Rudi Bekkers shares with the AOM audience the ideas of his paper authored with Simon den Uijl and Henk de Vries, whose focus is on Patent Pools. Their work examines the experiences with three generations of patent pools in the optical disc industry. den Uijl, S., Bekkers, R., & de Vries, H. (2013). Managing intellectual property using patent pools: Lessons from three generations of pools in the optical disc industry. California Management Review, 55(4), 31-50.

1. Managing Intellectual Property Using Patent
Pools
Lessons from Three Generations of Pools in the
Optical Disc Industry
Academy of Management (AoM), August 2013
Based on special issue of California Management Review (Issue 55
Volume 4, Summer 2013)
Simon den Uijl, Rotterdam School of Management, Erasmus University / Royal Philips
Rudi Bekkers, Eindhoven University of Technology
Henk J. de Vries, Rotterdam School of Management, Erasmus University

2. 1. Introduction
2. Using patent pools to facilitate market adoption and
appropriate IPR
3. CASE #1 Patent pools in the optical disc industry
4. CASE #2 Patent pools in telecommunications
5. Designing and managing patent pools
6. Discussion and conclusion
PAGE 222-09-09
/ Department of Industrial Engineering and Innovation Science
Presentation outline

3. • Technology platforms are increasingly important. These platforms typically
cumulate many blocking patents (SEPs) fragmented across many owners
• This creates considerable transaction costs and may invoke other problems such
as royalty stacking
• It is in the interest of platform owners, though, to ease access to the required IPR
• In patent pools, two or more patent owners make a bundle of their patent
available to any licensee at a publicized price. Patent pools are an innovative
mechanism to realize better access, while guarding the interests of patent owners
• Patent pools have grown more sophisticated over time, responding to new
challenges
• This paper analyzes the conditions for successful patent pools by examining
three generations of patent pools in the optical disc industry, and offers a generic
framework to guide strategy and innovation managers in establishing and
managing a patent pool through the four phases of its lifecycle.
Introduction

4. Using patent pools to facilitate market adoption and appropriate IPR
• Companies have been pooling patents since the early 20th century, but as a result
of antitrust scrutiny, the concept was virtually abandoned in the 1950s
• In 1995, the US Department of Justice (DoJ) issued new intellectual property
guidelines, triggering the introduction of 'modern' patent pools.
• Many modern pools are on compatibility standards (e.g. DVD, MPEG, H.264)
• … but there exceptions (Golden Rice Pool, Medicines Patent Pool, Librassay)

5. Using patent pools to facilitate market adoption and appropriate IPR
Modern patent pools have the following characteristics:
• all pooled patents are available to licensors participating in the pool, as well as to
external licensees;
• licensees are offered standard licensing terms, usually a simple, coherent menu
of “patent packages” with prices and other terms;
• licensing fees are allocated to each member according to a pre-set formula or
procedure;
• an independent party is involved to evaluate the essentiality of patents before
they are included in the pool;
• membership for licensors is voluntary, and most allow additional patent owners to
join after formation of the pool; and
• they include various adjustment mechanisms for adding new patents and
recalibrating royalty shares.

6. Using patent pools to facilitate market adoption and appropriate IPR
• Competition is increasingly on technology platforms, which combine multiple technologies as
well as parties with diverse roles (e.g. devices, content providers, service providers)
• Positive network externalities lead to 'tipping' or 'winner takes all' features (network utility grows
with number of users, which in turns attracts complementary products)
• Platform sponsors (often the founders) need to encourage innovation around their platforms at the
broad industry level
• For a variety of reasons, platforms tend to include a large number of essential patents, which
creates patent thickets that can become an obstacle:
• Royalty stacking (royalties that are reasonable in isolation may together become an
prohibitive burden)
• Holdup risk (if one or more patent owners ex post require much higher royalties than
they could have demanded before inclusion of their patented technology in the platform or
standard)
• Transaction costs (if there are many distinct patent owners then implementers need to
spend a lot of resources and time into negotiations)
• These problems are catalyzed by ever growing numbers in patents, strategic strategies to obtain
essential patents, and the growing diversity of patent holders (e.g. NPEs)

