Does piracy lead to product abandonment or stimulate new product development?: Evidence from mobile platform‐based developer firms

• DOI: http://doi.org/10.1002/smj.3208
• Date: 01 December 2020
• Author: Lars Bo Jeppesen,Milan Miric
• Published date: 01 December 2020

RESEARCH ARTICLE

Does piracy lead to product abandonment or

stimulate new product development?: Evidence

from mobile platform-based developer firms

Milan Miric

1

| Lars Bo Jeppesen

2

1

University of Southern California,

Marshall School of Business, Los Angeles,

California

2

Copenhagen Business School,

Frederiksberg, Denmark

Correspondence

Milan Miric, University of Southern

California, Marshall School of Business,

Los Angeles, CA.

Email: mmiric@marshall.usc.edu

Abstract

Research Summary: With the growth of digital plat-

forms, understanding the role of property rights on

those platforms has become increasingly important.

Digital piracy, the unauthorized copying and distribu-

tion of digital products, is therefore an important stra-

tegic issue, both because of lost revenues and because it

is thought to decrease innovation. Yet, while the latter

effect is often argued, empirical evidence is limited. We

study whether piracy affects innovation and whether it

leads firms to shift to different types of innovations. By

studying a large piracy event in a mobile app market-

place, we find that piracy leads to a decrease in the

release of incremental innovations, such as bug fixes,

but does not decrease more substantial revisions. Addi-

tionally, it is associated with subsequent new product

development.

Managerial Abstract: For many platform companies,

a critical issue is understanding how piracy and imita-

tion should be regulated, motivated in part by a com-

mon narrative that piracy will eliminate innovation on

these platforms. The present article suggests that these

effects are slightly more nuanced. We find that piracy

does lead to a decline in incremental innovations, such

as bug fixes or appearance tweaks, but no discernible

decline in more major innovations, such as feature

updates or entirely new versions. This implies that

piracy can shape the type of innovation, potentially

Received: 12 June 2019 Revised: 23 April 2020 Accepted: 26 April 2020 Published on: 2 August 2020

DOI: 10.1002/smj.3208

Strat Mgmt J. 2020;41:2155–2184. wileyonlinelibrary.com/journal/smj © 2020 John Wiley & Sons, Ltd. 2155

leading to products that are less polished and refined

but not affecting the overall level of innovation.

KEYWORDS

digital innovation, digital piracy, mobile applications, new product

development, platforms

1|INTRODUCTION

For many modern digital platform companies, their success depends on being able to foster

innovation and attract and retain third parties to create complementary products (Eisenmann,

Parker, & Van Alstyne, 2011; Jacobides, Cennamo, & Gawer, 2018; McIntyre &

Srinivasan, 2013; Parker & Van Alstyne, 2017). A number of recent studies have sought to

understand the implications of various factors in shaping how these platform companies are

able to attract third parties and foster innovation (Boudreau & Jeppesen, 2015; Cennamo &

Santalo, 2013; Kapoor & Lee, 2013; Wen & Zhu, 2019). Property rights can play an important

role in encouraging innovation by providing innovators with exclusive control over the technol-

ogies they create (Teece, 1986). This can, in turn, allow firms to have a unique position relative

to their competitors and limit the threat of imitation by others in the marketplace, creating an

incentive for innovation. Yet, within many digital industries, questions remain whether prop-

erty rights are, in fact, effective at fostering innovation (Goldfarb, Greenstein, & Tucker, 2014;

Greenstein, Lerner, & Stern, 2013). One well-known case relates to digital piracy, the

unauthorized copying and distribution of digital products. While studies have established that

digital piracy may affect the revenues that firms capture (Rob & Waldfogel, 2007;

Waldfogel, 2012b), it remains an open question whether and how piracy influences subsequent

innovation.

One prominent narrative for how piracy influences innovation argues that the economic

losses from piracy diminish incentives for innovation. For instance, within the packaged soft-

ware industry, where piracy is said to account for more than $63 Bn in lost revenues annually,

leading firms have come out to warn against the economic consequences of piracy (BSA, 2016).

Autodesk argued that piracy “undermines the economy generally and software innovation in par-

ticular.”Similarly, the CEO of Adobe stated that Adobe may abandon support for Chinese lan-

guage versions of their software as a consequence of their products being pirated in China.

Even in the context of mobile platforms, where the platform owner has considerable discretion

regarding their policy to govern and control third-party software, piracy is argued to have a

huge negative effect on firm revenues. For instance, market research firms estimate that $17Bn

in revenues (approximately 14 Bn installs) have been lost as a result of software piracy on

mobile app markets.

1

This is also the narrative put forth to motivate why legislators need to reg-

ulate piracy (SIIA, 2018). Yet, while academic research has provided evidence that piracy

reduces the profits of firms (Athey & Stern, 2015; Novos & Waldman, 1984; Waldfogel, 2012a),

there is limited evidence that aligns with the narrative, suggesting that piracy does not necessar-

ily deter innovation or long-term innovation strategies. A number of studies have identified

benefits of piracy, particularly surrounding the growth of consumer awareness that occurs as a

1

Based on online report published by Koetsier (2018).

2156 MIRIC AND JEPPESEN