What can we learn from stories such as these? Magicians need protection, but not the sort that legal rules against copying are likely to provide. Magicians’ social norms provide a sort of “super-trade-secret” protection, where magicians are subject to community sanction for disclosing secrets in situations that the formal law would ignore. Exposing tricks is rarely against the law, yet the norms system punishes those who do so. And while the law does not distinguish between sharing with fellow magicians and with ordinary people, the norms system treats the two as entirely different.
And like comedy, the world of magic offers some important lessons about innovation. Social norms can serve as an alternative or supplement to legal protection, especially when legal rules are costly or cumbersome to use. And these norms can evolve, as the story of comedy shows. Is a private, norms-based system preferable to a legal system of copyright, patent, and trade secret rules? This question is impossible to answer as a general matter. Each system comes with its own costs and benefits. On the one hand, the norms system is cheap to enforce and appears to incentivize plenty of innovation. We don’t lack for comedy or magic today, either in terms of quantity or variety. But on the other hand, the system presents the danger of mob justice (including gossip and the inability to appeal), does not recognize the full range of forms of ownership and transfer found in the formal law, and lacks a clear fair use standard and reasonable time limitations on the right of ownership.
Of course, all weaknesses are relative. Ordinary IP law offers comedians and magicians little help, and it is unclear whether rewriting legal rules would be possible. More to the point, it does not seem necessary to rewrite the legal rules to better serve comedians and magicians: they are thriving without it.
4
FOOTBALL, FONTS, FINANCE, AND FEIST
In 1950, 20-year-old John Bogle was working late in the Princeton University library researching his senior thesis in economics. Bogle was interested in the growing investment management industry. In particular, he wanted to understand whether people who trusted their money to mutual funds run by professional fund managers were making a good decision. Mutual fund managers charged high fees for their investment funds. Were they worth it? Bogle wondered.
To find the answer, he combed through price reports for hundreds of funds. What Bogle found surprised him. It wasn’t just that actively managed mutual funds were failing to beat the market by enough to justify their managers’ high fees. They were failing, on average, to beat the market at all. Investors would be better off, Bogle argued in his thesis, titled Mutual Funds Can Make No Claim to Superiority over the Market Averages, if they could find a low-cost way simply to mimic the market’s return.
Bogle’s interest in investing, and his skepticism about Wall Street, started in his youth. His father was ruined in the stock market crash of 1929 and was forced to sell the family home. Bogle has said that this experience made him a financial conservative, a perspective that fueled his skepticism about whether actively managed mutual funds delivered for their investors.
Bogle’s senior thesis earned him an A+. It also caught the attention of Walter Morgan, the head of the Philadelphia-based Wellington Management Corporation, then, as now, a leading investment management company. Morgan hired Bogle right out of Princeton in 1951. Bogle rose through the ranks and eventually was made head of the firm, but was fired in 1974 following a number of years of below-par performance at Wellington’s actively managed funds and a trouble-plagued merger with a Boston-based rival.
Finding himself out of a job in his mid-40s, Bogle picked up where he’d left off as a Princeton senior. He decided to put the ideas in his senior thesis into practice. Immediately after his firing from Wellington in 1974, Bogle founded The Vanguard Group. Vanguard’s initial business was providing administrative services to Bogle’s old firm, Wellington. But by 1976, Vanguard had introduced its first index fund, the Standard and Poor’s 500 stock index.
Veteran investors scoffed, calling the fund “Bogle’s folly” and refusing to believe that Americans could be happy with investment returns that were purposefully aimed to achieve the market’s average return. They were quickly proven wrong. The Vanguard Group, which started with a paltry $11 million in investment, grew explosively on the wide appeal of its low-cost index funds. Vanguard’s flagship 500 Index fund crossed the $100 billion milestone in November 1999, and surpassed the actively managed Magellan fund in 2000 to become the largest mutual fund in existence.1
Vanguard itself is now the largest mutual fund company in the United States. And the firm is not just big and rich, it is also innovative. Vanguard was the first firm to introduce bond market index funds, and the first to offer stock market index funds aimed at stocks of particular market capitalization (i.e., small-cap or large-cap stocks), and particular profiles (i.e., value stocks vs. growth stocks). Today these are commonplace ways of structuring mutual funds that investors take for granted. When the new index funds were introduced, however, there was widespread criticism from Wall Street experts. Yet in each case there turned out to be a sizable market for Vanguard’s innovations.
John Bogle never tried to patent the idea of the index fund. Even if he had tried, he almost certainly would have failed: at the time the index fund was invented, most courts held that new methods of running a business were not patentable. The idea of a mutual fund that holds a representative index of stocks on behalf of investors would have been treated as an unpatentable business method.
In the years since, business methods have become patentable. At the time Bogle introduced the index fund, however, competitors were perfectly free to copy his idea. They didn’t do so right away. Vanguard’s first index fund competitor, the Wells Fargo Stagecoach Corporate Stock Fund, arrived only seven years later.
