Saturday, 29 September 2012
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Friday, 7 September 2012
At Procter & Gamble, the Innovation Well Runs Dry
For much of its history, Procter & Gamble (PG) didn’t just launch new products, it created new product categories, from the first mass-produced disposable diapers to Crest teeth-whitening kits. That’s one reason P&G has more than 1,000 Ph.D.’s among the 8,000 employees at its 26 innovation facilities around the world. “P&G is largely a branded science company,” says Larry Huston, former innovation officer at P&G who’s now managing director of 4inno, a consulting firm.
Lately, though, there’s been a dearth of pioneering brands emerging from the world’s largest consumer-products company. Spending on research and development in fiscal 2012 ended June 30 was $2.03 billion, or 2.4 percent of sales, the same as the prior year and down from 3 percent of sales in 2006. P&G’s most recent homegrown blockbusters—Swiffer cleaning devices, Crest Whitestrips, and Febreze odor fresheners—were all launched at least a decade ago. Says Peter Golder, a professor at the Tuck School of Business at Dartmouth College: “P&G is built on creating new categories, and innovation is in its DNA, but they need to rediscover it.”
Regaining its new-product mojo is crucial because P&G’s business strategy has long been to charge premium prices for cutting-edge products. A 150-oz. container of liquid Tide detergent is $18 at Target (TGT), for instance, 20 percent more than the retailer’s house brand. As rising commodity prices have increased the cost of most basic household products, cash-strapped customers may still be willing to pay more for true innovations but not necessarily for the kind of product extensions and embellishments P&G has turned to.
That’s created a challenge for Chief Executive Officer Bob McDonald, who has lowered profit forecasts three times since Jan. 1. He’s trying to cut $10 billion in costs by 2016 and reverse market-share declines in such key categories as U.S. detergents. McDonald is under pressure from activist investor William Ackman, who in July took a $1.8 billion stake in P&G and may seek management changes. Blockbusters have “dried up a bit,” acknowledges Bruce Brown, P&G’s chief technology officer. “We want to get back to more of that.”
McDonald earlier this year assembled a team of researchers, marketing managers, and senior executives from across the company to chart a bolder innovation course. The group spent 10 weeks analyzing P&G’s new-product pipeline and selecting the most promising ideas for development. But most won’t be ready for at least another year.
P&G’s 175-year history is filled with such consumer-product innovations as the first synthetic detergent (Dreft, in 1933), the first fluoride toothpaste (Crest, in 1955), and the first stackable potato chip (Pringle’s, which later dropped the apostrophe, in 1968). Researchers typically have leveraged technologies already used in P&G products to come up with entirely new ideas. For Crest Whitestrips, launched in 2002, they adapted bleaching methods from P&G’s laundry business, film technology from the food wrap business, and glue techniques from the paper business.
In recent years, however, the company’s product pipeline has been mainly focused on “reformulating, not inventing, products,” says Victoria Collin, an analyst at Atlantic Equities in London. Among these are new scents of Tide for Eastern European markets and Secret deodorant’s Natural Mineral line. As a result, analysts say P&G has lost customers in the U.S. and other developed countries, who’ve switched to cheaper products made by such rivals as Unilever, as well as store brands.
When former CEO A.G. Lafley took charge in 2000, he sought to increase the rate of product development by collaborating with outside partners who could help with everything from packaging to product design. Working with outsiders has enabled P&G to gain access to some important technologies, such as a wrinkle-reducing ingredient made by a French company, Sederma (CRDA), that’s used in its best-selling Olay Regenerist skin cream.
But Lafley also decentralized R&D, making business-unit heads responsible for developing new items. R&D chief Brown says that inadvertently slowed innovation by more closely tying research spending to immediate profit concerns. Between 2003 and 2008, the sales of new launches shrank by half. By the time McDonald became CEO in 2009, the number of what the company considered to be big product breakthroughs had fallen to an average of fewer than six per year as unit heads focused on short-term results and smaller inventions, says Brown.
McDonald, who has acknowledged that the company’s R&D has been “inadequate” in some product categories and regions, has now centralized 20 percent to 30 percent of P&G’s research efforts. He also named Jorge Mesquita, already chief of its pet care and snacks businesses, as head of P&G’s new business creation and innovation unit and given him responsibility for coordinating product launches.
One area of focus is beauty, where “we lost our way for a couple of years,” says Brown. That business, which includes deodorants, cosmetics, and hair care and made up 24 percent of P&G’s $83.7 billion in sales in fiscal 2012, has been lagging competitors such as L’Oreal (OR) in product launches. (L’Oreal says it rolls out about 500 a year.)
McDonald has said he hopes cost-cutting will free up more money for product development. Yet the squeeze has forced P&G to make tough choices even when it does introduce appealing products. One example: Spending to support a popular new Olay hair removal product last year pulled money from other products, “so the base business lost more than this new thing gained,” Brown says.
Meanwhile, Unilever says it can roll out 10 new products in 60 countries in the same time it once took to introduce them in just 10 countries. Recent new products include Clear anti-dandruff shampoo and a Rexona deodorant that uses proprietary Motionsense technology to activate the product as the wearer moves.
Kimberly-Clark (KMB), maker of Huggies diapers and Kleenex tissue, has opened research centers in South Korea and Colombia and increased R&D spending in the first half of this year by double-digits from the year before. “Our international business is growing so rapidly that the demand for innovation has increased,” Chief Financial Officer Mark Buthman says.
P&G still brings plenty of new products to market. SymphonyIRI’s New Product Pacesetters report, which tracks the top-selling non-food innovations, showed P&G with one-third of the top 25 last year. And the company over the years has acquired big brands, including the Olay and SK-II skin care lines and Gillette. Yet homegrown products remain the challenge. Says 4inno’s Huston: “You’ve got to be constantly creating innovation.”
The bottom line: P&G, with $84 billion in annual sales, made its name as a new-product whiz. But its biggest homegrown hits are at least a decade old.
Wednesday, 5 September 2012
Kill Your Desk Chair—and Start Standing
Arise, office workers of the world! You have nothing to lose but your chairs. And even if they are of supple executive leather or high-tech Aeron mesh, those chairs are lethal. A raft of recent medical research has shown that the more time a person spends sitting every day, the more likely he or she is to suffer from heart disease, diabetes, obesity, cancer, and, worst of all, an early death. One recent study, from the Pennington Biomedical Research Center in Baton Rouge, La., followed 17,000 Canadians over 12 years and found that those who sat for most of the day were 54 percent more likely to die of heart attacks than those who didn’t. The findings have spawned a new diagnosis: “sitting disease.” And strikingly, even regular exercise and a healthy diet don’t protect you—sitting in a chair for eight hours after going to the gym and munching on tempeh is still sitting.
