The pursuit of profit by one industry faction at the expense of another should not be dictating policy, but that is what’s often happening at the nexus of intellectual property law and antitrust law. 

Some large and influential companies in the U.S. and elsewhere want governments to help them lower their patent-licensing fees. Such fees have funded technology investment that enables, for example, the enormous success of the smartphone sector, including its diverse range of industry participants and the extensive adoption by 1.75 billion consumers worldwide. That certain major vested interests at home and abroad have the common objective of undermining patent licensors is no justification for competition authorities to accede by intervening in the marketplace. 

The stakes are high, and smartphone patent licensing is contentious with various disputes in commercial litigation and antitrust around the world, including venues in the U.S., Europe and Korea.  

Smartphones are particularly rich in intellectual property -- including standard-essential patents that cover wireless, computing, audio and video technologies -- and markets for these technologies have functioned very well for consumers and suppliers. Yet the licensing fees and litigation costs are relatively small in comparison to the enormity of a sector with $412 billion in mobile handset sales revenues and $1.13 trillion in carrier services revenues.

Consumers have benefitted from economic specialization within the mobile phone sector as most of the companies who led in development of standard-essential technologies -- including Alcatel, Ericsson, Motorola, Nokia, Qualcomm and Siemens -- stopped producing phones. New entrants to the mobile phone business have exploited low barriers to market entry with open standards and the easy availability of technologies required to build substantial market shares. Apple entered the market in 2007 with little or nothing in standard-essential patents and yet has performed extremely well. The company’s profit margin in the last quarter of 2014 was 40 percent, while IHS estimated the margin on an iPhone 6 could be as high as 69 percent. Samsung advanced to global leadership in 2012 by switching focus to smartphones including its Galaxy models in 2009. Mobile phones have since contributed up to 60 percent of Samsung Electronics’ operating income. Xiaomi shot from market entry to smartphone leadership in China within three years. In the last few years, dozens of other manufacturers have entered what is a highly competitive and innovative market. 

Five companies with patent licensing programs— Alcatel-Lucent, Ericsson, InterDigital, Nokia and Qualcomm—continue to develop and contribute most patented technologies to mobile communications standards that include 2G, 3G and 4G LTE. Their research and development expenses of $17.2 billion significantly exceed their intellectual property licensing fees totaling only $10.6 billion in 2014, according to the companies’ public disclosures and audited annual reports.  Smartphone product and mobile operator markets are the largest implementers and beneficiaries of these technology developments. Nevertheless, these licensing fees are less than 3 percent of the handset sales revenues and less than 1 percent of mobile service revenues including the mobile broadband data capabilities used for mobile Internet access including video streaming.  

However, mobile technology developers, including those above who are improving 4G LTE and creating 5G for commercial implementation from around 2020, are being undermined by coordinated attacks on their patent licensing-based business models. Under the shadow of pending antitrust investigations, and in some cases interventions, it is nigh impossible to obtain injunctions or import exclusion orders for standard-essential patent infringement  in a variety of leading jurisdictions including the U.S., Europe, Japan and Korea.  

This is exerting enormous downward pressure on patent licensing royalties: it endangers the R&D engines that enabled the smartphone revolution with mobile broadband and other innovations.  Technology product makers are going after short-term gain by dragging their feet in licensing negotiations, even if this provokes patent litigation. Some of these companies are even seeking intervention on royalty rates from their national antitrust authorities. These tactics can be very appealing to implementers – particularly if the worst possible consequences they face for shunning a license are to pay the usual fair price but years later. In the meantime, while implementers make and sell products for profit, licensors are starved of the licensing income they need to maintain their R&D investments and contributions to the standards.

We increasingly hear siren calls to slash patent fees by changing the rules to weaken patent protections. So far, fees are predominately calculated by multiplying a royalty rate times a royalty base, usually the sale price of the product using a technology. Some licensees are pushing to change the way royalty fees are determined by switching the base from the price of, for example, the smartphone to the price of certain chip components. There is no legal precedent for this and there are few, if any, such market “comps” in existing licensing agreements. Moreover, antitrust agencies are ill-equipped to intervene in the marketplace by setting patent fees, including the royalty base and royalty rates. And it is not their place to do so. 

Meanwhile, policy discussions have focused on theories, promoted by parties that would profit from lower patent licensing fees, of alleged patent hold-up and royalty stacking -- which suggest patent holders can charge excessive royalties – despite the utter lack of evidence offered by proponents of these theories. To the contrary, there is abundant evidence showing the smartphone market is open, competitive, accelerating with innovation and technology adoption, and increasingly cost effective for consumers. Unsurprisingly, no party seeking to reduce its royalty costs has yet tried to prove in court the total amount of the alleged smartphone “royalty stack,” or more importantly, that the total amount of royalties they pay to use technologies they did not invent is “excessive.” 

Antitrust agencies should resist pressures from vested interests to regulate the market in favor of one business model over another. Invention companies that rely on patent-licensing fees are outnumbered and outgunned in lobbying by the companies selling products that are in high demand because of the valuable technologies inside them. If this free-market economic balance shifts to favor short-term profits of technology implementers over long-term innovation, consumers will be the biggest losers.

Mallinson is the founder of WiseHarbor, providing expert services in wireless, mobile and telecommunications.