Licensing renewal – improving regulation

Telecoms.com periodically invites third parties to share their views on the industry’s most pressing issues. In this article Engineer Gerado Mantilla and Lawyer Patricia Falconí Castillo offer a deep dive into the topic of licensing renewal.

We live in a time where the rapid and growing technological changes are transforming societies, economies and public-private relations; which, in addition, not only generate an important impact in any company and more than anything on telecommunications, it implies to advance deeply in business models changes; and, it must influence unrestrictedly on Administrations, especially on National Regulatory Authorities (NRA), which must observe the changes that could accompany this economy transformation with a totally innovative and agile vision.

Telecommunications have been recognized as a transversal element on society and economy digital transformation. Recently, the Inter-American Association of Telecommunications Companies (“ASIET” in Spanish), public a document called “Telecommunications: a strategic ally for Latin America development”, where it made important contributions to telecommunications regulation policy, in special, regarding authorizations issue on spectrum use.

In this document, ASIET proposed the spectrum licensing duration up to 20 years. However, from our point of view, this recommendation should be accompanied by recommendations such as establishing clear rules for licensing renewal; being an important factor for telecommunications companies that make investments.

In certain countries, there are cases in which administrative titles or administrative authorizations granted by regulators allow operators to provide telecommunications services cases, which may not have a finite period of validity. For specific mobile services, spectrum licensing are required, which have a finite time for its duration, having a substantial difference between provider to provide service and an input as indispensable as its radio spectrum.

Although in most cases the Telecommunications Laws establish possibility to renewing these licensing, it is no less true that these processes can generate uncertainty to service providers and therefore in the rest of the sector.

Now, it is worth analyzing these aspects since its genesis, taking much more relevance when considering telecommunications markets openings, especially in Latin America, where in many cases some spectrum licensing for use and telecommunications exploitation have already been renewed.

From these licensing renewals, it has been possible to observe a lack of clear rules and tangible or measurable elements that allow an objective identification of causes that will be evaluated by NRA to make decision to renew or not. It is evident that, due to exclusive decision from NRA, as grantors of licensing, there must always be a legal reserve for final decision, based either on current regulations or depending on public policy needs.

To make this evaluation, it is necessary to consider how other economic activities, traditionally comparative with telecommunications markets, such as banking and other productive sectors, establish its authorizations for general public services provision.

Legal Analysis

We must start with clarifying what are licensing in telecommunications, so we can say they are: the voluntary agreement between the State and companies licensed, which generates rights and obligations between those parties, by virtue of which the State delegates temporarily, a public service execution, to ensure its operation, carrying out exploitation at risk and licensing expense, under supervision and State control itself. That is, licensing are subject to a specific term, in Brazil for example, it are 20 years, Chile 30 years; and, Mexico 20 years.

Knowing what licensing are and assuming that, one fundamental pillars for telecommunications development are investments that companies make it, not only at infrastructure level, but also when it participate on radio spectrum assignments; licensing granted must take care of legal security application principle, which “is nothing other than the possibility that the State must give us through the right to foresee the effects and consequences of our actions or the conclusion of contracts to perform them in the terms prescribed in the norm, so that they have the effects that we want or to take the updated measures to avoid the effects that we do not want, and that could take place according to the law”

In this sense, although there is no consensus on how to measure legal security and its impact on the economy, it is no less true that the “Global Competitiveness Report” issued by the World Economic Forum considers legal security as a fundamental pillar to have an attractive legal framework for investments, measured on institutional soundness parameter, being the first of twelve parameters that make up this index.

This pillar consists of 22 parameters, among which are included, among others, government regulation complexity, regulatory policy transparency, government services to improve companies performance, all of which are closely linked to legal security system.

One could then consider, as key factors for investments, legal security and regulatory predictability that NRA can provide to companies in the sector. With this, it is not a question of limiting or normative restricting of the State power, on contrary, this faculty must be developed and implemented from licensing moment, through clauses establishment that contain clear elements that are will consider at renewal time.

It could be admissible if and only if, public policies under which these elements were established have changed substantially; or in its absence, constitutional framework of country undergoes modifications that are opposed to said elements, in exercise of its regulatory the State power, could generate certain modifications, without this meaning, violations of economic equilibrium contract, subtract or limit acquired rights; make it more expensive or impossible to comply with obligations, but above all taking care opportunity for its; that is, that modifications are not made within last years concession from our point of view.