For those in nonsedentary lines of work these findings are probably validating. But most Americans have the sort of jobs where they sit at desks while day by day their arteries harden and their bellies soften. The good news is that we don’t have to revert to a hunter-gatherer lifestyle to combat this silent assassin. Many of the problems can be solved, researchers say, simply by getting up: standing and stretching once an hour or walking down the hall to talk to someone rather than sending an e-mail. A growing number of office workers, though, are opting for something more radical—they’re going seatless. Their savior is the standing desk.
Standing desks aren’t new. Ernest Hemingway used one; so did Vladimir Nabokov, Winston Churchill, and Henry Clay. Thomas Jefferson designed his own. Standing-desk proponents claim Leonardo da Vinci as one of theirs, as well as Michelangelo, at least when he wasn’t on his back painting the Sistine Chapel ceiling. As Secretary of Defense, Donald Rumsfeld spent his days dashing off his infamous “snowflake” memos from a stand-up desk. Ever the standing evangelist, he questioned limits on how long Guantanamo interrogators could keep detainees on their feet in a “stress position.” “I stand for 8-10 hours a day,” he wrote at the bottom of one memo. “Why is standing limited to 4 hours?”
Today, though, the standing desk is going mainstream, especially in the tech world, with its office perks and geekish penchant for workspace optimization. Standing desks have been spotted at Google (GOOG), Facebook (FB), Twitter, and AOL (AOL). Asana, a startup launched by a Facebook co-founder, provides employees with motorized desks that adjust from standing to sitting height at the touch of a button. Office furniture maker Steelcase (SCS) says sales of its stand-up desks are growing at four times the rate of its conventional desks, and Ergo Desktop, a small firm that makes an attachment that converts a normal desk into a standing one, says this year’s sales are on pace to triple last year’s.
Like the proponents of macrobiotics and barefoot running, today’s antisitting crusaders argue that our modern lifestyle—with its roughage-free processed foods, foam-cushioned shoes, Barcaloungers, and swivel chairs—has, by cosseting the body, actually caused it to break down. When we sit our muscles atrophy, our back crimps, and our metabolism slows. As James Levine, a Mayo Clinic endocrinologist, has written, “[A] growing body of evidence suggests that chair-living is lethal. Of concern is that for most people in the developed world chair-living is the norm.”
Yet if sitting is deadly, standing all day can also be hard on the body. It puts more strain on the heart and can increase the likelihood of atherosclerosis and varicose veins. “You’ve got to remember, 100 years ago most work was done with people standing up, and that’s why we tried to sit people down, because there are a number of problems,” says Alan Hedge, a design and ergonomics professor at Cornell University. “Standing all day is really, really not good for you.”
The watchword among ergonomists these days is “postural rotation”: sit a little, stand a little, then repeat. Michael Mullen is a designer at Oregon–based Anthro, which makes Steve’s Station, an adjustable standing desk. (“Steve” is another designer at the firm.) Mullen divides his workday between standing up to sketch on a tablet computer and sitting to do computer-aided design on his PC. He says many of the workers at Anthro’s client companies settle into a similar routine: “Maybe they stand for the morning, then sit in the afternoon. Or they do an hour or two sitting, and then stand for relief.” So-called sit-stand desks such as Steve’s Station or the cheaper WorkFit line, from Ergotron, are built for this kind of variation. In Denmark employers are required by law to provide their employees with adjustable desks. Research by Hedge and others, however, suggests that sit-stand desks themselves are no panacea. Hedge looked at how the desks were adopted at Intel (INTC) and found that when the novelty wore off, users tended to stop adjusting them and just stayed seated all the time.
Those workers who think they can keep to a strict postural rotation regime, though, and don’t happen to work at an ergonomically progressive place such as Google, or in Denmark, face another challenge: convincing their employer to install new furniture. One strategy might be to walk around the office gingerly, touching one’s back and giving off an air of litigiousness. Vanessa Friedman is an ergonomics consultant for mid- to large-size companies. Most of the businesses that call her to help install standing desks, she says, do so after a worker’s compensation claim. “In California, where we are, back injuries commonly cost $60,000. After that, $1,500 on a desk doesn’t seem like a lot to spend,” she says. If sitting disease catches on as a diagnosis, she points out, claims are likely to increase.
Photograph by Jason Nocito for Bloomberg Businessweekjury
A few companies, including Mutual of Omaha and Blue Cross Blue Shield, have gone one step further: They’ve installed desks with treadmills, allowing some of their employees to work while walking in place (slowly, at speeds less than two miles per hour). Even at that pace, treadmill desks leave their sitting and standing brethren in the dust healthwise, their champions claim. The writer A.J. Jacobs jury-rigged one in his home office as part of his research for his book Drop Dead Healthy, a gonzo exploration of today’s wellness research. He still uses it, balancing his laptop on two photo albums and a large toy train whistle stacked on a treadmill he originally bought to run on. “I’m a great believer. I’m on it right now. I try to get to five miles a day,” he told me when we spoke by phone. “It gets rid of all my excess energy. It also keeps me awake. Now when I sit down and try to work while sitting, I fall asleep.”
Why the U.S. Olympic Committee Cracked Down on a Knitting Group
As it did for the 2008 and 2010 Olympic Games, the online knitting group Ravelry plans next month to host its own Ravelympics, in which thousands of knitters attempt to complete an ambitious project—such as knitting a hat for the first time, or finishing an entire blanket—during the two weeks the Games take place. They form teams and challenge each other to events such as “scarf hockey” and “sock put.” Often people knit their Ravelympic projects while watching the real Olympics on television. As long as a craft is completed, each Ravelete, as the participants call themselves, wins a virtual medal. “The idea was that these amazing events would inspire us and motivate us in our own projects,” says Kimberli Smith, 47, the Ravelry member who first conceived of the Ravelympics.
The first year the knitting games took place, more than 2,000 people completed close to 8,900 projects. This year, more than 7,500 people have signed up. On July 27, the 2012 Ravelympics kicks off with a marathon knit-off during the opening ceremonies of the 2012 London Games. At least, that was the plan. Earlier this week, the U.S. Olympic Committee (USOC) sent the 2 million-member knitting group a cease-and-desist letter, asking them to stop.
