Lessons From The Dark Side Of Capitalism: How Pirates Help To Shape New Industries

Rather than being suspicious of pirates, business leaders should pay attention to the practices of pirate organizations.[1] Since the dawn of capitalism, piracy has pushed business into areas outside its normal boundaries, reshaping existing industries and giving birth to new ones. For instance, sea pirates fought the monopolies of the Indies companies in the 17th and 18th centuries and forced the state to recognize and enforce the freedom of the seas. This has dramatically affected the development of international trade. Similarly, pirate organizations operating in cyberspace and advocating for Net neutrality are shaping the future of the digital economy. So, if your business significantly depends on the Internet economy to generate revenues, you might want to know more about what cyberpirates are trying to achieve.

Challenging the state and its convenient monopolies
Many innovative business ideas were originally considered illegitimate by civil society or declared illegal by the state (or both). Until Napster triggered a massive overhaul of the music industry, it was uncommon for consumers to purchase music by the song. If you, as a consumer, wanted to acquire that one big hit song, you would often have to buy a 12-track album for $20 and spend a good deal of your listening time skipping the 11 tracks you didn’t like.

Distributing free software was not Bill Gates’ next big idea back in the 1990s, yet it became a key driver of growth in the software industry (e.g., think of mobile apps). And if you know people who spent time in the United Kingdom prior to 1967, ask them about radio broadcasting – well, ask them about the BBC actually, because back then it was the only radio station authorized by the British government to broadcast. But pirate radio changed the rules of the game and ended the BBC’s monopoly. Pirate organizations also played a role in ending Microsoft’s dominant position and in wiping out the comfortable monopoly of “The Majors” in the music industry.

Rather than posing a threat to capitalism, pirate organizations indicate those directions and sectors in which the economy is likely to move. So, instead of continuing to associate piracy with theft and vandalism, we should view pirate organizations as norm-generating entities that change the course of capitalism by redefining its rules. Who promoted the freedom of the seas in the 17th century against the state monopolies that claimed ownership rights on sea routes? Sea pirates. Who helped achieve the freedom of the airwaves against the state monopoly of the BBC in the United Kingdom? Pirate radio stations. And what exactly do cyberpirate organizations such as Wikileaks or Anonymous want today? They want cyberspace to be open, neutral, and respectful of privacy and treated as a common good of humankind – rather than as a territory to be divided up and conquered by competing nation-states.

By gaining a deeper understanding of what pirate organizations actually do, entrepreneurs can strategically understand where and how capitalism is going to change. Here’s a prediction: the space travel and space mining industries will be the next big thing a few decades from now. In 2012, Google founder Larry Page, Microsoft’s chief software engineer Charles Simonyi, and a few other investors announced their funding of Planetary Resources, a space exploration start-up whose purpose is mining natural resources from asteroids. The biggest risk underlying their enterprise is not technological, but normative.

How can a private organization legitimately claim ownership rights on asteroids’ underground resources? In the 17th century, the monopolistic East India companies claimed ownership rights on the sea routes they had discovered. But a few decades later, and after multiple piratical assaults, most of those routes were declared “international waters”, a common territory of humanity that cannot be appropriated by government or private organizations.

Planetary Resources, at this stage, is exploiting a normative loophole. The only existing rules that guide economic activity in outer space were set by the United Nations’ Outer Space Treaty (1967), which prevents “appropriation by claim of sovereignty” but remains silent regarding economic appropriation by private entities. If some organizations came to violate the expectations set in the Treaty about the need to consider celestial bodies as “common heritage of mankind”, we might witness the rise of activist organizations – literally, space pirates – which may attempt to change the rules of the game. This has happened before and in fact, has happened every time capitalism expanded into new territories (e.g., the high seas, the airwaves, cyberspace).

Defining the territory of pirate organizations
Pirate organizations appear at pivotal points in the history of capitalism: whenever and wherever there are moves into new territories, pirates emerge to challenge claims to monopolistic control of that territory. New territories do not yet have consensual rules, and with their discovery questions arise about legitimate use, control, ownership and sharing of the profits generated within the territory. Monopolies are centralized organizations controlled to a large extent by the sovereign, who they depend upon to sustain their privileges. Direct, centralized control of the territory by the sovereign makes monopolies convenient to establish the new norms in a partially uncharted territory: with monopolies, there are no third parties with whom to haggle about norm definition.

Sovereign states have always played the primary role in defining those rules, but pirate organizations have always been around to contest existing arrangements and propose alternative norms. So what happens when the Iranian government attempts to set up a centralized agency that claims exclusive control over the Internet and turns cyberspace into a nationally bounded intranet? Within days, pirate organizations represented by collectives like Anonymous retaliated by launching attacks on government websites to make their voice heard, forcing the government to go offline.

