Standard Essential Patents in the auto industry – the case of 5G A patent landscape analysis on how SEPs and FRAND will affect the auto industry

April 2019

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I. Introduction

Similar to the transition in the mobile phone industry from feature phones to smartphones and where business models, platforms and market participants have transformed the way that profits are distributed among companies, we will see shifts and profit redistribution within the auto industry. Most market experts predict dramatic changes in this market as a result of disruptive technology trends such as self-driving vehicles, electrification and connectivity via technologies such as 5G.

The smart car of the future will be constantly exchanging information with its environment. Vehicle-to-X systems will enable communication between other vehicles, roadsides and infrastructure. The auto industry could be one of the first sectors outside of the smartphone world to heavily rely on 5G technologies. However, the integration of the highly patented 5G standards creates economic risks for vehicle manufacturers. Royalty rates – for example, for standard essential patents (SEPs) in cellular communications standards such as 4G and soon 5G – can easily mount up to hundreds of millions of dollars a year.

Patents in the automotive industry tend to be vertically licensed. A Tier 1 manufacturer would not usually request licensing fees from an original equipment manufacturer (OEM) but would rather incorporate the license to use the suppliers’ IP rights or third-party IP rights into its component supply contracts. Also, when it comes to licensing negotiations, royalties between Tier 1 suppliers and OEMs are mostly based on a single part that has been improved by an invention – licensing costs have thus had a marginal influence on vehicle prices so far. In contrast, patent licences in the communication industry focus principally on the net selling price of the device and mainly target OEMs. Consequently, royalties are much higher, especially for manufacturers that do not own a patent portfolio to cross-license. Bylaws of standard-setting organisations, such as the European Telecommunications Standards Institute’s IP policy, do not explicitly set out how royalty rates for SEPs should be calculated. As evidenced by Daimler’s request to EU antitrust regulators to probe Nokia’s SEPs, royalty expectations between SEP holders from the communications industry and the car manufacturing industry drastically diverge. While double-digit royalty rates based on whole product net sales are common in the communications industry, such rates would be inconceivable in the auto industry, where marginal profits are comparably low. Also, car manufacturers argue that the suppliers

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2 should take a licence, while SEP holders seem to directly negotiate with OEMs. Broadcom’s recent$1 billion patent claim against Volkswagen (Mannheim District Court) is another example of the patent holder directly targeting the OEM, while the infringed technology was used in the supplier’s components (eg, from Becker Automotive Systems (a subsidiary of Harman Becker) and Conti Temec (a subsidiary of Continental AG) originating from the chip manufacturers Texas Instruments and Nvidia). Just at the beginning of 2019 Broadcom initiated similar actions against the German OEMs Daimler and BMW.

II. How FRAND applies to licensing SEPs in the Auto Industry?

Avanci – a joint licensing initiative – offers a fixed rate of $15 for the use of 4G (including 2G/3G and eCall) in vehicles. Avanci claims that the rate remains fixed regardless of whether additional patent owners join the patent pool. Car manufactures such as BMW, as well as the Volkswagen subsidiaries Audi and Porsche (the parent company is still negotiating) have recently signed contracts with Avanci. At present, automotive connectivity is mostly used for emergency calls (eg, eCall), smartphone signal enhancement, telematic data and software updates, digital radio and navigation. However, in the future, connected vehicles will rely more heavily on 5G technologies not only to navigate but also to drive autonomously through complex traffic situations. Some economists argue that a FRAND licence is connected to a consumer’s willingness to pay for the added benefits of driving a car that supports 4G or 5G. If the self-driving vehicles of the future rely on patented 5G standards that offer autonomous driving features – the consumer’s willingness to pay could be more than $15 per car. The question is, will royalties depend on where 5G is used in the supply chain and should the FRAND determination be based on the entire product, in this case the relatively high-priced cars, or on the smallest saleable unit? Also, if cars do become ‘smartphones on wheels’, will royalties increase to amounts comparable to the smartphone industry? And if licensors and licensees do not agree on a licensing rate, will we soon experience the equivalent of a smartphone war in the automotive industry?