“We believe using the name ‘Ravelympics’ for a competition that involves an afghan marathon, scarf hockey and sweater triathlon, among others, tends to denigrate the true nature of the Olympic Games,” the USOC wrote in the letter. “It is disrespectful to our country’s finest athletes and fails to recognize or appreciate their hard work.”
This is not the first time the USOC has contacted Ravelry regarding its Olympic knitting enthusiasm. During the 2010 Ravelympics, the group sold a $6 handmade enamel lapel pin called “2010 Ravelympic Badge of Glory” and donated half the proceeds to the Special Olympics. The badge featured an image of a dog wearing a knit hat and a gold medal. It was very cute, but there was a problem: The Olympic theme infringed on the USOC’s intellectual-property rights. Since 1978, the nonprofit organization has had exclusive rights to control the commercial use of the word “Olympics” (or anything that resembles the word) in the U.S. Companies like Nike (NKE), Adidas, and Gatorade pay millions of dollars for the rights to use the Olympic name and rings on their products—something Ravelry obviously didn’t do. After they were contacted by the USOC, the group immediately stopped selling the pin, although they’d already made enough money to donate $3,200 to the Special Olympics.
The Ravelry vs. USOC situation highlights the difficulty companies and organizations face when they try to protect their copyrighted work on the Internet. Ravelry was founded in 2006 as a social networking site and pattern database for people who knit; a place where users could discuss different types of yarn, swap knitting patterns, and form online friendships through their shared hobby. A search through the site today reveals a lot of original handiwork, but also the occasional trademark-infringing craft. There are Batman sweaters, sock patterns that incorporate MLB team logos, and even an X-Men finger puppet. All of these projects are handmade and none of the finished items are for sale, although every once in a while a user will ask for compensation for a knitting pattern. (For its part, the MLB seems to encourage these knitting projects and has reportedly featured some in a display at the Baseball Hall of Fame.)
In its cease-and-desist letter, the USOC linked to nine Ravelry members’ Olympic-themed projects, both free and for sale, and asked that they be taken down. Targeted items included a free hat pattern inspired by Lindsey Vonn, a free crocheted Olympic ring necklace pattern, and a $2 Olympic-themed dish towel pattern. “As far as individuals using [the Olympic logo] and supporting the Olympic Games, I think that’s great,” says USOC spokesman Patrick Sandusky. “For personal use. But this is about using our trademark in a commercial way without giving us that information.” In other words, you can knit as many Olympic-themed dish towels as you like, but you can’t sell the pattern for $2 on the Internet.
“Most people on Ravelry understand that even though it doesn’t seem like a big deal, there is a legitimate trademark issue and that the USOC has to aggressively protect its trademark to hang on to it,” says Donna Bowman, 46, one of the co-organizers of the Ravelympics. “But we don’t understand how the idea that having a competition that references the Olympics is somehow taking away from the athletes and the prestige of the brand.”
It’s this aspect of the USOC’s letter—the request that the Ravelympics be renamed, and the insistence that a knitting competition somehow disrespects the athletes—that has the social networking site in an uproar.
“Our active user base has a fierce love for this site,” says Bowman. “I don’t know if Facebook inspires the same kind of passion and love that we have for this thing.” Ravelry’s founders don’t have the funds to fight a legal battle with the USOC, and if pressed, Bowman says they will agree to change the name of the Ravelympics. But they won’t do it quietly. A surprising number of the group’s members have taken to Facebook (FB), Twitter, and other online outlets to protest the USOC’s decision. “I hope this is the death of the corrupt USOC,” one user wrote on the U.S. Olympic Team’s Facebook wall. “I got a nice new hashtag for ya.. #StitchThis,” wrote another. “I don’t think they knew the hornet’s nest they were poking,” says Bowman. One blog, called Mason-Dixon Knitting, is even trying to knit enough pairs of socks for Stephen Colbert that he takes notice and addresses the Ravelympics’ plight on his TV show. “All these knitters with pointy sticks have a lot more presence and support on the Internet than they probably imagined.”
The USOC, for its part, has released two written apologies on its website, but it has not backtracked on its requests. “That [cease-and-desist] letter was sent from our law department and was written by a summer law clerk,” explains Sandusky. “The ‘denigration’ statement was made in error. The letter was probably a bit strongly worded and we regret that and apologize to the community. But we don’t apologize for trying to protect our right to the term ‘Olympics.’”
Oh, well. If Ravelry can’t have the Olympics, at least the group can rely on another massive knitting competition: its annual Tour de Fleece.
My Bright Idea: Jennifer Granholm on Worker Retraining
The most powerful recent innovation in government is when states aggressively use community colleges for retraining. In Michigan, where large numbers of workers were displaced from the manufacturing industry, we created a wildly successful program: No Worker Left Behind. NWLB’s unique configuration resulted in worker placement at four times the national average. We received federal waivers to reconfigure our workforce training dollars and used the business community to identify specific skills needs. The first 100,000 unemployed workers who enrolled received two years’ tuition at their community college or approved training school—$5,000 per year. The catch: They had to agree to be trained in an area of need. Steering people into specific training while they collected unemployment benefits allowed them to feed their families while achieving advanced skills for specific jobs. Eighty percent of those employed after training were employed in their degree field. Our goal was to enroll 100,000 people; in 18 months more than 150,000 people enrolled, with thousands more on the wait list. Bottom line: Specific, relevant training allowed us to give skills and dignity to a generation of displaced adults.
Jennifer Granholm, the former Democratic governor of Michigan, now hosts Current TV’s The War Room with Jennifer Granholm.
Apple vs. Samsung: The Longer View
For much of the 1980s, Apple (AAPL) battled Microsoft (MSFT) in court, trying to prove that early versions of Windows illegally copied the look and feel of Apple’s Macintosh operating system. Steve Jobs lost that fight, a defeat that at the time seemed like an industry-defining event. History proved otherwise.
On Friday, Aug. 24, Apple, now the world’s most valuable company in terms of market capitalization, got the best of Samsung Electronics in the first of its patent cases to go to a U.S. jury. A nine-person panel in San Jose spent an astoundingly brief three days forging through a 600-question verdict form to conclude that the Korean manufacturer infringed six patents for Apple mobile devices. The judgment in federal court came with a $1.05 billion price tag—less than half what Apple was looking for, but not too shabby all the same.
On the first day of trading after the verdict, Aug. 27, Samsung shares plunged 7.5 percent (it made up some of the loss the next day). As Bloomberg Industries mobile-device analyst John Butler explains, the court outcome “signals competitors to steer well clear of Apple’s designs or face the possibility of a lawsuit.”
