Getting into the groove

Compatibility and interoperability are the cornerstones of any technology company’s route to market, but becoming the standard by which an entire industry bases its innovation can be a lucrative IP prize

Consumers need – and have come to expect – interoperability and standardisation in the technology they purchase, but how does one company’s innovation become an accepted industry-wide standard – and what does it mean for the associated intellectual property (IP) Rights?

For Mattias Ganslandt, director for the Centre of European Law and Economics (CELEC) in Brussels, standard-setting is an ‘economic phenomena’ that reveals a lot about consumer pressure on industry. ‘Compatibility is in the consumer’s interest,’ he says. ‘We value and expect it, which puts pressure on the vendors to deliver it. The result has been a voluntary and open system in which competitors work together to build technology that is compatible to the end user.’

Of course, there are huge benefits for business too. Use of accepted consumer standards encourages faster adoption of the fruits of their innovation, and it allows companies to build on existing technologies rather than having to develop their own versions at huge expense. ‘But there are problems at the interface between standardisation and IP Rights,’ says John Ketchell, director of CEN, the European Committee for Standardisation. ‘It needs to be simplified considerably.’

Format wars
Technology standardisation is a multimillion dollar business and yet, Ketchell says, it is little known and poorly organised: ‘There are something like 300 open standard bodies, usually not-for-profit consortia,’ he explains. ‘The cost of joining the bodies, attending the meetings and drawing up the documents is immense, to the point that when Oracle acquired a competitor in 2008, it took US$2m out of standards system in subscription fees alone.’

Companies want to generate maximum revenue from the IP that supports these standards, so these consortia often become ‘battlegrounds’, due to conflicting approaches; for example, over which document formats to adopt across the industry.

‘The stakes are high,’ agrees Ganslandt. ‘Becoming the standard brings considerable reward, not just in terms of the financial benefit of the licensing, but also the network effects, the sheer number of users and the share of the market.’

But, says Ketchell, ‘there are lots of casualties when it comes to trying to make your product the standard. Some companies spend two to three years trying to develop a standard that comes to nothing. That’s why IP is so important to the industry; if there wasn’t a chance of making a return via licensing fees, companies just wouldn’t be doing it.’

‘IF INNOVATORS ARE UNABLE TO MAKE A FAIR RETURN ON THEIR INVESTMENT, THEY ARE LESS LIKELY TO INVEST IN R&D, REDUCING INNOVATION AND CONSUMER WELFARE’
- CHRISTOPHER STOTHERS

While the goal for establishing standards is not IP-led in itself, IP has become a key – and often heated – part of the process, particularly when it comes to licensing innovations to competitors. ‘Setting standards creates a slightly different role for IP,’ says Ganslandt. ‘In older models, such as those used in the telecoms industry, you’d see collaboration between companies that were linked in some way [for example, the innovator of the handset and the network provider], as there is obvious interest and benefit in collaborating on standards.

‘In the current situation, where an innovative firm produces a technology that could provide a breakthrough for the industry, it’s extremely important to ensure that this IP is accessible to all. To do this, the company must be rewarded in some way; otherwise there is no incentive to participate.’

But critics say that the organisations that own the standard by which the whole industry develops have an enviable monopoly, which could result in unworkable licences and therefore standards. As a result, many believe that the IP associated with standards should be free or rewarded in a different way. However, Ketchell argues that this would involve a dramatic shift from most current innovation models.

‘Under the current IP system, it is legitimate to reward the IP that supports technology standards,’ he says. ‘We wouldn’t get far without it. Just think of the number of patents in a mobile phone handset. What’s to prompt a company to allow its competitors to share its hard-won developments, if it doesn’t receive any revenue in return?

‘Of course, we do need to monitor for unfair practices such as excessive pricing or collusive pricing whereby participants agree standards and cross-licence the associated rights between them, thereby raising a barrier to new and potentially innovative competitors,’ he adds. ‘But there are already solutions that we can call on; for example, where there is failure to disclose (often described as a “patent ambush”), this may be resolved by sanctions within the standard-setting body’s rules or by competition law.’

The right IP
Christopher Stothers of Milbank, Tweed, Hadley and McCloy LLP agrees: ‘From an IP Rights owner’s point of view, it’s a question of investment and the balance of risk and reward. Without sufficient levels of both innovation and standardisation, the technology sector would not have experienced the enormous growth we have seen in recent years,’ he says, offering as examples the provision of videos on YouTube and the ability to send pictures between mobile phones irrespective of network, as well as facilities for checking-in to flights online.

‘If innovators are unable to make a fair return on their investment, they are less likely to invest in R&D, reducing innovation and consumer welfare by depriving consumers of benefits which they would otherwise have chosen,’ he emphasises.

‘Of course, there is plenty of room for improvement,’ adds Ketchell. ‘It’s fair to say that the system isn’t broken, but we need more collaboration as well as fewer standards bodies. And we need to remember the ultimate purpose of standardisation, which is to provide consumers with a mark of quality and trust.’


This article first appeared in IP Review, issue 24