The Patent Box aims to stimulate UK innovation

The last couple of years have seen a rapid escalation in the number of patent disputes in the telecoms sector, prompting many big names to call for changes to software patent law to better allow the industry to break out profits derived from patents.

On Friday, the UK Government will close its consultation on the Patent Box draft legislation due to come into force on April 1 2013. The legislation aims to reduce corporation tax from 26 per cent to ten per cent for profits made on patented technologies. By offering this tax break, the aim is to increase high-tech manufacturing innovation in the UK and to encourage more telecom companies to set up on UK shores and increase investment.

Yet with the implementation of the legislation only a year away, if companies are to benefit from the reduced rates of corporation tax on patent profits, they need to understand which patents are owned – an arduous process that needs to be started now, according to legal experts in the field.

Jeremy Morton, patent lawyer and partner at CMS Cameron McKenna LLP, said the development should mean that some smaller businesses should now take a greater interest in filing patents, while others will want to review their established R&D, patent management and transfer pricing arrangements so as to make best use of available tax regimes internationally.

“What all this means is that patent battles are not just seen in court but also in the auction house. Old-school technology businesses like Kodak are seeking to pay off debt by offloading under-exploited patents that could have strategic value to others as bargaining chips,” Morton said.

Read the opinion piece from Jeremy Morton

“Patent Box will allow companies to apply the reduced tax rate to relevant profits from the sale or licensing of patents, the sale of products that owe value to patents, and compensation won in patent litigation. The regime is generous when it comes to products, because there need only be one European or UK patent underlying the product in order to be able to include the whole of the income from the product as the starting point for the calculations.”

Yet while this is a potentially attractive new regime, it has not been developed with the telecoms sector particularly in mind, so to take best advantage companies will need to review not only their tax and transfer pricing arrangements, but also the terms of joint ventures, licensing arrangements, business disposals and acquisitions, and plans for group reorganisations.

Patent value is now more important and complex than ever

It is impossible to open the business pages without some reminder of the huge importance of patents to the telecoms industry.  This largely reflects the changes in the industry and the transformation of mobile devices so as to challenge the role of the PC, cameras and even books.  The government’s proposal to introduce a ten per cent rate of corporation tax for patent-related profits is designed to encourage investment in innovation in the UK, and further highlights the opportunities for those who get patent value right.  This could mean that some businesses (perhaps SMEs) should now take a greater interest in filing patents, and others will want to review their established R&D, patent management and transfer pricing arrangements so as to make best use of available tax regimes internationally.

Patent value is now more important and complex than ever as giants like Apple and Samsung battle for market share, not least because patents can provide competitive edge by delaying others’ introduction of attractive user features.  Also, the relative strengths of patent portfolios will determine the net royalty burden when competitors enter into cross-licences.  These cross-licences are needed because of technology standardisation and the existence of multiple patents that are essential in order to implement those standards.   This complicates the application of the Patent Box in the telecoms sector, because the contribution to profits from a company’s own patents is not always easy to discern.

What all this means is that patent battles are not just seen in court but also in the auction house.  Old-school technology businesses like Kodak are seeking to pay off debt by offloading under-exploited patents that could have strategic value to others as bargaining chips.  Speaking of Kodak, it is worth noting, in present economic circumstances, that the Patent Box regime contemplates the making of profits, albeit particular kinds of profits from prescribed activities calculated by making prescribed deductions.  Where losses arise from these calculations, businesses should carefully analyse how to make use of Patent Box (if at all).

Patent Box will allow companies to apply the reduced tax rate to relevant profits from the sale or licensing of patents, the sale of products that owe value to patents, and compensation won in patent litigation.  The regime is generous when it comes to products, because there need only be one European or UK patent underlying the product in order to be able to include the whole of the income from the product (and, potentially, accessories, although this is not clear) as the starting point for the calculations.  Perhaps controversially for the telecoms sector, however, this contrasts with the approach taken to services businesses: if services income is generated with reference to patent rights, an intra-company royalty arrangement must be established and the reduced tax rate can only be applied to the royalties earned for licensing of the patent to enable the services.

