Licensing strategies of the new "intellectual property vendors"

California Management Review

Volumn 50, Issue 2, 2008, Pages 6-30

  Davis, Lee ^a  

^a Department of International Economics and Management   (Denmark)

Author keywords

[No Author keywords available]

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EID: 41249094774     PISSN: 00081256     EISSN: None     Source Type: Journal    
DOI: 10.2307/41166433     Document Type: Review

References (92)

1. See 〈www.orbeng.com.au〉, accessed on October 15, 2007;
2. Andre Morkel and Kelvin Willoughby, "Orbital Engine Corporation," teaching case, 1992. The company changed its name to Orbital Corporation in October 2004.
3. In addition to RISC chips, ARM'S product offering currently includes processors, physical IP, cache and SoC designs, application-specific standard products (ASSPs), and related software and development tools. Its technology is used in digital applications ranging from wireless, networking, and consumer entertainment solutions to imaging, automotive, security, and storage devices. See 〈www.arm.com〉, accessed on October 15, 2007; Eleanor O'Keeffe, "ARM Holdings Plc," teaching case, INSEAD-EAC, Singapore, 2002.
4. RIM agreed to pay even though the U.S. Patent and Trademark Office, in a preliminary ruling, had found all five of NTP's patents invalid. Nor did NTP provide e-mail service or compete with RIM. See Keith E. Maskus, "Reforming U.S. Patent Policy: Getting the Incentives Right," Council on Foreign Relations Report, CSR No. 19, November 2006, p. 5.
5. David J. Teece. "Capturing Value from Knowledge Assets: The New Economy, Markets for Know-How, and Intangible Assets," California Management Review, 40/3 (Spring 1998): 55-79.
6. Andrew B. Hargadon, "Firms as Knowledge Brokers: Lessons in Pursuing Continuous Innovation," California Management Review, 40/3 (Spring 1998): 209-227.
7. See, for example, Ulrich Lichtenthaler, "The Drivers of Technology Licensing: An Industry Comparison," California Management Review, 49/4 (Summer 2007): 67-89;
8. Ashish Arora and Andrea Fosfuri, "Licensing the Market for Technology," Journal of Economic Behavior & Organization, 52/2 (October 2003): 277-295;
9. Bernard Guilhon, Raja Attia, and Roland Rizoulieres, "Markets for Technology and Firms' Strategies: The Case of the Semiconductor Industry," International Journal of Technology Management, 27/2-3 (2004): 123-142;
10. Tamara Nanayakkara, "Negotiating Technology Licensing Agreements," International Trade forum, 4 (2002): 13. A wide variety of license arrangements may be negotiated. Some licenses are restricted to particular markets, for example. Some contain provisions that obligate the licensee to share information regarding any improvements made in the licensed technology, often free of charge.
11. Hargadon, op. cit.
12. Ashish Arora, Andrea Fosfuri, and Alfonso Gambardella, "Markets for Technology and Their Implications for Corporate Strategy," Industrial and Corporate Change, 10/2 (June 2001): 419-451.
13. Joshua S. Gans and Scott Stern, "The Product Market and the Market for "Ideas": Commercialization Strategies for Technology Entrepreneurs," Research Policy, 32/2 (February 2003): 333-350.
14. It might be noted that the concept "market for ideas" is not new; it was used over thirty years ago by Ronald H. Coase, in "The Economics of the First Amendment: The Market for Goods and the Market for Ideas," American Economic Review, 64/2 (1974): 384-391. However, Coase was analyzing the economics of the First Amendment of the U.S. constitution, not the tradability of ideas among firms.
15. The term "invention factories" was coined by Hargadon, op. cit.
16. See for example Arora, Fosfuri, and Gambardella, op. cit.; Oliver Williamson, The Economic Institutions of Capitalism (New York, NY: The Free Press, 1985);
17. Oliver Williamson, "Comparative Economic Organization: The Analysis of Discrete Structural Alternatives," Administrative Science Quarterly, 36/2 (June 1991): 269-296;
18. Kwaku Atuahene-Gima, "Inward Technology Licensing as an Alternative to Internal R&D in New Product Development: A Conceptual Framework," The Journal of Product Innovation Management, 9/2 (June 1992): 156-167;
19. Toru Yoshikawa, "Technology Development and Acquisition Strategy," International Journal of Technology, 25/6-7 (2003): 666-674.
20. Lichtenthaler, op. cit.
21. Alvin K. Klevorick, Richard C. Levin, Richard R. Nelson, and Sidney G. Winter, "On the Sources and Significance of Inter-Industry Differences in Technological Opportunities," Research Policy, 24/2 (March 1995): 185-205.
