On May 31 2023, the U.S. and the EU wrapped up the fourth Trade and Technology Council, committing to foster the development of joint standards around next-generation mobile telecommunications and electric vehicle charging. Since the very first TTC meeting in 2021, standards have been at the heart of discussions, and the Luleå meeting was no different. As part of the meeting’s joint statement, an annex dedicated to 6G reiterated the importance of ensuring transatlantic leadership in the future of communications standards.
TTC negotiators have good reason to prioritize connectivity standards. Global cellular technology standards are the foundation of all aspects of our society and global economy — facilitating market access and acting as a catalyst for further technological innovation. Indeed, macroeconomic analysis estimates that their economic contribution accounts for between 7.4 percent and 63.6 percent of GDP growth across different geographies and periods.
Cellular standards are the result of effective global collaboration. Contributing technologies that are essential to the functioning of a standardized technology, businesses and researchers — contributors or standard essential patent (SEP) holders — are compensated by users of the standardized technology — implementers. This compensation is structured via patent licensing whereby contributors license their SEPs to implementers on fair, reasonable and non-discriminatory (FRAND) terms, typically reflecting the economic value that the patented technology adds to the end product. Licensing revenues are then used by contributors to fund R&D for future innovation.
Today, thanks to the high-quality contributions of Ericsson and Nokia — two of the world’s top five contributors to global connectivity standards — the EU is a leader in the development of ICT standards. But that might be about to change.
On April 27 2023, the European Commission announced a radical new proposal to upend the EU’s SEP system. The proposal not only introduces a wide-ranging and experimental system, but it does so without committing the resources and expertise needed to deliver on it. Take the prospect, for example, of giving control over specialized SEP tasks to a new competence center within the EU Intellectual Property Office (EUIPO), a body with no patent or standards experience. Building the right setup and competence for handling different SEP issues will take time and resources; rushing this process without sufficient staffing risks undermining the entire system.
The proposal not only introduces a wide-ranging and experimental system, but it does so without committing the resources and expertise needed to deliver on it.
Over more than 30 years, Ericsson has a record of not only sharing our technology to develop global connectivity standards, but also licensing and implementing patents from others. Seeing both sides of the equation, we can say unequivocally that the Commission’s abrupt overhaul of the system puts Europe’s long-term technology leadership, and even the balance of the global knowledge economy, at risk.
Jeopardizing Europe’s long-term innovation and growth
The Commission’s intention is clear: to accelerate European innovation in the growing connected devices sector by increasing transparency and predictability. They aim to do this by creating a European registry of SEPs and mechanisms for aggregate royalties’ notifications and dispute resolution.
Contributors need commercial incentives to invest in the R&D needed to generate SEPs. Fewer incentives have a knock-on effect, slowing the pace of innovation.
The logic might add up on paper, but the effect is completely dependent on the quality of the system and its implementation. Contributors need commercial incentives to invest in the R&D needed to generate SEPs. Fewer incentives to invest and contribute have a knock-on effect, slowing the pace of innovation. The result is higher costs for implementers and, ultimately, consumers. Without ready-to-use standards, companies would need to invest in the R&D themselves, which would be very costly. Equally, without the interoperability that standards provide, their products may not generate as much revenue due to market fragmentation.
A slowing pace of innovation and higher costs in developing connectivity standards would be bad news for European businesses of all sizes. Increased costs could mean SMEs get locked out of the system of innovation, and larger businesses — like in the automotive industry, strong promoters of the proposed regulation — increasingly rely on advancements in connectivity to fuel growth. Indeed, the total revenue from connectivity-enabled products and services in the automotive sector was calculated to grow from $223 billion in 2018 to $2 trillion by 2030. While the Commission thinks it is helping industrial patent implementers achieve long-term economic growth, tightening the hose on the knowledge economy has the opposite effect: it reduces the flow of innovation to a trickle that will have lasting economic consequences. Europe’s industrial economy simply cannot succeed without a strong knowledge economy at its heart.
Also at risk: EU technological leadership
The EU has enjoyed a privileged position as the center of ICT standard developments, a development that has been market and consensus driven. Patents declared at the European Telecommunications Standards Institute (ETSI) represent 70 percent of worldwide SEPs. The SEP regulation as it stands would jeopardize this leading position, threatening not only the competitiveness of the EU’s knowledge economy, but also its authority in standardization.
The economic stakes are high. Licensing revenues for 2G, 3G and 4G standards stand at around €18 billion per year. The proposed SEP regulation will put this at risk, ceding Europe’s licensing revenues to other parts of the world. Asia, where several top contributors to global connectivity standards reside, is likely to benefit most.
In addition, the uncertainty it creates could also undermine the outsized role the bloc’s authorities and courts play in developing the rules of engagement globally. Europe is a central hub for standards, SEPs and adjudication. But with the proposal introducing many new procedures to an untested body in record time and with insufficient budget, delays and inefficiencies could mean SEP holders treat the EU as a lower priority.
The uncertainty it creates could also undermine the outsized role the bloc’s authorities and courts play in developing the rules of engagement globally.
In short, the proposed SEP reform package puts one of Europe’s key advantages in the global knowledge economy at risk. The proposal is set to undermine the commercial and continued innovation logic that has helped Europe become a global leader in cellular standards — to the continued benefit of all European businesses.
Instead of rushing such a radical proposal through in the final months of the current European Commission’s mandate, any recalibration of the SEP licensing ecosystem needs to be measured to maintain quality and truly protect European interests. And finding that balanced approach needs time and proper stakeholder consultation. The semiconductor industry — where the EU has become increasingly reliant on foreign technology and has had to scramble to ensure economic security and sovereignty — serves as a cautionary tale. If Europe surrenders its leading position in the development of global tech standards, other regions will fill the vacuum. Why risk it?
