Huawei announces 5G licensing fee standards. Will the patent licensing market change?

Jiwei.com reported that Huawei recently announced its patent licensing fee standards for 5G multi-mode mobile phones: the upper limit of the patent licensing fee for a single mobile phone is US$2.5, and a reasonable percentage rate applicable to the sales price of the mobile phone is provided.

A single stone can cause a thousand waves. With its physical business in an unprecedented predicament, what is Huawei's intention in doing this? As a world-leading 5G patent holder, what impact will Huawei's opening up of fees have on the licensing market?

Apple and Samsung are the first to be affected

In his famous article "The Stars Do Not Ask the Traveler", Ren Zhengfei summed up Huawei's current situation and said: "We are living in a great era, but at the same time we are hit by a storm unprecedented in a century." In the field of smartphones, IDC data shows that Huawei's market share in the fourth quarter of last year has fallen to fifth in the world; in the field of 5G communication equipment, according to Dell'Oro statistics, by the fourth quarter of 2020, although Huawei continued to lead, its market share had fallen from 35.7% in the first quarter to 31.4%.

In this context, Huawei announced that it would start charging 5G patent fees. One speculation is that after the mobile phone business came under pressure, intellectual property income may become an important source of income. However, Huawei's Chief Legal Officer Song Liuping repeatedly emphasized that Huawei is a company that mainly makes products, and its main source of income is still to provide customers with the best products and services, not patent licensing income.

In fact, according to Jiwei.com reporters, this is not the first time Huawei has announced patent licensing rates. In the 4G era, Huawei announced a licensing rate of about 1.5%. Huawei mentioned in the "Innovation and Intellectual Property White Paper 2020" just released that in 2015, Huawei signed a patent licensing agreement with Apple, granting Apple a wireless basic patent license; in 2016, Huawei and Samsung initiated multiple patent infringement lawsuits against each other in China and the United States. In 2019, Samsung paid Huawei a licensing fee and the two parties reached a settlement. These two licensing agreements are Huawei's patent licensing practices in the 4G era.

Therefore, it may not be entirely true to simply view Huawei's 5G patent fees as a move to save itself after its real business suffered setbacks. If Huawei's patent licensing policy from 4G to 5G is viewed in context, it may be imperative for it to publish its fee standards, regardless of the current predicament. With top 5G patent licensors such as Qualcomm, Nokia, and Ericsson already putting forward their fee standards, if Huawei does not disclose its fee rates, it may be disadvantageous for its future collection of further patent fees.

By publicly disclosing its 5G licensing fees, Huawei has, on the one hand, demonstrated its open and transparent attitude towards patent licensing fees, clearing obstacles for subsequent charging; on the other hand, it has established an image of fair pricing with lower charging standards. Even if litigation arises in the future due to patent licensing, Huawei will be the first to gain public support due to its relatively fair fees.

Combined with Huawei's previous actions, the first target of this 5G patent licensing fee should still be Apple and Samsung. If Huawei considered the attempt from 0 to 1 in the 4G era, then in the 5G era, Huawei is already preparing from 1 to 100. One is to further expand the scope of patents licensed to Apple and Samsung and increase intellectual property income; the second is to lay the foundation for licensing their patents to other mobile phone manufacturers, even car companies, and IoT manufacturers on a large scale. Huawei only gave a fee cap this time, and did not give a percentage rate, which also left room for flexibility, and did not rule out the possibility of flexible adjustments based on different industries in the future.

Nokia's troubles

Prior to this, the world's major 5G patent holders had already announced licensing fee standards. In 2017, Ericsson took the lead in giving 5G standard essential patent fees: a minimum of $2.5 and a maximum of $5 per mobile phone; in the fall of the following year, Nokia announced that the upper limit of the licensing fee for 5G standard essential patents was 3 euros per device; InterDigital charged patent royalties ranging from $0.36 to $1.2 for each multi-mode 5G mobile phone (before negotiations); and Qualcomm announced a licensing fee rate of 2.275% of the price of a 5G brand single-mode mobile phone and 3.25% of the price of a brand multi-mode mobile phone. The price of the mobile phone is capped at $500. Based on this calculation, a mobile phone that supports 3G/4G/5G at the same time needs to pay a maximum of $16.25 in patent royalties.