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III. Who is leading the 5G patent race for vehicular applications?

More and more car manufacturers are realising that one way to prepare for SEP licensing is to engage in developing 5G technology that is relevant to the auto industry. In order to identify 5G declared standards patents that relate to a car application, the IPlytics Platform tool was used to perform an extensive full text search of declared SEPs and technical contributions. The analysis was based on state-of-the-art stemming and semantic indexing methods. Figure 1 illustrates how the data on patents, declared SEPs, standards and contribution documents is structured.

Figure 1. Data integration of patents, declared SEPs, standards and contributions

Worldwide Patents (USA, Europe, Korea, Japan, China, etc.) • Extended patent families 90 M • Legal status (pending/granted, lapsed/revoked/active/expired) Patent • Worldwide reassignment information Documents • Worldwide litigation information

Declared Standard Essential Patents 280.000 • 30 SDOs and 11 patent pools SEP • Patent and standards document ID declarations • Licensing commitments (e.g. FRAND, reciprocity) • Patent Pools

Standards Documents 4 M • 2,5 M standards documents (Full text, author, supporting company) Standards / • 1,5 M standards contributions (Full text, author, contributing company) Contributions • Type (TS, TR, CR, WI), Status (revised, agreed, approved, noted)

The first analysis identifies declared SEPs that describe a vehicular application declared to 5G technical specification (technical specifications that relate to 5G excluding earlier 4G specifications). Figure 2 illustrates 5G SEP families as to the year of declaration over time. The yearly counts of SEP families show a steep increase starting only in 2016, while the first 5G specifications were development in 2015.

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Figure 2: Number of 5G declared SEP families related to a vehicular application as to year of declaration

1200 994 1000

800

600 429 400

200 0 23 0 2015 2016 2017 2018

The analysis further identifies the top 15 patent owners declaring SEPs families that describe a vehicular application in 5G. Figure 3 shows that most patents are owned by the US companies Qualcomm and Intel, by the Chinese company Huawei, by the Koreans Samsung and LG as well as by the Europeans Nokia and Ericsson. Yet, not a single car manufacturer or automotive supplier declared SEPs for 5G specifications.

Figure 3: Number of 5G declared SEPs families related to a vehicular application

QUALCOMM Inc. (US) 305 Ericsson Inc. (SE) 261 Samsung (KR) 224 Huawei Technologies Co., Ltd. (CN) 206 Nokia (incl. Alcatel-Lucent) (FI) 112 Intel Corp (US) 106 LG Electronics (KR) 104 Guangdong Oppo Mob. Telc. Corp. (CN) 53 ZTE Corp. (CN) 28 Sharp Corp (JP) 27 China Academy Of Tel. (CATT) (CN) 24 InterDigital Technology Corp (US) 9 BlackBerry (CA) 7 IPR Licensing, Inc. (US) 4 Apple Inc. (US) 3

0 50 100 150 200 250 300 350

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IV. 5G SEP Litigation for vehicular applications

The identified declared SEPs are further matched to US litigation data showing the main plaintiffs as to the number of litigated declared SEPs with a vehicular application. Figure 4 ranks the plaintiffs with Huawei and Nokia being the yet strongest litigators. IPR Licensing Inc. and Evolved Wireless Llc. are patent assertion entities (PAEs) litigating earlier acquired patents from LG and InterDigital. A deeper look into the litigation data does not identify any car manufacturers or automotive suppliers as defendants yet. As of today, the plaintiffs mainly target handset manufacturers (e.g. Samsung, Apple, ZTE, HTC, Huawei) or base station suppliers (Nokia, Huawei).

Figure 4: Number of litigated 5G declared SEPs related to a vehicular application

Huawei Technologies Co., Ltd. (CN) 16

Nokia (incl. Alcatel-Lucent) (FI) 10

Apple Inc. (US) 4

InterDigital Technology Corp (US) 2

Evolved Wireless Llc (US) 2

BlackBerry (CA) 2

IPR Licensing, Inc. (US) 1

0 2 4 6 8 10 12 14 16 18

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V. Who is developing the 5G standard for vehicles?

