Intellectual Property Licensing as a Business Model in the Mobile Industry

Intellectual Property Licensing as a Business Model in the Mobile Industry

In 2017, mobile operators will generate over $1.2 trillion in service revenues worldwide. Even more impressive is the fact that the overall mobile industry will generate over $2.2 trillion globally. The primary reason for this growth is the empowering of new business models and disruptions across industry verticals. The combination of faster broadband networks, continuous rollout of new devices, and the insatiable consumer appetite for applications and new services has transformed the global GDP in a short amount of time. At the core of these disruptions are the new network and device capabilities that continuously push the boundaries of what’s possible. Additionally, competition across the board has forced not only the leading players to be constantly on the edge of innovation but has also allowed new entrants to quickly ramp up and scale to disrupt and transform markets unlike at any time in the human history.

There are a couple of topics that need a deeper discussion and a broader understanding than is typically appreciated by many. One is the laborious but necessary standardization process in the wireless industry. Standards allows the industry to rally around the best technology paths/choices. The process ensures most effective and accelerated growth for the entire ecosystem. Standards ensure scale. Standards accelerate the market growth. Standards allow future-proofing of products. The reason the phone you buy in UK works in Guatemala is because our industry assiduously works on standardizing network evolution and interfaces. Without this critical process, the industry will be in a mess and the progress will be hampered by incompatibilities and interoperability challenges. The reason the likes of Facebook and Google can attain instant scale is helped in no less part by the uniformity of the underlying platform of networks and devices. The application layer doesn’t have to work worry about too many permutations and combinations around the globe. Without the hard work of the 3GPP and other relevant industry bodies, we might have not seen the accelerated growth in the mobile industry over the last two decades.

Secondly, the notion of Intellectual Property (IP) licensing has been deeply embedded in our industry. Given the complexity of various parts and pieces that make up wireless network and mobile device, it is natural that different companies will focus on diverse areas to establish their expertise and value proposition. Other industries that rely on innovation and invention like pharmaceuticals, transportation, and IT are structured similarly. There is heavy risk in pursuing R&D. Some projects yield high return but many don’t. Additionally, it is not an efficient use of capital for companies to pursue similar R&D projects or expertise. Each company decides what they are good at, what they should invest in, what are the attractive product-market gaps, and how to fill them. Typically, that involves licensing of IP from 3rd parties or even competitors because it makes business sense. That’s why IP licensing is quite common in the mobile industry across domains.

IP licensing also allows new entrants to scale quickly. Five years ago, no one had heard of Oppo and Vivo. In 2017, they are among the top 5 handset manufacturers behind Samsung and Apple. The handset cost equation involves several components like supply chain for R&D, components and parts, product development, manufacturing, branding, marketing and sales, and distribution before the device gets into the hands of the consumer. For new comers, it might not make sense to spend a lot of capital upfront on R&D but rather squeeze margins in developing proficiency in other segments like distribution or sales or focus on bringing the latest featureset to the market the quickest. By managing the end-to-end cost equation well, startup OEMs are able to get some margin breathing room to expand their business. As such, it makes more sense for them to license pieces of technology that their R&D is not going to produce. Additionally, since some of the players are just coming late to the market, it’s more cost effective to license existing IP than to build their own.

Given that these issues are not new, industry participants and standard bodies have had a framework of Fair, Reasonable, and Non-discriminatory or FRAND terms to deal with patent rights amongst industry participants. Under this licensing framework, they are committed to offer access to their IP under FRAND terms. Wireless industry has worked under this umbrella for over the last 2-3 decades around the globe.

The standardization process and the FRAND framework to discuss and license IP go hand-in-hand. Participants have the incentive to contribute to the standardization process and convince the ecosystem to adopt their solutions. The standardization process itself is merit-based which forces the consensus around the best solutions to technology evolution. The FRAND system provides the right balance for essential patent holders to contribute and resolve potential conflicts as they work towards a licensing scheme that works for all. It is important for participants to feel comfortable sharing their inventions and innovations to the pool for the greater good of the industry. This funds the R&D and keeps the industry moving at a breathtaking pace.

The launch of iPhone, Android, and LTE rearchitected not only the wireless industry but also all the ecosystem around it. Uber has shaken up the taxi market, Airbnb the hotel industry, Netflix the entertainment ecosystem, WeChat the Chinese ecosystem, Paytm the Indian ecosystem, and so on and so forth. As we are starting to lay the foundations of Connected Intelligence era with sensors and software helping us program the value chains and consumer’s daily lives, IP’s role will broaden. Would GE or Siemens really want to hire an army of wireless engineers to develop LTE and 5G chipsets or would they rather just license the technology and products to build their own story on top. As the industry is preparing for the 5G network upgrade cycle, the tech ecosystem is also experiencing some other powerful growth curves of AI, AR/VR/MR/Voice, IoT, Robotics, Cybersecurity, Blockchain and much more. The intersection of all these domains and industries will create an unparalleled growth opportunity for new startups, new projects and initiatives that will transform the global economy.

We believe that standardization and IP licensing will be critical pillars on which new products and services are built. To fuel the R&D engine, the innovators must have incentive to keep blazing the way with new ideas that could come from anywhere. The harmonization of these principles around the globe will be essential for the ongoing progress we have seen over the last few years. Mobile will continue to play a critical role in digital transformation and it is important that we create an equitable playing field where new business models and disruptions can thrive.