Ericsson is under investigation, and the monopoly of telecom equipment manufacturers backfires

Beijing Business Daily reporter confirmed with Ericsson that due to complaints from related enterprises about Ericsson's intellectual property licensing business in China, the State Administration for Market Regulation recently launched an investigation into Ericsson's related licensing business. For telecom equipment manufacturers, there are already countless lawsuits and investigations involving patents. The 5G era is coming, and for mobile phone manufacturers, if the issue of patent fee standards cannot be resolved as soon as possible, they will need to spend more money on patent fees in the future.

Officially launch the investigation

Ericsson said it will fully cooperate with the investigation and will not make further comments during the investigation. Ericsson licenses its industry-leading patent portfolio based on fair, reasonable and non-discriminatory (FRAND) principles and is committed to strictly following this principle.

It is not clear what specific issues the State Administration for Market Regulation is concerned about in its investigation of Ericsson. However, there have been rumors in the industry that many mobile phone manufacturers have reported to the State Administration for Market Regulation, complaining that Ericsson has violated the Anti-Monopoly Law in the 3G and 4G standard essential patent (SEP) licensing market.

Kang Zhao, editor-in-chief of Operator Finance Network, said that in the early years, the standards of the communications industry were jointly formulated by major equipment manufacturers and chip manufacturers, and most of the patents were in their hands. However, at that time, they all made mobile phones, so they needed to exchange patents with other manufacturers. In fact, it was difficult to collect patent fees, or the collection was not much. "Later, these equipment manufacturers and chip manufacturers stopped making mobile phones, so they dared to charge patent fees to mobile phone manufacturers. The typical example was Qualcomm, followed by Nokia."

Liu Qicheng, editor-in-chief of Communication World Omnimedia, pointed out that in the 2G, 3G and 4G era, Ericsson held a large number of communication patents, while most domestic mobile phone manufacturers started out with 3G and 4G mobile phones, and had relatively few intellectual property patents, so they had to rely heavily on telecom equipment vendors like Ericsson. As the scale of domestic mobile phone manufacturers has grown in the past two years, the patent fees they pay to Ericsson have also increased each year, which has put a lot of pressure on themselves.

"Especially since this year, the overall mobile phone market shipments have declined significantly, the production costs of mobile phones have increased, and the profit margins of mobile phone manufacturers have been further compressed. Therefore, mobile phone manufacturers have no choice but to complain to these patent manufacturers, accusing them of charging too high fees." Liu Qicheng said.

According to data released by the China Academy of Information and Communications Technology, in the first quarter of 2019, the total shipments of the domestic mobile phone market were 76.931 million units, a year-on-year decrease of 11.9%. Among them, the shipments of domestic brand mobile phones were 70.857 million units, a year-on-year decrease of 6.6%, accounting for 92.1% of the mobile phone shipments in the same period.

Xiaomi Chairman Lei Jun admitted at the Mi 9 launch conference that the cost of mobile phones has further increased, on the one hand due to the general increase in component prices, and on the other hand due to the high cost of more advanced technologies and processes.

Telecommunications industry news

In the telecommunications sector, antitrust investigations against telecommunications equipment manufacturers are commonplace. In 2009, the Korea Fair Trade Commission fined Qualcomm 273 billion won for abusing its dominant position in the CDMA modem and radio frequency chip market. In 2013, domestic mobile phone manufacturers collectively complained to the National Development and Reform Commission that Qualcomm was suspected of abusing its market dominance. In 2015, the National Development and Reform Commission ordered Qualcomm to stop its illegal activities and imposed a fine of approximately US$1 billion.

This is the second antitrust investigation launched by the national antitrust regulatory authorities in the field of intellectual property licensing market. In addition, the Shenzhen Intermediate People's Court also heard the intellectual property antitrust lawsuit between Huawei and IDC. All three intellectual property antitrust cases occurred in the field of communications.

Before 2014, Ericsson was the world's largest telecommunications equipment provider. Later, due to the strong growth of Huawei and the merger of Nokia and Alcatel-Lucent, Ericsson's market share declined and ranked third in 2018. However, due to long-term R&D investment, Ericsson had 49,000 patents in 2018, most of which were standard essential patents. According to the IHS Markit report, Ericsson's market share of mobile communication equipment sales in 2018 reached 29%, ranking first in the world.

As one of the main contributors to 2G, 3G, and 4G mobile communication standards, Ericsson has signed patent licensing agreements with many Chinese mobile phone manufacturers, but patent disputes between them have always existed. In 2014, Ericsson sued Xiaomi for patent infringement in India; also in 2014, TCL filed a contract breach lawsuit in the United States District Court for the Central District of California for Ericsson's violation of FRAND commitments in SEP licensing, requesting the court to re-determine Ericsson's 2G, 3G, and 4G licensing rates. In December 2017, the US court ruled to halve Ericsson's original licensing rates.

What’s Changing and What’s Not Changing in 5G

In Kang Zhao's opinion, the mobile phone manufacturers' complaints against Ericsson are not only due to their own economic pressure, but also in preparation for the upcoming 5G mobile phones. "Because China will officially commercialize 5G next year, it is not possible without solving the 5G patent fee issue. And according to the previous statements of several global communication equipment giants and Qualcomm, they all have the right to collect patent fees, then the 5G industry will not be able to continue, and mobile phone manufacturers will become employees of telecommunications equipment manufacturers."

In the face of the future market, hundreds of millions of 5G mobile phones will be shipped, and Qualcomm has announced huge patent royalties. A patent fee is charged for each 5G mobile phone using Qualcomm's core mobile network patents worldwide: single-mode 5G mobile phone: 2.275%; multi-mode 5G mobile phone (3G/4G/5G): 3.25%. Ericsson also announced patent fee standards, high-end equipment is $5 per unit, and low-end equipment is $2.5 per unit.

Huawei, which has a large share in the 5G field, will also announce its own charging plan. A Huawei official said that Huawei's 5G patent pre-sale fee is not charged for the entire device, and Huawei reiterated that it does not blackmail the society and manufacturers. The price is very transparent and lower than the previous 4G patent licensing fee. Data shows that Huawei has signed more than 30 5G commercial contracts worldwide.

However, Kang Zhao pointed out that Ericsson, Qualcomm and others will not only talk about 5G patents. 5G is developed on the basis of 2G, 3G and 4G. Each generation needs to use the technology of the previous generation. That is to say, Qualcomm, Ericsson, Nokia and others will claim when charging fees that 5G also uses the first generation of communication technology and the basic patents of 2G, and that patent fees need to be paid.

Liu Qicheng also said that these patents still exist in the 5G era. Although Chinese manufacturers have more say, the patent fees must still be paid.

"Ericsson is relatively moderate among global communications manufacturers. Qualcomm is the one that has the highest level of protest on the issue of patent fees, and has firmly refused to cancel them. There is no reasonable model on the issue of patent fees. The main thing is to negotiate a suitable ratio. I personally feel that all major equipment manufacturers with patents and chip manufacturers such as Qualcomm should not charge more than 2% in patent fees. They can negotiate among themselves how to distribute this 2% among themselves," said Kang Zhao.

Beijing Business Daily reporter Shi Feiyue