The next iPhone may well be the first one without a Qualcomm chip, given the bruising battle between Apple and Qualcomm over the latter’s royalties. While doing that is tricky given how Qualcomm technology drove most improvements in wireless technology —the 3G and 4G we use today is built on Qualcomm technology—how does it matter if the phone continues to deliver? Actually it does, because it lies at the heart of availability of low-cost phones and, in a recent consultation paper on telecom equipment manufacturing, Trai has raised the same issues on the royalty model followed by firms like Qualcomm, Ericsson, etc.
The Qualcomm-Ericsson model is based on open and collaborative work. These firms, and others, work on technology and, once their patents are recognised by 3GPP/ETSI, the industry body for standards, anyone is free to use them—royalties are taken from the final phone manufacturer; there are some disputes with manufacturers who don’t want to pay but, by and large, the model has worked well, which is why there are as many manufacturers of phones as they are today. All licences are issued on FRAND terms—Fair Reasonable And Non-Discriminatory—which means anyone is free to start manufacturing using these patents as long as the royalty is paid; unlike pharma patents which are exclusionary and prevent people from manufacturing using them, FRAND increases the number of manufacturers.
This is where the Apple fight comes in. Apple is arguing, like Intel, Cisco, etc, that the royalty must not be levied on the phone, it should be levied on, say, the chip—in jargon, that’s called the ‘smallest saleable part’. The standards’ organisation for WiFi, IEEE of which Apple and Intel are a part, has moved to this type of patenting and has also said that, even if royalties are not paid by licensees, the patent holder can’t threaten them with a court injunction—Ericsson has got a few temporary injunctions in India against phone makers who refused to negotiate to pay royalties.
Royalty on the chipset and other parts sounds fair, but in reality deals a body blow to the model used by Qualcomm, Ericsson, etc— since the IEEE model makes monetisation of patents difficult, it is likely this will also stifle future open-source R&D. Since the patent doesn’t only reside in just the chip, but also resides in the overall handset or in the cloud, who is to pay for it—if a patent helps utilise spectrum better, for instance, should the chip-maker pay royalty or the handset user, the telco or everyone? It is in order to get over such complications that the 3GPP model levies royalty on the mobile phone. Also, if even a very small royalty is levied on parts like chipsets, the patent gets ‘exhausted’ and so it becomes difficult to charge royalty on the phone since chipsets, etc—any item on which royalty has been paid—will have to be excluded, amplifying disputes between the parties. And if the fear of a court injunction is not there, collecting royalties will be near impossible.
While Trai has not plumped in favour of either the 3GPP or IEEE model, the questions asked in its consultation suggests the IEEE model is preferable. So, after it says, “issues pertaining to the basis for determination of royalty i.e., whether on the value of the Smallest Saleable Patent Practicing Component (SSPPC) or on the net price of the downstream product … remains open ended”, it adds, “please suggest a dispute resolution mechanism for determination of royalty distribution on FRAND … basis”.
Apart from it not being clear why a commercial dispute is Trai’s business, what it needs to keep in mind is that if royalty has to be charged on SSPPC, the open collaboration model, where people build upon the work done by others, goes for a toss. The world then goes back to an exclusionary model where a handful of firms own technology and cross-licence this among themselves—recall, in the 1990s, since there were just a handful of firms (cross-licensing technology to each other), handset prices remained high. Once the 3GPP/ETSI model came into being, the number of manufacturers of chipsets, mobiles, etc, rose and handset prices crashed (see graphic). While Apple etc are arguing the royalties are very high, the fact that handset prices are crashing suggests the 3GPP model is encouraging new players and lowering prices.
An analysis by Ron Katznelson (bit.ly/IEEE-LOAs) shows a dramatic reduction in the number of patents (Letters of Acceptance, in jargon) after IEEE moved to the new SSPPC+no-injunctions policy—they rose from 25 in March-Sept 2009 to 47 in March-Sept 2013 and fell to just 5 in Sept 2016 to March 2017. India can’t want to go down the path of restricting R&D to a handful of big tech giants.
Apart from the issue of keeping handset prices low by increasing the number of manufacturers, if India has to develop its own design capabilities—as part of the local value addition process which, right now, is just 6-7% of the value of the phone—its best bet is the open-source-collaborative approach followed by 3GPP. What looks like an arcane battle over what royalty model is to be followed has large ramifications for an Indian start-up for enabling them to ride the same model which has made their global counterparts successful.