The draft legislation requires companies to have undertaken technical development if they are to enjoy the beneficial regime, even if they are purely licensing businesses.  This should have the effect of excluding those companies that acquire telecoms patents purely for licensing purposes (sometimes known as ‘trolls’).  However, it is open to interpretation whether the development requirement is satisfied for example by acquiring patents and then participating in the development of a relevant standard – if so, patent trolls might still qualify.  Where the tax paying company is part of a group, the development work can be done by another group company as long as the claiming company manages the patent portfolio.  This latter point may have implications for technology businesses that outsource the exploitation of patent portfolios.  The extent of required development, and of the requirement for involvement in patent management, will clearly be open to interpretation and large businesses will also need for example to consider whether to manage all intellectual property in one subsidiary or create a standalone patent holding arrangement.

The distinction between patents and other intellectual property (such as software copyright or trade marks) is another important factor, because relief will be limited to profits from patent rights.  This contrasts with similar regimes in other countries, such as Luxembourg, which do include income from other intellectual property.  Under the UK regime, the calculation of attributable profits involves a deduction of a notional royalty for the use of ‘marketing assets’ that include for example brands.  This could be particularly significant for the telecoms sector, where the contribution made by particular patents is sometimes difficult to gauge.  Unlike the pharmaceutical sector, where one patented compound will often comprise the entire product, the numerous patents for, say, features of a mobile handset, often bring only small incremental gains.

Consumers will often be entirely unaware of the contribution made to the end product by those patents.  So, for companies that do opt in to the UK regime, it will be important to ensure maximum input to the Patent Box in respect of income that could be attributed to patents, as opposed to excluded features that may be more visible to users.

The consultation on the draft legislation closes on 10th February.  This is potentially a highly attractive new regime, but it has not been developed with the telecoms sector particularly in mind.  To take best advantage companies will need to review not only their tax and transfer pricing arrangements, but also the terms of joint ventures, licensing arrangements, business disposals and acquisitions, and plans for group reorganisations.  Savings could be considerable, but planning must begin now in order for arrangements to be in place when the regime comes into operation in 2013.

Jeremy Morton is a Patent lawyer and Partner at CMS Cameron McKenna LLP

Without an adequate medium of delivery, there is no message

Way back in 1996, at the dawn of the digital revolution, Microsoft founder Bill Gates declared in an article that “Content is King.” Gates drew a parallel to television, saying that “The television revolution that began half a century ago spawned a number of industries, including the manufacturing of TV sets, but the long-term winners were those who used the medium to deliver information and entertainment.” This statement has proved prophetic.  However the ensuing evolution of content – or more specifically content quality –is also proving to be one of the greatest challenges to the digital future. Without an adequate medium of delivery, there is no message.

The iPhone, the iPad, the Android platform, the Kindle, the ultrabook – new mobile devices have transformed the world in which we live and work. But this transformation has come at an increasingly high financial cost. The scale of network investment required to achieve the performance that customers expect – and the increased need to support complex services and content – is threatening the business case for mobile broadband services.

Typical mobile operators spend between 20 percent and 30 percent of operating expenses and 50-70 percent of capital expenses on network cost. As data volumes increase and the deployments of 4G networks proliferate, so will network costs. Such increases, combined with uncertainties about how to monetize higher levels of data traffic, represent a continuing challenge to operators that could hinder future profitability and cash flow.

One of the solutions to this problem is to limit network costs through network sharing, a formal arrangement between two or more mobile operators to share various components of their networks.

Changing Strategy

Historically, networks have been considered areas of competitive differentiation. Superior network performance and coverage have been the slogans of providers for years. However, many network components today are simply table stakes and may not be true differentiators. Indeed, by focusing on cost-reduction measures such as network sharing, management may be able to reinvest savings into alternative differentiating strategies such as customer service, innovative offerings and being first-to-market with new devices.

A well-executed network sharing venture has the potential to deliver a 20 to 40 percent reduction against standalone cost run rates . From one-third to two-thirds of those benefits are rooted in cost avoidance, with the balance resulting from actual cost reductions. Equally important, network sharing can help an operator significantly accelerate deployment speed, plug coverage gaps and grow revenues without increases in network costs.

