Are firms serious about open innovation?

Cross posted from the Open Innovation Blog.

Given the popularity of open innovation, it was inevitable that companies — and researchers — would seek to wrap themselves in the term to leverage its cachet to legitimate their otherwise unremarkable efforts.

One way that I’ve seen this is through a Google news watch on “open innovation” that lands in my inbox every night around midnight ET (9pm Pacific.) Every day there are 1-5 stories about companies (and increasingly the government) trumpeting their latest “open innovation” breakthrough. I am convinced that half the PR people (or execs sponsoring the underlying initiatives) couldn’t articulate a recognizable definition of open innovation.

In talking about this in conjunction with the creation of the Open Innovation Community, I found that Henry Chesbrough has a similar news watch. I’m concerned that faux open innovation will muddy the waters and confuse the market; also, from a research standpoint, a theory of everything is a theory of nothing. However, Henry is more inclined to give them the benefit of the doubt, perhaps because he is a more optimistic person.

The issue came up earlier this year in a press interview. Orange Silicon Valley (a branch of the French mobile phone company) hired a former WSJ technology writer to prepare a 48-page report on the future of Silicon Valley. This included interviews with 10 Silicon Valley experts, including California’s second most famous open innovation researcher. Here is an excerpt:

Do you think the phrase is being overused?

We don’t have a term for it, but there is an Open Innovation equivalent of “greenwashing.” Greenwashing is where people wrap themselves in claims of environmental-friendliness, but don’t change their actual practices to make their products more marketable.

When I use Google to see how corporations use “Open Innovation,” I’d say only about a third of it is really legitimate; the rest of it is just people want a buzzword to make themselves seem more innovative and more trendy.

In many cases, when they appoint a VP for Open Innovation, there is an attitude change and they really are being more collaborative. At other times, it’s just a new name for something they’ve always done, and they’re just calling it something else.

I was thinking of a particular example three years ago when one of Silicon Valley’s most respected companies renamed their university relations office to be their open innovation office.

However, I was a little more encouraged in looking through the news articles that Google emailed to me in November (thus far) — perhaps more encouraging than when I started the news watch four years ago.

Two sorts of articles have been there consistently throughout. One is for the crowdsourcing companies that are seeking to match firms with external suppliers of ideas — certainly a form of open innovation, but (as I’ve found in my research) tending to be narrowly focused on just the sourcing aspect.

The other common thread are stories that treat “open source” as synonymous with “open innovation.” The two terms are not synonymous: there’s an overlap in some cases but they are disjoint in other cases. This is the sort of misuse of the term I’m trying to discourage.

And yes, I saw a certain amount of greenwashing-type usages, using the buzzword for PR purposes. Alas, some of this is being done by the US government: small high-visibility innovation efforts don’t make a $3.5 trillion/year bureaucracy innovative — any more than banning iPad purchases make it efficient.

Still, what I found in this month’s data was more encouraging than I expected to find. One example was this news item from last week:

XYZ Corporation has announced a new Web portal to support its existing Open Innovation program. The new Web portal will increase the pace of innovation, in targeted areas, by improving XYZ Corporation's ability to leverage outside resources.

At the one level, this is the same as hiring Innocentive or Nine Sigma to find new technologies. On the other hand, the effort of setting up a portal demonstrates a greater level of commitment to OI — and perhaps to act upon these ideas — than a few experiments with outsourced crowdsourcing vendors.

Overall, I think the trend line is encouraging. There’s more real open innovation happening in practice, and perhaps even a higher proportion of it is real.

Week of open innovation

This week I’m at the annual Open and User Innovation Workshop, this year at MIT. See my open innovation blog for more updates.

I’ve been having trouble keeping up with blogging this summer due to many obligations, including the new Solar Workforce Project which has caused me to pay more attention to cleantech business issues.

I still intend to update this blog with news about the mobile industry, Apple, standards and open source, even if I can’t react to the news of the day.

Apple the open innovator

Macworld Expo opened today in San Francisco — unlike the first one 1985, without Apple and also without me.

In honor of the news peg, Forbes writes about Apple’s system integration strategies:

As good as Jobs and his team are at marketing their own inventions, they're even better at repackaging other people's enthusiasm, technology and ideas into something beautiful, and selling them.…

Just take apart Apple's signature product, the Macintosh computer. Crack open the glossy shell and you'll find a machine that runs on the same sorts of Intel processors, Seagate hard drives and Nvidia graphics chips as any machine from Dell or Hewlett-Packard.
…
While Jobs touts that Apple is different because it makes the "whole widget," the company actually relies heavily on outside innovations. Intel and Nvidia supply the Mac's processors. Companies such as Toshiba and LG provide its glossy displays. Open-source programmers have helped build Apple's signature OS X operating system. And in China, manufacturers such as Foxconn bolt it all together.

In other words, Apple is practicing open innovation. Yes, it is more integrated (with more internal software R&D) than Dell or HP. But compared to IBM in the 1970s or DEC in the 1980s — or even Sun in the 1990s — Apple’s success as a system integrator is more based on external technology sourcing than previous market leaders.

