Software piracy, long a source of anxiety among application makers and large software companies, can have beneficial effects.

Wendy Bradley, assistant professor of strategy, entrepreneurship and business economics at the Cox School of Business at Southern Methodist University, and Julian Kolev, economist at the United States Patent and Trademark Office, have recently reviewed the impact of software piracy in an article [PDF] titled “Software Piracy and Intellectual Property Management Practices: Strategic Responses to Product Market Imitation”.

Economists examined mentions of piracy in the annual SEC-mandated 10-K filings of 106 publicly traded companies that generated 40 percent of their revenue between 1991 and 2000, based on the belief that software companies , so dependent on patents, copyright, and trademark protection, “benefit disproportionately from cumulative innovation”.

They compared the intellectual property (IP) strategies of these companies to those of a controlling group of companies not facing significant IP risk, before (1991-2000) and after (2001-2007). a major “hacking shock” – the debut of BitTorrent in July 2001.

The authors see the arrival of BitTorrent in July 2001 as an ideal dividing line because the decentralized file-sharing protocol can handle large files in ways that Napster could not, and because intellectual property rights holders could not close it.

What they found was that the “piracy shock” drove affected companies to innovate, as measured by increased spending on research and development and in patent, copyright and copyright applications. brands.

This increase does not appear to be driven by efforts to directly prevent software piracy. Instead, it may be the result of companies innovating and changing their strategies to, at least in part, overcome the effects of piracy.

“By comparing the intellectual property strategies of software companies at risk of piracy (the processing group) to those of non-risk companies (the control group), we find that our processing group significantly increases its innovation activity after the shock of piracy in terms of R&D spending and requests for copyrights, trademarks and granted patents, ”their article states.

“Our analysis also reveals a dynamic response: companies tend to sharply increase their R&D spending and copyright filings in the first two years after the piracy shock, while the impact on patents is the greatest. more important over longer horizons of three to seven years. “

Previous studies of film and music piracy, the authors note, have not established an increase in intellectual property-based innovation, although these research projects have indicated that unauthorized copying does not reduce the number of films made per year (Danaher and Smith, 2017 [PDF]) or the number of songs (Waldfogel and Aguia, 2018 [PDF]).

Bradley, in an email to The register, said: “Fortune 500 companies have long understood the importance of IP management practices to their bottom line, from Xerox to IBM; Patents have great value, including (but not limited to) patent license fees. “

“A lot of people thought that piracy was going to have a tangible and immediate negative impact on businesses, especially in the software industry,” she said. “Our results show that on the contrary, increasing piracy rates have led software companies to innovate more. This innovation has manifested itself in the form of new highly cited patents in the software industry, in particular.”

When asked how defensive this innovation is – efforts to protect existing revenue – and how creative it is – efforts to explore new opportunities – Bradley said research data indicates that innovation does not was not defensive.

“Defensive patenting would likely not generate citations, and our citation-weighted patent score is specifically aimed at addressing this concern,” she explained. “The citation-weighted results are broadly similar to the unweighted patent measure, so I would conclude that most patents are not defensive.”

Bradley said she and her co-author looked at the revenue impact of software piracy and found that it increased disproportionately among the pirate-prone “treatment” group.

“We don’t look at the content of patents, so we don’t know if this innovation is about new features or business processes, but we think it’s an opportunity for follow-up research, especially case studies or qualitative work. , “she said.” For example, subscription software has dramatically changed the competitive landscape in recent years.

To tolerate or not?

When asked if the hack’s results suggested adopting policies to condone hacking, based on her perceived advantage, Bradley said she didn’t make that argument.

“The policy implications are delicate, and we wrote the article for a managerial audience suggesting that greater innovation is an effective response to piracy,” she explained. “There are many reasons to support anti-piracy policies, especially coordinated efforts between countries attacking the supply.

“Without going too far in terms of policy suggestions, I think one implication is that anti-piracy efforts could be focused on industries that are already very innovative or very competitive. We are not advocating ‘tolerance’ of the hacking, but resources are limited. governments can devote themselves to enforcement, and we would like to send them to areas where the net effect of hacking is the most negative. “

Likewise, she said managers dealing with these issues should consider whether it makes more sense to invest in anti-piracy policies such as litigation or to develop new and better versions of their products that entice people to buy them legally.

We are not pushing for “tolerance” of piracy, but the resources that governments can devote to law enforcement are limited, and we would like to send them to areas where the net effect of piracy is the most negative. .

Bradley maintains that his research is applicable even in dominated markets where there is little competition.

“We emphasize the interpretation that innovation increases due to increased competition,” she said. “We want to be careful when we talk about two-sided platform markets, like the iOS App Store, where the concept of competition is more complex. Using a platform lens, our article focuses more on competition between applications than competition between operating systems. “

Bradley said that in a monopoly environment there is little incentive for companies to innovate and although it is beyond the scope of this particular research project, she nonetheless sees the results as an indication that, even in the absence of political intervention, piracy increases these incentives.

“Another way of looking at it is this: For a dominant historical company in a position of strength, piracy could push them to increase innovation more than they would without it,” she said. “Past examples include phone features and the old Bell monopoly, or more recently, Apple adding features that the jailbreak community has released in the iPhone.”

Piracy, she suggests, encourages people to try and compare products without committing to a purchase and it can provide a way for small software companies to gain traction through word-of-mouth.

“This, in turn, pushes large companies to innovate to stay competitive and maintain their dominance in the market, instead of relying on a potentially anti-competitive stance or low consumer awareness of alternatives (given the marketing benefits and senior brands of Apple, Google and Microsoft), “said Bradley. ®

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