The Knockoff Economy (25 page)

It’s often easy to discount amateur innovation, but it might be especially important in a creative arena like font design. Like so many areas in this
book, font innovation is more about tweaking than pioneering: most new fonts involve incremental developments based on well-known designs. Amateurs are well placed to engage in incremental innovation because the investment required is relatively low, and small creative insights can be significant in an art form that is itself composed of subtle variations on the same set of fixed letters.

There is another significant shift in the production of fonts, and it too is driven by technological change. Following digitization, font design has increasingly merged into graphic design. During the era of metal type, the punchcutters who produced usable type were very highly skilled. After the digital revolution, all this changed: general graphic design skills and an interest in type are all that is needed to produce attractive fonts. As a result, many graphic designers today undertake font design projects that would not have occurred before digitization. This also means more fonts.

Technological innovation has made font design easier and cheaper. But it also has more subtle effects. Because fonts are designed to work well with particular printing technologies, the technologies in wide use at any particular time shape the fonts that get produced. And as these technologies change, the fonts designed for them change as well.

For example, during the 19th century the tremendous growth in newspapers spurred a lot of font innovation. Printers needed to produce legible newspapers using mass printing on cheap, coarse paper. The result was fonts that could be easily read under these adverse conditions. Times New Roman is an example of this wave of newspaper-driven font innovation. Later, as offset printing became more refined, more delicate fonts could be legibly reproduced, and this set off another wave of innovation. As phototypesetting grew in the 1970s, still newer designs appeared, some tied to the technology’s ability to render fonts with narrower letter spacing.

The process repeated itself as readers moved from paper to screen in the 1980s and 1990s. Early computers couldn’t handle richly detailed fonts, so fonts were made from large blocks. Later, processor and memory limitations eased, but screen resolution remained low. The result was more innovation in sans serif fonts, more legible on low-resolution screens. As screens gained resolution, more new serif fonts began to appear. But the technology does
not stand still. Smartphones and tablet computers feature smaller screens. And consequently, screen readability has revived as an issue.

The overall point is that technological change induces innovation in fonts. New technologies have made it easier to create fonts. And other innovations, like the huge success of the iPhone and Android phones, have shaped the kinds of fonts people want. Font innovation is thus driven by innovation in the products that people use to consume text. So long as these technologies continue to evolve, incentives to invest in the production of new fonts arise as a sort of fortunate accident.

The preceding discussion shows that often innovation in fonts is not undertaken for its own sake, but in service of some other aim. This dynamic is not driven only by changes in technology. The ceaseless demands from advertisers for new and interesting ways of selling things has led to many new fonts. And font innovation is also undertaken in order to sell word processing and graphic design software.

The practice of bundling fonts with software is the primary reason that ordinary consumers do not engage in much piracy of font designs. Most of us think we have plenty of fonts to choose from on whatever word processing software we use. There are font files available on peer-to-peer networks like BitTorrent, but only a tiny group of people care enough to go this route.

Graphic designers are the real market for fonts. For this audience, bundling also plays a major role in inducing innovation and blunting the impetus toward piracy. For example, Adobe, the largest producer of fonts in the world, is in the font business principally as a way to help sell their market-leading Creative Suite graphic design software. Adobe gives away more than 100 fonts with Creative Suite. They sell many additional fonts, but these are just a small sideline business. Nevertheless, Adobe continues to invest in the design of new fonts. Adobe’s innovation in font design helps to bolster their position in the product that provides virtually all their revenue: their software. Incentives to create new font design are woven into competitive pressures in a related market for software. In the area of fonts, market competition plays a large role in inducing innovation.

Incentives to create new fonts also reflect broader cultural changes. Fonts, like fashion, are subject to trends. To be sure, trends in font design last far longer than in the fashion industry, and also are not as overwhelming a factor in the marketplace. But as in fashion, there are classic styles and bold new designs.

Consider Helvetica, the archetypal clean-lined font we described a few pages back. Helvetica and its many imitators are associated strongly with mid-20th century modernism. These designs still have substantial currency, as Apple’s adaptation of Helvetica illustrates. But for all its continuing influence, Helvetica is not really the font of the moment. Other styles have risen to prominence that are the antithesis of the modernist Helvetica style. An example can be found, of all places, on the placemats used in Mario Batali and Nancy Silverton’s famed Pizzeria Mozza in Los Angeles.

This Pizzeria Mozza placemat, from 2011, uses fonts that look like recreated letterpress type from the mid-19th century. These sorts of fonts are currently in wide use, in part because they are linked to the contemporary design aesthetic of the “steampunk” movement and to a general love of
antiquarian styles—think of the rash of old-timey cocktail bars in major American cities, manned by bartenders in sleeve garters and waistcoats chipping blocks of ice. Steampunk originated in a Jules Verne-esque genre of science fiction, first appearing in the late-1980s, that was set in a world in which things like computers and space travel are reimagined in a Victorian-era context.

