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Uijl Bekkers IP and Patent Pools

Rudi Bekkers shares with the AOM audience the ideas of his paper authored with Simon den Uijl and Henk de Vries, whose focus is on Patent Pools. Their work examines the experiences with three generations of patent pools in the optical disc industry.

den Uijl, S., Bekkers, R., & de Vries, H. (2013). Managing intellectual property using patent pools: Lessons from three generations of pools in the optical disc industry. California Management Review, 55(4), 31-50.

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Uijl Bekkers IP and Patent Pools

  1. 1. Managing Intellectual Property Using Patent Pools Lessons from Three Generations of Pools in the Optical Disc Industry Academy of Management (AoM), August 2013 Based on special issue of California Management Review (Issue 55 Volume 4, Summer 2013) Simon den Uijl, Rotterdam School of Management, Erasmus University / Royal Philips Rudi Bekkers, Eindhoven University of Technology Henk J. de Vries, Rotterdam School of Management, Erasmus University
  2. 2. 1. Introduction 2. Using patent pools to facilitate market adoption and appropriate IPR 3. CASE #1 Patent pools in the optical disc industry 4. CASE #2 Patent pools in telecommunications 5. Designing and managing patent pools 6. Discussion and conclusion PAGE 222-09-09 / Department of Industrial Engineering and Innovation Science Presentation outline
  3. 3. • Technology platforms are increasingly important. These platforms typically cumulate many blocking patents (SEPs) fragmented across many owners • This creates considerable transaction costs and may invoke other problems such as royalty stacking • It is in the interest of platform owners, though, to ease access to the required IPR • In patent pools, two or more patent owners make a bundle of their patent available to any licensee at a publicized price. Patent pools are an innovative mechanism to realize better access, while guarding the interests of patent owners • Patent pools have grown more sophisticated over time, responding to new challenges • This paper analyzes the conditions for successful patent pools by examining three generations of patent pools in the optical disc industry, and offers a generic framework to guide strategy and innovation managers in establishing and managing a patent pool through the four phases of its lifecycle. Introduction
  4. 4. Using patent pools to facilitate market adoption and appropriate IPR • Companies have been pooling patents since the early 20th century, but as a result of antitrust scrutiny, the concept was virtually abandoned in the 1950s • In 1995, the US Department of Justice (DoJ) issued new intellectual property guidelines, triggering the introduction of 'modern' patent pools. • Many modern pools are on compatibility standards (e.g. DVD, MPEG, H.264) • … but there exceptions (Golden Rice Pool, Medicines Patent Pool, Librassay)
  5. 5. Using patent pools to facilitate market adoption and appropriate IPR Modern patent pools have the following characteristics: • all pooled patents are available to licensors participating in the pool, as well as to external licensees; • licensees are offered standard licensing terms, usually a simple, coherent menu of “patent packages” with prices and other terms; • licensing fees are allocated to each member according to a pre-set formula or procedure; • an independent party is involved to evaluate the essentiality of patents before they are included in the pool; • membership for licensors is voluntary, and most allow additional patent owners to join after formation of the pool; and • they include various adjustment mechanisms for adding new patents and recalibrating royalty shares.
  6. 6. Using patent pools to facilitate market adoption and appropriate IPR • Competition is increasingly on technology platforms, which combine multiple technologies as well as parties with diverse roles (e.g. devices, content providers, service providers) • Positive network externalities lead to 'tipping' or 'winner takes all' features (network utility grows with number of users, which in turns attracts complementary products) • Platform sponsors (often the founders) need to encourage innovation around their platforms at the broad industry level • For a variety of reasons, platforms tend to include a large number of essential patents, which creates patent thickets that can become an obstacle: • Royalty stacking (royalties that are reasonable in isolation may together become an prohibitive burden) • Holdup risk (if one or more patent owners ex post require much higher royalties than they could have demanded before inclusion of their patented technology in the platform or standard) • Transaction costs (if there are many distinct patent owners then implementers need to spend a lot of resources and time into negotiations) • These problems are catalyzed by ever growing numbers in patents, strategic strategies to obtain essential patents, and the growing diversity of patent holders (e.g. NPEs)
  7. 7. Using patent pools to facilitate market adoption and appropriate IPR For (prospective) licensees, pools: • Provide a one-stop shop for access to patent licenses, • Lower transaction costs and (usually) a discounted licensing fee compared to multiple individual licenses, • Create a level playing field (fewer competitors that do not pay royalty fees), • Reduce uncertainty, increase transparency. For (prospective) pool member (licensors), pools: • Help to promote the adoption of their technology, • Lower transaction costs, • May lead to higher profits thanks to the more efficient licensing and collection of royalties.
