Software program piracy drives firms to change into extra aggressive, claims a examine • The Register

Software piracy, long a source of concern among app makers and large software companies, can have some positive effects.

Wendy Bradley, Assistant Professor of Strategy, Entrepreneurship, and Business Administration at the Cox School of Business at Southern Methodist University, and Julian Kolev, an economist with the United States Patent and Trademark Office, recently published an article examining the effects of software piracy [PDF] entitled “Software Piracy and IP Management Practices: Strategic Answers to Product Market Counterfeiting.”

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

They compared the intellectual property (IP) strategies of these companies along with a control group of companies that were not exposed to significant IP risk before (1991-2000) and after (2001-2007) a major “piracy shock” – the debut of BitTorrent in July 2001.

The authors consider the July 2001 introduction of BitTorrent to be an ideal dividing line because the decentralized file-sharing protocol can handle large files in ways that Napster couldn’t and because IP holders couldn’t close it.

What they found was a “piracy shock” that drove affected companies to innovate, measured by an increase in spending on research and development, as well as patent, copyright and trademark registrations.

This increase does not appear to be due to efforts to directly prevent software piracy. Instead, it may be the result of companies changing innovations and strategies to at least partially overcome the effects of piracy.

“If we compare the IP strategies of software companies at risk of piracy (the treatment group) with those of companies not at risk (the control group), we find that our treatment group significantly increases their innovation activity after the piracy shock. of R&D expenditures and granted copyright, trademark and patent applications, “it says in their paper.

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

Previous studies on film and music piracy found no increase in IP-based innovation, the authors say, although these research projects indicated that unauthorized copying does not reduce the number of films produced per year (Danaher and Smith, 2017.). [PDF]) or the number of songs (Waldfogel and Aguia, 2018 [PDF]).

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

“Many people thought that piracy would have a tangible and immediate negative impact on businesses, especially in the software industry,” she said. “Our results show that instead, increased piracy rates prompted software companies to innovate more. This innovation was particularly in the form of new, much-cited patents in the software sector. “

When asked how far this innovation was defensive – efforts to protect existing revenue – and how creative it was – efforts to explore new opportunities – Bradley said the research data suggests the innovation was not defensive.

“Defensive patenting would likely not generate citations, and our citation-weighted patent score is specifically aimed at addressing this issue,” 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 that she and her co-author researched the effects of software piracy on revenue and found that it had increased disproportionately in the piracy-prone “treatment group”.

“We don’t delve into the content of the patents, so we don’t know if this innovation is a new feature or business process, but we see this as an opportunity for follow-up research, especially case studies or qualitative work,” “She said.” For example, subscription-based software has permanently changed the competitive landscape in recent years. “

Tolerate or not?

When asked if the piracy findings suggest the adoption of guidelines aimed at tolerating piracy based on perceived benefits, Bradley said she did not advance that argument.

“The political implications are tricky, and we wrote the paper for the executive, suggesting that more innovation is an effective response to piracy,” she said. “There are many reasons to support anti-piracy action, especially coordinated efforts between countries attacking the supply side.

“Without exaggerating the policy proposals, I think anti-piracy efforts could focus on industries that are already highly innovative or very competitive. We are not pushing for ‘tolerance’ of piracy, but resources are limited. Governments can devote themselves to enforcement, and we want to send this to areas where the net impact of piracy is most negative. “

Likewise, 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 will motivate people to buy legally.

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

Bradley claims her research is applicable even in dominated markets where there is little competition.

“We emphasize the interpretation that innovation increases because of increasing competition,” she said. “We want to be careful when talking about two-way platform markets like the iOS App Store, where the concept of competition is more complex. From a platform perspective, our paper is more about competition between apps than competition between operating systems. “

Bradley said that companies have little incentive to innovate in a monopoly environment, and while that is outside the scope of this particular research project, she sees the results as an indication that piracy increases those incentives even in the absence of political interference.

“Another way to think about it is, for a dominant established company in a strong position, piracy could make it innovate more than it would without it,” she said. “Past examples are phone functions and the old Bell monopoly, or more recently Apple has added the features that the jailbreak community developed on the iPhone.”

Piracy, she suggests, encourage people to try and compare products without committing to a purchase, and this can provide a way for smaller software companies to gain exposure through word of mouth.

“This in turn pushes large companies to innovate to stay competitive and maintain their dominance, rather than relying on a potentially anti-competitive position or low consumer awareness of alternatives (given the superior marketing and branding advantages of Apple, Google and Microsoft). ) “said Bradley. ®

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