Drive time open innovation platitudes

Many of my friends using podcasts for their daily commutes or for jogging. A new podcast posted at EnterpriseLeadership.org talks about the basics of open innovation from the standpoint of the IT industry and IT users.

The podcast reflects a telephone interview host Tom Parish did with me a few months ago. It’s a good starting point on open innovation, although much more detailed information is available at our open innovation website.


Cross posted from the Open Innovation blog.

Len Lauer’s brave bet on open innovation

Well, everyone was telling the truth when Len Lauer stepped down as COO of Qualcomm last month to become CEO of a “non-competing” company.

He’s surfaced as the CEO of Memjet, an inkjet printer company also based in San Diego. Don Clark of the Wall Street Journal has the story.

Like Qualcomm, Memjet likes to patent things, in this case behind its lead technologist Kia Silverbrook, formerly CTO of Canon.

Something about this just doesn’t make sense. While I’m a big advocate of open innovation, Memjet is trying to crack a very vertically integrated industry.

I actually worked in inkjet printers for more than a decade — sitting there in my Oceanside software company, supervising (and sometimes actually writing) software for a wide range of color printers, including (for a time) most of HP’s inkjets.

The problem I see with Len’s career move is the part about Memjet licensing its inkjet heads to others to make the actual printers. HP, Canon and Epson have a cozy patent cartel, cross licensing and making their own printers and disposable cartridges. I don’t see any of them licensing technology, no matter how cool it is. (Attempting to invent patents — or suing for a cross-license ala Broadcom — around seems much more likely).

So maybe some of the 3rd tier players — Brother, Samsung — might be interested. Maybe even the 2nd tier players such as Lexmark and Xerox. But how are you going to get market share with these players — no matter how cool your technology — given their distribution and brand recognition are so far behind the Big Three?

Even if you did, get some of them, would the royalties ($1 per printer? $5 for a printer and a lifetime of cartridges?) be enough to pay back “hundreds and hundreds of millions” of VC investment?

Yes, I certainly see the analogy to Qualcomm’s QCT chip business, but Qualcomm got into the chip business when no one knew how to make CDMA chips and few merchant chip vendors existed for handsets (Motorola, Nokia, Ericsson, Matsushita made their own.)

Maybe I’m missing something, but to me printers are a 20-year-old mature industry, without a lot of opportunity for entry.

So my hat’s off to Len, a braver man than I. We’ll see in a few years whether he’s a smart man too.

Markets for IP and innovation

In discussing open innovation with some visitors today, we got to talking about markets for innovation — which are similar to (but not the same as) markets for IP.

There are two modes of open innovation, outbound and inbound, and the outbound mode depends on being able to monetize the innovation. Maybe if you’re IBM you can rely on indirect monetization (NB: IBM Global Services) but most companies need more direct monetization. Inbound OI works as long as there is a supply of innovations, which might be motivated by money or by non-monetary incentives.

So I was asked, how do firms find innovations? In other words, how are markets organized? We know from economics that markets play a number of important roles, including search, matching buyers and sellers, providing feedback/constraint on claimed quality/performance and price-setting.

From easiest to hardest, I think there are three types of innovations that might be sourced via open innovation:

• components, such as semiconductor chips
• IP, such as non-exclusive (or exclusive) patent rights
• custom innovations, such as Threadless or other user-generated content

Search can be difficult, but is greatly improved due to the Internet. As with any market, matching a price to quality/features is the hard task, particularly for new or thinly-traded goods.

To me, the advice given for one of these markets for innovation would not necessarily apply to the others, because they are sufficiently different that lessons from one might not transfer to the others.

Similarly, there are two (or three) different IP business models. For some companies (such as Dolby or Qualcomm) IP licensing is the primary business model and thus revenues have to cover all IP development costs. For others, the IP revenues are incidental or supplemental, and “success” here means incremental revenue but not necessarily enough to justify the R&D in the first place.

A subset of the incidental case (or perhaps a separate case) is the salvage case, as when Xerox is unloading the Xerox PARC patents to boost the bottom line because they never figured out what to do with them in the first place. A salvage operation is particularly misleading as a role model, because usually the IP is being sold for a fraction of its original cost on the theory that some revenue is better than nothing.

So a word to the wise: don’t believe a consultant if he tries to sell you a one-size-fits all innovation market (or IP licensing) strategy. One size does not fit all.

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.

Nokia needs some open innovation

Nokia’s stock price was punished after releasing glum financial news Thursday. As I write this Friday morning, the stock is off 16% from its Wednesday close. While some say buy on bad news, Tiernan Ray of Barron’s says “Easy Call on Nokia: Sell”. (I think that would be more prescient if it had been published on Wednesday morning, or last week).

Ray is not alone in the chorus of naysayers. Parmy Olson of Forbes calls Nokia the next Motorola — long-dominant now unable to respond to new rivals and even the FT is painting a glum picture. The Times of London seemed inclined to take Nokia’s upbeat interpretation at face value.

