The Internet of Things (IoT) is growing exponentially and this growth is expected to be paramount in terms of both the number of connected devices and the potential size of businesses. The IoT is complex and parties entering this field must make several decisions regarding their:
- choice of technology;
- standardisation alternatives;
- business model; and
- IP rights and patent strategy.
This update highlights the IP rights landscape with regard to the IoT and identifies the strategic steps required for developing a viable IoT IP rights strategy.
The IoT has introduced a major challenge to the mobile phone industry's traditional consumer-phone-operator paradigm. Under this structure – which has been largely unchanged for the past 25 years – operators purchase or acquire access to the mobile phone frequency band through national or international legislation. They typically purchase phones and provide an offering to consumers based on their communications demand. Traditionally, handset manufacturers have responded to operator demands and implemented new functionality where necessary. Over time, some infrastructure providers – such as Ericsson, Nokia Siemens, Alcatel Lucent and Huawei – have become stronger and increasingly set the agenda for network development. This is partly due to the fact that operators are spending increasingly less on research and development. The same applies to phone manufacturers that have always strived to 'own' their customers. Key brands, such as Apple, Samsung and Sony, often have a stronger relationship with consumers than operators and, over time, it has become increasingly difficult for operators to provide unique solutions other than pricing plans.
Technology providers in the cellular business are in an extremely strong position with regard to IP rights. Companies such as Ericsson and Qualcomm have a strong portfolio of standard-essential patents and East Asian players (eg, Samsung and Huawei) are filing a substantial number of IP rights. The focus on IP rights filing was partly initiated by Motorola when it obtained a number of patents relating to its first and second-generation mobile phones almost 20 years ago. This encouraged competitors, such as Ericsson and Nokia, to increase their efforts substantially in this regard.
Figure 1: Top Patent Cooperation Treaty applicants in 2014 from the World Intellectual Property Office statistics database
A party may have to pay up to 15% of its handset/device net sales in royalty costs if it has no patents with which to protect its business. In most cases, this is an impossible burden for a sustainable business.
With regard to conventional standardisation activities, the amount of research and development that a party undertakes is essentially equivalent to the IP rights strength that it obtains. The biggest change in recent years is that Chinese players such as Huawei and ZTE have increased their efforts substantially in this regard and are now on a par with the main US, EU, Japanese and Korean market players.
Standard wireless technologies are easy to assess with regard to standard modules that are purchased from a certified vendor or where a licence fee is paid to the standard owner. However, if a business is based on a modified standard, a player wanting to enter the IoT field must understand the legal risks and business implications in this regard. Further, the applications and services utilising the wireless standards may not be covered in the standards and could thus be protected by IP rights – either of the new player or a competitor. This is both an opportunity and a risk that must be assessed before entering the IoT field.
The IoT has expanded the conventional consumer-phone-operator value chain. In most industries, market players using the IoT try to create brand loyalty and present their own products to consumers. For example, power companies would like to have access to their consumers' homes and already have infrastructure in place that enables them to do so (eg, high-power copper cables). Car manufacturers, such as Tesla, Audi and BMW, are also trying to build infrastructure that can enter the home by developing cars that can obtain new software and applications at night while they charge. However, Google has the third highest number of patents relating to self-driving cars, surpassed only by Toyota and Daimler. In addition, media companies (eg, Nintendo, Sony and Microsoft), cable and satellite television players (eg, Comcast, Boxer and Viasat) and traditional devices manufacturers (eg, B&O and Sonos) are all trying to use their assets in anticipation of a future battle regarding the IoT.
Several automotive, software and media companies are starting to file IP rights in the IoT domain. As such, a number of powerful players may target the same market, which presents an obvious risk of competition and double counting.
With Google acquiring Nest (a thermostat company) and power companies such as EoN introducing free home surveillance area services and new business models, parties must assess their competition, as competitors cannot come from outside their industry. Unforeseen and unpredictable competition from an outside player may jeopardise a business – for example, if a competitor gives away assets for free that another party had planned to sell.
In addition, these outside competitors may hold IP rights that are within the scope of the competing party's business. It may be difficult to compete with companies such as Google, Apple or Microsoft regarding security or consumer applications if these companies have an extensive patent portfolio.
Appliance companies such as Electrolux and Siemens used to compete with regard to design, power consumption and unique refrigerator and stove features. However, with the rise of the IoT, companies like Samsung have become a major player. Not only does Samsung have an extensive patent portfolio in the mobile domain (among others) and deep knowledge of connectivity end-related IP rights, it also has a direct relationship with its smartphone users, which – in a world of connected home appliances – may be crucial for its business.
Most market players have good knowledge of their vertical competition – at least with regard to traditional players. However, as increasingly more telecoms players enter the market, companies operating in the IoT field can expect these players to have IP rights (including patents) that encroach on their future areas of business.
As such, it is crucial for parties to assess any potential IP rights threats and proactively develop an IP rights strategy, in order to ensure that they have the freedom to act at a later stage.
The alliances formed by industry giants such as Apple, Google, Qualcomm, Intel and IBM are fighting to attract other companies to their IOT standard, while some service providers are building their own structures. It is likely that there will be consolidation over time, but increasingly more players are entering the scene and it is unclear which party will prevail in the long term. While several of the alliances claim that everything is based on open standards, this does not mean that all intellectual property is free and accessible to any party that want to enter this market.
Different companies will enter the IoT field with different approaches and business objectives. Some will use standardised components and technologies, while others will try to modify specific parts in order to create unique technologies or product offerings. Since the technologies relating to the IoT are handled by a variety of standardisation forums and industry initiatives, it is extremely important to understand both the standardisations' legal framework and the industry's patent and IP rights structure.
Companies entering the IoT domain must have an IP rights strategy that, as a minimum, assesses the company's future business. This will enable the company to start identifying their business opportunities and avoid some of the biggest threats. This strategy should complement the overall strategy work that most companies carry out.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.