FIGURE 4.2 Pizzeria Mozza placemat

In the 2000s, steampunk emerged as a significant trend in art and design. Designers following the steampunk aesthetic reject the sleek and often cold modernism of objects like the iPhone as inauthentic and alienating, and reach back to older technologies for inspiration. Importantly, steam-punk pushes back against the “cleanliness” that has long been dominant in industrial design—including, of course, in modern fonts such as Helvetica. Steampunk-inspired designers find typographic models in the fonts common during the Victorian and Edwardian eras, examples of which we see on the Pizzeria Mozza placemat.

In short, font designs respond to broad cultural and artistic trends. Fonts do not change all that swiftly. But aside from the speed of the cycle, the trend cycle in fonts is similar to that in fashion. If a font is popular enough it will be copied. Sometimes this copying will be exact. Often, however, the copyist will add some variations of her own—and what will emerge is a nonidentical font that is nonetheless recognizably of the same style. Because of digitization, designs in the new style can be made and distributed quickly. As copying and close variation spreads, the style becomes ubiquitous. Like fashion trends that are overdone, once-ubiquitous fonts lose their power, either because they have lost their novelty or the ability to convey what they were originally designed to connote. And as in fashion, font designers innovate in response.

Over the past several decades the financial services industry has become one of America’s biggest economic sectors. Measured in terms of financial flows and trading volumes, the industry is enormous. The capitalization of US stock markets grew from $136.0 billion, or 13.1% of US GDP in 1970, to approximately $19 trillion, or 180% percent of GDP in 2000. Even after the 2008 financial crisis, stock market capitalization is still roughly equivalent to GDP.
²⁵
And as the value and amount of trading in financial markets have
grown, so have profits. Profits in the financial industry have more than tripled in size relative to the overall economy since the end of the Second World War.

The financial sector has not just become very large and hugely profitable, however; over this same period it became increasingly filled with America’s best and brightest. In 2007, just before the financial crisis began, nearly half of Harvard College’s graduating class went into the financial industry or management consulting. And these smart people, unsurprisingly, are also pretty innovative.
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In the wake of the financial crisis, of course, it is very difficult to tell whether many of the recent financial innovations—new kinds of securities, derivatives, pricing models, methods of investing, and so on—are a blessing or a curse. Some commentators, including luminaries like Nobel prize-winning economist Robert Merton, maintain that the financial services industry has benefited society immeasurably through major innovations such as affordable household financing, countless types of derivatives, and low-cost mutual funds. Others argue that most financial innovations serve only to benefit bankers. Famed investor Warren Buffett called derivatives “financial weapons of mass destruction.” Former Fed Chairman Paul Volker opined in 2009 that the only socially beneficial financial innovation of the past 25 years has been the ATM.

Whatever the answer, there is no question that the financial services industry has been innovative—and with surprisingly little reliance on IP. Its creative output has included, among other things, thousands of varieties of derivatives, bonds, currency warrants, credit and currency swaps, collateralized debt obligations, exchange traded funds, investment indexes, and the pricing models and trading strategies associated with these instruments. For a long time, as the story of John Bogle and his Vanguard index funds illustrated, the industry produced these innovations with few protections against copying other than, in some cases, secrecy. Considering that the cost of innovation can be substantial—estimates of the investment required to produce most forms of financial innovation range between $500,000 and $5
million
²⁶
—this seems surprising. How can the financial services industry’s record of innovation be explained?

For much of the industry’s history the most plausible form of legal protection, patent, was simply not available for many financial innovations. Nor could innovators rely on trade secrecy law for financial innovations that related to publicly traded securities. Because virtually all the details of a new security become public once the offering is filed with the Securities and Exchange Commission, secrecy is typically impossible. Trade secrecy is more viable for other types of financial investments, such as pricing models, but even in these cases, for reasons we will explain, financial firms often are better off sharing information than keeping it secret.

In 1998, there was a major legal change that made patents much more available to the financial industry. In a case called
State Street Bank and Trust Co. v. Signature Financial Group Inc.,
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a federal court established for the first time that novel methods of doing business were patentable. Prior to this ruling, business methods of almost any kind were thought to be unpatentable. (We mentioned business method patents earlier in this chapter, in the context of football plays and formations.) The decision in
State Street
directly involved the financial industry—at the core of the case was a “hub and spoke” method of pooling mutual fund assets.

In the wake of
State Street
bankers began to seek patents for their inventions. In 1997, the year before
State Street,
the Patent and Trademark Office (PTO) granted just 198 patents in the category of “Data Processing: Financial, Business Practice, Management, or Cost/Price Determination.” (This category includes most patents relevant to the financial industry, but also a large number which are not.) In 1999, after
State Street,
the PTO granted 833 patents in this category. In 2006, it granted 1,260, and in 2009, 1,956. Yet the raw data on the number of business method patents may be misleading. More than a decade now after
State Street,
the latest data suggests that only about a tenth of the granted business method patents appear to be relevant to the financial industry.
²⁸
That’s still hundreds of patents, but less has changed in the industry than even this smaller number suggests.

This is due partly to the actions of the industry itself in the wake of
State Street.
Fearing that they would often end up as defendants in costly patent lawsuits, financial firms worked in concert to secure from Congress a “prior user” defense to accusations of copying.
²⁹
This means that firms that have developed confidential methods of doing business—such as
internal business processes—cannot be sued for patent infringement so long as the method of doing business was kept as a trade secret and practiced at least one year before a patent holder brought suit.