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The Currents in an RFID Pool

By Olga Kharif In an Aug. 9 move that could provide a boost to the deployment of radio frequency identification (RFID) gear, about 20 companies announced the formation of the industry's first patent-licensing consortium. The group, which brings together more than half of the industry's suppliers, aims to pool its members' patents and license them out.

But one company, a key player in the RFID field, Everett (Wash.)-based Intermec, part of Unova (UNA), is conspicuously missing.

Officially, the consortium's mission is to speed up adoption of RFID, used to track goods in manufacturing or in the supply chain, by making licensing of RFID-related intellectual property less of a hassle (see BW Online, 8/9/05, "RFID's Second Wave").

NEXT GENERATION. But chances are, one of the real goals of the consortium -- which joins suppliers like Alien Technology, Symbol Technologies (SBL), and Avery Dennison (AVY) -- is arm-wrestling Intermec, which owns the lion's share of intellectual property relating to next-generation RFID technology.

Intermec holds key patents on so-called Gen 2 RFID. Expected to hit the market in late 2005 or early 2006, Gen 2 should offer huge improvements over older RFID systems. Gen 2 tags, which are placed onto pallets of goods so they can be scanned by RFID readers to track the cargo en route, can be read at longer distances and promise more reliability.

And Gen 2 tags and readers from different suppliers will interoperate for the first time, offering the potential to drastically reduce costs of RFID deployments, says Chantal Polsonetti, an analyst with tech consultancy ARC Research.

DISCOUNT DEAL. Thus, Gen 2 is widely expected to persuade companies running RFID trials to move to full-scale deployment -- and to jump-start a broad-based adoption of the technology. It will be key to expanding the RFID industry, from $1.7 billion last year to $5.9 billion by 2008, according to technology-market researcher Venture Development Corp.

Intermec hopes to benefit from this growth handsomely, because all Gen 2 suppliers will need to license some of its 149 patents. In fact, license sign-ups are going full speed. In May, Intermec announced its Rapid Start Licensing Program, under which suppliers that sign up before Sept. 1 will pay 75% lower up-front licensing fees and also gain access to all of Intermec's patent portfolio.

Companies that miss this promotion might end up paying 50% more than the discounted fee later, according to ARC Research. So it's no wonder that "there's very strong demand for the program," says Tom Miller, president of Intermec. Licensees announced so far include RFID powerhouse Zebra (ZBRA), which also belongs to the consortium.

PRESSURE TO JOIN. But here's the glitch: Perhaps believing the fees are still too high, some of the biggest names in RFID have likely held out of participating in the program, says Erik Michielsen, an analyst at tech consultancy ABI Research.

Instead, these industry heavyweights have formed this consortium. Why? Perhaps they hope that, collectively, they could further lower Intermec's fees and reduce its power by persuading the company to join the consortium. "It isn't our intention in any way to attack their Rapid Start program," says Stan Drobac, designated spokesperson for the consortium and vice-president for RFID strategy and planning at Avery Dennison.

Often today, a company wishing to make RFID gear has to sign licensing agreements with dozens of patent-holders. The consortium will cut the amount of legwork. "We want to offer one-stop-shop licensing," Drobac said. The consortium still awaits approval from the Justice Dept.'s antitrust division.

WAIT AND SEE. The group could also, potentially, use the consortium's patents as a bargaining tool. Intermec typically licenses its patents in exchange for royalties as well as for access to its licensees' RFID patents. When the consortium becomes operational, probably in early 2006, its member companies might be able to bargain not only with their own patents but also with other members' patents. That could force Intermec to lower its prices as well.

Already, chances are, the consortium's formation will slow Intermec's license signings, as various companies wait to see if Intermec joins, says Reik Read, an analyst with investment bank Robert W. Baird & Co. "When you get a level of uncertainty, companies tend to wait and see what happens," he says. (Robert W. Baird, in a disclosure form, says it might be receiving compensation from Symbol Technologies, which is embroiled in patent litigation with Intermec.)

It will take a lot of work for the consortium to represent a real threat to Intermec. Its members wouldn't want to trigger any antitrust inquiries. More important, the consortium is a volunteer organization, so its members don't have to place all of their RFID patents into the pool.

FUTURE SHOCK? So the consortium could, potentially, simply end up as a dumping ground for useless patents. Plus, "There is no guarantee at all that all essential patent-holders are going to participate," says consortium member Carl McGrath, who is also chief technology officer at system integrator Tyco Fire & Security (TYC). Tyco is currently in discussions with Intermec, he says.

For this reason, Intermec is not worried at this point. "We don't see any impact on Intermec's Rapid Start licensing program from this consortium," Miller said in a prepared statement.

Yet, an impact could come later, as the consortium gains momentum in 2006 -- a crucial year for Gen 2 technology adoption. This is the consortium's warning shot. And Intermec might do well to take the warning seriously. Kharif is a reporter for BusinessWeek Online in Portland, Ore.

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