The role of consumer preference development in incremental innovation: How diamond multimedia helped create the iPod

Texas Law Review

Volumn 85, Issue 6, 2007, Pages 1553-1577

  Peterson, William R ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

EID: 34547815054     PISSN: 00404411     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (162)

1. Mintel Reports, Emerging Technologies: MP3 Players - US - September 2004 - Market Size & Trends (2004), http://academic.mintel.com/ (follow "reports" tab; then follow "Mintel Reports: USA" hyperlink; then follow "Electronics" hyperlink; then follow "Emerging Technologies: MP3 Players - US - September 2004" hyperlink; then follow "Market Size & Trends" hyperlink).
2. Mintel Reports, MP3 Players and Other Portable Audio Players - US - June 2006 - Market Segmentation (2006), http://academic.mintel.com/ (follow "reports" tab; then follow "Mintel Reports: USA" hyperlink; then follow "Electronics" hyperlink; then follow "MP3 Players and Other Portable Audio Players - US - June 2006" hyperlink; then follow "Market Segmentation" hyperlink); U.S. Digital Music Player Sales, by Share, 2005-06 (Sept. 18, 2006), http://academic.mintel.com/ (follow "search" tab; search for "digital music player sales" in "News and Other Databases"; then follow "2006-09-18 U.S. digital music player sales, by share, 2005-06" hyperlink).
3. See John Lobato, Paying for the Sins of Their Users: Liability and Growing Uncertainty in a Digital Age: Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 125 S. Ct. 2764 (2005), 29 HARV. J.L. & PUB. POL'Y 357, 369-71 (2005) (noting the Rio as a "novel audio tool" that initially prompted lawsuits from the record companies).
4. Rick LePage, Five Reasons the iPod Succeeded, PLAYLIST, Oct. 22, 2006, http://playlistmag.com/features/2006/10/ipodfive/index.php.
5. See JOHN B. TAYLOR, ECONOMICS 412 (Bonnie Binket et al. eds., 2d ed. 1998) (defining externalities).
6. Id.
7. See Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP., Winter 1991, at 29, 29-30 (discussing technological research as a positive externality allowing incremental innovation).
8. CONSTANTINOS C. MARKIDES & PAUL A. GEROSKI, FAST SECOND: HOW SMART COMPANIES BYPASS RADICAL INNOVATION TO ENTER AND DOMINATE MARKETS 31 (2005).
9. Id. at 4-5.
10. Id. at 31.
11. See H. SCOTT BIERMAN & LUIS FERNANDEZ, GAME THEORY WITH ECONOMIC APPLICATIONS 83 (Denise Clinton et al. eds., 2d ed. 1998) (discussing two hypothetical situations where the parties involved consider only sum benefits between them, not externalities).
12. TAYLOR, supra note 5, at 186.
13. Supply-demand curves are graphed with price on the vertical axis and quantity on the horizontal axis. The curves illustrate the marginal supply and marginal demand as a function of quantity. The supply curve at quantity n shows the cost of producing the nth item. When those items are sold for a price greater than the cost of production, the difference between the sale price and the production cost for all goods sold forms the producer surplus. The demand curve can also be conceptualized as graphing the marginal benefit at a quantity, which should be equivalent to demand. Id. at 68-69.
14. Id. at 131-33, 165-66.
15. Id. at 412.
16. Id.
17. See BIERMAN & FERNANDEZ, supra note 11, at 83 (noting as part of a hypothetical that "if the . . . industry is very competitive, then the only way [a company] can stay in business in the long run is to ignore the cost of any resources for which the firm is not explicitly charged").
18. See, e.g., id. (discussing a paper mill that pollutes a river, damaging households downstream).
19. See Jeffrey K. MacKie-Mason & Hal R. Varian, Pricing the Internet 1 (Feb. 10, 1994) (unpublished manuscript), http://www-personal.umich. edu/~jmm/papers/Pricing_the_Internet.pdf (describing potential for congestion on the Internet).
