product, communities devoted to physical products can range
had lost interest in working further on the program, and so his re-
from simple information exchange sites to sites well furnished
sponse to Raymond's suggestions was to offer his role to Raymond
with tools and infrastructure. Within sports, Franke and Shah's
so that he could evolve the popclient further as he chose.
study illustrates relatively simple community infrastructure. Thus,
380
Raymond accepted the role of popclient's maintainer, and over the
the boardercross community they studied consisted of semi-
next months he improved the program significantly in conjunction
professional athletes from all over the world who meet in up to 10
with advice and suggestions from other users. He carefully culti-
competitions a year in Europe, North America, and Japan. Franke
vated his more active beta list of popclient users by regularly com-
and Shah report that community members knew one another well,
municating with them via messages posted on an public electronic
and spent a considerable amount of time together.
They also
66
Democratizing Innovation
assisted one another in developing and modifying equipment for
aerodynamicist employed by an aerospace firm.
their sport. However, the community had no specialized sets of
tools to support joint innovation development.
Note that physical products are information products during the
386
design stage. In earlier days, information about an evolving de-
384
More complex communities devoted to the development of physical
sign was encoded on large sheets of paper, called blueprints, that
products often look similar to open source software development
could be copied and shared. The information on blueprints could
communities in terms of tools and infrastructure. As an example,
be understood and assessed by fellow designers, and could also
consider the recent formation of a community dedicated to the de-
be used by machinists to create the actual physical products repre-
velopment and diffusion of information regarding novel kitesurfing
sented. Today, designs for new products are commonly encoded
equipment. Kitesurfing is a water sport in which the user stands
in computer-aided design (CAD) files. These files can be created
on a special board, somewhat like a surfboard, and is pulled along
and seen as two-dimensional and three-dimensional renderings by
by holding onto a large, steerable kite. Equipment and technique
designers. The designs they contain can also be subjected to au-
have evolved to the point that kites can be guided both with and
tomated analysis by various engineering tools to determine, for ex-
against the wind by a skilled kitesurfer, and can lift rider and board
ample, whether they can stand up to stresses to which they will
many meters into the air for tens of seconds at a time.
be subjected. CAD files can then be downloaded to computer-
controlled fabrication machinery that will actually build the compo-
385
Designing kites for kitesurfing is a sophisticated undertaking,
nent parts of the design.
involving low-speed aerodynamical considerations that are not
yet well understood. Early kites for kitesurfing were developed
The example of the kitesurfing group's methods of sharing design
387
and built by user-enthusiasts who were inventing both kitesurfing
information illustrates the close relationship between information
techniques and kitesurfing equipment interdependently. In about
and physical products. Initially, users in the group exchanged de-
2001, Saul Griffith, an MIT PhD student with a long-time interest in
sign ideas by means of simple sketches transferred over the Inter-
kitesurfing and kite development, decided that kite-surfing would
net. Then group members learned that computerized cutters used
benefit from better online community interaction. Accordingly, he
by sail lofts to cut sails from large pieces of cloth are suited to cut-
created a site for the worldwide community of user-innovators
ting cloth for surfing kites. They also learned that sail lofts were
in kitesurfing (www.zeroprestige.com). Griffith began by posting
interested in their business. Accordingly, innovation group mem-
patterns for kites he had designed on the site and added helpful
bers began to exchange designs in the form of CAD files compat-
hints and tools for kite construction and use. Others were invited to
ible with sail lofts' cutting equipment. When a user was satisfied
download this information for free and to contribute their own if they
with a design, he would transmit the CAD file to a local sail loft for
wished. Soon other innovators started to post their own kite de-
cutting. The pieces were then sewn together by the user or sent to
signs, improved construction advice for novices, and sophisticated
a sewing facility for assembly. The total time required to convert an
design tools such as aerodynamics modeling software and rapid
information product into a physical one was less than a week, and
prototyping software. Some kitesurfers contributing innovations
the total cost of a finished kite made in this way was a few hundred
to the site had top-level technical skills; at least one was a skilled
dollars---much less than the price of a commercial kite.
