Prize-making innovation strategies

Today’s news includes two examples of using contests with large cash prizes as a way to spur innovation.

Netflix today held a press conference to announce the winner for the $1 million winner-take-all prize. The NYT account notes the last-minute maneuvering by runners-up hoping to dislodge the winner.

I suppose (as the NYT argues) this fits under the rubric “crowdsourcing,” even though compared to many models (like Threadless) the potential “crowd” of contributors across the world could fit in a large college classroom (or perhaps a high school football stadium).

Certainly it counts as open innovation — or, as Hank Chesbrough wrote in his pathbreaking book of the same name “Open Innovation is based on a landscape of abundant knowledge.” Later that same year, he wrote (borrowing from Bill Joy)

Not all the smart people work for us so we must find and tap into the knowledge and expertise of bright individuals outside our company.

Prizes work for a number of reasons. As Netflix did, at least until prizes become commonplace the sponsors can milk the contest for free publicity, both reducing search costs and increasing visibility of the brand. Also, the sponsor only has to pay one winner, not all the losers who (like most lottery ticket buyers) spent a lot of money and end up with nothing.

In this vein, the folks who administer prizes for space exploration — the X Prize Foundation — brag about all the free labor by losers:

In its first three years, the Northrop Grumman Lunar Lander Challenge has helped to demonstrate why NASA’s prize program – Centennial Challenges – is one of their most innovative and efficient programs. To date, only $350,000 of the initial $2,000,000 in prize money has been awarded, yet a dozen teams of spectacular engineers and innovators have already devoted more than 70,000 working hours toward building new technologies to win the competition. The Challenge has also demonstrated the connection between first generation lunar exploration, including the Apollo Lunar Modules built in the 1960s by Northrop Grumman, and the next generation vehicles being designed today.

NASA is putting up $2 million in prize purses for the Centennial Challenges, while Northrup Grumman (whose predecessors built the original Apollo lander) and a New Mexico spaceport are giving operational support.

According to stories today, Armadillo Aerospace is the first team to qualify before an Oct. 31 deadline to demonstrate a credible 21st century lunar lander. The team is led by John Carmack of id Software (best know for the Quake shoot-em-up videogame).

After the NGLLC is awarded, Armadillo and others hope to win the Google’s $20 million prize for landing a robot on the moon by 2012. Unlike others, Google will give a second prize.

Younger people forget that NASA was once an energetic, can-do government agency — before endless budget cuts and tragic deaths made it a lumbering risk-averse bureaucracy. Prizes are among the most efficient ways for the government to spur innovation, and so I have to hand it to whoever at NASA came up with this approach. As the NASA website explains:

Centennial of Flight
In December 1903, Wilbur and Orville Wright, two bicycle mechanics working with no government support, initiated the age of powered flight with their success at Kitty Hawk. NASAs Prize Program honors the spirit of the Wright Brothers and other independent inventors by acknowledging the centennial of the first powered flight in 2003. The NASA Centennial Challenges program also recognizes that the rapid and dramatic progress in aeronautics in the early years of the first century of flight was often driven by prize competitions.

So in that regard, crowdsourcing technological innovations is an example of back to the future — a decidedly 18th century idea. Suzanne Scotchmer’s faith in prizes as an incentive for innovation is being born out.