Final Group Project Essential Patents

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Final Group ProjectEssential Patents Standards
David Klingle Henry Sage Rahul Shah Stephen
Stokols
Prepared for Hewlett Packard
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Project Overview

• Work with Hewlett Packard to assess the role of
  essential patents in standard setting
• Theoretical assessment of possible standard
  setting scenarios
• Look at specific examples
• Attempt to generalize lessons learned from
  targeted examples

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Our Approach

• Work with HP contacts to understand project
  objectives
• Target specific areas of focus (e.g. wireless)
• Research standards cases involving essential
  patents
• Attempt to create and categorize standard setting
  scenarios
• Select targeted cases within each category for
  further evaluation and assessment
• Analyze case studies and extract key insights
• Formulate strategic considerations based on key
  insights

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Why Have Standards?

• Help to build a basis in industry for
  development, commerce, and continuity of products
• Helps to create a universal market, a major
  concern in today's global economy
• Offer a means of narrowing the variety of ways
  information is exchanged among different groups,
  allowing synergy between multi-company
  development efforts

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Essential Versus Merely Useful

• Essential Patents are critical to implementing a
  standard and can not be avoided or engineered
  around.
• E.g. CDMA patent portfolio
• Merely Useful patents are not critical to
  developing to a standard but rather are used for
  applications pertaining to a standard or other
  peripheral areas of differentiation
• E.g. User Interface patents

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Essential Patent Scenarios

• Win in market
• Build industry consortium
• Gain endorsement of government agency or major
  Non-Government Organization (NGO)
• Wild cards

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Scenario 1 Win In Market
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Bet Big, Win Big

• No formal standard setting process
• Focused on extracting maximum value from IP
• Define and capture entire market
• Proprietary use of essential patent (at least
  initially)
• Vertical integration Own value chain
• Strive for long-term revenue generation
• Licensing/royalty strategy versus give-away

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Sony Betamax Versus VHS

• Sony was first to video recording market with
  Beta
• Beta was superior to VHS in visual quality
• Sony attempted Bet Big, Win Big strategy
• Sony decided against licensing to OEMs
• Sony forced standards competition versus
  standards cooperation
• Marketplace choose VHS as standard, leaving Sony
  with negligible market share

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Palm OS

• Palm first to market with innovative PDA hardware
  and OS
• Pursued Bet Big, Win Big strategy on Palm OS
  becoming PDA standard
• Palm OS has captured approximately 90 market
  share
• Palm OS licensing revenues have outgrown hardware
  revenues
• Facing competitive backlash from Microsoft
• Over 60 hardware and software partners have
  aligned with Microsoft Windows CE

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Decision Criteria

• Can you own the value chain?
• Hardware/Software, capital, useful/supporting IP,
  etc.
• How big is your lead?
• Speed to market
• Significance of first mover advantages
• What is your competitive environment?
• Direct/Indirect competitors
• Existence of competing standards
• What is your degree of innovation?
• Incremental versus revolutionary

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Key Insights

• High risk/high reward strategy
• Can be capital intensive (vertical integration)
• Can limit options
• Foreclose joint ventures, strategic alliances,
  etc.
• Will create competitive backlash
• Could motivate pooling of resources (e.g. Windows
  CE consortia, VHS partners)
• Can be unsustainable over time
• Need for strategy flexibility
• Open to licensing to maintain standard dominance

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Scenario 2 Build Industry Consortium
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Hedge Your Bets

• Initiate formal standards setting process and
  representative body based on your patent
• Shared usage of relevant essential patents
  (standardized licensing agreements or free)
• Reasonable and nondiscriminatory (RAND) licensing
  terms
• Focus is on commercializing merely useful patents
• Setting the standard is means to an end
• Gain industry support rather than competition
• Need participation of others to make the market

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WAP Standard Setting Royalties

• Unwired Planet initiates WAP Forum (1997) based
  on its essential patent to drive standard setting
  process
• Included Nokia, Ericsson and Motorola
• Currently has more than 500 members
• Forums goal to send content to handheld devices
  over low bandwidth established WAP standards
  (1998, 2002)
• Forum charges high membership fees and uses
  proprietary protocols (based on 23 patents to
  date)
• Patent pools includes merely useful and essential
  patents
• Members pay licensing fees on top of membership

