Recently in Innovation Category

I recently blogged about a presentation the 2008 Communications Policy Research Forum in Sydney on disruptive innovation in the music industry.

You can now download an Adobe PDF version of the PowerPoint slides here.

The refereed paper has been published in the Proceedings of the Communications Policy Research Forum 2008 (pp. 155-175 or PDF file pp. 179-199).  You can also download a local copy of the paper here.

The paper's case study examines why Radiohead and Nine Inch Nails released their new albums as digital downloads.  I suggest a major reason why, and one that was overlooked by Web 2.0 pundits, is that each artist was in the 'label shopping phase' of a new contract and defected after negotiation problems with their major labels.  This fits a pattern in mergers and acquisitions: the major labels lost artists due to integration problems in a merger or acquisition.  Terra Firma Capital Partners has since partially confirmed this hypothesis: the private equity firm endures more post-acquisition integration problems with EMI and is fighting against government regulation of Great Britain's financial services sector.

The paper's data appendices contrast the artists' strategies with signficant events and innovations in music industry contracts, conglomerate mergers and deal structures.  Somehow I missed U2's March 2008 deal with Live Nation: I found out about it in an October 2008 announcement.  Guns n' Roses also finally released Chinese Democracy (MySpace audio stream): a new album that has taken 15 years, a rumoured US$14 million budget and 14 recording studios in New York, Los Angeles, Las Vegas and London.  I may write a paper on it . . .

Paul Roberts has an interesting post on Value Chain 2.0: the use of Web 2.0 methodologies and platforms in value chain analysis, process redesign and supply chain management (SCM).

Value Chain 2.0 transformations actually predate Tim O'Reilly's Web 2.0 term but this is largely hidden from non-domain experts.  One reason why is the historical influence of engineering and mechanistic models on public perceptions of SCM.  Logistics, operations and industrial economics all moulded Michael Porter's value chain model.  Mainframe interfaces shaped SAP's materials management and enterprise resource planning systems.  A climate of downsizing and recessions influenced how business leaders applied Michael Hammer and James Champy's business process reengineering.  SCM has evolved yet the public perceptions remain.

There's a broader context and history to Value Chain 2.0 that some Web 2.0 descriptions may not do justice to.  Some of the more well-known examples: Eric von Hippel cast the die in The Sources of Innovation (New York: Oxford University Press, 1988) about 3M's ideation, innovation and new product development processes; von Hippel elaborated on discussions which occurred since the mid-1970s.  SAP and other ERP vendors have had end-user case studies in conferences for over a decade.  Dell's dotcom era choiceboard for consumers to customise their orders meant more efficient throughput and higher inventory turnover.  Lego Mindstorms builds on decades of insights in constructivist learning and robotics.  Procter & Gamble's Connect + Develop initiative reflects P&G's expertise in brand development and consumer goods marketing, and leverages decade-long trends in knowledge management and information systems.  This suggests a deep history or a path dependence to many 'new new' Web 2.0 cases and trends.

Perhaps Value Chain 2.0's initial contributions are to make these initiatives more explicit to non-domain experts and to provide an accessible interface for consumers.

Recently I posed two questions about Foresight in Organisations: What are are the intervention points?  After five or six years, who are the teachable case studies for successful implementation of the foresight function?

I've only read the Los Angeles Times and New York Times reviews but Charles D. Ellis's The Partnership: The Making of Goldman Sachs (Penguin Press HC, New York, 2008) has some answers to both questions.

Ellis suggests Goldman Sachs has three intervention points to cultivate a foresight function: (1) a human resources function staffed by A+ people who recruit "A+++ people" usually in computational finance, financial engineering and statistical arbitrage; (2) an organisational culture tolerant of the "longer-term view" that is linked to the "[operational] details" necessary for strategic execution; and (3) a creative tension between past excellence and new frontiers.  Intriguingly, the "longer-term view" or "forward view" in Foresight parlance, emerges from people in a supportive culture who are faced with challenge at the boundary of the firm and the external competitive environment.

