Media

Forget Hollywood — U.S. startups are in dire need of copyright protection

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The recent debate over SOPA, PIPA, and OPEN has left a bitter taste among those who think the tech industry is in desperate need of intellectual property reform. Add to it the recent shutdown of Megaupload and big-time patent disputes, and it’s easy to see how IP enforcement has become a weapon that threatens technological innovation in a way like never before. Despite the mess, a recent trend has left many startups crying out for greater copyright/IP protection: the rise of copycat kings like Rocket Internet in Germany, Fast Lane Ventures in Russia, and others in China, who are quick to “clone” successful U.S. businesses like Pinterest, Fab.com, Airbnb, Groupon, and Zappos in overseas markets. And I’m not just talking about taking an idea and tweaking it; this is about copying a site’s entire design, layout, and logo almost pixel for pixel and coming up with some uninspired derivative name (e.g., “Pinspire” instead of Pinterest, “Zolando” instead of Zappos) that reeks of being a cheap knock-off.

Supporters of clones argue that they promote competition, spur faster innovation, and provide access to new products/services in markets that U.S. businesses have not yet entered. They also draw on the “ideas are cheap” theme, playing up the importance of execution. But all of that sidesteps the negative effects of models based on outright copying:

Cloning doesn’t promote innovation; it decreases it.

Pinterest, Pinspire

Let me first say that not all copying is bad. Copying something and using it in a way that makes it recognizably different or better is often valuable—think of music remixes, parodies, or fan fiction. Isaac Newton himself said, “If I have seen further it is by standing on the shoulders of giants.” We don’t want to overly restrict this type of copying. But copying without any sort of improvement or modification hurts innovation because it doesn’t add anything to the original and takes away incentives to create the original in the first place. Xeroxing someone else’s book and profiting from it as if it were your own is harmful because it takes away that person’s incentive to come up with original ideas and is therefore not allowed. This is exactly the type of copying that clones use, and sooner or later it could have detrimental effects on our startup ecosystem by causing entrepreneurs to be less innovative.

It’s possible that clones might force startups like Airbnb to roll out new features more quickly than they would otherwise, but do you really think the Airbnb team is not already doing everything it can to go as fast as possible? Everyone knows that life at a startup is about going full-throttle while facing resource constraints and making tradeoffs—Airbnb is going to roll out features as fast as it can regardless of whether clones exist. So to say that clones will promote faster innovation doesn’t make much sense. If anything, it removes the incentives to put in the work necessary to be first. Why should a startup go to the trouble of running A/B tests, usability tests, market research, and focus groups to develop an optimal design or feature if someone else is simply going to take the end result and copy it over a weekend?

Healthy competition doesn’t mean more of the same thing.

Competition has several benefits including lower prices and greater consumer choice. But successful U.S. startups already face significant competition from others attempting to capitalize on the latest trend. How does adding a clone have a meaningful impact on competition? Consumer choice should be about actually having to decide between two different options, not two of the same exact thing. Pinterest vs. Fancy is the type of competition we need. Pinterest vs. Pinspire is the type that doesn’t offer much in terms of additional choice. Claims that clones add value through competition also seem much more disingenuous, given that their founders appear to build them only to sell them back to the original companies they were based on, often at a large premium (as an example, CityDeal, a Groupon clone, was acquired at a price rumored to be north of $100 million).

U.S. startups don’t have a fair chance to enter overseas markets first.

Proponents of clones say that consumers in international markets like Germany and China shouldn’t have to wait for U.S. companies to expand their services if someone else can provide them today. This argument would have a lot more weight if the lag time were measured in years or even months, but instead we’re talking about weeks. Given that imitators claim they can roll out a clone in less than six weeks, U.S. startups don’t stand a chance of beating their knock-offs to these new markets.Clones have the luxury of only having to focus on scaling quickly; innovators have to worry about both product development and scaling their business, making it more difficult for them to enter new markets as quickly as clones. The lead-time advantage that tech companies used to rely on has also been severely diminished due to cloud services like AWS, which have dramatically lowered the time and cost to get up and running.

And for those who think that clones are likely to be limited to super-successful American startups who have raised huge amounts of funding, think again. Just look at Wrapp, a Swedish gift-giving service that was just a few months old when Rocket launched a clone called DropGifts, despite the fact that Wrapp’s business model is untested and the team only raised a modest amount of funding. Clones are simply making it harder and more expensive for startups to launch in overseas markets. We might even see more U.S. startups staying in stealth longer until they can launch in several markets at once, meaning everyone would have to wait longer to benefit from new products/services.

Two potential solutions that give greater IP protection to U.S. startups would help improve the current clone problem:

International harmonization for enforcement against “close copies”

The recent escalation in international IP disputes has highlighted the problems with different enforcement standards. When you’re talking about trying to stop overseas clones, U.S. startups are basically out of luck since IP rules in other countries are either much more lenient or simply not enforced. The U.S. has recently been pushing for international IP harmonization, but unfortunately those efforts have been focused on treaties like ACTA which are designed to protect large content providers when they should instead try to address the issue of protecting U.S. entrepreneurship. There needs to be a mechanism/process in place for allowing U.S. startups to shut down overseas clones that are essentially “close copies” of the original.

Lead time protection for entering new markets

There should be some built-in time that is reserved for the original business to enter overseas markets before it can be copied. This could last just a few months and would at least protect against clones who seek to enter markets within weeks of a launch. After that period expires, clones could start copying but should be required to improve on the original in some way that differentiates it from the original.

Such a move would not be as radical as it sounds. In the 1980s, innovators in the semiconductor industry complained that it took significant time and money to develop new chip designs that were vulnerable to rapid, cheap cloning by competitors, especially foreign ones. This chip “piracy” threatened the ability of U.S. companies to recoup their investments. In response, Congress passed the Semiconductor Chip Protection Act (SCPA) which allowed competitors to use new, innovative designs if they improved on them enough to make something original. As a result, this promoted follow-on innovation, increased competition, and led to U.S. firms dominating the global chip industry.

Tech has remained resilient despite the broader economy’s up and downs these last few years in part because it’s such a hotbed of entrepreneurship. We should be concerned about the negative effects of startup “piracy” and the risks of deterring startup innovation. So much attention has been given to Hollywood lately about the threat of lost jobs and profits due to content piracy that we’re missing the possibility that the piracy that’s really going to have that type of impact is startup cloning. Unless we do something about it.

This is a guest post written by Wei Lien Dang, who is currently a JD/MBA student at Harvard University. He studies entrepreneurship, venture capital, and emerging issues in Internet law.

Cloned woman photo via Hasloo Group Production Studio/Shutterstock