Department Of Industrial Policy Promotion—India

New Title To Go HereAssessing the Economic Case for Patents:

Perspectives from the ICT Industry

GMU-CPIP IP and Global Prosperity 2016

Dr. Kirti Gupta

Qualcomm Inc.

The Fundamental Challenge of Wireless Communications

Wireless communications involve transmitting and receiving radio signals over portions of radio frequency spectrum allocated by regulatory bodies

The technologies incorporated from 1G to 4G standards are all targeted towards optimizing usage of scarce spectrum

Efficient usage of radio frequency spectrum

Investment in Technology Standards Years in AdvanceEach new generation of mobile devices and networks takes roughly a decade of risky R&D to invent,

and then collaboration among engineers from across the industry who jointly develop the standards

1980 1988 1995 2002 20142008 2020

• Regional Systems

• Digital Voice

• Simple Data

• First Global Systems

• Mobile Broadband (High-speed Internet)

• Apps Enabled

• Streaming Media

R&D Commercial

1G

2G<0.5 Mbps

Enhanced voice

Email and mobile internet

Applications enabled

NOT POSSIBLE: Roaming, text, email, apps, or streaming media

2010: 5G TECHNOLOGY

Millions and billions of small devices

wirelessly connected. Smart cities,

smart homes, mobile enhanced

infrastructure, and more.

• New Paradigm

• Internet of Things (IoT)

New business modelsFirst data ratesStreaming media at high speeds

Digital voice + textInternational roaming enabled

Analog voice

3G63+ Mbps

4G300+ Mbps

5G

2002: OFDM2009: LTE REL 8

2011: REL-A 10

2000: CDMA 2000 1X2000: WCDMA REL99

2002: EV-DO REL 02006: HSDPA REL 52007: HSUPA REL 62009: HSPA + REL 7

1997: EV-DO

1998: EV-DV

1995: CDMA

IS-95A

1987: GSM

1988: CONCEPTION OF

CELLULAR CDMA

• Non-Interoperable Systems

• Analog Communications

As Wireless Technology Advances to Increase Supply of Broadband…

Demand for Mobile Transmission Evolves Toward a World of Data

Source: Ericsson's Mobility Report (2007-2015)Source: Compiled from major 3GPP releases including: GSM/EDGE, WCDMA Rel-99,

HSPA, HSPA+, LTE Rel-8-12 at www.3gpp.org

00

500

1,000

1,500

2,000

2,500

3,000

3,500

2,000

3,000

1,000

4,000

5,000

6,000

2007 2008 2009 2012 2013 2014 2015 20161996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Voice Data

~12,000X peak download speeds between 2G and 4G

Voice and Data Usage in Mobile Networks 2007-2016Peak Data Rates for Mobile Networks in Mbps

14.4 28 42100

300

600

3000Mbps

6,246% growth in data traffic between 2007 and 2016

0.40.2

2010 2011

Case Studies: Wireless System Inventions Enable New Platforms

• Assisted GPS

• High Data Rates• Mobile Payments

• Multimedia, Audio,

Video, Graphics• Cellular Modem 3G/4G

• Camera

YouTube($1.65 Billion)

Phone Base Station Servers in Cloud

Uber($62.5 Billion)

• Multimedia, Audio,

Video Graphics• High Data Rates

• GPS Positioning

• Camera

Pokemon Go($160 Million)

Royalties as a Percentage of Total Mobile Industry Revenues Generated by Enabling Technologies

Phone Base Station Servers in Cloud

Licensing of top 5 SEP ownersMobile industry GDP contribution

Comparing against the global mobile industry revenues,

licensing royalties account for a fraction of the cost

Source: GSMA – Mobile Industry Revenues; SEC Filings – Licensing Revenues

$3.1TMobile Industry Contribution to GDP (2015)

$11BLicensing Revenues of top 5 SEP Owners99.65%

0.35%

Types of standards

Types of standards (but of a very different kind)

The Mobile industry is one of the most R&D intensive

27%

23%

14%

13%

12%

8%

8%

6%

5%

4%

4%

4%

3%

2%

2%

1%

0 5 10 15 20 25 30

Mobile non-silicon component manufacturing

Health care technology

Mobile silicon component manufacturing

Software and Internet

Mobile network infrastructure suppliers

Pharmaceuticals

Mobile IP innovators and component design

Biotechnology

%

Chemicals and energy

Consumer products

Mobile network operators

Industrials

Automobile manufacturers

Aerospace and defense

Mobile handset makers

Computing and electronics

Industry R&D spend as a percentage of Revenue (%, 2013)

Sources: Boston Consulting Group, “The mobile revolution: How mobile technologies drive a trillion dollar impact” (2015) (based on data from Ovum; Gartner)

The Mobile Industry Technology Development Stages

The stages of development in this industry include:

Investment Risk:

Medium RiskMarket adoption unknown

Lower RiskMarkets adopt technology

Highest RiskInter-standards competition& market adoption unknown

Standardized technologyis developed

Standards-compliant productsare developed

Interoperable networksare deployed

Gupta, Kirti. "Technology Standards and Competition in the Mobile Wireless Industry." Geo. Mason L. Rev. 22 (2014): 865.