Two other biographies partially validate Ellis's insights.

Perry Mehrling's biography Fischer Black and the Revolutionary Idea of Finance (New York: John Wiley & Sons, 2005) and his working paper 'Understanding Fischer Black' describe why Goldman Sachs recruited the economist Black: to tap his academic knowledge to design new financial instruments, and use his influence as coauthor of the Black-Scholes equation in finance to impress clients.

Emanuel Derman describes his Goldman Sachs collaboration with Black in My Life As A Quant: Reflections on Physics and Finance (New York: John Wiley & Sons, 2004) and how the firm benefited from the influx of PhD graduates in the 1980s.  Derman was bored at AT&T Bell Labs which had a reactive culture of research management.  He transitioned into Goldman Sachs' fixed income division in 1985 and then moved to equities in 1990 where he thrived for the next decade in a culture that appreciated how conceptual expertise can underpin a firm's competitive advantage in new growth markets.

The contrast was so different that I pointed Derman's experience out in a private submission to Australia's National Innovation System Review (aka Cutler Innovation Review) in comments about the institutional design and research management culture of Cooperative Research Centre consortia.  Maybe given the subprime fallout CRCs can also learn something from Goldman Sachs and Berkshire Hathaway's Warren Buffett who has now taken a $US5 billion equity stake in Sachs' foresight culture.

During a stint as Disinformation's site editor I learnt to monitor how analysts and experts respond to significant events.  Analysts and experts can situate the significant event in relation to a discipline or knowledge area.  So, it's a strategy in which the event and the expertise are wayfinders to help learn about the discipline, in a contextual, real-time way.

For the past five days I've looked at Change.gov: how President-Elect Obama uses open government principles and strategic communication to implement his transition prior to the Inauguration on 20th January 2009.  It's not all gone smoothly: ProPublica's Mike Webb and BoingBoing's Xeni Jardin note that some early information on Obama Administration policies were removed (Slate confirmed this occurred).  The Obama campaign's Twitter page may be dead as the President-Elect now opts for more traditional media outlets.  Despite this, Change.gov is a very intriguing project that generates lots of commentary in the media and policy circles.

As a real-time case study Change.gov may turn out to be a richer learning experience than an entire bookshelf of dotcom era books on change management projects, e-government transformation and e-policy ecosystems.  Who will write the case study for Harvard Business School MBAs and Harvard Kennedy School policymakers?  Will the Obama Administration license David Bowie's "Changes" as the site's theme music?

A side-benefit of Change.gov is some really insightful media commentary about the games that new political appointees must play to thrive in the Beltway.  Exhibit One: The New Republic's Noam Scheiber explains how Tim Geitner cultivates a keen political awareness for institutional buy-in and is a frontrunner for the US Treasury Secretary.  Geitner's insights are useful for change agents or anyone who wants to navigate organisational politics.

I recently spoke at the 2008 Communications Policy Research Forum in Sydney on disruptive innovation in the music industry.  My presentation looked at the reasons for why Radiohead and Nine Inch Nails pursued online release strategies for their respective albums In Rainbows (2007) and The Slip (2008), and evolved from some initial thoughts here. The reasons suggested in media coverage - Web 2.0 experiments, disruptive innovation and freeconomics - were 'true yet partial' explanations.  They overlooked two significant facts: (1) both artists were in the 'label shopping' phase near the end of their contracts; and (2) both artists were frustrated with their respective labels EMI and UMG, who each triggered artist defections due to post-merger integration problems.  The presentation also discusses the role of Disruptive Innovation Markets, the Disruptive Information Revelation principle, and lessons for journalists, new media theorists, policymakers and valuation analysts.  Thanks to the Network Insight Institute team (Mark Armstrong, Cristina Abad and Mark Armstrong) and the two anonymous reviewers for their help.

