Revisiting the price of innovation

By: | Published: February 19, 2016 12:18 AM

A huge influx of imported ‘phone components’ on zero duty and zero countervailing duty (CVD) and minimum quality standards has disrupted business models for mobile handset industry.

A huge influx of imported ‘phone components’ on zero duty and zero countervailing duty (CVD) and minimum quality standards has disrupted business models for mobile handset industry. While the government is encouraging making-in-India and companies like Sony are initiating manufacturing Android TVs here, most Indian brands still import components, assemble locally and sell at competitive market rates.

High investments on design and development of a product and the cost for making it market-compliant are met by the innovator. Those using a patented technology, made possible because of investments, need to obtain a licence from the patent holder. As a result of a fair return on investments, innovators are able to continue their R&D activities and offer consumer-centric solutions/products. The major beneficiaries are consumers, who can smoothly change from one mobile device to another, and have full access to data-driven apps and ease of exchanging messages, files and pictures with friends and peers irrespective of handsets, at an affordable price. Technology providers give out irrevocable declaration (mainly on reciprocity basis) to make patented standardised technologies on fair, reasonable and non-discriminatory terms and conditions (FRAND). Thanks to the FRAND regime, SMEs can build their businesses on affordable, open, interoperable and high-performance solutions (through standardisation), rather than compete with monopolistic structures, which lock-in consumers.

The government has decided to forego taxes on import of phone components to promote self-employment and MSME growth, which can import duty-free and CVD-free phone components, assemble handsets here, add a mark-up cost and sell at market-driven rates. However, the question is, what happens to Make-in-India in such a case and the due remuneration that should accrue to the holder of standardised technologies?

Standards and FRAND-assured essential patents have supported growth of Indian mobile telephony industry. Standards are adopted to attain economies of scale via lower implementation costs.

A standard-essential patent (SEP) covers technology that is elected purely on ‘technical merits’ and ‘consensus’ (meaning non-substantial opposition) by SSOs/SDOs. Such technologies improve spectral efficiency, and provide improvements in communication capabilities.

It is disappointing that there is a reluctance in paying reasonable remuneration to SEP holders by the implementers of technology. Groups such as the Indian Cellular Association hold that such remunerations will lead to shifting the cost burden on to the consumers, which is a short-sighted view. Consumer interest lies in being able to receive technology upgrades timely, which cannot be accomplished if innovations are not rewarded and recognised. There is an issue of ‘patent hold-out’ being faced where implementers of essential patents either do not pay up royalties or force licensing agreements below FRAND terms. This negatively impacts technology providers who invest billions on R&D. FRAND commitment ensures that the standardised technology does not get locked up.

Often, there are issues revolving around misuse/misappropriation of patent rights by unwilling licensees, which compel the right holder to seek injunction against such infringers. Licences based on FRAND reflect the contribution made by patented technology towards performance of standards and the value it brings to consumers.

As a manufacturer and seller of telecom devices, SMEs must evaluate patents, standards and products in the context of a reasonable remuneration accruing to the technology provider under FRAND terms. They must ascertain whether patents are essential to the standard, and the contribution made by the SEP in performance of standards. Since there is no evidence to royalty stacking in practice and in light of the diminishing arguments for Smallest Saleable Patent-Practicing Unit, the royalty base should be the end-product sale price which is in compliance with various SSOs policies and judicial pronouncements. Since portfolios are dynamic, the validity for entire portfolio of patents can be ascertained in terms of the past (comparable) licences, as recommended by the Delhi High Court in the Intex case. Some of those telecom companies that initially only implemented standards eventually contributed to further evolution of those standards.

SMEs must look at paying up of reasonable remuneration as an assurance to receive technological breakthroughs and upgrades that would further fuel consumer demand. As per the research study by Keith Mallinson (2015), the aggregate total of cellular royalties is below 5% of the total worldwide market for handsets and cellular infrastructure. Evasion of remuneration under FRAND is a short-sighted view that will harm India’s position as one of the world’s largest markets for mobile telephony/infrastructure.

The government has proposed the new DPP and is encouraging private firms including SMEs to make in India and buy in India by giving credit lines and incentivising design and product innovations. Other departments could also take the lead. We expect major breakthroughs from Trai and telecom ministry too. As the tech space is moving towards virtual reality and 5G, accessing and implementing SEPs and technologies globally will be an important demand driver for new products. For SMEs in India, this is a perfect case for deep-diving into the technology landscape with many investors driving the tech-theme forward.

The author is Head of Center, Business Innovation, Indian Institute of Corporate Affairs. Views are personal

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