The Knockoff Economy

by Kal Raustiala

  By 2004, database production in the European Union had fallen below 1998 levels, which was just before the EU rule took effect across the entire community. In other words, the implementation of the new protection against copying correlated with a decline in production, not an increase. And, perhaps more significant, the European Union’s share of the global database market has stagnated. In 1992 about 26% of all online databases were produced by European firms, while about 60% were of North American origin.43 By 2005, North American production had swelled to approximately 70% of the global total. The European Union’s share had barely budged, and, by some measures, had even declined slightly. In essence, while database production in the United States and Canada (which, like the United States, lacks protection for fact-based databases) has continued to grow, database production in the European Union has stayed at best constant, and more likely has slowed a bit.44

  This is a nice natural experiment in the economics of innovation. And it raises the question of why the production of fact-based databases has continued to thrive in the United States despite the absence of protection. The answer has, as it often does in these instances, a few dimensions:

  First, even after Feist, some important copyright protection applies to American databases. Feist made clear that original ways of organizing databases are protected against appropriation, even if rivals are free to copy underlying data. This is a much narrower scope of copyright protection than applies in many other industries. But it is still useful. If the way in which a database is organized is original and valuable, rivals cannot copy that organization. Again, that is a far cry from the full panoply of rights that copyright could provide, but it is significant.

  Second, copyright is not the only thing that database producers can rely on to discourage copying. Some of these strategies mimic those we have seen in other low-IP industries. Database makers use contract law to bind users to terms of use that forbid or limit copying. They use encryption and digital rights management tools for the same purpose. They employ ordinary property rights—for example, online auction giant eBay pressed a successful trespass action to prevent Bidders’ Edge, an auction “aggregator” site, from acquiring auction data from its servers. And they file lawsuits alleging misappropriation and unfair competition—common law torts that provide some protection against copying that, for example, involves misrepresentation.

  These are not fail-safe strategies. Contracts bind only those who agree to them. Encryption and other technical fixes can be circumvented. Data can be recovered from many databases without trespassing on the owner’s network (for example, when data are distributed on a DVD, or downloaded onto a third party’s server). And unfair competition lawsuits in state courts are narrower and less useful than copyright lawsuits in federal court. But together, the legal tools seem, overall, to provide sufficient shelter from copying to maintain a healthy environment in the United States for the creation of databases.

  Third, and perhaps most important, the freedom to copy under American law reduces the cost of creating new (and better) databases. That is, the absence of broad database protections means that rivals can reuse existing data in new and creative ways. Think of our discussion of Pioneers and Tweakers. The rule that governs the US database industry gives wide latitude to Tweakers, who use existing data, often gathered at others’ expense, to provide new functionality and make users’ lives easier. There may be some downsides as well to this system, of course. The EU approach may give individual database producers higher profits, for instance. But it has not grown the overall industry, in part because it chokes off the kind of beneficial tweaking and reworking that are here, as in many other instances, so useful to innovation.

  A good example of this is the Los Angeles Times’ tweaking of a database maintained by the L.A. Unified School District. L.A. Unified, the second-largest district in the nation, collected the names of thousands of English and math teachers working in the district and the test scores of their students over several years.* The Times took the L.A. Unified data and tweaked it by applying statistical tools designed to measure the “value added” by individual teachers—that is, the extent to which the quality of a teacher improved students’ progress compared to what they would have been expected to achieve, on average.45

  The result was published as the Times’ Los Angeles Teacher Ratings database, and it created a sensation in L.A. It sparked a furious response from teachers’ unions and some academics who study education, who complained that the measures of teacher “value-added” were poorly done and their conclusions overbroad. In response to the Times’ database, L.A. Unified published a value-added database of their own, using different statistical measures and presenting the results in a different way. Ultimately, the database competition resulted in the public receiving much more insight into the quality of the education on offer in L.A. Unified. And if the push-and-pull between the Los Angeles Times and the district leads to a better understanding of when and how teachers add value, then the tweaking of this database might even lead to better results for L.A.’s kids.

  This episode illustrates a broader point. The monopoly theory tells us that copying kills creativity. But in the world of databases, we see the opposite: copying actually sparks innovation. The US, where copying is allowed, has a much more vibrant database industry than does Europe, where copying is banned. Theory can tell us something about the relationship between imitiation and innovation. But to really understand it, we have to get out there and look at how real industries behave. What we found, in all of the cases we’ve examined, is a lot of imitation. That’s not all that surprising. The surprising part is how much innovation is taking place.

