Invention vs. Innovation

January 11, 2010 in Essays

Everyone loves The Inventor. It’s pretty easy to see why: She is the person who got the ball rolling, he was the bright spark who came up with the idea, they are the people who created new products, services, systems and thoughts that provide great improvements in our everyday lives.

EmmetBrown

Accordingly, we’ve structured many parts of our economy and our legal systems to protect and encourage them. Concepts such as patents, copyrights and intellectual property were established to give inventors and creators and extra degree of protection.

A few hundred years ago, when these protections were first being conceived, it was understood that they were short term taxes on society to reward creators and inventors, with the hope that it would have a net positive societal benefit in the long run. Giving inventors a short-lived monopoly over their new idea was a ‘necessary evil’ to give them the incentive to create, without which (it was assumed) much less invention and creation would be done, which is a bad thing indeed. Short term pain, long term gain.

Copyright Symbol

Here is an excerpt from a speech given by Lord Macaulay in 1841 to the British House of Commons as they discussed a new copyright bill:

The principle of copyright is this. It is a tax on readers for the purpose of giving a bounty to writers. The tax is an exceedingly bad one; it is a tax on one of the most innocent and most salutary of human pleasures; and never let us forget, that a tax on innocent pleasures is a premium on vicious pleasures. I admit, however, the necessity of giving a bounty to genius and learning. In order to give such a bounty, I willingly submit even to this severe and burdensome tax. Nay, I am ready to increase the tax, if it can be shown that by so doing I should proportionally increase the bounty.

Macaulay’s argument is very well reasoned one – If giving the creator a legal monopoly over the ownership of their thoughts and inventions can be proven to increase the benefit to society (more/better books, music, products, services etc.) then it is a good thing.

Now here’s the problem – The bounty isn’t worth the tax. Don’t get me wrong, I do think that the total benefit to society of new inventions, works of art and creative thoughts are hugely invaluable, I just don’t think that the original creator should be credited with providing most of the benefit.

Patent

The Innovator

This is where I draw the distinction between the Inventor and the Innovator. The Inventor creates the new idea, but it’s often The Innovator that brings it to market. Without The Inventor we would have no new ideas, but without The Innovator those new thoughts might never reach people to provide a benefit.

Wired magazine’s recent article “Time Your Attack: Oracle’s Lost Revolution” provides a perfect illustration of this. The article discusses Larry Ellison’s failed attempts at building a cheap Net PC:

They imagined a simple machine that would eschew software installed on a hard drive in favor of accessing applications online. Data — videos, documents, pictures — would be stored in Oracle databases instead of on the computer itself. In place of a robust operating system, this machine would work with programs and files through browsers like Netscape Navigator.

In essence they were coming up with the idea of net books and cloud computing – as I’m sure many people at the time were. The article continues:

It was a powerful idea, one that would enchant companies and analysts throughout the IT industry. But it would ultimately fail.

This is an example of how an idea that we know is great (because net books are selling like hotcakes) can still end up failing. If we had applied our inventor-centric view of the world to this idea back in 1999, we would have been happy if Ellison had acquired full intellectual property rights for his idea. After all, he was the idea man and we needed to reward him and others for coming up with great ideas.

But Ellison didn’t get the monopoly on this idea and right now we can all agree that that is undoubtedly a good thing. In the decade since then there has been a slow and steady growth in the area of cloud computing and an explosive growth in the sales of net books. This has come about through slow but steady improvements, incremental upgrades, iterations and developments by thousands of people, none of whom necessarily “invented” the original concept. This is the value of The Innovators. They take an invention and bring it to market, make it more efficient, make it affordable, create smarter distribution channels to get it into peoples hands and improve it again and again over time.

The Wright Brothers' First FlightWhen considering the total benefit for society that comes from a new technology like this, it is obvious that the lions share is created by The Innovators and not The Inventor. Consider all the benefits we get from the modern aviation industry. A small (but significant) portion of that is from the Wright Brothers, but the majority is from all The Innovators in the industry over the last number of years.

