technical standards and intellectual property rightsintellectual...

Technical standards and intellectual property rightsintellectual property rights

Aija LeiponenImperial College London andImperial College London and Cornell [email protected] © Imperial College Business School1

Commercialization of technical inventions

• Requires access to complementary assets• Recall Teece (1986): complementary assets and

appropriability interact to determine who profits fromappropriability interact to determine who profits from innovation• Teece (2006): discussion of complementary innovations was

d d l d i th 1986underdeveloped in the 1986 paper• In network industries, standards may partly define the requisite

complementary assets• Commercializing hardware innovations requires licenses to

“essential IP”

C i li ti IPR d t d d tti t t iCommercialization, IPR, and standard-setting strategies interact

© Imperial College Business School

FolloWAPFolloWAP1999-2006: Mobile services ecosystem for IMecosystem for IM

Platform strategy

IM TypeIM

Community Vendor

Device Vendor

Operating System Vendor

OTT Client Vendor

Gateway Client Vendor

Connectivity (Gateway) Provider

Network Operator

End Customer

Formal standardizationOpen Mobile AllianceInternet Engineering Task Force3G Partnership ProjectGSM Association

Operator IM Active Passive Passive Passive Active Active Active Active

OEM IM Active Active Active Passive Active Active or N/A Passive Active

GSM Association

De facto standardizationIndustry 1. mobile IM with EircellDeals with Vodafone

AppleAOL Agile Comverse AT&T

OTT IM Active or Passive Passive Passive Active Active

or N/A N/A Passive Active

SMS IM Active Passive Passive N/A N/A N/A Passive Active

Apple Comverse

Deals with Vodafone, Hutchison, BT, Turkcell, Telecom Italia...Parallel work on mobile gateway to MSN

HTCMotorolaNokiaRIMSamsungSony Ericsson

FacebookGoogleICQMicrosoftYahooRegional (QQ)

BeejiveeBuddyFringSHAPEPalringoNimbuzz

Cre8MiyowaNeustarSevenSynchronica

China MobileTelefonicaOrangeVerizonVodafone

Nokia (Symbian)Java (Oracle)Google (Android)RIMWindows Mobile

CommunologyCre8MiyowaNeustarNokia – OviSevenSynchronica

Who profits from innovation? (Teece Research Policy 1986)(Teece, Research Policy, 1986)

IDifficult to make

IIHolder of complementary

High money

Online informationservices, most software

assets makes money

Online grocery business

Imitabilityservices, most software

IVInventor makes money

IIIParty with both technology and assets or with bargaining

Low Electronics components, scientific instruments

power makes money

Pharmaceuticals, communication devices

Freely available or unimportant

Tightly held and important

Complementary assetsComplementary assets

Afuah & Tucci: Internet Business Models and Strategies, 2001: p. 71

Strategies for building business models

IRun

IITeam up

HighRun

Constant improvement

Team upInternal developmentCooperation vs. Internal

IV IIIImitability

Low

IVBlock

Rely on patents,

IIIBlockTeam up

contracts Control IP + complementaryassetsPatents + standards

F l il bl Ti htl h ld dFreely available or unimportant


Complementary assetsComplementary assets

Afuah & Tucci 2001: p. 72

(1) Complementary assets

Capturing returns from innovations requires the mobilization of complementary assets• Marketing• Manufacturing• After-sales support

Di t ib ti• Distribution

“SYSTEMIC TECHNOLOGIES:”• Ability to control interfaces• Ability to control interfaces• Patents to cross-license

Who owns how to integrate requisite assets? Who owns, how to integrate requisite assets? Can be prohibitively expensive to build

(2) Imitability

Appropriabilityregimes

Tight Loose

Knowledge Codified TacitKnowledge Codified TacitIPR Protectable & enforceable Not protectable

Technology Hard to replicate Easy to replicategy p y p

Network effects Allow customer lock-in Few switching costs

New entrants Constrained Open

Size effects Economies of scale Scale no advantage

Example industries Chemicals, banks, pharmaceuticals, instruments

Food, consulting, retailing, softwarepharmaceuticals, instruments retailing, software

Dodgson, Gann, Salter: Management of Technological Innovation, p. 272

Network markets (Besen & Farrell 1994)

• Tipping: VHS vs Betamax; Apple OS vs Windows; Blue Ray vs. HD-DVD

• Switching costs• Switching costs• History matters• Competing within a standard vs. between standardsp g

• Price competition vs. features competition• Implications for users’ expectations, speed of adoption


Strategies of appropriation

Formal• Patents• Copyrights

Informal • Secrecy• Lead times or first mover• Copyrights

• Trademarks• Design registrations• Confidentiality agreements

• Lead times or first mover advantages

• Complexity of design• Access to sales/distribution Confidentiality agreements

• Standards (de jure = law/committee based)

channels• Access to suppliers• Access to users and

customerscustomers• Standards (de facto = market

based)

Dodgson, Gann, Salter: Management of Technological Innovation

How do IPRs influence commercialization?