For many people North Korea evokes the comic image of the lonely playboy Kim Jong-il in Trey Parker & Matt Stone's Team America World Police (2004).  I found a more complex sociopolitical reality in 2006 whilst researching a Masters mini-thesis which dealt in part with North Korea's covert nuclear weapons program.  A week after handing the mini-thesis in Disinformation's video producer Nimrod Erez sent me links to stark photos of daily life in North Korea's capital Pyonyang (folio 1, folio 2 & discussion board): deserted highways, military monuments to past battles and derilect residential towers.

Kim Jong-il's nuclear ambitions were a significant barrier to foreign direct investment (FDI) in North Korea notably under South Korea's Sunshine Policy to achieve geostrategic stability in the Korean Peninsula.  Jong-il's nuclear rollback "opens the way" to Hyundai Asan's FDI investment in the Kaesong Industrial Park (YouTube promotional video).  South Korea's small and medium enterprises (SMEs) spearhead the FDI initiative which creates an emerging market, provides knowledge transfer, and hedges against country and currency risks.  South Korea's government further offsets the SME's country and operational risks with "low-interest loans and insurance."  The SME's engagement strategy also benefits emerging market watchers such as the blog North Korean Economic Watch.

If the FDI initiative fails then North Korea officials can always turn Kaesong Industrial Park into a subsidiary of the Erich von Daniken theme park in Interlaken, Switzerland.

Has Tim O'Reilly's Web 2.0 meme become a high-tech bubble about to burst?

Origins of the Web 2.0 Boom

O'Reilly's vision of a new Web platform originally fused two developments.

The first development: C, Smalltalk and object oriented programmers devised design patterns in the early 1990s to reuse software code and workaround solutions across projects.  A 1995 catalog catapulted its four authors to software engineering fame.  To capture the rapidly growing number of design patterns programmer Ward Cunningham created the first wiki: the Portland Patterns Repository.

The second development: a re-evaluation of dotcom era business models to encompass new technologies that enhanced the end-user experience including the site interface and information architecture.  Industry buzz around News Corporation's acquisition of MySpace (18th July 2005), Yahoo!'s purchase of Flickr (21st March 2005) and del.ico.us (9th December 2005), and Google's stock-for-stock deal for YouTube (9th October 2006) made O'Reilly's vision the 'default' vision for Web pundits and investors.

The media's buzz cycle soon went into warp speed as Facebook frenzy replaced MySpace mania.  In a move that exemplified the pivotal role of complementors O'Reilly & Associates morphed into the juggernaut O'Reilly Media.  Ajax and Ruby Rails soon replaced Java and C# as the languages for new programmers to learn.  For activists in community-based media, angel investors investing in scalable programming prototypes and international conglomerates seeking to control their industry white-spaces Web 2.0 provided an all-encompassing answer to venture capitalists on how they would change the world.

Two Scenarios: Web 2.0 Boom & Bust

For industry pundits Google's decision in October 2008 not to acquire Digg may signal the Web 2.0 boom has become a bubble.  If true Google's decision could be the mirror of News Corporation and Yahoo!'s acquisitions in 2005.  Slate's Chris Anderson points to several factors: no tech IPOs in the second quarter of 2008, the cyclical nature of the digital consumer market, the exit of Yahoo! as a potential buyer due to internal problems, market noise due to low barriers of entry for startups, and a smaller "window of opportunity in which startups can think of a new neat trick, generate buzz, and cash out."  YouTube's co-founder Jawed Karim adamently believes that Silicon Valley is in a bubble.

Twitter is the latest startup in the duelling scenarios of Web 2.0 boom versus bust. New York Times journalist Adam Lashinsky experiences a similar euphoria to Facebook and YouTube when he visits Twitter's co-founder Jack Dorsey.  Sceptics counter that Facebook and YouTube have not 'monetised' their business models into profitable revenues.  Portfolio's Sam Gustin raises the 'monetisation' problem with Twitter co-founder Biz Stone who believes that service reliability is a priority over the "distraction" of revenue pressures.  In support of Stone's position Anderson observes that cloud computing and open source software are lowering the operational costs and slowing the burn rates of startups.

