How You Should Think About Patents and Royalties
It’s easy for those with only a casual knowledge of standards-based technology development to consider patents and royalties a harmful and unfair “tax” on the companies that sell products based upon those standards. But understanding how standards like Wi-Fi are created delivers a completely different view. Patents and royalties aren’t a tax on the system; they’re the fuel that powers the system.
Let’s start with a quiz. Assume you’re at the airport in a crowded lounge, or maybe in a conference hall. Your notebook computer is connected via Wi-Fi and you’re about to make a critical video call, but notice other folks around you doing the same thing. Your main concern is (choose one):
A. I hope this call goes through and looks and sounds great.
B. I hope royalties on the Wi-Fi router aren’t excessive.
C. I hope royalties aren’t being paid to a non-practicing entity (NPE).
Hold that thought.
How Standards are Created
Though the standard-setting process varies among organizations like MPEG and the IEEE, most follow this basic structure. The process starts with a functional requirements document that, as the name suggests, defines the technical requirements for the new specification. Relating to our quiz, the key functional specs for Wi-Fi 6 were improved efficiency and throughput in high-density Wi-Fi environments, like airports or conference halls.
Once the functional requirements are set, individual members in dozens or hundreds of companies submit “technical contributions” to meet these requirements. This is a competitive process as different companies propose different technological approaches. Movement through the process is driven by individual voting members. In the IEEE group that sets Wi-Fi standards, as generally in standard-setting bodies, members vote to add technical contributions to the specification framework, adopt the specification into a draft, and approve the draft.
Member companies submitting technical contributions can be retail product manufacturers, chip vendors or other component vendors, telecom operators or pure research companies funded through product royalties. Or a combination of these. Technical solutions contributed to standards are almost always patented, which means they are highly innovative and involve substantial development, testing, and refinement.
These technical contributions are designed and developed by highly skilled professionals working in an extremely competitive environment driven by the voting process. Their charter is to create patentable technologies that solve key requirements of the specification. They’re the ones who make your video call a success or a failure.
Of course, not all technical contributions are accepted. Contributors often propose several solutions for every technical problem, but eventually only one is integrated into the standard. So, the companies employing these talented developers must fund the development of multiple inventions for each that’s integrated into the standard. This requires substantial investment.
Deploying the Standard
Once a standard like Wi-Fi is complete, it contains the best-in-class of multiple proposals from dozens of companies. Component vendors build chips that implement the standard and product manufacturers integrate these components into retail products that are sold to businesses and consumers. Products that implement the standard pay royalties back to companies that contributed technology to the specification, either bilaterally, or through patent pools that combine multiple contributors.
About These Royalties
A few things about these royalties. First, companies build products around standards-based technologies because the development process ensures that the standard will include the most effective technical solutions for achieving the requirements of the new specification. Deploying the standard allows them to remain competitive with other manufacturers and ensures that their products are compatible with all others that use the same standard.
Second, because of how standards are created and documented, companies who implement the specification can easily find out who the contributors are and that patents were actually deployed in the specification. The expectation of royalties is not a surprise; it’s a well-established component of the technology innovation ecosystem.
Finally, to ensure that patent holders don’t abuse the leverage that a standard gives them, royalties associated to standard-essential patents must be Fair, Reasonable, and Non-Discriminatory (FRAND). While opinions will certainly vary about what’s reasonable, FRAND is an established legal concept that both patent-holders and implementors can rely on in court. That said, by far the majority of patent licensing agreements are hammered out via negotiation, not by judges or juries.
How You Should Think About Patents and Royalties
Now back to our quiz. Your main concern is (choose one):
A. I hope this call goes through and looks and sounds great.
B. I hope royalties on the Wi-Fi router aren’t excessive.
C. I hope royalties aren’t being paid to a non-practicing entity (NPE).
The correct answer is obviously A. The Wi-Fi 6 development process ensures that, if your laptop and the local router both support Wi-Fi 6, you have the world’s best technology delivering your call.
Should you care about royalties? No, because they’re baked into the standard-setting and implementation process that brought us Wi-Fi, cellular, and many other similar technologies. If the router costs a few dollars more to deliver the best possible experience, it’s a reasonable price to pay. After all, innovation is a long and expensive process, it requires the possibility of reasonable returns to be worth pursuing.
Should you care if you’re paying royalties to a non-practicing entity? Why would you? At the end of the day, it’s all about the best technology to get your call through. And it’s irrelevant if that comes from a chipset manufacturer, a router vendor, a university, or a research shop.
So again, royalties aren’t a tax on the system; they're the fuel that powers the system. Eliminate or dramatically reduce these royalties and you remove the incentive that produced technologies like Wi-Fi and cellular in the first place.
Photo by Mikhail Nilov from Pexels