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USB Standard Setting Royalty Free

• Intel initiated a USB forum in 1996
• Included Compaq, Microsoft and NEC
• Added HP, Lucent and Philips in 1999
• Established a royalty-free patent pool
• Successfully built USB market for PCs, in spite
  of superior IEEE 1394 standard (Apple Firewire)
• USB 2.0 adds 1 to the cost of a PC
• Firewire adds 15 (Apple claims royalty up to
  60)

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Decision Criteria

• Can you build the market by yourself?
• Industry recognition
• Sufficient resources, time, etc.
• Right time or too early?
• Is IP incremental or revolutionary?
• Competitive environment
• Existence of competing technologies/standards
• Size of competing companies, market influence
• Where are you going to make money?
• Pooling IP License free OR charge royalties?

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Key Insights

• Lower risk, potentially lower reward strategy
• Slower time to market multiple voices
• Cooperation drives long-term cost efficiencies
• Better for long-term viability of standard/market
• Process/body in place to drive subsequent
  iterations
• Diminishes competitive backlash
• May act as cartel to exclude competing products
• Consortium-based standards can be essential to
  entire industries (e.g. communication and
  networks)

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Scenario 3 Endorsement of Government Agency or
NGO
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Lobby, Lobby, Lobby

• Secure endorsement of standard based on your
  essential patent from regulatory bodies
• Government Agencies (e.g. FCC)
• Non-Government Organizations (e.g. IEEE)
• Independent bodies that set standards for an
  entire industry
• Congressional subcommittee mandating adoption of
  HDTV by 2006
• Institute of Electrical and Electronics Engineers
  (IEEE) for 802.11
• Build consensus with special interest group(s),
  leverage trade association membership, etc.
• Commit/pool resources to maximize representation
• Lobby relevant government agencies to initiate
  action
• Identify appropriate NGOs to assist in standard
  development

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GSM Government Agency

• European Commission establishes European
  Telecommunication Standards Institute to set
  European telecommunications standards
• Until 1989, European countries had disparate
  cellular standards
• GSM established as European standard in 1991
• 20 companies own patents essential to GSM
  standard
• Today GSM is de facto global standard, consisting
  over 600 million users (2 billion by 2005)

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IEEE Background

• The IEEE is a non-profit, professional trade
  association of more than 377,000 individual
  members in 150 countries.
• Through consensus-based standards activities,
  IEEE has more than 860 active standards with 700
  under development addressing multiple industries
• Computer engineering, biomedical technology and
  telecommunications, to electric power, aerospace,
  etc.
• For an IEEE standard to include a patent or
  patent applications, it must agree to
• Not enforce its patent, license without
  compensation, or license under reasonable rates
  with reasonable terms/conditions - RAND

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WLAN IEEE

• Interested companies found sponsoring group at
  IEEE to work on standard in 1990
• Working group formed, major companies support
  efforts (e.g. Cisco, 3COM, Intersil, Lucent)
• Identified essential patents held by other
  entities
• Secured their agreement to license patents per
  IEEE policies (RAND)
• 1999 IEEE officially endorses 802.11b standard
• 802.11 has emerged as the dominant WLAN standard

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Decision Criteria

• Can the marketplace arrive at a standard?
• Example ETSI in Europe versus FCC in the US
• How will you make money?
• Not much revenue is derived from essential patent
• Do you have the time and resources?
• Process is arduous and lengthy
• Significant non-market resources may need to be
  devoted
• Not a hired gun approach (independent groups
  drive results)
• Could a competing technology win-out?
• Barred from competing because of standard setting
• Are you sure your patent lies in the path of the
  standard?
• NGOs are independent and aware of legal issues

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Key Insights

• Government intervention may be inevitable
• Need merely useful patents or other products to
  benefit
• Allows for synergies that can boost market
• Joint ventures, strategic alliances,
  cross-licensing, etc.
• Levels the playing field
• Everyone now has access to your IP no
  discrimination option
• Can be big payoff if own essential IP for
  dictated standard
• Assumes objectivity adds credibility to
  standard
• Minimizes competitive backlash

