Tag Archives: innovation

Mavericks, mistakes and mum

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I caught up earlier this week on the drama Castles in the Sky about Robert Watson Watt and his invention of radar. My mum had been a young (18) radio location operator on the outskirts of London during the Second World War and liked to talk about it, so I was very interested, and thoroughly enjoyed the programme. It turns out there is an active Robert Watson Watt society which is raising a statue to him in his birthplace, Brechin. I knew nothing about him before this.

Kathleen Coyle is in this group of early radar operators

The story very much brought to mind two excellent books. One is Tim Harford’s [amazon_link id=”0349121516″ target=”_blank” ]Adapt[/amazon_link], about the structures that enable significant innovation – the ability to accommodate mavericks and mistakes, the importance of skunkworks and so on. The other is [amazon_link id=”0141042826″ target=”_blank” ]Most Secret War[/amazon_link] by R.V.Jones, about scientific intelligence during the second world war, including the decryption and encryption work at Bletchley Park. It’s also concerned with this question of how ideas work and fruitful failure can mesh with bureaucracy and order, and with the deep problem of information, the signal and the noise.

[amazon_image id=”0141042826″ link=”true” target=”_blank” size=”medium” ]Most Secret War (Penguin World War II Collection)[/amazon_image]

Innovation, the Romans and ‘us’

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There’s a new e-book free to download from Vox EU,Secular Stagnation: Facts, Causes and Cures.

The list of contributors is stellar, starting with the leading Stagnationists, Robert Gordon and Larry Summers, but also including economists such as Ed Glaeser and Joel Mokyr who disagree with the basic secular stagnation assertion that the pace of innovation and therefore technology-driven growth has declined.

For example, Glaeser writes: “It is hard to think of any innovations before the modern age that increased demand for the most skilled workers while providing consumer benefits for
the masses. Indeed, for such a thing to occur, one must imagine a world in which highly paid elite workers toil for the benefit of services that will be used by the poor. Could
such a thing be imaginable in pre-revolutionary France or in Ming China? Yet that is
exactly what happens at Google or Facebook. Highly paid workers work constantly to
improve a service that is provided freely to hundreds of millions of poorer users.”

He continues: “This inversion of the traditional nature of innovations represents the rise of superstarlike technologies (Rosen 1981) that enable the highly competent to provide their
services as almost a public good, with no congestion in use. The most natural precursor
to this modern inversion was well-paid artists, such as writers and movie stars, who
entertained the masses. The inversion also happened when Fred Astaire and Ginger
Rogers danced for depression-era movie audiences. The essentially zero marginal cost of providing internet-related services means that they are often monetised through the advertising of goods with a positive marginal cost. It is free to use Google, but their search engine will nudge users towards their advertisers. The free nature of these services has meant a democratisation of access to information; a fact that is rarely considered in attempts to measure inequality.”

However, the essay goes on to say this does not mean that all is well. It focuses on the adverse employment consequences of the interaction of negative demand shocks and labour market/educational institutions. There’s innovation, and then there’s who benefits from it. In that famous question, ‘What did the Romans ever do for us?’, the emphasis should be on ‘us’ not on ‘Romans’.

The book is a great summary of the state of the debate. I’m in the Glaeser/Mokyr camp at present, but none of us should be anything other than open-minded about these questions.

Innovation, competition and public good

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[amazon_link id=”1594203288″ target=”_blank” ]The Idea Factory: Bell Labs and the Great Age of American Innovation[/amazon_link] by Jon Gertner is a fabulously interesting and readable book. It’s a terrific business history about the research and development arm of AT&T during its golden, monopoly era. Scientists and engineers at Bell Labs created some of the defining technologies of modern times, including the transistor, the semiconductor, the laser, fibre optics, Claude Shannon’s information theory, submarine cables, satellites (Telstar), early work on mobile communications, and more.(Francis Spufford’s lovely book [amazon_link id=”0571214975″ target=”_blank” ]Backroom Boys[/amazon_link] has a chapter on the UK’s contribution to mobile communications at the same time.)

“Finding an aspect of modern life that doesn’t incorporate some strand of Bell Labs’ DNA would be difficult,” as Gertner rightly puts it.

