NETWORK EFFECTS AND TECHNOLOGY LICENSING: MANAGERIAL DECISIONS FOR FIXED FEE, ROYALTY, AND HYBRID LICENSING

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1 NETWORK EECTS AND TECHNOLOGY LICENSING: MANAGERIAL DECISIONS OR IXED EE, ROYALTY, AND HYBRID LICENSING Lihui Lin School of Managmnt, Boston Univsity, Boston, MA 05 Nalin Kulatilaka School of Managmnt, Boston Univsity, Boston, MA 05 Last visd: Apil 4, 006 Not: This aticl is fothcoming in th Jounal of Managmnt Infomation Systms, all 006. ABSTRACT A paamount qustion facd by tchnology innovatos is whth to licns an innovation to oth fims, and if so, what typ of licns it should us. Infomation tchnology innovations oftn hav th uniqu fatu of lading to nw poducts and svics that xhibit ntwok ffcts. This pap addsss th qustion whth th psnc of ntwok ffcts changs an innovato licnsing choic. Th litatu suggsts that without ntwok ffcts, a oyalty licns is pfd by poduc-innovatos. W find, howv, in a makt with high intnsity of ntwok ffcts, a fixd f licns is optimal. o low intnsity of ntwok ffcts, th optimal licns uss a oyalty at, ith alon o in combination with a f. W futh div th tms of th optimal licns and discuss th impact of th invstmnt ndd to plicat th innovation and th siz of th potntial makt. Ou sults povid insights fo licnsing dcisions in industis that xhibit ntwok ffcts. Kywods: Economic analysis, fixd fs, hybid chaging schms, IT valu, licnsing policy, ntwok ffcts, oyalty, tchnology innovations Acknowldgmnts: W would lik to thank th co-ditos Rob Kauffman, Eic Clmons, and Rajiv Dwan, and anonymous viws fo insightful commnts and suggstions that hlpd significantly impov th pap. W also thank Justin Rn, Jol Wst, and smina paticipants at th HICSS 39 confnc and th Univsity of Conncticut fo hlpful commnts. unding was povidd by th Boston Univsity Institut fo Lading in a Dynamic Economy. All os and omissions a ous.

2 Intoduction Tchnological innovations oftn hav th potntial to b dvlopd into standads. In infomation and tlcommunication industis, stablishing standads has povd vital fo th succss of poducts and svics built aound innovations [, 8]. Thfo, a fim dciding how to dploy its innovations should consid captuing valu not only fom its own us of th innovations, but also fom th sulting standads [4]. Th a two diffnt statgis to stablish an innovation-basd standad. ist, a fim can dploy an innovation within its bounday, and subsquntly dvlop a popitay standad. Whn a standad is built aound an innovativ modul, th fim must b vtically intgatd in od to kp th standad popitay. Th convntional wisdom fo such a statgy is that th fim can sustain a comptitiv advantag and an monopolistic pofits. Howv, it is qustionabl whth th fim can bcom o main a monopolist: oth fims may achiv substitutabl innovations and dvlop compting standads. Anoth isk fo building a popitay standad is that without th suppot fom oths, th nw tchnology may fail to gnat nough intst among uss o fail to satisfy gowing makt dmand. An altnativ statgy is to allow oths including comptitos to adopt on s tchnology. This statgy acts as a doubl-dg swod. On th on hand, th mo oths adopt th tchnology, th mo likly it is to bcom th dominant standad, which hlps dfat compting standads and dissuad potntial comptitos fom dvloping nw standads. On th oth hand, howv, this statgy invits oths to compt with on s own poduct. Rcnt sach and businss pactic hav shown that th potntial to own and stablish a standad tnds to outwigh th concns of comptition in th poduct makt. Bandnbug and Nalbuff [] notic a gowing tnd in modn businss wh comptitos ngag in coopativ

3 activitis, which thy call cooptition. Allowing comptitos accss to on s innovation is a spcial fom of cooptition most pvalnt in industis (such as infomation tchnology and tlcommunication industis) wh it is citical to stablish standads basd on innovations. In fact, many innovating fims mak tmndous ffots to psuad potntial comptitos to adopt thi tchnology, hoping to stablish an industy-wid standad. Innovatos usually also ncouag vndos of complmntay goods to build compatibl poducts and svics, futh pompting us of th standad. Why a fims so kn on stablishing a standad? On of th ky asons is that th own of a standad can ap high conomic bnfits by cating ntwok valu fo its uss. Uss gain utility fom th ability to connct (.g., mail) and collaboat (.g., wod pocssos) with mo uss, in addition to th standalon us of th poduct. This is calld a dict ntwok ffct. Whn many fims adopt a standad and poduc compatibl poducts, uss of ths poducts fom a lag ntwok and a willing to pay a high pic, allowing ach povid to an high pofits. A lag ntwok of uss also attacts an cosystm of supplis who innovat aound th standad and incas th vaity of complmntay poducts and svics (.g., opating systms), which futh incass th ntwok valu fo uss. Such ntwok valu, calld an indict ntwok ffct, plays an impotant ol in most standads. Th nxt qustion that aiss is how to stablish a standad. Numous cass illustat that convincing potntial comptitos to adopt on s standad can b cucial fo th succss of a standad. In th histoy of VCR standads, Sony had a had stat in dvloping vidocasstt cods. Littl known is that Sony invitd Matsushita and JVC to licns its Btamax o xampl, th Blutooth tchnology was fist dvlopd by Eicsson in 994. Instad of kping th standad popitay, it invitd fiv oth companis including its comptito Nokia to jointly fom th Blutooth Spcial Intst Goup (SIG) in 998. S [5, 6, 4, 4] fo xtnsiv discussions gading th conomic implications of ntwok ffcts sulting fom standads.