Yet monetisation remains a primary concern for Sand Hill Road entrepreneurs and other venture capitalists.  They differ in their decision-making criteria to Web 2.0 pundits and high-tech futurists: for angel investors and first round VC funding the entrepreneurs will demand a solid management team, the execution ability to control an industry whitespace, and viable sources of future revenue growth.  This is the realm of financial ratios and mark-to-market valuation rather than normative beliefs and ideals which probably influenced the acquiring firm's decisions and valuation models in 2005-06.

Furthermore, if a Web 2.0 bust scenario is in play, the 'contrarian' sceptics will look to Charles Mackay, Charles P. Kindleberger, Joseph Stiglitz and other chroniclers of past bubbles, contagion and manias for guidance.  With different frames and time horizons the Web 2.0 pundits, high-tech futurists and venture capitalists will continue to talk past each other, creating still more Twitter microblogging, blog posts and media coverage.

Several preliminary conclusions can be drawn from the Web 2.0 boom/bust debate.  In a powerful case of futures thinking O'Reilly's original Web 2.0 definition envisioned the conceptual frontier which enabled the social network or user-generated site of your choice to come into being.  The successful Web 2.0 startups in Silicon Valley have a distinctive strategy comparable to their dotcom era counterparts in Los Angeles and New York's Silicon Alley.  Web 2.0 advocates who justify their stance with MySpace, YouTube and del.icio.us are still vulnerable to hindsight and survivorship biases. There's a middle ground here to integrate the deep conceptual insights of high-tech futurists with the quantitative precision of valuation models.

It's possible that the high-visibility Web 2.0 acquisitions in 2005-06 were due to a consolidation wave and strategic moves/counter-moves by their acquirers in a larger competitive game.  There are two precedents for this view.  Industry deregulation sparked a mergers and acquisitions boom in Europe's telecommunications sector in the late 1990s comparable to the mid-1980s leveraged buyout wave in the United States.  Several factors including pension fund managers, day trading culture and the 1999 repeal of the US Glass-Steagall Act combined to accelerate the 1995-2000 dotcom bubble.  Thus, analysts who want to understand the boom/bust dynamics need to combine elements and factors from Web 2.0 pundits, high tech futurists and venture capitalists.

If the Web 2.0 boom has become a bubble then all is not lost.  Future entrepreneurs can take their cue from Newsweek journalist Daniel Gross and his book Pop! Why Bubbles Are Great for the Economy (Collins, New York, 2007): the wreckage from near-future busts may become the foundation of future bubbles.  Web 3.0 debates are already in play and will soon be eclipsed by Ray Kurzweil's Transhumanist agenda for Web 23.0.

Devo's first Melbourne performance in 25 years was 'a dream come true' cofounder Mark Mothersbaugh told the audience - in falsetto - as Booji Boy during the finale 'Beautiful World'. Most of the audience were 'less beautiful than their parents' who had attended Devo's last show in 1983.  Australia was 'relatively untouched then' compared to the post-industrial decay in Devo's hometown of Akron, Ohio.
 
The 90-minute setlist centered on Devo's first three albums from 1978-82.  After opening with clips from Chuck Statler's film In the Beginning Was the End: The Truth About De-Evolution (1975) the band played the MTV hits 'Whip It' and 'Girl U Want' early in the set.  Devo's heavy rock arrangements became even more intense when they dispensed with the Korg keyboard at the front-of-stage and their trademark yellow radiation suits to reveal black t-shirts and shorts.  Session drummer Josh Freese kept a fast drum tempo, Bob Casale switched deftly between keyboards and rhythm guitar, Bob Mothersbaugh added lead guitar histrionics to 'Uncontrollable Urge', 'Gut Feeling' and the Rolling Stones cover 'I Can't Get No (Satisfaction)', whilst Gerald Casale's vocals on 'Secret Agent Man' highlighted the band's humour.  The first encore 'Freedom of Choice' became a satire on Pax America: 'If you want proof of devolution just look at the current White House', Mark Mothersbraugh told fans.  For me, 'Jocko Homo' was the standout track with MIDI keyboard samples, jerky robotic stage moves, a wall of sound, and the audience singing the anthematic chorus.

