The Lessons from New Innovation Models for Policy

Peter Cowhey (pcowhey@ucsd.edu)Dean and Qualcomm Professor, UCSD

Jonathan Aronson (aronson@usc.edu)Professor of Communication and IR, USC

August 27, 2015

Takeaways

• Faster, cheaper innovation with more specialized products and new business models is much easier

• New innovation system transforms industries that largely escaped the first wave of the Internet revolution

• Changes in innovation pose challenges for public policy• Big technological/economic disruptions create political

conditions to consider big policy changes• Trusted digital environment• Trade and competition policies

The Silicon Valley model

• Silicon Valley model (“Regional Clusters”) emerged in 1980s: Research university, startups, VC, and outsourcing combine into specialized regional clusters

• This approach reestablished US leadership in high tech • Successful clusters mainly focus on ICT or biotech• Disrupts traditional industry leaders

• A new system of “Digital Platform Innovation” is emerging that transforms a broad range of industries & products

Why the U.S. Innovation System is Changing—Information Disruption

• Key: The value added of Ideas, Information (Software) and Services growing fast in all products & services, including traditional manufactured products• Value added in international trade is nearly half in services

• Cheap & Everywhere: Moore’s law greatly decreased ICT costs• Wireless data

• Modular: standardized interfaces allow cheaper “mix and match” of IT building blocks

Growing Role of IT in Economies

Role of IT Services

Devices 

669 -1.2 697 4.3

Data Center Systems

140 -0.3 143 2.6

Enterprise Software 300 5.2 320 6.8

IT Services 

922 1.8 963 4.5

Telecom Services 1,633 -0.5 1,653 1.2

Overall IT 3,663 0.4 3,777 3.1

Worldwide IT Spending Forecast in $billions

2013 spend 2013 change 2014 spend 2014 change Source: Gartner (Jan 2014)

Production Revolution

• New production systems—3D printers and robotics are the beginning of new production systems:‒ Speed and cost of production, including quality control,

drop substantially as every manufactured products will be networked with sensors

‒ Information technology enables production breakthroughs

• Smart materials are next step• Replacing plastics with metal oxides in 3D printers• Sensors embedded in materials

Cheap!! 3D printed prosthetic arm

with standard commercial gears: Costs $250 vs. $80,000 commercial model

Designed & produced by 17 year old (Source: Gizmag)

Way beyond Fitbit: Coleman “brain tattoo”

Drivers

•1. Shrinking overhead costs and head counts reduces startup costs

• Radical drop in cost of IT: WhatsApp has 450 million users and only 34 IT engineers

•2. Non-rivalrous data use: Information derived from products can create a collateral revenue stream

• Ads

• Using Facebook “likes” to predict smoking

• Privacy issues

Further implications

•3. User-co-invention: The ongoing, networked interaction of product suppliers and users allows for a continual re-invention of the product/business model

• Includes use of open source software

• Users have flexibility in using product—play lists for music

4. Financial alternatives for funding innovation combines experimentation and discovery model with new distribution models:

• Crowd sourcing—traditional marketing yields to co-invention

• “The Store”—e.g., Apple and Amazon

• ALIBABA – ALTERNATIVE FUNDING MECHANISM

Further implications

• 5. Batch-oriented production become more common, even in mass production.

• 6. Commercial scientific innovation processes are changing: Emerald Therapeutics -- networked robots operate lab testing equipment

Remote Lab Testing by Robots

The “Exchange” Economy

• Changing uses of capital stock—airbnb and uber

• Changing uses of human capital—on-line labor markets starting with “Mechanical Turk” to Elance-oDesk

• Changing media markets

Labor Markets & Transaction Costs

• Stronger divisions of labor—more specialization

• Tap unused assets

• Trust & monitoring—Uber rating systems of drivers and customers

• Flaws: Difficulties training workers, regulatory issues, and worker loyalty (when they are mobile)

Entire media industries transformed

  Gamesa Musicb Advertisingc Filmd Newse

Global Revenues

(2010)

 USD 53.7

billion

 USD 23.44

billion

 USD 442.29

billion

 USD 84.19

billion

 USD 159.7

billionGlobal Market Growth

(2009-10)

  

5.1%

  

-7.7%

  

5.8%

  

3.2%

  

0.0%

Online Revenues

(2010)

 USD 22.7

billion

 USD 7.19

billion

 USD 70.52

billion

 USD 5.28

billion

 USD 6.56

billionOnline Market Growth

(2009-10)

  

23.6%

  

6.9%

  

14.9%

  

30.8%

  

14.3%

Online Share in

Total (2010)

  

42.3%

  

30.7%

  

15.9%

  

6.3%

  

4.1%

Market Size and Growth of Online Content IndustriesComputer and video games revenues

Information & Price Discrimination

• BMW: Warns that new cars are networked—should information about its performance be shared?