7. Using patent pools to facilitate market adoption and appropriate IPR
For (prospective) licensees, pools:
• Provide a one-stop shop for access to patent licenses,
• Lower transaction costs and (usually) a discounted licensing fee compared to
multiple individual licenses,
• Create a level playing field (fewer competitors that do not pay royalty fees),
• Reduce uncertainty, increase transparency.
For (prospective) pool member (licensors), pools:
• Help to promote the adoption of their technology,
• Lower transaction costs,
• May lead to higher profits thanks to the more efficient licensing and collection of
royalties.

8. Using patent pools to facilitate market adoption and appropriate IPR
Yet, establishing a patent pool is not easy, and its benefits are rarely realized to the
full extent:
•Negotiating Cost—Forming a pool involves a process with substantial legal
expenditures. The benefits of forming a pool have to be compared with the
resulting costs.
•Asymmetric Information—Asymmetries in information (e.g., regarding the value
of individual patents) can cause bargaining breakdown.
•Self-Imposed Constraints—Efficient bargaining requires sufficient flexibility to
tailor patent pool conditions (e.g., license fee and royalty distribution) to individual
needs and bargaining powers. Many pools go for an equal treatment of all
members.
It is often hard to obtain a critical mass of IPR (especially now fragmentation of
rights is growing).

9. Case studies in two technology areas
Based on internal and external interviews (including key individuals that initiated
those pools), and material and literature review
•Optical disc industry: selected not only because this industry brought forward
the first 'modern' patent pool, but also is an example of successful pool formation
across multiple technology generations, and innovative changes.
•Mobile telecommunications industry: selected because pools would seem to
be able to address some of the major licensing concerns, yet have seen little
success

10. Pools in the optical disc industry
FIRST GENERATION OPTICAL DISCS - CD
•In 1979 Philips and Sony combined their technologies for optical discs in a shared
platform, the Compact Disc (CD).
•Although both were major players in the consumer electronics industry, they realized
additional market momentum was required to replace the installed base of the LP and
Compact Cassette.
•They published the standard (‘Red Book’) and established a joint licensing program.
Separate packages for players and discs.
•A third essential patent owner (DVA, later acquired by Pioneer) licensed its patents
independently.
•The number of patents was relatively small, and the patent climate in the early 1980s was
easy and benign.
•Under pressure of recording industry / record labels, Sony dropped licensing royalty
claims for disks (though Philips did not)
•Huge platform success, leveraged into CD-ROM (‘Yellow Book’) and CD-R (‘Orange
Book’)

11. Pools in the optical disc industry
SECOND GENERATION OPTICAL DISCS - DVD
•While Sony, Philips, Toshiba and Time Warner together started work on a optical disc for
video storage, the groups split into two camps (MultiMedia CD and SuperDensity Disc).
•With a platform competition looming, the computer and movie industry pressured the
respective camps to merge, eventually to become known as DVD.
•While being a huge success and quickly replacing VHS, the uneasy merger stayed
restricted to read-only disks, and for recorded discs competition flared up again resulted in
to incompatible standards (“+” and “-”)
•The two camps also each created their own a patent pool – DVD3C and DVD6C
•Being more visible now, the pools for the first time sought formal regulatory approval by
asking the US DoJ to issue a Business Review Letter (‘comfort letter’)
•DVD3C introduced a per-batch licensing system to combat licensees that defaulted
•While the pools did easy the licensing process, a producer needed to take licenses from at
multiple pools (DVD3C, DVD6C, but typically also MPEG-2 pool, and licenses for Dolby
Digital, UDF/ISO/IEC 13346, and for CD-Audio and possibly CD-R.

