The NOSE

Scaling Innovation: An Introduction to Prahalad & Krishnan's The New Age of Innovation.

Scale matters. But when and how? For a time the theory of capitalism rested on the belief that in a competitive process large-scale capitalism always beats out the smaller counterpart. Among the first to articulate this view was Marx: "The battle of competition is fought by the cheapening of commodities. The cheapness of commodities depends, ceteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore, the large capitals beat the smaller." Although the intellectual antecedents of "giantism" can be found in Marx, the theory of capitalism in the West as represented by Schumpeter, Galbraith and others in the 1950s and 1960s, also proclaimed the invincibility of the large firm. The concentration and centralization of capital leads to economies of scale, which in turn leads to the highest levels of productivity growth. Schumpeter, for example, wrote in 1942 that "What we have got to accept is that (the large establishment or unit of control) has come to be the most powerful engine of progress."

The thesis of giantism has proven to be economically suspect and historically unsound. Indeed, the pendulum has swung so far the other way that today "innovation" has become synonymous with entrepreneurship and the latent ingenuity in small firms. According to today's conventional wisdom it's the entrepreneur and the small business owner that innovates. By contrast large firms are inherently bureaucratic and sclerotic. Clayton Christensen in The Innovator's Dilemma has made the further point (in Hegelian fashion) that the very logic that drives incumbent firms to success later generates the seed of self destruction. Is there no hope then for large firms?

Prahalad and Krishnan's The New Age of Innovation is not an apologia for large-scale capitalism. However, it is one of the few recent books on innovation that approaches the problem synoptically and comprehensively. It can be read by firms small or large as a primer on innovation strategy. Their starting point is the claim that "traditional sources of competitive advantage, such as access to capital, physical location, and raw materials or technology, will become table stakes. These factors are diminishing in their importance as sources of competitive advantage. Access to these factors is becoming easier."

Value creation and new competitive advantage derive from a set of factors which Prahalad and Krishnan portray pictorially as a house. The two pillars are labelled as "N=1" and "R=G". N=1 asserts that "value is based on unique, personalized co-created experiences of customers" while "R=G" means that successful firms will draw on, though not necessarily own, ideas, talents, and resources globally. In addition to these two pillars an innovation strategy integrates business processes, analytics, technology, and social architecture. The individual elements in Prahalad and Krishnan's model are not new but their synthesis is original. Large firms need not throw in the towel just yet.

Stay tuned for more on Prahalad and Krishnan.

Philip Greenspun on Internet Software Patents

Philip Greenspun, a pioneer of internet web technologies at MIT, has written a new piece on Internet Software Patents.  (Via Feld Thoughts) It's a must read and a good starting point for understanding the Mad Mad Mad World of Internet Software Patents.

Greenspun conjectures that "Perhaps the natural progression of an industry is innovation, consolidation, then litigation." We are certainly seeing this pattern in the Blackboard Inc vs Desire2Learn patent case. As the 2006 Educause Catalyst Award recognized, Course Management Systems emerged in "pockets of innovation among faculty" throughout the world.  Later the CMS began to evolve into products through pioneering work at University of British Columbia and Cornell University. It began to hit mainstream with the emergence of  Prometheus (origins at George Washington University), Desire2Learn (origins in Canada), and then open source implementations with Sakai and Moodle.  Blackboard's acquisition of Prometheus and then WebCT completed the consolidation but also gave Blackboard a de facto monopoly status in the industry. (By most estimates Blackboard enjoys 60-75% of the CMS market share). If Greenspun is correct, then we are squarely in the litigation phase.

1. A Pattern Emerges. "In the Internet software patents that I've looked at in subsequent expert witness assignments, a pattern has emerged.  Someone takes a fairly standard business process and says "I'm the first person ever to have done this with a computer" or "I'm the first person ever to have done this with the Internet" and patents it."
2. A Developer's Perspective. "I was asked "Why didn't you patent this yourself, if you developed it first?"  My reply was "It only took me an hour to build; if I went down to the patent office after every hour of programming, I wouldn't get very much done.""
3. The Patent Examiner. "How come the patent examiner grants patents on stuff that a 12-year-old Visual Basic programmer would probably implement without too much thought?  A patent examiner is only permitted to spend about 12 hours looking at a patent.  If he or she cannot find prior art within those 12 hours, the patent is issued.  Mostly patent examiners look at other patents, but sometimes they search academic journals and popular magazines.  Still, if you had 12 hours to search, including time spent writing correspondence to the applicant, would you be able to find a publication on how to use a file cabinet with hanging folders?"