Negotiating, planning and managing a network sharing deal requires executive leadership to overcome multiple complexities, including organizational integration issues and regulatory challenges. The prize for overcoming these challenges is the opportunity to control costs and achieve market advantage in the years ahead.

The business case

For a typical mobile operator, the majority of network costs don’t come from the core network. They come from the access network, often called the “edge.” This includes “backhaul” – the microwave, fiber or copper connections between the core network and base stations – and the “radio access network,” the final connection to the device. A recent industry analyst report found that these elements can account for more than 80 percent of incremental network costs. Most network sharing arrangements will therefore cover one or more elements in the edge, while the backbone is rarely shared. Which elements exactly are shared or kept separate will depend on the tradeoff between cost control and differentiation that the sharing partners are willing to make.  The financial business case is one that is clearly measurable, while differentiation is much more difficult to quantify. Interestingly enough, it is the differentiation agenda that will stir up the most emotions.

Savings are usually realized by consolidating two network infrastructure footprints into one, eliminating redundant sites and connections. Cost avoidance is delivered by using another operator’s network sites or leveraging a joint deployment strategy, thereby reducing deployment  and operating costs. In addition, operators often receive a top-line boost from network sharing. By using a partner’s existing sites, operators can accelerate deployment of services and improve customer experience and retention. These have obvious positive impacts on revenues.

Mobile network sharing strategy depends on careful planning in three key areas.

Choosing the right organizational model

A formal network sharing partnership requires a dedicated organization to manage it. These arrangements are generally of three types. An operating joint venture involves both parties contributing financial and human resources to the organization. An asset-owning joint venture involves having the network sharing organization take control of the assets and liabilities related to the network share, with each party having an equity stake in the organization. The third arrangement is one where a neutral third-party operates and manages all aspects of the network sharing venture and charges back all relevant costs to the different partners.

If the sharing partners are similar in terms of spectrum position, backhaul strategy and market share, the first model is often the most appropriate. The other two models work better when there is a significant difference between the sharing operators.

Regulation

A number of important regulatory constraints, especially those focused on the impact of network sharing on competition, must be carefully considered and managed. Typically, operators cannot use network sharing to reduce competition or coordinate their market behaviors.

This restriction can hinder rollout synergies because it limits the extent to which the sharing partners can align their plans. Only the joint-venture organization is permitted to view both operators’ intentions, but it cannot share this information with either party. Both operators need to be aware of these constraints and not be tempted to compromise them in a way that would increase regulatory risk.

Integration

Successful network sharing requires meeting several integration challenges across systems, processes and people. From a technology perspective, the success of a network-sharing venture depends on the ability to align the information systems across the different organizations and to keep the information consistent for both. Network processes will also overlap, so it’s important for operators to understand each other’s existing processes, delineate the responsibilities each operator will have, and make any needed changes to either side’s approaches to support the success of the venture, as well as prevent any leakage of competitively sensitive information

Because network sharing changes the way people work, effective change management activities are important, including clear communications, team building and support for cultural change.

The common thread among these success factors is strong program management. A dedicated program management function – which drives the coordination and integration of the consolidation and rollout –can make the difference between success and failure of a network sharing venture. Some operators are looking to improve speed to value by leveraging a third party to deliver program management – an organization that can bring experience from other similar ventures and that can, by being neutral and not aligned to either side, be in a better position to make difficult decisions.

A final thought

Network sharing is a significant opportunity for network operators to keep costs under control while also improving the customer experience and retention. However, operators need to be aware of the subtleties that underpin this strategy, specifically around cost reduction versus cost avoidance. In addition, benefits will be difficult to achieve without effectively addressing a range of operational and management challenges around the organization, integration and competitive aspects. Getting this right will significantly improve an operator’s chances of driving advantage from a network sharing strategy.

Paul Bultema is Executive Director, UK and Ireland Strategy Lead, Communications, Media and Technology operating group, at Accenture. Read his comments on Customer Experience Management in a forthcoming feature due in February.

