The Knockoff Economy (3 page)

When football started, it was a brutal game of straight-ahead running plays—the slow grind of “three yards and a cloud of dust.” The results
weren’t always pretty, and indeed they were sometimes disastrous in an age when players wore little protection. In the 1905 college season, 18 players were killed and more than 150 badly injured. After viewing a photo of a mutilated player, President Theodore Roosevelt demanded change in the rules of the game. Football responded by innovating: teams introduced the forward pass into their offensive strategies.

The pass was thought to be less dangerous to players than the run, but some wondered whether it would ever count for much. A
New York Times
writer said, “There has been no team that has proved that the forward pass is anything but a doubtful, dangerous play to be used only in the last extremity.”
¹¹
Yet the pass not only caught on, it became, for many teams, the first tenet of their offensive doctrine. Passing changed football forever. Size mattered less; speed, smarts, and strategy much more. The pass added a range of previously unimaginable complexities to the offense, which demanded new defensive countermeasures. The result has been a continuous wave of innovation. And a just-as-continuous wave of copying.

Consider the “No Huddle Offense.” In 1989, Sam Wyche, then coach of the Cincinnati Bengals, had the seemingly crazy idea of employing a “hurry-up” offense, typically used in a game’s waning minutes, during the entire game. The offense became known as the “No Huddle,” and it worked exactly as it sounds—Wyche’s smaller and well-conditioned Bengals ran a very quick series of pre-scripted plays without huddles, all with the object of confusing and tiring the larger, less mobile players on the opposing defense. The strategy worked brilliantly and provoked anger among opposing coaches. In the days leading up to a playoff game against the Buffalo Bills, Bills coach Marv Levy angrily asserted that Wyche’s innovation was equivalent to cheating. But anger soon gave way to imitation. The following season, Levy’s Bills knocked off the no-huddle offense and went on to play in four straight Super Bowls.

So what does this mean? There is a lot of innovation in football. But there has been virtually no attempt to copyright or patent any of the innovations that have periodically roiled the game. There are some serious legal hurdles, but since American law already protects “choreographic works,” copyrighting a football play is not as far-fetched as it may seem. Patent protection extends to new and useful “systems,” and a novel football offense might be characterized this way. It might also be characterized as a “method of doing business”—a category of inventions which is also patentable (with some
restrictions) under U.S. law. In short, IP law might conceivably step in to prevent copying, but it never has. So why do football coaches continue to innovate, even when they know that their rivals will study their innovations and imitate them?

Fashion, food, football, and comedy are all industries in which creativity is vibrant and the patent and copyright laws are either absent or irrelevant. There are many similar examples, as this book will demonstrate. Few have been studied as a source of insights about innovation. The best known involves open-source software. The entire purpose of open source is to keep code “open”—to allow others freely to copy and modify what previous programmers have created. The use of copyright law to prevent copying or modification of the code is not permitted. And yet creativity flourishes and open-source software products, such as Linux and Firefox, have significant market shares. Others have explored the story of open source in depth. Still, we will say a few things about it in the conclusion to point out just how important the overall approach of open source is to our understanding of how imitation and innovation mix.

There are many other fields in which IP plays little or no role in incentivizing innovation. Fonts are a vibrant creative area, with literally thousands available and many new fonts created every year. Copyright law does not effectively protect new fonts against copying. And the advent of digitization has made copying very easy. Rather than slow down the growth of new fonts, however, digital technology has actually accelerated it.

The financial industry—banking, investment management, insurance—is also a fertile ground for innovation, with new investment tools and strategies deployed (for better or worse is not clear) in a ceaseless competition to maximize returns, hedge risk, and lower costs. Some of these innovations are patented, but many—and many very valuable ones—are not. As a result, financial industry innovators are often knocked off by their competitors. Still, copying does not appear to suppress incentives to innovate very much.

The computer database industry—which provides a huge range of products that collect and organize information and make it searchable using a computer—is another innovative industry where an enormous amount of new work is produced with very little IP protection. The content in some databases is copyrightable—for example, the huge collections of news articles available via Lexis-Nexis or the DowJones “Factiva” database. In many
other instances, the content of databases is composed of basic facts—like the price of houses—and under American law basic facts are uncopyrightable. This is a contrast with Europe, where factual databases
are
protected against copying. Yet the surprising thing is this: the database industry is growing on this side of the Atlantic, and stagnating on the other. The freedom to copy has not killed the U.S. database industry—if anything, it seems to have strengthened it.

These stories, and others, describe a world of robust creativity in the face of easy—and sometimes relentless—copying. These accounts are interesting in themselves. Taken together, however, they are more than just snapshots of particular settings in which innovation thrives without the incentives to create that IP is designed to provide. They raise wider questions about when, and how, restraints on copying are central to innovation in
any
setting.
^*

These questions are especially pressing now. Innovation is an ever more central driver of economic growth in today’s economy. Rules against copying have a critical role to play in this economy.
¹²
Yet there are several reasons to think that having too much regulation of copying can pose as great a danger as having too little. IP rights come at a price. IP protects creators by limiting competition, and less competition means higher prices for books, films, music, drugs, and so on. They require enforcement, which is often expensive. And IP regulations can be a powerful tool for established firms and industries to squash newcomers, and new technologies, that could, if left alone, give rise to entirely new businesses and cultural products.

As this last point emphasizes, strong restraints on copying can inhibit as well as enable innovation. One of the key arguments of this book is that innovation is often an incremental, collective, and competitive process in which the ability to build on existing creativity is critical to the creation of new and better things. Apple took the idea of a mouse and an icon-based computer display from researchers at Xerox, tweaked it, and commercialized it. Disney’s
Steamboat Willie
(and by extension Mickey Mouse) was a sort of proto-remix of Buster Keaton’s Steamboat Bill. Thomas Edison’s lightbulb imitated elements from over a dozen earlier bulbs. Shakespeare’s
Romeo and Juliet
borrowed from earlier writers (and
Westside Story
in turn
drew heavily from Shakespeare). Since few creations are entirely new, laws that prohibit copying can block as well as spark innovation. The flipside is that open and easy copying can spark as well as block innovation.