Why did Wall Street not copy Bogle’s innovation, even as Vanguard’s business boomed? Perhaps because the investment managers who run actively managed mutual funds saw little upside. Index funds don’t require much management—that’s the whole point—and therefore they limit the amount of money that can be made from investors in the form of management fees. (Unless of course the fund grows to be enormous, as Vanguard’s ultimately did.) As clients flocked to Vanguard’s funds, though, Wall Street’s resistance broke down. In the 1980s, fund giant Fidelity introduced index funds, and by 1990, a number of smaller competitors had followed suit. By the end of the ’90s, there were more than 270 index funds competing in the market, 40 of which were benchmarked to the S&P 500, exactly as Bogle’s had been almost 30 years earlier. By 2001, over 400 index funds were in existence, and today, there are more than a thousand.
So John Bogle invented the index fund, but the absence of patents meant that Vanguard’s rivals were free to copy Bogle’s innovation. And eventually they did. This was a smart move for Vanguard’s rivals, who got to market their own version of an investment product that people wanted. This was also a great development for consumers. Many people are locked into employer-administered retirement accounts that force them to use funds from companies other than Vanguard. Only after the widespread imitation of index funds were these people able to get the same access to low-cost index funds that Vanguard had been alone in providing for years.
And yet, here’s the puzzle: even though any firm is free to market index funds, and many dozens do, Vanguard is today still by far the biggest provider of index funds. The firm has done very well from its innovation. And even in the face of widespread copying of its central innovation, it has managed to stay on top.
Vanguard is not an isolated example. Like fashion, food, and stand-up comedy, finance is an innovative industry that operates with a surprisingly limited focus on intellectual property protection. In this chapter, we briefly look at finance, and we also present a number of snapshots of other creative endeavors in which copying is common and, for the most part, legal. Each has its own story, its own creative culture, and its own way of maintaining that creativity despite copying. We will sketch out the
basics of these industries and show how they add to our understanding of innovation. Along the way, we will explore the importance of a key aspect of the creativity-copying relationship: tweaking, or the freedom to rework and refine an innovation into something bigger and better.
We will start with football, which has a rich history of innovation without the use of patents, copyrights, or any other form of legal protection. We’ll then move on to the very different world of typefaces—or, in more modern argot, fonts. The shapes of letters are not copyrightable, and for that reason, font designers cannot prevent rivals from copying their work. And yet production of new fonts has boomed. We’ll then return to where we started—with innovation in the financial services industry. As it turns out, John Bogle’s story is not unique. The financial services industry has a long record of innovating despite imitation. We’ll examine how. We finish with a quick look at databases. In a landmark case called Feist, the Supreme Court held that facts, including facts collected in databases, could be freely copied. Immediately thereafter, the European Union went the other way and banned the copying of databases. And yet since the European rule went in effect almost two decades ago, the United States has increased its lead over Europe in the number and value of databases produced. How did this happen?
Each of these industries is different from the others. Finance is an economic powerhouse; databases are big and growing; football is smaller but still quite significant economically, and fonts are a tiny market. The four differ in many other (and obvious) ways. But each tells us something about the variety of ways in which creative cultures can be organized to help innovation co-exist with and even benefit from imitation.
FOOTBALL: INNOVATION AND THE I-BONE
Football in the late 19th and early 20th centuries was a pure running game—big running backs bashing their way through a scrum of defensive linemen. And in an era where players wore little protective equipment, the results were not pretty. As we noted in the Introduction to this book, 18 college football players were killed in 1905, and many more seriously injured. (Football was predominantly a college game in those days, and of course college football remains hugely important today.) The national outcry over gridiron carnage led the White House to intervene, resulting in the formation of a college cartel that would eventually become the National Collegiate Athletic Association, or NCAA.* Perhaps of equal importance, however, the outcry led to a rethinking of the rules of football. The most noteworthy change was the introduction of the forward pass.
The great allure of the pass was that it was thought to be less dangerous to players than the run. Yet it had an effect on the game that went far beyond safety. The pass catalyzed a process of change that continues today. It made football a much more complex and interesting game, with an enormous variety of new plays and formations. And over time the importance of passing has only grown, to the point that few teams succeed without a strong passing game.
Some stats from the first 11 games of the 2011 National Football League (NFL) season make the point. During that period, the Jacksonville Jaguars went an unimpressive 3-8. The Jaguars were simultaneously the worst passing team in football and one of the better teams at the run (number 12 of 32). Yet they gained more yardage passing (1,444) than running (1,306). And those figures underplay the value of the pass to even teams with a very weak passing offense. The Jaguars gained 5.2 yards per passing attempt (pretty anemic actually—good passing teams average over 7 yards) versus only 3.8 for the run. In a game of inches, that’s a big difference. The fundamental problem that keeps the Jaguars from scoring more points is that they are so bad at passing the ball.*
Passing is critical today, and has been for a long time. As football shifted its offensive focus from running to passing, teams developed an array of new plays and formations. In turn, defenses mutated to counter the aerial game. The result was a long-standing dynamic of innovative offensive strategies and defensive counterstrategies that has continually renewed the game. No other major sport has changed as profoundly or frequently as has football. The closest baseball comes is the designated hitter rule; in basketball, the shot clock and the three-point shot. These are important innovations and certainly controversial in some quarters. But none transformed their respective games as much as passing transformed football. Forward passing added a range of complexities to the gridiron. The result has been a continuous wave of innovation aimed at effectively deploying, and countering, the ability to pass the ball.
