Posts about reboot

When innovation yields efficiency

Much of the innovation we’ve seen lately hasn’t led to growth but instead to efficiency – that is, shrinkage.

I’ve been mulling over Mike Mandel’s cover story in last week’s BusinessWeek, in which he tried to puncture another bubble: the belief that we’ve had a rich decade of American innovation. He argues that there’s actually an “innovation shortfall” and he uses economic stagnation to plead his case. Now I’m not economist (that’s a straight line) and so I won’t argue about the impact of other events on growth – starting with the so-called financial crisis.

But as I thought through the major innovations of the last decade, many of them have not led to economic growth; they haven’t added money to the economy but left it in the economy. Thus measuring innovation’s impact in the revenue, growth, productivity, and market cap of large companies may not be valid. Instead, we are seeing innovation take money out of their pockets, leaving it with their customers. What they, in turn, do with that extra money and what impact it has on the economy is an entirely different question – and that impact is likely seen in any case not in large companies but in individual consumers and in small businesses. But I think the proper measure of the changes in the last decade is the innovation dividend. See:

* craigslist is blamed for destroying (that’s from the publishers’ perspective) $10 billion in classified ad value annually**, replacing it with its reported $100 million revenue. Newspapers act as if that was their money – as if they had a God-given right to it – but, of course, it wasn’t. When Craig Newmark spoke with my students at CUNY, and they asked him why he didn’t maximize revenue at craigslist and sell it for billions and then use that money for philanthropy, he told them that he thought he was doing more good for the country and the economy by leaving more money in the pockets of the people who were doing the transactions he now enabled. He cut out a gross inefficiency born of the monopoly that newspapers held over the means of production and distribution. If you try to measure his innovation’s impact on the economy with old methods and metrics – built on the assumptions of the old economy – you can’t see it. He didn’t make companies grow or become more productive. He added efficiency.

* Amazon, eBay, and the internet as a whole are blamed for destroying large swaths of the retail marketplace. But again, they brought efficiency in a number of ways: price transparency, which leads to lower prices for customers; critical-mass efficiency; the reduction of brick-and-mortar and staff costs; and I’d imagine a reduction in distribution and warehousing costs. The net result is fewer jobs, less rent, less waste (that is, books on shelves that get pulped; now they’re made just in time), and lower prices. Again, more money is left in the pockets of the transcators. The impact of innovation on retail is seen in shrinkage and efficiency, not growth.

* Google is blamed for destroying media but, of course, all it did was give advertisers a better deal. It dared to compete. Google did this not just by creating abundance rather than selling scarcity born of control of those means of production and distribution. This created a more efficient – read: less expensive – marketplace for advertising. More important, Google revolutionized advertising by selling performance, proving a return on investment. So the money that didn’t stay in the pockets of people buying and selling cars and homes, thanks to Craig, now stayed in the pockets of retailers and manufacturers thanks to Google. More efficiency. In What Would Google Do”, I argue:

We have shifted from an economy based on scarcity to one based on abundance. The control of products or distribution will no longer guarantee a premium and a profit. . . . We are entering a post-scarcity economy in which Google is teaching us to manage abundance, challenging the bedrock rule of economics, first written in 1767: the law of supply and demand.

Old rules and measures and analyses can’t track that.

* Web 2.0 is credited with making it much faster, easier, and far less expensive to start new companies. That is the other innovation dividend – the innovation that happens on the back of innovation. But this is happening, again, not at a large-company level but at a small-company level. Measuring spending on innovation, then, becomes another unreliable metric. The economics of innovation itself have changed.

The reliability of the standard metrics and analysis matters greatly because profound – and expensive – policy and economic decisions are being made on the basis of them and I’m not at all sure they’re valid anymore, or at least as valid. They miss too much of the change and impact and value and dynamics in this new economy. They lead us to bail out GM and Chrysler. One could argue, as George Will did in yesterday’s Washington Post, that that the bailout violates even old rules:

The administration’s deepening involvement in designing and marketing automobiles through two crippled companies ignores this truth: Capitalism is a profit-and-loss system, and the creative destruction it produces is supposed to clear away failures such as Chrysler, freeing capital for more productive uses.

But that capital, once freed, may not go to building huge new ventures. It may go to building small new ventures. It may stay in the pockets of people doing transactions and now instead of spending it on Toyotas, it may go to banks. You won’t see all the impact – except negatively – on the Dow Jones Average and the Fortune 500; those were the measures of the old economy. We need new measures.

** I had said craigslist and the internet replaced $100 billion in revenue in newspaper classified, which was an attempt to calculate over the life of the web, but that was difficult to calculate, so I changed the figure to $10 billion, the difference between classified revenue at its height in 2000 and in 2008.

Government by the people

In the midst of the UK’s MP expenses scandal – and as Gordon Brown’s government teeters, with nudges over the edge from The Guardian itself – the paper asked its columnists and then its readers to reform, even reinvent government. The results are in and are fascinating.

Tom Clark’s writeup in today’s paper service is quick to point out that this is a survey of Guardian readers with their baggage in their left hands. But that makes it even more surprising that, for example, 70% say they do not support demographic quotas as a means to configure Parliament. They want to change voting and the structure of Parliament and they want a constitution. May I recommend a First Amendment?

What’s exciting about this is that it turns the usual discourse around, shifting from complaining about government to doing something about it, taking responsibility. After the destructive comes the constructive.

: Speaking of…. See also Kevin Anderson’s report from the Deutsche Welle conference on the need for journalists to focus more on solutions than problems. More here.