• “Strategic patenting:” Patents can be used for many different strategic purposes

• Small firms are at a disadvantage in enforcing their patents;• Small firms are at a disadvantage in enforcing their patents; playing the IP game • Patents owned by firms with small portfolios are at greater risk

of litigation (Lanjouw & Schankerman J. Law & Econ 2004)

• Small innovators are more at risk of preliminary injunctions (Lanjouw & Lerner J. Law & Econ 2001)

• IPRs generate options for the mode of commercialization

Why firms use patents?y

Reason to use patents Process Product Innovation Innovation

Prevent copying 78% 96%

Blocking 64% 82%

Prevent suits 47% 59%

Enhance reputation 34% 48%

For use in negotiations 37% 47%For use in negotiations 37% 47%

Licensing revenue 23% 28%

Measure performance 5% 6%Cohen, Nelson and Walsh, Management Science 2002

Mode of commercializationI

The Attacker’s AdvantageFew opportunities for

IIReputation-Based Ideas Trading

HighFew opportunities for effective contracting. ‘Stealth’ product market entry.

TradingProbably few opportunities for contracting. Product market entry risky: high costs and

Imitabilityimitation risk.

IVGreenfield CompetitionId l t it t h

IIIIdeas FactoriesC t ti ith t bli h d

Low Ideal opportunity to choose between contracting and product market entry. Temporary monopoly.

Contracting with establishedfirms. Product market entry is very costly and perhaps impossible. Secure bargainingTemporary monopoly. impossible. Secure bargaining power.

Freely available or unimportant


Complementary assets

Gans & Stern, Research Policy 2003.

What exactly are standards?

• Coordination: traffic rules, electrical outlets, social norms...• Safety: construction code, food preparation, environmental mgt...

C i ti l I t t t l (htt TCP/IP)• Communication: language, Internet protocols (http; TCP/IP)...Coordination game

“choosing “battle of“choosing sides” Left Right

Left 10, 10 0, 0

Right 0, 0 10, 10

“battle of the sexes” Opera Movies

Opera 10, 5 0, 0

Movies 0, 0 5, 10

Standards battle (Besen & Farrell, JEP 1994)

“Tweedledum Dum Dee “pesky little Cards Marbles


& Tweedledee” tech tech

Dum tech 3, 0 8, 8

Dee tech 4, 4 0, 3

brother”

Cards 10, 0 5, 10

Marbles 5, 5 10, 0

War of attrition (Farrell & Saloner, 1988; Farrell & Simcoe, 2009)

• Conflict between technologies; side payments are not allowedConflict between technologies; side payments are not allowed• Two contestants compete for a resource of value V by

persisting while constantly accumulating costs over the time t that the contest laststime t that the contest lasts

• All-pay second-price sealed-bid auction• Simcoe & Farrell: committee-based standardization is marred

with severe delays because of vested interests (IPRs etc) butwith severe delays because of vested interests (IPRs etc) but a “neutral third party” or reduction of vested interest can improve the process


http://people.bu.edu/tsimcoe/working.html

Why are IPRs involved?

• Imagine someone holds property rights over the word “the” in English language• Every time you say it they have a claim for licensing• Every time you say it, they have a claim for licensing

revenue• If you refuse to pay, you will be sued• To publish your research in the English speaking world,

you need to use it


(2)

Qualcomm patent 4,901,307 (1990)

Patents and standards (Rysman & Simcoe, Mgt Sci 2008)

• Differences-in-differences estimation of citation patterns to patents being declared as “essential” in a set of standard-setting organizationssetting organizations• Identification problem: why & when are patents declared

essential? Unobserved factors may determine decision to disclose citationsdisclose, citations

• “Essential patents” in standards are more important/valuable (cited) than other patents

• Essential patents gain an extra boost of citations after the disclosure

Standard-setting activities and organizations have real Standard setting activities and organizations have real effects and need to be monitored by policymakers, understood by managers © Imperial College Business School

Where do standards come from?

