One of the main upsides that cellular operators can see from the move to open mobile internet models is the opportunity to do away with the handset subsidies that squeeze their margins in many developed markets, including North America and most of Europe. Open access to their networks from any device creates nightmares for cellcos, but also the chance to avoid the subsidy - initially used as a tool to stimulate uptake when mobile networks were new, but is now a millstone around their necks. But there are many obstacles in the path of the no-subsidy handset.
One obstacle is that, unless IPR charges in advanced devices are lower than in 3G, device costs will be prohibitive for most users, curbing uptake of open internet services. If this proves true, operators may see customers reluctant to venture off the closed network - with the advantage of keeping control of the subscriber and keeping their bandwidth usage at a manageable level for the network - but with the downside of being stuck with the subsidy indefinitely.
But the critical issue as the industry moves towards next generation mobile broadband systems is the level of IPR charging.
Intel and Samsung have sought to spearhead an open, transparent and low royalty structure for Wimax patents, in order to deliver the Wimax Forum's promise that its technology would be better than 3G in this respect, but so far actual charges remain vague. Last month, a group of vendors - the big European cellular vendors plus NEC and NextWave - formed an alliance that mutually agreed to limit the royalty fees they would charge one another for LTE technologies in handsets, and invited the rest of the industry to join. However, at least four probable major patent holders in LTE - Qualcomm, Nortel, Motorola and InterDigital - have remained outside. Now, Nortel has confirmed fears of a long drawn-out debate over licensing practices and fees, announcing a unilateral system of its own.
The LTE grouping, whose major members are Nokia Siemens, Nokia, Ericsson, Sony Ericsson and Alcatel-Lucent, wants the maximum aggregate royalty bill in an LTE handset to be a single digit percentage of the sale price (Nokia and Ericsson have pushed, so far unsuccessfully, partly due to their own charges and partly to Qualcomm's opposition, for a 5% ceiling in 3G.)
Nortel says it will have its own licensing system, rather than joining a group, but this will be consistent and open to all and will be based on "about" a 1% royalty rate to handset vendors. It claimed its early statement of intent would "provide increased transparency and predictability" and "help simplify the current guesswork, while ensuring that its innovation is rewarded."
Clear statements certainly help reduce the risk associated with early deployment of new technologies - and would be welcome from some Wimax patent holders - but the nature and timing of Nortel's announcement also shows it holding itself aloof from an even more productive approach of joining an industry consensus. This may be for political motives, but also suggests Nortel believes - as it has often stated - that it has significant IPR in LTE that might go under-rewarded in a communal system where it would have to fight for its share against other giants. Although its suggested rates are lower than Qualcomm's are in existing technologies (the CDMA giant, short of refusing to join the new group, has not shown its hand on its licensing position in LTE) Nortel is essentially pursuing the same route as its chip partner, preferring to set its own rates and maintain control rather than join any pool.
Nortel has been placing greater stress on its IPR assets in the past year or so, as its equipment business has come under pressure. The first sign of the importance to the company of its patent holdings in the future LTE standard was highlighted in March 2007 when it was reported as signing a four-year, $15 million licensing deal with Alcatel-Lucent for pre-LTE technologies and IPR (shortly after the French giant had purchased Nortel's UMTS activities). In this era of consolidation of equipment makers, vendors will look to apply their R&D results to a wider market through licensing to their traditional rivals.
Nortel believes it has contributed significantly to OFDMA-based standards including LTE. In 2006, it gained 3GPP approval for its HSOPA (High Speed OFDM Packet Access) technology, which combines OFDM and MIMO smart antennas, for inclusion in LTE, although it is not yet clear how the mixture of technical elements, and IPR, will work out in the final specs. The HSOPA project drew on many of the areas into which Nortel has ploughed R&D resources in recent years, particularly smart antenna arrays, OFDM and mesh networking. Nortel claimed that its HSOPA/LTE prototype demonstrated the potential to increase tenfold the number of users that could be served by an operator's network and to reduce the cost per megabyte to the operator to a potential one-twentieth of current UMTS costs.
Of course, the 1% of the company's new proposal is not quite as consistent as it may seem, since most licensing deals involve an element of cross-trading for other patents. In the footnote to its announcement, the company says: "Nortel will license its LTE standards essential patent claims for LTE handsets at a royalty rate of about 1% on the sale price, subject to specific terms to reciprocity, defensive suspension, and grant back to Nortel products, services and solutions, as well as other customary license terms and conditions."
Meanwhile Qualcomm, which tends to be blamed - and sometimes scapegoated - for the high IPR charges in UMTS (ignoring the fact they used to be even higher in GSM, where Qualcomm did not play), has been predictably negative about the Nokia-Ericsson LTE group. "This type of approach would have a negative impact on competition within the industry and consumer choice as it would restrict innovations," the company told RCRnews.
Caroline Gabriel is research director of Rethink Research Associates