Operators will have to fight for tablet retail revenues

The tablet market is set to explode over the next five years with retail revenues on such devices increasing from $34.5bn in 2011 to $121.5bn in 2016. Yet analysis from Informa suggests that the operators’ slice of this pie is in danger from independent retailers, such as Carphone Warehouse, Amazon and Tesco and direct manufacturers like Apple, coupled with the challenge in convincing consumers to take out data plans attached to these devices.

Informa expects independent retailers to increase their share of smartphone retail revenues from 29 per cent in 2011 to 34 per cent to 2016, a trend expected to be even more prevalent in the tablet segment.

According to Julio Puschel, principal analyst at Informa: “Tablets will drive significant changes to the current telecoms retail business model. New entrants, such as Amazon and other consumer electronics specialists which have already a very evolved online and multichannel strategy, will drive online tablet sales even faster than online smartphone sales, which will force operators to review their multichannel approach.”

Furthermore, independent retailers are innovating and promoting significant changes in telecoms retail, such as modernising their stores to offer a better customer experience, product testing and offering specialised customer support that also focuses on consumer education. As handsets develop and become more complex, presenting their features and benefits to consumers is more of a challenge for operators. Specialist retailers have to date proven to be better able to educate consumers by providing an enhanced, interactive shopping experience.

“Telecoms operators will need to watch the independent retailers closely to see how they are transferring their retail expertise to the smartphone and tablet market. They need to be able to offer an outstanding shopping experience that can match or outperform the independent retailers – not simply pushing device sales, but also demonstrating the services, content and applications attached to these devices,” said Puschel.

In related news, Google’s Android platform is becoming increasingly more popular in the tablet space.

In 4Q11, tablet devices running on Google’s operating system accounted for 39 per cent of the global market share, up from 29 per cent in the same period a year earlier, according to research firm Strategy Analytics.

During the quarter, global tablet shipments reached 27 million with Apple iOS maintaining its strong leadership at 58 percent. Global Android tablet shipments tripled annually to 10.5 million units, driven by models distributed in various countries by brands such as Amazon, Samsung and Asus.

Global tablet shipments hit 66.9 million units in full-year 2011, surging 260 percent from 18.6 million in full-year 2010.

Ericsson has been building strength in Europe

Infrastructure giant Ericsson took a big hit in the fourth quarter of 2011, as handset venture Sony Ericsson weighed on profits and sales in the network division remained sluggish. But the company showed good recovery for the full year, notching up a 12 per cent increase in revenues year on year to SEK226.9bn (€25.6bn), while profits rose 12 per cent to SEK12.6bn.

Group sales in the quarter were flat year-over-year and grew 15 per cent sequentially, a weaker than normal performance in the fourth quarter. Speaking with telecoms.com, Ericsson CFO Jan Frykhammar, said the main factor here was a slowdown network spending in North America and Russia. The company has also been building its strength in Europe, taking on lower margin contracts with a view to more repeat business in the future – a strategy that is working but has impacted the gross margin as a result.

2011 saw more build out of coverage for HSPA and LTE networks, with North America being more LTE centric and the rest of the world tilted more to HSPA.

But there were positive developments in the services business, notching up 70 new managed services contracts during 2011. Frykhammar also noted strong growth in consultancy and systems integration which reflects the importance of the Telcordia acquisition. The deal closed in early January and now the integration work will start, with Telcoridia becoming an integrated entity over time. The OSS firm is already a big name among Ericsson customers, especially in the US, and gives Ericsson expanded scope in terms of its customer base, with an aim to grow the business globally.

The fourth quarter was challenging for Ericsson’s joint ventures and both reported significant losses. The handset unit should not be a problem for long as Ericsson recently sold its 50 per cent share to Sony. ST-Ericsson is still struggling though and announced a new CEO in December who is tasked with securing that products get out in time. The company needs to capture revenue from smartphone growth, but Frykhammar said that at the moment its main focus in on the feature phone segment, which is in decline. ST-Ericsson also relies on a few big players, like Nokia, which is struggling in the sector at the moment.

