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Most technology firms—and today everybody considers themselves a technology firm—think piracy is a bad thing. However, the “shock” of piracy was found to lead large technology firms like Microsoft and Adobe to innovate more, according to new findings. This journey of innovation has many ports of call and choppy waters. In the study, ������ý Cox Strategy Professor Wendy Bradley and co-author Julian Kolev of the U.S. Patent and Trademark Office observe how technology companies altered their intellectual property (IP) portfolio strategies after a period of piracy motivated more diversified innovation strategies.

The high seas

The research analyzes 106 publicly traded companies that generated roughly 40% of revenue for publicly-traded firms in the software industry in the U.S. between 1991 and 2000. They looked at large firms, alongside a control group of companies not facing significant IP risk, in a “before” period in 1991-2000 and “after” of 2001-2007. The advent of this major piracy shock was the debut of BitTorrent in July of 2001. BitTorrent was a widely-embraced file sharing technology that made it much easier to transfer large files, and so pirate software.

In the short term, the authors showed that firms file for all types of IP, but leverage the use of copyrights and trademarks first. Pro-patent management firms in their sample, however, the ones that leaned toward patenting pre-shock, do things a bit differently. “After the shock, these firms tend to file more copyrights and trademarks than in the past,” Bradley noted. “All our treatment firms increase all forms of innovation in the short term, but pro-patent management firms balance out their IP portfolios more than firms without these practices after the piracy shock.”

Ode to code

Pro-patent management firms like Microsoft were part of the research sample. Bradley mentions that a number of large firms like Adobe don’t use patents exclusively, or, on occasion, some large public firms don’t use patents at all. They use other forms of IP protection, which could include trade secrets. About the tech firms Bradley says, “If you’re that large—you’re likely innovative. While firms in the pro-patent management group aim to balance or diversify their IP portfolios, other firms just innovate more in the same way. They don’t necessarily change their IP strategy.”

As a firm that relies on software code, and these tech firms are shrouded in code, how do you protect it? “Our paper is not just about innovation, but also how to protect it and prioritize the IP instruments available to you,” says Bradley. The IP protection arsenal is a wide array of choices based on strategy, timing and value. Large firms, patent-heavy ones, may realize that they want to complement the value of their patents with copyrights and trademarks. The reaction of adding more copyrights, trademarks and varied IP instruments is a proxy for more innovation happening faster, potentially because the patent process is slower and longer. “Piracy may weaken the value of patents and their enforceability, the value of which cannot be realized if work is being stolen,” Bradley explains. “A firm’s assessment of how to add value is being re-calibrated in the post-piracy shock period.”

Piracy is on the rise again and Bit Torrent activity is increasing. Even before the pandemic forced people to spend more time at home on the Internet, piracy was increasing. Some believe piracy is a reaction to the boom of software subscriptions (and others types) or “subscription fatigue.” “Piracy may be a pushback on the software industry’s monopolistic practices,” Bradley explains. “Subscriptions were a market-based solution to the piracy problem but now it’s creating other problems, including anti-competitive behavior. As a consumer, how many software subscriptions are you really going to have? You’ll likely just stick with the dominant type of software in an industry, such as Microsoft Word for word processing, rather than branch out to try ones, such as subscribing to Google Docs. This lack of choice may be pushing consumers toward piracy, which forces firms to re-think the subscription model or lose market share.”

As long as more and more products are digital, piracy isn’t going away, concludes Bradley. The good news for firms: if you innovate, you can maintain or improve your performance. “The big fear was that all piracy leads to massive sales loss and firm failure,” she says. “Our paper is a resounding—‘that’s not true.’”

After the piracy shock, the top large firms in the software industry increased innovation and performance. “For smaller firms, innovating is a no-brainer,” says Bradley. “For large firms, it turns out, advertising and brand building may not be enough to stay on top.” The predominant message to large firms is to keep innovating to maintain or grow market share—there will always be technology shocks.

The paper “Software Piracy and IP Management Practices: Strategic Responses to Product-Market Imitation” by Wendy Bradley, Cox School of Business, ������ý Methodist University, and Julian Kolev, an economist at the U.S. Patent and Trademark Office is under review.

Written by Jennifer Warren