A key patent holder wants royalties. If that starts a trend, adoption of the wireless tagging technology could suffer.
The royalty flap stems from a new protocol, the Electronic Product Code Generation 2 standard, designed to improve the compatibility of radio frequency identification (RFID) equipment from different suppliers and iron out a number of other technical kinks.
RFID supporters fear that the technology could become embroiled in an intellectual-property battle, driving up prices and slowing implementations, if other patent holders come forward to demand royalties.
The protocol is likely to contain certain patented technology from RFID equipment maker Intermec Technologies. The Everett, Wash., company recently demanded royalties for the use of the patents and is suing Matrics, a rival, for allegedly infringing on some of them. The patent infringement suit, filed in June, is pending. No schedule has been set for the trial.
The patent claim comes on the eve of a new protocol's debut. EPC Global, the organization that helped create the protocol, expects to finalize it at an Oct. 5 meeting. Now, some RFID backers fear other patent holders could come forward and demand royalties, slowing RFID's progress.
Major companies, including Albertsons, Procter & Gamble, Wal-Mart Stores and German retailer Metro, have already begun to set up RFID systems and are eagerly awaiting the release of the new protocol to advance their projects. They expect RFID, a wireless tracking technology that may someday replace bar codes, to help them reduce theft, shave labor costs and handle inventory more efficiently.
Observers say Intermec?s move was an abrupt departure from an ultra-cooperative standards-building effort, in which many participants had agreed to donate key intellectual property. The company holds the bulk of the most significant RFID patents.
?Suing Matrics in the heat of setting the Generation 2 standard was not conducive to bringing all sides together,? said Daniel Engels, a researcher at the Massachusetts Institute of Technology. ?It was a major concern and a major distraction to the process.?
Engels is research director of MIT?s Auto-ID Lab, an RFID research center that led early development of the technology and envisioned a royalty-free standard. The university handed off the standards baton last year to EPC Global, an arm of the Uniform Code Council, keeper of the bar code.
EPC Global is now leading the effort to devise standards and commercialize the technology, which works by placing special microchips--RFID tags--on merchandise. The tags signal their location across a network of RFID readers placed on shipping docks, in warehouses and stores, allowing retailers and manufacturers to monitor products on their paths from factory to store shelf, and possibly beyond.
Lingua non franca
The Generation 2 standard should resolve some lingering glitches in the system and is critical to advancing the technology beyond the trial stage, experts say. The main problem is hardware interoperability. Today, a hodgepodge of competing protocols governs wireless communication between RFID tags and readers. Adhering to a common protocol will enable any compliant RFID reader to recognize any compliant tag, regardless of who makes them.
Some makers of RFID readers, such as ThingMagic in Cambridge, Mass., have tackled the compatibility problem by designing readers that can be programmed to work with all kinds of tags. The only drawback is that users need to upgrade their readers' software whenever a new type of tag is introduced.
The standard is supposed to work better across international borders, addressing the fact that the ultra-high-frequency spectrum on which RFID operates varies in range from country to country. It's also designed to be less vulnerable to signal interference and to support larger-scale projects that involve tagging millions of everyday objects, such as razors and sweaters.
"You can't pick up a product today that doesn't have some sort of cross-licensing...It's how you make innovation happen."
--Intermec President Tom Miller
defending his firm's pursuit
of RFID patent royalties
But Engles and others fear that a standard that calls for the collection of royalties by one player will invite other RFID patent holders to demand fees, which could drive up prices and sap budding demand. In such a scenario, soaring license fees could cause RFID equipment makers, including Alien Technology, Matrics, Texas Instruments and Philips Semiconductor, to pass the extra costs along to customers.
Executives at Intermec defend the royalty program, saying most popular technology--including cell phones, laptops and bar codes--were brought to market through the licensing of intellectual property among suppliers. "You can't pick up a product today that doesn't have some sort of cross-licensing that takes place," Intermec President Tom Miller said. "It's how you make innovation happen."
Additionally, Intermec has donated technology covered by five of its RFID patents on a royalty-free basis--more than any other participant in the standards-building effort, Miller said.So far, few RFID equipment suppliers or buyers are panicking over the prospect of royalties. A spokesman for razor maker Gillette said his company expects the cost of royalties to be negligible--unlikely to drive up prices of RFID tags and readers. Gillette, a supplier to Wal-Mart that's participating in the retailer's RFID implementation, has "no concerns" about other patent holders making royalty claims, spokesman Paul Fox said.
Likewise, an EPC Global executive cast Intermec's patent declaration as a normal part of any standards building process and nothing that should hinder the technology's development. The group is also exploring a workaround as an alternative to the patented technology, which would let suppliers dodge royalties, said Sue Hutchinson, EPC Global product manager.
Even an executive at Texas Instruments, whose bottom line is at stake, said the prospect of paying royalties is not a big concern at the moment. However, the electronics giant has much deeper pockets and more change to spare than smaller players, such as venture-backed Alien Technology, which declined to comment for this story.
"I don't think it's unusual, and I don't think it's going to be catastrophic," Texas Instruments spokesman Bill Allen said of the patent claims. "This is just a process that industries go through."
Nevertheless, Intermec's royalty program, which levies 5 percent to 7.5 percent fees on various RFID hardware components, highlights a difficult balancing act for RFID patent holders--something Intermec's own Miller calls a "conundrum." One the one hand, patent holders want to profit from their development work. On the other, they don't want to sap the demand for the technology with excessive fees.
A pile-on by other patent holders could double the costs of RFID tags and related equipment, according to MIT's Engels. About 30 other companies and individuals, including Lucent Technologies and Micron Technology, hold important RFID patents, though some expire soon, he said.
"Anything that adds cost into the equation could impact that progress."
--Jeff Richards, CEO of R4 Global Solutions
Although it's a worst-case scenario, a doubling of price would be a major blow to the industry, which has been marching toward a 5 cent tag as a prerequisite for introducing more advanced RFID features, such as those to combat shoplifting and counterfeiting. Those features require the tagging of millions of individual items rather today's more common practice of placing tags on shipping cases, which requires far fewer tags. Today, tags sell for 20 cents to 45 cents each, depending on the volume of the order.
"We're seeing a downward trend in prices, and that's one of things driving adoption," said Jeff Richards, president and chief executive of R4 Global Solutions, an RFID consulting firm in San Francisco. "Anything that adds cost into the equation could impact that progress."
Yet even the royalty-wary say Intermec and others are unlikely to do anything to compromise the growth of a budding industry that's set to line their own coffers. To be sure, a lot of cash is at stake. U.S. retailers will ratchet up spending on RFID equipment from $91.5 million last year to nearly $1.3 billion in 2008, according to market research firm IDC. Outlays on RFID hardware alone are projected to total $875 million in 2007.
"Everyone wants to see this technology move forward," Richards said. "I don't think you're going to see a major revolt in which everyone takes their toys home."