Cellular Sep Royalties and 5G: What Should Competition Policy Be?

Abstract

Over the last 15 years the cellular SEP market has achieved a long-run equilibrium spanning the development, deployment and use of 2G, 3G, 4G, and now 5G technologies. Cumulative royalties have converged to market values, and the market has apportioned them according to the incremental value generated by the intellectual property. In this competitive market, cellular technologies earn Ricardian rents, which are determined by the differential value that they create over alternatives.

The same specialized technology firms that previously helped to develop 3G and 4G are developing 5G in significant part. As with previous wireless generations, standardization, patents, and licensing support vertical specialization. As with prior cellular technologies consumers, enterprises, and implementers can choose among many alternatives to 5G for various tasks. Thus, 5G continues under the conditions underlying the functioning cellular SEP licensing market.

We are therefore not aware of a prima facie argument to justify the intervention of competition authorities to regulate 5G royalties. Competition authorities should instead be watchful over the equilibrium which has existed in the market for cellular SEPs over the past decade or more, ensuring that parties do not undermine it through tactics employed in their quest to maximize their own share of economic surplus. Should parties undermine the equilibrium in this manner, the results could be tragic for the associated technology, product, and service markets.

Keywords: 5G, Patent licensing; standard-essential patents (“SEPs”); royalty rates

JEL Classification: L15, O31, 034, 038