20. Examples include Apple Computer's iTunes and Wal-Mart's Music Downloads. J. Cam Barker, Note, Grossly Excessive Penalties in the Battle Against Illegal File-Sharing: The Troubling Effects of Aggregating Minimum Statutory Damages for Copyright Infringement, 83 TEXAS L. REV. 525, 531 (2004).
21. See Kevin Werbach, Supercommons: Toward a Unified Theory of Wireless Communication, 82 TEXAS L. REV. 863, 907 (2004) (noting the sensitivity of streaming video to "jitter," the excessive loss of packets in transit).
22. The situation would be different if the user's contract with the Internet Service Provider charged based on the amount of bandwidth used, but almost all users currently pay a flat fee for unlimited Internet access. Richard C. Lee, Comment, Cyber Promotions, Inc. v. America Online, Inc., 13 BERKELEY TECH. L.J. 417, 426 (1998). Even then, extreme usage might result in the Internet Service Provider increasing the cost for all users, but ordinarily, use of bandwidth harming other users can be considered a negative externality.
23. See H. Michael Drumm, Note, Life After Napster: Will Its Successors Share Its Fate?, 5 TEX. REV. ENT. & SPORTS L. 157, 185 (2003) (discussing bandwidth limitations imposed by universities).
24. MacKie-Mason & Varian, supra note 19, at 24-26.
25. BILL GATES, NATHAN MYHRVOLD & PETER RINEARSON, THE ROAD AHEAD 52 (2d ed. 1996) [hereinafter GATES ET AL.].
26. Id. at 52, 54-55.
27. Id. at 54-56.
28. See id. at 56 (noting criticism of IBM for not keeping PC architecture proprietary).
29. This is an excellent example of a "network effect," where consumption of a good by one individual increases the marginal utility of the consumption of that good by others. The more consumers who buy IBM-compatible machines, the more software will be developed for the platform, so the more valuable IBM-compatible computers will be. For the importance of network effects to consumer preferences, see infra note 48 and accompanying text.
30. See GATES ET AL., supra note 25, at 56 (discussing competition faced by IBM due to its open architecture).
31. TAYLOR, supra note 5, at 415.
32. Scotchmer, supra note 7, at 31.
33. Id.
34. Id.
35. Id. at 30;
36. see TAYLOR, supra note 5, at 415 (discussing research as an externality).
37. William J. Carney, Defining the Corporate Constituency: Does Defining Constituencies Matter?, 59 U. CIN. L. REV. 385, 400 (1990) (emphasis added, footnote omitted).
38. Ted Hagelin, Valuation of Patent Licenses, 12 TEX. INTELL. PROP. L.J. 423, 430 (2004).
39. GATES ET AL., supra note 25, at 59.
40. Id.
41. This Note uses "more preferences" synonymously with "more useful preferences" and "more developed preferences." While "I guess I might buy one" might be as much of a preference as "I would be willing to spend $50 more if it were three pounds lighter," the latter is clearly far more useful when engaged in product design.
42. Jennifer Steinhauer, Heated Competition. Steaming Neighbors. This is Frozen Yogurt?, N.Y. TIMES, Feb. 21, 2007, at F1.
43. Id.
44. What this Note refers to as "preference development," Eric Goldman describes as the transformation of preferences from "latent" to "active" when discussing preference disclosure in the context of marketing. Eric Goldman, A Coasean Analysis of Marketing, 2006 WIS. L. REV. 1151, 1174.
45. Professor Goldman distinguishes between preferences imposed by external forces such as marketing and preferences intrinsic to consumers. According to his formulation, "so long as satisfaction of the preference creates positive utility for the consumer, the preference's source should be irrelevant." Id.
46. See HENRY CHESBROUGH, OPEN INNOVATION: THE NEW IMPERATIVE FOR CREATING AND PROFITING FROM TECHNOLOGY 55 (2006) (suggesting that "the most valid, most useful market research on future technologies and future market opportunities" comes from firms "selling real products to real customers, who pay with real money").
