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>>It’s Really About the DMCA

It’s Really About the DMCA

Prof. Randal C. Picker, The University of Chicago Law School
December 21, 2010

I was standing in line Sunday to order a sandwich – Italian beef, one of the Holy Trinity of Chicago food (deep-dish pizza and hot dogs, if you are so poorly informed that you have to ask) – and there he was: King Gillette.  I was at one spot of a Chicago-based chain and each location is decorated in paraphernalia from a particular era.  The wall hanging next to the checkout had an old-style Gillette razor, a number of razor blades and, most importantly, wrappers for old Gillette blades.  The image of King Gillette – that was his given name – appeared throughout the world on Gillette wrappers and Gillette had to be one of the most recognized people in the world.

My most recent paper is The Razors-and-Blades Myth(s).  Read the paper carefully and you will notice that there is no mention of copyright and certainly not the Digital Millennium Copyright Act, known to both friend and foe as the DMCA.  And yet it is just as much about the DMCA as the papers that I have written on printers, garage door openers, DVRs, VCRs and e-book readers.  (This looks like a research strategy based on what I find in my house each morning, but I swear that it isn’t.)  Let me relate the story of King Gillette quickly and then circle back to the DMCA.

In 1904, Gillette received two patents on razors, blades, and the combination of the two. As the patents make clear, Gillette had a clear vision of the markets that he would create: “Hence,” stated the patent application, “I am able to produce and sell my blades so cheaply that the user may buy them in quantities and throw them away when dull without making the expense … as great as that of keeping the prior blades sharp.”

But Gillette did more than invent a new razor and a new blade.  As Chris Anderson notes in his recent business bestseller, Free, Gillette invented an entire business strategy, one still taught in business schools and implemented today across many industries – from VCRs and DVD players to video-game systems like the Xbox and now ebook readers.  Create an installed base by selling a product at a low price or even giving it away, then sell a related product at a high price to recoup the prior investment.  This was the world that Gillette created.

Or did he?  In my recent paper, I look at the early days of Gillette, and the actual facts don’t match the stylized razors-and-blades story particularly well.  Gillette’s 1904 patents gave it the power to block entry into the installed base of handles that it would create.  While other firms could and did enter the replaceable-blade market with their own handles and blades – Gem Junior and Ever-Ready are prominent competitors from that era – no one could produce Gillette-style handles or blades during the life of the patents.

From 1904 through 1921, Gillette could have played razors-and-blades – low-price or free handles and expensive blades – but didn’t.  Instead, Gillette set a high price for its handle and fought to maintain those high prices during the life of the patents.  The firm understood to have invented razors-and-blades as a business strategy did not play that strategy at the point that it was best situated to do so.

It was only in 1921, when the 1904 patents expired, that Gillette started to play something like razors-and-blades, though the actual facts are much more interesting.  Before the expiration of the Gillette patents, the replaceable-blade market was segmented, with Gillette occupying the high end with razor sets listing at $5.00 and other brands such as Ever-Ready and Gem Junior occupying the low end with sets listing at $1.00.

Given Gillette’s high prices for its handle, it had cause to fear entry into the handles market when its patents expired, but it had a solution: In 1921, it dropped its old handle prices to match those of its replaceable-blade competitors.  And Gillette simultaneously introduced a new, patented razor handle sold at its traditional high price point.  Gillette was now selling a product line, with the old-style Gillette priced to compete at the low end and the new Gillette occupying the high end.  Gillette foreclosed low-end entry by doing it itself and also offered an upgrade path with the new handle.

But Gillette had no tool to block entry into the Gillette blades business and that entry came.  With the expiration of the patents, Gillette no longer had a way to tie the blades to the handles and thus, at least on paper, seemed to have no good way to play razors-and-blades.  Other companies could now make cheaper blades for Gillette’s handles, undercutting Gillette’s prices and therefore the strategy.  Yet – and here is the irony – Gillette did best at precisely the point when standard theory suggests that it should not have.

There is more to the Gillette story – that is a nudge to go read the full paper – but circle back to the DMCA.  At its heart, the DMCA is about lock-and-key systems for content and devices.  Amazon sells e-books that work on the Kindle platform and Amazon gets to decide whether the Kindle platform is just a physical device or also software that plays on iPads and Android-based systems.  Amazon can afford to sell the Kindle at a low price if it knows that you are going to buy your e-books from them.

The Gillette story suggests how tricky this type of systems competition can be.  Gillette used its 1904 patents to block entry into the Gillette razors-and-blades markets, but it didn’t exploit those patents in the way that the standard lore imagines.  Instead, it was only after anyone had a key to the installed base of Gillette razor handles – after anyone could produce blades that fit Gillette handles – that Gillette played something like razors-and-blades and did so successfully.

By |2018-06-05T13:43:45+00:00December 21st, 2010|Intellectual Property Issues|Comments Off on It’s Really About the DMCA