A Note of Caution

Recognising the importance of The Innovator can help us view the modern legal system from a different perspective. Intellectual property concepts were always intended as a means to an end. They granted creative businesses and individuals a certain amount of protection so that in turn they could provide a benefit to society.

But how do they affect The Innovator? As you might have realised by now, their affects can be quite detrimental. If Larry Ellison and Oracle had spent the last decade suing and intimidating any small company that tried to progress the development of net books and cloud computing we certainly would have been worse off than we are today.

Great new internet services that provide us innovative ways to discover content (like YouTube, google, spotify etc.) seem to be getting sued for copyright infringement almost every other day. Any time an innovative technology is released it seems inevitable that it will be sued for patent infringement, most likely by a competitor jealous of the success they couldn’t achieve – most often because they didn’t give customers the same level of value.

Is The Inventor’s bounty worth this tax? I don’t think so.

We need to realise that ideas by themselves do not provide huge benefit to societies, the value lies in making them a viable reality. A new technology will often remain an unwanted product until someone makes it simple and easy to use. An invention is no use to me unless I can afford to get my hands on it. I can’t enjoy a new song if I can’t first discover it then listen to it. A great book is no use to me unless I get to read it.

The benefit of The Inventor is rarely felt without the work of The Innovator and we can’t afford to keep punishing one to protect the other.

iTunes Beats Paypal for Registered Users

January 7, 2010 in Essays, Technology & Science

A few months back I was watching Apple’s Rock N’ Roll event (this post has been in my drafts half written since then!), and one thing mentioned that really struck me was the number of registered iTunes users who have registered credit cards – a whopping 100m.

I’ve seen the comparisons done between social networks (“omg, Facebook is bigger than Brazil!”), but hearing the iTunes figure made me realise that I have no clue how that stacks up against the other big hitters in the online world, so I did some research…

Registered Users

Ebay – 88.4 million

Paypal – 75.4 million

Skype – 480.5

Facebook – 300m

iTunes – 100m

Gmail – 146m

Yahoo Mail – 285

Windows Live Mail (msn/hotmail) – 343m

Wikipedia – 10.5m registered (only 148k ‘active’)

I’m still shocked that iTunes has more credit cards registered than Paypal, that’s a very impressive asset. I’m going to try dig up the equivalent for Amazon, but it’s tricky to find. The skype numbers should be taken with a pinch (or a truckload) of salt, as their definition of “Registered User” is basically any skype account ever created, including ones that were never used, have been inactive for years or multiple accounts for the one person.

Graphs

I thought some graphs might be nice so I did that too:

Registered Users

reg users pie

Definitions

Ebay – All users, excluding users of Half.com, StubHub, and our Korean subsidiaries (Gmarket and Internet Auction Co.), who bid on, bought, listed or sold an item within the previous 12-month period. Users may register more than once, and as a result, may have more than one account.

Paypal – All registered accounts that successfully sent or received at least one payment or payment reversal through the PayPal system or Bill Me Later accounts that are currently able to transact and that received a statement within the last 12 months.

Skype – Cumulative number of unique user accounts, which includes, among other things, users who may have registered via non-Skype based websites and users that have more than one account.

Wikipedia – Active: Users who have performed an action in the last 30 days.

Sources

Yahoo Mail, Gmail, Bing Mail, Ebay, Paypal, Skype, Facebook, Wikipedia,

Let me know if there’s any other companies you want me to add to the stats.

Murdoch’s Paywall

November 23, 2009 in Business, Economics, Essays

There has been a lot debate online recently surrounding Rupert Murdoch’s change of mind about paywalls for his online newspapers. I’ve been reading a huge number of arguments on both sides (including a 40min video interview with Rupert himself) and am sad to say that most of them seem to be missing the point.

Earlier today I read Adrian Weckler’s article ‘The case for a paywall for Irish newspapers’, and decided to write my response in a post here, and to summarize my thoughts on the debate in general.

