Profiting from innovation in the digital economy: Enabling technologies, standards, and licensing models in the wireless world

Teece, DJ (2018). Profiting from innovation in the digital economy: Enabling technologies, standards, and licensing models in the wireless world, Research Policy, 47(8): 1367-1387.

The value-capture problem for innovators in the digital economy involves some different challenges from those in the industrial economy. It inevitably requires understanding the dynamics of platforms and ecosystems. These challenges are amplified for enabling technologies, which are the central focus of this article. The innovator of an enabling technology has a special business model challenge because the applicability to many downstream verticals forecloses, as a practical matter, ownership of all the relevant complements. Complementary assets (vertical and lateral) in the digital context are no longer just potential value-capture mechanisms (through asset price appreciation or through preventing exposure to monopolistic bottleneck pricing by others); they may well be needed simply for the technology to function. Technological and innovational complementors present both coordination and market design challenges to the innovator that generally lead to market failure in the form of an excess of social over private returns. The low private return leads to socially sub-optimal underinvestment in future R&D that can be addressed to some extent by better strategic decision-making by the innovator and/or by far-sighted policies from government and the judiciary.

The default value-capture mechanism for many enabling technologies is the licensing of trade secrets and/or patents. Licensing is shown to be a difficult business model to implement from a value-capture perspective. When injunctions for intellectual property infringement are hard to win, or even to be considered, the incentives for free riding by potential licensees are considerable. Licensing is further complicated if it involves standard essential patents, as both courts and policy makers may fail to understand that development of a standard involves components of both interoperability and technology development. If a technology standard is not treated as the embodiment of significant R&D efforts enabling substantial new downstream economic activity, then rewards are likely to be calibrated too low to support appropriate levels of future innovation.