47. GATES ET AL., supra note 25, at 254-55.
48. GARY HAMEL & C.K. PRAHALAD, COMPETING FOR THE FUTURE 48 (paperback ed. 1996).
49. Zune.net | Beam Your Beats, http://www.zune.net/en-us/meetzune/ zunetozunesharing.htm.
50. GATES ET AL., supra note 25, at 58-59.
51. See supra note 47 and accompanying text.
52. See, e.g., Dan Tynan, The 25 Worst Tech Products of All Time, PC WORLD, May 26, 2006, http://www.pcworld.com/article/id, 125772-page,2-c,techindustrytrends/article.html.
53. CLAYTON M. CHRISTENSEN & MICHAEL E. RAYNOR, THE INNOVATOR'S SOLUTION 93 (2003);
54. see, e.g., Adi Gillat, Compulsory Licensing to Regulated Licensing: Effects on the Conflict Between Innovation and Access in the Pharmaceutical Industry, 58 FOOD & DRUG L.J. 711, 726 n.87 (2003) (mentioning the Segway Human Transporter as a potential replacement'for cars as the primary instrument of transportation).
55. Contrast the value of "I want my computer to have a graphical operating system" with "I want Microsoft Word to open documents in Print Layout instead of Normal Layout." Both statements have some value for all companies, but the former provides greater contribution to the product design of all companies.
56. See, e.g., GATES ET AL., supra note 25, at 58 (discussing the novelty and usefulness of a graphical operating system).
57. See Thomas S. Fletcher, Note, American Library Ass'n v. FCC: Charting the Future of Content Protection for Digital Television, 21 BERKELEY TECH. L.J. 613, 614 (2006) (discussing digital television).
58. Daniel Patrick Graham, Public Interest Regulation in the Digital Age, 11 COMMLAW CONSPECTUS 97, 114 (2003).
59. See Daniel E. Abrams, Comment, Personal Video Recorders, Emerging Technology and the Threat to Antiquate the Fair Use Doctrine, 15 ALB. L.J. SCI. & TECH. 127, 131-32, 137-39, 148 (2004) (discussing the potential for large-scale "time-shifting," which would cause television broadcast schedules to become largely irrelevant).
60. See id. at 148 (discussing how if time-shifting took hold, it would be irrelevant when broadcasters aired programs).
61. Scotchmer, supra note 7, at 31.
62. Id.
63. One could imagine a system designed to try to quantify these preferences. It might be based on repeated surveys asking consumers to identify desired features, degree of confidence in the desire, and degree of importance of the feature. This might serve to measure the state of the preferences at a given point in time, but since the development of preferences due to a single product occurs over time, attributing any changes in consumer preferences to a particular product would prove difficult at best.
64. E.g., Daphna Lewinsohn-Zamir, Consumer Preferences, Citizen Preferences, and the Provision of Public Goods, 108 YALE L.J. 377 (1998);
65. Daniel D. Polsby, Should Government Attempt to Influence Consumer Preference?, 23 HARV. J.L. & PUB. POL'Y 197 (1999).
66. E.g., MARKIDES & GEROSKI, supra note 8.
67. Id. at 4.
68. Id. at 21;
69. see CHRISTENSEN & RAYNOR, supra note 52, at 34 (defining "sustaining innovations" normally made by established companies as incremental improvements to improve product quality).
70. MARKIDES & GEROSKI, supra note 8, at 24-26.
71. Id.;
72. see CHRISTENSEN & RAYNOR, supra note 52, at 103 (describing the early challenge in emerging markets as "competing against nonconsumption").
73. MARKIDES & GEROSKI, supra note 8, at 24-25.
74. See Susan Nauss Exon, The Internet Meets Obi-Wan Kenobi in the Court of Next Resort, 8 B.U. J. SCI. & TECH. L. 1, 15-17 (2002) (discussing the potential use of holograms in a "cybercourt");
75. Susan Nauss Exon, A New Shoe Is Needed to Walk Through Cyberspace Jurisdiction, 11 ALB. L.J. SCI. & TECH. 1, 53 (2000) (same).
76. See James Bopp, Jr. & Daniel Avila, Perspectives on Cruzan: The Sirens' Lure of Invented Consent: A Critique of Autonomy-Based Surrogate Decisionmaking for Legally-Incapacitated Older Persons, 42 HASTINGS L.J. 779, 790 (1991) (noting the use of holographic messages in the film Star Wars and speculating on the role that holograms might play in surrogate decisionmaking to proponents of the invented consent theory).
