Why Competing Successfully Is About A Lot More Than Just Copying The Technology

from the not-quite-so-easy dept

Last week, we kicked off quite the discussion following my post suggesting that Apple’s iPhone patents weren’t necessary. One of the commonly used arguments against that is that without the patents, others would simply copy Apple and there would be no ability for Apple to profit. I had hoped that the original post showed why that was wrong — in showing that copying a product isn’t as easy as just being able to reverse engineer it, but perhaps I didn’t make the point strongly enough. Copying the technology is just one aspect to competing, and if the market is dynamic, by the time you catch up to whoever you’re copying, they’re way ahead of you. Witness the iPod. Apple continues to be innovative and pushing the boundaries of what can be done, and while competitors have made similar products, they’re always immediately behind when Apple launches something new. Partly because of that there’s also the perceived value or brand value associated with getting an iPod as opposed to a competitor’s product. Even if it’s an exact copy, people know and trust Apple, and trust the quality of its work. They also recognize that since Apple has established itself as a market leader, there’s an ecosystem around it that helps support the value of the iPod over other solutions. The iTunes store is one example (supplied by Apple, obviously), but also all of the other accessory makers out there who design products to work with iPods, but not with competing devices. It’s clearly a situation where even if someone could copy the technology, that’s not really enough to hurt the originator. Apple can still sell its products at a premium, because of a variety of factors.

Now we have another example as well. Microsoft has long viewed Google as a serious competitor, and apparently Bill Gates and the folks in Redmond have been pulling out all the stops to compete with Google. In many cases, they’ve created products that seem as good, if not better, than Google’s versions. Yet, despite all of that, they’re losing traffic while Google gains it. Once again, it’s not just about the technology, but the perceived view people have of Google as compared to Microsoft. Microsoft just hasn’t been able to convince that many people that its search and mapping solutions are as good or better than Google’s. Despite the claim that there are “no switching costs” for users to go elsewhere, that’s not quite true. The perception that Google is better (and the feeling that it’s “good enough”) means that there’s no reason for people to look elsewhere, and a Microsoft offering would need to be not just better, but significantly better to attract attention. Alternatively, they can work on increasing their brand value as well, in the space of online services. In other words, there are plenty of things that go into being able to innovate and build a successful product — and simply copying someone else’s technology is often a small part of that (and usually not a particularly good strategy). Patent protection only protects that aspect of copying (business model patents are another issue completely), but if they’re supposed to encourage innovation, and the technology is only a small part of innovation, then the incentives are mis-aligned. The market can reward innovation without needing government monopolies and protectionist policies. The trick is to continually innovate, not just in the technology, but in the quality, the service and the brand as well.

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Comments on “Why Competing Successfully Is About A Lot More Than Just Copying The Technology”

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another says:

Japan and China seem to have done a decent job of being successful without using innovation. Apple can command higher prices with patent protection, because it would be difficult to sell a cut rate product. Does the iPod still sell even though there are tons of MP3 players on the market that are very cheap? Of course. Do they sell more iPods at their high price if those cheap MP3 players were not on the market? Sure.

Technology is one thing, it is always changing. Your argument semi breaks down when it comes to pharmaceutical products. When Prozac went off patent, it lost 90% market share in the next 90 days.

That being said, innovation and marketing is the only thing that ensures the long term well being of a company. Apple seems to do quite well in both those areas.

chris (profile) says:

Re: Re:

“Your argument semi breaks down when it comes to pharmaceutical products.”

pharmaceuticals is a field where generics are *preferred* to name brands because of pricing. in the prescription drug market there is not much to offer in terms of product other than the drug itself and it’s price. it’s not like you need tech support or customer service from a prescription that can be provided by the drug company.

it doesn’t help that the drug companies are selling to a market that either pays out of pocket (and is looking for the lowest possible price) or is using health insurance (which often demands that generics be substituted) and it’s products are dispensed by pharmacists that often look for cheaper generics as a courtesy to the patient.

the ipod (or any consumer technology) is another story because of a number of factors, most of which revolve around the brand, after market accessories, services, and partnership agreements, none of which are patent related.

the product design and the UI *might* require patent protection, but apple has a history of fiercely protecting that with patent and trademark litigation.

which is why the patent dispute with cisco over the “iPhone” is so iRonic.

Dosquatch says:

Re: Re:

Your argument semi breaks down when it comes to pharmaceutical products.