  8. 8. Using patent pools to facilitate market adoption and appropriate IPR Yet, establishing a patent pool is not easy, and its benefits are rarely realized to the full extent: •Negotiating Cost—Forming a pool involves a process with substantial legal expenditures. The benefits of forming a pool have to be compared with the resulting costs. •Asymmetric Information—Asymmetries in information (e.g., regarding the value of individual patents) can cause bargaining breakdown. •Self-Imposed Constraints—Efficient bargaining requires sufficient flexibility to tailor patent pool conditions (e.g., license fee and royalty distribution) to individual needs and bargaining powers. Many pools go for an equal treatment of all members. It is often hard to obtain a critical mass of IPR (especially now fragmentation of rights is growing).
  9. 9. Case studies in two technology areas Based on internal and external interviews (including key individuals that initiated those pools), and material and literature review •Optical disc industry: selected not only because this industry brought forward the first 'modern' patent pool, but also is an example of successful pool formation across multiple technology generations, and innovative changes. •Mobile telecommunications industry: selected because pools would seem to be able to address some of the major licensing concerns, yet have seen little success
  10. 10. Pools in the optical disc industry FIRST GENERATION OPTICAL DISCS - CD •In 1979 Philips and Sony combined their technologies for optical discs in a shared platform, the Compact Disc (CD). •Although both were major players in the consumer electronics industry, they realized additional market momentum was required to replace the installed base of the LP and Compact Cassette. •They published the standard (‘Red Book’) and established a joint licensing program. Separate packages for players and discs. •A third essential patent owner (DVA, later acquired by Pioneer) licensed its patents independently. •The number of patents was relatively small, and the patent climate in the early 1980s was easy and benign. •Under pressure of recording industry / record labels, Sony dropped licensing royalty claims for disks (though Philips did not) •Huge platform success, leveraged into CD-ROM (‘Yellow Book’) and CD-R (‘Orange Book’)
  11. 11. Pools in the optical disc industry SECOND GENERATION OPTICAL DISCS - DVD •While Sony, Philips, Toshiba and Time Warner together started work on a optical disc for video storage, the groups split into two camps (MultiMedia CD and SuperDensity Disc). •With a platform competition looming, the computer and movie industry pressured the respective camps to merge, eventually to become known as DVD. •While being a huge success and quickly replacing VHS, the uneasy merger stayed restricted to read-only disks, and for recorded discs competition flared up again resulted in to incompatible standards (“+” and “-”) •The two camps also each created their own a patent pool – DVD3C and DVD6C •Being more visible now, the pools for the first time sought formal regulatory approval by asking the US DoJ to issue a Business Review Letter (‘comfort letter’) •DVD3C introduced a per-batch licensing system to combat licensees that defaulted •While the pools did easy the licensing process, a producer needed to take licenses from at multiple pools (DVD3C, DVD6C, but typically also MPEG-2 pool, and licenses for Dolby Digital, UDF/ISO/IEC 13346, and for CD-Audio and possibly CD-R.
