A press release last Friday showed that the most important regulatory body in the telecommunications industry is starting to have second thoughts about so-called "RAND Terms" for patent licensing on standards. This follows concerns about the same issue in the software world, most notably in recent Cabinet Office deliberations over the treatment of software standards in the context of procurement. Much of the pressure to permit patents licensed on RAND terms (also known as "FRAND terms") to be tolerated in software standards has originated from the telecoms industry; this development shows they are considered a problem in that industry too.
"RAND" stands for "reasonable and non-discriminatory" (sometimes preceded by F for "fair"), but all contract terms under this banner are actually arbitrarily determined after the publication of the standard. The ITU is reflecting a widespread concern about this practice, which actually allows patent holders to set market entry conditions and lately has led to an escalating war of suit and counter-suit among industry players.
The ITU, formed in 1865 as the International Telegraph Union but now known as the International Telecommunications Union, has previously embodied the general approach of the telecoms industry, treating patents on standards as a natural and desirable part of the industry model. But their press release Friday spoke of an "Innovation-stifling use of intellectual property" that is causing a crisis in their industry. They said:
In light of recent patent disputes that have caused shipments of goods to be impounded at docks and the worldwide increase in standard essential patent (SEP) litigation, ITU will host a high-level roundtable discussion between standards organizations, key industry players and government officials at ITU headquarters in Geneva, on 10 October 2012.
A Gentleman's Club
In their world, "open standards" are those where anyone is able to freely participate in the definition of the standard; "open" does not refer to the use of the standard itself, as it does for software standards. Their industry has multiple standards bodies which operate on the basis of a completely open forum. A technical committee that's open to all participants asserts requirements for standards; participants then propose technical solutions for the requirements. A rigorously transparent discussion and vote on the proposals follows, and the agreed best solutions become the standard.
The people (or more usually companies) who proposed those solutions are then entitled to charge patent royalties from all implementations of the standard as a way to recoup their costs. Companies historically entered the process understanding this is how it works, accepting that royalties are not only inevitable but necessary. Since every participant usually ends up having at least some ideas accepted, most participants in the process have some claims on each standard, with the result that net royalties payable between the participants may not be the relative burden they appear if taken in isolation.
The whole thing has the atmosphere of an old-fashioned gentleman's club, with the open process augmented by private discussions in smoke-filled rooms. That club atmosphere and royalty hairball have historically driven the success of the telecoms market and protected it from competition; any new entrant to the market faces almost insurmountable barriers to success.
At least, that's how it used to work. But the telecommunications market is being inexorably drawn towards software, as well as disrupted by new players. This has had two consequences.
- First, vendors from outside the club, such as Apple and Google, have seen the market as ripe for disruption and entered with clever strategies to either game the industry (Apple) or avoid its cartel-like club (Google). The ITU's cries of concern might be understood as the industry protesting that these newcomers aren't playing by the unspoken rules (unspoken perhaps because of the Sherman Act...).
- Second, established industry players have been straying into software standardisation, bringing with them their view that standards should be directly monetisable and proposing as norms ideas that are in direct conflict with the needs of open source software developers.
Representatives of telecommunications companies come to the software market with a RAND-expected view of standards, but their view is not useful in a standards community for software specifications where RAND is not considered reasonable. They express "horror" at "naive" expectations that "open standards" will be redefined as being entirely free of royalties. They argue that such a definition will prevent innovators recovering their costs, and that important technologies will be excluded for the market as a result. They argue that most standards are RAND licensed and that restriction-free approaches are the exception.
But they are wrong. The British Standards Institute say that almost no software standards are royalty-bearing; ComputerWorld's Glyn Moody has expanded on this too. More than that, the software standards arena is different. Work at W3C, OASIS and other bodies is conducted in the expectation that its participants will recoup their costs through commercial competition in a resulting dynamic market. RAND terms are theoretically available to standards in these bodies, but approximately no standards activities use them. In this context, RAND terms actually discriminate unfairly against the majority of market participants, who have come to the standards activity and the marketplace in the expectation of recovering their costs through profitable competition and not through rent-seeking patent taxation.
Given the sponsors and supporters of the ITU's consultation are almost all advocates of RAND terms, it seems unlikely the realisation and outworking of these realities will appear at their Fall consultation. But the tide is turning and at last the venerable institutions of the industry are admitting their concern. The new, integrated "ICT" market that's replacing the "IT" market is still being formed and there's everything to play for.