Joachim Henkel

Abstract: Efficient markets for technology are essential for innovative industries. A determinant of their efficiency hitherto neglected is the separation in the licensing process of technical knowledge from the intellectual property rights that cover it. I study this question in the context of the Internet of Things (IoT). Essential patents on communication standards such as LTE and Wi-Fi may be licensed upstream, to firms that put the technical knowledge on the standard into practice, or downstream to device makers. The choice of the licensing level is currently the subject of an intense debate. I present empirical evi- dence on the matter from a qualitative study comprising interviews with 30 individuals from 22 firms of different sizes and industries, focusing on startups. For IoT device makers, uncertainty regarding infringement, patent validity, and the licensing process emerge as hindrances to efficient licensing, compounded for SMEs and startups by resource constraints. Implications for practice are that device- level licensing of standard-essential patents (SEPs), if broadly implemented, would have a negative effect on innovation and entrepreneurship in the IoT. Policy makers should ensure that SEP-licensing is simplified. On a general and theoretical level, my study shows that the level of the value chain to which patents are licensed need not coincide with the level on which the patented knowledge is put into practice, and that the licensing level is an important contingency of the efficiency of markets for tech- nology.