The automobile technology sector with innovations for turning cars into wireless devices, electric and hybrid cars such as made by Tesla Motors, the self-driving car being developed by Google Inc. and even ride sharing services such as Uber, may offer patent investors a trading opportunity nearly as big as the recent patent wars over smartphones.
That’s the assessment of 3LP Advisors, the Boston and Silicon Valley-based intellectual property advisory firm, which has compiled an 82-page presentation on the outlook for IP disputes in the $9.1 trillion a year global auto industry, according to a market research report by IBIS Worldwide. The smartphone sector in comparison is expected to reach $1.8 trillion by next year.
3LP’s presentation was conceived by 3LP’s team including partners Kevin Rivette, Ralph Eckhardt and David Morland, and was developed by Mark Gober, a senior director, who was supported by Matt Mahoney, an analyst.
The firm’s views on the outlook for a patent war in the auto tech sector are shared by some in the patent advisory business including Zach Silbersher, partner with Markman Advisors, a New York-based consultant on patent disputes for institutional investors and family offices.
To be sure, others are skeptical of a patent war in the auto tech sector including Jayson Pankin, the CEO of Auto Harvest, a Detroit-based global on-line meeting place for innovators with an interest in advanced manufacturing intellectual property.
The issues deserve “attention from both automotive and technology corporations, and also from investors such as venture capitalists, private equity funds, and hedge funds,” Gober said. The “trends are relevant to prospective and existing investments of many such funds,” he added.
According to 3LP, annual revenue from connected cars has grown from $5 billion in 2010 to an expected $35 billion in 2016. And revenue is expected to grow to $40 billion in 2017 and to almost $50 billion in 2018.
A number of technology companies have been focusing on partnerships with big auto companies to get a piece of the auto tech sector. Amazon is working with Ford to develop the Echo and Alexa home automation services that could connect with a connected car. Microsoft also has partnered with automakers Toyota, Ford, Volvo, Nissan, and others, as well as connected car specialist Harman. They are developing a system for connecting cars to the Internet, other cars, mobile devices and home computers. Microsoft is even attempting to find safe ways to integrate Office 365 to the road. Earlier this year, Cisco Systems and Hyundai announced a partnership to make communication between car systems more effective with potential autonomous car applications.
Annual electric car sales, led by Toyota, Ford and Tesla, also have grown from a few thousand in 2010 to some 300,000 in 2014.
The technology for self driving cars also is expected to grow dramatically over the next few years. Partially or fully autonomous vehicles are expected to represent about 5% of vehicles on the road by 2020. That percentage is expected to grow to about 12% in 2025, 20% in 2030 and 25% in 2030.
3LP Advisors says the auto technology industry has been filing patents for inventions like crazy over the last few years. Google leads all companies with 201 autonomous vehicle patents or patents pending, followed by Ford with 106, General Motors with 96, Honeywell with 72, Lockeed Martin and Boeing, with 69 each. Toyota has filed 60 such patents, followed by the U.S. Navy with 55, iRobot Corp. with 51 and Honda with 42. Another 10 companies including John Deere, Caterpillar and Korea Electronics Telecom have each filed at least 26 patents.
In addition, ride sharing companies including Uber, SideCar (a unit of General Motors), Lyft and DiDi will be fighting it out for patent dominance in that end of the market. Uber already has a strong lead with 180 ride sharing patents, followed by SideCar with 12, Lyft with 2 and DiDi with zero. But new entrants in the ride sharing sector also include FaceBook, Apple, Parc (a Xerox company), and GM.
3LP Advisors is urging more established clients to use their IP strategically and aggressively to keep new entrants out of the market. Indeed, the firm cites the examples of General Electric, Procter & Gamble, Kimberly Clark and Kodak who have tried to do so, some with more success than others.
GE used its IP to force Mitsubishi Heavy Industries out of the U.S. wind turbine market. Similarly, P&G and Kimberly Clark filed enforcement actions against Paragon which led to a $200 million contingency in favor of P&G, a filing of bankruptcy by Paragon and an eventual settlement out of court.
To be sure, Kodak’s entrance into the instant camera business was thwarted by Polaroid’s aggressive efforts to protect itself with patents. After spending some $1.5 billion on its own factory for producing instant camera, Kodak was forced to shut down the factory and pay $925 million in damages as a result of Polaroid’s enforcement action.
When Dutch company TomTom tried to enter the U.S. GPS market with no patents, it was more successful in fighting off enforcement action filed by Garmin. Its success was tied to its purchase of patents from Horizon Navigation, which allowed it to countersue Garmin. TomTom ended up settling with Garmin, National Products and Mobile Traffic Systems Corp.
“TomTom’s success was built on an aggressive defense and a patent acquisition strategy that enabled it to go on offense,” 3LP says.
Patent wars are inevitable but winnable, 3LP says.
“Don’t bury your head in sand. Don’t assume that new market entrants can’t eat away at your market share – just ask Motorola and Nokia. The time to act is now – before new entrants gain momentum – and you can be like Qualcomm and Microsoft which have generated billions in patent royalties from smartphone manufacturers.”
Incumbent players should make sure they have the right patent assets, figure out where they should be filing their patents based on where the industry is heading. In addition, they also should identify high-value patent portfolios and acquire the relevant ones.
Other recommended moves include leveraging incumbents’ patent position to encourage favorable partnerships and supply chain relationships. They’re also encouraged to induce partnerships by demonstrating the relative strength of their IP. By being aggressive early, it may be possible to lock in favorable royalty rates now before it’s too late, and benefit from the revenue streams.
