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
• 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
Takeaways
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
Worldwide IT Spending Forecast in $billions
2013 spend
2013 change
2014 spend
2014 change
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
Role of IT Services
• 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
Production Revolution
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”
•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
Drivers
•3. User-co-invention: The ongoing, networked interaction
of product suppliers and users allows for a continual reinvention 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 coinvention
• “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
Further implications
Remote Lab Testing by
Robots
• 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
The “Exchange” Economy
• 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)
Labor Markets & Transaction Costs
Market Size and Growth of Online Content Industries
Computer and video games revenues
Global
Revenues
(2010)
Global
Market
Growth
(2009-10)
Online
Revenues
(2010)
Online
Market
Growth
(2009-10)
Online
Share in
Total (2010)
Gamesa
Musicb
Advertisingc
Filmd
Newse
USD 53.7
billion
USD 23.44
billion
USD 442.29
billion
USD 84.19
billion
USD 159.7
billion
5.1%
-7.7%
5.8%
3.2%
0.0%
USD 22.7
billion
USD 7.19
billion
USD 70.52
billion
USD 5.28
billion
USD 6.56
billion
23.6%
6.9%
14.9%
30.8%
14.3%
42.3%
30.7%
15.9%
6.3%
4.1%
Entire media industries
transformed
• 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?
Information & Price
Discrimination
• 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 )
Pono Music—Scale of
Crowd Funding Growing
Wink: GE light bulbs—
crowd sourced controller
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
A New Innovation Eco-system
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?
Cement Sensor
$300,000
Source: Greg McRae, MIT and ANL
$10
New Evolutionary Path for Innovation
Kickstarter.com allows “crowd sourcing” to fund new
technology and services
Plug in special software to standard microchip
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
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
• 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
Dropcam = innovation that uses hardware
to enable a software service innovation
MinuteKey—99.6% accurate
• Large scale production still requires
complex engineering and high levels of
quality assurance and reliability
• But even this is changing quickly
Even Large Scale Production
Will Change
Tesla Auto Factory
Robotics, new tech & materials & new business
model reduced time from first design to product
from the traditional 5 years to 2 years
• 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?
Changing network
industries: electricity
• 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
More variety in successful
specialist clusters
Tractor Cockpit “imports”
information services
(Source: Fortune Magazine)
• 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
Some 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
More Policy Implications of
Digital Innovation