Topic 5 - Melbourne Business School

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5 Δεκ 2012 (πριν από 4 χρόνια και 10 μήνες)

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Markets for Ideas

Start
-
Up and Incumbent
Contracting Strategies

The Televisionary

Television


Though the principles of television had been apparent since at
least the invention of the radio, a number of fundamental technical
hurdles needed to be overcome


Perhaps most importantly, a “television” system required a
consistent method for encoding, transmitting and decoding signals
which could then appear on a specific location within the “grid”



By the late 1920’s, RCA was, by far, the single most powerful
company in the radio business, with both content (programs),
distribution (networks), and production (radio receivers)



Philo Farnsworth was a solitary (and talented) inventor who was
committed to the development of television, and was committed to
underming RCA through the creation of an independent television
company

Innovation and Commercialization
Strategy




Organization






Strategy




Farnsworth

RCA

Competitive Advantage in Television

Farnsworth

RCA

Farnsworth ultimately received a
cross
-
license
with RCA, plus a share
of RCA television profits.


However, the Farnsworth Television
Company was only a very minor
player in the television business,
having squandered resources and
focus during WWII


Farnsworth died in the early 1970s,
with only a few stalwarts defending
the reputation of the inventor of
television

Sarnoff unveiled television (finally) at
the 1939 World’s Fair.


Though WWII put a halt on
commercial television diffusion, much
incremental and sustained work along
the Technology S
-
curve in improving
production, distribution, and content.


RCA ultimately dominated the
introduction of television in the early
1950s, selling only a few televisions
before Farnsworth’s patents expired!

Profiting from Innovation

Profiting from Innovation:
Overview


Who Earns $ from Innovation?


Players


Drivers


Appropriability (IP and so forth)


Complementary Assets


Industry Structure


How can Development and Commercialisation Strategy Impact
how “Rents” from Innovation are Divided:


Between Suppliers & Customers?


Between Players on the Value Chain


Do great ideas == lots of $?

Value created

Value
Captured by
the Innovator

EMI’s CT Scanner

Xerox PARC

Linbeck

Most innovation in
financial services

RC Cola

GO/Apple
Newton?

Dell

Walmart

Coca Cola

Microsoft

Du Pont/Nylon

Pfizer/Viagra

Lilly/Prozac

Corning/Fibre
optics

Dividing up the Profits from Innovation

Customers

Inventor

Suppliers,

Others in

“value chain”

Imitators,

followers

Why are “ideas” potentially
valuable?


Direct Application to New Technologies


Both products and processes


“Seed Corn” for Future Inventions


Most innovations “stand on the shoulders of giants”


No “expiration date” on the value of an idea


Potential solutions for society’s most pressing
economic, social, and human challenges


Myopic focus tends to underestimate the ability to
transform social challenges through powerful (often
simple) ideas

Dividing up the Profits from _______

How big is the pie?


Who are the key players?


What players are likely to grab the largest shares?


Profiting from Technological Innovation:

Three Critical Factors


The Appropriability Regime




Control over “specialised” Complementary Assets




Industry Structure & Maturity

Appropriability is very important:



If a particular innovation, or the knowledge on which
it rests, can be completely “appropriated” it means
that no one else can use it or copy it. This both allow
for a large “share” of the pie to be retained by the
“supply” side and offers innovators enormous
bargaining power in the value chain..

Sources of Appropriability



Intellectual property protection


Patents


Finite length


The right to prohibit “producing”


Copyrights


The right to prohibit “copying”


Secrecy


Trade secrets & non compete clauses


Complexity and “tacit” knowledge


Speed (First Mover Advantages)

So, why is making $ from ideas so Hard?


The Disclosure Problem


Figuring out the “price” for an idea requires information
which intrinsically reduces its value


The Contingency Problem


Value of Ideas depends on factors such as market
demand, existence of other technologies


Difficult to Make Contracts Stick?