• De facto

D j• De jure

• CommitteesCommittees


Organization of standard-settingMode of coordination

Explanation Example

De facto No cooperation: markets select the winning technology or technologies

o PC operating systems (1980s)o 1. generation digital communication

in the US

N i i L di fi ti t di tl ith D l t f NMT i thNegotiation Leading firms negotiate directly with each other

o Development of NMT in the Nordic countries (early 1980s)

Private alliances

Firms cooperate through private alliances

o Symbian to develop operating systems for wireless devicesalliances y

o Other joint ventures, R&D alliances

Semi-open Firms coordinate specification d l h h d ll

o WAP Forum

forums development through gradually opening forums

Open SDOs Firms and governments meet in open and public Standards

o Development of GSM in Europe (ETSI, mid 1980s)open and public Standards

Development Organizations to coordinate standards development

(ETSI, mid 1980s)o Development of WCDMA (3GPP,

since mid-1990s)

De jure Public bodies (ministries, departments, i ) l t th l ti d

o Choice of NMT in the Nordic t i ( l 1980 )agencies) select the solution and

impose it on the industrycountries (early 1980s)

Leiponen in Newman & Zysman (eds), 2006

Open and cooperative standard setting

• Voluntary participation• Creation of “almost-public” goods

• Standards are available to all• Royalty payments to IP holders

• Intense committee work• Intense committee work• Over 20 working groups in 3GPP alone

• Fair, Reasonable, And Non-Discriminatory licensing of IP

• Why do non-IP holders contribute? • Learning }• Learning• Advertising }SENDING AND RECEIVING INFORMATION

How to influence committee-based standards?

Attend meetings Participate in consensus building discussions, voting M k l f f t Make proposals for features Draft specifications in committees Provide leadership through working group chairperson Provide leadership through working group chairperson

ships

• Weiss & Sirbu 1990: market share and power• Leiponen 2008: effects of consortium participation on

standard settingstandard setting• Simcoe 2008: IP is key


How do firms benefit from influencing standards?

• Potential royalty revenue• Need to enforce patents – can be tricky!Information exchange advertising learning (Bar &• Information exchange – advertising, learning (Bar & Leiponen)

• Alliance partners (Metiu & Rosenkopf)p ( p )• Exit strategies for small innovators (Fleming &

Waguespack)I fl th ’ i ti ti it (D l & L i )• Influence others’ innovation activity (Delcamp & Leiponen)

• One-mode connections yield power; two-mode connections generate knowledge (Leiponen AOM)g g ( p )


Third Generation Partnership Project (3GPP)

• International alliance among regional standards bodies

• Develops UMTS/WCDMA, one of the 3G wireless telecom systemsS t d f ETSI th E t d d• Separated from ETSI, the European standards body in 1998, began operations in 2000

UMTS Terrestrial Radio Access Network

3GPP work item process3GPP work item process

Work item proposal Feature ideaWork item “committee”

Work item proposal (need 4 supporters)

Feature idea

About 80% complete:TSG approval

Change control Specification developmentTSG approval development

Changes only through formal

Technical Specification

Change Requests

Industry consortia to influence peers (Leiponen, Mgt Sci 2008)_

• 3GPP setting• What other consortia and alliances do firms join and why?

D t k f ll b ti ti iti ll T• Dense network of collaborative activities – recall Teeceand coordination game

• Major firms spend millions on consortia and have dozens j pof alliances with peers

D th t l ll b ti ti iti i fl th Do these external collaborative activities influence the standardization outcome?


Firm

Bipartite network Unipartite projection

Firm 1

Committee 1Firm

2 Firm 1 Firm 2

Committee 2Firm

3

2

Committee MFirm

N

Firm NFirm 3

Learning vs. InfluencingKnowledge vs. Power

Econometric approachP l d t f ti b hi lli• Panel data of consortium memberships, alliance formation, 3GPP work items and change requests

• Estimation methods: negative binomial fixed effects; g ;“Chamberlinian” random effects with firm-level means of time-varying variables

• Unobserved heterogeneity: e g innovations that reduce• Unobserved heterogeneity: e.g. innovations that reduce cost of making standardization proposals/requests and increase benefits from consortia

Identification from exogenous variation in consortium tiesa merger of 5 consortia into one – exogenously changed consortium

network structure of many firmsConnections from consortia in which firms stayed throughout the periodConnections to Asian firms that entered late


Results

• Connections from external consortia enhance the number and probability of change request acceptance (“influence”), work item proposals (“productivity”)work item proposals ( productivity )

• Consortium memberships increase work item proposals but not change requests• Learning productivity vs. Power influence

• Memberships in related consortia are more important• Large firms benefit more from connections than small ones• Large firms benefit more from connections than small ones• Strategic alliances do not have the same effect

C ti f i ti d titi Consortia are a grey area of innovation and competition policy – should perhaps be more closely scrutinized


Future research avenues

• Could the functioning of the IPR & licensing institutions be improved?• Working papers by Bekkers & West; Rysman & SimcoeWorking papers by Bekkers & West; Rysman & Simcoe

• How should the limits of cooperation in SDOs and consortia be defined?• Antitrust policy debate in the US; little research or debate in

Europe• Should entry be made easier for small innovators?y• Is Europe falling behind in emerging technology areas

because of under-appreciation of standards?• Web services; smart grid• Web services; smart grid

• Utilize policy changes as identification opportunities© Imperial College Business School

technical standards and intellectual property rightsintellectual...

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