4 tchnology in Dcmb 974. Howv, JVC and Matsushita dclind th off. Although Sony njoyd a vitual monopoly in th VCR makt fo a ya, in 976 JVC s intoduction of th VHS fomat launchd a VCR standads wa, which vntually stablishd VHS as th global standad [4]. As a count-xampl, Gnal Motos was th lad in th automobil tlmatics makt and attmptd to fog a woldwid standad by slling its OnSta systm to oth automobil manufactus [5]. OnSta povids a wid ang of in-vhicl safty, communication and infomation svics. Although it might b too aly to dcla a winn, Honda, Volkswagn, and Subau hav now adoptd OnSta as thi tlmatics standad, and suspndd dvlopmnt of thi own standads. OnSta is now availabl not only in most GM modls, but also in such maks as Acua, Audi, Volkswagn, and Subau. Simila battls suounding standads hav occud and continu to b fought in comput opating systms, high-dfinition tlvision, Wb svics, instant mssaging, and vaious oth tchnologis. Of ths ongoing standads was, th battl btwn Blu-Ray and HD-DVD ov th nxt gnation DVD standad is in many ways simila to th Btamax vs. VHS cas. Both camps a tying to licns thi tchnology to optical mdia manufactus and a sking suppot fom contnt povids. In all ths xampls, on ky issu th lading fim must solv is th tms of th contact fo tchnology us (most oftn a licnsing agmnt). In pactic, stablishing a standad and ngotiating with oth patis a highly complx dcisions involving not only conomic but also tchnological, lgal, and public policy issus. In this pap, w do not attmpt to captu all th nuancs of a standads statgy. Instad, w focus on th conomic issus and in paticula, addss th following qustions: ) should an innovato dvlop a popitay standad o should it allow oths to adopt its tchnology? ) if it allows oths accss to its tchnology, how much should it chag fo th accss? W dvlop a gam- 3

5 thotic duopoly modl in which an innovating fim facs th choic to ith kp its tchnology popitay o allow anoth fim to adopt its tchnology. If th tchnology is kpt popitay, th oth fim can achiv a substitutabl innovation at a cost and stablish its own standad. If th fim allows adoption of its tchnology, it thn nds to dcid on a picing mchanism accptabl to th oth fim (i.., ffctivly pmpting a substitutabl innovation). Bfo w gnaliz th picing mchanisms fo tchnology shaing, w discuss diffnt foms of innovations and th mann in which uss can gain accss to thm. An innovation may com in th fom of a nw poduct, and a standad is stablishd whn many uss adopt th poduct, cating a lag installd bas. Th innovato thn can licns its tchnology, convying th ight of manufactuing simila poducts to licnss. Howv, singlpoduct standads a a, and most oftn a standad involvs a systm consisting of multipl complmntay poducts and svics. 3 In ths cass, th own of a systm may lt oths off on of th poducts o svics, and just chag fo accss to th systm. o xampl, camaks that hav adoptd OnSta pay GM subsciption fs to accss th OnSta ntwok, and buys of cas with OnSta installd pay fo th svics on a monthly basis. o anoth xampl, Qualcomm licnss its CDMA tchnologis by authoizing infastuctu and mobil phon supplis such as Lucnt, Motoola, Nokia, Sony, and TCL to dsign, manufactu, and sll poducts compatibl with th CDMA standad []. In fact, most innovations in infomation and communication tchnologis (ICT) occu in a modul (componnt, algoithm, achitctual lay, tc.) of a lag systm, lading to nw systms with th innovations mbddd. Ov th yas, ICT innovations hav bn achivd at diffnt achitctual lays (hadwa, opating systms, applications, tlcommunication potocols, businss pocsss, tc.) and ld to 3 o xampl, Appl s digital mdia standad is built lagly on its innovativ dvic, th ipod family, but Appl also povids complmntay poducts and svics, namly th ituns softwa and digital contnts though ituns Music Sto. 4

6 numous standads. Innovatos can off th tchnology to oths ith though licnsing th ight of poviding a dvic/svic, o via th sal of a ky componnt modul that mbodis th tchnology, o by shaing application pogamming intfacs (API) fo a f [8]. 4 Whil accss to innovations may tak vaious foms, th a two basic typs of picing mchanisms: a fixd f, o a p unit chag. o xampl, a fim using a licnsing statgy can chag ith a fixd f p licns o a oyalty at p unit of output. In a suvy of tchnology licnss, Rostok [3] finds that 39% of th licnsing contacts usd oyaltis alon, 3% fixd fs alon, and 46% down paymnts plus a unning oyalty. om th picing pspctiv, sal of a componnt, volum-basd svic chags, and oyalty-basd licnss a all foms of p unit chags, whil lump sum sal o svic chags, and f-basd licnss a vaiations of fixdf picing. In th st of this pap, w discuss picing choics in tms of fixd-f licnsing and oyalty licnsing. Not that ou sults also apply to cass of sals and svic chags. 5 W obtain sval intsting sults. ist, a fim with an innovation should licns its tchnology to its comptito in psnc of ntwok ffcts. Whil pvious sults show that without ntwok ffcts, th lading fim dos not licns whn th makt dmand is low [8] w find that with a ntwok ffct, it is always optimal to licns on s tchnology. Th intuition is that without a ntwok ffct, th pospcts of aning monopolistic pofits outwigh licnsing vnus in som cass, but vn a slight ntwok ffct will mak a licnsing statgy always pfd to a kping-it-popitay statgy. 4 Dtails gading accss to spcific lays, moduls, and achitctual contol points a tchnical dcisions with impotant implications. Ou sach, howv, focuss on th conomic aspcts. 5 Sinc w study th picing choic fo shaing tchnological innovations, ou sach is closly latd to and contibuts to th patnt licnsing litatu. Anoth stand of litatu that studis contacting choics btwn fixd fs and oyaltis is th sach on fanchising. Empiical vidnc shows that most fanchisos collct both a fixd f and sals oyaltis (s,.g., [9, 9]). Incntiv concns play an impotant ol in dtmining th tms of th fanchis contact [7, ]. This is du to th cntal ol of th tadmak in fanchising, which is not psnt in tchnology licnsing [3, 9]. 5

7 Scond, th optimal licnsing stuctu dpnds on th intnsity of ntwok ffcts. W compa th two licnsing mthods, fixd fs vs. oyaltis, and find that a oyalty licns is pfd whn th intnsity of th ntwok ffct is low, whil a fixd f should b usd whn th intnsity of th ntwok ffct is high. Ou sults mak pvious findings in th patnt licnsing litatu a spcial cas. Th litatu suggsts that whn th patnt hold is also a poduc in th industy, oyalty licnsing should b pfd to fixd-f licnsing, bcaus th invnto-poduc is intstd in not only th licnsing vnus but also its pofits fom poduction [3, 6, 7]. Ou sults show that a oyalty licns is optimal whn ntwok intnsity quals zo, which is th cas studid in th litatu. W futh show that as th intnsity of th ntwok ffct incass, th optimal licnsing statgy shifts fom a oyaltybasd gim to a f-basd gim. Th ason fo this shift is as follows. With a oyalty licns, th lading fim limits th quantity its comptito povids whil a fixd-f licns allows th comptito to poduc as much as it wants. With incasing ntwok intnsity, in od to tak advantag of th ntwok ffcts, it is in th bst intst of th lading fim to lt th comptito to poduc mo. Thfo, it should not us a oyalty at to stict th comptito s poduction, but us a fixd-f licns instad. As an xtnsion to ou modl, w allow th fim to off not only a pu-f o puoyalty licns, but also a hybid licns that consists of both a fixd-f componnt and a oyalty at. W find that a pu fixd-f licns should always b usd whn th ntwok intnsity is high, and th ational is again to ncouag th poduction of th comptito in od to tak advantag of ntwok ffcts. Whn th ntwok intnsity is low, a oyalty at should b usd alon whn th makt dmand is high and combind with a fixd-f componnt whn th makt siz is small. Th ason is as follows. A oyalty at confs quantity ladship onto th 6

