Innovation Can Be The Plunder Of Piracy, If You Copy Right

Depending on the industry, moving first--or copying second--can make or break a company. So you better know which kind you're in.

First-mover advantage usually refers to the period of de facto exclusivity that an innovator enjoys due to the practical difficulties of copying a particular innovation. In other words, if it takes time for copyists to successfully copy a creation, the creator may have a first-mover advantage--particularly if being first can provide enough of a head start to lock in markets or at least make it hard for latecomers to compete. In some cases, first-mover advantage can offer a sufficient incentive to engage in meaningful innovation, even without the prospect of intellectual property rights to protect that innovation.

First-mover advantage seems to be enough to maintain substantial innovation in football. New formations and plays can offer meaningful advantages to creative coaches and teams, even though nothing stops other teams from copying those innovations.* In fact, many football coaches teach others their plays and approach. In part, coaches keep innovating despite the prospect of copying because they are incredibly short-term thinkers who have to win a game every week; winning now trumps the possibility of losing over the longer term as (hypothetically) their idea spreads.

But there is another reason that copying does not deter innovation in football. Football formations and plays often depend on a certain kind of team and player, and teams cannot be reconstituted quickly. Given this, an innovative coach can achieve substantial success with a new formation even if opponents ultimately adopt it too. The window in which the innovating team is the only one using the new system--or at least, using it well--is large enough to make innovations worthwhile.

Fashion also exhibits some first-mover advantage, though how much is a hotly contested point among those who study apparel markets. It is easy to copy a new design, and it is not hard to find examples of a hot dress appear- ing quickly in inexpensive stores such as Forever 21. Some even claim that knockoffs have appeared in stores before the original. While the instances in which copyists beat or match originators to market are unlikely to be fre- quent enough to really matter, it is still the case that many copyists are remarkably fast. Hence the lead time enjoyed by originators is often brief.

But--and this is important--it is hard to see how that lead time can shrink entirely. There is no point in knocking off a garment that does not sell well. And most designs do not sell well. The only way to be sure a garment will sell is to see how it fares in the stores. In short, copyists can only be so fast before they are simply making bets on what trends will be hot. And if they are that good at guessing what will be hot, why not just make it them- selves and be first--or open a store and sell only those designs guaranteed to sell?

So while copying in fashion can be fast, in reality there is almost always some degree of lead time for innovators. And this lead time is essential for the operation of fashion’s piracy paradox to operate. (In fashion, copying helps set trends, and trends are what sell fashion--so, paradoxically, piracy is one of the key drivers of the fashion industry's success). The freedom to copy a design that is becoming hot helps to create trends and, ultimately, expands the market for that design. For this to work, however, the design must become hot in the first place. Over time this dynamic leads to the diffusion and eventual death of the design and, as early adopters seek something fresh, the debut of a new design. The creative cycle starts anew.

What is special about the piracy paradox in fashion, in other words, is not just that an innovative designer can sell enough units before copies emerge to make innovation worthwhile. If the only advantage to fashion designers was that short window of exclusivity, we would be making a simple first-mover advantage argument. Instead, the heart of the piracy paradox is that copying drives early adopters to seek new designs. That in turn gives the innovator a new market to chase. What really matters in fashion is not the first- mover advantage per se. Rather, the lead time a first mover has makes it worthwhile for the fashion conscious to chase new designs. The fashion-following consumer is the key player. Since the fashion conscious are differentiators, not flockers, they will only adopt designs that differentiate. And in a system of free and legal copying, that requires some lag between the debut and the diffusion of a design. As a practical matter, that lag continues to exist, no matter how fast copying technologies become.

Probably the most common example of first-mover advantage is software. Being first--and creating a network of users that all rely on the same pro- gram and, as a result, can easily share files and documents--can give decisive and durable advantages to the first mover’s product. And that can lead to substantial market control and lasting profits. We wrote this book using Microsoft Word, not because it is the best word processing product in existence, but because we both already had it (and it is plenty good for our pur- poses). There is not much competition in the word processing world, and that is partly because we all know that if we have a Word document we can send it to virtually anyone and that person too will use Word to open it. We are all part of the Word network, and that makes sharing and communicating easy--and Bill Gates rich.

Only a few industries exhibit such "positive network externalities," as economists call them: benefits that accrue from the fact that others are using the same network. The simplest example of network externalities is a telephone: a single phone is useless, two phones on a network are nice, but hundreds of millions of connected phones are much, much better. Each additional phone on the network makes the other phones more valuable. As we have just discussed, first-mover advantages can certainly accrue in the absence of positive network externalities. But when these externalities exist, the power of first-mover advantage is much greater. The ability to lock consumers in a network that they do not want to leave makes it easier to defeat new entrants into a market, even those that mimic or improve on an existing product.

Think of (the short) history of social networks. Perhaps Facebook, so dominant today, will give way to Google +. But many people do not want to shift over to Google + because their friends are all on Facebook. It is not impossible to dislodge a leading product even when network externalities exist--Friendster and Myspace, after all, were ultimately buried by Facebook. But it is more difficult. When products exhibit positive network externalities, first-mover advantages are very powerful.

Reprinted from the Knockoff Economy: How Imitation Sparks Innovation with permission from Oxford University Press, Inc. Copyright © 2012 by Oxford University Press.

Kal Raustiala is Professor of Law at UCLA and the author of Does the Constitution Follow the Flag? Christopher Sprigman is the Class of 1963 Research Professor at the University of Virginia School of Law.

[Image: Flickr user John Morgan]

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