Governments Believe Manufacturers’ Cross-Licensing Is Bad for Society, but New Research Says, “Not Always”

Qualcomm, the world’s largest supplier of cellphone microchips, requires downstream cellphone manufacturers in its supply chain to cross-license their patents with Qualcomm and its clients. Cross-licensing their patents means the downstream manufacturers must share their patents without restrictions and without reaping royalties.

Cross-licensing has placed the manufacturing giant in the crosshairs of powerful governments. China fined Qualcomm $975 million for cross-licensing and other “anti-competitive” practices, which it claims harm society. For similar reasons, South Korea, Japan, the European Union and the United States have either fined or heavily scrutinized Qualcomm. Governments, generally, appear to take a dim view of cross-licensing.

Is Cross-Licensing the Anti-Competition Boogeyman?

Is cross-licensing the threat to competition world governments make it out to be? A new study from a team of researchers, including a faculty member from Haslam, finds that is not always the case. Tingliang Huang, Amazon Distinguished Professor in Haslam’s Department of Business Analytics and Statistics, and his fellow researchers, Jingqi Wang (Chinese University of Hong Kong, Shenzhen) and Junghee Lee (University of Notre Dame), used game theory and analytical modeling to investigate the effects of a supplier requiring its downstream manufacturers to cross-license. Their model accounted for multiple factors, such as downstream firms’ relative technical capabilities, pricing and quantities.

“We don’t just look at firms’ or consumers’ interests,” Huang says. “We particularly look at whether cross-licensing deters or encourages innovation, which is a more objective measure.”

With the team’s findings that cross-licensing can drive innovation, the idea that cross-licensing is against societal good, which some governments argue, is undercut.

Cross-Licensing and Its Unexpected Effect on Competition

Huang says the team intuitively thought cross-licensing would inhibit innovation, in part because smaller manufacturers can free-ride on others’ patents. The models, however, showed it is far from that simple. Competition made a difference, for instance.

“If I’m a powerful manufacturer in a supply chain, and my competitor is falling far behind me, the pressure to me is really small, right?” Huang says. “But if my competitor, who is also in the supply chain, cross-licenses with me to become more innovative, then he can catch up, which may incentivize me to innovate even more. More competition may give stronger incentive to businesses to innovate more.”

Cross-Licensing’s Impact on Society

The value of Huang and his associates’ study — the first of its kind, the research team believes — is manifold. Especially important, Huang says, is that the mathematical models should be generally applicable across industries, so other researchers can analyze the impact of cross-licensing in them. For example, in the pharmaceutical industry, Pfizer recently signed cross-licensing contracts with smaller firms, so it could a be candidate for study.

The research also finds that Qualcomm and other large suppliers should reconsider the practice of forced cross-licensing.

“This is surprising, but it may not always be in the best interest for Qualcomm to require its downstream manufacturers to cross-license,” Huang says. “What is even more surprising is that, when considering upstream supplier Qualcomm’s own innovation incentives, cross-licensing is more likely to achieve a higher level of total innovation than without it, despite the free-riding problem. It depends on how the supply chain innovates.”

Finally, while governments may have valid reasons to oppose cross-licensing, such as protecting native companies, since the practice can benefit society, they should carefully examine the business environment before opposing cross-licensing for “societal good.”

“Cross-licensing in a Supply Chain with Asymmetric Manufacturers,” by Jingqi Wang, Tingliang Huang and Junghee Lee, was published in June in Manufacturing & Service Operations Management.