To be sure, it is very hard to determine the optimal mix of imitation and IP in a given industry, let alone across the spectrum of our creative economy. The prevailing view, embodied in the monopoly theory, is that copying is a serious, even mortal threat to creativity. But perhaps the opposite is true: fewer restraints on copying could actually yield more innovation—or the same amount of innovation at a much lower cost. (That is the fundamental notion behind open source.) To date, there are few if any convincing tests of either of these propositions. Much of our regulation of copying, in short, is based on theory and intuition, not hard evidence.

Our central point is simply this: despite the widespread view that copying is a serious threat, when we stop and look at a broader range of creative industries, we see that imitation often co-exists with innovation. If the future is going to be one of more, rather than less, copying—and everything to date suggests that will be the case—these industries present a window on the ways in which innovation can continue to thrive.

And this has implications for how we think about the future of our increasingly ideas-based economy. Consider this example. In the 1980s the motion picture industry tried to use copyright law to eliminate a fearsome new technology—the VCR—that the industry’s chief lobbyist, the famed Jack Valenti, in a congressional hearing memorably likened to the Boston Strangler.
^*
That bid, spurred by the fear that Americans would begin copying films and television shows at home, just barely failed—the Supreme Court voted 5–4 to permit the VCR, and one vote going the other way would have resulted in the elimination of the home video market. Contrary to Valenti’s prediction, that market became a huge moneymaker for Hollywood.
¹³
In subsequent decades the VCR, and then the DVD player, poured many more dollars into the film studios’ coffers than piracy was ever able to steal away.

As this history shows, getting our policies on copying right—or wrong—can have major economic impacts. And the story of the VCR illustrates that the relationship between copying and creativity is anything but simple. The film industry feared the VCR’s ability to copy, but later discovered that copying created rather than killed markets, allowing the industry to grow and fueling future creativity.

Copying is not always so benign, or so lucrative. Rules about copying have an important, even essential role to play in our economy and our world. But that role is much more nuanced than many believe. Major industries survive and even thrive in the face of copying, and in some cases copying makes them richer and more productive. If we can begin to unlock that paradox, we can learn a host of important lessons about the future of innovation.

Oprah Winfrey: How do you keep reinventing?
Ralph Lauren: You copy. Forty-five years of copying; that’s why I’m here.
—Oprah Winfrey interviewing Ralph Lauren, October 24, 2011
^*

In 2007, viewers of
The Late Show with David Letterman
saw celebrity Paris Hilton wearing a flower-printed dress designed by Foley + Corinna. Dana Foley, a one-time aspiring playwright, had begun making vintage-inspired women’s clothing many years earlier. After Foley met Anna Corinna, a vintage clothing reseller, at the 6th Avenue flea market in New York City, the two women went into business together. They opened a store on the Lower East Side in 1999 and, several years later, another in West Hollywood. The design team eventually emerged as an industry favorite, but they also developed wider market appeal—according to the
New York Times,
in 2008 they sold over $20 million worth of garments and accessories.

After Paris Hilton’s appearance on the David Letterman show, fast fashion retailer Forever 21 began selling a $40 dress strikingly similar to the Foley + Corinna design Hilton had worn.
¹
The original dress was not expensive by the standards of high-end fashion. Yet it sold for about 10 times as much as Forever 21’s knock-off. Shortly after the two dresses were shown, side-by-side, on some apparel Web sites, Anna Corinna was interviewed by the
New York Post.
“It’s awful,” she declared. “To me, the most awful part is that they’re huge companies and they [employ] designers, and a designer’s job is to design…. I totally understand being influenced by or inspired by, because everybody does that. But this obviously is neither. To me, they should be embarrassed. They’re not designing, they’re stealing it.”
²

Many of Forever 21’s customers may have been unaware of Foley + Corinna’s dress, and simply bought Forever 21’s model because they liked it. Others may have been aware of the original but preferred the cheaper copy. As Ms. Corinna argued to the
Post,
“A lot of people don’t know they’re buying a knockoff, or they just don’t care, they’d rather buy the cheaper one…. If you’re in Forever 21 in whatever city, you see it and think, ‘Oh, that’s pretty,’ and you buy it.”

The story of Forever 21 knocking off Foley + Corinna is not unusual.
^*
Every season—indeed, every day—clothing designs are copied, reinterpreted, and “referenced” by other firms in the apparel industry. Some well-known apparel companies, such as Allen B. Schwartz and Faviana, center their business strategies around copying striking designs. The practice is so widespread that the magazine
Marie Claire
features a regular section titled “Splurge vs. Steal” that pairs an expensive version of a given design (perhaps the original, but not necessarily) against a far cheaper version.
³
At times the two versions are virtually indistinguishable.

The ubiquity of knockoffs in the fashion world is the direct result of a gap in American copyright law. Copyright protection in the United States does not extend to fashion designs, and in the more than 200-year history of US
law regulating creative endeavors it never has. As we will explain in a moment, some elements of clothing, such as the label or the fabric print, are protected against copying. But for designs, it’s a free-for-all. Anyone can copy or reinterpret a successful design, and there is nothing the original designer can do about it. In the case of Foley + Corinna, the Lower East Side designers received substantial attention from the incident, which struck a chord with reporters and bloggers alike. But they did not receive any legal judgment, nor could they stop Forever 21 from copying their work.