8 licnso; howv, it has a ngativ ffct on th siz of th ntwok. Thfo, a pu oyalty licns should b usd only whn th makt is sufficintly lag such that th ngativ ffct on ntwok siz is dominatd by th positiv ffct of quantity ladship. In addition to th intoduction of ntwok ffcts, th licnsing gam in ou modl also has two impotant points of dpatu fom th standad stup of th licnsing litatu. 6 ist, w consid dastic innovations that lad to nw poducts and svics whil th litatu focuss on incmntal innovations that duc costs. Scond, w gant a compting fim an option to dvlop its own tchnology standad, which has not bn considd in pvious sach. Kulatilaka and Lin [8] study th licnsing of dastic innovations in an unctain nvionmnt without ntwok ffcts. It is found that a oyalty licns is optimal in absnc of unctainty, whil a oyalty cap contact can b usd as a financing vhicl in fac of unctainty. Th st of this pap is oganizd as follows. In Sction, w st up th modl and dscib how w modl ntwok ffcts. Sction 3 studis th th choics facd by a fim with an innovation: () no licnsing o shaing of th tchnology, and shaing with ith () a fixd f-basd licns, o (3) a oyalty-basd licns, and divs th optimal dcisions. Sction 4 xtnds th modl by allowing a hybid licns. Sction 5 povids concluding maks. Modl. Modl Stup W consid an industy wh two compting fims achiv innovations that can b dvlopd into a nw poduct o svic xhibiting a ntwok ffct. Suppos on of th fims, im, has achivd a licnsabl innovation. Th oth fim, im, tmpoaily lagging bhind, can achiv a substitut innovation by invsting K. im can ith tain its innovation as a 6 S, fo xampl, [,, 5, 6, 6, 7]. S [0, 3] fo suvys of th litatu. 7

9 popitay tchnology, o licns th innovation to im. Basd on im s statgy, im dcids whth to invst K in its own innovation (s Tabl fo a complt list of notations). ist, consid th cas wh im tains its innovation as popitay. If im invsts in its own tchnology, th two fims will ngag in Counot comptition, poducing pfctly substitutabl but incompatibl poducts und compting standads. 7 W only consid th fims Counot pofits and igno any intmdiat cash flow im may an bfo im poducs (th intmdiat cash flow is ngligibl compad to th pofits both fims mak in th lif cycl of th poducts). If th makt dmand is low and im dcids not to invst, im bcoms a monopolist. Nxt, consid th cas wh im licnss its innovation to im. If im dcids to licns to im, it maks a tak-it-o-lav-it (TIOLI) off to im. Th licns may tak on of two diffnt foms: a fixd f, o a quantity-basd oyalty at. im thn has th choic of whth to accpt o jct th off. By accpting th licnsing off, im adopts im s tchnology and will not invst K. Th two fims thn ngag in Counot comptition in th poduct makt. Unlik th cas wh im kps its innovation popitay and im invsts in its own innovation, in this cas, th is only on standad (i.., im s tchnology) in th makt. If im jcts th licnsing off, howv, im s invstmnt will sult in two compting standads. ims may incu som cost in poducing th ntwok poduct. o infomation goods such as softwa, th maginal cost is clos to zo. Sinc ou focus is on th ntwok ffcts, w assum zo poduction cost. Th al wold, of cous, is inhntly mo complx than ou stylizd modl. Th can b multipl plays, possibl coodination, mgs and acquisitions, 7 W discuss th cas wh im can also invst to achiv a standad compatibl with im s in Sction 5. 8

10 and complmntay ntwoks. Ou modl is intndd to isolat licnsing as an impotant statgy though which fims stablish ntwok standads.. Dmand fo Ntwok Goods and th Intnsity of Ntwok Effct W now discuss th dmand function in a makt that xhibits ntwok ffcts and how fims licnsing dcisions impact dmand in such a makt. A lina invs dmand function fo a nomal good can b psntd by: (, ) p q = q wh q is th quantity dmandd fo th good. Both fims know th dmand paamt,. Though is tatd as ctain in this modl, it can also b intptd as th xpctd valu of maximum potntial dmand. In th cas of a ntwok good, uss div addd valu fom th psnc of oths in th ntwok. This additional valu, which w call ntwok valu, dpnds on th numb of oth uss of this good. Evn though uss mak thi puchasing dcisions indpndnt of ach oth, and join th ntwok at diffnt tims, thy do not bas thi dcisions on th actual numb of uss at th tim thy join th ntwok, but ath on th xpctd siz of th ntwok. W assum xpctations a xognously givn. W also assum uss a homognous in thi valuation of ntwok bnfits, and th ntwok valu compounds th standalon valu of th good. 8 wh Thfo, w can wit th dmand function fo a ntwok good as: (,, ) ( ) p q q = + v q q q is uss xpctation gading th siz of th ntwok. Th tm v q psnts an individual us s willingnss-to-pay fo th ntwok valu of th good, and is an incasing ( ) 8 Th is both good ason and mpiical vidnc that indicats diffnt consums will contibut diffnt amounts of ntwok valu. o instanc, on might div substantial valu fom having clos finds, family, and collagus who us th sam standad wod pocsso o instant mssaging systm. 9