The Perception Problem


Different individuals will perceive the value of an idea
differently…difficult to benchmark in the absence of
product market experience


Appropriability: Tools for
Protection

Tools for Intellectual Property Protection


Patents




Copyright




Trademarks




Trade Secrets

Patents: The Basic Facts


Right to Exclude others for 20 years


Quid pro quo
: right to exclude in exchange for
disclosure


Traditional justification: incentives for innovation


Standard for patentability (US)


First to invent (in Europe, first to file)


Three Criteria


Non
-
obviousness (to someone schooled in the art)


Novelty (beyond what already is patented)


Utility (a potentially useful description)


Specialised examiners have much discretion (and no explicit penalties
for mistakes)


“There are as many patent offices as there are patent
examiners”


Court of Appeals for First Circuit (CAFC) hears all patent appeals, and
is perceived to be both (a) consistent and (b) somewhat pro
-
inventor


CAFC tends to reverse grants associated with “over
-
generous” examiners

Copyrights:

The Patent’s Disreputable Cousin


Right to Exclude others from
copying
for
a long time


No

Quid pro quo
: rights granted without standardised
disclosure mechanism


Traditional justification: Protecting artistic works


Standard for copyrighting


A ban on copying precise expression


No standard of utility or novelty itself


Except if expression itself is duplicated


Though certification and registration are possible, not required


Copyright cases often revolve around “subjective” criteria such
as whether sw copies the “look
-
and
-
feel” of leading app


Trademarks & Trade Secrets


Trademarks


Right to stop others from
confusing
your potential customers


Limitless duration as long as business is ongoing


More “property rights” than “intellectual”



Trade Secret Law


Right to keep knowledge a secret


Extremely high standards for prosecuting a case


Mechanisms developed over last 20 years both to


Set up a good case for trade secret theft


Set up a good defense against a trade secret suit


Complementary Assets

Persistent Success

Typesetter Industry


Waves of radical innovation


1440: manual, Gutenberg


1886: ‘hot metal’ linotype machine, Mergenthaler


1949: analog phototypesetting


1965: digital CRT phototypesetting


1976: laser imagesetting


One firm: Mergenthaler Linotype survived as
industry leader


Effect on Specialised
Complementary Assets

Generation

Specialised
Manufact
-
uring
Capability

Sales &
Service
Network

Extensive
proprietary
font library

Devalue
Specialised
Comple
-
mentary
Assets

Hot Metal

High value

High value

High value

N/a

Analog
Phototypesetter

Much lower value
than prior
generation

Much lower value
than prior
generation

Same value as
prior generation

Yes

Digital CRT
phototypesetter

Same value as
prior generation


Same value as
prior generation


Same value as
prior generation


No

Laser imagesetter

Same value as
prior generation


Same value as
prior generation


Same value as
prior generation


No

Mergenthaler’s success


1895: recognised need for new font development


1902: library of over 100 fonts


1913: 1000 typefaces


1923: 200 typefaces


Would take 20 years for an entrant to duplicate (with
computers, took Compugraphic a decade and $23
million to generate 1000 fonts)


Key fonts trademarked: “
Helvetica



Complementary assets as a source of
market
power
.

www.myfonts.com


What are complementary assets?

Those assets necessary to translate an innovation into
commercial returns

Core
technological
know
-
how

Distribution

Services

Complementary
technology

Competitive
manufacturing

Suppliers

Complementary assets can only be a
source of strength if they are
tightly held

Complementary Assets

How tightly held?

Innovation

Celebrex

Vanilla Coke

Search Engines

iPod

Types of Complementary Assets Offering
Advantage


Things you own


Brand name




Distribution channels




Customer relationships


Things you can do


Manufacturing
capabilities




Sales and service
expertise




Capture customer
knowledge


How can we assess whether we control
specialised complementary assets?


Assess asset and capability requirements at it stage of
development


Suppose that innovation had been developed by “external”
start
-
up team


Would a start
-
up consider you the ideal partner?


Are there any capabilities for which it is necessary to
approach a partner? A potential competitor??


Firm controls stage
-
specific assets if a start
-
up would
consider you the ideal partner and no “bottleneck”issues


NB: Ensure that no key disclosures are required in order to
implement


more on this later ...

