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Technical standards and intellectual property rightsintellectual property rights
Aija LeiponenImperial College London andImperial College London and Cornell [email protected] © Imperial College Business School1
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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
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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
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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
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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
Tightly held and important
Complementary assetsComplementary assets
Afuah & Tucci 2001: p. 72
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(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
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(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
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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
© Imperial College Business School
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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
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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
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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
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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
Tightly held and important
Complementary assets
Gans & Stern, Research Policy 2003.
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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
© Imperial College Business School
& 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
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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
© Imperial College Business School
http://people.bu.edu/tsimcoe/working.html
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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
© Imperial College Business School
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(2)
Qualcomm patent 4,901,307 (1990)
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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
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Where do standards come from?
• De facto
D j• De jure
• CommitteesCommittees
© Imperial College Business School
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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
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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
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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
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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
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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 )
© Imperial College Business School
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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
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UMTS Terrestrial Radio Access Network
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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
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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?
© Imperial College Business School
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© Imperial College Business School
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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
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© Imperial College Business School
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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
© Imperial College Business School
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© Imperial College Business School
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© Imperial College Business School
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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
© Imperial College Business School
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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