[amazon_image id=”1594203288″ link=”true” target=”_blank” size=”medium” ]The Idea Factory: Bell Labs and the Great Age of American Innovation[/amazon_image]

The book is also a thoughtful exploration of how this institution was able to be so consistently innovative for such a long time. The key is the implicit deal between AT&T and the US authorities to permit the company its monopoly of local and, for many years, long-distance calls as long as the fruits of the research were shared with competitors. Thus key technologies such as the transistor were quickly licensed at low cost. It was an excellent system for delivering the public good of innovative ideas. The parent company was a dull but profitable utility. It paid good and steady dividends to shareholders, and to Bell Labs. “The paradox of course was that a parent company so dull, so cautious, so predictable was also in custody of a lab so innovative,” Gertner writes.

An interesting question is therefore how Bell Labs came to be so innovative in the first place. Apart from the steady flow of generous funding from the parent company, its rules seemed to have played a vital role. People were strongly discouraged from closing their doors. Anybody could ask anybody else – no matter how eminent – to help on a problem. The different disciplines were located in close proximity. All work had to be written down in specified notebooks and countersigned, so ideas were attributed, but nobody could claim individual patents. Everyone had to work on their own side-projects, an idea copied by Google. Its director saw the lab as a living organism, with physical proximity essential for the fruitful cross-fertilisation of ideas.

In those pre-competitive times, the value of patents was well understood, and Bell Labs was careful to patent its discoveries, but there was no inhibition in exchanging ideas with the broader scientific community. For example, in the early days of semi-conductor research, visitors from Fairchild Semiconductor in Palo Alto and Texas Instruments in Dallas were frequent visitors to the Bell Lab home in New Jersey. It’s hard to recall a time when commercial entities were so open with each other about their R&D.

Eventually of course the monopoly power for social returns deal broke down – and apart from Bell Labs, the other social aspect of it was AT&T’s use of long distance profits to subsidise local calls. By the time the break up of AT&T into the Baby Bells occurred in 1984, there had been several assaults on the monopoly by various US regulators. (Tim Wu’s [amazon_link id=”1848879865″ target=”_blank” ]The Master Switch[/amazon_link] gives an account of the communication monopoly from a far more sceptical perspective than The Idea Factory.) The Federal judge who finally oversaw the agreement to break up AT&T was not concerned about the vertical integration of AT&T with its research subsidiary or Western Electric, the equipment subsidiary, seeing economic benefit to consumers in the supply chain links, but rather with the horizontal integration. Hence the deal to break off the regional Baby Bells. Competition from MCI on long distance calls was already occurring. But some people anyway saw the end of the monopoly as an inevitable result of the earlier licensing of key technologies. AT&T and Bell Labs had given birth to their own future competitors.

The inevitable question is what kind of innovation system could again deliver such fundamental technological advances? All of the communications technologies have involved vast, vast sums of money and multi-year, multi-person efforts. Mariana Mazzucato has argued that government involvement in innovation is always essential, due to the scale of funding and effort, and the risk involved, giving examples mainly from the computer industry in her book [amazon_link id=”0857282522″ target=”_blank” ]The Entrepreneurial State[/amazon_link]. Governments of course fund university research, as do some foundations, but direct public funding of research and – importantly – development in the commercial sector is rare – often done through the defense budget in the US, previously through nationalised entities in other countries.

Elsewhere, and in the post-privatisation era, it is pretty rare. And today’s information sector monopolists and quasi-monopolists do not seem to have the same sense of public obligation as their Bell Labs predecessors; the profit motive did not drive the creation of transistors and semi-conductors, although it was vital in getting them into new products in the market once they had been invented. Dominant companies in digital businesses with low marginal costs and strong network effects have tremendous market power which it’s hard for competition authorities to address because there are large consumer benefits and because there’s always the hope of disruptive entry by a new and better soon-to-be-dominant company. Perhaps the right public policy approach is to learn a lesson from the history of Bell Labs and look at what public or social benefits these dominant players offer until that disruption happens?

[amazon_image id=”1848879865″ link=”true” target=”_blank” size=”medium” ]The Master Switch: The Rise and Fall of Information Empires[/amazon_image]

The social life of innovation

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I’m half way through and really enjoying [amazon_link id=”1594203288″ target=”_blank” ]The Idea Factory: Bell Labs and the Great Age of American Innovation [/amazon_link]by Jon Gertner. It was published in the US in 2012 and was a bestseller, but I’m not sure it was ever published here in the UK – it was a tweet from Tim Harford that alerted me to it. If that’s right, perhaps Penguin thought it was too American and nobody on this side of the Atlantic had ever heard of Bell Labs. Yet this is the organisation that employed Bill Shockley, John Tukey, Claude Shannon and many other brilliant scientists and mathematicians in the mid-20th century. When I studied at Harvard in the early 1980s one of my fellow-students, Kaye Husbands, had worked at Bell Labs, which is how I first came to learn about it.