Nokia has long gotten no respect in the US from analysts, journalists and many industry members due to their geographically skewed footprints. (Nokia is hoping to solve this with increased US distribution.) Nokia and Apple have long seemed mirror images across the pond, with Europeans being unable to understand Apple’s strength (or Research in Motion’s) because they and their friends don’t use the products, just like American’s didn’t understand Nokia’s. But if European commentators are glum on Nokia, then that’s bad news.

The most interesting of the three FT articles was the one the editors buried, “Nokia to accelerate mobile services push,” which notes that Nokia has spent heavily to create its own maps, music and email services that are not producing financial returns.

I think the Motorola analogy is an apt one. Nokia is like Samsung and LG, a hardware company that makes new devices with lots of features. On a good day, it’s a devices company that makes stand-alone devices that people want to use, rather than (as with so many high-end phones) just lumps of plastic with abominable software.

However, Nokia is not yet a mobile systems company, the way that Apple and RIM are, and that Google seems likely to become. Some of this may relate to its software and services skills, or operator resistance in Europe to its clout, or many other factors.

But my sense is that the Motorola analogy is quite apt. Motorola invented the hand-held cellphone market and dominated the US for more than 15 years; it assumed it would be the leader because it always had, and now it’s in freefall.

The paradigm for mobile devices has shifted — with iPhone, BlackBerry and the dozens of gPhone models soon coming — and so far Nokia has not been able to make the shift. In particular, despite its redeployment of Symbian as an open source platform (to compete with Android), Nokia seems to think it can control all the shots. It’s the 1-tonne gorilla in Finland (and at least 300 kilo in the EU), and it’s gotten used to end-to-end control and people buying it anyway.

I think it’s long past time for Nokia to admit it can’t control everything; Google and Microsoft have admitted it, and they are certainly dominant companies in their own right. Nokia needs to use more open innovation — cooperating with outside suppliers of technology rather than trying to buy them and control them. And it needs to build partnerships — as it tried to back in 1998 when it co-founded Symbian.

Google provides a good example. Even though everyone knows Google is calling the shots, Android is nominally governed by the Open Handset Alliance, which defines aspects of the whole platform (such as the Android Market), not just the software. If Nokia wants to avoid becoming the next Motorola, it needs to cooperate on things like app stores and music portals to create a pan-industry standard to compete with Android, the iPhone and their ilk. It’s no substitute for being a nimble, capable software savvy systems integrator, but it’s the best play for the hand they’re now holding.

48 hours of user innovation

This week I’m in Hamburg attending the annual “User and Open Innovation” research workshop being held here. Major themes include user innovation, lead users, user entrepreneurship, communities, open source and open innovation.

Some of the sessions will be of interest to Open IT Strategies readers. For more information, see the postings from my open innovation blog. (Or subscribe here).

One way to save the auto industry

Instead of financial restructuring and bailing out failed labor contracts, perhaps the auto industry could be saved by coming up with a new way to make better products. (Could happen, right?)

A great article by Charles Mann in the June Wired quotes Henry Chesbrough as recommending open innovation. Noting the slow rate of change in the industry, Henry said

“It's as if the computer industry were still dominated by Wang and Data General and DEC, and they were still selling minicomputers.”

Despite my disagreements with its lousy PR efforts, I think Tesla Motors (a Silicon Valley car company) is well ahead of Detroit in implementing open innovation. For its electric sports car, Tesla utilizes car bodies and assembly from Lotus Cars (using external innovations), as does one competitor. Meanwhile, it has just agreed to sell its batteries to Daimler (licensing internal innovations).

The article also quotes another very smart innovation economist, Steve Klepper of CMU.

A radical reconfiguration may be the only way this vital industry can survive on these shores. "They're going to have to swing for the fences," says Steven Klepper, an economist at Carnegie Mellon University who studies industry innovation. "The only way I can see for them to win the game is to change it entirely."

In his article, Mann reveals his great love for the US auto industry and desire to see it rise again:

I should declare a personal interest here. My father worked as a Big Three executive for much of my childhood, most of that time at Ford. He left to run his own marina, but he always remained loyal to Detroit. He never bought a foreign car. I didn't buy one until after his death, and even then I felt like I was thumbing my nose at his memory. I would like to return to a US product. More than that, I would like millions of Americans—people who don't share my sentimental ties—to come back to vehicles from US companies.

Keppler is right. Ford could survive as the last man standing of a sickly US auto industry (think Renault or Fiat), but on the current trajectory the other two companies have very long odds.

Chrysler’s solution is to become a subsidiary of Fiat, which is likely to bring more of the same — a two-country vertically integrated car company (didn’t work last time). Since it has the least to lose, perhaps GM could take the lead in using external sourcing of technology.

It's the software, stupid!

