Free spillovers of design information to producers

The third interaction between free and producer paradigms involves the spillover of free design information to producers (represented by the downward pointing arrow in figure 6.1). Producers can adopt free designs they think are likely to be profitable and commercialize them for the market at large. Research shows that such design spillovers can be highly valuable to producer firms, providing higher sales revenues, higher gross margins, and longer product life cycles for the producer (Lilien, Morrison, Searls, Sonnack, and von Hippel 2002; Winston Smith and Shah 2013; Franke, von Hippel, and Schreier 2006; Poetz and Schreier 2012); Nishikawa, Schreier, and Ogawa 2013).

Evidence for the importance of free designs to producers is illustrated by studies that explore the sources of all "important” innovations in a field. At the time of this writing I am aware of four empirical studies of this type that are focused on consumer products and services. Shah (2000) studied the source of important innovations in four sporting fields; Hienerth, von Hippel, and Jensen (2014) did the same in the specific sport of whitewater "playboat" kayaking; Oliveira and von Hippel (2011) studied the sources of important retail banking innovations; and van der Boor, Oliveira, and Veloso (2014) studied the sources of important innovations in mobile banking. These authors found that designs created by individual and collaborating users in the household sector accounted for a very significant fraction (from 45 to 79 percent) of all "important" innovations commercialized by producers in those fields. The innovative designs in the four studies were very rarely protected by their household sector developers: they were free innovations.

Cost savings for producers that adopt free designs can be estimated by first calculating producers' per-innovation design costs for innovations they do develop. That number can then be used to roughly estimate producer design cost savings in the case of each design adopted from free innovators. Data were collected for this calculation in the case of the whitewater kayaking study described in chapter 4. In that study, it was found that 79 percent of all important innovation designs commercialized had been developed by kayakers and revealed for free. The reduced R&D costs for kayak producers adopting those free designs were very significant: my colleagues and I calculated that development cost savings were 3.2 times larger than whitewater kayak producers' total product design budgets over the entire history of that sport (Hienerth, von Hippel, and Jensen 2014).

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