  12. 12. Pools in the optical disc industry THIRD GENERATION OPTICAL DISCS – Blu-ray •As commercial stakes were continuing to grow, competing standards appeared for the successor of DVD, a generation to store high definition movies •This time, market pressure did not result into a merge of proposals, and competing technologies fought their battle in the marketplace • Blu-ray by Sony, Philips, and Panasonic, with support of Samsung, Pioneer, LG, Sharp, Hitachi, Mitsubishi, and Thomson. The Blu-ray supporters created the One- Blue pool. • DVD-HD, developed by Toshiba, NEC, and Sanyo. After a period of market competition, its success was limited and the standard was withdrawn from the market. But the DVD-HD developers also owned patents essential to Blu-ray and created a separate pool, known as the BD Premier pool. • Since Blu-ray players are usually backward compatible with DVD and CD, this created even more fragmentation in pools and non-pooled patents. • Concerned with this fragmentation, the Blu-ray pool pioneered with the ‘pool of pools’ concept by trying to pool all necessary technologies, including previous generations, into a single, one-stop shopping process
  13. 13. Pools in the optical disc industry With a total per-unit fee of only US$ 9 (compared to US$ 25 for the separate pools covered), the One-Blue was found attractive by licensees and quickly gained momentum
  14. 14. Pools in the optical disc industry
  15. 15. • Main 2G (GSM) mobile standard faced considerable licensing problems, including exclusion of players (see Bekkers, Verspagen & Duysters, 2001) and alleged prohibitive fee levels • For 3G (UMTS/W-CDMA), a high profile pool forming process was established in parallel with standardization efforts • Initially 5 or 6 meetings per month, high level involvement and commitment, including almost all leading firms in the business. • By many seen as a ‘royalty controlling scheme’ with ‘a cap (maximum) on royalties’ , which discouraged firms with revenue-based licensing model and/or high value patent portfolio • Considerable delay with obtaining green light from three leading competition authorities (US, EU, Japan) – described as ‘deliberate obstruction’ by political / commercial forces • Despite lip service of many firms supporting need for pool, only very few eventually committed themselves as members once the pool went live. The desire to cross- license and obtain higher degree of control was stronger than the desire to have a pool Pools in the telecommunications industry
  16. 16. • While the pool is operational, it only covers a minor fraction of all patents essential to the 3G standard • While two 4G pools were launched recently, their coverage is very low too 0 10 20 30 40 50 60 Sept.1998 January1999June 1999Sept1999Late 1999M id 2003M id 2004Late 2012 (Any - not split) North American Asian European Pools in the telecommunications industry
  17. 17.   Optical drive market Mobile telecommunications market Ratio of technology implementers vs. patent owners Implementers >> patent owners Most implementers are also patent owners The conviction that a pool facilitates market growth There was a believe that a smooth, one- stop shop mechanism to make licenses available would facilitate adoption by vendors and, eventually, by customers. One winning standards, independent of pooling efforts; market size considered autonomous The role of bilateral licensing and cross- licensing No specific need was perceived for bilateral licensing. Strong desire for bilateral (cross) licensing. The motivation of pool initiators to reduce overall licensing costs Reduction of licensing costs was not a main driver Reduction of licensing cost was a main objective from day one. Comparing the cases
  18. 18. In the paper, we offers a generic framework to guide strategy and innovation managers in establishing and managing a patent pool through the four phases of its lifecycle. Designing and managing patent pools y
  19. 19. The future of pools – three relevant trends. 1). Rapid growth in patenting intensity, and increase of the number and diversity of patent holders for any specific technology. 2). Increased convergence of functionalities into devices and products. Whereas traditional technologies could often be exploited as a device or service in its own rights, today’s devices often incorporate many differ- ent technologies. 3). The increasing use of IT and telecommunications standards as enabling technologies in larger systems including smart grids, logistics and transportation, personal health, and the “internet-of-things” As result of these three trends, many of tomorrow’s markets will have to deal with a more diverse and more fragmented IPR market, both in terms of sellers (patent owners) and buyers (technology implementers). This increases transaction costs and renders current practices of bi-lateral or cross licensing increasingly ineffective. Patent pools will be more and more recognized as an attractive model to facilitate these IPR markets, benefiting technology developers and technology implementers alike. Designing and managing patent pools y