Huawei – Nowhere to run pt. XXVIII

Patents are no panacea.

• Huawei may be down, but it is far from out as it is now putting its efforts into replacing the revenues it is losing from US sanctions in other ways.
• I have to hand it Huawei as its management are fighters who executed extremely well to delay the impact of the sanctions and now are turning their battle-hardened experience in other directions.
• These include providing network equipment to fish farms and mines but the one I think it is really pinning some recovery hopes on is patents.
• Unfortunately, I think that this a triumph of form over substance.
• Huawei has already filed two patent infringement suits against Verizon (see here) over its alleged use of 12 patents in the areas of video communication and computer networking.
• It now intends to take this one stage further and assert its 5G patents against handset makers charging around 0.5% of the wholesale price which will be capped at $2.50 a unit.
• Huawei has declared that it has 3,007 5G patent families and has a total of 100,000 patents which is higher than anyone else, but this does not necessarily mean that any of this paper has value.
• To accompany this push Huawei has also published a white paper extolling its R&D prowess and when it comes to the implementation of 5G in base stations it has a point.
• This is not because it has more 5G patents than anyone else but because those who have looked at its 5G infrastructure solution have found it to be the best, better even than one-time leader Ericsson.
• This is why Nokia is now spending all the money it is earning and all the money it will save from its new cost reduction program on catching up because there is a big opportunity to replace Huawei outside of China.
• However, when it comes to its ability to extract royalties from handset makers for its 5G patents, there is another story to be told.
• This is because I have long believed that merely counting the number of patents held is a deeply flawed method of assessing the value contribution to a technology.
• The issue is best described by what I have long called “the seats and drinks trolley problem”.
• This issue also came to light in 2007 and 2008 when Nokia and Qualcomm were fighting tooth and nail over 3G IP and patent counting was used to de-emphasise Qualcomm’s contribution to the standard.
• The best way to understand this flaw is to use the analogy of an aeroplane.
• In order for a passenger aeroplane to fulfil its function (transporting people), it requires engines, ailerons and wings but also seats and drinks trolleys.
• Hence the IP for all of these items will be deemed essential to the standard.
• However, the IP for the engines, ailerons and wings is much more essential than the seats and the drinks trolleys because the aircraft is still able to fly without seats and drinks trolleys.
• It is this distinction that I think that patent counting misses and why I suspect that the Asian companies (Huawei in particular) are massively over-represented in the SEP count.
• This is for two reasons:
  • First, similarities to 4G: 5G is actually very similar in many ways to 4G and was only created as a separate standard in order to reduce latency and optimise transmission at millimetre wave frequencies.
  • For example, 5G uses the same OFDM coding system that 4G does meaning that the overlap is far greater with 4G than 4G had with 3G and so on.
  • Hence, a lot of the core IP that allows the 5G standard to “fly” is very similar to 4G and may even be replicated.
  • In the 4G patent count, Huawei and Samsung, in particular, have a much smaller share raising the question of how they came from so far behind in a similar standard to lead 5G.
  • One answer could be that they have developed IP that looks more like seats and drinks trolleys rather than engines and consequently, their contribution is less valuable than it appears.
  • Second, Apple: in the most recent patent war, Qualcomm and Apple were engaged in by far the most bitter dispute until Apple suddenly caved in and agreed to pay Qualcomm’s fees and use its 5G chips (see here).
  • I am pretty certain that Apple would have sourced its 5G chips from anywhere else if it would have allowed it to have a working 5G solution for the millimetre wave spectrum that is being used by a number of US carriers.
  • This would have allowed it to carry on fighting Qualcomm and still have a working 5G product for the USA.
  • The fact that it felt it had to use Qualcomm is a strong indication that when it comes to working product, Qualcomm (and I suspect Nokia and Ericsson) has a much stronger position in 5G than patent counting gives them credit for.
• Hence, I am far from convinced that patent counting is an accurate reflection of reality.
• Consequently, I think Huawei will have great difficulty in earning any meaningful revenues from its patents from handset makers.
• The one exception is Apple with which signed a patent license in 2015.
• However, I think that was more about Apple being keen to maintain a good relationship with the Chinese government (where it sells a high number of iPhones) as opposed to recognising the value of Huawei’s patent portfolio.
• There is some history of the Chinese government intervening on Huawei’s behalf (Salmon fishing in the Faroe Islands) and Apple presents a soft target with its shipments to China.
• Furthermore, Apple has a history of fighting tooth and nail when it thinks that the price being charged for patents is too high and so I suspect it is paying Huawei a token amount.
• The net result is that Huawei is unlikely to be able to replace lost profits from smartphones and infrastructure with patent revenues and that consequently, the outlook remains as bleak as ever.
• I think that in infrastructure the main beneficiary is Nokia (in which I hold a position) and Xiaomi, Oppo, Vivo and Samsung in smartphones all of whom still have unfettered access to smartphone components.
• Tough times are about to get much tougher.