My own conclusions after reading Greenspun's insightful article?

Who benefits from Internet Software Patents? Trolls, Monopolists, and Lawyers. Who loses with Internet Software Patents? Consumers, Entrepreneurs, Software Engineers, Innovators, and Educators.

Developing an IT Innovation Strategy

I lead a discussion tomorrow on "Developing an IT Innovation Strategy" at the 7th Annual Minnesota IT Symposium. Here's the blurb.

"In a dynamic and global market, innovation will increasingly become the core determinant of the success or failure of firms. Two questions underlie the development of an innovation strategy within a firm or organization. The first concerns the sources of innovation. The second concerns the sustainability of innovation over time.

Our discussion will focus on developing an IT innovation strategy. In particular, we will consider the processes that must be place in an organization to stimulate and sustain innovation. We will also consider the unique challenges facing IT in enabling organizational innovation. The framework for the discussion will draw upon the latest research on innovation from MIT."

Blackboard's Fabian Strategy Against Open Source

Near the end of the third century BC a new force crossed the Pyrenees and the Alps, marching menacingly to the doorsteps of Rome. Led by the brilliant Hannibal, the Carthaginian army and its cavalry of elephants achieved punishing victories in lightning succession against much larger forces. The greatest empire in the world was under threat.

Carthage lost. Rome won. Hannibal's ultimate defeat in large measure was due to a strategy devised by Fabius Maximus. Recognizing that time was on the Roman side Fabius avoided direct pitch battles, choosing instead to follow a patient, slower war of attrition. In the end, Fabius' strategy paid off. After his army's defeat Hannibal was hunted down by Roman troops to the Sea of Marmora, where he committed suicide by poison.   

Blackboard's war against the open source menace is following Fabius' strategy: Avoid direct engagement and erode the enemies' strategic vulnerabilities over time. Open source software's strategic weaknesses are twofold and Blackboard will exploit them ruthlessly: a) the lack of legal protection or indemnification for end users;  b) the necessity of creating an ecosystem of commercial partnerships around the core software. Blackboard's patent litigation simultaneously strikes at both, cleverly and indirectly.

By using open source software your organization exposes itself to legal liability. Blackboard doesn't have to say it. Your legal counsel knows it. Commercial software is usually accompanied by an intellectual property contract provision ("indemnification") which protects the end-user against third-party infringement and misappropriation claims. For example, here is an excerpt from Microsoft's  "Intellectual Property Indemnification" protection to end users:

Askance by K. Tokuyasu

"For any covered software, we will: defend you against any claims made by an unaffiliated third party that the covered software infringes its patent, copyright, or trademark or misappropriates its trade secret, and pay the amount of any resulting adverse final judgment against you (after any appeals) or settlement to which we consent."

Although Blackboard's current counsel has said that "for business reasons" his company doesn't intend to sue open source projects or higher education institutions, it's not a binding commitment. Go to your counsel's office and say: "It's ok for us to use Sakai because Blackboard has promised not to sue us." I am sure she will listen to everything you have to say and politely show you to the door. See then if she ever invites you back. (If your counsel is receptive to your ideas, then your institution probably needs to get a new counsel.) From a risk perspective using mission critical software without indemnification is like going through life without catastrophic health insurance. Large institutions can afford to play the russian roulette risk game because if the gun goes off it's not likely to be lethal. Smaller and mid-size institutions don't have that luxury and Blackboard knows it.

