Ideas for Leaders #114

What to Learn from Pirates

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Key Concept

Pirate companies may be viewed by ‘legitimate’ business as cheaters and rogues, but research by Professor Jean-Philippe Vergne of the Richard Ivey School of Business in London, Ontario shows that pirates are often innovators who fill gaps or create new business models that better fit the current and future challenges of an industry.

Idea Summary

For as long as capitalism has existed, there have been pirate organizations that have refused to play by the rules and standards set by the state and the ‘legitimate’ business world. Traditionally, these pirates have been viewed as rogues and cheaters who deserve the same fate — or at least its economic equivalent — as their namesake of the high seas: immediate disarming and destruction.

Take Napster, for example, the pioneering online company that enabled the file sharing of individual songs. Napster operated without regard to copyright laws, and after two years of legal challenges from individual artists, major music companies and the Recording Industry Association of America, Napster filed for bankruptcy. Napster, however, had introduced a new concept for music consumers — buying one song at a time — and time has proven that this was one genie that music industry powers could not put back in the bottle. Napster did not play by the rules, but it revealed a path to a completely new business model for the music industry. This path would lead to a massive shift in power from the music industry old guard — the major music labels who benefitted from the old business model that required consumers to buy a 12-song album to get the two songs they really liked — to innovative newcomers to the industry, notably Apple and its iTunes. 

Napster exemplifies the two central points that Vergne and his colleagues discovered in their research:

  • Pirates are pioneers in challenging the stranglehold of monopolies. (Vergne will point out that even the peg-legged, skull-and-crossbones pirates of the high seas were essentially capitalists challenging the ocean monopolies of the various East India companies.)
  • Pirates are innovators who lead the way to the future.

Business Application

Vergne is not a historian. His goal is not to reform the reputation of past pirates, but to show how today’s business leaders can benefit from the insight and innovation of these rogue capitalists. According to Vergne, there are specific and important lessons to draw from the presence of pirates in your industry.

First, are industry norms adding value to society, or just benefiting the entrenched incumbents? Monopolies can impose the rules they want on society… until pirates who refuse to play by those rules come along to create havoc. The fact is that sustainable profits are only possible in industries whose norms are acceptable to society. In the long run, might does not make right.

Second, what are you doing wrong? If a new business model created by rogues is having a positive response from customers, established companies in the targeted industry should take a long look at their own business models. Is your model truly the best for your customers? Talk to your enemies, Vergne suggests, instead of having them arrested.

Third, don’t sue your customers. That has been the shortsighted response from a number of companies targeted by pirates. These companies insist their customers play by their rules, even if those rules are not made in the customers’ best interests.

Fourth, sympathize with the devil (and do not be evil). Alliances, even temporary, with innovative pirates can push the industry forward to the benefit of all. Where would iTunes be if the recording industry, now dominated by a computer company, had allied itself with Napster instead of launching a take-no-prisoners fight with the pioneering company?

Fifth, don’t slow down progress. Keeping a lock on your knowledge will slow down the diffusion of that knowledge and innovation to the rest of the industry. But does the proprietary strategy (think Blackberry) work better than the open-source strategy (think Android)?

In short, shutting down innovative, successful pirates is rarely successful, but even if it is, the victorious incumbents have only swept under the rug the serious inherent problems in the industry revealed by the pirates. And those inherent problems are not going to stay hidden forever.

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Authors

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Source

Idea conceived

  • 2013

Idea posted

  • March 2013

DOI number

10.13007/114

Subject

Real Time Analytics