A few weeks ago, Ericsson took steps to place more emphasis on protecting its intellectual property, by reorganising its Licensing and Patent Development department with the aim of creating a larger revenue stream from its IPR. In addition, the company’s chief intellectual property officer, Kasim Alfalahi, will now report directly to president and CEO Hans Vestberg.

“Over time, patents and licensing will become a stronger revenue stream for us. We have the strongest patent portfolio in the industry and it’s an important business opportunity for us,” Frykhammar said.

Incoming CTO Ulf Ewaldsson

Swedish equipment vendor Ericsson has announced Ulf Ewaldsson as its CTO, effective February 1. Ewaldsson is currently head of product area radio within Ericsson’s Business Unit Networks and a member of Ericsson’s research board.

Ewaldsson was involved in defining the creation of Ericsson products based on HSPA and LTE in the Radio Access Network and the Antenna Integrated Radio Unit (AIR).

He will be a member of Ericsson’s executive leadership team and will be based in Stockholm, Sweden. Therefore he will not take on the role as Head of Ericsson Silicon Valley, which Håkan Eriksson also had.

From February, Hakan Eriksson – a company lifer with 25 years notched up, the last nine as CTO – will be the head of the firm’s operations in three southern hemisphere markets: Australia, New Zealand and Fiji.

It will be a big change in pace as he swaps responsibility for global technology leadership and a Silicon Valley uniform of khakis and polo shirts for a regional market where total population is some distance below 30 million and a pair of thongs.

Ebay is predicting global sales of $8bn via mobile on eBay alone

Service revenues or fees from m-commerce transactions are expected to reach $37bn by 2016, bolstered by mobile remote payments for physical goods and services and international mobile money transfers. These two elements together will be worth over $25bn in 2016, accounting for two thirds of the total m-commerce market, according to statistics released this week.

Online auction house and PayPal owner eBay recently reported that sales from mobile payments now account for over ten per cent of its total purchases in the UK. Ebay is predicting global sales of $8bn via mobile on eBay alone up from $5bn last year, while PayPal is projecting that its global mobile total payment volume will be $7bn in 2012.

“According to our research, mobile retail will be worth a massive £19bn to the UK economy by 2021,” said Angus McCarey, UK retail director for eBay.

Shailendra Pandey, senior analyst at Informa Telecoms & Media, which published the m-commerce forecasts, said the market is increasingly moving in the direction of openness and interoperability with other telecoms, internet and financial services networks. This is likely to ultimately lead to the merging of the credit-card and mobile-payments business models, and quite possibly drive mobile operators, banks and credit card companies into competition with each other.

“Currently the majority of m-commerce transactions – including mobile banking, remote and local payments, and money transfers – are conducted using SMS, especially in developing markets. In the next five years, traffic will shift steadily onto more secure and lower-cost bearers, such as USSD (Unstructured Supplementary Service Data) and packet data, mobile applications, and NFC in the case of local payments, with a corresponding fall in service revenue per transaction,” said Pandey.

Mobile operators in developed markets are creating cross-network alliances and joint ventures to compete with the global reach of the OTT players. At the same time, operators are also pursuing their own individual service rollout plans focused on own-brand mobile-wallet and prepaid-cash products. “There will be ‘first-mover’ benefits for those operators and service providers that are early to market with mobile wallet and m-commerce services as they will create greater subscriber ‘stickiness’ for their network and more churn from their competitors”, Pandey said.

In related news, Turkcell and Research In Motion on Wednesday announced the commercial availability of an NFC-based mobile wallet application, the Turkcell Cep-T Cüzdan, for the BlackBerry Bold 9900 smartphone.

Users can tap their NFC-enabled BlackBerry against a MasterCard PayPass reader at retail points to make payments of up to TL35 ($19) per transaction with no pin or signature.

The two operators plan to establish 4G mobile broadband labs in the US and China

The world’s biggest carrier in terms of subscribers, China Mobile, is testing interoperability specifications for the time division flavour of LTE (TD-LTE) with US operator Clearwire.

