Publication

Transparency, Predictability, and Efficiency of SSO-based Standardization and SEP Licensing

12/12/2016

A recent study, commissioned by the European Commission, looks at several issues related to standardization including: “patent hold-up”, “royalty stacking”, and licensing practices. The study concludes that long-held SEP licensing practices -- whole portfolio licensing, licensing at device level, broad royalty base (e.g., value of the end-product) -- in the telecom industry are consistent with economic theory, and that there is no reliable empirical evidence on the existence of “patent hold-up” and “royalty stacking”. The study presents potentially beneficial policy instruments to the standardization process: FRAND commitments, ex-ante (-post) disclosure, patent pools, ex-ante (aggregate) royalty caps, and essentiality assessment by third parties.

 

A recently released study commissioned by the European Commission focuses on issues related to the standardization process and considers a number of policy options which might help alleviate these problems. It builds on a widespread consultation from stakeholders to complement the evidence available from the academic and policy discussions, and it proposes as well as assesses practical solutions to the identified issues.

The study begins by highlighting the importance of SSOs -- there are currently about 550 SSOs worldwide, with 190 of them to be Telecom and Electronics SSOs. According to the authors, a medium to large size firm will spend about $50,000 a year to just participate in a single SSO in one year. Even at a likely conservative estimate of 50 members by SSOs, this adds up to more than $13B a year for all SSO participants.

The authors of the study proceed by focusing on different SSO related issues. First, they recognize that there is no reliable empirical analysis of “patent hold-up” and “royalty stacking” within SSO based standardization processes. Concerning “patent ambush”, SSO participants believe that this problem can be caused in principle by non-SSO participants.  Next, the authors provide a discussion about the choice of the standard and they claim that the best standard is the solution that strikes the best trade-off between performance and costs. Finally, they highlight the importance of Internet of Things and explain how crucial it is for the standard-setting and SEP licensing procedures to be simple, transparent, economical and fair.

The study suggests different policy instruments, which can be potentially beneficial to the standardization process: (i) FRAND Commitments -- by emphasizing that FRAND commitments should generally also bind new owners after the transfer of a patent, (ii) ex – ante (total) royalty caps, (iii) ex – ante/post disclosure, (iv)patent pools, (v) essentiality assessments by third parties.

Finally, the study analyzes four different licensing strategies.  The findings can be summarized as follows:

  1. Whole portfolio licensing: The study concludes, based on feedback from stakeholders -- including SEP implementers -- and lack of strong theories of harm, that there is no need for SSOs, or anybody else, to impose rules regarding the bundling of SEPs and non-SEPs.
  2. Patent pools:  They are a potentially powerful arrangement that can limit or even resolve the stacking issue and can save on transaction costs, they are not a panacea though. Hence, it is not recommended that SEP-holders be required to join a pool.
  3. Royalty base: In economic terms, there would seem to be little sense in mandating the type of royalty base that should be used in SEP licensing. In particular, imposing a “smallest tradable component” rule would be hard to justify. For example, if SEPs contribute to a very substantial share of the value that consumers place on the final product, the use of a broad base (e.g., value of the final product) is appropriate.
  4. Vertical level of licensing: It is not clear at all that any kind of overarching rule would be useful, as the vertical level of licensing should depend on the structure/features of the underlying industry. For instance, licensing the end user in non-telecom industries (e.g., car manufacturers) deserves serious attention. Negotiations and enforcement costs are clearly minimized by licensing the component manufacturers rather than the final users. That being said, the authors admit that it would be premature at this stage for the Commission to take a position on this issue.
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