July 27th, 2005
Shining example of why patents and standards don't mix
I’ve routinely used ZDNet as a bully pulpit directed at both the sellers and buyers of technologies who look to establish or adopt certain standards that have patents connected to them. When a proprietary (often patented) technology earns the status of de facto standard (aka: practically unchallenged market dominance), the licensor of that technology (usually the patent holder) is basically afforded a legal monopoly and an unprecedented amount of market control.
To put a recognizable face on this issue, just consider the control that hundreds of thousands of businesses and organizations turned over to Microsoft when they became so addicted to Microsoft Office that there was no way out. Documents couldn’t be easily or perfectly converted to an alternative. Macros weren’t portable. The list goes on. Then, when Microsoft decided to change the licensing cost, those people couldn’t say boo. Who was in control? What about when those products had security problems? How free were they to go out and get a different, perhaps more secure product? Well, of course they were free to do so. It’s a free world. That is of course until the CFO gets a look at how much it will be to convert. Suddenly then, the world isn’t so free any more. It’s cheaper to suffer at the hands of a patent holder than it is to switch. Now, multiply your situation by the hundreds of thousands of others and you can see why it’s pretty cush to be the patent holding vendor in such a situation. By focusing on the use of unencumbered standards in your IT strategy, you can avoid such discussions with your CFO and put the person who should be in control of your IT in the first place in control of it: You.
So, it should come as no surprise that "I told you so" was echoing in my head when I read a story (see The 3G handset quandary) reported by News.com’s Ben Charney about how handsets with Qualcomm’s patented wCDMA technology in them were going up in price rather than down. Near the bottom of the story, the second to last paragraph goes like this:
Qualcomm is facing pressure to lower wCDMA handset prices mainly because the chipmaker owns many of the standard’s patents. Licensing these patents to manufacturers has become a big business for the company, accounting for about 36 percent of the revenue it generates through all its licensing agreements with manufacturers.
But it’s at the beginning of the story where the effect of patents on the wCDMA standard is being felt. Charney reports "The increase, from $212 to $215, illuminates the cell phone industry’s failure so far to make an important piece of its future more affordable to the mass market." Imagine if we had to pay a penny every time we invoked the HTTP protocol (the protocol that handles communication between our Web browsers and all those Web sites)? Imagine if we were OK with that (we shouldn’t be) but then the patent holder raised the price to 2 cents per HTTP transaction?
wCDMA stands for Wide-Band Code Division Multiple access. It is, by virtue of some expensive network upgrades that are already taking place around the world, the ultimate 3G successor technology (rated at up to 2 mbps) to that which the current GSM(voice)/GPRS(data) providers (in the US: T-Mobile and Cingular) are using. In other words, much the same way users got addicted to MS-Office to the point of no return, the ubiquity of wCDMA is fait accompli.
Wouldn’t it be nice to be Qualcomm right about now and to know that you’re going to collect a royalty from every handset that gets sold by T-Mobile, Cingular, and other wCDMA-based cellcos? Or let’s just say you’re Qualcomm and you want to do the right thing by keeping the royalties on your technology down to some break-even point where you’re really not profiting. What happens when the economy starts to contract and profits start to falter? What are your choices if you’re a public company and shareholder value is your number one prioity (far ahead of "doing the right thing"). Not only is every entity down the line in Qualcomm’s food chain subject to the whims of Qualcomm’s decision making, there’s that other price — the one where it’s literally impossible for someone to start the next Nokia out of their garage because of how stifling to that person’s innovation the royalties on the technology are.
I’m not saying that Qualcomm is intentionally abusing it’s patent. What I am saying is that Qualcomm’s control over what others pay to use the technology is a perfect example of why patents (at least ones that are open to offensive use.. in other words, not ones that come with some sort of patent grant) don’t mix very well with standards. Whether they intend to abuse it or not, the patent holder ends up with far too much control and the licensees of that patent end up with all the risk. Tsk tsk on the International Telecommunications Union for ratifying wCDMA as a standard (under the name IMT-2000 direct spread).
