Thursday, August 3, 2023

Huawei's patent license terms for cellular IoT devices are highly differentiated and example of market-driven solution that addresses EU concerns over transparency

When I reported on Huawei's annual innovation and intellectual property event last month, I summed up the standard-essential patent (SEP) licensing terms for cellular IoT products in a highly condensed format:

  • IoT-centric devices: 1% of net selling price, capped at $0.75/unit, for categories NB, M, and 1; category 4+ to be discussed individually

  • IoT-enhanced devices: from $0.30/unit for Category NB to $1.00/unit for Category 4+

Given that IoT is basically the "new frontier" in cellular SEP licensing, and in light of the IoT and SME-related concerns that led the European Commission's Directorate-General for the Internal Market (DG GROW) to launch an aggressive rule-setting initiative, a more elaborate discussion of Huawei's cellular IoT licensing terms is warranted.

Huawei provides details on that licensing program in the form of a dedicated web page as well as a two-page PDF that elaborates on the key definitions, particularly of product categories. That effort is laudable, but it also shows that the topic--regardless of whether a particular company makes a licensing offer--is not as straightforward as licensing smartphones or connected vehicles.

The price matrix has three royalty structures:

  1. The simplest scenario relates to IoT-enhanced devices. That categoriy includes certain products such as shared bicycles where a lot of value is in areas other than connectivity. A bicycle can serve its basic purpose--getting from A to B--with or without connectivity, though cellular connections obviously facilitate "sharing economy" services. For such products, Huawei charges a fixed per-unit rate (from $0.30 to $1.00).

  2. IoT-centric devices are the ones that basically combine limited other functionality (such as meters, sensors, or GPS) with connectivity, and it's really just that combination that makes them useful. In April I commented on a European Commission document that claimed to know that a certain set of IoT licensing terms (by a Sisvel pool) were not FRAND, but as I noted, the products in question are very simple devices: they measure something, and send the data somewhere. That's why a royalty rate that may seem high to some EC officials can very well be justified in light of the fact that cellular connectivity accounts for a very large part of the overall value of such products. I also thought the EC did not sufficiently take into consideration that such products tend to be in use for far logner periods than smartphones, for which two years are a common upgrade cycle.

    Normally, Huawei's royalty rate for products that fall into that category is 1% of the net selling price, but capped at $0.75/unit, which corresponds to a cap of the royalty bae at $75.

  3. For IoT-centric devices that fall into 3GPP LTE categories 4 or higher, Huawei's web page just says: "Contact us for rates." I've asked some people in the industry what types of devices would be IoT-centric (as opposed to merely IoT-enhanced) but meet 3GPP's criteria for category 4+, and it seems no one can conceive of a use case for that combination. Category 4+ devices would be rather expensive while IoT-centric devices such as smart meters tend to be cheap. Therefore, I assume that Huawei can't state a royalty rate because if someone actually created a product that against conventional wisdom makes category 4+ use of cellular connectivity but is a smart meter-like IoT-centric device, Huawei would have to see it to be able to make an offer. It's a theoretical combination, but one that may never come up in practice.

For licensees, the percentage-with-absolute-cap royalty structure for IoT-centric devices such as smart meters is advantageous because it means that a cheap device, such as a $25 asset tracker, gets licensed at a low per-unit rate. For IoT-enhanced devices, however, a fixed per-unit fee works because those are expensive enough that it's not necessary to start with a percentage, but the key thing is that a fixed per-unit fee is certain not to capture the value in any other components of such a product. For instance, if one shared bicycle comes with more expensive wheels and tires than the other, but both make the same kind of use of cellular connectivity, patent royalties don't capture a part of the premium price that would be paid for better wheels and tires.

Presumably it helps that Huawei continues to be a major implementer that pays about as much to other patent holders as it collects from implementers. And at the end of the day, what licensees do by taking a proper license to Huawei's SEPs is to support further research and development, which was a key message of Huawei's recent presentation.

The 3GPP device category definitions are obviously not a special feature of Huawei's licensing terms. They were created by a standardization body. Huawei's PDF just provides clarifies, such as that Category NB (narrowband) includes Category NB1 as well as Category NB2.

Huawei's PDF defines a basic IoT device as a "finished, complete, and ready-to-use terminal device that (1) implements Cellular IoT Standards for data transmission but not voice transmission, and (2) has an application/user function that is dependent on data transmission." Certain product types (such as phones, tablets, and PCs) are explicitly excluded. The PDF also makes clear that "Non-Human-Powered vehicles" (such as automobiles) are not included. There obviously are licensing options and rather different terms for those.

The PDF furthermore gives examples of IoT-centric devices (asset trackers and smart sensors) as well as of IoT-enhance devices (smart utility meters, point-of-sale machines, shared bicycles, and connected healthcare devices).

The EU institutions should have more faith in market-driven solutions. Huawei's terms are transparent, designed to avoid patentee overcompensation, and should also suit IoT SMEs. The terms of Sisvel's IoT pool--whether or not everyone at the Commission has understood the rationale--are also perfectly transparent and SME-friendly. And it's been only two weeks since Avanci announced European SME Axxès (highway toll collection technology) as a licensor of the Avanci Aftermarket pool. Solutions are being worked on, and they increasingly address the problem that some EC officials believe to have identified.

Constructive approaches to licensing should be encouraged by the European Commission, but the ill-conceived proposal that is currently on the table threatens to complicate or in some areas even disrupt (by encouraging holdout) the licensing process. As I argued in my previous post, at least the EU Council and/or the EU Parliament should obtain an opinion from their legal services, as fundamental rights and international comity are at stake.