Private corporations are also potential targets. Cyberpirates have attacked firms such as Sony, MasterCard and Paypal when they believe they have violated civil society’s expectations about the nature of cyberspace. New developments in genetics have paved the way for piratical action in the biotech, pharmaceutical and agricultural industries. Companies such like Monsanto who have allegedly plundered genetic materials, considered part of our common heritage, by appropriating it through abusive patenting practices, had to deal with the wrath of pirates who published employee names, took down mail servers, and blacked out company corporate websites. As DNA is being mapped in greater detail, claims to gene ownership abound, but there is still no consensual rule to determine how government or private organizations can legitimately claim a profit based on such appropriation.

Lessons from the fringes of capitalism for managers: Do’s and Dont’s
The biggest problems of our time, such as climate change, natural resource depletion or privacy, are collective action problems and should be treated as such. This implies that just being a business leader is not good enough anymore. Managers have to take the long view and become industry leaders. Savvy managers need to recognize that there is no sustainable profit to be made in persistently illegitimate industries. Put differently, a company cannot sustain a profit in an industry whose normative foundations are not viable. Sustainable profits can only be made in industries governed by rules that are consensually acceptable the broader community. For a business to be valuable, it should operate in an industry whose norms create value for the broader society. To show industry leadership, managers need to participate in the broader norm definition process underlying industry survival. To achieve that, managers need to acknowledge that their best allies to define the rules of competition are their competitors, because they have a shared interest in the industry’s sustainability.

Acknowledge the dark side. If there is massive protest against the activities of your firm or industry it may mean that you’re doing something wrong. Talk to your enemies instead of trying to send them to jail.

Don’t sue your own customers. Many corporations targeted by pirate organizations, from Monsanto, to Sony Music and Universal Pictures, have engaged in legal action against some of their customers (sometimes via their industry associations, which circles back to point 1 above). Business strategy is sometimes full of commonsense: if you sue your target customer group, your chances of survival in the long run will decrease significantly.

Sympathize with the devil (and don’t be evil). Sometimes, it is appealing for firms to ally themselves, tacitly and temporarily, with pirate organizations that contribute to the development of economic opportunities. Google, although sometimes suspected of monopolistic tendencies, finds it beneficial to align with the stance taken by Anonymous when the latter defends principles that are in line with their corporate strategy (e.g., anti-copyright protests by cyberpirates may fit nicely with Google’s plans to digitize all the books ever published on earth). But Google also strategically teams up with the National Security Agency to identify the origin of the cyber-attacks targeting Gmail accounts.

Don’t slow down progress. If your business abusively relies on monopolistic arrangements such as long-term exclusivity agreements, patents, digital locks (such as DRMs) or intentionally incompatible standards, it will slow down knowledge diffusion and innovation. If you’re lucky, that will just end up hurting your bottom line – compare the recent technological and sales trajectories of proprietary BlackBerry OS with that of open source Android OS. If you’re less lucky, pirate organizations will show their muscle (e.g. Napster), outpace you and outsmart you without paying you a dime.

To clarify, think of how the major record labels did not follow any of these friendly pieces of advice in the late 1990s. They failed to recognize that their direct competitors were also their best allies and decided not to pool the huge song catalogues they owned to offer a convenient online one-stop shop for music downloading (1). Instead, they blamed the so-called pirates for their decreasing revenues and never admitted that they may be doing something wrong (2). Following that same logic, they decided to sue their customers after calling them pirates (3). They didn’t sympathize with the devil, (at the time, the devil was called Napster) but instead relied on the Recording Industry Association of America (RIAA) to implement a disputable strategic move: do nothing and stick to an outdated plan (4). And yes, it slowed down the diffusion of creative content and of the technological innovations meant to listen to it, such as portable music players (5). They even believed that Apple’s iPod and iTunes were trustworthy distributions partners to hand their catalogue to because Apple was not a direct competitor (Apple was selling computers, not music). Apple leveraged the one crucial norm that the pirate organization Napster had managed to diffuse broadly – the fact that the relevant stock-keeping unit in the music industry was no longer the album but the song – and the rest of the story is well known: there were 6 major labels in 1998, and now only three left in 2013.

Everyone loves a rebel, so the idea of the pirate has great traction in our society and popular culture: pirates push boundaries, chart and create new territories, and are dangerously innovative. Business can take a lesson from the pirate organization by paying attention and working with pirate organizations to innovate, push forward and be aware of new uncharted territories ahead so they aren’t taken by surprise by what is often contingent, confrontational and temporary.

The author gratefully acknowledges the research assistance and contribution of David Jackson, PhD Candidate in Media Studies and Community Manager at www.pirateorganization.com

Reprint from Ivey Business Journal

[© Reprinted and used by permission of the Richard Ivey School of Business

Reprint from Ivey Business Journal
[© Reprinted and used by permission of the Ivey Business School]