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Permissionless Innovation

By Henry Chesbrough, Marshall Van Alstyne

Communications of the ACM, Vol. 58 No. 8, Pages 24-26
10.1145/2790832

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"Permissionless innovation," is the freedom to explore new technologies or businesses without seeking prior approval.14 It has already produced an explosion of goods and services in the IT industry.14 Vint Cerf, a father of the Internet, invokes it when he argues the Web must remain open.4 It is cousin to the end-to-end principle of placing application-specific functions at end points, where others can build, rather than in the core.11 It improves efficiency and moves innovation closer to people with ideas.3 Hundreds of thousands of iOS and Android apps were not created by Apple or Google, but by permissionless innovation made possible by published APIs (application programming interfaces) and resulting market evolution. It facilitates experimentation in parallel: actors launch their own experiments without depending on the results of others. Permissionless innovation greatly increases the speed of invention and allows the ecosystem to provide ideas its system designers never had.1

The pharmaceutical industry could benefit from this approach. A successful new drug can cost upward of $800 million.5,6 Uncertainty about winning patent races means firms race to secure intellectual property rights. Competitors need patent shears to trim patent thickets.5,6 Yet the awful expense of maintaining IP creates abandonment problems due to the lag between costs and revenues. Innovation slows8 while, ironically, only 8% of pharma firms measure the value of their orphan patents.2

Industries outside the IT sector have shown the benefit permissionless innovation. One example is the Canadian firm Goldcorp, written off by analysts due to debt and high production costs.12 After decades of use, Goldcorp's Red Lake mine was underperforming. In-house geologists could not locate further gold deposits. When Goldcorp CEO Rob McEwan heard an MIT presentation on the Linux operating system, which allows anyone to access the code, he saw an opportunity. He gave away Goldcorp geological data going back to 1948 and challenged the world to find gold in his data. The world did. New models for discerning ore, visualizing veins, and improving extraction were submitted, along with 110 sites to look for gold at Red Lakehalf of them unknown to Goldcorp. Stock purchased a year before and sold a year after McEwan's decision tripled in value.

Goldcorp gave permission and incentives. It paid out $565 million, its highest payout to two collaborating Australian teams that had never visited the mines. But Goldcorp retained an economic complement, deeds to the 55 acres of Red Lake mines. Any increases in value applied directly to Goldcorp's assets. Permissionless innovation opened new insights that complemented Goldcorp's assets in the same way that Apple and Google opening their APIs added value to their operating systems. McEwan did not give away the business, he gave away permission to help find gold on his property.

Pharmaceutical firms can do the same with their tapped-out mines. FDA review effectively handles Type 1 errors, or false positives, such that unsafe, ineffective drugs seldom reach market. However, Type 2 errorsfalse negatives with more promise than their owners realizecan be the abandoned veins of hidden gold. Viagra could have been one of these. It showed limited promise as a hypertension drug, but the men in the treatment group refused to return their samples at the end of human trials, and treatment for erectile dysfunction has never the same. Similarly, Eli Lilly discovered the antibiotic Cubicin in the 1980s but abandoned it because it was too toxic to patients. After licensing, a small unrelated firm developed effective methods to poison bacteria without poisoning people, and Cubicin became a front-line treatment against antibiotic-resistant or "super bug" staphylococcusthe most successful intravenous antibiotic ever launched in the U.S.7 The value of Viagra and Cubicin came from the willingness to be innovative in ways not originally foreseen, to open innovation to outsiders and get value from what would otherwise be false-negatives.

The explosion of innovation in the IT industry comes from modularization of complex technologies and APIs to enable outsiders to access technologies without asking for permission. Modular technologies can allow firms to benefit from innovations of others by creating a platform that connects these elements together in useful, distinctive ways. They separate the core technology of a firm from extensions outside a firm as a governance model for innovation. They direct external parties to make contributions that are invited and welcomed. They help the platform owner benefit from third-party innovation by clarifying rules without requiring face-to-face interaction in advance.

New emerging rules apply to platforms that promote innovation.9 Crafting technology to protect closed parts benefits from open access like APIs so others can use the technology without knowing what is inside it. Donating technological assets to a commons or providing subsidy for open technology (APIs and SDKs or software development kits) can retain ownership over complementary assets one wishes to monetize.13 Encouraging entry into the open part of the technology lets a thousand flowers bloom and does not prevent selectively pricing access to the closed part of the platform. The open source dictum "with many eyes, all bugs are shallow"10 has a counterpart in open innovation: with open APIs more ingenuity is possible. The platform owner can observe external contributions that become popular in the market, but they must not grab too much of this new wealth for themselves. Third-party extensions make the platform more valuable for customers and more attractive for future innovators to drive even further innovation. This happens only if one does not confiscate what other people build. Successful platforms partner with innovators to share the wealth, buy them at a fair price, or grant them a grace period to collect their rewards. For example, enterprise software firm SAP outlines its future projects in a public two-year roadmap to let external parties know where to build, and what to avoid, in order to pursue opportunities in the platform's ecosystem.9

