The economic case against licensing negotiation groups in the Internet of Things

Abstract

Abstract Competition policy generally prohibits coordination among buyers or sellers, especially coordination on price, price-related inputs, and output. In licensing markets for standard-essential patents (SEPs), it has been periodically proposed that this rule should be relaxed to permit licensing negotiation groups (LNGs), which is expected to reduce transaction costs and the purportedly ‘excessive’ royalties paid to licensors. Based on the economic structure and historical performance of wireless technology markets, this policy intervention is likely to degrade, rather than enhance, competitive conditions in the wireless, automotive, and other markets encompassed by the ‘Internet of Things’. In the short term, LNGs would most likely result in a redistributive (not an efficiency) effect that shifts value from innovators to implementers in the technology supply chain without necessarily passing on cost-savings to consumers. In the medium to longer term, LNGs are liable to impose efficiency losses by endangering the viability of licensing-based monetization models that have funded research and development, promoted dissemination of technology inputs, facilitated entry in device production, and enabled business models across multiple industries. While LNGs may reduce the transaction costs of SEP licensing, the historical record shows that pooling structures can achieve the same objective at a substantially lower risk of competitive harm.