11 function of q (i.., v ' > 0). now psnts th maximum makt dmand fo th standalon us of th ntwok good. Accoding to Mtcalf s law, th total valu of a ntwok incass in popotion to th squa of th numb of uss in th ntwok [7]. It implis that fo ach consum, th ntwok valu of a poduct can b psntd by 9 v( q) = β q Th paamt β flcts an intinsic popty of a ntwok. That is, fo two ntwoks with qual siz, th ntwok with a high β ndows its uss with high ntwok bnfits. W dfin β as th intnsity of ntwok ffcts. Whn β = 0, v(q)=0, and th dmand dgnats to that fo a nomal good wh uss aliz only th standalon valu. In od to maintain th downwad-sloping popty of th dmand function, w stict β <. Thfo, th ang of valid β valus is [0, ). Ntwoks a diffnt with gad to th intnsity of th ntwok ffct. o xampl, a ntwok of onlin gam plays has a mo intns ntwok ffct than th ntwok consisting of uss of an onlin booksto. Plays of onlin gams bnfit fom th psnc of oth plays bcaus thy can intact with mo plays, and it is mo likly thy will mt plays with simila skill lvls. Whil customs of th sam onlin booksto may bnfit fom ach oth s viws of th sto and th books, th ntwok ffct is not likly as stong. In oth wods, a ntwok of onlin gam plays has a high β than a ntwok of onlin booksto consums. 9 Th total valu of th ntwok is thfo ( ) qv q = β q, which cosponds to Mtcalf s law. Mo gnally, w know that ntwok bnfits tnd to lvl off aft a ntwok achs a lag nough siz. In fact, in som cass vy lag ntwoks may vn bcom cumbsom to navigat and cat congstion, so that us bnfits may v q = β q α. dclin byond a ctain scal. Ths ffcts can b modld by a mo gnal function of th fom, ( ) 0

12 Th psnc of ntwok ffcts plays a vital ol in im s licnsing dcisions and in im s adoption dcision. Whn im dos not licns its innovation, o th two fims cannot ach a licnsing agmnt, im s invstmnt will sult in a compting standad. In this cas, only uss who hav puchasd th poduct fom th sam fim can intact with ach oth, foming thi own ntwok. Thfo, th uss a not willing to pay as much fo th ntwok valu than thy would if th poducts w compatibl. Th fims must consid this ffct whn making licnsing dcisions. Th cas of two compting standads is pobably bst illustatd by th VCR standads wa and th comptition btwn th two opating systms, Windows and Macintosh. If im succssfully licnss its tchnology to im, uss of both poducts fom on singl lag ntwok instad of two small incompatibl ntwoks, allowing thm to njoy high ntwok bnfits. Th fims a thn in a position to chag a high pic and an high pofits fo th poduct bcaus of uss incasd willingnss-to-pay. By using an appopiat licnsing statgy, im can stablish its standad as th industy standad and collct licnsing vnus fom im, whil it is poducing a good with a high ntwok valu. OnSta xmplifis such a cas. As mo camaks adopt th OnSta systm, mo svics that a complmntay to th systm will b availabl, sulting in high ntwok valu fo ca owns. This allows OnSta to chag a high pic fo its systm as wll as an high licnsing vnus. Whil th intnsity of ntwok ffcts dpnds lagly on th natu of th makt, povids of ntwok goods and svics may influnc th intnsity of ntwok ffcts though businss dcisions. 0 This pap focuss on th impact of ntwok ffcts on a fim s licnsing 0 o instanc, Spint PCS offs f PCS-to-PCS calls, so ach PCS subscib gains fom th xistnc of oth PCS subscibs. Spint futh offs a svic that allows walki-talki-styl communication, and uss who hav addd this

13 choic; thfo, th intnsity of ntwok ffcts is tatd as xognously givn. This implis that th assssmnt of th intnsity of ntwok ffcts and any dcisions that may influnc th intnsity should pcd th licnsing dcision. It also mans that whn th ntwok intnsity changs, a fim should modify its licnsing statgis accodingly. 3 Optimal Licnsing Dcisions: ixd f vs. Royalty W compa th following th statgis of im : () no licnsing o shaing of th tchnology, and shaing with ith () a fixd f licns, o (3) a oyalty licns. Th litatu has studid th choic btwn th two licnsing mthods, fixd f vs. oyalty, xtnsivly. H w xplo how ths two licnsing mthods diff in psnc of ntwok ffcts. o ach statgy, w solv fo th fims optimal poduction dcisions. o th two statgis that involv licnsing, w futh solv fo th optimal licnsing f and th optimal oyalty at. W thn find th optimal licnsing dcision. 3. No Licnsing Suppos im dos not off a licns to im. If im invsts K, th two fims will hav incompatibl standads. Thfo, ach fim s customs fom thi own ntwok. Sinc th two fims poducts a pfct substituts in thi standalon valu, th pics fo th poducts a givn by (w us subscipts and to psnt ims and spctivly): i ( ),, i p = + v q q q i = Th pofits a givn by: ( ), πi = q i + v qi q q i= To dtmin th fims optimal poduction dcisions, w solv th fims pofit maximization poblms and impos a fulfilld xpctation quilibium (EE) condition [4]. svic civ vn high ntwok valu. Thus by offing mo svics, Spint has incasd th intnsity of th ntwok ffct.

14 Und EE, ach fims chooss th optimal quantity of th ntwok good by maximizing its pofits and stting th quantity qual to cosponding xpctd quantitis. W us th functional fom v( q) of ntwok ffcts und EE. = β q. Libnstin [0] shows how to div th dmand cuv in psnc q = q =, 3 β π = π = 3 β W s that th two fims ngag in symmtic Counot comptition and poduc idntical quantitis. im s nt payoff fom dvloping its own standad is: Π = π. K ( ) Assuming a zo svation payoff fo im, im will nt only whn > 3 β K. W 3 K th nty thshold of dmand fo im. Whn im dos not licns, call ( β) im s payoff function is givn by: 0 whn NL Π = K whn > ( 3 β ) Whn th dmand is blow th nty thshold, im stays out of th makt, making im a monopolist. Th pofit-maximizing monopolistic quantity und EE is givn by q =. Thus, w obtain im s payoff function: β NL Π = ( -β ) ( 3 β ) whn whn > 3. Licnsing by Mans of ixd Whn im licnss its tchnology to im by mans of a fixd f,, th two fims again ngag in Counot comptition. Howv, sinc th two fims now confom to th sam 3

