Innovation requires freedom

From the Wall Street Journal, July 22, 2016, p. A13:

The Closing of the American Mind
There are dangerous signs that the U.S. is turning its back on the principles of a free and open society that fostered the nation’s rise.

I was born in the midst of the Great Depression, when no one could imagine the revolutionary technological advances that we now take for granted. Innovations in countless fields have transformed society and radically improved individual well-being, especially for the least fortunate. Every American’s life is now immeasurably better than it was 80 years ago.
…
When I attended the Massachusetts Institute of Technology in the 1950s, I quickly came to appreciate that scientific and technological progress requires the free and open exchange of ideas. The same holds true for moral and social progress. I have spent more than a half-century trying to apply this lesson in business and my personal life.

It was once widely accepted that progress depends on people challenging and testing each other’s hypotheses. This leads to the creation of knowledge that, when shared, inspires others and spurs the innovation that moves society forward and improves lives. … Recall Sir Isaac Newton’s statement that he achieved so much by “standing on the shoulders of giants.”
…
Despite our enormous potential for further progress, a clear majority of Americans see a darker future. Some 56% believe their children’s lives will be worse off than their own … I empathize with this fear. The U.S. is already far down the path to becoming a less open and free society, and the current cultural and political atmosphere threatens to make the situation worse …

Education in America, and particularly higher education, has become increasingly hostile to the free exchange of ideas. On many campuses, a climate of intellectual conformity has replaced open debate and inquiry, stifling discussion on a host of topics ranging from history to science to economics. Dissenters are demonized, ostracized or otherwise treated with scorn and derision. This disrupts the process of discovery and challenge that is at the root of human progress. …

Similarly, in business the proliferation of corporate welfare wastes resources and closes off opportunity for newcomers. It takes many forms—direct subsidies, anticompetitive regulations, mandates, tax credits and carve-outs—all of which tip the scales in favor of established businesses and industries. The losers are invariably the new, disruptive and innovative entrepreneurs who drive progress, along with everyone who stands to benefit from their work. …

Government, which often has strong incentives to stifle the revolutionary advances that could transform lives, may be the most dangerous. The state often claims to keep its citizens safe, when it is actually inhibiting increased individual well-being. See, for example, the FDA’s astronomically expensive and time-consuming drug-approval process, which University of Chicago professor Sam Peltzman argues has caused “more sickness and death than it prevented.” …

Unleashing innovation, no matter what form it takes, is the essential component of truly helping people improve their lives. The material and social transformations in my own days have been nothing short of astonishing, with a marked improvement in well-being for all Americans. If the country can unite around a vision for a tolerant, free and open society, it can achieve even greater advances, and a brighter future for everyone, in the years ahead.

Mr. [Charles] Koch is chairman and CEO of Koch Industries and the author of “Good Profit: How Creating Value for Others Built One of the World’s Most Successful Companies” (Crown Business, 2015).

Understanding Apple's platform strategy: A little theory can help

Today is the first day of the Worldwide Developer’s Conference (WWDC), Apple’s annual effort to both inform and excite its ecosystem of third-party providers. As with any conference, it’s also a chance to get together with friends, old and new, particularly at parties thrown by companies that want to improve their visibility to the developer attendees.

I remember in 1988 going to my first WWDC in San Jose: our company was so poor that the two cofounders (Neil and I) had to split a single pass to be able to have any presence at all. My last WWDC was in 2003, as my company neared its end, and I went to meet with a former employee who was in town for the conference. The conference is capped at 5,000 developers, but rather than use price to discourage demand (as do most media companies), since 2014 Apple has used a lottery system to allocate seats to registered developers.

Since the early years of the Jobs II era (1997-2011), WWDC has been used to make important product and technology announcements for the broader public. As such, it also gives the business press to take another junket to San Francisco and write their annual (or quarterly) pontifications on the state of Apple, its products, market position, competitive advantage, business model, stock price or anything else.

One article caught my attention on Twitter this morning:

Apple's True Strengths Don't Lie in Innovation
By Christopher Mims
Wall Street Journal, 13 June 2016, p. B.1.
…Apple's normally festive Worldwide Developers Conference begins Monday under something of a pall. The company's first quarterly sales decline in 13 years has many people asking whether it will grow again. They also want to know how Apple, with its healthy supply of cash, could make that happen.

The conventional answer is "create a totally new product line," or its cousin, "unveil something no one has done before." That is, Apple should try to out-innovate its competitors.

That is a terrible idea. It runs counter to Apple's strengths, as well as its growth trajectory.

Here is why: Apple's core strengths are the scale of its ecosystem -- the company says it has more than one billion active devices world-wide -- and the spending power of their owners.

As someone who’s studied the theory of standards wars for two decades — and Apple’s practice of standards wars for three decades, and wrote the most-cited paper on Apple’s iPhone strategy — this seemed somewhere between foolish and idiotic.

But if you dig a little deeper, what the columnist (who seems prone to exaggerating for effect) really is doing is playing a semantic game. The language of "innovation is bad, no innovation is good” would be more accurately summarized as “risky radical innovation is bad, continuous incremental innovation is good.”

The author states

Apple is expert at offering a more polished, more accessible version of products and services that rivals have offered for years. And yet, it reaps over 90% of the smartphone industry's profit, and in 2015 its App Store delivered 75% more revenue to developers than Alphabet Inc.'s Google Play store.

If you look up “innovation” in the Oxford English Dictionary, the very first definition is:

1a. The action of innovating; the introduction of novelties; the alteration of what is established by the introduction of new elements or forms.

In other words, by offering a superior (and unique) version of a now standard product category, Apple is following the dictionary definition of “the introduction of new elements of forms.”

Meanwhile, any MBA who’s had a decent competitive strategy class can tell you that if you have a better product — and consistently superior profits — then you have successfully created some form of sustained competitive advantage that has survived efforts by your rivals to compete away that advantage and those superior margins.