R&D Investment is risky

Some Highlights of the SEP/FRAND DebateSuggested theories of harm

R&D and Patenting

SSOs set Standards

Manufacturers Invest

Patent holders set

royalties

Product market

competition

STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5

• Patent owners make a commitment to license their SEPs on Fair Reasonable and Non Discriminatory (FRAND) terms.

• However, under this model, concerns have been raised about patent holders charging “excessive royalties” at Stage 4.

The Premise for “Patent hold-up” and “Royalty Stacking”

Source: Gelatovic and Haber (2016)

Some Highlights of the SEP/FRAND DebateSuggested theories of harm

R&D and Patenting

SSOs set Standards

Manufacturers Invest

Patent holders set

royalties

Product market

competition

STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5

Ex- Ante Ex- Post

Patent holder

faces competition

Competition

is eliminated

“Patent hold-up”

“Royalty Stacking”

Ex-post Opportunism

Standard is Established (SEPs)

Manufacturers have sunk costs

Some Highlights of the SEP/FRAND DebateSuggested theories of harm – Problem 1: Issue with underlying premise

R&D and Patenting

SSOs set Standards

Patent holders set

royalties

Manufacturers Invest

Product market

competition

STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5

The Premise of ex-post licensing rates is incorrect

For e.g.: Royalty rates for 4G LTE were announced prior to widespread deployment of the technology

Source: Stasik (2010), ETSI (2010)

Some Highlights of the SEP/FRAND DebateSuggested theories of harm - Problem 2: Limited Model

R&D and Patenting

SSOs set Standards

Manufacturers Invest

Patent holders set

royalties

Product market

competition

STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5

Ex- Ante Ex- Post

Patent holder

faces competition

Competition

is eliminated

“Patent hold-up”

“Royalty Stacking”

Ex-post Opportunism

Standard is Established (SEPs)

Manufacturers have sunk costs

Some Highlights of the SEP/FRAND DebateSuggested theories of harm - Problem 2: Limited Model

R&D and Patenting

SSOs set Standards

Manufacturers Invest

Patent holders set

royalties

Product market

competition

STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5

Ex- Ante Ex- Post

Risk before R&D sunk

cost: Will the standard

succeed?

Competition

across and

within SSOs

A particular

standard

succeeds

Standard is Established (SEPs)

Manufacturers have sunk costs

Standards adoption unknown

Inventors have sunk costs

“Patent hold-out”

Ex-post Opportunism

“Reduced Royalties”

Some Highlights of the SEP/FRAND DebateSuggested theories of harm – Problem 3: Evidence from the market?

R&D and Patenting

SSOs set Standards

Manufacturers Invest

Patent holders set

royalties

Product market

competition

Patent holder

faces competition

Competition

is eliminated

“Patent hold-up”

“Royalty Stacking”

Ex-post Opportunism

Standard is Established (SEPs)

Manufacturers have sunk costs

Ex- Ante Ex- Post

Should see

impact on

product market

competition

Evidence From the Mobile IndustryReducing consumer prices as number of SEP owners increase

Average Selling Price and Number of SEP Owners (1994-2013)

0

50

100

150

200

250

300

350

400

450

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Average Selling Price of Handset SEP Owners

130

123

116

110

105101

95

8984

74

68

58

49

38

3230

19

742

Source: Gelatovic and Gupta (2015), “Royalty Stacking and Standard Essential Patents: Theory and Evidence from the Mobile Wireless Industry:, Hoover IP2 Working Paper

Evidence From the Mobile IndustryIncreasing market entry and reducing concentration as number of SEP owners increase

Number of firms and average sales per firm (1992-2013, thousands of 2013 $)

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

19

93

19

92

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

Ave

rage

sal

es p

er f

irm

3G Cell phones

introduced

iPhoneintroduced

4G Cell phones

introduced

2G Cell phones

introduced0

5

10

15

20

25

30

35

40

45

50

Average Sales per Phone Manufacturer Number of Phone Manufacturers

Nu

mb

er o

f fi

rms

Source: Gelatovic and Gupta (2015), “Royalty Stacking and Standard Essential Patents: Theory and Evidence from the Mobile Wireless Industry:, Hoover IP2 Working Paper