Royalties Expected To Increase Cost Of RFID Technology

High-tech companies contributing patented technology to the UHF Electronic Product Code Generation 2 standard have agreed to do so on a royalty-free basis, with the exception of one, Intermec Technologies.

Intermec, based in Everett, Wash., says it has contributed technology protected by a dozen patents, and does not intend to provide all of the intellectual property royalty-free.

"It's not our intention to give away our innovation and IP," Mike Wills, vice president and general manager of Intermec, said.

The possibility of having to license technology used in the Gen 2 standard is significant because vendors have been struggling to reduce the per-unit cost of electronic tags, a key component of RFID, or radio-frequency identification, technology.

RFID, which could one day replace the familiar barcodes found on packaged goods today, is an umbrella term for standardized technology used in tracking the flow of goods through a supply chains. Suppliers within the consumer goods industry have been working feverishly to adopt the technology in order to meet 2005 mandates from Wal-Mart Stores, the world's largest retailer; Target, Albertsons and others.

Gen 2, under development by standards body EPCglobal, would standardize communications between the tag placed on a goods-carrying pallet or case and a reader, which is the hardware that scans the tag and passes its product information to data-filtering and routing software. The software helps companies integrate RFID data into the business applications running their supply-chain systems.

RFID tags contain microprocessors that hold a lot more product information than a barcode, making it possible for retailers and suppliers to reduce costs by closely aligning consumer demand with supplies. For the shopper, it means there would be fewer times a store would be out of their favorite wine and cheese combination.

But before electronic tags can become as commonplace as barcodes, their per-unit cost must drop to a few pennies. Today's tags, which are being deployed on pallets and cases found in warehouses and loading docks, cost from 20 cents to 30 cents apiece for quantities of 10 million or more, according to tag maker Matrics, based near Washington, D.C.

"Royalties would artificially inflate the price of the tags, but at what percent is anybody's guess," Girish Rishi, senior vice president of marketing for Matrics, said. "Royalties could be detrimental to the growth of the tag market because they are a very price sensitive commodity."

Intermec made its position known in a big way last month in a patent-infringement lawsuit filed against Matrics in a federal court in Delaware. Intermec, which is suing for royalties, claims Matrics has infringed on four of its patents, one of which is part of the Gen 2 standard. Matrics declined comment on the suit.

While Intermec does not intend to seek royalties for all its patented technology, it does plan to seek payment for its ownership of the Gen 2 air-interface protocol, which is "the most fundamental piece of the tag-reader communications," Erik Michielsen, analyst for ABI Research said.

Intermec, a division of UNOVA, acquired the technology in 1997 through the purchase of Amtech. Its royalties are expected to add to the cost of RFID tags.

"The Intermec intellectual property will account for a few percent of the cost of a chip," Michielsen said. "It's not going to be something that's prohibitive, but the cost is going to be there.

"Whether purchasing managers at consumer-good manufacturers can eliminate the added cost through negotiations and bargaining remains to be seen."

If tag makers absorb the cost, then it will certainly affect already slim margins. Competition is expected to heat up over the next year as the largest manufacturers, such as Texas Instruments Inc., start increasing shipments significantly. Tag prices are expected to drop by about 25 percent by mid to late 2005, Michielsen said.

Despite Intermec's public statements, the company has not yet officially notified EPCglobal that it wants royalties for its technology, Sue Hutchinson, director of product management for EPCglobal, said.

Asked if any vendors have sought royalties for Gen 2, Hutchinson said, "To my knowledge, at this point, there is not."

Companies that have contributed IP to the standard have until Aug. 2 to notify EPCglobal if any of the technology is not royalty free, Hutchinson said. Gen 2 is currently in the final stage for approval.

EPCglobal, a joint venture between EAN International and the Uniform Code Council, is a major player in the development of RFID standards in the retail industry. All the major retailers and suppliers, such as Procter and Gamble, Unilever and Kimberly-Clark, are adopting the organization's standards.

While unusual, companies do sometimes seek royalties, Hutchinson said. EPCglobal approves cases in which a royalty-free alternative is unavailable, and the IP owner's fees are "reasonable and non-discriminatory."

The Gen 2 standard stemmed from the coming together of two groups, the EPCglobal's Hardware Action Group, dubbed Global, and another organization dubbed Freedom. Members of Global included Intermec, Philips Semiconductor, Zebra Technologies. and about 10 other vendors. Freedom included Alien Technology, Matrics and others.

This story courtesy of TechWeb.