22. Dorothy Leonard-Barton, "Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development," Strategic Management Journal, 13/5 (Summer 1992): 111-125.
23. See, for example, Adam B. Jaffe and Josh Lerner, Innovation and its Discontents (Princeton, NJ: Princeton University Press, 2004);
24. Carlos A. Primo Braga, "Trade-Related Intellectual Property Issues: The Uruguay Round Agreement and Its Economic Implications," in Will Martin and L. Alan Winters, ed., "The Uruguay Round and the Developing Economies," World Bank Discussion Papers, Washington, D.C., 1995, pp. 381-411.
25. See, for example, Peter C. Grindley and David J. Teece, "Managing Intellectual Capital: Licensing and Cross-Licensing in Semiconductors and Electronics," California Management Review, 39/2 (Winter 1997): 8-41;
26. Kevin G. Rivette and David Kline, Rembrandts in the Attic: Unlocking the Hidden Value of Patents (Boston, MA: Harvard University Press, 2000).
27. Farok Contractor, International Technology Licensing: Compensation, Costs, and Negotiation (Lexington, MA: Lexington Books, 1981);
28. Richard Caves, H. Crookel, and J.P. Killing, "The Imperfect Market for Technology Licensing," Oxford Bulletin of Economics and Statistics, 45/3 (1983): 249-267.
29. David J. Teece, "Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy," Research Policy, 15/6 (1986): 285-305.
30. John Hagedoorn, "Sharing Intellectual Property Rights - An Exploratory Study of Joint Patenting Amongst Companies," Industrial and Corporate Change, 12/5 (October 2003): 1035-1050;
31. Holger Kollmer and Michael Dowling, "Licensing as a Commercialization Strategy for New Technology-Based Firms," Research Policy, 33/8 (2004): 1141-1151; Klevoricket al., op. cit. Teece himself, in his 1998 contribution [op. cit.], argues that when firms compete in markets for know-how, there can be advantages to R&D collaborations (though he emphasizes that idea tradability is still difficult).
32. See for example, Ashish Arora, "Licensing Tacit Knowledge: Intellectual Property Rights and the Market of Know-How," Economics of Innovation and New Technology, 4 (1995): 41-79;
33. Jay Pil Choi, "Technology Transfer with Moral Hazard," International Journal of Industrial Organization, 19/1-2 (January 2000): 241-267;
34. Bruce A. Larson and Margot Anderson, "Technology Transfer, Licensing Contracts, and Incentives for Further Innovation," American Journal of Agricultural Economics, 76/3 (August 1994): 547-556;
35. Ines Macho-Stadler, Xavier Martinez-Giralt, and David Perez-Castrillo, "The Role of Information in Licensing Contract Design," Research Policy, 25 (1996): 43-57.
36. Arora, Fosfuri, and Gambardella, op. cit.
37. Ashish Arora and Robert P. Merges, "Specialized Supply Firms, Property Rights and Firm Boundaries," Industrial and Corporate Change, 13/3 (2004): 451-475.
38. Gary P. Pisano, "The R&D Boundaries of the Firm: An Empirical Analysis," Administrative Science Quarterly, 35/1 (March 1990): 153-176.
39. This conundrum was first explored by Kenneth A. Arrow, "Economic Welfare and the Allocation of Resources for Invention," in Universities-National Bureau of Economic Research, The Rate and Direction of Inventive Activity: Economic and Social Factors, Conference No. 13 (Princeton, NJ: Princeton University Press 1962).
40. Gans and Stern, op. cit. While Kearns is often seen as the victim here, he in fact could have done much more to position himself more favorably in relation to Ford and the other automakers, saving himself (and everyone else) the stress of decades of lawsuits. See Jerome Davis and Lee Davis, "The 'Mad Max Puzzle': Positioning and the Lone Inventor," in Lars Fuglsang, ed., Innovation and the Creative Process (London: Edward Elgar, 2007).
41. Teece (1998), op. cit.
42. Wesley M. Cohen and Daniel A. Levinthal, "Innovation and Learning: The Two Faces of R&D," Economic Journal, 99/397 (1989): 569-596. Information may also be "sticky," to the degree that it is costly to transfer from one place to another.
43. See Eric Von Hippel, "'Sticky Information' and the Locus of Problem Solving: Implications for Innovation," Management Science, 40/4 (April 1994): 429-439.
44. Klaus Kultti and Thomas Takalo, T. "Hold-Ups and Asymmetric Information in a Technology Transfer: The Micronas Case," Journal of Technology Transfer, 27/3 (June 2002): 233-243.
