To ensure equipment from different manufacturers work together, industries agree to use components that conform to specific requirements. Standards make sure images recorded by a Sony video camera can play back on a Panasonic TV, or a Cisco router can transmit data from a Dell PC.
Manufacturers freely comply with standards because it ensures their products work with a vast array of other devices consumers already have or will be likely to buy. America’s booming tech sector is obviously a part of this ecosystem and is directly affected when the standards process becomes dysfunctional.Patented technologies can be used in standards, and companies that contribute them to a successful standard can be rewarded. But the market also provides needed balance—if patent holders try to set licensing fees too high, their standard faces industry-wide rejection.
Yet sometimes there are exceptions.
Because the FCC regulates broadcast TV, it has the power to mandate a particular TV standard. It chose a standard developed by the Advanced Television Systems Committee (ATSC) for use in cable boxes and “cable-ready” TVs that defines how the device tunes to each channel. By law, it must be used in digital televisions, converter boxes and other products containing digital television receivers sold in North America, South Korea and other countries that use the U.S. broadcast standard. This has proved too much of a temptation for abuse.
The ATSC standard is essentially a government-granted monopoly. MPEG LA, which manages the ATSC patent pool on behalf of its group of patent holders, charges a royalty of $5 per unit. That may not sound like much, but this is quite high compared to licenses for digital TV standards used in Europe, Japan and China, which cost $1.03, 98 cents and 16 cents per unit, respectively.
The higher cost has a snowball effect in the supply chain. In 2009, the Coalition United to Terminate Financial Abuses of the Television Transition, which included Vizio and Westinghouse, estimated that U.S. consumers pay about $20 to $30 more per digital set than consumers in other countries because manufacturers are being overcharged to use the intellectual property.
What’s worse is that the FCC requires ATSC-compliance in all digital TVs, whether or not they will be connected to a cable or satellite TV system. As more consumers “cut the cord,” switching from higher-cost multichannel providers to more economical Internet-based video on demand providers such as Netflix, Amazon Prime, Hulu and iTunes, they are paying for components they don’t need. Even if they do use cable, the royalty cost likely is redundant, as cable and satellite tuners must use ATSC as well.
The price distortion created by mandated use of patents has not gone unnoticed by other government agencies charged with antitrust enforcement. In a July 13 hearing by the Senate Judiciary Committee, Suzanne Munck, Chief Counsel for Intellectual Property at the Federal Trade Commission cautioned that patent holders could “use the leverage that they may acquire as a result of the standard setting process to negotiate higher royalty rates…than they could have credibly demanded beforehand.”
MPEG LA’s role compounds matters further. The company is among the most aggressive patent pool administrators. It has a long-standing reputation for forcing companies to purchase irrelevant and soon-to-expire patents in bundles with the actual patents they need, for buying up and warehousing patents on potentially competitive technology simply to prevent their market introduction, and for suing any company that attempts to market a product that incorporates techniques similar to those in its patent portfolios.
Smaller companies and start-ups are the easiest targets. In June 2013, four patent owners within the ATSC patent portfolio license sued Craig Electronics, Curtis International and ViewSonic for infringing on ATSC. This suit is more than likely an attempt to coerce the companies to buy the inflated ATSC license package from MPEG LA rather than face enormous legal costs trying to defend their claim.
The U.S., the epicenter of technological innovation and creation, should be especially concerned and ought to consider legislation to rein in frivolous patent suits from non-practicing entities.
Federal agencies need to be aware of how potential government-mandated standards compliance can lead to abuse. Given the way TV viewership is changing—especially the trend away from multichannel cable TV, perhaps it’s time for the FCC to review the scope of its ATSC requirements to make sure that U.S. consumers are not losing from the monopolistic behavior of the ATSC patent pool.