15 standad, th customs of both fims fom on lag ntwok, lading to high ntwok valu. Th makt pic is thfo givn by: ( ) p = + v q + q q q Th fims pofits a: ( ) πi = q i v q q q q + + i=, Th two fims optimal poduction dcisions yild th following quilibium quantitis: q = q = 3 β Th fims payoffs und a fixd f licns a givn by: Π = +, ( 3 β ) Π = ( 3 β ) Nxt, w xamin how im should st th licnsing f. Rcall th assumption that im maks a TIOLI off to im. Thfo, th optimal f should maximiz im s payoff whil nsuing that im will ag to th tm of th licns. W assum that im ags to licns whn it is indiffnt btwn licnsing and not licnsing, o achivs high payoff by licnsing. In oth wods, th optimal f is th solution to th following constaind maximization poblm: Max Π = + ( 3 β ) st.. Π = Π L N ( 3 β ) Obviously, im wants to chag th highst possibl fixd f, which is constaind by im s accptanc. This mans that th constaint is binding and th optimal f is dtmind by Π = Π, as follows: NL 4

16 = ( 3 β ) β( β) ( 3 β) ( 3 β) whn 3 + K whn > W can thn div im s payoff und th optimal fixd f, Π (s Tabl ). This is th maximum payoff that im can achiv with a fixd-f licns. im s payoff is tivial whn im chags th optimal f, bcaus by dfinition Π =Π. NL 3.3 Licnsing by Mans of Royalty If im licnss im s tchnology by mans of a oyalty, it pays im a oyalty,, fo ach unit it poducs. im s payoff thus consists of two pats: pofits fom slling its own poduct, and oyaltis fom im : ( ) Π = q v q q q q q im s payoff is givn by: ( ) Π = q + v q + q q q Th quilibium quantitis und th optimal poduction dcisions a: q ( β ) + = 3 β, q ( β ) = 3 β Th fims payoffs und quilibium quantitis a: ( 5 4 ) ( 5 5) β β β Π = + + ( 3 β ), Π = ( β) 3 β What is th optimal oyalty at fo im, givn th quilibium output? Again, th optimal at should maximiz im s payoff as long as im ags to licns. In oth wods, th optimal at should solv: 5

17 Max st.. ( 5 4 ) ( 5 5) β β β Π = + + ( β) ( 3 β ) Π = Π 3 β NL W call th constaint im s accptanc constaint. Th xpssion of, howv, suggsts that unlik th cas of f licnsing, it may not b in im s bst intst to chag th highst at accptabl to im. W us a th-stp appoach to solv th abov constaind maximization poblm and dtmin th optimal oyalty at. ist, w solv th unconstaind maximization poblm, diving th at that maximizs im s payoff gadlss of im s accptanc, which w dnot by. 5 4β = 5 5 ( β β + ) Scond, w find th oyalty at wh im s accptanc constaint is binding (i.., Π =Π NL ), dnotd by. Bcaus im s payoff dcass with th oyalty at, is th maximum oyalty at im will ag to. W hav, - β = 3 whn K whn > β β β ( β ) min (, ). This is bcaus whnv Last, th optimal at is dtmind by taking th minimum of th abov ats, that is, Π <, it is in im s bst intst to chag instad of, and whn im is focd to chag du to im s accptanc constaint. 6

18 W fist not that whn, < fo any valid valu of β. Thfo, ( ) min, = whn. Nxt, fo >, w find that = whn = ( β)( β+ β ) ( β)( β)( 5 β)( 0 3β) K. W dfin 3 ( β)( 5 5β+ β ) K. uthmo, whn ( β)( β)( 5 β)( 0 3β) < < <, and > whn >. Thfo, In sum, th optimal oyalty at is givn by: = whn 5 4β = whn 5 ( 5β+ β ) min (, ) = 3 β = β β K whn > ( 3 β ) <, and = whn >. igu dpicts how th optimal oyalty at is dtmind. Ovall, th optimal at is dtmind puly by im s payoff maximization whn, and im s accptanc condition is binding and dtmins th at im chags only whn >. Th sult fo > is asy to undstand, but it is supising that whn, it is optimal fo im to off a oyalty at low than what im is willing to pay. Th ason fo this count-intuitiv sult is as follows. Th ational fo licnsing, by ith fixd f o oyalty, is that whn th dmand is low and im is unwilling to nt th makt, du to th ntwok ffct, it is in th bst intst of im to ntic im to poduc and hlp gow th ntwok. Thn why would im chag a at low than th maximum at accptabl to im? With a f licnsing stuctu, im poducs th sam amount as im dos, and thus im chags th highst f im is willing to pay. With a oyalty licnsing stuctu, howv, im poducs a high quantity than im dos. Thfo, to tak full advantag of ntwok ffcts, it is optimal fo im to chag a at low than what im is willing to pay to futh ncouag im s poduction activity whn dmand is lativly low. 7

19 W can also div im s payoff und th optimal oyalty at, Π (s Tabl ), which is th maximum payoff im can gt by offing a oyalty-basd licns. 3.4 Optimal Licnsing Dcision o ach of th th statgis: no licnsing, f licnsing, and oyalty licnsing, w hav discussd fims optimal dcisions and divd im s maximum payoff (s Tabl ). Basd on ths sults, what is im s optimal dcision? To answ this qustion, w simply nd to compa th payoff functions und diffnt statgis fo givn paamt valus and choos th payoff-maximizing statgy. W dfin th following notation. o givn paamt valus, if th payoffs fo two A B licnsing statgis A and B satisfy Π >Π, w say A dominats B, o B is dominatd by A, dnotd by A B. With slight abus of notation, w us NL,, and, to dnot im s th statgis: no licns, a fixd-f licns, and a oyalty-basd licns, spctivly. Th statgis and imply that th f and th oyalty at a st optimally. Obviously, th optimal statgy has to b dtmind fo diffnt angs of dmand and diffnt β valus. ist, whn dmand is within im s nty thshold (i.., ), w find NL that Π > Π fo any and any valid β. It mans that th statgy of no licnsing is dominatd by oyalty licnsing, and thfo w only nd to compa th two statgis that involv licnsing. Compaison btwn Π and Π yilds th following sults. Whn β = β 0.306, th optimal f licns and th optimal oyalty licns yild th sam payoff fo any. uthmo, oyalty licnsing dominats f licnsing (i.., ) fo β < β, whil f dominats oyalty (i.., ) fo β > β. 8

