Profiting in the Info-Coms Industry
in the Age of Broadband:
Lessons and New Considerations
Jackie Krafft
CNRS, France
Background
† « Profiting from innovation », Teece (86)
Academic debate on whether it applies or not in a global,
digitally interconnected economy often labelled today as
‘the age of broadband’
† Teece argued that success in organizational strategies
(contract versus integration) depends to a great extent
on
- whether strategies are initiated by innovators or
imitators
- how strategies are articulated within a) regimes of
appropriability, b) dominant design issues, c)
complementary assets access
Innovators and
imitators
advantageously
positionned /
independent owners
of complementary
assets
Innovators and
imitators
disadvantageously
positionned /
independent owners
of complementary
assets
Weak
legal/technical
appropriability
Innovators excellently
positionned versus
imitators with respect to
commissioning
complementary assets
Innovators poorly
positionned versus
imitators with respect to
commissioning
complementary assets
(1) Contract
(2) Contract
(3) Contract
Innovator will win
Innovator should win
Innovator or imitator will
win; assets owners won’t
benefit
(4) Contract if can do
so on competitive
terms, Integrate if
necessary
Innovator should win;
may have to share
profits with assets
holders
(5) Integrate
(6) Contract (to limit
exposure)
Innovators would win
Innovator will probably
lose to imitators and/or
assets holders
DEGREE OF INTELLECTUAL PROPERTY PROTECTION
MARKET POWER OF INNOVATORS/IMITATORS
VERSUS OWNERS OF COMPLEMENTARY ASSETS
Strong
legal/technical
appropriability
Objectives of the paper
† Analyse the robustness of Teece (86) in its ability to
provide a framework appropriate to the organizational
changes that have occurred in the broadband industry
† Focus on 2 stylized facts of the ‘age of broadband’:
- SF1: « R&D and patent licensing are increasingly high in the
industry, but the initiators of innovations have greatly changed
over time »
=> From integration to contract, in a context of technological and
institutional change (full liberalisation)
- SF2: « Small, facilities-less companies emerged during the
development of the Internet industry, but have generally
performed badly as the industry has matured and broadband use
has become widespread »
=> From contract to integration, in a context of technological
change (from narrowband to broadband)
Objectives of today’s presentation
† Analyse who profits in the broadband industry and how, in a
context of full liberalization
† Center on SF1, where key actors are the equipment suppliers
(ES) and network operators (NO)
† Revisit Teece’s conclusions:
- confirm that the dynamics of complementary assets are
crucial to analyse how firms perform in the broadband
industry along the different stages of its development life cycle
- complement on the identification of the sources of
technology provision in a context of institutional change
- show that, even in a tight appropriability regime, the entry
of firms with no complementary assets or core capabilities in
related (upstream/downstream) activities may be stimulated,
but may also penalize the early innovators
Innovators and
imitators
advantageously
positionned /
independent owners
of complementary
assets
Innovators and
imitators
disadvantageously
positionned /
independent owners
of complementary
assets
Weak
legal/technical
appropriability
Innovators excellently
positionned versus
imitators with respect to
commissioning
complementary assets
Innovators poorly
positionned versus
imitators with respect to
commissioning
complementary assets
(1) Contract
(2) Contract
(3) Contract
Innovator will win
Innovator should win
Innovator or imitator will
win; assets owners won’t
benefit
(4) Contract if can do
so on competitive
terms, Integrate if
necessary
Innovator should win;
may have to share
profits with assets
holders
(5) Integrate
(6) Contract (to limit
exposure)
Innovators would win
Innovator will probably
lose to imitators and/or
assets holders
DEGREE OF INTELLECTUAL PROPERTY PROTECTION
MARKET POWER OF INNOVATORS:IMITATORS
VERSUS OWNERS OF COMPLEMENTARY ASSETS
Strong
legal/technical
appropriability
Outline
† Decompose the broadband industry in terms of activities and
assets
† Relate this decomposition to Teece’s framework
† Show that liberalisation in telecoms has:
- favoured a change in the sources of technology provision, from NO
(downstream) to ES (upstream)
- had a positive impact on the entry of new firms (both upstream and
downstream)
- had attracted firms that did not possess the core assets or
capabilities to penetrate the industry and that, in other
circumstances, should have been prevented from entering or would
have exited soon after entry
- had indirect effect that early innovators do not necessarily profit
from innovation, do not necessarily win against imitators
† Relate these conclusions to Teece’s framework on the issue of
liberalizing an innovative industry
Decomposition of the broadband industry:
Firms, Activities, and Assets (in the sense of Teece)
Firms
Activities
Assets
(in Teece’ sense)
Equipment suppliers
Incumbents and
Entrants
Equipment provision
Conception,
development, R&D on
broadband products
and services
Network operators
Incumbents and
Entrants
Network operation
Production/commerciali
zation of network
facilities
Integration
before full liberalization…
Firms: Equipment suppliers
Activity: Equipment provision
Asset: R&D
Firms: Network operators
Activity: Network operation
Asset: Production/commercialization of network facilities
Specialization
after full liberalization…
Firms: Equipment suppliers
Activity: Equipment provision
Asset: R&D
Firms: Network operators
Activity: Network operation
Asset: Production/commercialization of network facilities
SF1: « R&D and patent licensing are increasingly
high in this industry, but the initiators of
innovations have changed greatly over time
† How R&D and production assets can be combined to
generate profitable (or less profitable) outcomes
† For a long time, these assets were integrated within a
single category of firms, the NO, which had
accumulated:
- R&D capabilities in basic electrical instruments (cables,
semiconductors, aerials),
- manufacturing capabilities related to the production of
electronic communication techniques (transmission,
multipoint communication, digital information)
† With liberalization, R&D assets and related capabilities
were progressively disintegrated by NO to upstream
suppliers, the ES, the NO retaining only the production
assets
Changes emerging with full
liberalization
† With full liberalization, a massive shifting in the
knowledge base [know-how in Teece’s terms], from NO
to ES occurred, in relation to both the sources and
nature of innovation:
- Change in the source of innovation: NO were
progressively delegating R&D activity to ES, and ES were
proving not only to be efficient subcontractors but also
active innovators
- Change in the nature of innovation: incumbent ES were
having to compete with entrant ES which had their
origins in the software and data processing industries
and whose R&D capabilities could easily and quickly be
extended to the conception and development of Internet
and broadband technologies
R&D and Patents
Firms
R&D before
liberalization
R&D after
liberalization
ES
5% of annual sales 15% of annual
sales
NO
15% of annual
sales
Note: Entrant ES invest
Incumbent ES invest
Entrant NO invest
~
~
5% of annual sales
20%
10%
0
R&D and Patents
Evolution of the number of patents by firm on average
(Technology Class H04 L: transmission digital information,
source: EPO)
400
350
Entrant ES
300
250
Incumbent ES
200
150
NO
100
50
0
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
- ES patent much more than NO whose patent rates stagnates till the 1980s
- A decoupling occurred among ES, entrants becoming the leaders of innovation
(the innovators), while incumbents lag behind (the imitators)
Connection with Teece (86)
Since full liberalization:
† Each and every innovation can be adequately covered by a
patent, and firms (especially the ES) increasingly rely on legal
appropriability regimes to protect their innovation.
=> Strong legal appropriability regime, in Teece’s sense
† Innovators and imitators (resp. entrant and incumbent ES) are
advantageously positioned vis à vis independent owners of
complementary assets (NO)
- ES have invested heavily in R&D (on average at three times
the level of NO) and thus appear to be the leading companies in
the industry
- The capacity of NO to provide end-users with advanced
services on the basis of high capacity and intelligent networks
depends on the technological know how of ES
=>ES are exerting, in Teece’s sense, an important market
power over the owners of complementary assets (NO)
Strong
legal/technical
appropriability
Innovators and
imitators:
Entrant ES
Incumbent ES
Owners of
complementary
assets:
NO
Innovators and
imitators
advantageously
positionned /
independent owners
of complementary
assets
(1) Contract
Innovator will win
Specialized assets
involved:
R&D and production
DEGREE OF INTELLECTUAL PROPERTY PROTECTION
MARKET POWER OF INNOVATORS:IMITATORS
VERSUS OWNERS OF COMPLEMENTARY ASSETS
Teece predicts:
(1) specialization between ES and NO, and
(2) entrant ES (the innovators) would win
« Expected » impact of SF1 (in reference to Teece):
emergence of distinct complementary assets, vertical
specialization and entry
†
†
Distinct assets progressively emerged among ES and NO, based on
complementary capabilities
- Liberalization in communications infrastructure and services triggered
important restructurings in the major R&D labs. Most were historically
related to incumbent NO (the ex-monopolies), and the emergence of
competition affected them in two essential ways: companies began to
outsource, and the labs had to be significantly downsized
- This phase of the restructuring left some room for upstream actors, the
ES, to operate as the main generators of technology, while downstream
actors, the NO, began to specialize in mass manufacture of infrastructure
and related services
Within this vertical specialization phase:
- entrant ES were able to emerge and perform extremely well up to the
early 2000s
- competition at the level of NO was fostered. New NO could enter the
industry and remain viable in the face of large, incumbent companies,
since they could rely on ES to access the complementary assets (R&D,
patents, innovations, technologies) and related capabilities that they
were unable to develop by themselves
« Unexpected » impact of SF1 (in reference to Teece):
a massive process of M&As
affected the early innovators
†
†
New quantitative and qualitative challenges to ES involved
large innovation R&D investments, and a re-orientation of the
initial know-how towards the development of new capabilities.
Various business strategies were introduced by incumbent and
entrant ES to match these innovation and development efforts
- Bilateral collaborations between major incumbent and entrant
ES (1995-1998), to favour the creation and diffusion of new
technologies, to facilitate the exchange of knowledge and
develop new articulated competencies, and to render
quantitative and qualitative coordination in R&D assets and
related capabilities possible
- M&As (1998-). Entrant ES (the innovators) were massively
taken over by incumbent ES (the imitators), since M&As
appeared as a way of acquiring new knowledge and capabilities
more rapidly than through inter-firm cooperation
However, in the year following these M&As most of the
companies suffered major losses in revenue and decreasing
share prices
Conclusion
† We confirm that Teece (86) was right in maintaining
that in a strong legal appropriability regime, and with
innovators and imitators advantageously positioned
vis à vis independent owners of complementary
assets, innovators should win
† But we argue that, given important changes in the
source and nature of innovation in a context of
liberalization, innovators (the entrant ES from the
data processing and software industry) can be
acquired by imitators (the incumbent ES)
† … this tends to suggest that liberalizing an innovative
industry is an intricate issue, with expected, as well as
unexpected outcomes, including the recomposition of
an oligopoly composed of incumbents