Paywall or Die?

Ardian makes many of the points that are being made by journalists and newsfolk around the world, that the business model is collapsing and they can’t afford to keep giving it all away for free. He finishes his article with the question:

But if the choice is a continuous decline in circulation figures or a paywall, it’s not really that tough a choice. I mean, ask yourself: what would you do?

The fundamental problem in the paywall debate, but the one too often overlooked, is one of supply and demand. The question the article asks is “Should we decide to command a price, yes or no?”, but economics tells us that the only question one can really ask is “Can we command a price“.

As a simple analogy, imagine one major Irish newspaper put up a paywall, but none of it’s competitors decided to follow suit. This paper obviously wouldn’t do so well, most of the news stories would be available in the other major publications or elsewhere online, it’s own articles wouldn’t be shared, tweeted or linked to as much as other papers and it would also lose the water-cooler effect if much fewer people are reading it.

This is the best analogy I can think of to describe the problems I see with an industry wide paywall – but the problems that afflict that single newspaper would hurt the whole industry, and the competition would be from other online news sources, international papers, bloggers and independent journalists.

The Economics

If you view news as a commodity, it can be fairly undifferentiated. If you take my analogy above, there are some people who would stay and pay for the subscription, but most would not. This is because the news is largely the same to them regardless of the source.

It is also served up at a near zero marginal cost. Think about it, how much does it cost the Sunday Business Post for each additional article read by a new visitor (or even – how much does it cost yourtechstuff.com?). In economics, when the market is competitive, price will always fall to the marginal cost. If you’re in an industry with a marginal cost of close to zero, it will be very, very, very difficult to command a price.

The Business Model

So back to the closing question, paywall or death? As always, (and without wanting to sound like a Carlsberg commercial) there’s a better third option here. This is a business model problem that newspapers have. In print, they have little competition for audience attention, and therefore can sell that attention for a high price to advertisers. Online, this is not the case, and so the price the can command for advertising is much lower. They therefore need a new revenue model, and here’s my suggestion for how they should get started:

Always remember that standard news articles cost nothing to distribute, attract an audience and command no price, so if you’re going to publish them, keep them free. Then figure out how to convert a proportion of the readers of those articles into paying customers.

If you want to charge your readers (or a subset of your readers), start by asking what value you can add to your service to make it worth the price. This is the biggest flaw in Murdoch’s plan – he’s wants to introduce a new price, but without introducing a new clear reason for his customers to buy. Some publications, like the WSJ, already add value by offering in depth insight into content for a specific market. This is one option, but it does leave you open to new competition that could easily offer the same content for free.

Preferably this new revenue model would involve selling new scarcities, such as personalisation, physical products, access to ‘behind the scenes’, or an editors time (e.g. letters to the editor can be read by everyone, but only written by subscribers – or better yet a discussion forum with the editors, accessible only by subscribers).

Here are some quick examples of news organisations leveraging free news articles to sell scarcities (there’s obviously not too many examples though, otherwise the industry wouldn’t be in such a pickle!):

  • Tecdirt’s “crystal ball” membership option – for only $15 per year “with the Techdirt Crystal ball, we give you a chance to see the headlines of some of the posts we’re working on, and some indication of when they might get published. And, once a story is published, you’ll be able to see it up to 60 minutes before anyone else can.”
  • The New York Times’ Gold & Silver online membership plans – The packages carry an annual cost of $150 and $50, respectively, and emphasize behind-the-scenes benefits like newsroom tours, exclusive videos of reporters telling “the story behind the story” and ancient back issues.
  • The Insight Community – a clever way to charge a brand to work with your readers to build or design a new product.

So that’s my input and advice for this debate, and can be summarized in these two lessons that I learned on my first day of Leaving Cert Economics:

  1. In order for a good to command a price, it must be scarce in relation to demand
  2. In a competitive market, price will always fall towards the Marginal Cost of production