Not exactly. Pharms aren’t in a constant upgrade cycle like technology*, so you don’t have the factor of “by the time you catch up, they’re ahead again”. When a generic for Prozac came out, it did exactly the same thing in exactly the same way in everything but name (which gets changed to a chemical formulary) for a much lower price. There’s very little reason NOT to switch to the generic. By a similar token, if Creative released a “fruit branded compressed digital media file player” that was in all other respects completely identical to an iPod, but for half the price, do you not think the generic would sell better?

With pharms, you also don’t have a 3rd party accessory market specific to a given drug. (Indeed, I have a hard time imagining how any such accessory could possibly be medication specific short of something like a Prozac Pez dispenser…)

You also lack the community tie-in. Community support tends to pop up not around a particular medication, but rather around the ailment it is meant to treat. These communities tend to focus on treating the disease more effectively and/or less costly, which pushes towards newer medications or generics, but never towards a name-brand if an alternative exists.

* – the closest analog is something like a subtle change in formulary near end of patent, creating something like “Prozac CR”, which gets patented as a new drug.

Noel Le (user link) says:

reply to Masnick

If you’re talking about patents, *copying* by competitors is entirely irrelevant because you can infringe a patent by not copying or even having knowledge of it. Within the context of patents, exclusivity pertains to imitation and the ability to sell inventions matching the patented specifications (rather than copies as is relevant in copyright).

I’ll write more after cleaning various items off my desk, but see a recent piece I wrote up on this topic here: http://weblog.ipcentral.info/archives/2007/01/why_there_is_no_1.html.

Lewis Baumstark (profile) says:

Re: reply to Masnick

Noel, you need to be clear what you mean by “patented specifications.” If you mean the “implementation of a machine/process/etc as published in the patent application” then imitation and copying are effectively the same thing and constitute infringement.

If you mean the “function of the machine/process/etc (i.e., the effects caused on the outside world)” then yes, imitation and copying are different things. But under that definition imitation does not infringe a patent since it cannot be patented. Functionality is not patentable, only the details of the machines/processes/etc that implement the functionality is patentable.

Dudetastic says:

Mike, as usual, has a keen and progressive view on the market but its not always as realistic. Yes Apple will always be ahead of its competitors, but its not exactly like a footrace; being one step ahead doesn’t count, you have to be one generation ahead and that takes much longer than it takes to reverse engineer and copy someone else’s products.

Your example with Google is really just recognizing the value of name recognition and a first mover advantage. These are things that can overcome such reverse engineering and competing on price, but that doesn’t take away from the fact that the R&D invested benefits competition just as much as yourself after a very short while.

Knowledge should be open to everyone, but making money off someone else’s idea isn’t always fair. Improving someone else’s idea and making money off of an improved product or method based on a previous idea should be fair game, but of course the creates a whole other issue of whether or not the new idea falls under that.

misanthropic humanist says:

artifact vs mechanism

by the time you catch up to whoever you’re copying, they’re way ahead of you

This is one of my main arguments against patents in a very dynamic market like software. Unless you copy code verbatim (and violate copyright) you can keep that lead while the others play catch up.

Dudetastic: you have to be one generation ahead

I disagree somewhat. It’s nice to have a long advantage on second place, but even a small lead is all it takes to remain king of the hill.

“In many cases, they’ve created products that seem as good, if not better, than Google’s versions. Yet, despite all of that, they’re losing traffic while Google gains it.”

This goes back to my post where I used the example of microphone manufacturers to illustrate the power of the brand. Against all expectations the “generics” offering arguably better product copies for less money failed to destroy the expensive originals. Google is synonymous with search. I think that even if MS did offer a substantially better product than Google they would never quite shift the powerful image that company has in relation to its product.

another: “Your argument semi breaks down when it comes to pharmaceutical products.”

Yes, agree somewhat, but this is a much more complex area. Stay with me please, because this isn’t an easy argument.

A piece of technology like an iPod is the sum of its parts, ergo – you can dismatle and reverse engineer an iPod and understand exactly how it works in every important respect. Drugs are different. They require a complicated context that is human medicine. So, say my company BigPharm does a whole lot of research on a ancient Indian plant remedy. My team spend 10 million on extracting and purifying the active ingredient. What have I done to add value that deserves protecting?

i) I have identified and isolated the active ingredient
ii) I have developed a process to extract it.
iii) I have spent considerable money on trials to approve the safety of my product.

All those are non-trivial investments. But what research knowledge do I have (presumably kept back as trade secret) that is valuable to me? None at all. Anybody can come along and produce generics of the active ingredient. And of course it is morally abhorent to try to control any use of a plant that is an ancient remedy, to prevent another company from trying to identify and extract through their own process the same chemical compond. The fact that I as leader of the market spent the money on approving the safety of the active ingredient appears unfair, but it is a fact of life. The ingredient is now approved, for everyone. (Maybe there could be a fair law that allowed a generic to share in that cost, but that’s another problem)

Now – consider another scenario.