In less than two years, Apple has gone from no cellphone to having a single phone model that accounts for a 8.2% of the 2008 smartphone market (10.7% in Q4) and 0.9% of the overall 2008 market. The secrets have been its pre-existing industry ties (including its brand, desktop software and iTunes Music Store), its skills as a systems integrator, and their ingenious strategy for creating a new ecosystem.

However, at its core Apple has succeeded because it’s a great software company. They have been a software company since their founding — when Steve Wozniak wrote software to control Apple’s first floppy disk drive. Apple has changed what consumers (and the industry) expects from a smartphone through their software.

Of the major players in the industry, only one or two have the prospect of also being great software companies. The rest should admit that they’re a failure and outsource software to outsiders, shifting from vertically integrated R&D to open innovation. This reminds me of my post-doc, when I studied how Apple dumped its below-average manufacturing capabilities and from then on used outsourcing.

Clearly Research in Motion (16.6% of smartphones, 1.9% overall) is a great software company. There are aspects of the BlackBerry software that I don’t care for, such as the browser. However, there is no question that they have both created a compelling user client and built a tremendously successful, rapidly growing business around systems integration with their industry-leading backend.

The market leader Nokia is the other possibility. From what I’ve seen, they’ve succeeded despite rather than because of their software. They have volume, market share (38.6%by Gartner’s 2008 estimate) , branding and solid hardware, but no one (other than the most hardened Nokia bigot) would say that their software interfaces are compelling or lead the industry in ease of use. It has been steadily losing smartphone market share to the BlackBerry and now iPhone.

The wild card is Symbian, the longtime OS supplier for its high-end S60 phones. Nokia spent €264 million (more than $400 million) to buy that portion of Symbian it didn’t own already, with the deal closing last November. With the entire solution in house, will the Nokia team respond effectively to the iPhone challenge by hiring outside usability experts? Or will they continue to do more of the same, with hardware and software features substituting for a compelling user experience?

There are promising signs. Even before Nokia began to shift from handsets to services, it spent heavily on software. It has a more coherent platform strategy than any of the other top five vendors, limiting itself to S40 and S60. It also was an early adopter of WebKit — Apple’s modernization of KDE’s HTML libraries — and thus have a browser experience that approaches Apple’s and Google’s.

For the rest of the industry, the only hope is outsourcing software. Without the sin of pride and “not invented here,” Taiwan’s HTC has been gaining market share rapidly (from a low base) by using operating systems from Microsoft and Android. The enterprise-centric Windows Mobile doesn’t have a compelling user experience, and Android is a long way from being the ne plus ultra of cellphone experience, but they are both better options than what HTC could have done on its own.

Sony Ericsson (7.6% in 2008) is hardly sinless here: with parents like Sony and Ericsson it would be impossible. However, their falling market share appears to have woken them up. They have been a longtime member of the Symbian alliance, they’ve added Windows Mobile to their portfolio, and they have announced plans to ship an Android phone.

Motorola seems like it is also admitting their software weaknesses and moving towards open innovation. Software has been Motorola’s downfall as they missed the shift from component-based functionality to software-based functionality and thus have been a non-entity in smartphones,.

However, things seem to be changing in the face of unrelenting bad news: the longtime #2 vendor has fallen to 5th place (below 7%) in the Q4 estimates. Led by a new outside co-CEO with no allegiance to the old way of doing things., they seem to realize they have to do something new. Two of their three platforms are now outside platforms: WIndows Mobile and Android, and if Android proliferates to the low-end (as predicted), they can probably drop their legacy P2K low-end platform.

This leaves the two big Korean players, Samsung and LG, who were #2 and #3 in global sales in the 4th quarter and accounted for 16.3% and 8.4% for the entire year. Even more so than Nokia, they have succeeded despite their software.

Samsung has an incoherent smartphone strategy that surpasses even Motorola, with shallow experiments in just about everything. They shipped the best Palm OS phone ever, my longtime favorite the i500. They have been a Symbian member but done little with it. The closest thing they’ve had to a smartphone hit has been the BlackJack, which feels like a surfboard to me but has won some praise. They were an early member of the Embedded Linux Consortium and has long shipped Linux smartphones to China. Meanwhile, they are a founding member of both the LiMo and Android consortia, and claim they’ll ship examples of each this year.

At this point, Samsung seems committed to using open innovation for their high-end phones, but they still use their own OS for the bulk of their phones. Will they see software as essential to the usability of their products or just a cost to be minimized in their low end phones?

Historically, in electronics LG has copied its larger longtime rival. LG has done Windows Mobile and Symbian phones, and someday will do Android too. Still, LG seems even less committed to first-class software for its phones, and thus unique devices (like the LG Lotus) languish for lack of connectivity with applications and other devices.

I have long been skeptical of the prediction that the fragmentation of cellphone operating systems must inevitably end — a prediction that most recently I heard in December at a Symbian event and yesterday at an Android event. I think a bigger impact on fragmentation — and industry usability — would be to end the “not invented here” mentality and mediocre in-house software solutions, switching to one of the major shared platforms like Symbian, Android, or even Windows Mobile.

