The Value of Standard Essential Patents and the Level of Licensing

Bowman Heiden [1] and Jorge Padilla [2] and Ruud Peters [3]


Abstract

This paper argues that the value of standard essential patents (SEPs) should be independent of the level of licensing in the value chain. We further argue the value of enabling technologies, such as SEPs, is best determined in relation to the value it produces to the consumer or end-user, regardless of the licensing level. Finally, we discuss legal, economic, and organizational factors that can guide market actors to determine the optimal level of licensing through private ordering. Two cases studies, regarding optical standards and cellular standards, are presented to illustrate SEP licensing challenges and solutions in practice.

Key messages

  • FRAND-based standards have generated globally successful markets. For example, cellular connectivity has enabled $4.1T in economic value in 2019 where only a small fraction is represented by SEP royalty payments.
  • As a matter of economic efficiency, SEP value is dependent on the end-use value but independent of the level of licensing in the value chain.
  • The pricing of SEPs has become a contentious issue. The recent controversy regarding the level of licensing is nothing but a discussion about value: those arguing for upstream or component-level licensing ultimately seek to lower the price through reducing the royalty base.
  • The determination of the level of licensing requires a holistic analysis of economic, legal, and organizational factors in a specific industry that goes beyond the assessment of basic transaction cost issues, in particular, attention should be paid to collective action problems, market structure, patent exhaustion risks, and traditional industry supply chain norms, etc.
  • Two case studies from (1) Optical Storage Standards and the One-Blue licensing platform, and (2) Cellular Standards in Connected Vehicles and the Avanci licensing platform, illustrate market challenges and solutions to the determination of SEP value and level of licensing in practice.

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[1] Bowman Heiden is Co-Director, Center for Intellectual Property (CIP), Chalmers/UGOT/NTNU; Visiting Professor, UC-Berkeley.
[2] Jorge Padilla is Senior Managing Director, Compass Lexecon.
[3] Ruud Peters is CEO, Peters IP Consultancy B.V. ; Former Chief IP Officer and Executive Vice President at Koninklijke Philips N.V.