Now, reviewing Chilean, Mexican and Brazilian laws, it can see something in common and there is no clear and express provision of what elements will be considered within the renewal processes, only establish process to be followed, requirements and request times. This lack of clarity translates into a strong legal uncertainty that can limit or strongly restrict investments in the sector, generating delays when deploying new infrastructure or adopting new technologies.

Propositive elements

Taking into consideration this legal analysis, we can afford to present a possible proposal that allows us to place this issue on discussion table, only as an initial vision, but not as a single truth or formula or even a position in favor of one of the actors on telecommunications market. Obviously, each NRA has the possibility of making the decisions that it consider appropriate in favor of development and services deployment; however, from an academic position we can propose these elements.

Deepening, we consider that there are elements that can be considered, in order to reduce as much as possible the NRA discretion; without implying limitations of its faculties, on contrary that generate legal security; by defining clear and measurable objectives, which could be following: investments, coverage, services quality, tax payments and administrative fees.

At investments case, operators usually carry it out during licensing entire duration, which usually focus on the first years of network deployment, considering the first 5 years of the licensing – new licensing. However, although these investments decrease after fifth year, operators continue to invest on equipment maintenance and systems necessary to ensure network operation.

In renewals licensing case, although there has already been a first investment, it is no less true that companies must constantly invest in technological innovation and network, based precisely on high technological turnover by accelerated services improve and same generations.

Next element is networks coverage, many NRA impose obligations on mobile operators to cover certain areas or population centers that may not be of interest to operators, given their low or no profitability. The fulfillment of these coverages can easily be measured by NRA, and can be included from beginning, with certain indicators that allow the operators to foresee all necessary actions to guarantee its compliance and effective deployment.

Quality services licensed is another element that has been clearly defined by NRA on different occasions and especially for mobile services, including access to Internet through mobile, fixed or nomadic clients since its licensing. Those that although it can be redefined by NRA, must be attached to legal security principle and regulatory predictability, that is to say, that although NRA can redefine its during licensing time, it must be set considering: (i) respect for those deployments carried out under initially set quality indicators (rules non-retroactivity); (ii) that its redefinition is not on granted licensing last period, with sole purpose of having enough time for implementation and processes stabilization if applied; (iii) are set under international technical standards similar to market to be applied; and, (iv) not alter contract economic equilibrium.

About taxes payment and administrative fees, it is easy to identify correct payment in amount and time. In addition, existence or not repairs regarding these quarterly and annual payments, can be considered as elements that allow evaluating how operators have complied with this parameter.

Conclusions

In short, parameters identified are nothing new and many of its are already defined within specific regulation of each country. However, in many cases they have not been recognized as elements that may be causal to support approval or disapproval of spectrum licensing renewal.

Additionally, we consider that this discussion is at an ideal time to be evaluated by  NRA, considering upcoming processes of granting new licensing associated with spectrum that will be assigned for 5G deployment.

Finally, licensing renewals certainty about renewal methodology, spectrum evaluation, requirements and above all, in case of public competitions, process results, which translates into generating legal security.

 

Mantilla croppedGerado Mantilla is a professional with 19 years of experience in telecommunications market, performance in regulators, mobile operators and international consulting teams. Participation in International Organizations: International Telecommunications Union (ITU) and Inter-American Telecommunications Commission (CITEL). Right now, Gerardo is Regulatory Project Manager at Artifex Consulting S.A.

 

Falconi Castillo croppedPatricia Falconí Castillo is a Lawyer with more than 10 years of experience in Telecom regulation and competition. She has advised in Peru, about spectrum assignments, according to the best international practices; and proposals of normative improvements for its allocation. Currently, Patricia collaborate with Artifex Consulting S.A. and partner from Prospect Law Firm at Ecuador.

Qualcomm banks almost $5 billion from Apple and that’s just the start

In its latest quarterly earnings announcement Qualcomm revealed just some of the cash it’s trousering from Apple after winning their legal fight.

“On April 16, 2019, we entered into settlement agreements with Apple and its contract manufacturers to dismiss all outstanding litigation between the parties,” said the relevant bit of the report. “We also entered into a six-year global patent license agreement with Apple, effective as of April 1, 2019, which includes an option for Apple to extend for an additional two years, and a multi-year chipset supply agreement with Apple.