45. Thursby has analyzed the risk that a licensee might shelve an invention by a university researcher, and what contractual solutions exist. This logic can readily be extended to IP firms. See Marie Thursby, "Shirking, Sharing Risk, and Shelving: The Role of University License Contracts," Paper presented to the Summer Conference of the Danish Research Unit for Industrial Dynamics, Copenhagen, June 27-29, 2005. Available via the DRUID homepage, 〈www.druid.dk〉.
46. See Williamson (1985) and (1991), op. cit.
47. The automakers had to pay 30-40 Australian dollars per engine, as opposed to the industry rate of about 1 Australian dollar. See Morkel and Willoughby, op. cit. For recent developments, see 〈www.orbeng.com.au〉, accessed on October 15, 2007.
48. O'Keeffe, op. cit.; Maija Palmer, "Arm Bolstered by Royalty Revenues," Financial Times, April 20, 2006, p. 21; 〈www.arm.com〉, accessed on October 15, 2007.
49. J. Stanley Metcalfe and Michael Gibbons, "Technology, Variety, and Organization: A Systematic Perspective on the Competitive Process," in R.S. Rosenbloom and R.A. Burgelman, Research on Technological Innovation, Management, and Policy (London: 1989), pp. 153-173;
50. Nathan Rosenberg, "Why Technology Forecasts often Fail," The Futurist, 29/4 (July/August 1995): 16-21.
51. Grindley and Teece, op. cit.; James E. Bessen, "Holdup and Licensing of Cumulative Innovations with Private Information," Economics Letters, 82/3 (March 2004): 321-326.
52. Kirk Monteverde and David J. Teece, "Appropriable Rents and Quasi-Vertical Integration," Journal of Law and Economics, 25/2 (October 1982): 321-328.
53. This was demonstrated empirically by Klein et al. in their analysis of General Motor's decision to buy out Fisher Body in the 1920s. Benjamin Klein, Robert G. Crawford, and Armen A. Alchian, "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, 21/2 (October 1978): 297-326.
54. Gans and Stern, op. cit.
55. Oliver Hart, Firms, Contracts, and Financial Structure (Oxford: Clarendon Press, 1995).
56. Williamson, op. cit.
57. See P.H. Rubin, Managing Business Transactions (New York, NY: The Free Press, 1990).
58. Peter Smith Ring and Andrew Y. Van de Ven, "Structuring Cooperative Relationships between Organizations," Strategic Management Journal, 13/7 (October 1992): 483-498.
59. Jeffrey H. Dyer and Harbir Singh, "The Relational View: Cooperative Strategy and Sources of Interorganizational Competitive Advantage," Academy of Management Review, 23/4 (October 1998): 660-679.
60. Suzanne Scotchmer, "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Journal of Economic Perspectives, 5/1 (Winter 1991): 29-41;
61. Stefano Breschi, Franco Malerba and Luigi Orsenigo, "Technological Regimes and Schumpeterian Patterns of Innovation," Economic Journal, 110/463 (April 2000): 388-410;
62. Robert P. Merges and Richard R. Nelson, "On Limiting or Encouraging Rivalry in Technical Progress: The Effect of Patent Scope Decisions," Journal of Economic Behavior and Organization, 25/1 (September 1994): 1-24.
63. Royalty payments are adjusted to reflect the overall contributions of the different parties to the agreement. See Grindley and Teece, op. cit.
64. Franco Malerba and Luigi Orsenigo, "Innovation and Market Structure in the Dynamics of the Pharmaceutical Industry and Biotechnology: Towards a History-Friendly Model," Industrial and Corporate Change, 11/4 (August 2002): 667-703.
65. Biotech firms may experience difficulties in contracting for access to specific research tools. Some scholars have expressed concerns that this situation has led to an "anti-commons" problem. See especially Rebecca S. Eisenberg, "Bargaining Over the Transfer of Proprietary Research Tools: Is this Market Failing or Emerging?" in Rochelle C. Dreyfuss, Diane L. Zimmerman, and Harry First, Expanding the Boundaries of Intellectual Property (Oxford: Oxford University Press, 2001), pp. 223-249. Other scholars find only limited evidence of an anticommons problem in practice, though problems of hold-up may well exist between particular buyers and sellers.
66. See John P. Walsh, Ashish Arora, and Wesley M. Cohen, "Research Tool Patenting and Licensing and Biomedical Innovation," in W.M. Cohen and S.A. Merrill, eds., Patents in the Knowledge-Based Economy (Washington, D.C. National Academies Press, 2003).
67. In Phase I clinical trials, the new drug or treatment is tested on a small group of people (20-80) for the first time to evaluate its safety, determine the safe dosage, and see what side effects exist. In Phase II, it is given to a larger group (100-300), and in Phase III, to an even larger group (1,000-3,000) to further evaluate its safety and effectiveness. See 〈www.clinicaltrials.gov〉, accessed on October 15, 2007.