Instead of leveraging ancient public knowledge my team of wizard biochemists at BigPharm create an entirely new synthetic drug based on years of biomolecular research. No such counterpart exists in nature.

What assets do I now have?

i) As before I have the active ingredient
ii) Also I have my patented process
iii) And I have the FDA approval like before.
iv) This time however I have an additional asset. I know the mechanism of the drug.

This last part is by far the most important aspect of any medical advance. As it stands I can patent i, ii and iii, but keep iv as a trade secret. While that does not “advance the arts and sciences”, if I am the only one who understands why that drug works I am infinitely further ahead of all my competitors.

I can improve on my drug, while my competition cannot.

another says:

Re: artifact vs mechanism

I agree, except that in some cases, the companies don’t really understand why it works, just that it works. In other cases, you give a researcher a compound and a disease it treats, they can figure out why it works.

Comparing drugs to iPods (or iPhones) is really not right though, as you can invent the drug, but then have to spend $500 or $700 million drugs proving the drug is safe and actually does what it says it does. That takes many years, while you can copy an iPod and put it on the street in weeks.

misanthropic humanist says:

artifact vs mechanism

another: “..in some cases, the companies don’t really understand why it works, just that it works. In other cases, you give a researcher a compound and a disease it treats, they can figure out why it works”

Good points indeed. Here’s a brain teaser then;

What if BigPharm spend those millions achieving i through iii above on a compound that they “don’t really understand why it works”.

Then a genius scientist from CheapPharm, in a flash of insight works out exactly how it works and opens the market to a whole new *class* of drugs.

Does that invalidate my work? Can I/should I be able to stop CheapPharm (who now understand the mechanism) from manufacturing better, cheaper drugs because my patent occupies one instance of a whole class of compounds on the chessboard?

I can’t answer this. I don’t think any of us can. And if you think the issues are complex with chemistry that’s just peanuts when you apply the principles to algorithms and mathematics (as some would wish for).

So, I submit there are certain things that should not be patentable. Not on the basis of any socialist philosphy. Not on the basis of fairness or market competitiveness. But on the basis of logic alone lest we descend into argumentum ad absurdum.

angry dude says:

pharma's patents

Hey, misanthropic humanist,

Your ignorance is astounding !

It is a common knowledge than once a chemical formula for a drug is known that drug can be very easily reproduced for pennies on a dollar. And it is a routine procedure nowdays to analyse any chemical substance.
Thus, patents on drugs…
I hope you will never need Viagra, my friend, cause Viagra owes its existence to US Patent Law.
Keep bashing US patent laws…

misanthropic humanist says:

Re: pharma's patents

Sorry AngryDude, I must correct you. Knowledge of a chemical formula in no way implies a synthetic procedure. It does not even definitely describe the compound. Take for example C7H6O3. There are several compounds that are described by this, one of which will kill you. The useful one, acetylsalicylic acid, can be synthesised thus:


In your case I highly reccomend 6aR,10aR)-6,6,9-trimethyl-3-pentyl-6a,7,8,10a-tetrahydro-6H-benzochromen-1-ol
, one in the morning after breakfast and then as needed. Consult your doctor if symptoms persist.

watever says:

yeah..It needed to kill the brand

Google brainwashed the whole internet that search can’t get ne better than google..

It is no more competing with the technology of google..but competing with the brand..

The only way to increase the brand value is by innovating…

n google is no more a small company so that msft can play the same dirty tricks it has done with netscape and borland..

First of all it needed to make the products geek friendly and a better browser which doesn’t suck…

|333173|3|_||3 says:

Google have the advantage in search because of the many extra features, and search is just a bit of advertising anyway. While clustering engines are better for research, if I want an image, or a definition, google is a good place to start.

TThinking of iPods, waht would help competitors is if they copied the iPod connector, meaning that they could interface with iPod accessories. THis might be safer if a third party shell was set up to make link cables/adaptor plates, to protect the competitor from Apples lawyers

Tom Evslin (user link) says:

The patents were probably needed to protect against patent trolls who would’ve (and probably will) claim to have invented every obvious and non-obvious feature of the iPhone.

But the interesting question is why Apple chose to hype the patents as part of the announcement. You answered that pretty well at the end of your previous post on this – the patents make up for some of the weaknesses of the exclusivity strategy.

I posted more on this http://blog.tomevslin.com/2007/01/why_did_steve_j.html

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