20 Whn dmand is abov im s nty thshold (i.., NL > ), w find that Π >Π fo any and any valid β. Again w can igno th no licnsing statgy and focus on th two licnsing statgis. W fist compa Π and Π fo th dmand ang of <. W find that fo ach (,, th xists a uniqu lvl of th ntwok intnsity β such that f and oyalty licnss (tms st optimally) yild th sam payoff. W dfin ths lvls of β as β, which is a function of, dnotd by β ( ) licnsing (i.., ( ) β > β.. uthmo, oyalty licnsing dominats f ) fo β < β ( ), whil f dominats oyalty (i.., ) fo Applying this notation to th sults w obtaind ali fo th ang of, claly, w hav ( ) β = β fo. o <, howv, th is no closd-fom xpssion fo β ( ). W can constuct β ( numically though. W can also pov that β ( ) ) is continuous and incasing in, and that β ( ) = β and β ( ) β Last, w compa Π and Π fo th dmand ang of >. Again, fo any (, + ), th xists a uniqu lvl of th ntwok intnsity β, dnotd by β ( ), such that im is indiffnt btwn f and oyalty licnsing, and fo β < β whil fo β > β ( ). Simila to th cas wh <, β ( ) ( ) can only b numically β is dfind as th oot of th quation β β + β = 0 that falls in th ang of [0, ). 9

21 constuctd fo >. β ( ) is also continuous and monotonically incasing in in this ang. uthmo, β ( ) has an upp bound. Dfin lim β ( ) β3 W obtain th following poposition. ( ). Numically, β Poposition (Th Pu ixd and Pu Royalty Poposition). With only pu f and pu oyalty licnsing fo any lvl of dmand, th xists a uniqu intnsity of th ntwok ffct β such that th optimal f licns and th optimal oyalty licns yild th sam payoff, and oyalty licnsing dominats f licnsing fo β < β ( ) whil f licnsing dominats oyalty licnsing fo β β ( ) Th function β ( ) divids th spac into two gims: blow β ( ) >. igu dpicts th abov sult in th β spac (not that and a functions of β). is th oyalty gim wh a oyalty-basd licns is optimal, whil abov optimal to chag a fixd f p licns. β ( ) is th fixd f gim wh it is This sult has intsting implications fo fims licnsing statgy. ist, fo any positiv ntwok intnsity, it is always optimal to licns on s tchnology. It is undstandabl that whn dmand is high, th statgy of bing a monopolist is not sustainabl bcaus of compting standads, and thfo a licnsing statgy bnfits th lading fim mo than a no-licnsing statgy dos. Whn th makt dmand is low ( < ), howv, im can actually b th monopolist by not licnsing its tchnology to im. Ou sults show that vn in such a cas, du to ntwok ffcts, th statgy of bcoming a monopolist and aning monopolistic pofits is no long optimal. Instad, th fim should allow oths to poduc compting yt compatibl β 3 is dfind as th oot of th quation 3 β 6β 9β = that falls in th ang of [0, ). 0

22 poducts. This yilds a total quantity high than that in a monopolistic makt, sulting in a lag ntwok. Thus, it cats high ntwok valu fo both fims customs, lading to high pofits fo th licnso. Scond, as th ntwok ffct intnsifis, th lading fim with an innovation should switch fom a oyalty licns to a f licns. Whn considing pu licnss only, oyalty licnsing should always b usd if th intnsity of th ntwok ffct is blow β, whil f licnsing is always optimal fo a ntwok with intnsity high than β 3. To undstand th intuition bhind th abov sult, w nd to compa th two licnsing mthods in mo dtail. Und a f licnsing stuctu, th two fims poduc th sam amount. 3 Whn using a oyalty licnsing stuctu, howv, im acts as a Stacklbg lad, poducing a high quantity than im dos. In fact, im poducs mo und a oyaltybasd licns than it would do und a f-basd licns, whil th opposit is tu fo im. 4 Th total quantity und a oyalty licns, howv, is low than that und a f licns. 5 An incas in th total quantity has two countvailing ffcts on th pic of th ntwok good: on th on hand, th pic will dcas whn th total quantity supplid is high du to th conomics of nomal goods; on th oth hand, fims can chag a high pic fo th ntwok good bcaus th uss now div high ntwok valu. Th scond ffct is obviously th ntwok ffct, which stms fom th dmand sid. In contast, th fist ffct aiss fom th supply sid, and thus w call it a supply-sid ffct. Whn ntwok intnsity is low, th supplysid ffct dominats th ntwok ffct, thfo bing a Stacklbg lad in quantity and 3 Rcall that und a f licns, q = q =. 3 β 4 W know that > 0. Thfo, fo im, 5 Th total quantity und oyalty licnsing is + ( β) ( β) β > β ; fo im, β < β β , whil th total quantity und f licnsing is 3 β.

23 kping th total supply low is mo impotant fo im, which suggsts that it should us a oyalty licns instad of a f licns. Whn ntwok intnsity is high, howv, th ntwok ffct dominats th supply-sid ffct, and cating a lag ntwok is in im s bst intst. By using a f-basd licns, vn though im givs up its ladship in quantity, it bnfits fom captuing high ntwok valu. Th ky diffnc btwn a oyalty licns and a f licns is that a oyalty licns lads to asymmtic quantitis poducd by th two fims and sults in a low total quantity than that und a f licns. A oyalty licns not only gnats licnsing vnus, but also confs quantity ladship onto th licnso. Whil ladship in quantity is dsiabl fo a nonntwok good o a ntwok good with low ntwok intnsity, it is no long tu fo a ntwok good with high intnsity. In th latt cas, bing a quantity lad pvnts it fom taking full advantag of th ntwok ffct. Thfo, a fim sking to licns its nw tchnology in a makt that xhibits high ntwok intnsity should us a f licns bcaus it gnats licnsing vnu without discouaging oth fims poduction activitis. Also fo ntwok goods with high intnsity, th disadvantag of bing a quantity lad is not du to th cost of poduction, sinc w assum zo poduction cost instad, it is mly du to fogon ntwok ffcts on th dmand sid. Th choic of th licnsing statgy may also b influncd by th siz of th makt. Whn th intnsity of th ntwok ffct is in th mdium ang (i.., β < β < β3), th choic of licnsing statgy dpnds on th siz of th makt. Whn makt siz is small, th fim switchs fom oyalty to f licnsing at a low lvl of ntwok intnsity, whil th chang of gim happns at a high lvl of ntwok intnsity fo a lag makt. Th intuition is that th ducd total quantity sultd fom a oyalty licns has a mo significant ffct in a small