[amazon_image id=”1594203288″ link=”true” target=”_blank” size=”medium” ]The Idea Factory: Bell Labs and the Great Age of American Innovation[/amazon_image]

I’ll review the book at length later in the week. The question it immediately raises, though, is about the structure of innovation, a costly business. AT&T funded Bell Labs from its monopoly profit but its executives were well aware that its privileged position of a regulated monopoly meant Bell Labs had to serve public purposes as well as private profit, and to do so in a public way. This meant that, for example, the transistor technology was publicised and quickly licensed on reasonable terms to competitors – AT&T knew there would be an outcry if the company tried to keep that innovation to itself. An interesting history lesson for large technology organisations. Indeed, as John Kay often points out, sustained success for any business depends on its moral purpose as a social institution delivering benefits to everybody, not on maximising short term profit; and the very purpose of a tech business is innovation.

Of course, the AT&T monopoly was eventually broken up by the US authorities, but I’m not yet that far through Gertner’s account.

To infinity, and beyond

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Brad Stone’s [amazon_link id=”059307047X” target=”_blank” ]The everything store: Jeff Bezos and the age of Amazon[/amazon_link] is a rattling good read, and it should be on everybody’s reading list. The raw material is a gift to a storyteller of course. Jeff Bezos is clearly an extraordinary character, Amazon an extraordinary company, and the period since the dawn of the internet an extraordinary era. Stone has covered the company for many years and the account here is authoritative.

[amazon_image id=”059307047X” link=”true” target=”_blank” size=”medium” ]The Everything Store: Jeff Bezos and the Age of Amazon[/amazon_image]

The book is particularly good on the distinctive dynamics of online businesses, and the consequences for the various strategic calls Amazon has had to make. For example, when a solitary analyst at Lehmans, Ravi Suria, started to write negative reports in 2000 about Amazon’s then-low or negative margins, it risked becoming a self-fulfilling prophecy because financial viability depended on suppliers not demanding faster payment, and on customers having the confidence to continue flocking to the website. I hadn’t really appreciated before Amazon’s negative working capital requirement as customers pay for goods faster than suppliers need to be paid for them.

There are descriptions of moves straight out of the playbook of [amazon_link id=”087584863X” target=”_blank” ]Information Rules[/amazon_link] by Carl Shapiro and Hal Varian (although this book, one of my all-time favourites, isn’t referenced), such as super saver delivery – free for people who don’t mind waiting longer – and also Clay Christensen’s [amazon_link id=”0062060244″ target=”_blank” ]The Innovator’s Dilemma.[/amazon_link] Amazon has set up some new areas of business as skunkworks, but in other cases Jeff Bezos simply drove through new activities that would cannibalize existing sales. One example is the introduction of Marketplace, putting other retailers on the same page as Amazon itself.

[amazon_image id=”087584863X” link=”true” target=”_blank” size=”medium” ]Information Rules: A Strategic Guide to the Network Economy[/amazon_image]

The corporate culture sounds awful; I’d never work there. Amazon has become a nasty competitor as it has grown – and the book has an interesting section on its entanglements with competition authorities over e-books. It raises some questions too about the company’s business methods in dealing with both suppliers and smaller competitors – undercutting pricing in nappies, apparently to induce an online diaper supplier to sell out to Amazon; the use of grey markets in high quality goods to get a better price, thereby undermining the viability of the supplier. All, though, in the interests of delivering Amazon customers “everyday low pricing”, a desirable aim but one that simply conflicts with some other desirable aims such as sustaining craft production. This is an unfinished story, as the long term will one day catch up with the short term.

The other big question, not explicitly raised but obvious, is what a post-Jeff Bezos Amazon will be like. That’s no doubt many years away but his driven personality and vision have shaped the company. Succession in these digital giants is clearly a big issue.

All in all, a terrific book for thinking through some of the dilemmas the online world presents, and for thinking about the digital challenge to existing business models. The Jeff Bezos story is amazing too, and by the way he wants to colonise space. That’s not a joke.

Highly recommended book, whether for pleasure or for business students.