Open to user innovation

I’m now finally back in California, after five days and four nights in the Boston area. The first four days were spent at the HBS-MIT conference on user innovation, which was held at Harvard Business School Monday-Wednesday.

This is the sixth conference, but the first to mention “open innovation” and the first one I’d attended. I’ve been blogging on some of the interesting stuff over at my open innovation blog. (BTW, this is not a brand extension too far — the OI blog is intended to be a summary of academic research related to open innovation, for an academic or semi-academic audience).

On Wednesday night and Thursday until I dashed to the airport, I was at the MIT libraries (and also the archives) doing research for my planned book, From MIT to Qualcomm. I found some fascinating tidbits, like the terms of the endowment that made Claude Shannon in 1957 one of MIT’s first endowed professors.

I’m probably going to be offline much of the next week, as I head Friday to the annual Academy of Management conference, which draws some 6,000 professors and graduate students in OB, strategy, entrepreneurship and related management disciplines to listen to workshop, papers and panel discussions.

On Friday I’m speaking to entrepreneurship doctoral students, on Sunday I’m talking about standardization, and on Monday I’m presenting the open innovation side at a panel session on user and open innovation.

Did I mention that the conference is in Anaheim? Anyone who’s met my daughter (and my wife’s aversion to roller coasters) knows that somewhere in there I’ll be spending time at the Magic Kingdom.

McCain's prize idea

Today John McCain unveiled a plan to spend $300 million in government money as a prize for a better battery. ($300 million = $1/American: get it?) This is part of a stampede of politicians seeking to appear to do something, whether or not it does any good (cf. Congressional investigation of energy “speculators”).

Batteries of course are for electric cars, which purported to solve two of the problems of the gasoline-powered cards: their carbon emissions, and increasingly scarce supplies of petroleum that are driving up energy costs.

IMHO this is a bad idea from a policy standpoint — not the prize, but the target. One problem is that batteries are hard and there has been billions of dollars of R&D spent over the past two decades already making batteries for cell phones and laptops; from what I’ve heard, it will be expensive to make something better than a lithium-ion battery, and the next technology will only be slightly better. Also, having the ability to run an electric car gets rid of the auto’s emissions, but it doesn’t generate the additional electricity needed to run it (which might come from coal or nuclear plants) nor deliver it across the transmission grid.

Instead, two things better to spend the money on would be cutting the production costs by 90% for either photovoltaic cells (creating more energy) or LED residential/commercial illumination (using less energies). Both are known technologies that everyone expects will achieve cost goals in the next 10-15 years, but additional funding could pull that forward by 5 years or so.

But leaving aside the goal, what about the use of a prize?

On the radio, one guy interviewed said “we should spend it with the national labs.” The radio show host suggested another Manhattan Project.

Frankly, I think throwing it at the government is about the worst thing you could do. (Other than perhaps have no-bid contracts as set-asides in a pork-laden spending bill). Frankly, while the national labs have some smart researchers, they have no where near the concentration of talent working on government research during World War II, the Manhattan Project at Los Alamos or the MIT Radiation Lab.

Instead, the government needs to do a little open innovation of its own (“Not all the smart people. in the world work for us”) and use the market to get the best answers. Today, the top scientific and engineering talent is scattered across academia, industry and government labs. You want a wide range of ideas — in terms of approaches and technologies.

It turns out that the prize idea is actually one that worked in the past — whether in conjunction with or instead of the right of exclusivity (i.e. a patent). In her book, economist Suzanne Scotchmer showed that there are cases where a prize is the optimal incentive mechanism for attracting innovation.

My co-author and friend Karim Lakhani (of Harvard Business School) has also done research on the value of prizes, and is quoted in an April Fast Company article about how prizes are effective at stimulating innovation.

One dirty little secret of prizes: the sponsor often benefits from the losers, even if the losers do not. For the X Prize for space flight, all of the finalists have an incentive to try to develop commercial businesses to earn a return on their aerospace R&D, so the donor gets not one commercial spaceflight company, but probably two or three. EBay’s $100K prize for the “best widget” has even more nake self-interest: it would get dozens (hundreds?) of widgets to make eBay more useful, but only has to pay for one.

However, prizes do have a win-win aspect: free publicity. Even if you finish #2 in the X Prize, you get a lot of publicity and (perhaps) legitimacy that you can use to launch your business. Try getting that with an SBIR award or a patent.

A dozen milestones in IT openness

InfoWorld has published an interesting retrospective — woulda, coulda, shoulda — of key passing points in the evolution of the IT industry.

Modestly labelled “Tech's 15 turning points,” nearly all the milestones relate to issues of IT openness and the implications both for the firm (that chose to be open) and the rest of the industry.