• Progressive Insurance: If you install a vehicle monitoring device, good driving conduct (no sharp braking, less night time driving) will yield discounts

• Facebook “likes” better predict consumer smoking and drug use than other techniques—Facebook in insurance industry?

Pono Music—Scale of Crowd Funding Growing

• Consumer electronics innovation • Mission is to provide the best

possible listening experience of your favorite digital music

• 191% funded on Kickstarter ($1,535,193 pledged )

Wink: GE light bulbs—crowd sourced controller

A New Innovation Eco-system

Examples of a new innovation eco-system:

•“Node” : Crowd sourcing to create an entry-level product that launches technology to change how we monitor air pollution•“Dropcam” : Cloud services and hardware are combined faster and cheaper to define well established service and hardware markets

Both of these examples show how ICT services and software enable novel business models combining hardware and services

Identifying a problem—Circa 2007 Could we reduce the cost of monitoring air pollution patterns in cities? Semiconductors permit “Laboratories on a Chip”, but where was market with the economies of scale necessary for the chip to be financially feasible?

Source: Greg McRae, MIT and ANL

Cement Sensor

$300,000 $10

NODE by George Yu A modular handheld powerhouse of sensors

World, meet NODE. With this modular, Bluetooth-enabled device, Variable Tech puts the power of practical sensors in your hands

Successful! : 152% funded, $76,340 pledged

First evolutionary step

New Evolutionary Path for Innovation

Kickstarter.com allows “crowd sourcing” to fund new technology and servicesPlug in special software to standard microchip

Source: kickstarter.com

Combining hardware, software & services“Small business security systems are often expensive and difficult to install. With Dropcam, you can set up multiple

cameras on your own and start streaming live video instantly.”

Dropcam

Dropcam = innovation that uses hardware to enable a software service innovation

• Faster & cheaper: by order of magnitude from idea to production‒ Modular software: Applications software “plugged into”

software on chips used by standard digital cameras‒ New production design: Later built its own cameras in China—

prototypes built on 3D printers and then dropped price by 50%

‒ Cloud: WiFi and Cloud video storage was essential (more video uploaded on Dropcam than on YouTube on a daily basis!)

• Real-time experimentation changes business model—expand from “security” to home video systems

MinuteKey—99.6% accurate

Even Large Scale Production Will Change

• Large scale production still requires complex engineering and high levels of quality assurance and reliability

• But even this is changing quickly

Tesla Auto FactoryRobotics, new tech & materials & new business model reduced time from first design to product

from the traditional 5 years to 2 years

Changing network industries: electricity

• IT stage one: The smart grid begins with “smart meters” and then has automatic monitoring and load balancing with variable pricing—friendly to renewables• Also subject to sophisticated cyber attack

• IT stage two: Microgrids. Use mesh networks to run mini-generation systems with smart demand management. Enhanced security and reliability at micro and macro levels.

• Age of decentralization of systems?

More variety in successful specialist clusters

• Clusters need not just focus on extraordinary concentrations of ICT or biology talent: ‒ Farm regions become exporters of specialized

agriculture information services, not just growers of crops.

‒ Crop insurance and weather forecasting

Tractor Cockpit “imports” information services (Source: Fortune

Magazine)

Some Policy Implications of Digital Innovation

• Older industries transformed: Digital innovation revolutionizes even traditional industries. Can state owned enterprises change fast enough?

• Small is beautiful: It rewards flexible exchange of ideas and talent. Need smaller flexible places to meet, like universities, rather than huge technology parks (Less impt for Japan than China

• Public policy should emphasize small scale infrastructure of services: Public investment in technical testing & quality certification systems for smaller entrepreneurs helps

More Policy Implications of Digital Innovation

• “Modular mix and match” requires sophisticated and enforceable intellectual property systems: to makes it “safe to share” ideas Japan does fine here – more applicable for China

• Global leaders need to support rules to make the supply and use of information technology and services as seamless and integrated globally as possible: a goal of new international trade agreements