77. See Susan L. Goldberg, A Cure for What Ails? Why the Medical Advocate Is Not the Answer to Problems in the Doctor-Patient Relationship, 1 WLDENER L. SYMP. J. 325, 338-39 (1996) (describing the holographic doctor featured on "Star Trek").
78. HAMEL & PRAHALAD, supra note 47, at 109.
79. MARKIDES & GEROSKI, supra note 8, at 9, 68-69.
80. Id. at 34-36.
81. Id. at 57.
82. Id. at 54.
83. Id. at 62.
84. HAMEL & PRAHALAD, supra note 47, at 48.
85. Modem information technology might speed this process of collecting consumer information and incorporating it into product design. See BILL GATES & COLLINS HEMINGWAY, BUSINESS @ THE SPEED OF THOUGHT: USING A DIGITAL NERVOUS SYSTEM 197-99 (1999) (noting Microsoft's use of electronic customer feedback systems).
86. Eliot Van Buskirk, Introducing the World's First MP3 Player, CNET, Jan. 21, 2005, http://reviews.cnet.com/4520-6450_7-5622055-1.html.
87. See Alex Allemann, Note, Manifestation of an AHRA Malfunction: The Uncertain Status of MP3 Under Recording Industry Association of America v. Diamond Multimedia Systems, Inc., 79 TEXAS L. REV. 189, 199-200 (2000) (mentioning that consumers were no longer limited to playing music files on a computer or by burning onto a compact disc).
88. Id. at 200 n.93.
89. Id.
90. See Mintel Reports, supra note 1.
91. Ian Fried, Apple's iPod Spurs Mixed Reactions, CNET NEWS.COM, Oct. 23, 2001, http://news.com.com/ Apples+iPod+spurs+mixed+reactions/2100-1040_3-274821.html.
92. Apple Computer, Inc., Identifying iPod Models, http://docs.info.apple. com/article.html?artnum=61688.
93. Press Release, Apple Computer, Inc., Apple Launches iTunes for Windows (Oct. 16, 2003), http://www.apple.com/pr/library/2003/oct/16itms.html.
94. See Sahana Murthy, Comment, Public Concern - A "Newsworthy" Exception to the Grant of Preliminary Injunctions in Trade Secret Cases, 36 GOLDEN GATE U. L. REV. 219, 219 (2006) (noting the "spectacular success" of the iPod).
95. Apple Computer Inc., Annual Report (Form 10-K), at 31 (Dec. 1, 2005), available at http://sec.gov/Archives/edgar/data/320193/ 000110465905058421/a05-20674_110k.htm.
96. See Mintel Reports, supra note 2.
97. Id. at 31;
98. Apple Computer Inc., Annual Report (Form 10-K), at 24 (Dec. 19, 2003), available at http://sec.gov/Archives/edgar/data/320193/ 000104746903041604/a2124888z10-k.htm;
99. see Mintel Reports, supra note 1;
100. Mintel Reports, supra note 2. Some data was unavailable, so U.S. iPod sales before 2005 were assumed to be 70.7% of worldwide sales (as they were in 2005).
101. LePage, supra note 4;
102. see Allison Linn, An Apple Milestone: 100 Million iPods Sold, MSNBC, Apr. 9, 2007, http://www.msnbc.msn.com/id/18021581/ ("Apple has, in just a few short years, played a major role in transforming a fringe technology into a mainstream phenomenon . . . . [E]xperts credit Apple with making the technology easy enough to appeal to a mass audience.").
103. Apple Computer Inc., supra note 89, at 31.
104. MARKIDES & GEROSKI, supra note 8, at 48.
105. Id. at 4;
106. see CLAYTON M. CHRISTENSEN, THE INNOVATOR'S DILEMMA: WHEN NEW TECHNOLOGIES CAUSE GREAT FIRMS TO FAIL 30-31 (1997) (discussing the failure of established companies due to disruptive technologies).