Below are the titles (and my commentary)

1. Apple's NeXT move: to deliver its first new OS in nearly 20 years, Caesar recruits Brutus to migrate Apple to open systems
2. Dawn of Free Software: RMS starts a communitarian movement that occasionally ships software
3. Microsoft dodges a bullet: Microsoft is closed, but not so closed as to be broken up
4. Handspring launches the smartphone era: by licensing an off-the-shelf PDA OS, they create a new product category (at least in the US)
5. That '70s spam: costless open access invites abuse
6. Rise of MS Office: tying one proprietary platform to another makes both valuable
7. IBM's second coming: even the best proprietary platform strategy runs out of gas
8. The ARPANet is for porn: in an open marketplace, man’s basest imperative will eventually be monetized
9. The Web loses synch: formal standards take too long, and your competitors will copy your best de facto standards
10. Linux staves off SCO: proprietary Unix company unable to put the genie back in the bottle.
11. Intel dispels MHz myth: marketing triumphs over technology every time
12. NetWare falls to Net: the dominant PC proprietary network is vanquished by the open internet
13. IT made accountable: industry excess invites regulatory excess, which perpetually wastes piles of money
14. Apple flips chip strategy: you can't fight global network effects
15. Outsourcing goes global: open borders mean more competition and global job mobility

Interestingly, the intro mentions two even more important passages that are not in the article: Steve Jobs taking the 1979 tour of Xerox PARC, and IBM’s 1980 decision to outsource the CPU (and OS) for its new PC. But — being the subject of countless Cringely columns and even a movie — maybe those are so obvious as to be not worth mentioning.

Not all R&D created equal

As a UCI postdoctoral student in 2000, I was adapting parts of my dissertation to be an e-commerce study of Apple Computer. The idea was that the study (released as a working paper) would stand side-by-side with other PC industry e-commerce studies done by my colleagues on Dell and Gateway.

At the time, Dell was still riding high as the cost leader of the PC industry, earning record profits from relentlessly commoditizing the Wintel PC business. At best, Apple seemed to be demonstrating a dead cat bounce from the depths of its near-death experience in 1997.

One of the arguments I had with my colleague, Jason Dedrick, was whether Dell did more R&D than Apple. While Dell had low R&D intensity, at the time it was much bigger than Apple, so the reported cash R&D figure was higher than Apple’s. I argued that Apple was still doing more innovation, no matter how big Dell’s number looked, because we knew that Dell (unlike Apple) was not spending significant money on either developing software or on being the first to bring new technologies to the PC industry.

This week, Dell CEO Michael Dell was interviewed by Walt Mossberg of the WSJ at the newspaper’s annual “D” conference. I wasn’t there, but there’s a summary of the interview on the WSJ blog and the Barron’s blog, as well as some video highlights.

Dell confirmed the point I was making back in 2000-2001 when arguing with Jason. Here’s my transcription of the relevant portion of the taped interview:

Mossberg: The former Dell of CEO of Dell — Kevin Rollins — appeared at this conference a few years ago. And I'm paraphrasing here — it's not an exact quote — but he said something like “R&D was a waste of money.” Was that the Dell philosophy at the time and is it now the Dell philosophy?

Dell: No. (long pause … then video cut) We'll spend roughly $600 million year in R&D, so certainly not an insignificant committment to developing new technology and new products. I think it's also to remember that there's tens of billions of dollars of R&D spent in the industry

In other words

• most of our “R&D” is really just product development
• we don’t do much research
• we rely on the rest of the industry to create technological innovations for us.

Now there’s nothing wrong with using open innovation to support a generic cost leadership strategy: historically Dell lets component suppliers do the technology innovation, and then copies at lower costs the innovations of companies like Apple, HP or IBM (now Lenovo). I personally think that Michael Dell is silly to feel embarrassed about being a not-very-innovative company: solving key supply chain problems and being a relentless cost-cutter made him worth $16 billion. Much as I like innovation, I’d trade places in a heatbeat (even if it meant moving to Texas).

In fact, it would be stupid for him to try to make Dell into Apple. There’s only one Apple, and even Sony (with its brand and 50+ years of innovation) has been unable to match it in PCs and music players. If Dell tries to combine its traditional strategy of cost-cutting with bits and pieces of innovation, it will become “stuck in the middle” (as our old undergrad strategy textbook used to call it), neither fish nor fowl — in other words, like HP for much of the past decade.

The problem instead appears to be execution. When Dell comes out with products, then need to be good ones, even if they’re not first to market. As the news article in CNET made clear, the company needs to improve its product design:

[Dell] promised that the PC maker will not be a technology laggard going forward.

"We've tripled our resources in design and user experience," the company's founder and CEO said in an interview with technology journalist Walt Mossberg at the D6 conference here.

Business execs (like politicians and even judges) lose their way when they care about what other people think of them, rather than doing what they know is right. For Dell’s shareholders, let’s hope that Michael Dell returns to his winning formula, suitably updated to allow for today’s greater consumer expectations of product design and usability.

Two minor victories for openness

Wednesday’s paper brought news of two minor victories for openness.

The most clear cut was the concession by the National Association of Realtors that it would stop fighting the US Justice Department over control of its home listings. Some NAR brokers (regional bodies?) had adopted rules saying that their home listings couldn’t be shown on non-Realtor websites, and so in 2005 the Justice Department filed an antitrust suit.

