How to License SEPs to Promote Innovation and Entrepreneurship in the IoT

The Internet of Things (IoT) relies heavily on wireless communication technologies, which are covered by thousands of standard-essential patents (SEPs). Numerous applications of IoT technologies are being developed, frequently coming from entrepreneurial firms. The high degree of fragmentation on the side of device makers raises the question of how—i.e., on which level of the value chain—SEPs should be licensed. Device makers prefer upstream licensing, allowing them to purchase fully licensed modules, while SEP holders tend to favour licensing at the device level. I present empirical evidence on the matter from a qualitative study comprising interviews with 18 individuals from 12 firms of different sizes and industries, including device makers and SEP licensors. The focus lies on the perspective of entrepreneurial firms. I also review and discuss arguments presented in the literature. I find that device-level licensing poses serious problems to device makers, in particular to SMEs. The main problems are: A lack of resources and pertinent legal and technical competence, precluding fair negotiations with licensors; high transaction costs due to a high degree of industry fragmentation; and uncertainty regarding cost and patent clearance. As a consequence, device-level licensing would likely have a chilling effect on innovation and entrepreneurship in the IoT. Policy makers should ensure that IoT SEP licensing is simplified. They should commission studies on the feasibility of licensing and price differentiation higher up in the value chain, and on the aggregate cost of developing the main standards. Adding to those formulated by the SEPs Expert Group, I propose two additional principles for IoT SEP licensing: Licensing at a value chain level where transaction costs are minimal; and licensing in a way that promotes downstream innovation and entrepreneurship.