Why is Everyone Afraid of IP Licensing

Legal scholars have tended to approach the licensing of intellectual property rights with skepticism, calling for legal intervention to protect the public domain against purported encroachment by IP licensors. Recent decisions by the U.S. Supreme Court are consistent with this view. This skeptical approach overlooks three core efficiencies generated by real-world content and technology licensing markets. First, licensing permits firms to customize supply chains in order to allocate supply-chain functions to the least-cost provider of each function, thereby minimizing total innovation and commercialization costs. Second, licensing permits firms to construct hub-and-spoke formations in which larger downstream firms bear production and distribution risk while smaller upstream originators of creative and technology inputs bear development risk. Third, licensing enables firms to divide innovation assets into sub-assets deployed across multiple parameters in space and time, yielding efficiency and distributive gains in certain circumstances by expanding access across a broad spectrum of valuation intensities. Newly reinvigorated skepticism toward IP licensing preserves formalistic doctrines in IP law that frustrate efficient knowledge transactions or compel firms to adopt second-best mechanisms in order to assemble content and technology inputs for delivery to consumer markets.