This is an example of disintermediation — cutting out the middleman. Theoretically, any listing originated by a Realtor could be sold by a web-based discount broker who passes its savings onto its customers. Two examples of such firms are Zip Reality and Redfin, although the WSJ predicted that the effect of competition on overall commissions will be slow.

If this plays out, the commissioned human being in real estate will eventually be replaced (as in plane tickets and many financial services) by a computer serving a website. Given the stakes and risks, I worry a little bit about new home buyers (or sellers). On the other hand, the fraud (mainly by overleveraged home buyers) in the past few years show that the existing system of real estate agents, appraisers and lenders already had gaps big enough to drive a mobile home through.

The other interesting tidbit was the proposal by major US cable TV operators to standardize distribution of advanced cable services, allowing Sony to incorporate set top box functionality in its TVs. The reports say that the standardization is mainly in software — a Java application called “tru2way” that is used to arbitrate requests for access to interactive services. (Of course, access to unscrambled cable channels has been governed by FCC-approved standard frequency allocations for decades).

This has to be bad for the two major producers of settop boxes: General Instruments (now owned by Motorola) and Scientific Atlanta (owned by Cisco). Once upon a time, Microsoft hoped to dominate settop boxes with Windows CE, but the cable companies said nyet to Microsoft creating another platform monopoly and instead went with Java. The (relatively) open nature of the Java standard means that any STB maker (and now TV maker) can implement a Java-based connection standard.

The other interesting thing to me is the parallel to the Carterfone decision that allowed consumers to hook any standardized device up to their home phones. Once upon a time, phone companies and cable TV companies charged on a per-connection basis. I remember as a teenager wiring an extension in my bedroom without notifying (or paying) The Phone Company, and going to great lengths to minimize the chances that TPC could detect the extra line.

Now consumers will be paying for their connection to the network, plus any equipment they rent — but soon the commodity functionality of switching channels will be bundled into most new TV sets. The tru2way standard comes from the CableLabs and (in the tradition of “Wi-Fi”) is the consumer-friendly name of what used to be called “OpenCable Applications Platform” (or OCAP).

As the LA Times (and the trade press) makes clear— but the business press does not — Sony is a holdout late to the CableLabs party, lagging Panasonic, Samsung and LG.

HP's "open innovation" gambit

In March, HP reorganized their labs to re-emphasize "open innovation". At the time, I said “all we can do is wait and see.”

This week HP got a splash in the local papers when it announced an RFP for its new “Innovation Research Program.” Each of the seven HP regions have their own preferred research topics, totaling 49 overall. Among the 31 topics for “Americas” are social computing, networks on demand, exascale datacenters, personalization, and a number of semiconductor and materials topics. Other regions have shorter (non-overlapping) lists: EMEA has eight topics, including four about information/knowledge management and two on security.

The story was covered by the Chronicle, the Merc and CNET, among others. All featured Rich Freidrich, director of the “Open Innovation Office” (which apparently was reorganized from the university relations office). Internal HP blogger Jamie Beckett interviewed Friedrich:

"I want to use this office to partner with some of the brightest minds in the world," Rich says.

He also hopes to change the way HP and its partners collaborate and to explore using Web 2.0 social networking tools to pursue and support research.

'I'm interested in what a Research 2.0 world looks like," Rich told me.

"How do we build a research community that combines the deep technical expertise of university professors, the deep domain knowledge of industry and the financial resources of government to solve the pressing problems of today and set the agenda for tomorrow?

And how do you do it in a way that you harness collective wisdom and create a really vibrant community?"

As the blogger notes, HP has been partnering with universities for years. In fact, I attended a workshop last month (hosted by UC Santa Cruz) in which one of the HP university account managers (now with the OIO) talked about best practice of working with universities, including his own journal article on the subject.

Clearly there is a continuity between HP’s long-standing university ties (going back to Terman, Hewlett and Packard) and its efforts to introduce open innovation into its R&D activities.

Week in review

This week I’ve been swamped coaching my two simulation teams in the final rounds of their International Collegiate Business Strategy Competition. A long slog that began on Jan. 7 (during winter vacation) ended Saturday with both teams victorious.