24 makt, and thfo, oyalty licnsing bcoms suboptimal at a low lvl of ntwok intnsity. On th oth hand, a oyalty licns s ffct on quantity is lss significant in a lag makt. Thfo, fims with innovations should stop licnsing by oyalty and switch to a f licns at a low lvl of ntwok intnsity (in th mdium ang) fo a small makt, whil th switch happns at a high lvl of ntwok intnsity fo a lag makt. Within ach gim, th tm of th optimal licns is givn by th following coollais. Coollay. (Optimal ixd Licns Condition). Whn β β ( ) licns is a fixd f givn by: = ( 3 β ) β( β) ( 3 β) ( 3 β) whn 3 + K whn > >, th optimal Coollay. (Optimal Royalty Rat Licns Condition). Whn β β ( ) optimal licns is a oyalty at givn by: 5 4β whn 5 ( 5β+ β ) = 3 β β β K whn > ( 3 β ) <, th Th abov sults a also dpictd in igu. Th fixd f gim is futh split by th nty thshold fo ntwok intnsity into two gions: in Rgion A, th f is st to mak im indiffnt btwn licnsing and staying out of th makt, whil in Rgion B th f maks im indiffnt btwn licnsing and nty by dvloping its own tchnology. Whil in both gions th optimal f incass with th dmand fo any givn β, it incass at a low at in Rgion B wh im has incntiv to dvlop its own tchnology. This mans that im s cdibl that to dvlop an altnativ standad limits im s ability to chag a high licnsing f. 3

25 Th oyalty gim is split into Rgions C and D by. In Rgion C wh th dmand is abov th nty thshold (not that > ˆ ), th oyalty at dtmind by im s accptanc constaint dcass with dmand fist; it thn incass with dmand, but at a low at than in Rgion D, wh th at is dtmind by im s payoff-maximization (s also igu ). Th fact that oyalty at b ducd facing high dmand implis that im s incntiv to dvlop an altnativ standad ducs im s bagaining pow svly. 4 Extnsion: Optimal Licnsing Dcisions Allowing fo Hybid Licnss In this sction, w allow fo a hybid licns consisting of a fixd-f componnt and a oyalty p unit of output. W find that in many situations, th lading fim should still us a pu-f o pu-oyalty licns; a hybid licns dos achiv high payoffs whn th intnsity of ntwok ffct is low and th makt siz is small. Whn th lading fim can us any combination of a fixd f and a oyalty at to licns, it solvs th following poblm: Max, c st.. c ( 5 4 ) c ( 5 5) + + c Π = + β β β c ( β) ( 3 β ) Π = Π 3 β, 0 c c NL c c c c Solving th abov poblm yilds th following poposition. Poposition (Th Hybid Licnsing Chag Poposition). Assuming that a licns can us any combination of a fixd f and a oyalty at, whn β 0.5, a pu fixd-f licns is optimal fo any lvl of dmand. Whn β < 0.5, a pu oyalty licns is optimal fo 4

26 and a hybid licns consisting of both a fixd-f componnt and a p-unit oyalty is optimal fo <, wh ( β)( β) 3 ( + β)( β)( 5β+ β ) K. (S th Appndix fo th poof.) Th sults in Poposition a illustatd in igu 3. Simila to igu, th β spac is dividd into two gims: abov th hoizontal lin β = 0.5 is th fixd f gim wh a pu fixd-f licns is optimal, whil blow is th oyalty gim wh th optimal licns uss a oyalty at, ith alon o in combination with a f. Th intuition fo this sult is just as w hav xplaind in Sction 3: a oyalty has th ffct of limiting th licns s output, and thfo should b avoidd whn th ntwok intnsity is high. In such cass, th licnso should us a pu fixd-f licns, which allows it to tak full advantag of th ntwok ffcts. W consid th spac blow β = 0.5 as th oyalty gim bcaus any positiv oyalty at, combind with a f o not, lads to asymmtic output quantitis and a small ntwok ovall. Ou sult indicats that whn th intnsity of ntwok ffcts is low, it is optimal fo th innovating fim to kp a quantity ladship via a positiv p-unit oyalty at. Th oyalty gim is futh dividd into th gions: Rgion C wh a pu oyalty licns is optimal, and Rgions D and E wh a hybid licns should b usd. It suggsts that in makts with low ntwok intnsity, a oyalty at should b usd alon whn th dmand is high whil it should b combind with a fixd f componnt whn th dmand is low o th ntwok intnsity is not too low. Again, th intuition is th sam as what w hav dvlopd in Sction 3. W know that using a oyalty lads to a small ntwok. This ffct is lss impotant whn th makt is sufficintly lag, and thfo a pu oyalty licns is optimal. o a small makt, howv, th ffct is ath significant, thfo, th innovating fim should low th oyalty at to allviat th ngativ ffct of a oyalty; in th mantim, it can add a fixd-f componnt to th licns to compnsat fo th lost licnsing vnu. 5

27 W also div th optimal licnss fo ach gim. Coollay. (Pu ixd Licnsing Condition). Whn β 0.5, th optimal licns is a pu fixd-f licns givn by: = ( 3 β ) whn. + K whn > β( β) ( 3 β) ( 3 β) 3 W notic that two gions in th f gim, A and B in igu 3, a substs of Rgions A and B in igu, spctivly. uthmo, th optimal f fo Rgions A and B a th sam as thos fo Rgions A and B. W also find that in both gions, th optimal f incass with th intnsity of ntwok ffcts fo any givn dmand. This simply mans that high ntwok intnsity allows th lading fim to chag a high f. Coollay. (Pu Royalty Licnsing Condition). Whn β < 0.5 and, th optimal licns is a pu oyalty licns and th at is givn by: = K 3 β β β ( β ) 3 Th abov coollay shows that in Rgion C, th optimal pu-oyalty licns is th sam as that in Rgion C of igu. In fact, Rgion C is a subst of Rgion C. 6 Coollay.3 (Hybid Licnsing Condition). Whn β < 0.5 and <, th optimal licns is a hybid licns consisting of a fixd-f componnt and a p-unit oyalty, dnotd by ( β c, c ). Th oyalty at is givn by c = - ( β ). Th fixd f is givn by: 6 Rgion C is a subst of Rgion C. It can b povd analytically that > and shown numically that lis blow β ( ). 6

