The Lessons from New Innovation Models for Policy

1. 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

2. 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

3. 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 The Silicon Valley model

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

5. Growing Role of IT in Economies

6. Worldwide IT Spending Forecast in $billions 2013 spend 2013 change 2014 spend 2014 change Source: Gartner (Jan 2014) Role of IT Services

7. 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

8. Cheap!! 3D printed prosthetic arm with standard commercial gears: Costs $250 vs. $80,000 commercial modelDesigned & produced by 17 year old (Source: Gizmag)

9. Way beyond Fitbit: Coleman “brain tattoo”

10. 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

11. 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

12. 5. Batch-oriented productionbecome more common, even in mass production. • 6. Commercial scientific innovation processes are changing:Emerald Therapeutics -- networked robots operate lab testing equipment Further implications

13. Remote Lab Testing by Robots

14. 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

15. 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

16. Market Size and Growth of Online Content Industries Computer and video games revenues Entire media industries transformed

17. 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

18. 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

19. Wink: GE light bulbs—crowd sourced controller

20. 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 enablenovel business models combining hardware and services A New Innovation Eco-system

21. Cement Sensor 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? $300,000 $10 Source: Greg McRae, MIT and ANL

22. 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 New Evolutionary Path for Innovation Source: kickstarter.com

23. 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

24. 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

25. MinuteKey—99.6% accurate

26. 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

27. Tesla Auto FactoryRobotics, new tech & materials & new business model reduced time from first design to product from the traditional 5 years to 2 years

29. 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

30. 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

31. Tractor Cockpit “imports” information services (Source: Fortune Magazine)

32. 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

33. “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