12. Pools in the optical disc industry
THIRD GENERATION OPTICAL DISCS – Blu-ray
•As commercial stakes were continuing to grow, competing standards appeared for the
successor of DVD, a generation to store high definition movies
•This time, market pressure did not result into a merge of proposals, and competing
technologies fought their battle in the marketplace
• Blu-ray by Sony, Philips, and Panasonic, with support of Samsung, Pioneer, LG,
Sharp, Hitachi, Mitsubishi, and Thomson. The Blu-ray supporters created the One-
Blue pool.
• DVD-HD, developed by Toshiba, NEC, and Sanyo. After a period of market
competition, its success was limited and the standard was withdrawn from the
market. But the DVD-HD developers also owned patents essential to Blu-ray and
created a separate pool, known as the BD Premier pool.
• Since Blu-ray players are usually backward compatible with DVD and CD, this
created even more fragmentation in pools and non-pooled patents.
• Concerned with this fragmentation, the Blu-ray pool pioneered with the ‘pool of
pools’ concept by trying to pool all necessary technologies, including previous
generations, into a single, one-stop shopping process

13. Pools in the optical disc industry
With a total per-unit fee of only US$ 9 (compared to US$ 25 for the separate pools
covered), the One-Blue was found attractive by licensees and quickly gained
momentum

14. Pools in the optical disc industry

15. • Main 2G (GSM) mobile standard faced considerable licensing problems, including
exclusion of players (see Bekkers, Verspagen & Duysters, 2001) and alleged
prohibitive fee levels
• For 3G (UMTS/W-CDMA), a high profile pool forming process was established in
parallel with standardization efforts
• Initially 5 or 6 meetings per month, high level involvement and commitment, including
almost all leading firms in the business.
• By many seen as a ‘royalty controlling scheme’ with ‘a cap (maximum) on royalties’ ,
which discouraged firms with revenue-based licensing model and/or high value patent
portfolio
• Considerable delay with obtaining green light from three leading competition
authorities (US, EU, Japan) – described as ‘deliberate obstruction’ by political /
commercial forces
• Despite lip service of many firms supporting need for pool, only very few eventually
committed themselves as members once the pool went live. The desire to cross-
license and obtain higher degree of control was stronger than the desire to have a
pool
Pools in the telecommunications industry

16. • While the pool is operational, it only covers a minor fraction of all patents
essential to the 3G standard
• While two 4G pools were launched recently, their coverage is very low too
0
10
20
30
40
50
60
Sept.1998
January1999June
1999Sept1999Late
1999M
id
2003M
id
2004Late
2012
(Any - not split)
North American
Asian
European
Pools in the telecommunications industry

17. Optical drive market Mobile telecommunications market
Ratio of technology
implementers vs. patent
owners
Implementers >> patent owners Most implementers are also patent owners
The conviction that a pool
facilitates market growth
There was a believe that a smooth, one-
stop shop mechanism to make licenses
available would facilitate adoption by
vendors and, eventually, by customers.
One winning standards, independent of pooling
efforts; market size considered autonomous
The role of bilateral
licensing and cross-
licensing
No specific need was perceived for
bilateral licensing.
Strong desire for bilateral (cross) licensing.
The motivation of pool
initiators to reduce
overall licensing costs
Reduction of licensing costs was not a
main driver
Reduction of licensing cost was a main objective
from day one.
Comparing the cases

18. In the paper, we offers a generic framework to guide strategy and innovation
managers in establishing and managing a patent pool through the four phases of
its lifecycle.
Designing and managing patent pools y

19. The future of pools – three relevant trends.
1). Rapid growth in patenting intensity, and increase of the number and diversity of
patent holders for any specific technology.
2). Increased convergence of functionalities into devices and products. Whereas
traditional technologies could often be exploited as a device or service in its own rights,
today’s devices often incorporate many differ- ent technologies.
3). The increasing use of IT and telecommunications standards as enabling technologies
in larger systems including smart grids, logistics and transportation, personal health, and
the “internet-of-things”
As result of these three trends, many of tomorrow’s markets will have to deal with a more
diverse and more fragmented IPR market, both in terms of sellers (patent owners) and
buyers (technology implementers).
This increases transaction costs and renders current practices of bi-lateral or cross licensing
increasingly ineffective. Patent pools will be more and more recognized as an attractive
model to facilitate these IPR markets, benefiting technology developers and technology
implementers alike.
Designing and managing patent pools y