Perhaps this confusion is because the author has an undergraduate neuroscience major but no business degree.

But once we get away from the terminology problems, I did find one paragraph that seemed both factual and prescient:

In any case, I think it will be many years before mobile is toppled as the dominant platform. The PC ruled for nearly 30 years, and we are less than a decade into the age of the iPhone.

I don’t agree with the conclusion that Apple (or Google or Facebook) shouldn’t pursue related diversification. However, I do agree that it must feed and harvest its mobile “cash cow” (as BCG defined it 45 years ago) while continuing to search for new growth opportunities.

As an Apple shareholder, I’m disappointed at the loss in price and market cap over the past year as it lost its growth multiple. But I still think there’s enough of the company’s DNA (even after the loss of its visionary founder) to propel it to new growth as it finds a way to meet needs unmet by its many competitors and imitators.

Fractalization (and trivialization) of technological innovation

My friend Frank Piller this morning shared a witty story from last week’s New Yorker. The title and subtitle say it all:

“Let’s, Like, Demolish Laundry”
Silicon Valley is in a bubbly race to wash your clothes better, faster, and cooler. This is not a metaphor. Unless, you know, it is.

The story about IT-enabled laundry delivery services focuses on Washio, a LA-based seed-funded startup. The three founders cruise along confident in the brilliance of their idea until they run across three Bay Area rivals (Laundry Locker, Prim, Rinse) — one incubated by Y Combinator — and eventually five more from NYC and two from Chicago.

Author Jessica Pressler makes only a feeble effort to restrain her sarcasm. In commenting why so many other tech entrepreneurs are addressing the same need:

In reality, when people in a privileged society look deep within themselves to find what is missing, a streamlined clothes-cleaning experience comes up a lot. More often than not, the people who come up with ways of lessening this burden on mankind are dudes, or duos of dudes, who have only recently experienced the crushing realization that their laundry is now their own responsibility, forever. Paradoxically, many of these dudes start companies that make laundry the central focus of their lives.

But even in this segment, “new innovations are dying from the day they are born… There’s a term for this. It’s called the hedonic treadmill.”

Some of it has an anthropologist-visits-the-strange-tribe-of-Silicon-Valley feel. Even though their main office is in Santa Monica, Washio has the same (post-Amazon) disrupting of the physical world that brought us Pets.com and Uber. Their goal is to be “the Uber of laundry," and their share a common seed stage investor.

But early on, Pressler raises a more fundamental question:

We are living in a time of Great Change, and also a time of Not-So-Great Change. The tidal wave of innovation that has swept out from Silicon Valley, transforming the way we communicate, read, shop, and travel, has carried along with it an epic shit-ton of digital flotsam. Looking around at the newly minted billionaires behind the enjoyable but wholly unnecessary Facebook and WhatsApp, Uber and Nest, the brightest minds of a generation, the high test-scorers and mathematically inclined, have taken the knowledge acquired at our most august institutions and applied themselves to solving increasingly minor First World problems.

Certainly Amazon and Google and Facebook (mostly) allow us to do things we did before, just more quickly and cheaply and conveniently. Yesterday, my sister-in-law could have mailed pictures of her daughter’s graduation to her friends and relatives, but instead she posted them on Facebook and they were instantly available.

Like Pressler, many of these activities seem trivial when I compare this to other “big” innovations, like trying to get mankind back into space or provide enough food and energy to bring 5 billion of the world’s 7 billion people up to developed world living standards. After changing jobs three years ago, life at my new employer reminds me that the life sciences have many important unsolved problems, whether it be preventing deaths from malaria and tuberculosis in sub-Saharan Africa or finding a cure for cancer.

But on another level, Pressler’s article would come as no surprise to my innovation strategy students of the past eight years (whether at KGI, UCI or SJSU). The pattern is straight out of Dealing with Darwin, the grand unified theory of innovation by Geoff Moore (best known for Crossing the Chasm).

One reason I use the book is that it offers a cogent explanation of the role of innovation in mature industries. He subdivides such innovation into two categories, operational excellence (cheaper) and customer intimacy (better). For the latter, he uses the metaphor of “fractalization”, as illustrated by this diagram from Chapter 6:

As Moore explains (p. 111-112)

Figures 1 through 3 represent the early, middle, and late stages of a growth market. ... As the figures indicate, the driving dynamic at this point is a single-minded attempt to acquire new customers and claim market share.

By the time we hit figure 3, however, the market for the basic offering has become saturated. One can no longer grow simply by adding new customers to the category because the bulk of them have already been added. After virtually every home has a phone, every garage a car, every child a personal sound system, what do you do next?
…
Thus, from the mass-market Model T car, for example, the automotive industry first generated line extensions: a sedan, a station wagon, a truck, a couple, a limousine.
…
Increasingly fine-grained fractalization can and will continue as long as there are discretionary dollars to spend in the system and the category as a whole has not become obsolete.

We do need to recognize the contributions of the laundry app innovators (even if they go the way of the sock puppet). By moving the realm of innovation from the physical world to the digital world, they are enabling new form of experimentation and innovation — as happened in retail, communications, advertising, journalism and other established industries.

Pressler makes clear that the laundry apps still depend heavily on their contract laundry suppliers who do all the work. But if such apps catch on, it would seem obvious that the laundry market will be rapidly consolidated, with the tiny corner dry cleaners replaced by a handful of regional factories. One would expect (as with Web 1.0 and 2.0) the adoption will be most rapid in Silicon Valley, with the shops in Palo Alto or SoMa served by ecofriendly delivery trucks driving from large plants in Morgan Hill or Livermore.

Apple can't replace Steve Jobs - but it must try

It's no secret (and no surprise) that Apple has not been the same since the retirement and death of Steve Jobs in 2011. But with the stock stalled, now some are calling for Jobs' hand-picked successor, Tim Cook, to get the axe.