28 c β ( ) whn < ˆ -β = ( β)( + β)( 5β β ) ˆ + K whn 4- ( β) ( 3-β ) < Basd on Coollay.3, w find that fo an optimal hybid licns, as th intnsity of ntwok ffct incass, th oyalty at dclins whil th f iss, at a givn. 7 This is consistnt with th intuition that incasing ntwok intnsity suggsts mo us of f and lss us of oyalty. As th intnsity of ntwok ffcts iss, th switch fom a oyalty to a f occus suddnly if only pu licnsing mthods a considd, whas whn hybid licnss a also allowd, th tansition fom a pu oyalty to a pu f happns gadually via a hybid-licns zon. 8 In sum, a hybid licns maks a diffnc only in small makts with low ntwok intnsity (Rgion D ) and lag makts with mdium ntwok intnsity (Rgion E ). In such cass, by combining two typs of licnsing stuctu, th innovating fim is abl to cat and xtact high suplus than it dos with a pu f o oyalty licns, whil kping im indiffnt. In pactic, howv, a hybid licns tnds to b mo costly to ngotiat and implmnt than a pu f o pu oyalty licns. Thfo, whn a fim facs makt conditions that fall in Rgions D o E, it should tad off th bnfit and cost of a hybid licns, and whn th cost xcds th bnfit, th fim should choos a pu f o pu oyalty licns instad. 7 Basd on th compaativ statics of and with spct to β. c c 8 Not that th hoizontal axis β=0 is in th pu-oyalty gion. Th optimal licns whn β=0 is a pu oyalty at givn by = whn 3 and = K whn >. 9 7

29 5 Discussion and Concluding Rmaks This pap consids a fim s licnsing choic whn it has achivd an innovation that lads to a ntwok poduct. W find that in psnc of ntwok ffcts, it is always optimal to licns on s tchnology, vn whn it is possibl to bcom and main a monopolist in th makt. W also find that as th intnsity of th ntwok ffct incass, th optimal licnsing mchanism shifts fom a oyalty gim to a f gim. W futh div th tms of th optimal licns as functions of th intnsity of th ntwok ffct, th invstmnt ndd to plicat th innovation, and th siz of th potntial makt. On of th ky insights w gain fom th sults is that th psnc of ntwok ffcts changs th optimal makt stuctu fo fims. With positiv ntwok ffcts, a fim should no long sk to act in a popitay way and chag monopoly pics that limit output. Rath, it should mak oom fo comptition to gow th makt by licnsing its tchnology. o ntwoks with lss intnsity, it is optimal to tain quantity ladship and stict oth fims poduction using a contactual mchanism. Whn th intnsity of ntwok ffcts is high, howv, th lading fim should giv up its quantity ladship to allow th makt to gow vn futh in this cas, th bnfits of making a lag pi outwigh that of gtting a big slic of a small pi. Ou sults hav implications fo fims that a tying to stablish a standad and to ach agmnts with oth patis. ist, to succssfully licns a tchnology, th lading fim should choos th licnsing mchanism and tms of th contact basd on lvant infomation of th makt. Whn patis fail to ach a licnsing agmnt, it is oftn th cas that th innovating fim chags too high a f o oyalty, not offing oth patis nough incntiv to adopt its tchnology. 8

30 Scond, patis may fail to ach an agmnt du to diffnt stimats of paamts. Each paty may hav its own stimat of th intnsity of th ntwok ffct and xpctations about th siz of th makt, lading to diffnt opinions of a fai contact. Such discpancis may lad to ith failu of ngotiation, o agmnts that significantly bnfit o cost som of th patis. o xampl, if th lading fim s stimat of th ntwok intnsity is high than that of oth paty s, no agmnt can b achd, whil in th opposit situation th patis will ag on a contact that bnfits th oth paty mo. Ou modl can b futh xtndd in sval ways. H w assum that th paamts a common knowldg. Whil th intnsity of ntwok ffcts and makt siz a paamts that can b stimatd basd on publicly availabl infomation, th invstmnt quid to achiv a compaabl innovation is oftn pivat infomation known only to fims capabl of such an innovation. Thfo, asymmtic infomation may play an impotant ol in making licnsing agmnts. Ou sults show that th low th quid invstmnt, th low th f o th oyalty at. Th infomation asymmty may lad to th wll-known advs slction poblm, wh a potntial comptito accpts a licnsing contact only whn its tchnology dvlopmnt is not pomising and mo thatning comptitos will dclin an off. Whn th cost of achiving a compaabl innovation is common knowldg, it is woth xploing th possibility of th lading fim utilizing this knowldg to dt nty. Spcifically, instad of licnsing, th lading fim can adopt a pdation statgy, choosing a quantity that maks nty unpofitabl. A compaison btwn th pdation statgy and th licnsing statgy yilds an intsting finding: whn dmand is abov th comptito s nty thshold, licnsing is pfd fo any intnsity gat than 0. (β>0.); fo low dmand, licnsing 9

31 still dominats pdation fo sufficintly high ntwok intnsity (β>0.38). 9 This sult infocs th insight that in makts xhibiting stong ntwok ffcts, fims switch thi statgy fom gaining and kping makt pow to a statgy of cooptition, such as foging businss patnships using licnss o oth contacts. Th compaison btwn licnsing and pdation shows that fo mdium-sizd makts with low ntwok intnsity, th lading fim dos hav an incntiv to dt nty by pdation. Dspit th dtnc, howv, a potntial comptito may still nt th makt with its own tchnology, xpcting futu pofits to mo than compnsat fo tmpoay losss (in a subgam pfct quilibium, th incumbnt will accommodat th ntant aft th nty). To futh invstigat th tadoffs btwn dtnc and licnsing, a multi-stag gam is ncssay, which is an intsting diction fo futu sach. Although ou sults povid insights in statgic invstmnt and licnsing, th a sval cavats that must b attachd. ist, by considing a lina function of ntwok valu, w pclud th possibility of th wll-documntd ntwok satuation ffct. Howv, whn th ntwok valu can b appoximatd by a pic-wis lina function, th qualitativ natu of ou sults holds tu. Scond, th simpl stuctu of ou modl dos not flct th impact of contact duation. Howv, a most sophisticatd modl that consids ths fatus can b dvlopd along simila lins. Ou modl assums that a potntial comptito may invst to achiv a tchnology incompatibl with th lading fim s. Is it possibl fo th comptito to achiv a compatibl tchnology (supposdly at a high cost) without licnsing it fom th lading fim? o this to happn, th lading fim s tchnology must b accssibl to som xtnt. o xampl, softwa companis can dvlop pogams compatibl with opn souc softwa, but it is almost 9 Dtaild analytical sults a availabl upon qust. 30

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