Don't bank on a big agreement on LTE IPR

By Paul Lambert

Don’t expect to see a major breakthrough in IPR with LTE vendors. The companies that dominate in this arena are so firmly entrenched in their opposing attitudes to licensing IPR that only a combination of pressures will bring about change – and gradual change at that. As such, LTE IPR rates will closely resemble WCDMA’s: The sizable reduction operators want to see won’t happen.

That is not my opinion but is a view shared with me by various protagonists in the hidden game of IPR negotiations.
So, what’s behind the statement that LTE IPR will be similar to WCDMA IPR?

Well, at Informa Telecoms & Media’s LTE World Summit last month, several people told me that IPR levels for LTE equipment would be about the same as those for WCDMA, because of the way IPR is handled. Essentially it boils down to a clash of concepts: bilateral negotiation vs. upfront royalty disclosure.

Qualcomm avowedly believes that the IPR rates companies pay each other should be the result of bilateral negotiation. Qualcomm says that no two bilateral negotiations are the same. It has granted about 150 licenses in the 3G arena, and it says that each is different.

The other dominant view is that IPR rates should be the result of a set price that is payable by all potential licensees. To achieve this, in April Alcatel-Lucent, Ericsson, NEC, NextWave Wireless, Nokia, Nokia Siemens Networks and Sony Ericsson announced “a mutual commitment to a framework for establishing predictable and more transparent maximum aggregate costs for licensing IPR that relate to 3GPP Long Term Evolution and Service Architecture Evolution standards.”

The companies say that a reasonable maximum aggregate royalty level for LTE-essential IPR in handsets is a single-digit percentage of the sales price. For notebooks with embedded LTE capabilities, the companies support a single-digit dollar amount as the maximum aggregate royalty level. The parties say the market will drive the LTE-licensing system in accordance with these principles and aggregate royalty levels.
Despite the forces stacked against it, Qualcomm shows no signs of turning away from the bilateral negotiation principles that have benefited the company – and, it says, the industry – so well. To support the latter claim, Qualcomm cites the fact that 3G-chipset prices, an area where it is pre-eminent, have fallen faster than did those for 2G chipsets, an area from which it was largely absent.

But regardless of what Qualcomm says, some operators insist that Qualcomm charges too much for 3G IPR and is still holding back the development of the 3G market. They say this while vowing that they will not allow it to repeat the same trick with LTE.

Of course, they want Qualcomm to charge less for LTE IPR – an area where, like for 3G, it is also expected to be one of the few dominant players – but that doesn’t mean they’re right to expect it.

Under an agreement announced in July 2007, all members of the Next Generation Mobile Network Alliance, an industry body set up by major operators to shape next-generation technologies, agreed to submit claims for IPR royalty rates for next-generation technologies to an independent, trusted third-party notary, such as a lawyer, selected specifically for that purpose.

The third party will aggregate the individual royalty claims that each NGMNA-member IPR holder will claim from licensees for using the IPR holder’s portfolio in association with a specific technology. The value will typically be expressed as a percentage of the price of a mobile phone that contains the IPR.

The anticipated royalty rate for each technology will be the aggregate of the IPR rates supplied to the trusted third party by the IPR holders. Each vendor is expected to simply pick a percentage number that they think they can get, bearing in mind that there will still be some room for negotiation.

But this system – trumpeted at the time as a major force that would bring transparency to the IPR system and, as a result, lower costs – is unlikely to deliver any meaningful reductions in IPR rates for LTE.

There is little hope that the independent notary will work, because all vendors are quoting the highest price, not the one they’ll set in the market, so operators still have no way of knowing what the likely cost of IPR will be.

Because of the huge increase in mobile broadband usage, operators will have to build LTE networks and then wait and see what the IPR system will be, in the hope that it won’t be any higher, and might actually be lower, even if by a small amount.

Pressures are also mounting on Qualcomm. Some investors are understood to be urging Qualcomm management to lower IPR rates to increase sales at the company’s chipset division and to expand the LTE market as fast as possible. There is cautious optimism in the industry that IPR rates for LTE will be just enough lower than those for WCDMA to keep operators happy.