The public challenge came this week from Trip Chowdhry, head of a small (and little-known) Bay Area stock analyst firm. From my PR background, it appears to be a (successful) attempt to gain publicity by getting ahead (or fueling) a change at Apple.

His March 8 analyst note is direct and to the point:

RESEARCH: Every month we attend 8 to 11 Technology conferences, Summits and User Group Meetings, and speak to no less than 300 people. Here is the converged view on Apple

KEY MESSAGE:
• Apple Shareholders, Apple Employees and the Developer Community at-large have lost confidence is Apple’s current leadership
• Apple’s CEO Tim Cook is being incentivized to operate in a comfort zone of complacency until August 2016
• To prevent further destruction of shareholder value, Apple’s CEO and CFO need to be replaced sooner rather than later
• The team of Jon Rubenstein [sic] (Father of iPod) as CEO and Fred Anderson as CFO, may be best to revive Apple

He notes that Apple stock has fallen since its 2012 peak, while the NASDAQ has risen. While comparing to the stock's (any stock's) peak is unfair, Apple has lost ground to Google over the past 2 years (although Apple out gained Google over the past 5 years).

Apple vs. Google share price, March 2012-March 2014 (source: Yahoo)

While I recommend reading the entire document, I’m not sure how much stake I put in his conclusions, and not just because he misspelled the name of his would-be savior, Jonathan Rubinstein. Let me take the report’s arguments in order.

An Impossible Standard
First, no one — no one — could repeat Steve Jobs’ success: Steve Jobs is an impossible act to follow. In the 14 years of the Jobs II era (1997-2011), the company created the iPod, iTunes, iPhone and iPad. (This doesn't even include launching the company and creating the Apple II and Macintosh in his first decade at Apple). While there have been great CEOs in the past 50 years — Jack Welch and Lou Gerstner come to mind — none has the sustained record of innovation and industry transformation to compare to Jobs. (One might argue Intel had more of an impact on the IT industry, but it was under a series of CEOs).

The fact is, hired CEOs can often succeed at squeezing out fat, but are rarely successful at driving innovation. Welch led tremendous improvements in efficiency (which allowed GE to successfully diversify) and Gerstner accelerated a long-overdue shift from high-margin (but increasingly commoditized) hardware to low-margin, differentiated services. It's almost always the entrepreneurs and founders (like Jobs) that create the breakthrough business models and technologies that transform an industry.

A decade ago, the Apple community was speculating who would eventually replace Jobs. One scenario was to buy a Facebook or Twitter and let the acquired CEO take over. (That is, after all, how Jobs rejoined Apple in late 1996 after selling NeXT back to his former employer). But buying an immature (if inspired) leader of a one-trick pony is not going to help the world’s most valuable company create new forms of diversification.

Developer Disinterest
I am inclined to discount the developer reaction, for two reasons. First, developers (particularly Apple developers) tend to be whiny when the platform leader doesn’t give them everything they want — yesterday. That was my world for 15 years, and without visibility into the priorities (and limitations) of the mother ship, we were always good at telling Apple what we wanted but not much help in getting there. (I don’t imagine Microsoft developers are any better).

Second, we know Apple’s developer loyalty had peaked and would peak. As Mike Mace and I showed four years ago, Apple got ahead of its competitors with the iPhone but gave everyone something to copy. At some point, one of its rivals (in this case Android) would match many of its best features, attracting both buyer and developer interest. In addition, as in any platform war, developers who missed out on the first platform will hope to strike it rich on the second, while winners on the first platform look to add other platforms to obtain revenue growth.

Lack of Urgency
A major thesis of Chowdhry is that the stock option grants to Cook do not encourage him to act quickly, but in fact encourage him to wait another two years to stimulate the company’s growth. It’s unfortunate that Chowdhry didn’t make this point two weeks ago, because this would have been a great question for shareholders to ask at the Feb. 28 annual meeting.

I don’t know Cook, his financial situation or motivations, but certainly the whole point of options is to encourage executives to act in the best interests of shareholders. But I do agree with Chowdhry that Apple can’t wait, and if there are new technologies ready to release (iWatch, a new AppleTV) they are long past due.

Jon Rubinstein
Qualcomm Annual Meeting
March 4, 2014

Anointing a Savior
Probably the strongest contribution of the piece is the suggestion of Rubinstein. I don’t know if Rubinstein (former NeXT and Apple exec, former Palm CEO, current Amazon and Qualcomm director) would do a better job that Cook.

However, from having followed him for more than a decade, I think he is a very plausible choice. He is an innovator, he seems to be able to lead large organizations, he knows Apple well. He also seems to have the ego necessary to be a great Apple leader — not the ego of a Jobs or Gates (let alone a Musk or Ellison), but enough to really throw himself into making the company great once again.

Is there a better choice for the next Apple CEO than Rubinstein? Maybe, but I can’t think of one. (Then again, Carol Bartz looked good on paper before joining Yahoo, and we know how that turned out).

A Foolish Consistency

“A foolish consistency is the hobgoblin of little minds”
Ralph Waldo Emerson.

I’d never head of Chowdhry, but then (except for my iPhone research) I haven’t followed Apple as closely as I did before I closed my company in 2004. A quick Google search found two stories about his prior predictions for Apple.

First, a July 2013 story (by an Apple fanboy) in Fortune lambasted Chowdhry for saying innovation at Apple was over. It cites the four points of the latter’s complaint

1. Apple has not innovated since the passing away of Steve Jobs.
2. The likelihood of Apple being able to come up with innovative product ... is very slim, given that the Apple Stock is 40% below its high of $705: This lower stock price is prompting some of the smarter Apple employees to leave Apple for other companies such as Google, which is a very serious problem for Apple.
3. Apple has changed from being an innovative company to a company returning cash to the shareholders; and that has completely backfired: ... Everyone is wondering who is getting all the Cash? ... Some are speculating if Tim Cook and Peter Oppenheimer will remain at Apple.
4. The current executive team led by Tim Cook and Peter Oppenheimer have destroyed the shareholder value at Apple:

So in some ways, this makes the March 8 report old news, but at least it’s consistent.

