Connecting the connected car - why FRAND is important to the automotive industry

William Warne
CES is now an important event for automotive manufacturers and suppliers. (Source: Getty)

The integration of connectivity into vehicles is disrupting the automotive industry. This disruption may lead to a five letter acronym (FRAND - Fair, Reasonable and Non-Discriminatory) having a major impact on how both the automotive and mobile telecoms industries have traditionally done business.

Looking at the coverage from CES last month, you could be forgiven for thinking it was a car show. Over recent years, this event has become increasingly important for automotive manufacturers and suppliers, demonstrating the growing significance of connectivity to the industry. Retail consumers are increasingly choosing cars based on technical gadgets, rather than traditional factors like performance. Things like mobile wifi, in-car assistants and semi-autonomous driving are no longer futuristic fantasies. Even the automotive Holy Grail – the fully autonomous car – is predicted to be only a few years away.

The drive for vehicle connectivity does not end with the latest must-have features. Fleet operators are embracing the benefits of connectivity, allowing for real-time tracking and fleet management. Original equipment manufacturers (OEMs) are also increasingly seeing the importance of connectivity to help support their vehicles throughout their life cycle. The idea of your car booking itself a service is no longer that far-fetched.

Licencing in the mobile and automotive industry

All these exciting technologies rely on mobile connectivity and the drive to implement them is bringing together two very different industries – the automotive and mobile telecoms industries. The automotive industry has its roots in heavy manufacturing: long-established OEMs design, manufacture and sell their products. Over the last century, the basic model remains essentially unchanged other than the increased outsourcing of manufacturing to suppliers. Where outsourcing is done, the risk generally falls to suppliers – if a part fails or intellectual property (IP) is infringed, it is the supplier's fault.

The mobile telecoms industry, by comparison, is much newer – it barely existed 40 years ago. Much of the connective technology underpinning their products is standardised, meaning any device built to operate a standard (e.g. ETSI cellular standards or wifi) can connect using that standard. Developing these standards has been a huge undertaking, with telecoms companies investing billions of dollars since the 1980s. To reward this investment, these companies can charge a royalty to use their IP covering the standards, providing they do so on FRAND terms. As most owners of larger standard essential patent (SEP) portfolios are also the phone manufacturers, a model developed of licencing at the handset level, rather than at the supplier level.

Currently, very few connectivity modules in vehicles are licenced. However, the increasing roll-out of connectivity by the automotive industry means this will change. The scale of implementation, number of connective modules per vehicle and importance of connectivity to the industry means the total royalty burden in dollars per vehicle is unlikely to be lower than for smartphones (a high single figure percentage of handset retail price). There is an argument the burden could become significantly higher, with SEP licencing royalties becoming an appreciable proportion of connected vehicle retail price if the technology comes to influence buying habits.

The issues around royalty payments

If this royalty burden falls to suppliers of connectivity modules in the traditional way, it could cause significant issues. Even a fraction of a percent of vehicle retail price would far exceed their margins, meaning licensed suppliers would have to significantly raise their prices. In a highly competitive marketplace where it is impossible to ensure everyone is licensed, this is would be a big problem, especially as SEP owners have committed to licence on fair and reasonable terms. Alternatively, SEP owners will argue that their licencing model means the OEMs should pay the royalties. If OEMs refuse to accept this, they could face being sued for SEP infringement with the risk of an injunction if they are considered unwilling licensees.

Ultimately, SEP owners will want to be paid a licence fee and companies at all levels of the automotive supply chain will want to minimise their exposure. Finding a solution to the licencing point issue is likely to be an important topic over the next few years.

Related articles