Free Revealing

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= uncompensated spillover of knowledge


"The second assumption is that any “free revealing” or uncompensated spillover of proprietary knowledge developed through private investment will reduce the innovator’s profits from that investment. It is therefore assumed that innovators will avoid such spillovers as much as possible. The user innovation literature challenges this assumption. Although the proprietary approach is often the most profitable way to exploit an innovation, user innovation theory shows that this is not always the case.

There are disadvantages to the proprietary approach. Secrecy is one example. Proprietary knowledge must be kept secret for it to remain that way, but this only makes sense for inventions that cannot easily be reverse-engineered. Even though there is no limit to the term of trade secret protections in principle, in practice, most development secrets can be compromised, sometimes very quickly. The costs of preserving secrecy can be significant and must be balanced against the benefits of exclusive access. Further, when it comes to licensing an innovation, a dilemma arises. IP owners want to sell as many licenses as possible to generate revenue, but if the information is disclosed to too many users, the benefit of trade secrecy protection may be lost.

There are also several ways in which a self-interested innovator can benefit from a free revealing approach. First, free revealing of IP may establish a non-proprietary technology that encourages the purchase of proprietary technology with which it works. To use a software analogy, a company may make an operating system free to users because it intends to sell other software that is exclusively compatible with this operating system. These secondary pieces of proprietary technology can offset any monetary losses from the non-proprietary technology.

Free revealing may also facilitate improvements to the core technology. If the original innovator then gains access to those improvements, this represents a cost saving in R&D for that company.

In addition, by revealing its IP, a company may generate a favorable reputation that is useful in selling associated offerings, by enhancing brand value or improving the company’s ability to attract and keep high quality employees.

It is often assumed in discussions of open source that the benefits of adopting a free revealing strategy for exploiting innovations must be unique to software or other information goods, but such benefits can apply to physical goods as well. Biotechnology can benefit from free revealing, and some companies are already beginning to implement such practices to this end.

As mentioned earlier, one can use non-proprietary products as enticements for other proprietary goods or services. Companies are often willing to contribute to the creation of open databases in order to attract customers to a host Web site that offers additional commercial content. Others give away the rights to use valuable cell lines and experimental animals, and sell consulting services on how to maintain them. Microarrays, a way for conducting many experiments at once on a DNA or protein “chip,” are another potential field, as proprietary chips are too expensive for some institutions and applications. Developing open standards for manufacturing microarrays could produce a proprietary market for tools that would conform to those standards.

Another way is to pre-empt the establishment of a proprietary standard. The most obvious example of this strategy is the participation of companies in the SNP consortium, which pays academic scientists to place genome sequence data in the public domain. For these companies, giving away data is not a charitable act—it avoids having to negotiate IP access among themselves and with other companies down the line. Interestingly, the human genome sequencing project considered adopting open licenses, but the idea was abandoned because it was decided that any restrictions on the data, even in the form of a license designed to ensure it stayed non-proprietary, would create a dangerous precedent. In that case, open source development was successfully taken to its extreme.

(An even more ambitious proposal for large-scale collaboration has been made by Steve Maurer, an economist at UC Berkeley. Maurer suggests harnessing and combining volunteer efforts across the life sciences community to research potential malaria drugs that would then be made publicly available. Maurer argues that an open source approach would reduce the total costs of drug development. As highly trained volunteer labor would perform the research, sponsors could avoid overpaying R&D costs, which are difficult to estimate in early stages. In addition, because the IP would be available to everyone, any company could manufacture the drug, and the resulting competition would keep down the market price for the completed product.

Biotechnology companies can also enhance their reputations by using open source techniques. One example of this strategy is the contract research company Millennium Research. Millennium makes much of the technology it develops available to the general public, boosting its reputation for innovation and expertise, as well as for user-friendliness and social-mindedness. This kind of attitude seems to resonate with users.)

Along with the benefits of adopting a free revealing, non-proprietary strategy for exploiting an innovation, there are costs to contend with as well. Opportunity costs are the gains that an innovator could have made by adopting an exclusive proprietary approach. Actual costs include the expense of diffusing an innovation. Clearly, choosing the best strategy for exploiting any particular innovation involves weighing the costs and benefits of a proprietary versus a non-proprietary approach. It is a trade-off, and in many cases, in biotechnology as elsewhere, the balance may tip in favor of the traditional proprietary approach. This is generally the case in the pharmaceutical industry.

Normally, the opportunity cost of adopting a free revealing approach is not prohibitively high, as patents have a limited term and can be easy for other industry members to circumvent. However, the pharmaceutical industry has structured itself so as to make patent ownership particularly profitable. It has successfully pushed for patents that are broad enough to effectively cover not just a particular molecule that has value as a drug, but all the variations of that molecule that might be effective. This means that pharmaceutical patents are almost impossible to invent around. Combined with legal tactics for extending patent terms, the opportunity costs of giving up an exclusive proprietary approach to drugs in favor of an open source approach are likely to be too high for big pharma to be interested. As stated earlier, cases like these illustrate some of the negative effects of proprietary IP regimes." (