However, the other story from January 4 of this year reports:

Global Equities Research analyst Trip Chowdhry came out in support of a bullish perspective on Apple (NASDAQ:AAPL) in a recent research note obtained by Street Insider. The analyst argued that Apple has the ability to continue to expand its gross margins throughout 2014. Chowdhry reiterated his “Overweight” rating on Apple shares and an $800 price target.

Hmmm... The stock closed at $536 on Tuesday, below where it was on January 1. If I were Chowdhry’s customer, this quick flip from bull to bear would cause me to question his competency more than a simple spelling error.

Conclusions
As an Apple shareholder and 30-year Apple user, the questions Chowdhry raises are important ones, and long overdue to be discussed.

Only three directors have the potential to put pressure on Cook. Art Levinson is board chair and was CEO of Genentech from 1995-2009. Bill Campbell was an Apple execs in the 90s (head of Claris) before becoming CEO of Intuit in 1994. Finally, Robert Iger has been CEO of Disney since 2005 and an ABC executive since 1974.

Alas, if Apple holds true to form, it will be like any other Fortune 500 company and fight change tooth and nail. The directors will circle ranks around the CEO, either because they believe in him, because they are cautious, or because they know a new CEO will replace most of the board. (Al Gore, in particular, seems unlikely to be retained by a future board, and so can cash his $54m in Apple shares and move on to something else).

So if there is going to be change at Apple, it will come from BlackRock, the investment firm that is Apple’s largest shareholder (at 5.6%) according to Apple’s most recent proxy statement — a shareholding unchanged from a year ago. Its shareholdings would be worth $8.4 billion more if Apple returned to its September 2012 stock price.

The reality is that Apple must innovate — or stagnate and slowly die (ala HP). Its competitors will copy its best ideas, and thus it must continuously come up with new ideas. That’s the opportunity — and risk — of being an innovator.

As someone who sleeps in a house paid for by Apple’s success from 1998-2002, I’d like to see Apple regain its mojo. But at this point, I’m not optimistic enough to place a major bet on such a revival.

30 years of changing the world

Thirty years ago today, Steve Jobs unveiled the Macintosh. I didn’t see it live, but I bought the Time magazine report and put myself on the waiting list later that week.

It wasn’t much of a computer. At $2500, the Mac 128 was an overpriced and underpowered toy that didn’t do much other that matrix-print doodles. As I showed in my dissertation, it was another three years before Apple had something that could compete credibly with the IBM AT, and by that point the wheels were falling off of Apple as an organization as a series of mediocre CEOs replaced Jobs.

That said, Apple Computer changed the world — not once, but several times over. And nearly all these breakthroughs occurred when Steve Jobs was in charge.

Other firms changed the world, too. From the PC era, that would include IBM, Intel, Microsoft, Compaq, Visicorp and Lotus Development. When cellphones became smartphones, Nokia, Symbian and Research in Motion helped define the category before Apple released its first phone in 2007.

Some companies did a better job of created a technology (or product category) than a sustainable business. The first Palm PDA was an incredible breakthrough, but in the end, the world didn’t want a PDA, it wanted an all-in-one communication and computing device.

Just like aerospace engineers during the space race, I’m pleased to have lived through this era with a front-row seat. I’m also pleased to (so far) never have owned a Windows machine, which (given the PC industry’s ongoing decline) is a record that I’m likely to sustain to the end (Windows or mine).

Who's killing camera companies?

The Wall Street Journal Tuesday noted the financial difficulties faced by the world’s two leading camera makers, Canon and Nikon, sold 44% of the world’s cameras last year — pocket cameras, point-and-shoot, and SLRs. For these Japanese makers, Q2 sales of “compact digital cameras” (presumably all non-SLR) are down 26% and 30% respectively. Revenues from SLR systems (cameras, lenses, accessories) are also down, but less sharply.

Author Aaron Black are right to say “there may be more pain to come.” I particularly worry about Nikon, and not just because 20+ years ago I switched from Canon to Nikon after my insurance company (with the help of a burglar) gave me a chance to replace my manual focus system with an autofocus one.

Nikon was once the pre-eminent maker of SLR cameras for professional press (newspaper and magazine) photographers, of which I was briefly a member. You don’t need to a front page headline on a dead tree paper to know that this is a declining market that’s never coming back.

More seriously, Nikon is far less diversified: for it, the WSJ says that cameras make up 78% of revenues for Nikon (which also provides semiconductor lithography equipment) but only 40% of revenue for Canon (which makes copiers, laser printers and medical imaging). So if stand-alone camera revenues go to zero, then there won’t be much of Nikon left. This may be delayed by attrition of its Japanese camera rivals — Olympus, Konica Minolta, maybe Sony — but the end result is the same.

My UCI students predicted 11 years ago that cameras would supplant video cameras and smartphones would supplant cameras as digital convergence took hold. But there’s more to this story than just smartphones. I think the camera makers bear their own share of responsibility, since they seem to have stopped the wave of innovation that drove camera sales for at least 50 years.

In the 1960s, interchangeable lens SLRs supplanted the earlier rangefinder designs, due to their inherent accuracy (particularly for wide and telephoto lenses). In the remainder of the century, it was computer-aided automation that made (technically correct) photos nearly effortless, as SLRs acquired zoom lenses while adding auto-exposure, programmed auto-exposure, auto flash, auto-advance and auto-focus capabilities. Ease of use both broadened the market to the average consumer, although the zoom point-and-shoot cameras gradually offered most of what people need for a fraction of the price.