I took away three lessons about innovation from Devo's 2008 tour.

Devo's expertise in art direction differentiates their live show from others: a Pop Art aesthetic now fused with New Wave nostalgia.  This sensibility may be why Brian Eno, Iggy Pop and David Bowie engaged in a bidding war to produce Devo's first album Q: Are We Not Men? A: We Are Devo (1978).  It's also why Virgin's Richard Branson invited Devo to Jamaica in a ploy to sign John Lydon as their frontman, which Simon Reynolds recounts in Rip It Up And Start Again (Faber & Faber, London, 2005).  Branson perceived Devo as the New Wave heirs to the Sex Pistols' Situationist critique (p. 80-81).  This New Wave branding ensures Devo has a core fanbase and branding that resonates enough to sell plenty of red flowerpot hats 25 years later.  It's also evident in the Australian support band Regurgitator's aesthetics and Band in a Bubble experiment, and the Primus theme for South Park.

Devo mania was however a New Wave subculture that did not go mainstream.  Despite MTV's heavy rotation of 'Whip It' and 'Girl U Want' the network became the 'Home Shopping Network for record labels' claims Mark Mothersbaugh, rather than maintain its avantgarde and experimental credentials (p. 349).  A mainstream audience would not understand Devo's satirical parodies of Christian fundamentalist and 19th century eugenicist doctrines on human and cultural evolution nor its embrace of the Church of the Subgenius.  Devo by the mid-1980s was consigned to mid-level status on Enigma Records: what happens after a fad or mania fades away can be just as much a lesson as the subcultural tipping point.

The production company Mutato Muzika offers a synthesis of how to escape the half-lives of subcultural fads and the limits of mid-level success.  Mark & Bob Mothersbaugh and Bob Casale have refocused on composing advertising jingles, film and television scores.  Mutato provides a small team environment which composer John Enroth describes as a focus on pragmatic 'craft' with timeboxes for project delivery that are differentiated from the 'art' projects that members pursue elsewhere.  Mutato developed business models including corporate sponsors for songs and Apple iTunes release and distribution that are now 'indie' common practices.

As the next stage in devolution Mutato looks to be a sustainable business that can collaborate with the mainstream media yet is also centred on a personal aesthetic experience and philosophical outlook.

The software consultant Ed Yourdon once warned US programmers in his book Decline and Fall of the American Programmer (1992) that they faced global hypercompetition.  This was a fashionable message in the turbulent early 1990s of industry deregulation, export tariffs, mega-mergers, downsizing and reengineering.  Spenglerian pessimism made Decline and Fall an IT bestseller as Eastern European and Russian computer programmers emerged as low cost competition with their US counterparts.  Now in Thomas Friedman's vision of a flatter world the Eastern European and Russian computer programmers have help from an unlikely source: electronic copies of IT textbooks.

Several barriers mean that US textbook publishers are cautious about embracing ebook versions.  Publishers fear the Napsterisation of ebooks on peer-to-peer networks.  There's no standard ebook device although Amazon's Kindle is the latest candidate.  There's no standard ebook format: most use Adobe PDF, however when Acrobat 8 was released Adobe shifted its ebook functionality to a new Digital Reader that did not necessarily read a user's existing ebook collection.  Potential customers do not have a utility function to necessarily favour ebooks over printed copies: publishers charge high prices for ebook versions that may contribute a higher contribution margin to profits but that give the customer little price differential compared with print counterparts.

