Buyer Power and Power Buyers in Cellular SEP Licensing: Are there Implications for Competition and Competition Law?

Abstract

European competition law has always had a role in shaping the development of ETSI standards. In the 2000s and for part of the 2010s, competition law concerns about the “hold-up” of standard essential patent (SEP) implementers by SEP holders became prominent and competition law intervention in the area was largely shaped by hold-up concerns. Recent years have seen recognition of another problem: hold-out by patent implementers. Limitations on injunctive relief and the requirement that fair, reasonable, and nondiscriminatory (FRAND) terms be available at all times limit the licensor’s ability to achieve payment and the ease with which implementers can use SEPs for years before paying significantly limits the bargaining strength of the SEP holders. Hold-out or the credible threat of hold-out may lead not just to costly and inefficient litigation but also to depressed rates in “market-based” license agreements. However, even where these problems and issues are recognized, they are often treated as issues of bargaining that may affect the distribution of rents between SEP holder and implementer, rather than competition law issues.

This paper illustrates how the problems of hold-out should properly be viewed as the problems of monopsony. This is particularly the case because SEP holders in fact interact with a concentrated licensee market, with smartphone makers such as Apple holding a very high share of potential licensable revenue. These firms can act as dominant buyers, with vertically unintegrated SEP licensors dependent on them for revenues, but also for “validation” of their licensing programmes. This leverage or dominance spills over into a market-wide impact, through a variety of mechanisms we discuss, and thus is not simply an issue of bargaining. The evidence on royalty rates actually paid suggests that the leverage or dominance of buyers is not countervailing in nature but depresses royalty rates below the level that balances the interests of implementers and technology developers as envisaged by ETSI’s Intellectual Property Rights (IPR) policy and the FRAND commitment.

The resulting extraction of SEP holders’ innovation rents is akin to the effects of monopsony, and its results and effects on output (especially long-term output of innovation) are equally counterproductive. The monopsony power we describe also threatens to distort the pattern of future innovation because it asymmetrically impacts the incentives of unintegrated SEP owners. In an environment where innovation in air interface standards (e.g. the advance in capabilities from 2G to 5G) is a major driver of consumer welfare gains, a dynamic perspective on competition requires that competition authorities review the effects of hold-out as they would the effects of monopsony.

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