“While we continue to assess the accounting impacts of the agreements, our financial guidance for the third quarter of fiscal 2019 includes estimated revenues of $4.5 billion to $4.7 billion resulting from the settlement (which will be excluded from our Non-GAAP results), consisting of a payment from Apple and the release of our obligations to pay or refund Apple and the contract manufacturers certain customer-related liabilities.

“In addition, our financial guidance for the third quarter of fiscal 2019 includes estimated QTL revenues for royalties due from Apple and its contract manufacturers for sales made in the June 2019 quarter.”

Fiscal Q3 for Qualcomm is equivalent to financial Q2, so it covers all the initial payments Apple will make to Qualcomm as a result of their settlement. If you factor in the June quarter sales royalties that wouldn’t otherwise have been paid that should mean Qualcomm’s current account will be around $5 billion better off by the Summer.

There didn’t seem to be any details revealed about the new patent licence agreement, but the two-year backlog points to a historical rate of around $200 million per month. Given the apparently dominant negotiating position Qualcomm will have been in regarding access to its 5G products it’s easy to believe Apple will be handing over a fair bit more than that for the foreseeable future.

There was one other comment of interest in Qualcomm’s outlook. “Our financial guidance for the third quarter of fiscal 2019 also includes $150 million of QTL revenues from Huawei, which represents a minimum, non-refundable amount for royalties due by Huawei while negotiations continue. This payment does not reflect the full amount of royalties due under the underlying license agreement.”

While this is essentially a restatement of the announcement Qualcomm made a quarter ago, it implies the dispute still isn’t resolved. Aside from all this Qualcomm’s Q1 revenues were roughly in line with expectations but a relatively downbeat general outlook drove its shares down a couple of percent.

Apple capitulates to end war with Qualcomm

Qualcomm and Apple agreed to settle all the ongoing litigations with the iPhone maker paying the chipset maker an undisclosed amount and signing a six-year licensing agreement.

On Monday, Qualcomm and Apple went to court over the allegation that Qualcomm has been abusing its monopoly position to over-charge for its chips. The stakes could have run up to tens of billions of dollars, with the OEMs Foxconn and Pegatron already demanding compensation of $9 billion dating back to 2013. The case at the Southern District Court of California in San Diego was meant to last for five weeks.

On Tuesday, the two companies released a brief statement to announce a settlement. “Qualcomm and Apple today announced an agreement to dismiss all litigation between the two companies worldwide. The settlement includes a payment from Apple to Qualcomm. The companies also have reached a six-year license agreement, effective as of April 1, 2019, including a two-year option to extend, and a multiyear chipset supply agreement.”

This is definitely good news for the two companies especially for Qualcomm, and good for the industry and consumers. Specifically, for Qualcomm it means its business model will remain intact and the company can put an end to a multi-year legal saga; for Apple, in addition to avoiding the punitive $31 billion penalty, this settlement will be able to quicken its steps to launch a 5G iPhone, making up the gap already expanding between itself and the leading pack.

A few hours later, Intel announced that it intends “to exit the 5G smartphone modem business and complete an assessment of the opportunities for 4G and 5G modems in PCs, internet of things devices and other data-centric devices. Intel will also continue to invest in its 5G network infrastructure business. The company will continue to meet current customer commitments for its existing 4G smartphone modem product line, but does not expect to launch 5G modem products in the smartphone space, including those originally planned for launches in 2020.”

It must have been a blow to Intel’s mobile ambition, especially after it announced only late last year that it would bring the launch of its first 5G modem forward by half a year to the second half of this year, an act to prove the doubters wrong. That originally planned 5G modem to be launched in 2020 referred to in the announcement, presumably a second generation, was supposed to power the first 5G iPhone, after Apple all but officially declared that it would enter into an exclusive relationship with Intel.

Putting the two things together it may be reasonable to infer that Apple agreed to settle after it had realised that it does not have other options than coming back to Qualcomm for the supply of 5G modems (assuming Intel had updated Apple about its imminent decision to withdraw from the market).