: And see Lloyd Shepard’s tweet: “sheesh. when voting is a process of elimination, you know democracy’s in trouble. this is how people end up supporting arsenal”

The new Detroit isn’t Detroit

GM says it is reinventing itself. And what makes them or the government think they can do that on top of old infrastructure and old ways even with our billions? Good fucking luck.

Last week, I met the man who is really reinventing the car industry, Jay Rogers, founder of Local Motors. He is creating the platform and API for new cars that are designed collaboratively by communities and built in microfactories across the country by staffs of only 41 using almost entirely off-the-shelf parts. He says he will be profitable selling only 500 cars. He plans to build 3-5,000 of each model and he’s months away from delivering his first.

When I first looked at Local-Motors, I didn’t think it was for me. Its first model is a muscle car being built in and for the Arizona market. In a video, Rogers talks about being able to come into the microfactory to help build your own car. I try everything I can to avoid ever opening a hood or picking up a wrench. That’s why I buy Toyota.

But over lunch, Rogers made clear that he is building a company and cars in harmony with the vision for a new car company I suggested in What Would Google Do?.

It’s collaborative. Rogers set the broad goal for the first car but then the community designed and voted on designs for it. What’s fascinating is that (as I predicted could happen) they make economic decisions and trade-offs. Some really wanted an incredible taillight and Rogers said, fine, that’d cost a fortune to tool up to make and would raise the price of every car by $1,000. Nevermind, the community said; they took a $99 Honda lens and designed around it so you’d never know where it came from. This also means that Local Motors does what it does best and links to the rest, a key precept of WWGD?

The community takes ownership. And the company hands much – but not all – control to them. I wondered how the community defines itself and manages to settle its disputes. The company has to get involved and listen. Rogers said the most important hire a company can make today is a CCO, chief community officer. This isn’t anarchy or democracy. Rogers coins a rather high-fallutin’ phrase for what he advocated: bimodal intelligence. That is, everyone has a voice but at the end of the day, the company has a role to guide the process and product; that is the value the company adds but that works only if the company listens well.

It’s small. And small is the new big. That is precisely why GM and Chrysler are at a disadvantage against him, like newspapers against online entrepreneurs: The incumbents are saddled with huge infrastructure costs and have to do everything in big ways, including fail. And this means…

The mass market is dead, replaced by the mass of niches.
I don’t want the same care you want. I want choice. Hundreds of microfactories can give it to me.

It’s a platform. I saw this more than Rogers did, but it’s clear that because Local Motors publishes its design data openly, I could start a company to provide parts and products for its cars. It enables others to build business on top of its platform. This means that…

Business is public. The more openly and collaboratively Local Motors does its business, the better it is for its products, customers, and relationships.

It’s local. I also didn’t understand this at first. But seeing the car being made for Arizona drivers, I get it. A car for New Yorkers will surely be different.

Middlemen are doomed. Local Motors has no dealers. The factory is the showroom. The customers are the salesmen.

And on and on….

I plan to visit Local Motors’ Boston headquarters to learn more. No, I’m not suggesting that this small company with its microfactory will replace GM, not yet. But this car company can innovate and invent and listen to customers far better than GM can. This car company can become profitable far faster.

Advertising as failure

At Burda’s DLD conference in Munich, talking with the Nokia Ideas Project, I first happened on the notion of advertising as failure. That is, the ideal relationship a company should have with its customer is that it produces a great product the customer loves and talks about and thus sells; there is no need for advertising there. It’s only in the case of failing at that idea that one needs to advertise. (And by the way, I hope there’s enough failure to continue to support media!)

This, then, is about the impact on the ad agency as a middleman:

At the Brite conference at Columbia, I expanded on the idea:

Jeff Jarvis at BRITE ’09 conference from BRITE Conference on Vimeo.

Health-insurance stagnation

America’s health care system – or lack of one – leads to a stifling of economic innovation and mobility. Consider:

* Daniel Taghioff argues that people are more likely to risk starting new enterprises – leading to economic growth – in countries that have health safety nets.

Turning to entrepreneurialism – would you rather risk all to start a new business in a place like the US where if you lose everything you may end up, literally, with nothing, no health-care, no decent schooling for your kids and so on? Or would you choose a society where, if all else fails, the state (or strong social networks) will take care of you? . . . The list of countries with the most new businesses per capita is full of small to medium sized countries with strong social safety nets, or small Asian countries with very high levels of social cohesion.

* I know I didn’t quit my job until I had new health care insurance lined up, for without an employer, I wouldn’t have gotten any (and in the interim had to pay $24,000 per year in COBRA). How many people are sticking with jobs, unhappily and thus probably unproductively, just because of insurance handcuffs? What if they were freed? It would be better for them and their employers.

* General Motors was brought down by more than its its health insurance obligations. Nonetheless, those obligations weighed heavily on the company as they do on many other companies with long legacies and large staffs.

* I was at a WEF event yesterday at which one of the wise counsels pointed to the exacerbation of the health-care crisis that is coming with so many Americans unemployed. This, I think, will force the political issue.

Rather than spending billions to bail out and now even buy crumbling legacy industries and crooked banks, how much more value would universal health insurance give to the economy?

What if, instead of bailing out the past and filling potholes, the government assured universal broadband access? What would that do to spur innovation and entrepreneurship and begin to reform education, which, in turn, would spur innovation? What if education were reformed to emphasis innovation over test-taking? What if investment in new companies were a high priority of the tax code?

We are not thinking strategically enough about these issues in the political debate. We complain about companies thinking short-term but so does the nation.