While Apple and its legal team had every reason to celebrate, the mobile-device wars aren’t over yet—not by a long shot. The verdict represented just one round in a bout being fought fiercely among at least a half-dozen companies, on four continents, that likely will continue for years.
David Paul Morris/BloombergApple CEO Tim Cook has little incentive to destroy Samsung, one of Apple's biggest component suppliers
Samsung’s attorneys next will ask U.S. District Judge Lucy Koh to throw out the verdict. She’ll probably decline to do that, and then Samsung will appeal to a higher court. In coming months, Koh is scheduled to decide whether to issue an injunction blocking the sale in the U.S. of eight Samsung mobile phones and one tablet that the jury found to have infringed Apple patents, in which case the Korean company may have to delay some deliveries until it can design around the offending features. The timing could be advantageous to Apple, which is expected to launch the new iPhone 5 in September and a smaller version of its iPad tablet in October.
Still, Samsung will not have to write a billion-dollar check anytime soon, if ever. And the effect on Samsung of a possible injunction would not be cataclysmic; the devices in question are older ones and will account for less than 1.4 percent of the Korean company’s worldwide profits next year, says Mark Newman, an analyst with Sanford C. Bernstein who previously worked at Samsung.
The best way to view Apple’s smartphone victory is that the company now has the upper hand in a global negotiation being conducted via litigation. That’s right: a negotiation. Apple and Samsung are using the courts to help set prices for a series of eventual cross-licensing agreements covering each other’s intellectual property. Apple, which already cross-licenses some of its mobile patents with Microsoft, just saw the price of its IP go up as a result of the San Jose verdict, but it did not mortally wound Samsung.
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Apple’s larger conflict is with a range of device-making rivals that, like Samsung, use the Android operating system that Google (GOOG) gives away for free. The big prize in the far-flung patent disputes is having the dominant operating system in a growing market for mobile phones and tablets that’s already worth several hundred billion dollars a year. Currently, Android accounts for about 60 percent of the mobile market, three times the reach of Apple’s iOS, according to analysts with Bloomberg Industries.
Eventually all the competitors will settle up (on confidential financial terms) and get back to ordinary competition. Steve Jobs and Bill Gates didn’t exactly become friends after their software litigation petered out in the 1980s; instead, they leashed the lawyers and focused on new products. Indeed, Apple is Samsung’s biggest customer for mobile-device components; the companies continue to quietly collaborate even as their lawyers bash one another. Unlike his predecessor Jobs, who was intent on defeating Android, Apple CEO Tim Cook has no incentive to crush Samsung.
Given how popular Samsung’s and other companies’ Android devices are with consumers, it’s unlikely that major telecom carriers would limit their selection of them in the wake of the San Jose verdict. And in the long term, the duel between Apple’s closed-garden operating system and Google’s open system (and between the iPhone and its many imitators) will be determined where it ought to be: at retail sales counters in the U.S. and around the world. In the court of capitalism, consumers are the ultimate jurors.
The bottom line: Apple’s $1 billion court victory over Samsung ultimately will have little impact on the larger battle for mobile device dominance.
With Adam Satariano and Peter BurrowsBen Epstein's Wi-Fi Roaches
When Ben Epstein sees a cockroach, he’s more likely to get out a circuit board than a can of Raid. Epstein, 57, is a vice president at OpCoast, a defense contractor in Point Pleasant Beach, N.J. For the last few years he’s been using insects—specifically, the death’s head cockroach, a two-inch-long, glossy brown branch of the species—to create wireless networks. The goal is to use the insects to communicate with people trapped in collapsed buildings, mines, and other areas rescuers can’t easily reach. The insects might also conduct surveillance. “These are real bugs that can do bugging,” Epstein says, laughing.
On its belly, each roach carries a dime-size circuit board along with a radio, a microphone, and a battery. The gear, which adds up to two grams, about half the weight of a roach, is still in the prototype phase. As the bugs crawl into crevices and disperse, their microphones pick up sounds, while the radios transmit data via a local-area wireless technology called ZigBee. In the future, the bugs might carry sensors to detect radioactivity or chemicals.
Epstein and his team are working to make the electronic circuitry even tinier, so it can be carried by smaller insects such as crickets and water bugs. They’re also testing a metal composite that flexes like a muscle when electricity is applied. Placing the material on a cricket would alter the flutter of its wings and distort the pitch of its chirp. It’s a way to relay information as aural zeroes and ones, like the bits in a computer, which could be decoded by software. “It has the potential for being a redundant communication system at a low cost,” says Dwight Woolard, a program manager at the Army Research Office.
Epstein came up with the idea of using insects to form wireless networks while listening to swarms of cicadas in Shanghai, where his wife is from. Submitting a funding proposal “was like writing a science fiction novel,” Epstein says, but resulted in $850,000 from the U.S. Army. “Ben is extremely creative,” says Hong Liang, a professor of mechanical engineering at Texas A&M University, one of Epstein’s partners on the project.
Epstein has tinkered with electronics since he was a kid in Cherry Hill, N.J. “My bedroom looked like a TV repair shop,” he says. “Everybody was giving me their old junk.” After studying electrical engineering at the University of Rochester, he earned a Ph.D. in bioengineering from the University of Pennsylvania in 1982. He then spent a year doing research in France, where he indulged his passion for pipe organ music. “I lived in Paris and had the schedule of all the masses,” Epstein says. “I tried to get three in on a Sunday.”
He worked as a researcher at RCA, then led business development for France Telecom in the U.S. About a decade ago he landed at OpCoast, where he now works on technologies that help the military jam radios. About half of his time is devoted to insects—for whom he’s developed an unusual appreciation. “I always thought roaches were icky,” Epstein says, “but these are actually cute.”
Tinkered with electronics growing up in New Jersey
Researched in Paris while pursuing his love for the pipe organ
Outfitting insects with wireless gear to help soldiers
The Rise of Innovative State Capitalism
Over the past five years, as much of the developed world has staggered through crisis, a new type of capitalism has emerged as a challenger to laissez-faire economics. Across much of the developing world, state capitalism—in which the state either owns companies or plays a major role in supporting or directing them—is replacing the free market. By 2015 state-owned wealth funds will control some $12 trillion in assets, far outpacing private investors. From 2004 through 2009, 120 state-owned companies made their debut on the Forbes list of the world’s largest corporations, while 250 private companies fell off it. State companies now control about 90 percent of the world’s oil and large percentages of other resources—a far cry from the past, when BP (BP) and ExxonMobil (XOM) could dictate terms to the world.