In addition to leaning in on Intel, Apple has also been reported to be strengthening its in-house modem development capability, ultimately aiming to rid itself of reliance on external suppliers. Based on the terse announcement released together with Qualcomm, it looks Apple does not believe the home-grown modems will be good enough to compete with Qualcomm in the next few years. Huawei is another supplier that has launched its own 5G modem, but it may be safe to estimate that the chance of Apple going for Huawei chips is slim.

In keeping with the normal practice of settlement cases like this, the companies did not disclose the amount Apple will pay. However, Qualcomm updated the SEC shortly after the settlement announcement was made, as the settlement would have material impact on the earnings. The company expected an EPS incremental of about $2 “as product shipments ramp” without giving a specific timespan. As a reference, in the quarter ending 30 December 2018, Qualcomm delivered an EPS of $0.87 on the back of a total revenue of $4.8 billion. Therefore, assuming Qualcomm’s operational efficiency remains largely constant, the payment Apple will make could run into the $10 billion range.

Payment aside, there must be some soul-searching going on inside Apple, including by Tim Cook, the CEO, who came from a supply chain management background: how could Apple have let itself be cornered so badly in the first place? It’s hard to view this as anything other than complete humiliation for Apple, especially when you consider how aggressively it pursued this case.

On top of the millions it will have paid to lawyers Apple’s negotiating position in arriving at this settlement, considering what was widely assumed about its 5G modem situation, must have been very weak. So it’s quite possible Apple has ended up paying considerably more for Qualcomm’s chips than it would have if it had never initiated this war. Having said that, Apple’s share price seems completely unaffected by the news, probably indicating offsetting relief that it’s back in the 5G game. Qualcomm’s share’s however, surged 23% on the news.

Intellectual property and 5G: 2019’s culture clash

Telecoms.com periodically invites third parties to share their views on the industry’s most pressing issues. In this piece Pio Suh, Managing Director of IPCom, looks at intellectual property law in the context of the 5G era.

2018’s Unwired Planet v Huawei Court of Appeal judgment in the UK highlighted the complexity of patent licensing, and demonstrated the need for flexibility, transparency and a level playing field when it comes to negotiating intellectual property (IP) licenses in the telecoms and technology sectors.

It signified what we’ve predicted – and hoped for – for some time: a turning of the tables, and a re-balancing of the power traditionally held by some multinational corporations. Rather than the complexity, cost and time of Unwired Planet having to negotiate multiple patent licenses for every patent bearing country, for example, the case confirmed that setting worldwide licence rates is FRAND (fair, reasonable and non-discriminatory). No matter their financial standing, power has also traditionally lain in the hands of the licensee. This party often has the upper hand in licensing negotiations, as they are able to either refuse to take a licence or stall the development of negotiations; known as ‘hold up’. Licensing IP in a FRAND manner, however, allows a licensor to confer the benefit of their technology on an implementer while being efficiently and fairly reward for their R&D efforts and IP.

This year, 5G mobile technology will be the catalyst for a range of innovations, which will have far reaching impacts across a broad range of sectors, including automotive, healthcare and manufacturing. Fair recognition of 5G R&D and innovation is going to be crucial in the success of the new mobile technology, and businesses will need to understand the complexities in IP licensing, to ensure their innovations are rewarded.

FRAND and the re-balance of power

It’s a given that negotiations and decisions regarding IP licensing should be dictated by FRAND terms. Relying upon appropriate comparable benchmarks will facilitate open, amicable negotiations; and, in many cases, it will encourage dialogue, offers and counter-offers, avoiding the need for litigation.

However, we may have been too optimistic, too soon. The ongoing battle between Apple and Qualcomm demonstrates how expensive, and convoluted IP licensing can be. The latest in the saga? Qualcomm has successfully sued Apple for infringement of patents. This has resulted in both China and Germany banning Apple from selling some models of the iPhone. However, the ban does not extend to resellers, meaning these models are still available, at least for the time being. The immediate impact on Apple will be negligible, both in terms of sales in these regions and public perception – if I can still buy an Apple handset, will go the thinking, then surely the brand can’t have done wrong?

We’ll be keeping a close eye on how this rather complex situation develops through 2019 – and we shouldn’t be the only ones. It’s no longer solely technology companies – such as Apple, Qualcomm and Huawei– which need to understand the lay of the IP licensing land. The gradual arrival of 5G has welcomed many new sectors into the communications and technology industry, all of which will need to get smart on IP.

