Is IPR the Poisoned Chalice for the IoT?

Subscribe To Download This Insight

By Jamie Moss | 2Q 2019 | IN-5463

The great diversity of IoT device types makes establishing licensing fees complicated. Incorporating connectivity to revolutionize products and services should not become a burden to manufacturers and fair IPR rates will benefit all.

Registered users can unlock up to five pieces of premium content each month.

Log in or register to unlock this Insight.


A Rude Awakening


Internet of Things (IoT) device manufacturers are being asked to pay licensing fees to the Intellectual Property (IP) owners of cellular communications technology for the use of their patented inventions. This is proving problematic, as it is a cost that some IoT manufacturers had not factored into their Bill of Materials (BoM). While all manufacturers experience the acute problem of no commonly agreed upon amount considered reasonable for them to pay, IoT devices can have wildly different sticker prices, use connectivity to solve different business problems (the results of which are worth differing sums), and rely, to varying degrees, on connectivity as a fundamental part of their value proposition. For example, a tracking device is dramatically different in every respect from an industrial machinery item, yet both may make use of the exact same connectivity technologies and telecommunications components.

Device manufacturers should not need to become telecommunications experts to benefit from connectivity. A fact consciously re-emphasized at Mobile World Congress in 2019 and cited by all parties, ranging from startups and incumbents to service providers and hardware manufacturers, was simplicity for the enterprise in terms of understanding and implementing their communications products, which is a vital requirement for the IoT market to grow. Therefore, IoT device manufacturers will default to using modules, rather than the direct integration of chips (and necessary ancillary components) in their connected products. Modules are pre-packaged communications systems of increasing sophistication that incorporate a modem, a Subscriber Identity Module (SIM), and even sensors and an application processor in a single chipset form factor package ready for plug-and-play Printed Circuit Board (PCB) integration.

Crucially, module vendors also pay licensing fees to IP owners. This is an important part of their business strategy, as modules have declined dramatically in price with IoT market maturity. The profit margins for modules are becoming ever slimmer, necessitating increasingly savvy Intellectual Property Rights (IPR) negotiations to ensure profitability. The IP costs are never deferred to module vendors’ downstream customers, so it is understandable that those customers might not expect to be approached to pay licensing fees themselves. The size of the mobile phone market has meant that IPR fees have been effectively standardized for a long time. The automotive market has also become a powerful individual vertical, often incorporating the direct integration of chips, rather than modules, with fees also being standardized. But with the great diversity of device types in the IoT, how do we calculate a reasonable licensing fee based on the physical value or the perceived value that the incorporation of connectivity provides?

IP is a Literal Gold Mine


As more connected devices are developed, IP fees will become an increasingly common obstacle for manufacturers and successful devices that sell well will become publicly visible targets for IP owners’ lawyers. The industry cannot afford to have device manufacturers thinking of the IoT as a poisoned chalice, i.e., as a purportedly great opportunity to revolutionize their products and services that then becomes a burden. IP fees were not much of an IoT issue historically, as IP owners could concentrate on the bounty of the mobile phone and smartphone markets. A genuine threat now is that IoT device manufacturers become dissuaded from using cellular and seek to use Local Area Networking (LAN) technology, such as Wi-Fi, instead, fundamentally compromising the connected utility they can offer, devaluing, in a very real business sense, the potential impact of the IoT.

Many of today’s IoT devices are connected variants of existing products and an evolutionary development. Relatively few IoT devices have connectivity as the single, central enabler of their value proposition, unlike the entirely connectivity-based smartphone. Even the most classic example of a Business-to-Business-to-Consumer (B2B2C) connected device—the Kindle—has a utility beyond its connectivity and can always be used as a standalone reader, as can most of today’s other IoT devices. The Kindle was not developed to be profitable as a hardware sales proposition and is thought to have been retailed at close to cost, existing to enable Amazon’s core business of content and media sales. IoT device manufactures are still exploring the new business models that connected variants of their existing products can enable, from security, to Over-the-Top (OTT) Value-Added Services (VAS), to aftersales engagement and support.

IP owners’ eagerness to capitalize on IoT growth is justified. The race to develop IP that becomes part of the global standard for each new generation of cellular technology is intense, as so many downstream products are guaranteed to make use of it. A huge financial investment in Research and Development (R&D) is required, but the end result can be a literal gold mine. Becoming a strong IP holder in telecommunications is enough to account for a company’s entire fortune. Failing to re-secure a suitable portfolio for the next generation means being forced to rely on diminishing returns from aging and increasingly less-useful technology that will one day be redundant and worthless. Such inevitability can put great and early strain, often unnecessarily, on a company’s share price and market capitalization. So, IP owners have the right to take all the value they can, when they can.

Fair and Affordable Rates Benefit All


The fees applicable to mobile phones, smartphones, and the automotive market will not be an appropriate benchmark for IoT devices. IP owners must be tactful when approaching IoT device manufacturers. Many manufacturers will not be used to negotiating IPR fees and they must not be scared off from doing so. Even manufacturers of large and expensive industrial equipment must adhere to precise margins and Returns on Investment (ROIs). Manufacturers will not be willing to go down a road that exposes them to unnecessary costs, unpredictable costs, or costs that return uncertain utility; especially when the endgame for their connected endeavors has yet to be fully conceptualized, let alone realized. Greed today must not hinder longer-term relationships and the rewards yet to come from a more mature IoT market with a more tightly integrated and acutely dependent need for cellular connectivity.

IoT device manufacturers must not be afraid to make their position clear and to not be bullied. As the direct licensing of cellular IP to IoT device manufacturers becomes more common, common price points for fees will be realized. So, in the meantime, manufacturers must not shy away from exploring the full utility that Wide Area Network (WAN) connectivity can provide. As module manufacturers already pay licensing fees, it may be the case that it is not correct for an IP holder to effectively seek two sets of fees from a single instance of a product containing their invention. IP owners may need to decide at which point of the value chain they wish to intervene. A cessation or reduction of fees in the module market would improve module vendor profitability and help further decrease module prices, to more affordably sell through to manufacturers, creating a more meaningful downstream target for utility-based fees.

Global standards bodies, including the 3rd Generation Partnership Project (3GPP), may need to become active in brokering a standard for IoT licensing fees. Fair and affordable rates will benefit all within the industry. There may even need to be consideration for a royalty-free basis, or even a deferred royalty basis, for devices of a specific type and/or those that enable a certain type of utility; for example, Narrowband (NB)-IoT devices that act as an emergency trigger mechanism may never actually be used, but when they are used, they will then provide a financial return for the associated service provider or device manufacturer, thereby becoming eligible for a licensing fee. It is crucial to remember that it is the IoT business models that define the value of the connectivity used, not the price point of an IoT device.


Companies Mentioned