Guest Post: Is Big Tech FRANDly to Competition?

Charles Duan is the Director of Technology and Innovation Policy at the R Street Institute, a nonprofit, nonpartisan think tank based in Washington, D.C. This post is cross-posted at the Disruptive Competition Project.

On Tuesday, Apple released a new policy on its website relating to the obscure topic of “FRAND” licensing of patents. That’s an especially obscure corner of the already-obscure area of patent law. But it’s worth the attention of anyone who follows the debates over big tech and platform dominance, because Apple’s statement reveals an important industry-wide shift in many key tech companies’ views on their position in the technology ecosystem. So far, that shift has favored smaller companies hoping to break into the technology market, but current threats could endanger those small companies and competition generally.

Though you’ve probably never heard of the acronym FRAND, you certainly know some of the acronyms it has produced: Wi-Fi, USB, HTML, 4G LTE. These are examples of “technology standards,” which allow computers and electronic devices to communicate and work with each other. Unsurprisingly, standards are absolutely fundamental to just about every smart device out there today, from your mobile phone to your Wi-Fi juice maker. Standards are the reason that, when you look for a new Bluetooth headset compatible with your latest phone, you find not just one company making them but dozens.

Technology standards don’t arise out of thin air; they are rigorously devised by “standard-setting organizations,” consortia of companies and engineers that assemble technologies into standards. A problem comes up when a company contributes a patented technology to the standard—a patent on a component of Wi-Fi could (and did) allow someone to sue anyone who owns a wireless router. Standard-setting organizations try to avoid that by requiring members to license any patents essential to the standard on terms that are “fair, reasonable, and non-discriminatory,” or FRAND. Implementers of products using the standard can thus feel safe knowing that they will not be pushed out of the market due to overbearing pressure from a patent holder.

The FRAND obligation represents a balance between implementers of standards and holders of standard-essential patents. But there is an ongoing debate as to which way that balance swings. Apple’s statement promises to push the needle toward implementers and away from itself as one of the world’s largest patent owners. That contrasts with positions of other companies and the Trump Administration, who treat the FRAND obligation as essentially allowing patent holders free rein.

By taking the pro-implementer side of the FRAND debate, Apple reflects an industry-wide shift from a desire for dominance to a culture of compatibility. Just a few years ago, Apple was waging “thermonuclear war” with its smartphone patents and pushing any number of proprietary iPhone dock connectors; today the company embraces the USB-C standard and offers a patent peace treaty. And it’s not just Apple. In 2012, Google took the anti-implementer side when it bought Motorola’s patent portfolio, yet today the company’s trade associations call for vigorous enforcement of FRAND obligations to protect implementers. Microsoft, once a champion of closed, proprietary technologies, today embraces open-source technology and calls for “seamless interoperability across software platforms and hardware devices.”

What explains this change of heart? Direct self-interest doesn’t seem to be enough, since these companies are major players that are fully able to negotiate favorable patent licenses, and they are also major patent holders. Instead, these companies are realizing that they actually depend on small technologists. In a world of app stores, Bluetooth accessories and, yes, even Wi-Fi juicers, no company can hope to satisfy the full range of consumers’ technological demands. Large platform companies need small implementers to make devices and software compatible with platforms such as Android or iOS. Because of that, the big guys depend on the legal policies behind technology standards being friendly to implementers.

This platform–implementer symbiosis ends up being an important check on tech company dominance, and so it is unfortunate that some, including parts of the U.S. government, would prefer to swing the FRAND debate the other way. The Department of Justice, just a few months ago, retracted its longstanding FRAND statement on the grounds that it could “make it too easy for patent implementers to bargain collectively,” somehow ignoring that FRAND is meant to make it easy for implementers to bargain. A letter from Senators Thom Tillis (R.-N.C.) and Chris Coons (D.-Del.) recently encouraged the DOJ in this regard. And behind them are a handful of major patent-holding companies, most notably Qualcomm, Nokia, and Ericsson, who license their standard-essential patents with such creative aggression that the antitrust authorities have come after them multiple times across the world.

If these government officials and patent holders get their way in the FRAND debate, the harm falls not on the big platforms like Apple, Google and Microsoft. It falls on the small companies who depend on standards for their products to work. It falls on American consumers who will no longer enjoy the innovation that these small companies produce when they make compatible devices. And it falls on the economy at large, when the major technology platforms, without their symbiotic relationship with small developers, are forced to withdraw to in-house production, making them ever larger and more concentrated. In that way, what started as an obscure corner of patent law could end up having lasting effects on big tech and competition for years to come.