Patent thickets and litigations will shatter 5G developments

1.1 Revisiting the patent thickets of the telecommunications industry

Patent thicket concerns never looked so real as for 5G, which is more complex, patented, and fragmented than older cellular standards. 5G relies on many different technologies, some employed by older generations of standards ensuring backwards compatibility, while others are new, such as a new radio interface, massive multi-input multi-output or heterogeneous cells

An increasing number of companies are declaring 5G SEPs to the relevant Standard-Development Organisations (SDOs), mainly to ETSI, with SEPs for older generations re-declared as 5G SEPs. According to one estimate, declared 5G SEPs surpass 95,000, compared to the 4G 45,000 and 3G 39,000 declared ones. The ETSI database alone contains 25,070 disclosed 5G SEP families. The trend of declared families is exponential, from 12,000 in March 2019 to more than 20,000 in June 2020, and many more still to come in parallel with further releases of 5G specifications by 3GPP. As a result, 5G SEP figures eclipse those of 4G, which had less than 6000 declared SEPs in a comparable early time such as 2013. Admittedly, not all declared SEPs are truly essential because of the well-known over- declaration problem. Some studies estimate essentiality ratios of declared 5G SEPs to vary between 20 and 30%, with significant deviations by SEP holder. Nevertheless, even using essentiality filters, the resulting numbers of actual 5G SEP families are still in the four digits figure, such as over 1500 5G SEP families each for LG, Nokia, Huawei, and Samsung as of 2019.

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However, more important is the number of SEP owners. Even with many SEPs, patent thicket concerns would not arise if a few entities would hold them since implementers could successfully identify and negotiate with those few patentees. However, 5G SEPs ownership is also highly fragmented. Estimates are that over 30 companies declared 5G SEPs back in 2019, doubling in 2020, exceeding 100 as of February 2021 and growing with new standard releases. Although the ownership is highly skewed, any company with a single true 5G SEP is a potential gatekeeper to the diffusion of 5G.

The disaggregated ownership of complementary SEPs raises the royalty stacking concern, where individual SEP royalties can stack up, making the royalty excessive in the aggregate. Economists predict that an aggregate price would be higher when complementary assets are priced independently than if a monopolist prices all complementary assets together. Such an issue, known as the Cournot complements problem, depends on double marginalisation where each licensor adds its margin and maximises its pricing independently of complementary suppliers. Currently, the top five 5G SEP owners have announced their 5G royalty rates ranging from $0.36 to $13, already producing a stack of about $25 for a $500 phone (Table 1).

While the announced 5G SEP stack may be justified by the underlying value of the technology and is not insurmountable in itself, if the remaining hundreds of 5G SEP owners start monetising SEPs, a prohibitively high cumulative royalty can ensue. Moreover, each 5G application sector perceives the royalty stack differently. For example, $25 might be an appropriate royalty for devices using 5G fully, but hardly be suitable for other products that use only limited 5G functionalities – like smart utility meters.

Moreover, other factors complicate SEP licensing in the IoT. The IoT devices will not only use 5G and other connectivity standards like Wi-Fi or Bluetooth but will also cover many different standards for quality, cybersecurity, interoperability between IoT devices and cloud services and more. The myriad of standards exacerbates the IoT patent thickets concerns. Additionally, firms coming from diverse IoT industries may have little experience with SEPs or divergent IP licensing practices than the telecommunications industry. Most IoT companies will be SMEs with no or limited IP knowledge and lacking dedicated licensing budgets. Thus, the transaction costs of obtaining bilateral licences for 5G and other IoT related standards may be prohibitively expensive for many IoT implementers.

2.2 The infringement jungle in the IoT

Conversely, SEP owners will experience a 5G patent infringement jungle. As seen, 5G applications go beyond previous generations of cellular standards, making it the first general-purpose mobile technology, useable by diverse smart objects in any industry. The sheer plurality of implementations and uses will create mass SEP infringement problems, with patentees having to identify, negotiate, possibly sue, and conclude bilateral licences with every IoT manufacturer from different industries and countries. Such a bilateral licensing model becomes prohibitively expensive and practically unfeasible.

Moreover, many 5G implementers are either too big to be enjoined in every territory of infringement (the ‘lions’ of the jungle) or too small to be worth the cost of a lawsuit (the ‘ants’ of the jungle). Implementers would also be reluctant to take licences unless all their competitors are licensed as well, otherwise risking cost-disadvantages due to higher licensing costs than their unlicensed com- petitors. Consequently, implementers may rationally hold out from concluding licenses, raising patent enforcement costs to SEP owners, and diminishing innovation returns from R&D.

The first licensing disputes of the 5G SEP infringement jungle have already started in the automotive sector, where cars are becoming “smartphones on wheels”. One study estimates that by 2023 nearly 70% of new vehicles worldwide will be shipped with embedded connectivity. The conditions for licensing 5G SEPs produce tensions since SEP holders and automakers disagree over royalties for cellular connectivity of connected cars. Since late 2018, patent infringement lawsuits against automotive companies, such as Tesla, and competition law complaints against cellular SEP holders, such as Nokia, were initiated globally. Licensing disputes are only likely to escalate in other IoT industries and products implementing 5G.