Compared with other giants, Huawei's fee of up to $2.5 per phone is low. Wu Zheng, an intellectual property expert, told reporters: "The rates given by various manufacturers before are generally linked to patent strength. However, Huawei has claimed the most 5G patents, but its rate is lower than that of Qualcomm, Nokia, etc., which may have a profound impact on the future direction of the global patent licensing market."

Official data shows that as of December 31, 2020, Huawei holds more than 40,000 patent families (more than 100,000 patents). In the latest report of German patent analysis agency IPLytics, Huawei ranks first in global 5G standard essential patent declarations, with a market share of 15.39%. Even taking into account different statistical calibers, Huawei's global leading position in the field of 5G patents is unquestionable.

With the announcement of this rate by Huawei, it can be foreseen that it will become a reference for other mobile phone manufacturers to negotiate with 5G rights holders and even a basis for lowering their bids, causing considerable trouble for Ericsson and others.

The transparency of patent licensing fees has long been a chronic problem in this market. Standards organizations are of course inclined to promote transparency in licensing, and top patent pools are also taking measures to promote transparency, but rights holders who focus on patent monetization naturally reject transparency for profit reasons.

Ding Jianxin, director of Huawei's Intellectual Property Department, believes that Huawei's announcement of rates this time will help solve this problem: "As an important technical contributor to the 5G standard, Huawei follows the FRAND principle. We hope that the information provided today can provide transparent cost expectations for implementers of 5G technology, increase investment certainty, and promote the popularization of 5G technology."

Francis Gurry, former Director-General of the World Intellectual Property Organization, also commented: "Huawei's release of 5G standard essential patent (SEP) rates will promote the industry's widespread adoption and use of standards designed to ensure operability, reliability and transparent competition, while providing a fair return on its R&D investment."

Multi-party game in licensing negotiation

However, other mobile phone manufacturers may not be grateful to Huawei for this. After all, the public licensing fee rate is just a standard. The actual licensing fee rate still needs to be negotiated between the right holder and the implementer. Transparency is too idealistic, especially for cellular communication standard SEP. Whether mobile phone manufacturers can use Huawei's standards to get lower rates from Qualcomm, Nokia and other manufacturers is highly uncertain.

To a large extent, it depends on whether Huawei's low rates have enough influence to put pressure on other right holders. On the one hand, there is the issue of the essential rate of standard essential patents, and there is almost no undisputed conclusion on the essential rate. Huawei may not be controversial as the world's number one in the number of 5G standard essential patents (SEPs), but it is difficult to determine how many of its declared SEPs are truly essential. If a third-party report proves that Huawei's SEP essential rate is low, will Huawei's 5G influence be discounted?

On the other hand, although Huawei's announced charging standards are far lower than those of 5G rights holders of the same level, it cannot be said from the perspective of judicial logic that the rates of Qualcomm, Nokia, and Ericsson do not comply with the FRAND principle. If these 5G rights holders form a de facto alliance to prove that their quotations are fair and Huawei's low prices are just voluntary choices, then Huawei's low rates will not objectively affect the negotiation situation of other manufacturers.

In other words, the logical chain of using Huawei's low rates to pressure other rights holders has not yet been established. To achieve this goal, Huawei still needs to have a detailed report and algorithm to prove that the rates offered by other rights holders do not comply with the FRAND principle, and only the offer given by Huawei is fair and reasonable.

Forcing other rights holders to lower prices is an uncertain possibility, but after Huawei announced 5G charges, the additional intellectual property costs are almost certain. More importantly, even if mobile phone manufacturers can use superb negotiation skills to complete the difficult operation of forcing Qualcomm to lower prices, the saved costs may only go into Huawei's pocket. This makes it difficult for other mobile phone manufacturers to wholeheartedly support Huawei's new intellectual property policy.

This time, Huawei may have to fight alone.

However, social development depends not only on the stock of knowledge that has been produced, but also on the potential incremental knowledge. Innovation is rewarded and intellectual property is protected, which is the foundation for the continuous output of incremental knowledge. As Huawei said in the "Innovation and Intellectual Property White Paper 2020": "No advanced technology can be produced out of thin air, but can only be obtained through continuous and arduous efforts and exploration. Only by respecting and protecting intellectual property can we stimulate the innovative vitality of society. It is the only way to innovate and the cornerstone of our efforts to bring the digital world to everyone, every family, and every organization, and to build an intelligent world where everything is connected."