Wednesday, January 4, 2023

Huawei uniquely attains net-licensor status without defining its patent licensing business as profit center: 20+ license agreements struck in 2022

Huawei may have become the information and communications technology industry's first "accidental net licensor" of major proportions. In this context, "accidental" doesn't mean that anybody got hurt (nor that it was never intended): it's just that this outcome wasn't the original ambition.

The week before last, the South China Morning Post reported that "last year the company’s royalty income exceeded the expenses it paid for licensing technologies from other companies for the first time, according to Huawei."

What makes this all the more surprising is that Huawei's 2021 total revenue was still in the $100 billion range. It's easy to be a net licensor with a small product business, but for a large-scale (actually, hyperscale) implementer it's astounding, even when considering that "Huawei last year filed a record 6,952 patent applications, up 27 per cent from the previous year, through the Patent Cooperation Treaty (PCT)," which "made Huawei the world’s biggest PCT filer for five consecutive years."

While it is now imperative for Huawei to generate more revenue from patent licensing in order to fund its innovative activity despite the fallout from a U.S. trade ban, there are no signs of Huawei having sacrificed the values it defended during its net-implementer times. It's just that when it runs the numbers at (or toward) the end of a given year, the company now finds that its income from outbound patent licensing exceeds its royalty payments to third parties. That's my interpretation of the following one-sentence paragraph from the South China Morning Post article:

"However, [Huawei IP chief Alan] Fan said the company is not treating IP licensing as a business or relying on it as a major revenue stream."

The Chinese newspaper says "Huawei founder Ren Zhengfei told the company’s intellectual property (IP) team to step up efforts to turn its vast pool of patents into revenue via 'reasonable pricing' and 'generate an appropriate return' on the R&D investments, according to a company memo made public in April." So it is probably fair to say that

  • yes, Huawei is now placing greater strategic emphasis than before on outbound licensing, but

  • no, this doesn't mean Huawei intends to generate a high percentage of its total profits from IP royalties.

Another factor that enabled Huawei's licensing income to surpass its licensing costs is that certain types of technologies with respect to which Huawei holds particularly powerful rights--such as wireless connectivity and video/audio codecs--have become extremely ubiquitous. Take connected cars: according to the SCMP article, Huawei "has reached royalty agreements with 15 carmakers globally, including Audi, Mercedes-Benz and BMW."

The article also mentions two major cross-license agreements that Huawei announced last month: one with OPPO and another with Nokia.

On the bottom line, it appears that Huawei is now less prepared than in the past to condone free-riding on its innovations, but constructive implementers won't find it hard to strike agreements, compared to the royalty demands they face in most other negotiations...