Understanding cooperative innovation

David ClarkMIT CFP

November, 2012

The limits of disruption

• Small companies do not usually change the world.

• Usually, small companies must take the world as they find it, identify a niche, and move in. – Of course, there are exceptions—the true success

stories.• Google, Facebook (perhaps), Twitter (perhaps)

– And then they are no longer new entrants. They become the new incumbents.

How do big firms innovate?

• One answer: buy small firms. – Let them take the risk, and buy the successful ones. – But this only gets you “small company” innovation.

• Not enough if you dominate the market.– If you own the pie, to grow you have to make the

pie bigger. – This means change the world.

• Cisco’s Chambers, several years ago, said we can no longer grow by M&A.

Making new opportunities

• Sometimes one firm can shift the landscape.– Hypothesis: this is not often true.

• Multiple actors must align to create new business opportunities (and new social value).

• We are calling this cooperative innovation. – Cooperation among competitors and along the

value chain to produce new functionality, new capabilities, new opportunities.

Observations and examples

• Example– The creation of the secure Web (SSL)• Required modification of client and server software,

creation of CA system and merchant certificates, the upgrading of many Web servers, and so on.

• Created e-commerce.

• Observation– The distinction between entrant and incumbent

may not be very helpful in understanding the dynamics of cooperative innovation.

Consider some failures

• Curing spam.• QoS on the open Internet.• Migration to IPv6.• Better security generally.

Spam• The rise and fall of Goodmail.

– Goodmail proposed a scheme:• Bulk mailers register with their type of service: opt-in, opt-out, spam,

etc.• Mail from registered mailers would be forwarded without being filtered,

so long as they comply with their service class.• Other bulk mail would be filtered and perhaps modified.• To pay for this, bulk mailers would pay a per-email fee.

– Bulk mailers turned on them. • MoveOn, in particular.• Google said the power to filter should be in the hands of the user.

– Email providers abandoned them.– They went out of business.

Lesson from Goodmail

• Large email providers have market power.– The higher-level equivalent of the telco

terminating monopoly. • A scheme that additionally empowers actors

with such market power will be rejected by the ecosystem.

QoS• Tools for QoS do work (technically) but have not been

deployed on the public Internet.– No model for charging or allocation of revenues.– No agreement as to what the actual service definition would be.

• Continued disagreement as to whether QoS is needed. – Necessity of increased information sharing among competitors

was worrying. – Sense that partial deployment would be ineffective in the

market. • (We held several meetings to resolve “some of” these issues.)

– Now, rejection of the idea in favor of managed services that compete.

Lessons from QoS• Disagreement about the value of an idea will almost

certainly kill it.• Necessity for a lot of actors to move together is a

formidable barrier. – No way to do a “proof of concept” to resolve first issue.

• Difficulty of negotiation with competitors is a killer. – Business, technical, legal

• Failure of designers to deal with “money routing” is a killer. – Need to propose a business model, not just a technical model.

IPv6

• Perhaps not an innovation, just a necessity.• Slow progress. Very slow. • Many ISPs, most OS and service platforms

are capable.• Next barrier is upgrading all the Web servers. – Perhaps 200M of them?

• Less than 1% upgraded so far.

Lessons

• Lots of web servers upgraded to SSL, but very few upgrade to IPv6.– Not surprising at all. SSL brings them benefit. – IPv6 is a classic example of an externality. • I expend, somebody else benefits.

– Too many actors to come up with an easy scheme to internalize the externality.• At least, I have not seen the scheme yet. • ISPs could charge a premium to services that are not

IPv6-ready, if they themselves had the incentive…

Generalities• Need a leader.

– Should not be the actor with market power.– Need to hunt for the right actor who is in the right position.

• Need a financial model.– Need to argue that all actors have some incentive to act.– Shifting revenues along the value chain to balance incentives

may not be practical.• Massive transaction costs.

• Need balance of power and control along the value chain.• Need an approach that allows incremental deployment

and proof of concept.

Next

• We want to identify other case studies and try to elaborate and better understand general lessons.

• Can we solicit examples from you, either historical or forward-looking?