In this century, sales were driven by the shift from film to digital, and then the increasing quality of the digital image. My first digital SLR, the (Nikon-compatible) Fuji FinePix S1 Pro, had a 3 megapixel sensor. Last week, a houseguest showed me his 36MP Nikon D800, which exceeds the detail provided by National Geographic’s 20th century benchmark, Kodachrome 64.

Most people don’t need better resolution, or at least won’t spend $500+ to supplant their 10MP camera with a 20, 30 or 40 MP one. Camera resolution seems to be increasing faster than the size of “hard disks” (i.e. solid state disks) on computers, fueled in part by a shifts from desktops to laptops, laptops to notebooks, and notebooks to tablets (and thus a reduction or cap on storage space). And smartphones will always be better for emailing, texting or tweeting photos than cameras are.

So what can camera makers do to cause people to purchase a stand-alone device instead of a smartphone? Or if they can’t beat ’em, can they join ’em, e.g. as a lens supplier to smartphones (as Zeiss has done in providing lenses for Nokia and soon Sony).

Over the next decade, I think it should be possible to drive one more round of upgrades. I predict than in 10 years, one (but not both) of these two companies will still be developing new products to sell to loyal (i.e. locked in) customers of its SLR systems.

Big picture: technology trumps financial engineering

From the WSJ Wednesday:

For all the Fed has done, it hasn't managed to spur job creation. U.S. output may be returning to prerecession levels, but the total number of nonfarm workers still is more than seven million shy of its December 2007 peak, and in fact is back at 1999 levels.

More broadly, the Fed's failure reflects a longstanding flaw in its approach. For years, it has been pushing interest rates lower, doing so after each successive downturn as inflation became less and less of a concern. But that wasn't simply due to successful monetary policy. Technological innovation, the globalization of the work force and demographic change had plenty to do with it, too.

Instead of being a cure-all, the Fed's policies spawned two great asset bubbles, first in stocks, then in real estate. Economic rebounds and job creation lagged behind, despite the Fed's Herculean efforts.
…
The only real fix is to lower the cost of U.S. workers relative to foreign rivals and machines, or else raise their bang for the buck. The latter, while clearly preferable, requires education and training that won't turn things around overnight.

Freedom enabled by freedom

In a combination of bravery, perseverance and technological innovation, 33 Chilean miners are now free after 70 days of subterranean confinement. As the WSJ quoted one Chilean involved in the rescue: “It was 75% engineering and 25% a miracle.”

But in Thursday’s paper, a WSJ columnist argued that we also need to take economic freedom into account:

Capitalism Saved the Miners
The profit = innovation dynamic was everywhere at the mine rescue site.
By Daniel Henninger
It needs to be said. The rescue of the Chilean miners is a smashing victory for free-market capitalism.
…
If those miners had been trapped a half-mile down like this 25 years ago anywhere on earth, they would be dead. What happened over the past 25 years that meant the difference between life and death for those men?

Short answer: the Center Rock drill bit.

This is the miracle bit that drilled down to the trapped miners. Center Rock Inc. is a private company in Berlin, Pa. It has 74 employees. The drill's rig came from Schramm Inc. in West Chester, Pa. Seeing the disaster, Center Rock's president, Brandon Fisher, called the Chileans to offer his drill. Chile accepted. The miners are alive.

Longer answer: The Center Rock drill, heretofore not featured on websites like Engadget or Gizmodo, is in fact a piece of tough technology developed by a small company in it for the money, for profit. That's why they innovated down-the-hole hammer drilling. If they make money, they can do more innovation.

This profit = innovation dynamic was everywhere at that Chilean mine. The high-strength cable winding around the big wheel atop that simple rig is from Germany. Japan supplied the super-flexible, fiber-optic communications cable that linked the miners to the world above.

A remarkable Sept. 30 story about all this by the Journal's Matt Moffett was a compendium of astonishing things that showed up in the Atacama Desert from the distant corners of capitalism.

Samsung of South Korea supplied a cellphone that has its own projector. Jeffrey Gabbay, the founder of Cupron Inc. in Richmond, Va., supplied socks made with copper fiber that consumed foot bacteria, and minimized odor and infection.

What I found fascinating was the broad range of technologies involved in the rescue. This was a complex operation, and a systems approach was required to solve the myriad of problems in both sustaining the miners and extracting them from 700 meters below ground.

Henning made another important point: the market supplied most of these technologies in advance of their need under extreme circumstances in Copiapó. Individual decentralized inventors solve problems without waiting for a command-and-control bureaucracy to request it.

Finally, the miners lucked out in another way: they have a successful entrepreneur rather than a lawyer for president. Sebastián Piñera made his fortune off LAN Chile, an unusual well-run transoceanic airline in an industry that requires mastering extreme levels of operational complexity.

It doesn’t hurt that Chile ranks ahead of the US in at least one yardstick of economic freedom. But then the economic resilience of Chile saved even more lives last March, during the strongest earthquake of the past 40 years.

When anti-troll is anti-innovation

The Paul Allen/Interval Research patent lawsuit has occasioned much handwringing in the tech industry. Some of it recoils at the timing, nature and expansive claims of Interval. However, other is just reflexive antipathy to the idea of patents, particularly from the free software crowd.

Now one of the thought leaders (hate that term) of the open source crowd has weighed in with an expansive attack on all things patent. My friend Matt Asay of Canonical writes in The Register:

Businesses aren't built on ideas. They're built on execution. Google didn't win because it was the first to the search market. It won because it did search better than anyone else, and devised an ingenious way to monetize it.

This, more than anything else, is what makes the US patent system, overrun by patent trolls, so broken: it rewards ideas, not execution against them.

Anyone can think up a brilliant idea. The difficulty is in doing something with it.

Matt is clearly wrong here: I don’t know whether it’s his own bias (or vulnerability) as COO of an open source company, or just a overwrought reaction to the latest example of someone filling a silly suit (which may or may not make any progress in the courts).

