So one of the key factors for your ability to appropriate value from an innovation is whether or not there's strong IP protection, or intellectual property protection. So, when is the ability to protect IP strong? Well first, we mentioned before, legal protection. Is there a patent, or a copyright, or a trademark that you might get on your intellectual property? It's important to recognize that just simply the ability to get a patent doesn't necessarily mean that you have strong IP protection. There are certain industries, like pharmaceuticals and drug discovery, where a patent is somewhat ironclad. It's a recipe for creating that drug and it's very obvious when someone else has appropriated your technology, has basically violated your patent. There are other industry sectors, take software, where you and can, in fact, get a patent on software, however, it's harder to protect. It's easier for others to innovate around your patent, innovate around your software. And as a result, many software providers, rather than get a patent on their technology, we use trade secrets and the like, as a way to try and protect their intellectual property. In addition to legal protection, we can think about things like first-mover advantages. So if there are substantial first mover advantages, you can protect that intellectual property. One example would be learning curves, which we've discussed before. This is the idea that over time as you produce a product, you go down a learning curve, perhaps lowering your cost or improving the quality from this, that experience of producing that product. Intel, in the microprocessor industry, is a company who's been continually moving down the learning curve on microprocessors, and as a result, has been able to protect their intellectual property and their position through that process. When you have a product or a service that maybe gets branded and creates customer loyalty, that might be sufficient to keep competitors at bay. You think about these products that end up taking on the name of the attribute they have themselves, like a Kleenex in the tissue industry, or a Xerox for the photographic copying machines. All of these are examples of companies who were able to move in early and that early movement gave them an advantage, would helped, at least for some time, keep competitors at bay. The last thing to think about with first-mover advantages are network externalities. We've talked about these before. This is the idea that the value of a greater service increases as others consume it. So a classic example, again, would be something like the telephone. To be the first owner of a telephone is quite not valuable to you. It's only when others get telephones that it then has value, because now you have people to call. You see this a lot in various text sectors, social media companies, and the like. The more people use a social media platform, the more valuable it becomes. Well, if you're able to lock in a user base early on, if there's a substantial first-mover advantage, that can then strongly protect your IP, even if others try to copy exactly what you do. Some other things to consider here. Maybe it's simply that imitation by competitors is difficult. So I mentioned trade secrets before. You take Coca-Cola. Coca-Cola's formula for their Coke is actually a trade secret. One could imagine if they patented it and it was made public, as a result of the patenting process, eventually that patent would fall off of its legal protection after 17, 18 years. When that occurred, then anyone could make Coca-Cola. So by using a trade secret and keeping it protected, that can then prevent imitation by competitors. Now of course, competitors might be trying to backward engineer what you've done. So the question is, do you have a trade secret or do you have intellectual property that can't be backward engineered easily? And that tends to be cases where it's more technologically or socially complex innovation. Maybe bringing together different types of capabilities that are very hard for others first to observe and understand kind of what's your secret sauce. What's your secret recipe for bringing that together? Again, if you delay imitation by competitors, you can protect your IP and appropriate some of the value, at least in the short run. Finally, I want to think about diffusion among customers is fast. Sometimes you have situations where imitation is very easy. However, there is such a large, lucrative early market and it's easy to adopt these products. In other words, there's little or no switching costs or complementary investment needed, that you get substantial uptake in the short-run. And, though, while there might be quick imitators after that, you've already gotten a lot of the value out of the imitation, or the innovation, that you created. My favorite example of this is the Billy Bass. The Billy Bass was a novelty item back in the late 1980s, early 1990s. It was literally a fish mounted on a board, that when you walk by, would turn its head and start singing to you. Novelty item, for sure, surprisingly, perhaps, there was a large, lucrative early market for this novelty item. Well, soon after the Billy Bass appeared and was going off the shelves, competitors started to appear. There was Sammy the Shark, there was other ones, as well. Basically, the same concept as Billy the Bass. Now, that market, basically, evaporated very quickly as a novelty item as it was. However, the inventor of Billy the Bass did quite well for himself, and in fact, created quite a bit of value that he was able to capture, at least because there was a large, lucrative early market. And again, you see this in many things that have kind of a fashion or fad element to them. Now, we talked about what makes IP strong. Why is it often difficult to protect IP? Why is not just so simple as just going out and getting a patent? Well, once again, legal protection can be, first, difficult to acquire. It's expensive to go get a patent or other type of legal protection. And then once again, it's hard to enforce. Even in some situations, you especially see this with entrepreneurial ventures, they might be able to go out and spend the money and get a patent, and that patent might actually be fairly iron clad. However, if someone infringes on that patent, they don't have the resources to take them to court, to sue them, to enforce their patent. So once again, just the ability to get a patent is no guarantee that you'll be able to appropriate the value of the innovation. You have to think again of whether others can innovate around it and whether you have enough resources to be able to enforce the legal protection provided by that patent or copyright and the like. When it comes to secrecy, secrecy is often hard to maintain. Employees move from one company to the other. Trade secrets leak out, eventually. When we think about this kind of tacit knowledge that I was suggesting, socially complex ideas, even that tacit knowledge eventually gets diffused. Eventually, people figure things out. And then, finally, value might actually be created by a collection of advances. It's not sufficient to just have this one innovation. It actually takes a whole bundle of innovations to create value. And that relates to our next topic, which is these complementaries, and whether you possess and control the complementaries necessary to appropriate value from innovation.