The other Achilles heel of open source software is found in its symbiotic relationship with commercial providers. All commercial providers in the e-learning space, not just those that directly infringe Blackboard's patent, are now at legal risk. If I am an entrepreneur who is thinking of entering this space or a company such as Unicon, which is trying to build products and services around open source offerings, I have to calculate seriously my legal risks and ongoing investments needed to mitigate that risk. Guess what? I will probably go elsewhere. Why would I want to waste my time navigating legal landmines placed by an 800 million dollar company?

In short, Blackboard will choke open source by slowing new adoption and sucking all the oxygen from enterpreneurs around open source.

As one investment advisor has noted, time (and money) is on Blackboard's side and its monopoly choke hold on e-learning:

"Now, the controversy generally wouldn't matter that much -- academics are an easily angered lot (I should know, being among them), and they often take principled stands. That's fine, and often admirable, but it doesn't often have a huge impact on companies or businesses"

"Now, I don't think this is going to be that big a deal, and I expect that the firestorm of controversy within the academic community will simmer down in the coming months."

"No, I bought shares in Blackboard because, although still a small cap company, they have a dominant market position, a very well-integrated product, and a set of competitors that, though myriad, are quite weak in comparison. I see BBBB as having a near monopoly on this market, or at least a monopoly on the segment of the market that will always prefer to have a professional, supported suite of products as opposed to a homegrown or self-supported open source solution."

"I'm still holding my shares and I believe the prospects are good several years out,.."

How to Think About the Blackboard Patent: Part IV. Blackboard's Spin Strategy

A fictitious conversation between Blackboard's CEO and Blackboard's Spinmeister.

CEO: We seem to have gotten ourselves into a bit of a pickle. How do we spin this?   

Spinmeister: First, avoid any substantive comment in public about what the patent covers and what it doesn't cover. You can say something like: "Because this is in the courts, I can't comment."

CEO: I don't understand. Just because we have filed a lawsuit it doesn't mean I can't talk about what the patent covers.

Spinmeister. Yes. You and I know that. But you can use the fact of ligitation to evade answering any tough questions. Our goal is to intimidate Desire2Learn and raise the spectre of litigation. Talking specifics about the patent doesn't advance either goal.

CEO: So, what DO I say?

Spinmeister. Say, our patent doesn't cover ALL e-learning. Strictly speaking that's true. No patent covers everything. Keep repeating: "Our patent is limited and doesn't cover all e-learning." You don't have to say what it does cover. Remember also to keep repeating. "It's in the courts and I can't comment." And don't ever say that we have also applied for OTHER patents.

CEO: What if I am asked WHY we took out a patent and have others pending? Spinmeister. Repeat after me. Say it at least ten times before every meal. "intellectual property... intellectual property...intellectual property".."copying...copying...copying...". Most people don't understand the difference between copyright and patent and frankly don't care. If you say "intellectual property" and "copying" enough times it will naturally evoke an association with things like illegal downloading of music and theft. Use my soundbites and we will create the following association. Trust Me. Blackboard :: Adults :: Respect for Property :: Believers in Competition, Markets & Innovation Anti-Blackboard :: Juveniles :: No Respect for Property :: Peaceniks, Tree Huggers & Communitarians

Tollwood ... by Altweibersommer.

CEO. How do I handle open source?

Spinmeister. Calm down, dude. I know you want to strangle open source.You don't have to take them head on. Say: "Our litigation focus is on commercial providers." Lack of Indemnification is open source's achilles heel. All we have to do is raise the spectre of litigation. Let the lawyers at the colleges and universities apply the pressure internally against open source. They will kill it. We will just sit back and enjoy the show.

CEO. What about these stupid bloggers?

Spinmeister. Nothing to worry about. It's just a handful of individual bloggers raising a ruckus. Remember that no institutions or organizations with any clout have taken a stand. If you use my sound bites things will blow over in a few weeks. It will be just like a passing rainstorm in Texas.

CEO. What about innovation?

Spinmeister. Give me a break. It's just a word. Everyone is for it and no one knows what it is. Just keep repeating the word as everyone else does. Remember our company motto. Educate. Innovate. Everywhere. The first two are just words. The last word is what we are after: EVERYWHERE. 

CEO. Thanks.

Spinmeister. Anytime.