While I understand the sentiment, ideas matter too. Things like the laser and the transistor and recombinant DNA got invented by real people who certainly deserved monetary rewards for their contribution to mankind — whether or not they create a company to bring those ideas to market.

My own test is “did this person cause this invention to benefit mankind sooner.” A patent troll goes to a market that’s already developed and says “pay me some money.” A legitimate nonpracticing entity says “I’ve invented something, I’ll help you commercialize it and we’ll share in the profits.”

As law school prof Frank Pasquale notes on the Madisonian, discounting the role of the specific inventor because “it would have happened anyway” is a slippery slope: Microsoft, Google, Facebook and Canonical would have happened too, but they got up one morning and decided to pursue the opportunity with the right strategy before someone else did.

If we don’t incentivize invention, we'll get less of it. This is particularly true today when “innovation benefactors” (to use Henry Chesbrough’s term) are becoming scarce due to budget cuts in basic research and higher education.

The patent system certainly needs incremental reform to fix its excesses, as Adam Jaffe and Josh Lerner showed in their book Innovation and its Discontents. These reforms involve preventing junk patents from being issued, and making it easier to challenge the bad ones who slip through

People in the patent office certainly know about these problems, and are taking steps to address them. One of the most knowledgeable on patent excesses is Stuart Graham, a PhD economist with a JD who was appointed chief economist of the USPTO in March. A study Graham co-authored earlier this year concluded in part:

• Technological innovation is linked to three-quarters of the nation’s post-WWII growth rate. …
• Highly innovative firms rely heavily on timely patents to attract venture capital—76 percent of startup managers report that venture capital investors consider patents when making funding decisions.
• Delay in the granting of rights has substantial costs.…
• The enhanced post-grant review—the process by which a patent’s validity may be challenged through an administrative appeal in front of the USPTO—offers a cost effective and speedier alternative to litigation. The cost of such proceedings is expected to be 50-100 times less expensive than litigation and could deliver $8 to $15 in consumer benefit for every $1 invested.

Patent reform — whether through USPTO administrative action, legislation or court rulings — will improve the odds that a given patent is applied appropriately. However, no system created or run by human being is ever perfect, or ever will be.

Moreover, an effective innovation policy means more than just a patent policy: not all innovations are patentable, and patents are not always the best way to incentivize innovation.

Suzanne Scotchmer has talked about the historic role of prizes as a way to encourage innovations in her seminal book Innovation and Incentives. The idea of using prizes is catching on, with things like the X Prize and academic research on crowdsourcing. In some cases, the prize-winner even keeps the commercialization rights as an incentive to see it to market.

So while I certainly agree with Asay (and Chesbrough and many others) that we must reward those who bring goods and services to market, technological innovation is more than just execution: it’s also about technology. We need more than the MBAs and the salespeople and the bean counters and even the engineers who productize the technology; we also need the inventors who made it all possible.

Not all innovation is good innovation

A frequent frustration has been the lie perpetuated by con artists (or politicians) that all change is good. For these fraudsters, “change” (or “reform”) becomes a mantra or a cloak to hide any close examination as to whether the proposed change is a good thing or a bad thing.

Clearly, not all change is good. Hitler, Stalin and various ayatollahs come to mind. Different factions like different forms of change: in the US, leftists fight deregulation or tax reduction while rightists fight various forms of social change.

Similarly, in his talk Friday at the Tilburg Conference on Innovation, Prof. Andrew van de Ven of the University of Minnesota noted that “innovation” is also both a good thing and a bad thing. He called on scholars to refuse to be drawn into any definition of “innovation” that it as synonymous with “good thing”.

Alas, such intellectual honesty is in scarce supply among politicians and bureaucrats — as well as some industry trade associations. “Innovation” becomes a mantra of those seeking to wrap themselves in the halo of scientific progress — as with the current White House and its “Strategy for Innovation.”

Van de Ven pointed to a paper 20 years ago by William Baumol entitled “Entrepreneurship: Productive, Unproductive, and Destructive,” which made a similar point about entrepreneurs and the new ventures they create:

[T]here are a variety of roles among which the entrepreneur's efforts can be reallocated, and some of those roles do not follow the constructive and innovative script that is conventionally attributed to that person. Indeed, at times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy. How the entrepreneur acts at a given time and place depends heavily on the rules of the game-the reward structure in the economy-that happen to prevail.

Baumol argues that if the incentives are right, entrepreneurs grow new profit-making enterprises that provide employment, wealth and other societal benefits. In corrupt, non-transparent, or other hostile environments, entrepreneurs join the gray or black market, or create criminal enterprises.

So perhaps if we’re lucky, a reminder to academics about the accuracy of our constructs will eventually filter into the media and the political caste. But I’m not optimistic.

Is mobile innovation slowing down?

A provocative posting Wednesday to Infoworld:

Has mobile innovation come to an end?
Eerie parallels to the desktop PC's history suggest that smartphones have reached boring sameness -- or completeness of capability -- even faster

By Galen Gruman

In June 2007, the iPhone instantly obsoleted all previous smartphones (the BlackBerry and Palm families), finally approaching the promise that carriers and device makers had been making about the mobile future for a decade: Real Web access. A touch UI -- that rotates. Accelerometer and location detection. E-mail and instant messaging. Photos and music. A year later came the App Store and the tens of thousands of apps -- from games to time-wasters to serious business tools -- that also made the iPhone into a computing device.

Since then, there's been an ever-increasing number of competitors, but nothing fundamentally game-changing. Apple continues to refine the iPhone and iPod Touch, adding capabilities such as a compass, Exchange e-mail support, and video capture -- but the last round of devices didn't pioneer anything significant. Both Palm and Google delivered their own iPhone-inspired OSes (WebOS and Android, respectively), but did nothing significant beyond adding (very welcome) support for multiple simultaneous apps to what the iPhone had already brought to the table.
…
Is there no more innovation to be had in mobile? Has mobile matched the PC in becoming a stable platform where innovation happens slowly and mainly around the edges? After all, what does a PC in 2009 do that a PC in 2000 couldn't do -- even if not as fast -- beyond using different ports?