So how do we apply this to pharmaceuticals, which are complex and where partitioning is challenging? Separating the process into open and closed domains and stimulating permissionless innovation in the open arena is a start. Like Goldcorp, a pharma company can provide open access to preclinical and clinical data on a particular compound, and award prizes for third parties who determine the best diseases to target, or which variations to pursue. Assays to proxy therapeutic benefit might be shared widely, and compounds with "hits" (signs of positive activity) can become a part of negotiation for development. Computational models of particular compounds can be shared. Companies still can retain the patents. Drug companies already partition rights to IP for research, field of use, geographic region, or preset conditions such as royalties. A "part open, part closed" governance structure permits pharma companies to invite others to examine compounds and data and run experiments without prior permission. We already see this in practice when clinicians use "off label" drugs to treat unmet medical needs. Drugs approved by the FDA for one treatment sometimes work for another.


Think of permissionless innovation as a complement to traditional research and development.


If a pharma company controls the platform, why would others play? Pharma companies might keep the best drugs closed, opening only the least attractive. They can use platforms that are too closed and do not attract permissionless innovative activity. We argue that third parties are sophisticated enough to differentiate between opportunity and lip service. Why presume that pharma companies have all the ideas? They do not know everything outside their core technologies and markets. Third parties with specialized knowledge can find opportunities pharma companies miss, just like others found veins of gold missed by Goldcorp. Specialty companies can seek niche markets unattractive to large companies. Mission-oriented nonprofits with humanitarian motives can lift economic restrictions when looking for therapies. In permissionless innovation, all have a role to play.

Turning things around, why would pharma companies willingly open technology, data, and IP? Pharma companies are increasingly specialized by disease, but their compounds might have benefits in other areas. Epilepsy drugs, for example, are prescribed for ropathic pain. Drugs developed for one use are used for different conditions, as with Viagra. Drug development costs and the narrowing market focus create areas where permissionless innovation makes sense. Independent researchers are already looking for new diseases to target, using data and compounds of pharma companies.

Think of permissionless innovation as a complement to traditional research and development. Everything done to discover new drugs can still be done, but permissionless innovation adds access and incentive so third parties contribute to solving challenges that lie beyond the capacity of traditional pharma firms. Ecosystems can rejuvenate research and development. Through better governance, open innovation, and strategic platform management, smart firms can have thousands of partners innovate on their IP but on their terms and without prior permission. The future is open.

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References

1. Andreesen, M. The three kinds of platform you meet on the Internet (Sept. 16, 2007); http://pmarchive.com/three_kinds_of_platforms_you_meet_on_the_internet.html.

2. Arora, A., Fosfuri, A., and Gambardella, A. Markets for Technology: The Economics of Innovation and Corporate Strategy. MIT Press, 2001.

3. Baldwin, C. and Clark, K. Design Rules. MIT Press, Cambridge, MA, 2001.

4. Cerf, V. Keep the Internet open. New York Times (May 24, 2012); http://www.nytimes.com/2012/05/25/opinion/keep-the-internet-open.html.

5. Chesbrough, H. Open Innovation: The New Imperative for Creating and Profiting from Technology. HBS Press, Boston, MA, 2003.

6. Chesbrough, H. Why companies should have open business models. MIT Sloan Management Review 48, 2 (2012).

7. Chesbrough, H.W. and Chen, E.L. Recovering abandoned compounds through expanded external IP licensing. California Management Review 55, 4 (Apr. 2013), 83101.

8. Hargreaves, I. Digital opportunity: A review of intellectual property and growth. An independent report. 2001.

9. Parker, G. and Van Alstyne, M. Innovation, openness, and platform control. Mimeo: Boston University (2015). http://ssrn.com/abstract=1079712.

10. Raymond, E. The Cathedral and the Bazaar. O'Reilly, 1999.

11. Saltzer, J.H., Reed, D.P., and Clark, D.D. End-to-end arguments in system design. ACM Transactions on Computer Systems (TOCS) 2, 4 (1984), 277288.

12. Tapscott, D. and Williams, D.A. Innovation in the age of mass collaboration. Business Week (Feb. 1, 2007).

13. Teece, D. Profiting from innovation. Research Policy, 1986.

14. Thierer, A. Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom. Mercatus Center at George Mason University, 2014.

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Authors

Henry Chesbrough ([email protected]) is a professor at UC Berkeley's Haas Business School. He is the author of Open Innovation, and five other innovation books.

Marshall Van Alstyne ([email protected]) is a professor of information economics at Boston University, a visiting professor at the MIT Initiative on the Digital Economy, and coauthor of Platform Revolution; Twitter: InfoEcon.


Copyright held by authors.

The Digital Library is published by the Association for Computing Machinery. Copyright © 2015 ACM, Inc.

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