How Will Electrification, Connectivity and Autonomy Impact Auto Prices?

With the advent of electrification, connectivity and autonomy in passenger vehicles, the automotive landscape is changing at a rapid pace. Many vehicles can communicate with other vehicles, detect pedestrians, drive without user intervention, observe driver behavior, and drive long distances on a single electrical charge. Original equipment manufacturers (OEMs) in the auto industry, such as Ford and Porsche, look to differentiate themselves by offering these features in their automobiles. Robust IP portfolios protect these latest features, and the market is growing crowded with protection for the many components and processes related to this new industry.

Standard Essential Patents

Many of the patents in those robust IP portfolios are Standard Essential Patents (SEPs), which are patents claiming an invention that must be used to comply with one or more industry standards, such as NFC, LTE, and WiFi. SEPs often cover the latest technology for which consumers clamor. SEPs can be used to prevent a party from implementing a particular standard in their product. For this reason, standard setting organizations (SSOs) have required their patent holding members to make their SEPs available for license to any standards implemented on Fair, Reasonable and Non-Discriminatory (“FRAND”) terms. Standard setting is a cornerstone for many high-tech and manufacturing markets, and encourages innovation and investment in new products, according to the Federal Trade Commission (FTC). By agreeing to standards, companies can ensure that the numerous components can work together seamlessly, often called “interoperability.”

SSOs form around the latest areas requiring standardization, such as electrification, connectivity and autonomy of passenger vehicles. SSOs will have to be established (or are already established) for cellular communications, electrical vehicle charging, vehicle to vehicle communications, vehicle to infrastructure communications (e.g., highway lanes, stop lights), and sensor technology. By way of one example, the plug used to connect an electric vehicle to a vehicle charger is standardized to ensure that the vehicle can connect to vehicle chargers across the country. That plug design is standardized under the Society of Automotive Engineers (SAE) standard number J1772, and is protected by numerous patents.

Differences between OEM’s and New Entrants

OEM’s typically collaborate with each other rather than litigate over patent infringement issues. Various OEM’s have actually indicated that they have no intention of asserting their patents against other OEM’s. In 2014, Elon Musk of Tesla penned the oddly titled press release “All Our Patent Are Belong To You” in which he indicated that the patents plaques had been removed from the lobby of Tesla’s Palo Alto headquarters in the spirit of the open source movement and for the advancement of electric vehicle technology. According to Musk, Tesla would not initiate patent lawsuits against anyone who, in good faith, wants to use Tesla’s technology. In 2015, Toyota announced that it would enable cost-free licensing for thousands of its patents in hopes to encourage wider development of hydrogen technologies for vehicles over the next few years. Hyundai, BMW and Ford have also indicated that they are offering their electric vehicle patent portfolios for licensing.

On the other hand, electrification, connectivity and autonomy of passenger vehicles have brought a host of new and non-traditional players into the automotive space. Google and its subsidiary Waymo filed almost as many autonomous vehicle patents as Audi, more than BMW and Daimler individually, and more than GM and Volkswagen combined. Other non-traditional players in the automotive space include Apple, Microsoft, Facebook, Amazon, and Uber. Patent ownership in the autonomous vehicle space ranges from the aforementioned tech companies to non-practicing entities (NPEs). Due at least in part to those new players, the number of patent applications in the automotive space has increased, especially in the area of autonomous vehicles.

Many of these new players have a different perspective on the role of patents and are accustomed to litigating their intellectual property to maintain exclusivity. For example, Qualcomm has amassed a portfolio of more than 130,000 patents, many of which cover the key technologies that allow phones to send and receive data. Apple and Qualcomm have engaged in a billion dollar patent war over an $18 component featured in Apple’s smartphones. According to Bloomberg BusinessWeek, Qualcomm charges a royalty of as much as 5 percent of the average selling price of the phone, which can amount to more than $30 per device. Cell phone manufacturers refer to it as “the Qualcomm tax,” and the practice has been investigated by regulators in China, Taiwan, South Korea, Japan, the European Union, and the U.S.A.

The same $18 component can be found in many of today’s vehicles for the purpose of cellular communications. OEM’s also pay a $30 or higher royalty fee per car to incorporate that $18 component into their vehicles. This is just one example of a single component covered by SEPs. What will happen when new SEP pools form around the latest areas requiring standardization, namely, electrification, connectivity and autonomy of passenger vehicles? Automotive prices are bound to increase due at least in part to license fees on SEP’s.

How will OEM’s react to license fee increases?

OEM’s could simply pass increased license fees on to consumers, as they have done in the past. Consumers clamor for the latest technology, and some of those will pay more to have the latest and greatest technology, which are covered by the license fees, in their vehicles. The increased costs could be incorporated into the vehicle price, or the costs could be passed onto the consumer through connected and autonomous vehicle data packages having monthly fees, for example. Those consumers not willing to open their wallets can opt for a vehicle that does not include the bells and whistles of electrification, connectivity and autonomy.

The latest technologies generate, use and share a significant amount of vehicle data in the interests of enhancing passenger safety and vehicle performance. As one option for offsetting the increased license fees, the OEM’s could sell the data collected from the vehicles to advertisers, insurance companies, and/or government agencies. However, that data is likely to be viewed by private citizens as sensitive and personal (for example, routes travelled) resulting in a data privacy issue. According to the Federal Trade Commission, it could use its enforcement authority in appropriate circumstances to bring an action against an automaker that uses a consumer’s data in a way that violates the manufacturer’s stated privacy policies. On the other hand, that data could be used to improve safety.

OEM’s could work together, as they have done traditionally, and organize in buying groups to lobby the SEP owners to reduce royalty rates on SEPs. Of course, competitors working together to set the price of products or services to consumers would raise price fixing or other antitrust concerns. In this instance, however, OEM’s working together to lower prices of their vehicles would likely achieve procompetitive benefits by lowering the price of vehicles to consumers. According to the FTC, agreements among competitors that are not inherently harmful to consumers are examined under a flexible “rule of reason” standard that attempts to determine their overall competitive effect. The focus is on the nature of the agreement, the harm that could arise, and whether the agreement is reasonably necessary to achieve procompetitive benefits.

Regardless of how the OEM’s handle the price increases, change in the form of electrification, connectivity and autonomy has arrived, and those changes are destined to result in higher auto prices due to new litigious entrants into the automotive market.