In addition, incumbent players should file patent infringement lawsuits against competitors that are unwilling to negotiate. It will help demonstrate to new entrants’ investors that they have serious IP risks and disturb their ability to raise money and try to limit competitors’ ability to fully access their supply chains.
Conversely, new entrants are urged to follow the example of Apple and Blackberry/Research in Motion who succeeded in breaking into industries with strong incumbents by aggressively filing their own patents in key technologies and making sure they did so in the appropriate jurisdictions.
“It’s going to be hard to level the playing field just by filing your own patents, so you should be proactively buying assets,” 3LP says. “Once your IP position is more equal to that of incumbents, cut balanced and favorable deals with them. Form partnerships with better terms. Negotiate favorable cross-licensing deals.”
While disputes between incumbents and new entrants will no doubt bring trading opportunities, so too will enforcement actions filed by non-practicing entities or so-called patent trolls.
NPEs including Acacia Research Corp. (ACTG), Intellectual Ventures, WiLAN Inc. (WILN) and Marathon Patent Group (MARA) are among the NPEs who already are active in pursuing enforcement actions with limited success. (See sidebar on diminished NPE threat.)
For his part, Markman Advisors’ Silbersher said in an email that speculation has been rising whether the auto industry would be the next battlefield for patents.
“Part of that is driven by the fact that cars are no longer just cars—they’re equipped with all sorts of networking technology, almost a movable example of the internet of things. That makes them ripe for attack by scores of IT and networking patents that can be held by the types of entities that previously attacked smartphones, i.e., failed startups or individual inventors.”
Moreover, Silbersher said the incumbent auto makers have traditionally refrained from entering patent wars with each other and appear to have preferred a détente of competing in the marketplace rather than in court. He said not all industries are like this—the medical device industry is highly litigious over patents.
“But cars are a lot more different than they used to be—there’s simply a lot more technology in them. I don’t see the incumbents resorting to suing each other over their core engine technologies any time soon. But there are many new entrants trying to establish their solutions for other networking problems as the paradigm—those are likely the source for new patent suits.
“Indeed, the moment before the new entrants consolidate, and the industry starts to rally around one or two key solutions, that can yield increased patent suits, particularly when some the startups start to fail.”
Those startups may be “prime customers for the larger NPEs, like Acacia and Marathon, that are in the business of taking that IP to monetize when the rest of your business is turning south.”
Silbersher said the other trend to watch is standardization. "A lot of the smartphone patent sector is driven by licensing. Qualcomm, Nokia, Motorola and Microsoft do not sue competitors that often for patent infringement, but they hold key standard-essential patents that generate considerable revenue through licensing.
“In fact, almost all of Qualcomm’s profits come from licensing its patents, not from selling its chips. It would appear that the more networked cars become, the more they would require standard-setting."
Silbersher said the growth of standards will yield a handful of key players, either auto incumbents, or high-tech companies from other sectors (such as Microsoft) that will hold large portfolios of standard-essential patents that need to be licensed by all players. "That is definitely a trend to watch."
Another leading indicator to watch is the growth of the standard-setting organizations in the auto industry. Another factor is that courts have begun to crack down on how much licensors can charge for standard-essential patents. However, that could lead to more litigation if patent holders find it hard to negotiate rates that are profitable, and feel compelled to go on the defensive.
To be sure, not everyone believes that the auto tech sector will spawn patent wars the way the smartphone did.
For his part, Auto Harvest’s Pankin said he’s “not sure who would be in a patent war except people who could be described as loose nukes trying to monetize against a peaceful kingdom.”
Pankin said “there’s very little enforcement activity between people in the auto industry supply chain. It’s very different from the cellphone industry.”
Indeed, Pankin noted that many of the incumbents in the auto sector have already or are soon going to be celebrating their 100 year anniversaries, while cellphone makers are still in their teens or twenties. This history means the auto industry has developed valuable relationships with consumers over the years.
“They are very skilled at competing for the hearts and minds of consumers and often have relationships with families over many years.”
Consumers are much less connected with their phones and more apt to trade their phones in for the latest innovation.
“There have been a few disputes in the auto sector but I wouldn’t call it a patent war,” Pankin said. “I would call it a misunderstanding.”
“I can’t fathom a situation where an established player would need to resort to the courts to hang its hat on what a jury decides a claim means in a patent dispute,” he said. “It’s a loser strategy.”
The auto industry has a different culture than the cellphone industry with “many ways into it if you have a legitimate invention. The culture is inclusive. I’m not sure who would be in a patent war except maybe North Korea.
“I haven’t seen [Tesla CEO] Elon Musk sitting in a tank shooting at anyone,” he said. ”He’s playing nice.”
Indeed, Musk has been lauded for open sourcing the patents behind Tesla’s electric vehicles in an effort to help foster innovation in what he hopes will become a much bigger market for electric vehicles.
If there’s the possibility of a patent ware, “why haven’t we seen anyone suing [Tesla]?” Pankin said. “It disproves the theory at the current moment.”
Pankin conceded, however, that things could change.
“Like any market for anything if a cluster of people believe they have value on the outside, they will try to get that value on the inside through the court system.” It’s the same with biotech and energy and other industries, he said.
But, he said currently, the courts “don’t favor small, slightly funded, temporary businesses trying to shake down an industry.”
—To reach the reporter responsible for this story, please contact Dan Lonkevich at 707 318-7899 or at email@example.com