Even as state capitalism has risen, some writers, business leaders, and politicians contend that such systems fail to encourage innovation, the key to long-term growth and economic wealth. Ian Bremmer, the president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between Corporations and States, argues that state capitalists “fear creative destruction—for the same reason they fear all other forms of destruction that they cannot control.” In China 2030, a recent analysis of China’s economy, the World Bank concurred, noting that the country needs “a better innovation policy, [which] will begin with a redefinition of government’s role in the national innovation system … [and] a competitive market system.”
It is a mistake, however, to underestimate the innovative potential of state capitalism. Rising powers such as Brazil and India have used the levers of state power to promote innovation in critical, targeted sectors of their economies, producing world-class companies in the process. Despite its overspending on some state sectors, the Chinese government has nevertheless intervened effectively to promote skilled research and development in advanced industries. In so doing, the state capitalists have shattered the idea that they can’t foster innovation to match developed economies. State capitalists’ combination of government resources and innovation could put U.S. and European multinationals at a serious disadvantage competing around the globe.
State intervention in economic affairs runs against the established wisdom that the market is best for promoting ideas. At the same time, throughout history, the governments of many developed nations have actively fostered groundbreaking companies, from Bell Labs in the U.S. to Airbus in Europe.
Brazil is perhaps the best current example of how a state-capitalist system can build innovative industries. Successive Brazilian governments have intervened—with incentives, loans, and subsidies—to promote industries that otherwise would have needed long-term private investment to make them competitive with U.S. and European rivals. At the same time, Brazil preserved strong, independent management of state-backed firms, ensuring they did not become political boondoggles.
Three decades ago, for example, the Brazilian government gave aircraft manufacturer Embraer lucrative contracts and various subsidies, recognizing that it could potentially find a niche in producing smaller, regional aircraft. Private investors were dubious of Embraer’s chances. Had it relied solely on private investment, the company probably would have failed; instead, it flourished, becoming the world’s biggest maker of regional jets. Similarly, by investing in deep-sea drilling technology, Petrobras, a state oil company with an independent management board, has made itself competitive with multinational giants such as Chevron (CVX), Shell (RDS/A), and BP.
By picking industries it could dominate and supporting them even when private capital was scarce, Brazil has created internationally competitive companies in a range of industries, from aerospace to clean energy. Today the government often backs companies as a minority shareholder or through indirect vehicles, allowing for corporate independence while still helping companies make important investments in research and skills. Many of Brazil’s state-backed companies have survived the global slump far better than multinationals because they can rely on government assistance to see them through.
Combining government support with a mandate for profitability and independent management has yielded successful businesses in other state-capitalist economies. Singapore has used government incentives to push companies to move into industries such as solar and other clean energies, which, although not necessarily profitable now, will be the emerging technologies of this century. A comprehensive 2009 paper by Harvard Business School looked at India’s more than 40 state-owned science and engineering research laboratories, which have used a similar type of public-private collaboration. It found that the Indian state labs had “more U.S. patents than all domestic [Indian] private firms combined.” In China, greater political interference in state-supported companies has been worse for profitability and innovation than in places like Brazil. And yet in recent years, China’s score has steadily risen on the Global Competitiveness Index, a World Economic Forum ranking of nations, even as the score of the U.S. has dropped.
The rise of innovative state capitalists presents a more than formidable challenge to U.S. and European businesses; it could push multinationals out of some markets entirely. In oil and gas, for example, state companies already control most of the world’s reserves, and as state companies like Petrobras become as innovative as multinationals, they will not require foreign companies for exploration, deepwater technology, or refining. In their own large domestic markets the innovative state capitalists will be able to match multinationals’ technology, giving them dominance over mobile communications, high-end retailing, and other businesses.
Some developed countries may respond by either curbing state-capitalist companies’ access to their markets or by intervening heavily in their own economies. Neither of these solutions is really viable. As the state capitalists’ biggest companies expand their global operations, their technology, connections, and capital will be almost impossible to keep out. And aging, heavily indebted nations face huge challenges reforming their entitlement programs: They’re in no position to pour the amount of resources into companies that Brazil, India, or China can.
Instead of trying to prevent—or worse, dismiss altogether—the rise of state-capitalist systems, U.S. and European companies and governments would do better to learn from them. Singapore offers one model of how the state can intervene in the economy without stifling entrepreneurship. The government there identifies industries that are critical to innovation and future technology, helps provide initial angel investments in small companies, tries to woo talented men and women from other countries who work in these industries, and uses state resources to ensure that universities focus on basic science research that will yield dividends in the future.
All these strategies require only modest state investment, and nothing on the scope of China’s or Brazil’s large-scale lending to state companies. The U.S. itself has effectively employed such policies in the past—before restrictive immigration policies kept skilled foreigners out, state and federal governments robbed funds from universities for other programs, and even the idea of the government helping foster new industries such as clean energy became politically toxic. (See Solyndra.)
Developed nations still possess a huge advantage over their emerging-market competitors: The U.S. and countries in Europe have mature, large venture capital firms, while places like India don’t. In emerging markets, when innovative companies become large enough to leave the state’s embrace, they may have nowhere to turn. Venture capital giants, on the other hand, can help small groundbreakers grow. This advantage can be enormous for countries like the U.S. And in a world where the emerging-market giants are learning to innovate, any advantage will be critical.
Kurlantzick is Fellow for Southeast Asia at the Council on Foreign Relations.Robots: The Future of the Oil Industry
NASA’s Mars rover may have something to teach the oil industry. Safely traversing the Red Planet while beaming data through space turns out to have a lot in common with exploring the deepest recesses of earth in search of crude oil and natural gas. Robotic Drilling Systems, a small Norwegian company that’s bent on developing a drilling rig that can think for itself, has signed an information-sharing agreement with NASA to discover what it might learn from Curiosity.
The company’s work is part of a larger futuristic vision for the energy industry. Engineers foresee a day when fully automated rigs roll onto a job site using satellite coordinates, erect 14-story-tall steel reinforcements on their own, drill a well, then pack up and move to the next site. “You’re seeing a new track in the industry emerging,” says Eric van Oort, a former Royal Dutch Shell executive who’s leading a new graduate-level engineering program focused on automated drilling at the University of Texas at Austin. “This is going to blossom.”
Robotic Drilling Systems, NorwayA Robotic Drilling Systems Rig
Apache (APA), National Oilwell Varco (NOV), and Statoil (STO) are among the companies working on technology that will take humans out of the most repetitive, dangerous, and time-consuming parts of oil field work. “It sounds futuristic,” says Kenneth Sondervik, sales and marketing vice president for Robotic Drilling Systems. He compares it to other areas that have become highly automated, such as auto manufacturing or cruise missile systems.