However, I wanted to comment quickly on a few items:

• The WSJ had a great article (available free) on how Vizio used offshore manufacturing to come from nowhere to be one of the top TV makers — in a virtual three-way tie (with Sony and Samsung) for the most LCD sales in North America. Consumer electronics has been a brutal commodity business with entrenched competitors and (except for flat panels) excess capacity, so Vizio’s success (using open innovation) should be an inspiration for upstarts everywhere.
• Red Hat has beat a retreat from the desktop Linux business. Which Windows advantage matter most — the one from network effects or switching costs? (The exact question I tried to answer with my dissertation). I don’t know, but If Red Hat can’t make it, it’s hard to see how Linux is going to be a major factor in consumer or business PCs — at least in countries with high existing PC penetration rates.
• Adobe’s new Photoshop Express website got a very nice writeup in the WSJ — which basically said it’s about as good as the 1.0 of an online photo program can be. This shows that not only is Adobe trying to remake itself into a SAAS company, but its skills are transferrable. Also that by requiring Flash, its can continue to use its position in one software segment to boost another.
• Some (but not all) of the 4G wireless equipment makers agreed to a patent cooperating agreement to speed adoption of the GSM/W-CDMA derived LTE technology. It’s not clear if the parties have agreed to a formal pool or a set of rules — either for valuing patents or (as announced in August) for deciding which patents are essential. Given the past failure of telecom patent cooperation, this seems more like a promise to agree rather than an ironclad agreement.
• The patent “reform” bill S.1145 seems to be dying, with those big IT companies that want to weaken patents (e.g. Apple, Cisco) unable to overcome the opposition of those that like them just as they are. I wonder if anyone in D.C. understands “win-win” — such as recent efforts to make patent examination more rigorous and accurate.

"Reorg" of HP Labs

All day I’ve been trying to make sense of HP’s announcement Thursday that they’re reorganizing HP Labs. This is the official announcement:

HP today announced that it has sharpened the focus of its advanced research group, HP Labs, to address the most complex challenges facing technology customers in the next decade. ...

The redesign of HP Labs is intended to balance exploratory research with an entrepreneurial approach so breakthrough technology can be transferred more rapidly into commercial applications for customers.

HP Labs will pursue 20 to 30 large research projects – instead of the 150 smaller projects in the past – based on insight gained from newly expanded relationships with universities, partners, customers and venture capitalists.

At one level, it looks like a cut although there are pledges to keep up head count and funding. The 600 researchers are expected to focus on 23 areas instead of the 150 earlier projects; supposedly the priorities are being set by researchers.

CEO Mark Hurd was quoted as saying of the labs “It's one place where there is still R left in R&D.” Despite this, the press release and news accounts strongly suggest an increased emphasis on near-term results, and thus a shift from advanced research to applied research.

To me, one of the more interesting tidbits was a decision to embrace open innovation:

HP Labs has established an Open Innovation Office responsible for deepening HP Labs’ strategic collaborations with those in academia, government and the commercial sector. The office is designed to ensure joint research endeavors result in high-impact research that meets the scientific and business objectives of HP and its partners.

As part of this initiative, an Entrepreneur in Residence Program is being established to give venture capital investors and their portfolio companies early access to HP Labs research. In return, HP will receive insight into emerging market trends and potential business development opportunities.

HP’s interest in open innovation is personally gratifying, given my personal stake in the subject. And the idea of collaborating with academia, government and other firms seems like the right way to go about it.

Still, given all the HP mismanagement of the past 15 years, all we can do is wait and see. HP was once the shining exemplar for innovation excellence in the valley, and now (for better or worse) that mantle has passed to Google. So I’d like to think the new innovation strategy will increase effectiveness, but past results give reasons to be wary.

Strategos going away

An odd press release showed up on my “open innovation” news search today

UTEK Corporation (AMEX:UTK) (LSE-AIM:UTK), an Open Innovation services company, has agreed to acquire Strategos, Inc., a leading innovation and strategy consulting firm providing services primarily to Fortune 500 companies.

Founded in 1995, Strategos has offices in Chicago, Lisbon and London. Over the past 13 years, Strategos became a leader in providing strategic growth advisory services, helping its clients outperform their industry peers by building and deploying a sustaining capability to innovate more effectively and efficiently at scale.

Since inception, Strategos has performed services for 25 out of the 30 companies included in the DJIA (Dow Jones Industrial Average).

I’d never heard of Utek, but their website implies that they are an IP licensing middleman. CEO Clifford Gross has co-authored a book on commercializing technologies from US federal labs.

I was skeptical about the “open innovation” claim, since this is really just the “found money” approach of external innovation that became popular after Henry Chesbrough’s 2003 book was published. Normally, firms (and consultants) take an oversimplified version of open innovation: fire your R&D staff and then look for all that free innovation just waiting to be used.

However, Chesbrough is listed as a consultant to the company and confirmed his involvement, so the claim of being in open innovation is legit.

Strategos was once a breakthrough strategy consulting company, on the strength of founder Gary Hamel. With CK Prahalad, Hamel heavily influenced the approach to strategy during the 1990s with their book Competing for the Future and a series of articles. I personally enjoyed Leading the Revolution the best, but I have not had a chance to read his latest book, The Future of Management.

Strategos had a 3.5% loss last year on revenues of $10.8 million. If it earns out, Strategos shareholders will get $15 million in stock over three years (with the attendant risk of stock price fluctuations).

Still, that’s a far cry from LECG, started by Berkeley’s David Teece. Even allowing for LECG doing an IPO at the peak of the Internet froth, LECG today has a market cap of $240m — 16x that of Strategos and more than double the $110m market cap of the company acquiring Strategos.