The
Interaction

between Appropriability
and Complementary assets is critical:

Appropriability is
:

Loose

Tight

Complementary assets are
:

Freely

available

Tightly


held

Some examples

The Inventor’s

Dream

Qualcom in CDMA

Biotech?

Complementary
assets play

Dell, P&G

Caldon, M. Lynch

Few returns to
innovation?

Linbeck

Int. Wind.Wiper

The Big Win

Nylon, Viagra,
Kodak


MS Windows

Complementary assets are:

Available

Tightly


held

Easy to

maintain

Hard to

maintain

Uniqueness is:

Exercise:

Appropriability is:

Loose

Tight

Complementary assets are
:

Freely

available

Tightly


held

Position
:

Pharmaceuticals

Online Reservations

________________


Exercise:

Appropriability is:

Loose

Tight

Complementary assets are
:

Freely

available

Tightly


held

Position
:

CT Scanner

________________


Appropriability and Complementary Assets
over the life cycle:

Ferment

Takeoff

Maturity

Appropriability

Complementary

Assets

Managerial Implications


A great technology is not enough; key to advantage from innovation
lies in the ability to extract value through the commercialization
process, a process with Winners & Losers


Intellectual Property Reinforces Innovator Strength


Complementary Assets Reinforces Established Player Strength


Imitators Can “Leapfrog” During the Earliest Stages of Industry
Evolution


IP is used strategically (and sometimes slimily)


While IP protection has historically been weak in most sectors,
noticeable shift towards “excludability” in recent years


No cookbook / Possibilities for careless decision making


If you find yourself with one of these problems


hire a good
lawyer!

Case

Ecton, Inc.

Commercialisation
Choices

Contracting versus competition

Traditional Appropriability
Strategy

Commercialising in the Product Market
R&D Investments
Profiting from Innovation Involves
Competing

in

the Product Market

Christensen, 1997, p.23

Traditional Theoretical Perspective is that Start
-
Ups Profit from
Innovation through Competition in the Product Market… the Disk
Drive Industry Seems to Display the “Gale of Creative Destruction”

Increasingly, returns are earned through
contracting in the “Market for Ideas”


Profiting from Innovation Through
Contracting

out

ideas

Production & Marketing
Alliance
Licensing Revenues
Acquisition
R&D Investment
Critical Ingredient in
Contracting
is a
Market for
Ideas

Contracting
in Ideas Market
Competing in
Product Market
Bargaining
R&D Competition
In the absence of markets for ideas, earning
returns from innovation
requires

direct
commercialisation!!

Is Contracting Versus
Competition a Choice?


Necessary ingredient for
contracting
is a
market for
ideas


Missing market for ideas ==>
must
earn
returns through product market


Established ideas market ==> contracting
versus competition is a
key

strategic choice

Patterns of Contracting Vs. Competition
Across Industries are Enduring Puzzle...


Competitive Pattern


Technological Transitions are Associated with Changes in
Market Leadership


Descriptive cases often identify “blindness” on part of
incumbents (“The Attackers Advantage”)


Disk Drives


Photolithographic Equipment


Contracting Pattern


Sources of Innovation are Dynamic, Product Markets are Relatively
Stable


Descriptive cases often highlight personal relationships, contracting
intermediaries, etc…


Biotechnology (strong IP)


Software components (weak IP)

Case 1: The Biosensor


Development

of

a

medical

diagnostic

device

that

is

part

biological
.

30

patents

from

Australian

scientists
.


Joint

venture

between

the

CSIRO

and

Ambri

(a

subsidiary

of

PDL)
.


Should

it

be

“commercialised”

in

Australia?


What should Ambri do with the
Biosensor?

Appropriability is
:

Loose

Tight

Complementary assets are
:

Freely

available

Tightly


held

Case 2: Windshield Wipers


1962: Robert Kearns invented a little wiper switch
that made intermittent wiper possible


Fitted car with it and drove it to Ford


Ford passed on innovation


Kearns obtained patents


1969: Ford and others cracked secret


1990: Kearns wins suit against Ford for potential
damages payout of $US325 million (eventually gets
$8 million).

