-76 and 82-84) of the US7706348 (’348) patent “Apparatus and Method for Encoding/Decoding Transport Format indicator in CDMA Mobile Communication System,” the UST R (U.S. Trade Representative) vetoed against the ITC’s ruling. Notwithstanding the recent administrative and judicial blocking against exploiting SEPs for injunction, Samsung decided to appeal for its SEPs. Why? Considering the huge net profit from Apple’s 3G UMTS products sale in the US market and the pro rata share of Samsung’s SEPs to the total number of 3G UMTS SEPs, the amount of licensing royalty generated by Samsung’s share of 3G UMTs SEPs will be significant in amount. Thus, Samsung’s SEPs can play an important role in the potential settlement negotiation with Apple. ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 7
  • 8. *NPE’s LTE Patent FRAND Licensing Revenue TechIPm, LLC’s 4G LTE standard essential patent research for the US market reviles that NPEs’ IPR share accounts for 21% of 4G LTE Standard Essential P atents (SEPs) issued in the USPTO as of October 25, 2013. To evaluate the essentiality of a LTE patent, patent disclosures in claims and detail description for each 4G LTE patent are compared to the final versions of the 3GPP Release 10 technical specifications (LTE-Advanced). Total of 215 issued patents are identified as the potential candidates for 4G LTE SEPs relating to UE (cellular phones, smart phones, PDAs, mobile PCs, etc.) and base station (eNB) products. Considering the huge profit margin of 4G LTE UE and base station products in the US market, the amount of licensing royalty earnings generated by NPEs’ 21 % IPR share of 4G LTE SEPs will reach billion dollar per year level. ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 8
  • 9. *Samsung v. Apple LTE Patent FRAND Licensing Revenue Samsung’s and Apple’s 4G LTE smartphone SEPs’ IPR share are 21% and 2% respectively (for details about analysis method, please refer to http://www.slides hare.net/alexglee/4g-lte-standard-essential-patent-candidates-data-2q-2013). Then, base on various market research data, the net profits of Samsung and of Apple from smartphone sales per year in the US market are calculated as roughly $4 B and $6B respectively. Finally, if the average profit margin to the contribution of the 4G LTE SEPs of 25% and 10 years of licensing terms are assumed, the licensing royalty of Samsung that can have from Apple and of Apple that can have from Samsung are expected to be around $3.2 B and $0.2 B respectively. ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 9
  • 10. Monetization Strategy for SEPs Courts guidelines for calculating FRAND royalty provides three key factors that should be considered in setting a monetization strategy for SEPs. 1. Quality of SEPs: must check whether licensing patents are truly SEPs through essentiality evaluation and form a patent portfolios regarding core Technologies of the standard. 2. Quantity of SEPs: try to increase the IPR share through the alliance in standardization and IP creation processes, patent engineering for SEP development and/or acquisition. 3. Potential licensee: do market research for potential licensee to find market information (production quantities, profits, market share etc.) ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 10
  • 11. *Essentiality Analysis for Standard Essential Patents A standards essential patent is defined as patent that contain one or more claims that are infringed by the implementation of a specification for standardized technology. Thus, if a product is implemented following the standard specifications, it should infringe some essential patents. LTE Patent Claim Mapping Example Claim Specification 1. An apparatus for transmitting a random access signal comprising: 3GPP TS 36.211 V8.9.0 (2009-12) 5.7.2 Preamble sequence generation a CAZAC root sequence selector coupled to a CAZAC root sequence generator, wherein the CAZAC root sequence generator generates at least one CAZAC root sequences, and wherein the CAZAC root sequence selector selects a preamble root sequence from the at least one CAZAC root sequences. The random access preambles are generated from Zadoff-Chu sequences with zero correlation zone, generated from one or several root Zadoff-Chu sequences. The network configures the set of preamble sequences the UE is allowed to use. 2. The apparatus of claim 1 wherein: the CAZAC root sequence generator is a primelength Zadoff-Chu sequence generator. ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 11
  • 12. *Patent Engineering for SEP Development Sometimes, developing SEPs without participating in a SSO is possible because some of key aspects of the technologies adopted during the standardization can already be developed by a third party who is not the participating member of the SSO. Thus, if the third party filed a patent covering the technologies adopted as the standard, he or she can further develop it though claim development and patent prosecution process to be a SEP. In an actual case, when Adaptix, a subsidiary of a patent troll Acacia Research , sued Ericsson at the ITC for infringement of its 4G LTE SEP, Adaptix claimed that it has no obligations to FRAND commitments because it did not participate in ETSI’s LTE standardization procedures. (Adaptix, Inc. v. Ericsson, Inc., Certain Wireless Communications Base Station s and Components Thereof, ITC Inv. No. 337-TA-871.) ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 12
  • 13. Thank you! • If you have any questions please contact Dr. Alex G. Lee at alexglee@techipm.com ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 13
  • 14. Company Overview TechIPm, LLC is a professional research and consulting company specializing in technology and intellectual property mining and management. Technology Expertise • Mobile Computing & Wireless Communications Technology: LTE, UMTS, WLAN, WPAN, RFID, NFC, WSN, Cognitive Radio/SDR, M2M, Mobile TV etc. • Smartphone Applications: Location Base Services/Indoor Navigations, Mobile Payments, Augmented Reality, Wireless/Mobile UI/UX etc. IP Expertise • Strategic Patent Evaluation & Valuation: M&A Patent Due Diligence, Acquisition Feasibility Analysis, Investment Valuation • Patent Portfolio Analysis & Development: Design Around Strategy, Essentiality & Claim Development for Standard Essential Patents • Patent Litigation Strategy: Evidence of Use, Claim Construction Strategy • Patent Prosecution: U.S. Provisional Filing, U.S. Non-provisional Prosecution, International Prosecution (PCT and Foreign Offices) • Patent Business Strategy: Licensing/Monetization Strategy, IP Intelligence • Patent Analysis: Patentability, Freedom-to-Operate, Infringement, Validity Analysis, Patent Mining for Strategic Planning ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 14
  • 15. Major Clients Technology management professionals planning, developing, and investing in new technologies/products/services. In-house IP counsels developing patent strategy. Licensing professionals looking for a new licensing opportunities. High-tech investment management firms/banks. IP monetization/management consulting firms. ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 15
  • 16. 4G LTE Standard Essential Patent Candidates Data 2Q 2013 LTE Standard Essential Patent Candidates Data 2Q 2013 is a product based on LTE patents research for US market leader among LTE UE (cellular phones, smart phones, PDAs, mobile PCs, etc.) and base station (eNB) product manufactures. LTE Essential Patent Candidates Data provides MS excel file for assignee, patent (publication) number, prosecution status for published applications, related 3GPP TS36 Release 10 specifications, and the key technology components for an implementation of the products. ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 16
  • 17. References ©2013 TechIPm, LLC All Rights Reserved www.techipm.com 17