68. See especially Wesley M. Cohen, Richard R. Nelson, and John P. Walsh, "Protecting their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not)," NBER Working Paper, Cambridge, MA, 2000;
69. Wesley Cohen, Akira Goto, Akiya Nagata, Richard R. Nelson, and John P. Walsh, "R&D Spillovers, Patents and the Incentives to Innovate in Japan and the United States," Research Policy, 31/8-9 (December 2002): 1349-1367.
70. Malerba and Orsenigo, op. cit.
71. Grindley and Teece, op. cit.
72. Fred O. Williams, "Amherst, N.Y-Based Ultra-Scan Considers IPO," Knight Ridder Tribune Business News, October 4, 2002, p. 1; 〈http://ultra-scan.com〉, accessed on October 15, 2007.
73. Sarah Chapin Columbia and Stacy L. Blasberg, "Beware Patent Trolls," Risk Management Magazine, 53/4 (April 2006): 22-27. All in all, Lemelson received 562 U.S. patents on technologies ranging from automated manufacturing systems to bar code readers, video cameras, and facsimile machines. Beginning in the 1970s, he brought patent infringement suits against numerous major U.S. corporations including General Motors, IBM, General Electric, and Zenith, reportedly reaping hundreds of millions of dollars in royalties and court awards.
74. See also William F. Heinze and Harry Goldstein, "Dead Patents Walking," IEEE Spectrum, 39/5 (May 2002): 52-54.
75. Katherine Campbell, "A Chip Spun off the US Block: Venture Capital: Katharine Campbell Looks at a German University's Pioneering Spin-Off," Financial Times, December 7, 2000, p. 18.
76. See Patricia S. Abril and Robert Plant, "The Patent Holder's Dilemma: Buy, Sell, or Troll?" Communications of the ACM, 50/1 (January 2007): 37-44.
77. Jaffe and Lerner, op. cit.
78. MAV also made an agreement with Scaled Composites, which had been central to the development of the craft, to utilize the technology to build new spaceships to carry passengers into space. "One small step for space tourism . . . ", The Economist, December 18, 2004, pp. 141-142, 〈www.scaled.com〉, accessed on October 15, 2007.
79. See 〈ultra-scan.com〉, accessed on October 15, 2007.
80. These details are based on press releases from the companies concerned. For further information, see 〈www.neurosearch.com〉, accessed on October 15, 2007.
81. Arora, Fosfuri, and Gambardella, op. cit.; 〈www.cdtltd.co.uk〉, accessed on October 15, 2007.
82. "CombiMatrix and Benitec Enter Cross-Licensing and Collaboration Agreement," Nanotechwire, February 22, 2005, available at 〈http://nanotechwire.com/news.asp?nid=1655〉, accessed on October 8, 2007. See also 〈www.benitec.com.au/〉 and 〈www.combimatrix.com/ 〉.
83. Arora, Fosfuri and Gambardella, op. cit.; 〈www.qualcomm.com〉, accessed on October 17, 2007.
84. See Nancy Gohring, "Qualcomm Files Patent Infringement Suit Against Nokia," IDG News Service, November 7, 2005, available at 〈www.infoworld.com/article/05/11/07〉, accessed on October 17, 2007;
85. Mark Halper, "Nokia vs. Qualcomm," Fortune, December 25, 2006, pp. 23-24;
86. "Nokia Hits Back at Qualcomm in Patent Row," Computer Business Review, May 25, 2007, available at 〈www.cbronline.com/ article_news〉, accessed on October 17, 1007;
87. "Telecoms: Industry Update," Datamonitor, 6/10 (October 2007): 217-218.
88. Arik Hesseldahl, "NTP: A Taste of Its Own Medicine," Business Week Online, November 8, 2006, p. 29. Subsequently, the U.S. Patent and Trademark Office has rejected all five patents that formed the basis of NTP's case against RIM. NTP is appealing the ruling.
89. See Clayton M. Christensen, The Innovator's Dilemma (Cambridge, MA: Harvard Business School Press, 1997).
90. Alternately, they may make their own acquisitions. In November 2006, for example, Qualcomm bought nPhase LLC, which provides machine-to-machine solutions, helping to reinforce Qualcomm's position in this market. 〈www.qualcomm.com/press/index.html〉, accessed on October 15, 2007.
91. There are also indications that patent trolls are facing a more precarious existence. While RIM felt compelled to settle, another would-be troll, MercExchange, was less successful in its suit against eBay. In 2006, the U.S. Supreme Court reversed a lower court's ruling supporting MercExchange and tightened the standards for granting injunctions made at the behest of patent trolls. William R. Overend, "Patent Injunctions after eBay: The Bidding is Open on Who Really Benefits," The Corporate Counselor 21/3 (August 2006): 1-2, 7-8.
92. "Merck & Co., Inc. and Crucell Sign Cross-Licensing Agreement on Vaccine Production and Technology," Marketwire, December 27, 2006. Available at 〈www.genengnews.com/news/bnitem.aspx?name=10841302〉, accessed October 8, 2007.