Knock-off or knockout?

Let’s start in Beijing and its Silk Street Market, which is, in essence, a five-floor mall. A resident of China or a tourist can find here a profusion of luxury goods. Or, to be more precise, the consumer will find a profusion of products masquerading as luxury goods. On any given day, name brands will appear to beckon you to buy quality and buy cheap; from Rolex to Armani by way of Gucci and Burberry, the pirates seem to offer the impossible: high quality and low price. On the surface this seems like a simple story: those who pirate products are stealing profits from brand names. True, but five minutes away is a store that sells real Tag Heuer watches as well as other genuine watch models. The lesson is clear but counterintuitive: piracy and legitimate brands can live side by side. Is there a new global truth emerging here?

Previous research on product piracy has focused primarily on its costs to firms that generate and then exploit their own intellectual property.

Only recently have researchers begun to examine the possibility that product piracy might improve overall customer demand for legal versions of the product and thus benefit the entrepreneurial firm. Our research and thinking, while not condoning the lack of ethics that commercial pirates use, does proffer the point of view that – in some cases – piracy can actually help the firm being pirated. Entrepreneurship involves the discovery and exploitation of opportunities to bring into existence new products and services; and, as has been seen time and again the intellectual property behind an entrepreneurial firm’s new products can be pirated by competitors impacting the effectiveness of exploitation efforts. Product piracy is not a recent phenomenon, but technology advancements that have made piracy easier and improved the quality of the pirated products have forced global examination and discussion. Simply put, product piracy is the misappropriation of intellectual property by a party other than the rightful owner, resulting in the making of unauthorized copies of a product. And piracy is pervasive: it has been estimated that five per cent of software used in the US is illegal, while in China and Russia the rate of illegal copies approaches 90 per cent, and the losses from software piracy have been conservatively estimated at $1.5 billion a year. In one case, US officials have even complained that an entire automobile produced in China pirates a GM design. Cartier has declared that it spends more than $3 million a year protecting its intellectual property rights in over 125 countries. According to one source, Microsoft maintains a staff of 250 in its intellectual property protection department, which operates as a “worldwide police force”. A new logic on product piracy?

As we mentioned earlier, most research on piracy has focused on its costs to entrepreneurial firms: sales losses, brand image erosion and enforcement. Yet it is worthwhile to examine the possibility that product piracy might actually improve overall customer demand for legal product versions, thus benefiting entrepreneurial firms. How so? We put forth seven propositions that will help the business world to realize that piracy is not always deleterious; together, these propositions provide a new “logic train” for thinking about product piracy.

1. The greater the overlap between the markets of customers for legal versions of the product and customers for pirated versions, the more piracy reduces sales of legal versions

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This is the best starting point. Obviously, if there were two almost-identical products existing in the same marketplace – one genuine, one a close imitation – then the sales of the original product are bound to be affected, especially if the knock-off is cheaper. Piracy occurs in a variety of different ways, and the quality of pirated products varies. We contend that the quality of the pirated products likely also affects the amount of overlap between pirated and legal markets and should have significant implications for the entrepreneurial firm’s enforcement efforts. For example, consider the quality of a DVD made from a stolen master copy compared with one made from a recording in a theatre. Both are common practices, but the DVD made from the stolen master will have much higher quality, and thus higher overlap with the legal version, than the copy made in the theatre. This difference will affect prices paid, the likelihood of further acquisition of pirated copies, the number of public versions available and network effects. The price of a Class A copy of a Rolex watch can be 5-to-10 times higher than that of a Class B copy, owing to the differences in quality and the lower likelihood of detection of a copy. The closer the pirated product is in quality to the original version, the closer the customer markets for legal and pirated copies, and the more likely it is to detract from the entrepreneurial firm’s sales.

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