Complementary components and returns from coordination within ecosystems via standard setting

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Author Information : Cameron D. Miller, Whitman School of Management, Syracuse University

Puay Khoon Toh, McCombs School of Business, The University of Texas at Austin

Year of Publication : Strategic Management Journal (2020)

Summary of Findings : Our findings point to how managers can leverage standard setting to create and capture value in their technology portfolio beyond the licensing of standard essential patents.

Research Questions : When and how does a firm generate positive returns for itself as it coordinates technological development in ecosystems via standard setting? More specifically, under what conditions does a firm generate positive returns from its disclosure of standard essential patents during standard setting?

What we know : In an innovation ecosystem, multiple components need to be compatible before the entire system can function. This coordination is challenging because it is often the case that different firms own the various components and the ecosystem may lack a ‘platform leader’ to dictate design and engagement rules. Coordination of this type often occurs through standard setting—where multiple firms get together at a standard settings organization to sketch the blue print for the technological platform. Examples include the wireless communication standards like LTE and 5G.

Prior research tends to focus on how the firm can benefit from licensing technology that is essential for the standard to function—called standard essential patents, or SEPs. Firms wanting to adopt the standard (i.e., use the technological platform) must license SEPs from their owners SEPs can generate lucrative licensing royalties in the absence of price restriction; but many standard setting organizations require firms to license SEPs at fair, reasonable, and nondiscriminatory (FRAND) basis. Firms can incur substantial costs to develop these technologies and to participate in standard setting, which it may not recoup via restrictive licensing.

Novel Findings : Instead of focusing only on the SEPs, we broaden our examination to include what other non-disclosed complementary intellectual property (IP) the SEP owner has in its portfolio, to see how they help the firm create and capture value. This complementary IP typically covers component technologies needed to implement the standard or to improve the functionality of products that operate on the standard. We suggest that by disclosing SEPs to the standard, any non-disclosed complementary IP will increase in value because they will now function with the standard. Owners of the non-disclosed complements are free to license them at the rate the market will bear or to include them into products to increase their appeal to customers. Examining the effect of disclosing SEPs on the firm’s stock market return, we find that firms that disclose SEPs but have no complements tend to have no significant abnormal stock return or in some cases, may even generate negative returns. However, we find a strong positive relationship between the number of non-disclosed complementary components a firm owns and its stock market returns. We also find that these complements increase in value after the disclosure of their associated SEPs.

Implications for Practice : Our findings point to how managers can leverage standard setting to create and capture value in their technology portfolio beyond the licensing of SEPs.

Implications for Policy: There has been growing concern over the past several decades that SEPs give their owners monopoly power. To counter act this, many standard setting organizations obligate SEP holders to license the SEPs on a FRAND basis. Our analysis suggests that SEP holders can gain substantial power in the ecosystem even if they agree to FRAND licensing terms. This may explain why some firms have been willing to agree to free SEP licensing rates.

Implications on Research: Through this study, our goal is to contribute to the two sub-streams of research within the ecosystem literature—research on coordination of technological development and on ownership of complementary components within ecosystems. By showing that returns from coordination depend on what complementary components the firm owns, we stress the need to monitor the firm’s entire portfolio in order to assess whether it is worthwhile for the firm to engage in coordination.

Full Citations : Cameron D. Miller & Puay Khoon Toh. Complementary components and returns from coordination within ecosystems via standard setting. Strategic Management Journal (forthcoming)

Abstract : When and how does a firm generate positive returns for itself as it coordinates technological development in ecosystems via standard setting? We depart from the convention of examining a firm’s disclosed standard essential patents (SEPs), to instead focus on its non-disclosed complementary components. Using data from the ICT industry from 1988–2010, we demonstrate that a firm that discloses SEPs generates higher returns when it has more non-disclosed complementary components, especially when they are firm-specific. We further demonstrate the mechanism by showing at a component level that disclosure raises the value of non-disclosed complementary components. Findings suggest that adopting a systemic perspective over the firm’s entire portfolio to include its complementary components provides a more comprehensive understanding of returns from coordination within ecosystems.

These findings point to how managers can leverage standard setting to create and capture value in their technology portfolio beyond the licensing of standard essential patents.

Cameron Miller

Assistant Professor of Management at Whitman School of Management, Syracuse University
Cameron Miller is assistant professor of management, who teaches strategy courses. His research interests include technology strategy and innovation, competitive strategy and evolutionary economics. Prior to earning his Ph.D. in business administration from the University of Minnesota’s Carlson School of Management, Professor Miller worked for Standard & Poor’s in New York City, as a director in the global fixed income research department. He also was a senior analyst for The Modeling Group, LLC, in Stamford, Connecticut, and held various positions in finance, operations and research for investment and consulting firms. He earned a B.S. in business administration from Duquesne University, an M.A. in economics from the University at Albany, State University of New York.
Cameron Miller
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