Why Is the LTE IPR Agreement Such a Tough Sell?

An LTE patent framework is being pushed by a handful of companies to restrict the total IP licensing fees to single digit percentage of the handset ASP. Companies include Alcatel-Lucent (ALU), Ericsson (ERIC), NEC Corp. (NIPNY), Nextwave (WAVE), Nokia (NOK), Nokia Siemens Network and Sony-Ericsson (SNE). The announcement further calls upon interested parties to join this alliance to ‘stimulate early adoption’ of LTE. Although I can see the reasons for such an arrangement, I am not very optimistic about its large-scale success.

Part of the problem with LTE or any OFDMA-based standard is the diffused nature of the IP. Many more companies have a stake in the IP pie now than for example, in WCDMA in which Qualcomm (QCOM) has close to 30% of essential IP. So, if there is no upper bound on the royalty rates, the costs can potentially be more prohibitive than the existing CDMA standards and will have a direct impact on the handset ASP. You can read more about my OFDMA, LTE and WiMAX coverage here and here

Another thing to note is that this has been tried before in the 3GPP with WCDMA way back in 2002. Nokia, NTT Docomo (DCM), Ericsson and Siemens (SI) were among those who initially agreed to cap the cumulative royalty at around 5-6% of the handset ASP. The move did not generate widespread interest. Qualcomm, InterDigital (IDCC) and others with a strong IP presence have stayed away from such deals and are now reaping rich rewards. The WCDMA total royalty rates have hence remained much larger than the envisioned single digit numbers. You can read more about the IP strengths of Qualcomm and InterDigital here and here.

The handset vendors and carriers want to make sure that no one company becomes an Achilles heel in the productization and large scale proliferation of these technologies. However, even if chipset vendors join the bandwagon, these standards will still run the risk of an outsider company staking its claim on essential IP. So, while the 3GPP has tried hard not to repeat the 'Qualcomm effect' again for LTE, it will be interesting to see how this strategy plays out given the more diffused nature of OFDMA IP.

Disclosure: The author was long Qualcomm and InterDigital at the time of writing.

Comments

[RobertSyputa]

"So, if there is no upper bound on the royalty rates, the costs can potentially be more prohibitive than the existing CDMA standards and will have a direct impact on the handset ASP."

That is the fear of widely held IPR, that the field can become a 'patent thicket' in which companies that wish to supply products must take licenses from hundreds of individual companies and that aggregate royalties this exceed a level that would lead to widespread market adoption.
But several factors combine to make that unlikely:
1) Aggregation of IPR and defense into semiconductor companies.
2) Recent higher court rulings that instruct lower courts to consider the field of IPR in awarding settlements. This makes the dilution of IPR in a large number of patents held by many parties an argument that individual patents/portfolios hold relatively diluted value. That tends to deter the willingness of parties to pursue patent infringement cases.

The yet unnamed group is made up of 3G-LTE suppliers who have the ulterior motive of receiving revenue for their IPR while holding royalties to a level that is favorable to competitive adoption. It is not just meant to provide confidence or to keep rates unnecessarily low.

[VijayNagarajan]

Robert,

Those were very interesting insights. Receiving meaningful revenue itself is a fair objective. This also brings up another interesting point. We may then have more than one group which aggregates IP meaning that unlike the 3G standards where individual companies go against each other, we may have these different groups litigating against each other. Any thoughts?