The two operators, along with other members of the Global TD-LTE Initiative (GTI), plan to establish 4G mobile broadband labs in the US and China, featuring a joint test platform and IOT environment for TD-LTE devices to establish common test specifications and joint interoperability testing (IOT) for the global band configurations, including 2.3GHz to 2.7GHz.

The expected availability of the Quad-Band LTE 2.3-2.7 GHz spectrum range, in addition to certain other bands like 1.9GHz, as well as FDD and TD-LTE mobility interactions, makes it an ideal global configuration for mass 4G marketing worldwide, the duo claim. The labs will allow for the evaluation and qualification of commercial TD-LTE devices simultaneously in the US, China, and other promising markets, using common testing methodology, equipment, and infrastructure.

“The unmatched spectrum portfolio underlying Clearwire’s planned LTE network has the potential to deliver faster speeds and with greater capacity than any current or proposed 4G network in the United States,” said John Saw, chief technology officer of Clearwire. “Close collaboration with global wireless leader China Mobile accelerates the development of multi-mode multi-band TD-LTE and LTE FDD devices and provides the common test specifications OEMs, ODMs, chipset vendors and other critical component manufacturers need to rapidly develop and commercialize products to serve this massive global marketplace.”

In related news, Chinese manufacturer Huawei, said Tuesday it has won a contract to provide Nigerian operator Zoda Fones with a commercial TD-LTE network for the capital and its surrounding areas. The deal marks Nigeria, and Huawei’s, first TD-LTE network deployment.

The LTE World Summit takes place May 23-24 in Barcelona

European operators accounted for only seven per cent of cloud spend in 2011

European telecom operators risk being sidelined in the global cloud computing market by aggressive North American and Asian operators spending billions on an international presence.

Research from Informa’s Telecom Cloud Monitor reveals that European operators accounted for only seven per cent of the $13.5bn that services providers spent on cloud assets in 2011. North American and Asian operators accounted for 90 per cent, or $12bn of the total.

Camille Mendler, principal analyst at Informa, believes uncertainty around European security and privacy laws, coupled with continuing economic weakness, are responsible for stalling investment. However, the European Commission aims to define a common legal framework for cloud computing in 2012. And European operators are supporting local innovation, with half the cloud services launched in 2011 relying on European cloud technology vendors.

“European operators are being outgunned in cloud infrastructure,” said Mendler, “Although they are working to stimulate local demand, their investment strategy remains cautious.”

“It’s urgent to defuse concerns about cloud computing in Europe to drive market development. European operators are major players in this endeavour with their trusted brands and sales outlets,” Mendler added.

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Informa’s research highlights fundamental differences among the 127 operators worldwide currently selling cloud services. European operators are focusing on launching services at home, while North American operators are acquiring client bases and assets at home and abroad and Asian operators are pursuing a blended strategy of infrastructure investment and service launch nationally and internationally. Meanwhile, Latin American, Middle Eastern and African operators are building up domestic infrastructure and competences.

In 2011, the top five telecom cloud investors were AT&T, Centurylink, NTT, Telstra, Verizon and Windstream. Leading European operators investing in the cloud were Deutsche Telekom, Orange, Portugal Telecom and Telefónica.

The high price of copper makes it attractive for thieves

With copper theft on the rise due to the value of the metal used in communications equipment, a component manufacturer has developed an alternative cable which uses less copper.

Telecoms equipment manufacturer CommScope has developed a copper-alternative grounding wire, which is basically an electrical conductor that has copper metallurgically bonded to a solid steel core. The development makes the cable less susceptible to theft by increasing the resistance to cutting and drastically decreases the scrap value through lower copper content. For inside plant bonding and grounding applications, the firm also produces a copper clad aluminium version.

CommScope said that the ongoing volatility of copper pricing has created a major concern for the telecommunications industry, in which telecoms operators traditionally use copper ground wire for network grounding and bonding, as copper wire becomes an attractive target for thieves intent on stealing it for sale to scrap dealers.

As copper theft continues to grow as a global problem and copper raw material costs increase, the use of copper clad steel alternatives have gained acceptance in more and more applications.