67
Democratizing Innovation
388
User-to-User Assistance
Table 7.3 Innovators tended to be the ones assisting others with
394
their innovations (p < 0.0001).
389
Clearly, user innovation communities can offer sophisticated sup-
395
port to individual innovators in the form of tools. Users in these
innovation communities also tend to behave in a collaborative man-
Innovators
Non-innovators
Total
ner. That is, users not only distribute and evaluate completed inno-
Gave assistance
28
13
41
vations; they also volunteer other important services, such as as-
Did not give assistance
32
115
147
sisting one another in developing and applying innovations.
Total
60
128
390
Franke and Shah (2003) studied the frequency with which users in
four sporting communities assisted one another with innovations,
and found that such assistance was very common (table 7.2). They
Source: Franke and Shah 2003, table 7.
396
also found that those who assisted were significantly more likely
Such helping activity is clearly important to the value contributed
397
to be innovators themselves (table 7.3). The level of satisfaction
by innovation communities to community participants. Why peo-
reported by those assisted was very high. Seventy-nine percent
ple might voluntarily offer assistance is a subject of analysis. The
agreed strongly with the statement “If I had a similar problem I
answers are not fully in, but the mysteries lessen as the research
would ask the same people again.” Jeppesen (2005) similarly found
progresses. An answer that appears to be emerging is that there
extensive user-to-user help being volunteered in the field of com-
are private benefits to assistance providers, just as there are for
puter gaming.
those who freely reveal innovations (Lakhani and von Hippel 2003).
391
Table 7.2 Number of people from whom innovators received as-
In other words, provision of free assistance may be explicable in
sistance.
terms of the private-collective model of innovation-related incen-
392
tives discussed earlier.
Number of people
Number of cases
Percentage
0
0
0
1
3
6
2
14
26
3--5
25
47
6--10
8
15
> 10
3
6
Total
53
100
393
Source: Franke and Shah 2003, table 4.
68
Democratizing Innovation
398
8 Adapting Policy to User Innovation
and Wagner (1975) found the overall probability of success for
new industrial products to be only 27 percent. Elrod and Kelman
399
Government policy makers generally wish to encourage activities
(1987) found an overall probability of success of 26 percent for con-
that increase social welfare, and to discourage activities that re-
sumer products. Balachandra and Friar (1997), Poolton and Bar-
duce it. Therefore, it is important to ask about the social welfare
clay (1998), and Redmond (1995) found similarly high failure rates
effects of innovation by users. Henkel and von Hippel (2005) ex-
in new products commercialized. Although there clearly is some re-
plored this matter and concluded that social welfare is likely to be
cycling of knowledge from failed projects to successful ones, much
higher in a world in which both users and manufacturers innovate
of the investment in product development is highly specific. This
than in a world in which only manufacturers innovate.
high failure rate therefore represents a huge inefficiency in the con-
version of R&D investment to useful output, and a corresponding
400
In this chapter, I first explain that innovation by users complements
reduction in social welfare.
manufacturer innovation and can also be a source of success-
enhancing new product ideas for manufacturers. Next, I note that
Research indicates that the major reason for the commercial fail-
405
innovation by users does not exhibit several welfare-reducing ef-
ure of manufacturer-developed products is poor understanding of
fects associated with innovation by manufacturers. Finally, I eval-
users' needs by manufacturer-innovators. The landmark SAPPHO
uate the effects of public policies on user innovation, and suggest
study showed this in a very clear and convincing way. This study
modifications to those that---typically unintentionally---discriminate
was based on a sample of 31 product pairs. Members of each
against innovation by users.
pair were selected to address the same function and market. (For
example, one pair consisted of two “roundness meters,” each de-
401
Social Welfare Effects of User Innovation
veloped by a separate company.) One member of each pair was
402
Social welfare functions are used in welfare economics to provide
a commercial success (which showed that there was a market for
a measure of the material welfare of society, using economic vari-
the product type); the other was a commercial failure. The devel-
ables as inputs. A social welfare function can be designed to ex-
opment process for each successful and failing product was then
press many social goals, ranging from population life expectancies
studied in detail. The primary factor found to distinguish success
to income distributions. Much of the literature on product diversity,
from failure was that a deeper understanding of the market and
innovation, and social welfare evaluates the impact of economic
the need was associated with successful projects (Achilladelis et
phenomena and policy on social welfare from the perspective of
al. 1971; Rothwell et al. 1974). A study by Mansfield and Wagner
total income of a society without regard to how that income is dis-
(1975) came to the same conclusion. More recent studies of in-
tributed. We will take that viewpoint here.