Standards development in the communication industry is a process where companies send their best engineers to meet in worldwide conferences and meetings to present their latest R&D findings. Standard developing companies submit so called technical contributions e.g. introducing new projects (new work items) or proposing changes to existing projects (change request). These contributions often include patented technologies that eventually will be included in the next standards release. The number of technology contributions is a measure to identify future technology and patent leaders for the next standard generation. The IPlytics Platform database was used to perform an extensive search in full text technical contribution documents to identify which companies participate in developing 5G specifications that relate to vehicular applications. Figure 4 shows the top 15 companies that contributed to 5G specifications related to vehicles. The results show that there is yet not a single car manufacturer among the top 15 standards developers and major companies are chip, handset or base station manufacturers. A deeper look in the data identifies that Volkswagen (28 contributions for 5G), Robert Bosch (26 contributions for 5G), Toyota (25 contributions for 5G), Continental (23 contributions for 5G) or General Motors (22 contributions for 5G) are among the car manufacturers and suppliers who have started to also submit contributions related to 5G and e.g. V2X, however at a yet very low level.

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Figure 5: Number of 5G standards contributions per company related to a vehicular application

Ericsson Inc. (SE) 357 Huawei Technologies Co., Ltd. (CN) 308 Nokia (incl. Alcatel-Lucent) (FI) 260 QUALCOMM Inc. (US) 215 LG Electronics (KR) 122 Intel Corp (US) 106 Samsung (KR) 97 Siemens AG (DE) 80 China Mobile (CN) 72 Orange (FR) 53 NTT Docomo (JP) 49 ZTE Corp. (CN) 48 Deutsche Telekom (DE) 45 AT&T (USA) 44 Hisilicon (CN) 39 NTT DOCOMO Inc. (JP) 37

0 100 200 300 400

VI. Outlook

Connectivity in cars has the potential to fundamentally change the automotive value chain. In order to cope with these challenges, vehicle manufacturers must face complex licensing in the communications industry and ensure that they have the right IP strategy. This includes a more comprehensive monitoring of IP activities beyond the sphere of competitors and suppliers in the auto industry. Car manufacturers and suppliers should also increase their participation in standardisation activities. Standards that are developed and set today may well become the fundamental technology platform for emerging technologies and applications in the future.

The licensing of SEPs looks set to become a major issue for the whole auto industry. Senior managers and directors of car manufacturers and car suppliers should bear in mind the following considerations:

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• autonomous driving technologies, infotainment, navigation and communication will increasingly rely on patented technology standards such 5G; • the number of declared 5G SEPs is drastically increasing at levels far beyond earlier generations (eg, 3G or 4G); • licensing directors should bear in mind the dynamic market of SEPs, where patent assertion entities often acquire SEP portfolios to assert extensive royalty payments; and • licensing directors should consider royalty costs and appropriate security payments in advance. • Patent departments and R&D divisions should not only consider information retrieved from patent filing data, but also monitor standardisation activities and declarations of SEPs – analysing the interplay of patents and standards to quantify the IP risk potential. • The automotive industry should increase its activities in standards development to also develop a SEP portfolio for 5G standards.

About IPlytics Platform:

IPlytics Platform is an IP intelligence tool that augments the analysis of technology landscapes and a company’s competitive position. IPlytics Platform goes beyond patent data by linking and processing more than 90 million patents to 4 million standards, 280,000 standard-essential patents, 60 million scientific articles and the profiles of 4 million companies and start-ups on one platform.

IPlytics Platform helps users to perform analysis in the patent valuation, patent essentiality analysis and patent and standards landscaping fields, as well as trends in patent transfer or litigation information. The intuitive graphical interface allows users to easily navigate, analyse and drill down into full-text information, enabling in-depth technology analysis or a long-term monitoring of market segments.

For further information contact:

Tim Pohlmann | [email protected] | [T] +49 (0) 030 5557 4282

IPlytics Platform – The IP Intelligence Tool | [email protected] | www.iplytics.com