107. E.g., ALFRED P. SLOAN, JR., MY YEARS WITH GENERAL MOTORS 89 (John McDonald & Catharine Stevens eds., 2d ed. 1990) ("[H]owever sound the engine might have been in principle, it was not my policy then or at any time afterward to force on the divisions a thing of this kind against their judgment.");
108. see also CHRISTENSEN & RAYNOR, supra note 52, at 10 (noting that midlevel managers do not tend to support product concepts with uncertain markets). One might attribute the continuing success of Microsoft to attentiveness to new developments and market opportunities.
109. See GATES ET AL., supra note 25, at 69 ("We have to earn our leadership position every day. . . . [We] ask . . . 'Are we being critical enough of ourselves? Are we missing a new technology?'").
110. SLOAN, supra note 96, at 80.
111. See Ronald J. Mann, Do Patents Facilitate Financing in the Software Industry?, 83 TEXAS L. REV. 961, 974-75, 975 n.73 (2005) (describing venture capital firms as funding innovative, first-mover, start-up high-tech companies).
112. MARKIDES & GEROSKI, supra note 8, at 38-40.
113. See GATES ET AL., supra note 25, at 280 ("When hundreds of companies risk different approaches to discover the kinds and levels of demand, society gets to the right solutions a lot faster than it would with any form of central planning."). Analogous benefits of viewpoint diversity are found in many contexts.
114. See, e.g., David M. Peterson, Note, Do the Swift Boat Vets Need to MoveOn? The Role of 527s in Contemporary American Democracy, 84 TEXAS L. REV. 767, 790 (2006) (noting the importance of 527 organizations in "widen[ing] the discussion during campaigns and present[ing] the public with a variety of views").
115. MARKIDES & GEROSKI, supra note 8, at 57.
116. See Rochelle Dreyfuss, Protecting the Public Domain of Science: Has the Time for an Experimental Use Defense Arrived?, 46 ARIZ. L. REV. 457, 466 (2004) ("[Patentees] are free to decide that the best way to earn a reward is to block further work in their fields.").
117. TAYLOR, supra note 5, at 416.
118. Id. at 417.
119. Id. at 419.
120. See Jessica Owley Lippmann, The Emergence of Exacted Conservation Easements, 84 NEB. L. REV. 1043, 1050 (2006) (discussing the Endangered Species Act).
121. See Michael Klausner, Market Failure and Community Investment: A Market-Oriented Alternative to the Community Reinvestment Act, 143 U. PA. L. REV. 1561, 1580 (1995) (noting that the Community Reinvestment Act simply requires banks to issue loans in low-income communities, rather than attempting to internalize the positive externalities of such actions).
122. See Cass R. Sunstein, Television and the Public Interest, 88 CAL. L. REV. 499, 533-34 (2000) (noting that "compulsory disclosure of information can provide the simplest and most direct response to the relevant market failure").
123. TAYLOR, supra note 5, at 421.
124. Id.
125. Alex Stein, Of Two Wrongs That Make a Right: Two Paradoxes of the Evidence Law and Their Combined Economic Justification, 79 TEXAS L. REV. 1199, 1213-14 (2001) (describing the application of Pigovian principles to a tax on personal injury cases).
126. Henry E. Smith, Ambiguous Quality Changes from Taxes and Legal Rules, 67 U. CHI. L. REV. 647, 697-701 (2000) (discussing the difficulties in efficient use of subsidies).
127. See TAYLOR, supra note 5, at 417.
128. Id. at 418-19;
129. see Ronald H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1, 8 (1960).
130. TAYLOR, supra note 5, at 417-18.
131. Id. at 419;
132. see also Keith N. Hylton, Efficiency and Labor Law, 87 NW. U. L. REV. 471, 478 (1993) (hypothesizing that unions help solve the "free rider" problem associated with providing "public goods" in the workplace).
133. TAYLOR, supra note 5, at 406-07.
134. One could imagine circumstances in which this would not be the case: a firm might require that customers sign nondisclosure agreements preventing them from discussing their impressions of the product. Aside from the obvious unworkability of such agreements, the lost sales due to customers refusing to sign the agreements and the harms to advertising would seem to outweigh any benefits of denying this information to consumers. But consider the use of "beta" releases of software products, designed to allow a company to improve a product in response to market feedback before its widespread release. The purpose of nondisclosure agreements in beta releases seems more directed at preventing preliminary review of the product (which might reduce subsequent "buzz" at release) than on preventing competitors from using the increased preferences for their own product design.