formation stickiness and the resulting asymmetries of information
held by users and manufacturers, discussed in chapter 3, support
403
User
Innovation
Improves
Manufacturers'
Success
the reasonableness of this general finding. Users are the genera-
Rates
tors of information regarding their needs. The decline in accuracy
404
It is striking that most new products developed and introduced to
and completeness of need information after transfer from user to
the market by manufacturers are commercial failures. Mansfield
manufacturer is likely to be substantial because important elements
69
Democratizing Innovation
of this information are likely to be sticky (von Hippel 1994; Ogawa
of surgical equipment and coming upon prototype equipment de-
1998).
veloped by surgeons need not understand precisely why the in-
novators want this product or even precisely how it is used; the
406
Innovations developed by users can improve manufacturers' infor-
manufacturer need only understand that many surgeons appear
mation on users' needs and so improve their new product introduc-
willing to pay for it and then reproduce the important features of
tion success rates. Recall from previous chapters that innovation
the user-developed prototypes in a commercial product.
by users is concentrated among lead users. These lead users tend,
as we have seen, to develop functionally novel products and prod-
Observation of innovation by lead users and adoption by follow-
408
uct modifications addressing their own needs at the leading edge of
on users also can give manufacturers a better understanding of
markets where potential sales are both small and uncertain. Manu-
the size of the potential market. Projections of product sales have
facturers, in contrast, have poorer information on users' needs and
been shown to be much more accurate when they are based on
use contexts, and will prefer to manufacture innovations for larger,
actual customer behavior than when they are based on potential
more certain markets. In the short term, therefore, user innova-
buyers' pre-use expectations. Monitoring of field use of user-built
tions will tend to complement rather than substitute for products
prototypes and of their adoption by other users can give manufac-
developed by manufacturers. In the longer term, the market as a
turers rich data on precisely these matters and so should improve
whole catches up to the needs that motivated the lead user devel-
manufacturer's commercial success. In net, user innovation helps
opments, and manufacturers will begin to find production of similar
to reduce information asymmetries between users and manufactur-
innovations to be commercially attractive. At that point, innovations
ers and so increases the efficiency of the innovation process.
by lead users can provide very useful information to manufacturers
User Innovation and Provisioning Biases
409
that they would not otherwise have.
The economic literature on the impact of innovation on social wel-
410
407
As lead users develop and test their solutions in their own use en-
fare generally seeks to understand effects that might induce society
vironments, they learn more about the real nature of their needs.
to create too many product variations (overprovisioning) or too few
They then often freely reveal information about their innovations.
(underprovisioning) from the viewpoint of net social economic in-
Other users then may adopt the innovations, comment on them,
come (Chamberlin 1950). Greater variety of products available for
modify and improve them, and freely reveal what they have done
purchase is assumed to be desirable, in that it enables consumers
in turn. All of this freely revealed activity by lead users offers man-
to get more precisely what they want and/or to own a more diverse
ufacturers a great deal of useful information about both needs em-
array of products. However, increased product diversity comes at
bodied in solutions and about markets. Given access to a user-
a cost: smaller quantities of each product will be produced on aver-
developed prototype, manufacturers no longer need to understand
age. This in turn means that development-related and production-
users' needs very accurately and richly. Instead they have the
related economies of scale are likely to be less. The basic tradeoff
much easier task of replicating the function of user prototypes that
between variety and cost is what creates the possibility of overpro-
users have already demonstrated are responsive to their needs.
visioning or underprovisioning product variety. Innovations such
For example, a manufacturer seeking to commercialize a new type
as flexible manufacturing may reduce fixed costs associated with
70
Democratizing Innovation
increased diversity and so shift the optimal degree of diversity up-
innovations. One of these was the effect of reduced pricing power
ward. Nonetheless, the conflict still persists.