  CONCLUSION: COPIES AND CREATIVITY

  Well before there were rules about intellectual property, there was the human urge to create. The famed cave paintings in Lascaux, France, are at least 15,000 years old, and there are creative works that may be far older. Some even contend that there is an “art instinct” that drives individuals to produce things of beauty and meaning.1

  Regardless of its origin, clearly many of us do have an urge to create new things, or at least a preference for it, and we indulge that preference when we can—whether or not our innovations are protected against copying. One writer aptly put it this way: “Edison was born to be an inventor, Barishnikov was born to be a dancer, and no matter what the legal rules, Edison would no more have stopped inventing than Barishnikov would have stopped dancing.”2

  Still, it is widely believed that copying is bad for creativity. And the premise of laws against copying is that humanity’s innate or socially determined desire to create is simply not enough in a modern innovation-based economy. To have sustained innovation—and to do so in areas that require significant investments of time and money—it is necessary to have a reliable expectation of economic reward. This is thought to be true both for creators and for the intermediaries—publishers, pharmaceutical companies, and the like—that in a modern economy often fund, organize, and distribute innovative work.

  In our legal system, that expectation of reward rests on rules that guarantee a monopoly over a given creation for a period of time and restrain copying by others.3 The intended result is that the creator, and not the copyist, enjoys whatever profits flow from the innovation. Knowing this, the creator is encouraged to create. We have called this basic approach the monopoly theory of innovation.

  The monopoly theory is hostile to imitation because imitation, it is thought, inevitably undermines later rewards. As a result, imitation can destroy the incentive to innovate in the first place. This is why so many observers are so fearful of the emergence of technologies, such as the Internet and filesharing, that make copying cheaper and easier.4 More copying, they believe, must mean less creativity.

  But is this really the case? We have examined a wide array of innovative industries that, in one way or another, challenge this basic premise. Fashion, food, fonts, football, financial innovations—in all of these creative
areas, and more, copying is free and often legal. Sometimes copying is simply permitted as a matter of practicality. But in all, innovations are open to imitation. By the lights of the monopoly theory, these industries should be only weakly creative. Yet the opposite is true: these industries are vibrantly creative.

  Just recognizing this fact is significant, because it demonstrates that copying and creativity can co-exist. This does not mean that copying is always good. Nor does it mean that our copyright and patent laws ought to be abolished; they are an important element in our economic and cultural vibrancy.5 But it does mean that the relationship between imitation and innovation is much more subtle than commonly believed. We do not face a stark choice between the two. In some creative endeavors imitation has little effect on innovation. And in others, imitation can even spark innovation. The really interesting question is when—and why—this is true.

  Answering this question is important, because rules against copying come at the expense of another extremely significant source of economic and cultural vibrancy: competition. The basic logic of the monopoly theory is that copies will outcompete originals and, in doing so, destroy the incentive to originate in the first place. (If the copies did not outcompete the original, the original would not need protection against copying.) At the same time, our economic system fundamentally rests on competition. Competition is a powerful force for keeping prices low and quality high. It is also a potent instigator of innovation—as we’ve seen in contexts like football and financial innovation, competitors locked in battle against powerful rivals innovate just to stay in the game, without heed of intellectual property protections.

  So copying and competition are closely linked, and that makes restraints on copying less unambiguously good than they may appear at first glance. Rules against copying carve out special zones on the field of free competition; they declare that some forms of competition—those that rely on certain kinds of copying—are not permissible. Yet not all competition through copying is barred, and not only because the relevant patent or copyright has reached its time limit. In many areas, our social preference for competition trumps concerns over copying. Indeed, in some settings we welcome copying.

  To see this, consider a visionary restaurateur who opens a café on a decaying industrial street. If the café really takes off, another entrepreneur might quickly open a similar café, perhaps across the street or on the next block. In time, the street might be transformed as new restaurants and shops open up, transitioning from decrepit industrial zone to effervescent nightlife destination.* Did the second café copy the first simply by installing the same basic concept at the same basic location? Yes. But we typically call that kind of copying free market competition. As long as the two cafés differ enough in their names and décor for a customer to know that they are distinct entities, there is no legal barrier to the second café copying the first. And as a society we are better off: the cafés compete with one another for our dollars and patronage, and the result is better and more affordable coffee and croissants.6

  This does not mean that the first café owner might not feel the second acted unfairly. A great idea has been adopted by second-comer; one taper, in Thomas Jefferson’s words, has been lit by another’s flame. And that can burn a little. In an early episode of the HBO series The Sopranos, Paulie Walnuts and Big Pussy walk into a coffee shop with a strong resemblance to Starbucks. Paulie gets agitated at the sight of the cashiers ringing up lattes and cappuccinos:

  PAULIE: The fuckin’ Italian people. How did we miss out on this?

  PUSSY: What?

  PAULIE: Fuckin’ espresso, cappuccino. We invented this shit and all these other cocksuckers are getting’ rich off it.

  PUSSY: Yeah, isn’t it amazing?

  PAULIE: And it’s not just the money. It’s a pride thing. All our food: pizza, calzone, buffalo mozzarell’, olive oil. These fucks had nothing. They ate pootsie before we gave them the gift of our cuisine. But this, this is the worst. This espresso shit.