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Scenario X The Wild Card
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Extortion Hold Up

• Extorting licensing revenues after standard is
  set
• Essential patent value increases as market takes
  off
• Extracting maximum licensing value for the
  essential patent AFTER market and standard are
  launched
• Wielding the patent to shape market in your favor
• Essential patent to multiple, competing standards
• Delaying adoption of one standard to provide
  advantage to your favored standard
• Holding up consortium members
• Hedging bets on the future via both

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Geoworks Extortion After the Fact

• Geoworks held second essential patent for WAP
  threatened to sue in January 2000
• 20,000 licensing fee 10 royalty
• Unwired Planet filed suit in April 2000
  challenging Geoworks patent validity
• Under pressure from WAP Forum, Geoworks settled
  in January 2001
• Royalty free patent cross-license
• Strategic business partnerships

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Proxim Hold-up Extortion

• Developer of WLAN products over past 15 years
• Owns multiple essential patents relating to WLAN
  direct sequencing and implementation techniques
• Lead consortium favoring the HomeRF standard
• Included Siemens, Intel, Compaq, Motorola
• 1995 Signed agreements with IEEE to license its
  relevant patents to assist future development of
  the emerging 802.11 standard
• Agreed to RAND policies per IEEE
• Based on this agreement, the IEEE moved forward
  with work on establishing and implementing the
  802.11 standard

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Proxim Hold-up Extortion

• 1999 IEEE officially adopts/endorses 802.11b
  standard
• Intersil and Lucent manufacture of chips based on
  802.11b
• Sold to Cisco, 3COM, Symbol, Wayport and others
• 802.11b becomes more widely embraced than HomeRF
• Proxims stock deteriorates as 802.11 emerges as
  standard
• 2001 Proxim files suit against those making
  and/or purchasing direct sequencing 802.11b chips
• Suit seeks immediate injunctive relief based on
  patents
• Proxim sends letters to defendants offering new
  licensing terms IF they agree and sign NDAs
  within 30 days
• After 30 days, terms are no longer attractive

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Decision Criteria

• How essential are your patents to the standard?
• How essential are they to market development?
• Are they applicable to multiple, emerging
  standards?
• Can you effectively and profitably hedge?
• Can you delay negotiation of licensing terms?
• Effect on standard setting timeline and the
  marketplace
• Effect on your own business by delaying both
• Can you really define reasonable terms?
• Notion of reasonable is time dependent
• As market demand increases, value increases
  dramatically

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Key Insights

• Hedging is a desirable risk aversion strategy,
  but patents that relate to multiple standards are
  rare
• Attempting to delay licensing negotiations could
  damage much needed market relationships
• Rare that licensees would allow this to happen
• Could kill the standard setting effort from the
  outset
• Could create window for adoption of other
  standard, nullifying the value of essential patent

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Summary Key Decision Criteria

• Where are you going to make money?
• Are there secondary benefits to a consortium
  strategy (e.g. partnerships, complimentary
  technologies, etc.)
• What are the organizations that can influence the
  standard?
• How important is the standard to your overall
  business strategy?
• What are the industry/competitive dynamics in
  marketplace?
• How essential is your patent to a potential
  standard?
• Is your IP/IA incremental versus revolutionary?
• What is the potential for competitive backlash
  based on strategy pursued?
• What are your resources? Can you own the value
  chain?
• Financial, IP/IA, alliances, market power, etc.
• How important is speed in setting standard?
• What is your tolerance for risk?
• What are short/long term implications?

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Summary Key Insights

• Pursue win in market strategy if
• Possess resources to vertically integrate
• IP is revolutionary
• First mover advantage is significant
• Pursue consortium building strategy if
• You are a small player and can get big player buy
  in
• Licensing revenue is less important to business
  than setting standard
• Industry dynamics require broad based adoption
• Potential competitive backlash is significant
• Pursue government/NGO standards approval if
• Complexity of market demands objectivity in
  standard setting
• Players are uniform in their desire for a
  standard
• Confident that your patent lies within standards
  path