on manufacturers that create “platform” products. Often, a manu-
facturer of such a product will want to sell the platform---a razor, an
411
Henkel and I studied the welfare impact of adding users as a source
ink-jet printer, a video-game player---at a low margin or a loss, and
of innovation to existing analyses of product diversity, innovation,
then price necessary add-ons (razor blades, ink cartridges, video
and social welfare. Existing models uniformly contained the as-
games) at a much higher margin. If the possibility of freely revealed
sumption that new products and services were supplied to the
add-ons developed by users makes development of a platform un-
economy by manufacturers only. We found that the addition of
profitable for a manufacturer, social welfare can thereby be re-
innovation by users to these analyses largely avoids the welfare-
duced. However, it is only the razor-vs.-blade pricing scheme that
reducing biases that had been identified. For example, consider
may become unprofitable. Indeed, if the manufacturer makes posi-
“business stealing” (Spence 1976). This term refers to the fact that
tive margins on the platform, then the availability of user-developed
commercial manufacturers benefit by diverting business from their
add-ons can have a positive effect: it can increase the value of
competitors. Since they do not take this negative externality into
the platform to users, and so allow manufacturers to charge higher
account, their private gain from introducing new products exceeds
margins on it and/or sell more units. Jeppesen (2004) finds that
society's total gain, tilting the balance toward overprovision of vari-
this is in fact the outcome when users introduce free game modifi-
ety. In contrast, a freely revealed user innovation may also reduce
cations (called mods) operating on proprietary game software plat-
incumbents' business, but not to the innovator's benefit. Hence,
form products (called engines) sold by game manufacturers. Even
innovation incentives are not socially excessive.
though the game manufacturers also sell mods commercially that
412
Freely revealed innovations by users are also likely to reduce dead-
compete with free user mods, many provide active support for the
weight loss caused by pricing of products above their marginal
development and diffusion of user mods built on their proprietary
costs. (Deadweight loss is a reduction in social welfare that oc-
game engines, because they find that the net result is increased
curs when goods are sold at a price above their marginal cost of
sales and profits.
production.) When users make information about their innovations
available for free, and if the marginal cost of revealing that informa-
Public Policy Choices
415
tion is zero, an imitator only has to bear the cost of adoption. This
is statically efficient. The availability of free user innovations can
If innovation by users is welfare enhancing and is also significant
416
also induce sellers of competing commercial offerings to reduce
in amount and value, then it makes sense to consider the effects
their prices, thus indirectly leading to another reduction in dead-
of public policy on user innovation. An important first step would
weight loss.
be to collect better data. Currently, much innovation by users--
-which may in aggregate turn out to be a very large fraction of
413
Reducing prices toward marginal costs can also reduce incentives
total economic investment in innovation--- goes uncounted or un-
to over-provision variety (Tirole 1988).
dercounted. Thus, innovation effort that is volunteered by users,
414
Henkel and I also explored a few special situations where social
as is the case with many contributions to open source software,
welfare might be reduced by the availability of freely revealed user
is currently not recorded by governmental statistical offices. This
71
Democratizing Innovation
is also the case for user innovation that is integrated with prod-
from freely revealing what they know.
uct and service production. For example, much process innova-
These findings show that the characteristics of present-day intel-
tion by manufacturers occurs on the factory floor as they produce
420
lectual property regimes as actually experienced by innovators are
goods and simultaneously learn how to improve their production
far from the expectations of theorists and policy makers. The fun-
processes. Similarly, many important innovations developed by
damental reason that societies elect to grant intellectual property
surgeons are woven into learning by doing as they deliver services
rights to innovators is to increase private investment in innovation.
to patients.
At the same time, economists have long known that there will be so-
417
Next, it will be important to review innovation-related public poli-
cial welfare losses associated with these grants: owners of intellec-
cies to identify and correct biases with respect to sources of in-
tual property will generally restrict the use of their legally protected
novation. On a level playing field, users will become a steadily
information in order to increase private profits. In other words, in-
more important source of innovation, and will increasingly substi-