In this chapter we are interested in how this innovation occurs, but also in how it survives the inevitable copying that ensues. Football plays and formations, like most everything in this book, are not covered by copyright or patent law. Not that some haven’t tried: in the 1980s James R. Smith applied for a copyright on his “I-bone” offensive formation. We can find no record of a Copyright Office registration (although they did grant a copyright to a book describing the I-bone). While, as we will explain in a moment, it might be possible in theory to copyright a formation, as a practical matter copying is free and easy in football. Nothing stops another coach or team from imitating a great innovation on the field. But at the same time, that prospect doesn’t stop great innovations from being introduced.
Let’s take a quick look at a few of the more famous examples:
The West Coast Offense. The West Coast Offense, which relied on quick, short passes to control the ball and gain incremental yardage, was the brainchild of Bill Walsh, a three-time Super Bowl winner as head coach of the San Francisco 49ers and a man players referred to as “The Genius.” Walsh formulated the West Coast offense when he was offensive coordinator for the Cincinnati Bengals, which, in the late 1960s, were a recently formed and hapless NFL expansion team. He was one of the first to really understand how the short passing strategy could reshape the game.
In an interview given to Football Digest not long before being diagnosed with the leukemia that would eventually end his life, Walsh described how the West Coast Offense was born. The Bengals, he said, were an
expansion franchise that just didn’t have near the talent to compete. That was probably the worst-stocked franchise in the history of the NFL. So in putting the team together, I personally was trying to find a way we could compete. The best possible way… would be a team that could make as many first downs as possible in a contest and control the football. We couldn’t control the football with the run; teams were just too strong. So it had to be the forward pass, and obviously it had to be a high-percentage, short, controlled passing game. So through a series of formation-changing and timed passes—using all eligible receivers, especially the fullback—we were able to put together an offense and develop it over a period of time. In the process, we managed to win our share.2
Walsh’s new approach did more than win a reasonable share; when used by the 49ers and Joe Montana it led to three Super Bowl victories. Still, the West Coast Offense was not universally lauded; football traditionalists saw it as a cheap trick. As Walsh told Football Digest, “The old-line NFL people called it a nickel-and-dime offense. They, in a sense, had disregard and contempt for it, but whenever they played us, they had to deal with it.”3 Eventually, the West Coast’s advantages were recognized—and imitated—by Mike Holmgren and the Green Bay Packers, Jon Gruden and the Philadelphia Eagles, and many others.
The Zone Blitz. Once the West Coast Offense proved its mettle on the field, it began to spread around the NFL. Defenses, accustomed to seeing offenses that relied on the run most of the time, were ill-prepared to deal with an attack based mostly in short passes. They had to adapt. One particularly successful adaptation was the Zone Blitz—a defensive innovation perfected by Dick LeBeau during his mid-80s stint as defensive coordinator of the same Cincinnati Bengals franchise that had been the platform for Walsh’s offensive ideas, and originated by the early ’70s Miami Dolphins under Bill Arnsbarger.
LeBeau’s aim was to disrupt the quick, short passes of the West Coast Offense by increasing pressure on the quarterb
ack while still covering receivers. He did this by focusing on cornerbacks capable of fulfilling demanding man-to-man coverage assignments, and by using a defensive lineman or a linebacker to play a shallow zone defense. He would then send a fast defensive player after the quarterback. The problem for the offense was picking up where the blitz was coming from. The result was a potent counterstrategy to the West Coast attack.
The No-Huddle Offense. As we noted in the introduction, in 1989, Sam Wyche, then head coach of the Cincinnati Bengals (the Bengals again!) pioneered the use of the “hurry-up” offense during the entire game. Known as the “No Huddle,” it worked exactly as it sounds—Wyche’s Bengals rapidly ran plays, confusing and tiring the larger, less mobile players on the opposing defense. The strategy was very effective, but equally controversial. It was first denounced as cheating by Buffalo Bills coach Marv Levy, among others. But Levy’s Bills soon saw the light and ran the no-huddle offense themselves—and went on to play in four straight Super Bowls.
The Spread Offense. Until he lost his job in a scandal involving mistreatment of an injured player, Mike Leach of the Texas Tech Red Raiders ran perhaps the most consistently innovative offense in college football. Leach’s principal innovation was the spread—an offensive system that throws (both short passes and long) on almost every down, that uses every eligible receiver, and that implements a limited number of plays run out of a variety of formations in which the offensive linemen spread out across the field. The result is a defense that is both confused (so many receivers!) and tired from covering an offense spread over the entire field. Leach’s Texas Tech teams, long treated as also-rans in a conference dominated by powerhouses like Texas, Oklahoma, and Texas A&M, won a disproportionate number of games despite their inability to compete with better known rivals for the most talented players.
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