Until recently, robots have been a bit of a hard sell in an industry that has long relied on human ingenuity, says Mark Reese, president of rig solutions at National Oilwell Varco: “In the past, it’s been all about, ‘We need more and more people and experience, and that’s the only way to accomplish this task.’?”
The 2010 BP (BP) disaster in the Gulf of Mexico helped shift attitudes, says Clay Williams, chief financial officer at National Oilwell Varco. Eleven men were killed when the Deepwater Horizon rig caught fire and sank. Statoil has projected that automation may cut in half the number of workers needed on an offshore rig and help complete jobs 25 percent faster, says Steinar Strom, former head of a research and development unit on automation at the Norwegian company.
Robotic Drilling Systems is designing a series of robots to take over the repeatable tasks now done by deckhands, roughnecks, and pipehandlers on a rig. Its blue, 10-foot-tall robot deckhand has a jointed arm that can extend about 10 feet, with 15 or so interchangeable hands of assorted sizes. The robot is anchored in place to give it better leverage as it lifts drill bits that weigh more than a ton and maneuvers them into place. The company is also collaborating with researchers at Stanford University on a three-fingered robot hand embedded with sensors that give it a touch delicate enough to pick up an egg without crushing it.
The Mars rover is designed to collect data and take action on its own based on programmed “reasoning.” As a step in that direction, some companies are working on technology that will make drill bits more intelligent and able to respond instantly to conditions they encounter, such as extreme temperatures or high pressures. National Oilwell Varco and Schlumberger (SLB) have developed drill pipe wired with high-speed data lines to allow the bit to feed information to workers at the surface. Apache is writing software that will essentially allow the drill bit to think for itself, communicating directly with equipment at the surface that controls speed and direction. Graham Brander, the company’s director of worldwide drilling, sees it working much like a plane on autopilot, flying on its own with a human on standby, ready to assume the controls if necessary. “That’s what I view very much as the automation model for the oil and gas business,” he says.
Other breakthroughs are taking place onshore, where producers are racing to drill tens of thousands of wells in U.S. shale fields. On a recent morning in north Houston, Johnny Alverson, a senior foreman at rig builder Drilling Structures International (DE), fired up an 1,800-horsepower John Deere engine and picked up a remote control box as big as a car battery as he prepared to move a 167-foot-tall drilling rig without the aid of a crane. With the push of a couple of buttons on the remote, the green light lit up next to “walk” and the rig slowly heaved itself up five inches off the ground on four large, flat feet. The $20 million monster can move at a rate of a foot a minute. Says Drilling Structures Executive Vice President P.J. Rivera: “You start to feel good about yourself when you can pick up a million pounds with the flick of a thumb.”
The bottom line: In the wake of the BP disaster, the oil industry is automating. Success may save lives as well as boost efficiency.
Potholes? There's an App for That
When Boston Mayor Thomas Menino started the Mayor’s Office of New Urban Mechanics, the idea was to turn blogs and tweets complaining about neighborhood problems into a plan of action to solve them. The Democrat’s push for “participatory urbanism” means residents have more than 20 different venues to suggest improvements to City Hall.
The office’s most popular program is Citizens Connect, an app that allows people to report a variety of issues, including potholes and graffiti, directly to the right city department, along with pictures and a geo-tagged location. Since it launched in 2010, Citizens Connect has been downloaded more than 23,000 times and generated more than 31,000 repair reports. It allows the city to spend less time locating or inspecting the problems and more time fixing them. “What the app has generated is new eyes and ears in our neighborhoods,” says office co-chair Chris Osgood.
Best of all, pilot versions of such technological innovations generally cost the city less than $10,000. How? To encourage experimentation, the office partners with startups or other gadget makers willing to work on the cheap for the chance to actually test out their ideas. Other smart rollouts include a universal school identification card that grants schoolkids access to transit, public libraries, and community centers and an online tool to help parents pick the right public school for their children.
Paynter is a Bloomberg Businessweek contributor.John Chambers on Keeping Cisco on Top
My most important decisions are about adjusting to change. Over the last 20 years, we’ve reinvent-ed ourselves five or six times. Some were positive reinventions, some were very painful. I worry about missing market transitions, shifts in technology, a change in buying patterns. But I think fear is a wasted emotion. You have to change before it becomes obvious.
The toughest thing is when you see warning signals that others don’t. In August of 2007, we saw the financial institutions suddenly stop buying. Even though the CEOs are my friends and they were saying, “Nah, we don’t see a problem,” the data was undeniable. In 2009, when everybody was getting the darkest, we said, “You know, 2010 looks all right.” We bet, we did acquisitions, and it was a good year. In 2011, when everybody got really optimistic, we saw business from state governments starting to slow. I got crucified for being honest about negative trends.
We are reinventing ourselves again. People still think of us as a router and switch company. We’re moving away from being a plumber—though it’s an honorable profession that’s produced good financial results for us—and using our technology to change areas like health care and education. These past two years, we’ve gained market share across areas people said we couldn’t be in.
I’d like to say I like change. I don’t. I came out of IBM (IBM) and Wang Laboratories. Each company was on top of the world and then fell from grace. Once you’ve experienced that, and the pain that goes with it, the one thing you’re not going to do is not change. But once you decide on that change, you have to see it through. It takes three to five years to drive new strategy through a company. If it’s the right thing to do, you have to stay the course. That’s a mistake others make. They try different things in a crisis. If you’re changing your strategy every six months, I’ve got you.
When Shimon Peres first told me 15 years ago, “John, leadership is very lonely,” I said, “Shimon, how can it be lonely? I’ve got 50,000 people around me.” A few years later, I knew what lonely meant. When things really get tough, you’re by yourself. You make the call. — As told to Diane Brady
Five Products Apple Should Stop Making
Let’s all agree that Apple (AAPL) makes some rip-roaringly good products. The iPhone, the iPad, and the MacBook Air are all massive successes. And there are ceaseless rumors about the forthcoming iPhone 5. But Apple makes many things, and it stands to reason that some of their products are better than others. The problem for Apple (and it’s a problem many companies would like to have, no doubt) is that when the bar is set so high for the good stuff, the merely adequate starts to look unacceptable.