In other word, changes are incremental of of degree rather than disruptive and transformational.

What I find intriguing is that both as an observer and a participant, I think tech industries consistently underestimates the maturation/commodization of their respective segments.

I think there are a few more revolutions left so that smartphones will supplant laptops (or desktops) for more applications:

• large screen (HDTV 1080p) display, e.g. via goggles
• portable keyboard, whether via fold-out, virtual laser, chording or some other.
• voice input with reliable dictation with arbitrary speakers

Of course, the most interesting radical innovations are unanticipated. It may be software and platform innovation is slowing down, but there are still some hardware improvements possible.

Innovation in the trenches

A friend, Cheryl Perkins, has co-authored a new book entitled Conquering Innovation Fatigue. Here is the Amazon catalog copy:

This practical guide reveals the nine major “fatigue factors” that can block the path to innovation success, along with solutions to energize innovation. Original advances in innovation practice and new case studies are applied to guide inventors, entrepreneurs, companies, universities, and even policy makers in conquering innovation fatigue. Cost-effective solutions include guidance on intellectual assets, dealing with disruptive innovation, and driving innovation using the “Horn of Innovation” and “Circuit of Innovation” models. A surprising view of DaVinci as an engine of open innovation is presented. Throughout the book, a unique aspect is exploring the journey of innovators, including corporate employees and entrepreneurs, at the often-overlooked personal level using the metaphor of immigrants in a strange land to identify barriers and solutions.

The book has a website with a blog by Jeff Lindsay, who wrote the book with Perkins and Mukund Karanjikar. The authors base the book on the problems they faced at industry, and more recently as consultants.

I met Cheryl when she was the chief innovation officer at Kimberly-Clark. I giving my "intro-to-open-innovation” spiel to her co-workers in hopes they would get the OI religion the way that P&G had done (as recounted in the 2003 Chesbrough book).

Steve Jobs' replacement

The WSJ had a fascinating exclusive Friday on what’s happening at Apple at the midpoint of Steve Jobs’ planned medical leave. No one seems to have followed up on the story (yet).

Since Jobs and Apple aren’t talking, the WSJ reporters stitched together 2nd and 3rd hand accounts of how Apple is being run by COO Tim Cook as acting CEO with help from Jobs at home. The portrait is one of Jobs reviewing key details on current projects, as well as working on the future roadmap:

People privy to the company's strategy say Apple is working on new iPhone models and a portable device that is smaller than its current laptop computers but bigger than the iPhone or iPod Touch.

The article said that Apple expects Jobs to come back in June [my guess: to announce iPhone #3] and that the board is talking directly to Apple’s doctors.

The closing paragraph is the most intriguing:

Shaw Wu, an industry analyst at Kaufman Bros., says investors are prepared for the possibility that Mr. Jobs could play a reduced role. "Most investors have factored in a management transition," he said. "What people are expecting is that Steve Jobs would retain a chairman role, and Tim Cook would formalize his role."

I disagree that the market has factored this in: Apple with Jobs gone (or on his way out) is a much slower growth company that Apple of the past decade, which means the 23% stock growth this year would need a correction.

However, this prediction rings really, really true. Apple has gotten used to Steve not being there every day, Steve still has his finger in the pie and as chairman has the final say, but eventually he can let go. If there’s any point in the next few years when he’s going to give up day-to-day control, this is when it will happen.

Qualcomm did something like this when the only CEO it had ever known — Irwin Jacobs — gave up the reins in 2005 after exactly 20 years. He abdicated in favor of his son Paul Jacobs, who had trouble escaping the shadow of his legendary father. Irwin spent not quite four years as non-executive chairman, and then when everyone saw the company was running fine without him, quietly stepped down for good last month.

The problem is, Qualcomm is a systems and infrastructure company, and Apple is a consumer products company. It needs a product fanatic pushing the envelope on new designs, and neither Cook nor SVP Phil Schiller are it. So as I noted last August, if Cook is CEO they need a passionate product guru.

Mark Papermaster (poached from IBM) is finally starting work at Apple on April 24, when he will be SVP of Devices Hardware Engineering, reporting to the CEO. (Devices, of course, are Apple’s high-growth product lines like the iPhone). I know nothing about him other than his resume, but Papermaster (or one of the other product-related SVPs) is where Apple’s leadership will have to come from if Jobs decides (or is forced) to fade away into the sunset.

Life is more than just shipping products, and I hope that Steve will have some post-Apple time (whether now or a decade from now) to spend with his family.

Innovation, standardization and commoditization

If Silicon Graphics ran Christmas...
Ornaments would be priced slightly higher, but would hang on the tree remarkably quickly. Also the colors of the ornaments would be prettier than most all the others. Options would be available for 'equalization' of color combinations on the tree. — Internet joke, Dec. 1998.

Merc columnist Mike Cassidy had a poignant column Tuesday (also available here) on the liquidation of SGI (born Silicon Graphics). One excerpt:

There was a can-do and why-not attitude all rolled into one. One of the first people I met at SGI was Joe DiNucci, the vice president of marketing who worked at the company for five years ending in 1997.

Yes, he remembers the good times.

"There really was an entrepreneurial spirit there," he says. "The dark side of it was that it was kind of frat boy, locker-roomish."

But that sort of zeal and bravado meant that everyone talked to everyone and good ideas were infectious. "You could turn the company," says DiNucci, a valley veteran. "If you had a great idea and you had balls, you could make something happen."

And plenty did, starting with developing a way to create moving 3-D images on a computer screen. It was a lightning bolt at the time, and it was SGI's franchise.

