How Market Smarts Can Protect Property Rights Bharat Anand and Alexander Galetovic, Harvard Business Review, 2004

1. How Market Smarts Can Protect Property Rights Bharat Anand and Alexander Galetovic, Harvard Business Review, 2004 2013. 11. 09. SoHyun Shin MEIE881 ST: Advanced Technology Management POSMIT Lab. (POSTECH Strategic Management of Information and Technology)

2. Contents

3. Introduction PROTECTING INNOVATION The LAWis often not the best defenseagainst theft of intellectual property. • Far more effective in such cases areMARKET-BASED strategiesthat KEEP PIRATES IN PORT.

4. Six Market Strategies for Protecting Intellectual Property Market Strategies Preempt Threaten To retaliate Create Synergies (Among related businesses) Marry assets To complementary products Expand into rivals’ businesses Reallocate Resources to Adjacent businesses Defend Core Assets Embrace the Threats Deny access Out-innovation Narrow your Own business Preserve The core with Add-ons 1 2 3 4 5 6 Nip It in the Bud Prescribe a sedative Dig a Honey Pit Make a Bundle Move theGoalposts Let the Dogs Out Companies facing threats to their intellectual property have a range of alternatives, from defending their core assets to embracing the businesses that threaten those assets The choice of strategies depends on the nature and intensity of the threat and the strength of a company’s resources

5. 1. Nip it in the bud • What? • Prevent misappropriation • How? • Preempting Competitors • Overwhelming Competitors • Excluding Competitors • Preempting • Being first to marketso that you can capture profit of monopoly scale • Intelpreempts rivals by tightly managing its relationships with external constituencies (Customers, Users, and Suppliers) • Overwhelming • Capital One, the credit card issuer, overwhelms its rivals with a blizzard of new product • Keep Their Intellectual Property Out Of Sight From The Start • For companies that lack Intel’s or Capital One’s resources and core strengths • Coke’s recipe has never been deconstructed or revealed

6. 2. Prescribe a sedative • What? • Lower The Competitive Intensity • How? • Cross-licensing Agreements • Cross-licensing Agreements • “SEDATING” EFFECT on an underground market in weakly protected intellectual property • Companies do not sue one another for infringement because they know they are likely to infringe the infringer’s patents sometime in the future

7. 3. Dig a Honey Pit • What? • Entangle key asset • How? • Creating synergies among related businesses • Create Synergies Among Related Businesses • Company’s economic viability is usually tied to one or a few key properties • By forging synergies between such properties and adjacent ones company can protect its profits from rivals and poachers • Hit television shows leads audiences to the next program and cross promote other shows on the same network

8. 4. Make a Bundle • What? • Combine secure with insecure products • How? • Marrying asset to complementary products • Preserving the core with add-ons • Marry Assets: (Enhanced value of the package ) • In situations where it’s difficult to establish property rights to an asset, it can be wise to marry that asset to a complementary product • Excel, Word (stand alone software applications) can be easily copied and disseminated, but the Microsoft itself enhances the value of the package so it makes more likely that a would-be copyist will pay for it • Add-ons • Provides additional functions or customization for a core application • In the book industry, publishers sometimes insert a CD or sort of things in the back cover of their books.

9. 5. Move the Goalposts • What? • Redefine the firm’s boundaries • How? • Expanding • Narrowing • Redefine Boundaries: • Challenge for companies how to get a piece of COMPLEMENTS • Unlike the increasing piracy rates in music industry, not all music-related businesses are vulnerable • For example, blank CDs, computers with a CD burner , and portable MP3 players.

10. 6. Let the Dogs Out • What? • Relinquish Your Core Assets • How? • Reallocate resources toadjacent business • Reallocate Resources To Adjacent Businesses • For companies that have moved the goalposts and now encompass more viable businesses • It may pay to disregard the decline in their core • Several of music companies viewed the online customer as a threat, they tried to charge as much for downloads as they did for CDS, even though the costs of online delivery are minimal • By contrast, Apple wasn’t afraid to set prices low enough to change music –buying habits

11. Conclusion • Six Market Strategies • Nip It in the bud • Prescribe a sedative • Dig a Honey Pit • Make a Bundle • Move the Goalposts • Let the Dogs Out • Summary • Define the business you’re in as expansively as possible. Greater value may lie in adjacent businesses. • Do not be deterred by internal resistance.Sister divisions in adjacent businesses are operating under different economic incentives. • Do not be afraid to surrender your core asset. Doing so may be your salvation.

12. Discussion Issues 1  Nip It in the bud (the most “Defend core asset) I think that a company ,which will enter a new market, have to defend their core asset not embrace the threat. For nipping the bud (for blocking other competitors who want to enter a new market), you can dominate the new market (dominant design), thus you can success in the new market. • If your company would enter a new market, what do you think about the most appropriate strategy for protecting a technology and achieving a success among six strategies described in this paper?

13. Discussion Issues 2  IBM The threat is not to the company’s operating system business but to its hardware business. In response IBM has seen fit to invest $1 billion in the future development of the operating system known as Linux, though it has become the paradigmatic “pirated” good since entering the public domain. That $1 billion does not seem to have been wasted. IBM has built a business around selling products and services for Linux; in the fourth quarter of 2002 alone, it sold $160 million worth of Linux servers. Give an real example for 4th Strategy (Make a Bundle).

14. Q&A Thank you