That’s why Apple should consider the Jack Welch approach to product management: Just as the former General Electric (GE) chief executive officer would close or sell business units that did not place first or second in their industry, Apple should look at some of the laggards in its product portfolio and ask some hard questions about whether they have a future at the company. Here’s where it could start:
Safari. It’s a perfectly fine Web browser, but it’s not essential. Many people use Chrome, Firefox, and Internet Explorer already—Safari has never cracked 10 percent of browsers in use. Chrome’s now even available as a free app for the iPhone (it’s really quite good—you should check it out). With few compelling reasons why anyone should use Safari, there are few convincing reasons why Apple should continue to spend time and money on it.
Game Center. I’m sorry, but what is this? I just know it as the annoying thing that pops up before I want to play Angry Birds. Apple’s toe-dipping strategy in regard to social networks has never been terribly illustrious—remember Ping, Apple’s social music feature? Didn’t think so. The iPhone and iPod touch are great gaming devices; there’s no reason to muck up the experience with some riverboat-casino-looking app that’s just getting in the way.
Pages. This is Apple’s word processing application, but it’s the third player in a two-player contest. For most people, there’s Microsoft (MSFT) Word, and there’s Google (GOOG) Docs. One’s bloated and powerful, the other’s limited but streamlined. Nobody needs another word processing program. Apple likes to talk about how great Pages is for interesting layouts, but really—how many family newsletters have you made recently?
Numbers. Another Apple version of software that doesn’t need to be. Numbers is Apple’s challenge to Microsoft’s Excel, but for better or worse, Excel is the standard here. Maybe even Apple’s aware of this—the most recent version of Numbers (and Pages, for that matter) came out in 2009—that’s three years ago, an eternity for software.
Mission Control/Launchpad/Dashboard. Apple keeps pushing these different “views” of your desktop. Most people know them as the weird screens that pop up when you accidentally move your cursor into a corner of the screen and then have to figure out how to get back to what you were working on. And really? There have to be three different apps for all this?
So there are five things that Apple could probably shut down and no one would really notice. And they shouldn’t do it just to be more efficient: Every hour that Apple employees spend on these products is an hour they could spend on something that really deserves their attention. I even have a suggestion: iTunes. What started as a simple computer jukebox program has ballooned to now handle movies, TV shows, apps, syncing, account management … it’s gotten so bloated that it’s starting to look like a Microsoft product. Fix that, and you can make all the weird spreadsheet programs you want.
Q&A: The Corporate Scavenger Hunt iPhone App
Watson Adventures, a New York company that has been creating scavenger hunts for private parties and corporate retreats since 1999, has released an iPhone app that allows participants increased interaction during the hunt. Bloomberg Businessweek spoke with Julie Jacobs, Watson’s chief development officer, about the app, Watson’s tours, and how the company keeps people from Googling answers to its clues.
Can people use the app to do scavenger hunts anywhere?
We have satellite offices in eight cities and just started operating in Texas, too. We design hunts in historic neighborhoods and museums with very clever riddle-like questions. It’s an upscale, intellectual kind of game; for example, one of the games is called Murder at the Met! Corporations like them because it gets people to work together. And everyone brings something different to the table—some people are good at reading a map, others at wordplay. And you don’t have to be athletic to do well, which is always nice.
Watson Adventures has been organizing scavenger hunts for a while. How is the app going to change the way the game is played?
The way scavenger hunts normally work is that when you solve one of the puzzles, you write your answer down and then go onto the next clue. But you don’t know if you’re right until the end. With the app, if you put in an answer it’ll tell you if you got it right. If it’s wrong, it’ll give you a hint. So you know how you’re doing throughout the game, but not how the other teams are doing.
Do enough people have iPhones for this to be worthwhile?
So far we’ve found that in a corporate environment, about 1 in 6 people have iPhones, so it’s popular enough that at least one person will have one in a group. We don’t want one person buried in their iPhone, of course, so as long as more people have a phone, they can download it too. And we hand out printed copies just in case of a technical glitch.
Everyone has access to Google and Wikipedia now. How do you guard against cheaters?
We are actually designing a hunt for a launch of a TV show—I don’t think I am allowed to say what the TV show is, but I’m sure you can figure it out—and it offers a big prize, so we needed to make sure you couldn’t win it by Googling something. One of the tricks of the trade is to come up with something you can see only if you’re physically there. Historical architecture, stuff on the street. I just took a tour of New York City’s High Line, and one of the questions we ask on the tour is to name the NBC building that you can see. It’s actually NBC, for National Biscuit Company, not the TV station. We really want to get people out of the office and exploring the neighborhoods and museums.
Apple Gets $1 Billion From Samsung—Nothing Changes
It ain’t over yet, not by a long shot.
Apple got the best of Samsung in the first of their many patent trials to go to a U.S. jury. A nine-person panel came back to the federal courtroom in San Jose, Calif., Friday afternoon, after only three days of deliberation, and announced that the Korean electronics giant had infringed six of the seven patents for Apple mobile devices that were at issue in the trial. The verdict came with a $1.05 billion price tag, less than half of what Apple was looking for, but not too shabby, all the same.
While there are plenty of reasons for Apple’s (AAPL) legal team to celebrate, keep in mind that this is just one round in a bout being fought fiercely on four continents. The battle likely will continue for some time, maybe years. Samsung (005930:KS) will appeal the San Jose verdict, and it will not pull out its check book any time soon.
The smartest way to view this big Apple victory in the smartphone wars is that the Cupertino (Calif.)-based innovation machine now has an upper hand in a global negotiation being conducted via litigation. That’s right: a negotiation. Apple and Samsung are using the courts to help them set prices for a series of cross-licensing agreements covering each other’s intellectual property. In fact, it’s broader and more complicated than that. Apple is engaging in this multi-dimensional negotiation-by-lawsuit with a range of device-making rivals that, like Samsung, use the Android operating system given away by Google (GOOG). The San Jose case and dozens of others around the world are part of a struggle between Apple and Google over whose operating system will dominate a market for mobile phones and tablet computers worth hundreds of billions of dollars a year.
It is not a struggle, however, in which any one company is going to get destroyed or put out of business in court. Competitors are using the courts to figure out the terms of cooperation—whose intellectual property is worth what. Eventually they will get back to ordinary competition in the marketplace. Indeed, Samsung is one of Apple’s main component suppliers for mobile devices; these companies are quietly collaborating, even as their lawyers bash one another’s brains out.
In the end, the duel between Apple’s closed-garden operating system and Google’s open system—and the brutal competition between the iPhone and its many Samsung, Motorola, and HTC (2498:TT) imitators will be determined where it ought to be—at retail sales counters. Consumers are the ultimate jurors in the court of capitalism.
