TOKYO Telecom companies are struggling to complete by the end of June a patent-pooling scheme for third-generation cellular phones that some say is key to keeping equipment costs low. But the sheer number of companies involved is making it hard to muster a consensus on royalty payments and other issues. Moreover, the absence of one key patent holder Qualcomm Inc. in formal negotiations may cause new difficulties.
As of now, about 40 companies are debating the formation of a "3G Patent Platform" under the Universal Mobile Telecommunications System organization. The idea is to create a mechanism to gather and set license and royalty fees for key 3G patents for companies planning to build and deploy equipment for the next-generation cellular standard. Members of the group's executive council came here this past week to meet with top executives of Japanese companies in an effort to nail down the remaining issues.
"It's about 95 percent complete, but some of the remaining issues are significant and they could be showstoppers," said Brian Kearsey, a director at Alcatel and president of the UMTS Intellectual Property Association (UIPA), which is overseeing the patent-pooling work. "There's no guarantee we're going to succeed. It's very difficult, by virtue of the number of companies involved."
Effect on pricing
If the group fails to garner enough support from its members and key players, "the acquisition of the technology would be more expensive," Kearsey said. That's a situation that many service providers, which hope to spark demand by keeping 3G costs in line with current cellular technology, will be likely to wince at.
Kearsey declined to give a full account of the remaining snafus, but he did provide an example of one that was recently resolved and another that is still under negotiation. In the former case, the UIPA decided that patent holders would be barred from forcing potential licensees to pay for their entire 3G-related patent portfolio, a practice known as bundling. Instead, licensees will be allowed to "cherry pick" individual patents they deem appropriate for their own systems.
But while this will ostensibly prevent companies from gouging others for more licensing and royalty fees, companies are still fighting over royalty percentage caps. Currently, the UIPA is proposing a scheme to base royalties on a percentage of the "X-works cost" of a product, plus a standard royalty, which is a percentage of the X-works cost that will vary over time, Kearsey said. He declined to disclose the proposed royalty percentages, saying only that they are "generally acceptable within the working group."
The problem, Kearsey explained, is that some companies derive a significant amount of their total revenue stream from royalties, and are concerned that the royalty cap submitted for consideration is too low. A proposed compromise would keep the royalties at a low level, while giving companies the assurance that they would in turn enjoy a large number of licensees, Kearsey said.
While money matters appear to dominate the discussions, there are still some basic procedural issues to overcome. For example, the group which is made up of companies from Europe, Japan and North America has not decided on whether to seek out an independent third party or form a group comprised of member companies to determine which 3G patents submitted are essential and need to be included in the licensing pool.
(The group did decide, however, to nominate a third-party licensing administrator to handle the commercially sensitive information involved, according to Kearsey.)
Even without a formal decision-making body in place, the UIPA has already been relying on de facto outside arbiters to settle disputes. In the decision to ban patent holders from forcing licensees to buy their entire set of 3G patents, for instance, the U.S. Department of Justice settled the matter by telling the group that the practice would be considered anti-competitive and violate anti-trust laws, Kearsey said.
The wrangling over patent-licensing procedures and fees comes nearly two months after Qualcomm and Ericsson resolved a longstanding disagreement over CDMA interface patents by agreeing on a standard that supports multiple modes of operation.
Even so, Qualcomm (San Diego) is still a wild card in the patent-pooling effort. Qualcomm was a member of the UMTS group when it was formed in February 1998, but deactivated its membership last September, Kearsey said. UIPA still provides Qualcomm with regular reports, and has dispatched UIPA chairman John MacNaughton, a disinterested retired English barrister, to have high-level talks with executives of Qualcomm as well as other companies, Kearsey said. He declined to divulge the outcome of those talks, however.
In a terse response to requests for comment, a Qualcomm spokeswoman would only say that the company is part of the UMTS working group on intellectual property. However, the company does not agree with any of the proposed patent-pooling arrangements, said the spokeswoman.
By June 30, the UIPA hopes to have in place the cumulative maximum licensing costs and an administrative body charged with managing the patents. The patents will cover such areas as terminals, infrastructure equipment, test equipment and all other 3G-related equipment that doesn't fit into those categories.
The group hopes the patent-pooling mechanism will be operational by the end of 1999, when the general International Telecommunications Union standards-making process for 3G phones is due to wrap up. At the very latest, UIPA wants the patent pooling to be settled by early 2000, which would be about a year before Japan's NTT Docomo plans to roll out the world's first 3G cellular service.
"It's important to put in place a mechanism consistent with the commercial time frames," Kearsey said. He added, however, that the patent-pooling mechanism is being set up so it can function without fixed standards in place.
To expedite the process, Kearsey said the UIPA is trying to facilitate a direct dialogue among executives, engineers and lawyers. The group is also trying to build in as much flexibility as possible, such as giving companies a way to depart from the normal licensing terms under special circumstances and taking into account the many preexisting bilateral ties among telecommunications companies. Kearsey's own company, Alcatel, for instance, has agreements in place with Siemens, Motorola and Lucent Technologies, he noted.
But in the end, compromises will have to be made. "We can only succeed if certain companies are willing to accept a solution that is not perfect for their situation," Kearsey said. "If we're able to attract 60, 70 or 80 percent of the owners of 3G technology, we believe we will be successful."