When large tech companies abuse the system, it threatens current and future innovation
Op-ed originally published in The Hill, April 4, 2017
It’s hard to believe that 10 years have passed since Apple unveiled the first iPhone. Though tough to fathom today, at one time the tech giant had just a handful of employees, used federal grants to fuel the company’s R&D and received capital from a government backed investment fund.
Access to capital is a major hurdle for startups and small businesses, particularly in tech companies which data shows are more reliant on debt capital than non-tech. However, navigating the complicated system of intellectual property (IP) rights — in addition to existing major market forces — can just as easily pull the rug out from underneath a small company or new entrant.
Innovation in the fast-paced tech sector, with tangible consumer benefits like choices in the marketplace, requires some cooperation between competitors. For example, the manufacturer of a next generation technology, like a faster mobile connectivity chip, will often, for a license fee, collaborate with an existing patent holder to innovate something different and perhaps faster, smaller, or more efficient.
The stakes become much higher for technologies that allow an entire ecosystem to function — like the technology that allows a smartphone to connect to the Internet and make calls. These pivotal innovations are labeled as Standards Essential Patents (SEPs), a designation for individual patents that are essential to a technology standard.
Technology standards, comprised of SEPs, allow competing products to function together. For example, standards prevent consumers from being forced to purchase their TV from their Internet and cable provider.
Patents for technologies that are essential to a standard can be a goldmine, because many standards are widely adopted by manufacturers. Thus SEP holder’s control a quasi-monopoly over common technologies, for example mobile standards like 4G/LTE, which most of our phones use for connectivity. Manufacturers who make 4G/LTE phones must pay the license fees to the SEP holders for those standards.
These arrangements do come with special licensing obligations to protect consumers and markets from the abuse of this great power. SEP holders are required to commit to license those patents under FRAND (fair and reasonable and non-discriminatory) terms. However, in some cases SEP holders violate their commitment by charging extortion-level licensing fees or refusing to license their SEPs altogether.
A topical example of these violations exists in the Federal Trade Commission’s (FTC) January lawsuit against Qualcomm. The FTC asserts that Qualcomm, “Refuses to license standard-essential patents to competitors. Despite its commitment to license standard-essential patents on FRAND terms, Qualcomm has consistently refused to license those patents to competing suppliers of baseband processors.”
Qualcomm’s alleged abuse is enabled by its dominance. The company owns approximately 90 percent of all essential patents within the code division multiple access (CDMA) wireless standard.
A standard that enables access for many of the world’s mobile phones. Though this standard is dated, and newer standards have emerged, newer models are required to be backwards compatible for use in older networks. Qualcomm’s dominant market position allows it to negotiate high royalties and other favorable licensing terms.
Qualcomm’s war chest of SEPs allows it to employ favorable (and at times questionable) licensing deals. These deals ensure Qualcomm maintains a firm grasp on the mobile industry. In addition, their chipset business provides further leverage over competitors.
According to the Korean Fair Trade Commission’s decision following their investigation into the abuses, Qualcomm threatens to cut off the supply of chips, as part of its negotiations with competitors. As such, competitors ultimately capitulate to Qualcomm’s demands for excessive royalties and other unfavorable licensing stipulations for SEPs.
The elevated licensing fees charged by Qualcomm amount to a tax that can exclude competitors and harms competition. The tax is levied, and often paid, because Qualcomm dismisses their FRAND licensing obligations which are designed to prevent such abuses.
Tech sector small businesses and startups already face an array of challenges as small new market entrants. If dominant powers like Qualcomm dismiss the rules and don’t abide by their commitment to FRAND licensing — which is designed to ensure fair and reasonable terms — competition is stifled, innovation is hindered, and consumers lose.
Two out of three net new jobs in America are created by small businesses. When large companies like Qualcomm abuse their dominant market positions, they jeopardize the growth of small firms — firms that can possess next generation groundbreaking technology — and the entire American economy.
For the sake of the economy and innovation, let’s hope Qualcomm, and companies like it, adhere to their commitment to foster a competitive and fair business environment.
Matt Weinberg is a former White House appointee with the U.S. Small Business Administration, where he served as a senior adviser in the Office of Investment and Innovation. You can follow him on Twitter: @mattjweinberg