12/11/2012 06:44 pm ET Updated Feb 10, 2013

Patent Licensing Schemes: Creating a Bad Holiday Bargain?

As millions of Americans rush to buy gifts this holiday season, with a big emphasis on consumer electronics as a primary purchase for the young and old alike, it is probably safe to assume that most people are not focused on the patent licensing infrastructure that allows those consumer electronics to be brought to market. While much calculation and research may go into getting the best Black Friday or Cyber Monday deals, little do most consumers know that patent licensing actually has a relationship to how good those coveted bargains really are.

Understanding the relationship of patents to consumer choice and prices is critical to both the costs that consumers face at the retailer as well as the ease of entry for new inventors and companies in the consumer electronics space to offer new and lifestyle changing products.

How is it that many companies are able to provide products that are relatively the same? We all have our nuances as "Macs" or "PCs," but without a system in place for companies to get permission to use various technologies in products like media players, we would have a world of more lawsuits and fewer product launches.

A core component of the underlying technology used in consumer electronic media products is known as MPEG-2. It was created in 1996 by "pooling" together 27 patents that allowed for companies to go to one entity to get the licenses they needed for the various parts of this technology, essential to many of the products we enjoy today.

To make licensing certain technologies more available and streamlined to these consumer electronics companies, they are able to go to an entity like MPEG-LA, a "patent pool," and come together as a group of companies to license their use of certain technologies through one organization, with the intent of bringing the licensing costs to more affordable rates and increasing crucial patent process efficiencies. At its core, the idea is based on "strength in numbers": everyone cooperating in these pools makes it more affordable to license for all members, allowing you, the consumer, to get your consumer electronic device from your brand of choice. It allows you to have Sony's latest portable media player if you do not like Apple's iPod and vice versa.

This system seems like an effective solution until the patented technology that is being licensed begins to expire, meaning that the patents lose the power that brings their value. No more patent protection means there is less value to what is being licensed. If something has less value, one would guess that the price would go down.

Unfortunately, this is not the case with certain patent pools, including MPEG-LA's MPEG 2 pool. Their licensing fees continue to remain at the same rate for licensing its technology even as the patents that provide the protection and right to license near expiration or actually expire.

While consumers may be getting that desirable device this holiday season, consumers are also paying inflated prices resulting from abuse of market power by MPEG LA. From a legal perspective, the framers of the U.S. Constitution had in mind a healthy balance between protecting those who invent and making sure that society benefits from the inventions. In another intellectual property context, borrowing from Professor Lawrence Lessig's comments on copyright monopolies, "... the framers understood something very modern: they knew that the new always builds on the old. They understood the burdens of extended monopolies." The limits on the time of protection granted to an inventor in the Constitution was to allow for the invention to eventually become a public "good." Reducing it to pocketbook economics, the effect of this intent today in the consumer market is that products should become cheaper over time as the patent protection lapses. When patent pooling entities like MPEG-LA do not reduce their licensing fees to correlate to the value of their patents, consumer electronics companies may be prohibited from making products more affordable.

The modern American dream is the team of inspiring entrepreneurs in their garage or the local coffee house creating and inventing. Much of the economic turnaround, even if slow, is being led by startups and other small business owners who are trying to create new consumer electronic devices for consumers to enjoy. The failure of these patent pool licensing fees to drop puts a cost on the consumer good that could affect the consumers ability to purchase the items; it puts a cost on the entrepreneur that could make it market prohibitive to get their invention out to the public. To sum it up, this system could be punishing the idea rich and the cash poor, inventor and consumer alike. That's a holiday bargain for no one.