5G and the new culture clash

While earlier communications standards focussed primarily on connecting mobile devices to the internet and to each other, 5G is about unlocking significant opportunities in vertical sectors. Automotive, healthcare, mining, agriculture, manufacturing – it’s these industries where the more compelling business cases lie, and which are driving the development of technologies.

This has been great for these sectors while business cases were purely hypothetical. However, 2019 will see innovations come to fruition, and with them the issues and complexity of how to license crucial components of connected products. Major car manufacturers will need to consider every chipset, function and feature of their connected car; researching, negotiating and obtaining necessary patent licenses.

We’ll therefore witness a major culture clash in 2019, in which vertical sectors hoping to capitalise on 5G and the IoT will suddenly have to become technical experts and, as a result, know their stuff about IP. Failure to successfully navigate the IP landscape and ‘dance the FRAND dance’ could stifle progress and result in litigation.

An education in IP

Many of the vertical sectors now entering the IoT field are behind some of the most innovative ideas which, when realised, could bring huge socio-economic benefits. Think of the rapidly-growing market for connected wearables in the healthcare industry, for instance, or the productivity and efficiency gains promised by connected fleets of vehicles.

Many parties in vertical sectors will be dealing with situations they’ve never experienced before and will require guidance, education, and a clear-cut route to licensing and lawfully using IP. In order to encourage innovation and allow for these ideas to come to be developed, it’s important that all stakeholders work together to decipher and determine new rules around IP licensing and management. This will involve education, new partnerships and the exchange of knowledge. FRAND must continue to underpin these, and help to create a just, amicable business environment for all, and a fertile ground for 5G.

 

Pio Suh IPComAn attorney and member of the German Bar since 2006, Pio has over a decade of legal experience specialising in intellectual property rights and communication technologies. He has worked in-house for a number of multinational Fortune 500 companies – including Qualcomm, Oracle and Philips – to implement patent enforcement strategies on a global scale. Since July 2018 he is assigned as the new Managing Director of IPCom.

Qualcomm’s business model hangs in the balance as FTC case concludes

The US Federal Trade Commission accused Qualcomm of abusing a monopoly two years ago. Now a judge is set to decide if it was right to do so.

The original accusations coincided almost exactly with the commencement of hostilities between Qualcomm and Apple, with the latter saying the former was getting away with overcharging for its mobile chips thanks to having a monopoly in that market. The FTC case pretty much echoed that claim, with accusations of FRAND patent abuse thrown in for good measure.

It apparently takes a couple of years for this sort of thing to play out and the respective parties delivered their closing arguments recently. The FTC doesn’t seem to have made a formal announcement on the matter but credit to Cnet which has actually done some old fashioned reporting and sent someone into the court room.

Here’s the Cnet report from 15 Jan, which covers the FTC side of the case. The core of it seems to be that forcing companies who want to buy its chips to also take out patent licenses is wrong. It also claims that this process prevents other chip makers coming into the market and thus harms competition. Unsurprisingly a couple of Apple execs turned up to support the FTC case.

Among the FTC’s closing arguments is the warning that, if Qualcomm isn’t stopped, it will abuse the 5G market as it has previous once. But Apple’s own shift from Qualcomm to Intel chips would appear to contradict that assumption, as does Huawei’s recent launch of a 5G modem. These are also unhelpful in its bid to claim Qualcomm has a monopoly.

“The FTC hasn’t come close to meeting its burden of proof in this case,” said Qualcomm General Counsel Don Rosenberg in a press announcement. “All real-world evidence presented at trial showed how Qualcomm’s years of R&D and innovation fostered competition, and growth for the entire mobile economy to the benefit of consumers around the world.

“Our licensing rates – which were set long before we had a chip business, and revalidated time and again – fairly and accurately reflect the value of our patent portfolio. Qualcomm’s technology has been the foundation of a thriving, competitive industry.”

Now Judge Lucy Koh, who’s a veteran of this sort of thing, needs to weigh up all the evidence and arguments, and make a call one way or the other. The stakes are pretty high for Qualcomm as a decision against it would effectively be a decision against a big part of its business model. Expect Qualcomm’s share price react strongly either way when the decision is announced, which Koh warned might take a while.