DiNucci recalls when SGI was on the cover of Business Week, giving additional credence to the Paul Krugman line: “Whom the Gods would destroy, they first put on the cover of Business Week.”

Sure enough, Peter Burrows of BW, linked to some of this early coverage in his own column last week on the death of SGI (complete with a faux cover):

There was a time when Silicon Graphics Corp. was the Apple Inc. of corporate computing. It received coverage out of all proportion to its size, certainly by BW. And for good reason: It involved larger-than-life characters such as Jim Clark, who went on to co-found Netscape. SGI was forever on the cutting edge of technology innovation, and pioneered use of powerful computing technology in the making of movies, game consoles and for early Web companies in the mid-1990s. And it was a lightning rod in the best sense, always a central player in the big debates roiling the computer industry (workstation vs minicomputer, Risc vs Cisc and UNIX vs Windows, come to mind).

I think once upon a time, I would have shared in this nostalgia, but not today. Perhaps it was because I just missed becoming a Unix workstation geek when I jumped to the Mac in 1986. But I think it’s because as a researcher (and middle-aged industry veteran), the death of SGI seems like the natural order of things.

The normal progression is that maturing technologies get standardized, and standards enable commodization. Doing something unique lasts for a while, but unless you control a proprietary standard (possible but not likely) eventually there will be less control and more competition.

Competition engenders efficiency and price cuts for buyers, fueling adoption. The impact on innovation is mixed: competition can fuel innovation wars (as in cellphones) or it can squeeze margins and squeeze out R&D dollars (as in PCs).

So if some companies creating cool innovation in the high-risk, high-growth period — but fail during commoditization — that’s a dog-bites-man story. A few companies such as Apple, and IBM have re-invented themselves multiple times, but the cadre of one-great innovators seems much larger: Cray, DEC, Motorola, Sun. (Ironically, according to Wikipedia SGI once owned Cray, which in its latest incarnation is still making top-ranked supercomputers — only now using commodity processors).

I didn’t have this perspective as a 21-year-old software engineer or a 29-year-old entrepreneur — in part because I was young, and in part because (other than the BUNCH) the computer industry hadn’t seen a lot of casualties yet.

For my students, I try to sensitize them to this perspective: both the natural life-cycle of an industry and also the different sources of competitive advantage that firms need at different points in the life-cycle. As in previous years, I believe the best way to bring this realism to 20-something students is to assign Geoff Moore’s Dealing with Darwin, and I will be using it again in the fall.

Not all innovation is innovative enough

This month I’m working on a generalized paper on open and user innovation, a follow up to the encouragement I received for my talk at the User and Open Innovation Conference last august at Harvard. While doing the research for the paper, I found an interesting juxtaposition of two sources with the same argument: don’t bother with half-hearted innovation.

The first reference was in Geoff Moore’s Dealing with Darwin. Since I reviewed the book two years ago, I have been a big fan of the book. As I said in the review:

Certainly his most ambitious book yet, Dealing with Darwin, uses his consulting practice — with a special emphasis on Cisco — to offer nothing less than a grand unified theory of product and service innovation. While academics may be skeptical absent peer reviewed statistical tests, Moore appears to offer a complete framework for innovation that is both mutually exclusive and exhaustive. The hubris is stunning, even by business best-seller standards: still the integration is novel, as are many of the concepts.

Since that time, I’ve used it in every section of my MBA technology strategy class. The students find it approachable and useful, even if (as always) they rebel at the idea of reading an entire book (even if spread across two weeks).

One of the first ideas I use from the book is his proclamation in the first chapter (pp. 5-8) that if innovation is intended to support a differentiation strategy, it must be enought to “achieve separation” in the minds of a buyer. Without differentiation (as regular readers of this blog know), the alternative is commodization, competing on price and plummeting profit margins. Moore concludes that desirable innovation outcomes are either differentiating, neutralizing the differentiation of a rival, or improving productivity (i.e. cost reducing).

However, he argues, a majority of innovation spending is wasted, because they achieve none of these three. The “pernicious” examples of waste including neutralization efforts that overspend by adding “nice-to-have enhancements” that are not necessary for neutralization. Conversely, other efforts underperform, by spending heavily to create differentiation but that is not enough to achieve it.

As a (now timely) example, he mentions the fate of America’s biggest auto maker:

This is a horrible outcome. In effect, you have spent the resources for differentiation but have achieved the outcomes o neutralization. … You are sliding down a hazardous commoditization curve, and if you do not do something drastic in fairly short order, you will find yourself stuck at the bottom of the hill, with neither the energy nor the funds to get yourself back to the top.

This has been the fate of the Chevrolet division of General Motors [and other firms]… It is not that these companies do not innovate. It is that their offers do not achieve separation — and here is the kicker — they were never designed to!

Picture in your mind a Chevrolet sedan from the past ten years. Just try. Nothing? That’s my point. … Innovation for differentiation must be bold enough that, if it wins, it achieves separation. That’s why Chrysler’s failures are more memorable than Chevrolet’s successes— the Viper and the Prowler, for two.

We covered Moore’s book last month in my tech strategy class. This morning, while looking for more general innovation resources, I rediscovered a famous 1991 paper on new product development by Elko Kleinschmidt and Bob Cooper. To quote from the abstract:

While many writers and strategists maintain that innovation is important, research has often demonstrated that product innovativeness does not have a major impact on the rate of success in the marketplace. Elko Kleinschmidt and Robert Cooper demonstrate that the relationship between product innovativeness and commercial success is U-shaped. That means that both high and low innovativeness products are more likely to be more successful than those in-between. The authors suggest that past research has not allowed for this non-linear relationship and that their data show that moderately innovative, middle-of-the-road products are less likely to succeed when measured by a number of performance criteria.

So across two decades of academic and consultant study of innovation is evidence supporting a rather simple idea: innovate enough to make a difference to your buyers, or don’t bother.