The implementation of digital rights management (DRM) also leaves much to be desired: McGraw-Hill's Primis uses a digital fingerprint on a hard-drive that voids an ebook even if reinstalled on a reformatted drive due to a virus, whilst Thomson's Cengage Learning uses a time-sensitive model which gives the user access for one semester to an ebook with the full price of its exact print version.  Publishers are also slow to adjust cross-currency rates: Australian textbooks still cost $A120-$200 despite near parity between the Australian and US dollars.

Thus, it's no surprise that ebook divisions remain small in multinational publishing conglomerates.  One exception is Harvard Business School Press which appears to have ditched Sealed Media's DRM plugin for Adobe Acrobat after Oracle acquired SM in August 2006 and then had integration problems with information rights management.

These barriers suggest a failure in market design with analogies to George Akerlof's study of the used car market in his influential paper The Market for Lemons (1970).  Publishers counter that although there is a lack of ebook standards similar to Akerlof's paper the economics of publishing provide a disincentive to lower prices.  They claim high fixed costs in printing, photography rights and licensing fees for the case studies taken from Businessweek, Fortune and The Wall Street Journal.  Author fees and promotional budgets to professional associations add variable costs -  however, Australian academics have a disincentive to publish textbooks compared with their US colleagues, as Australia's Department of Education, Employment & Workplace Relations does not provide recognition points.

To survive US textbook publishers have turned to global market models with regional editions of popular texts (such as Asia-Pacific editions with local coauthors), and adopted the music industry's business model of electronic and online content (similar to how record labels have released Dualdisc, DVD and collectors editions of albums).  However as Yourdon warned US programmers this may not be a business model with longterm sustainability.  MIT's OpenCourseWare, Apple's iTunesU and Scribd all provide free content that mirrors the generic content in most textbooks, although some differentiate via a problem-based approach.

Yourdon's 'challenger' computer programmers now also have illegal BitTorrent sites such as The Pirate Bay, filehosting networks such as Rapidshare, and ebook sites including Avaxsphere.com and PDFCHM to choose from.  The last two provide solutions to Akerlof's challenge in market design: they have an easier user interface, a broader (illegal) catalogue of ebook titles, and DRM-free files compared to Cengage Learning or McGraw-Hill.  Even business strategists are getting in on the act, as Clayton Christensen, Curtis Johnson & Michael Horn explore in Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns (McGraw-Hill, New York, 2008).

There's one textbook coauthor who came up with a unique solution to Akerlof's dilemma in market design.  His Macroeconomics book coauthors Andrew Abel and Dean Croushore opted for the mod-cons from publisher Addison-Wesley: an online site and a one-semester ebook version as a bundle deal.  The textbook coauthor?

Federal Reserve Chairman Ben Bernanke.

Former securities analyst Henry Blodget recently launched ClusterStock which provides daily news, commentary, and research analysis on the economy, energy, financial services, retailing and technology sectors.  ClusterStock's parent company Silicon Alley Media appears to follow the Web 2.0 nanopublishing business model of Gawker Media's Nick Denton and Mahalo founder and entrepreneur Jason Calacanis.

In a 2008 last-minute submission to Australia's Review of the National Innovation System I contended that market-based approaches may resolve some challenges in the organisational design and concept to cash/concept to market processes of R&D consortia and institutions.  ClusterStock provides an example for strategic implementation: coverage of market events by sector specialists, near real-time commentary on conference calls, and assumptions testing via reader/user feedback.  The public face provides an information filter and feedback loop in the incubation and idea generation phases of creative innovation.  R&D consortia could implement this web publishing model as a peristyle public face with separate internal processes for 'commercial in confidence' information and corporate/government partners.

For his side of the infamous dotcom era blow-up plus an insider's critique of the investor ecosystem see Blodget's informative consumer guide The Wall Street Self-Defense Manual (Atlas Books, New York, 2007) and Slate Magazine's accompanying articles.