What should Bob Kearns do
with Windshield Wiper?

Appropriability is
:

Loose

Tight

Complementary assets are
:

Freely

available

Tightly


held

Strategy in the Marketplace for
Ideas


Could Bob have better protected his ideas for
intermittent windshield wipers? How?


Should Ford have treated Bob any
differently? How?


Should Bob have invested in developing the
intermittent windshield wiper in the first
place?




Case 3: Baby Einstein

Appropriability is
:

Loose

Tight

Complementary assets are
:

Freely

available

Tightly


held

Case 4: User
-
Based Innovation


Von Hippel has demonstrated that in many high
technology industries (e.g., scientific instruments
and semi
-
conductors/circuit board design), initial
innovations were generated by users


Then commercialised by manufacturers


Why?


Von Hippel: users possess key information


Gans and Stern: users have intrinsic value for innovation;
gives them bargaining power.

Encouraging User
-
Based
Innovation


What can manufacturers do to encourage
users to develop commercialisable
innovations?


Conferences


Beta
-
testing


Reputation for payment


Close information exchange


Gift
-
exchange

Are there benefits of trading in the
market for ideas?


Avoiding Duplicative Investments


Costly Marketing & Manufacturing Assets


Imitative R&D Programs


Taking advantage of “High
-
Powered”
Research Incentives in Small Firms


Product Market Assets v. Entrepreneurship


Softening product market competition


Extending product market franchises

Why Are Ideas Markets So Hard to
Create and Maintain?


The Disclosure Problem


Figuring out the “price” for an idea requires information
which intrinsically reduces its value


The Contingency Problem


Value of Ideas depends on factors such as market
demand, existence of other technologies


Difficult to Make Contracts Stick?


The Perception Problem


Different individuals will perceive the value of an idea
differently…difficult to benchmark in the absence of product
market experience


Strategies to Make

Ideas Markets Work


Protocols for Strong Intellectual Property rights


Use of contracting intermediaries



Venture capitalists


Specialised lawyers and dealmakers


Using mixtures of fixed fees and royalty payments


Developing a reputation for ideas dealmaking


Building a successful licensing track record


Alliances and limited participation to build trust

Overcoming
Disclosure

What to do when disclosure is an
issue

Strategies


Enter the product market yourself


deCode Genetics


Look for incumbents with a good reputation


Symantec

Genomics Revolution


Genetic
-
based diseases


Less than 1% of genetic code differs amongst all
humans


Different genetic traits can dramatically impact on
individual predisposition for many things including
cancer, heart disease etc.


Issue is how to identify specific genes

Iceland


Iceland has a population of 250,000


Most descended from initial Viking settlers 1000 years ago.


National obsession with family trees


Population genetics


Icelander and Harvard Professor, Karl Stefansson (founder
and CEO of deCode Genetics) wanted to explore
population genetics


Integrate genomics databases with medical records


Approached Icelandic government to license country’s
genetic code.


deCode Genetics


1996
-
1998


Raised VC funds


Signed 5 year $250m research agreement with Roche


Successfully lobbied Icelandic government to pass law to
establish the Icelandic Health Care Database


deCode has an exclusive 12 year license to this database.


Today


deCode are successfully applying this knowledge to
identify specific genes


deCode have a 7 year agreement with Merck to conduct
clinical trials

Heart Attacks


October 2003


deCode identified a key risk factor for heart attack


Identified single base pair that led to elevated production of
the ‘FLAP’ protein (making it twice as likely to have a heart
attack)


same risk increase as caused by smoking!


2004


deCode discovered that Bayer had done extensive clinical
trials into a drug that inhibits the ‘FLAP’ protein (Bayer had
been looking for an asthma treatment).


Bayer abandoned the trials as it wasn’t a successful
asthma treatment.


deCode licensed the drug from Bayer and is now pursuing
clinical trials.

Managerial Implications


When others hold complementary assets there is
value to contracting


Ability to contract depends on existence of market
for ideas


Strong IP: relatively easy to trade


Weak IP: requires reputation and trust


Expectations of contracting versus competition
influence innovation incentives ... Next topic