135. See TAYLOR, supra note 5, at 407, 419 (discussing free rider problems).
136. Sunstein, supra note 108, at 516.
137. SUZANNE SCOTCHMER, INNOVATION AND INCENTIVES 34 (2004), In addition, consider that designing products to prevent reverse engineering also attempts to create excludability in the technology used in the product.
138. TAYLOR, supra note 5, at 408.
139. Given the current costs of intellectual property litigation, rigorous inspection of every ship coupled with long arguments about whether the pilot actually glanced at the lighthouse seems an appropriate analogy. LeRoy L. Kondo, Untangling the Tangled Web: Federal Court Reform Through Specialization for Internet Law and Other High Technology Cases, 2002 UCLA J.L. & TECH. 1, 66 ("Since intellectual property litigation costs - often measured in the millions of dollars - typically rank among the highest in corporate law, economy is considered lacking in this area of law.").
140. This suggests that one might differentiate between "voluntary" public goods, from which individuals can choose to exclude themselves - such as information or light from a lighthouse - and "involuntary" public goods, from which every individual must benefit - such as clean air or national defense. Through state action, every voluntary public good could be made excludable through prohibitions on and monitoring of its consumption, although the enforcement costs of such prohibitions might often outweigh any efficiency gained by doing so.
141. See Datamize, LLC v. Plumtree Software, Inc., 417 F.3d 1342, 1352 (Fed. Cir. 2005) (invalidating a patent for failure to clearly demark the scope of the claimed invention).
142. See CHRISTENSEN & RAYNOR, supra note 52, at 32 (arguing that in traditional markets, "the race entails making better products that can be sold for more money");
143. HAMEL & PRAHALAD, supra note 47, at 33 (noting that in existing markets, the "rules of competition" have already been written).
144. And, additionally, it is insignificant compared to the costs of product development.
145. MARKIDES & GEROSKI, supra note 8, at 50.
146. Id. at 44, 119-20.
147. But see CHRISTENSEN, supra note 95, at xx ("There is strong evidence showing that companies entering these emerging markets early have significant first-mover advantages. . . .").
148. HAMEL & PRAHALAD, supra note 47, at 197-98.
149. MARKIDES & GEROSKI, supra note 8, at 42.
150. See Lowell W. Busenitz & Jay B. Barney, Differences Between Entrepreneurs and Managers in Large Organizations: Biases and Heuristics in Strategic Decision-Making, 12 J. BUS. VENTURING 9, 14 (1997) (suggesting individuals most susceptible to decisionmaking biases are most likely to become entrepreneurs). Early entry into radically innovative markets may also provide entrepreneurs with psychic (non-economic) benefits, such as pride and prestige for working on cutting-edge technology.
151. GATES & HEMINGWAY, supra note 79, at 262.
152. Busenitz & Barney, supra note 132, at 15.
153. Id.
154. Id.
155. Leslie E. Palich & D. Ray Bagby, Using Cognitive Theory to Explain Entrepreneurial Risk-Taking: Challenging Conventional Wisdom, 10 J. BUS. VENTURING 425, 427 (1995).
156. Joseph Bankman, The Structure of Silicon Valley Start-Ups, 41 UCLA L. REV. 1737, 1765 (1994);
157. see CHRISTENSEN & RAYNOR, supra note 52, at 8 (mentioning an industry maxim that out of every ten investments, two will fail, six will barely survive, and two will "hit the home runs on which the success of the entire portfolio turns").
158. Bankman, supra note 138, at 1765.
159. Id. at 1764 (quoting an unnamed "prominent venture capitalist").
160. Victor Fleischer, The Rational Exuberance of Structuring Venture Capital Start-Ups, 57 TAX L. REV. 137, 151-52 (2003) (footnote omitted).
161. SCOTCHMER, supra note 121, at 41.
162. Id. at 42.