  PUSSY: Take it easy.7

  Our legal system allows this kind of copying because the desire for free and full competition outweighs concerns about imitation. That is good for all of us, even if Italians (let alone Italian-Americans like us) might be better off if they possessed a monopoly on cappuccino.8 As one court aptly put it, in our system “there exists a fundamental right to compete through imitation of a competitor’s product, which right can only be temporarily denied by the patent or copyright laws.”9

  Of course, between two cafés competing on the same gentrifying block and two films, or novels, or cancer-fighting drugs, there is a lot of space: our rules against copying, and what the law calls “unfair competition,” exist for good reason. The important point here is simply that copying and competition are two sides of a coin, and that makes the determination of the right set of rules about copying tricky. And when competition and creativity can co-exist with copying, it is best to leave well enough alone. That is a key message of this book: in a surprising number of innovative industries, competition, copying, and creativity all run together, and in this good news story our intellectual property system rightly stays out of the picture.

  With this in mind, in this concluding chapter we draw together the various examples in this book to sketch out some broader patterns. What have we learned about the relationship between imitation and innovation? How do we explain the surprising creativity we have found? And are there tools or techniques that might help other industries stay competitive when confronted with copying?

  Just because fashion, finance, or font design remain successful in the face of pervasive copying does not mean every creative industry can do so, and we want to acknowledge the variety of innovative fields forthrightly. Innovative industries vary in many ways, but one of the most consequential is in the cost of creation. By “cost” we mean the expenses incurred in dreaming up something new and distributing it to consumers. Think of a blockbuster drug that requires armies of scientists to refine. These drugs can cost as much as $800 million to formulate and produce.10 Or a blockbuster film, full of special effects and boldface names. James Cameron’s 3-D film Avatar, for instance, cost nearly $300 million to make and $100-$200 million to market.11 For both films and pharmaceuticals, the upfront costs of creation can be very high.

  Other innovations are quite inexpensive, however. Musicians sometimes say that a lyric or chord change popped into their mind in a flash, and a few hours later they had a full-fledged song.* Marcel Duchamp drew a moustache and beard on a found postcard of the Mona Lisa and, et voila, a Dada masterpiece was born. Even with less dramatic (or swift) inspiration, songs, stories, poems, and many artworks are comparatively cheap to produce. There is a continuum of innovation, in other words, that runs from very cheap to very expensive.

  The creative industries we have explored in this book mostly fall at the low-cost end of the spectrum. Compared to new drugs, fashion designs are not especially costly to create; neither are new comedy routines, recipes, or football plays.* Whatever lessons we draw from our case studies, consequently, can be applied to high-cost creations only with care. Nonetheless, even for high-cost industries there are useful lessons that can be gleaned. As is probably obvious to everyone reading this, moreover, the cost of innovation can be significantly affected by a vital phenomenon in the contemporary world: technology. (We’ll say more about this at the end of this chapter.) The cost of creation is an important factor to consider as we weigh the broader messages that emerge from our cases studies.

  The basic point that we began this book with, however, remains: the traditional justification for IP rights—that copying kills creativity—cannot explain the surprisingly vital world of innovation we have detailed. And this has important ramifications elsewhere because, whether we like it or not, in many industries copying is here to stay. The increasing ease of copying has been widely perceived as a crisis. Indeed, the former head of the Motion Picture Association of America (MPAA), Jack Valenti, who onc
e likened the original videocassette recorder (VCR) to a rapist, would surely be turning over in his grave if he could see some of the most recent technologies used to pirate movies.12 Yet Valenti was wrong about the VCR. Far from killing the industry through copying, the home movie rental business it spawned turned out to be very profitable.

  We believe that there are ways to profit from today’s copying technologies as well. To do so we have to think about copying in a different light—not as a scourge to be eliminated but as a complex phenomenon that can help as much as harm. Ever-easier copying is only a crisis if our focus is solely to stop copying. If instead we focus—as we should—on promoting innovation, we quickly realize that there are many ways to do so, even in the face of copying.

  We will go a step further: in some cases copying ought to be welcomed, not stopped. Imitation can fuel innovation, serve as a form of advertising for originals, spur more competitive markets, and lead to better, more valuable new creations. In short, as we have shown in a wide range of fields, creativity can persist even in the face of widespread copying. Indeed, in some instances creativity occurs because of copying. In the end, the basic message of this book is optimistic. We live in a world of ever-easier copying. Yet, in a surprising number of ways, creativity can survive and even thrive despite copying.

  SIX LESSONS ABOUT INNOVATION AND IMITATION

  The creative industries we have explored clearly differ in important ways. Yet there are some cross-cutting features and lessons that merit special attention. We highlight six in this concluding chapter:

  • Trends and fads play a powerful role in several creative industries. In the fashion world and elsewhere, the dynamics spawned by trends can turn the conventional view of copying on its head.