Ultrabooks: A Slow Start for the Latest iPad Rival
Ever since the launch of the iPad, PC companies that specialize in old-fashioned laptops have been searching for a way to win back lost customers. That’s why big names in the industry have been working closely with Intel (INTC) to develop ultrabooks, a new category of thin laptops that weigh as little as 2 pounds. These laptops are supposed to appeal to iPad enthusiasts and hold their own against Apple’s (AAPL) sleek MacBook Air.
For companies accustomed to eking out the thinnest of margins, the new machines, with prices ranging from $650 to more than $1,600, offer the promise of healthier, if not huge, profits. Computer makers hope ultrabooks’ lower price will give them an advantage over the MacBook Air, and the machines’ Windows operating system—and physical keyboard—will make them a better option for business than the iPad. “This is one product where the PC guys have a fighting chance,” says Kirk Yang, managing director at Barclays (BCS) in Hong Kong. “They really have to make this work.”
So far, at least, the response has been disappointing. Ultrabooks, which first went on sale in late 2011, only accounted for about 5 percent of all laptops sold in the second quarter, according to Barclays, less than half of what manufacturers had been expecting. Says Bryan Ma, associate vice president at market research firm IDC: “The industry is under assault—from tablets and smartphones and the gloomy global economy.”
The high cost of the machines’ parts, especially Intel’s Ultraprocessor chips—which account for 25 percent of the total cost of an ultrabook—has driven prices for many models to well over $1,000, hurting sales.
That’s taken its toll on the stock prices of PC companies. In Asia, Acer’s shares have dropped 39 percent in the past six months, compared with a 7 percent fall in the Taiwan electronics index. Lenovo (LNVGY) is down 9 percent, and Toshiba is off 19 percent. U.S. companies haven’t been spared: Dell (DELL) has fallen 32 percent, and Hewlett-Packard (HPQ) has declined 34 percent.
Of course, the whole PC industry has been in the doldrums as consumers and corporate IT planners hold off on purchases until Microsoft (MSFT) launches its latest operating system, Windows 8, in October. Although Acer Chief Executive Officer J.T. Wang warned in a call with analysts on Aug. 17 that “big, explosive growth [from] Windows 8 will not happen,” companies are expecting that the new Microsoft OS might get buyers off the sidelines.
David McCloskey, Intel’s Asia-Pacific director of operations, says Intel expects sales of these lightweight gadgets to pick up soon as companies introduce more models and suppliers ramp up production of components. In June, Intel introduced Ivy Bridge, a new processor that’s 20 percent faster, and through a $300 million fund is helping suppliers develop software, hardware, and less-expensive materials for ultrabooks. “The reality is, it’s a multiyear journey,” he says of the ultrabook’s slow start. “We are committed.”
The next step for mass-market acceptance is for prices to come down. Dell recently added a midrange machine, the Inspiron, that sells for $700. In May, Lenovo announced superthin laptops that start at $720. Peter Hortensius, a senior vice president for Lenovo, predicts that lower prices resulting from less-expensive components will help ultrabooks account for about 25 percent to 30 percent of Lenovo’s laptop sales next year.
As prices drop, though, the PC vendors face a challenge. Apple can enjoy fat profit margins on its products not just because of its elegant design and high performance but also because of its admired brand. That’s not something other computer makers can match. Asian rivals run the risk of falling into the same sort of commodity trap they were aiming to escape. “Everybody is going to be fighting on price,” says IDC’s Ma. “They’re not Apple.”
The bottom line: Intel and PC makers are hoping that lower prices and a new operating system will improve the lackluster sales of their superthin laptops.
Before IPhone and Android Came Simon, the First Smartphone
In the 1995 techno thriller, The Net, Sandra Bullock plays a software programmer who unwittingly uncovers a plot to gain access to the world’s most sensitive computers. The bad guy, played by Jeremy Northam, tries to kill Bullock literally and virtually—by stealing her identity. (For a hacker, Bullock’s character is remarkably dim; when she finally catches on to what’s happening, she whines: “Our whole lives are on the computer.”) Apple (AAPL) gets the customary product cameo as the movie imagines a world in which ordering pizza online or accessing a database from a laptop computer in a car is commonplace.
A second product has a more prominent role, only there’s no logo or corporate sponsor credited for the cell phone used by Northam’s villain. In the final chase scene, he makes a call simply by pressing his phone’s touchscreen. When The Net was made, there was only one cell phone with a touchscreen and sufficient smarts for one-touch dialing: the Simon Personal Communicator. By the time the movie hit theaters that summer, the phone was off the market after its brief, six-month run before consumers. At least Simon left a more lasting impression than the movie did.
Early prototype designs. The yellow one (never produced) got all the attention in presentations
Simon was the first smartphone. Twenty years ago, it envisioned our app-happy mobile lives, squeezing the features of a cell phone, pager, fax machine, and computer into an 18-ounce black brick. The touchscreen (monochrome) had icons you tapped, or poked with a stylus, for e-mail, calculator, calendar, clock, and a game called Scramble in which you moved squares around the screen until you formed a picture. It featured predictive typing that would guess the next characters as you pecked. And it had apps, or at least a way to deliver more features—including a camera, maps, and music—by plugging a memory card into the phone.
BellSouth wanted customers to think of the phone as being as easy to use as “Simon Says ...”
It would take an additional 10 years before anyone called a cell phone “smart,” and a further five before the iPhone shattered our view of what these digital devices could do for us. Simon retailed for $899 and sold approximately 50,000 units. If you were a heavy data user, you had about 60 minutes before you needed to recharge—as little as 30 minutes in areas with poor cell coverage. The Smithsonian Institution has one. Nearly two decades later, you can still find Simons for sale by collectors at the same retail price.
When a few IBM (IBM) engineers first showed a working prototype at the 1992 Comdex computer show in Las Vegas, the model was code-named “Angler” and drew crowds of people eight-to-10 deep. BellSouth Cellular teamed with IBM to turn it into a commercial product with a Milton-Bradley-meets-Gene-Rodenberry name. The two companies hold 11 Simon-related patents—including how to highlight text on a touchscreen to do things like place a call, update apps in the field, and remotely set up and activate a cell phone—among other unique functions that are now standard on smartphones.
The story of Simon is the timeless lesson of tech innovation: Groundbreaking products require a rich ecosystem before the “big idea” can become truly useful or widespread. In this case, what was needed included fast networks, Web browsers, and a whole lot of apps waiting to be pulled off the Internet. In the early 1990s, none of these were available. Phone networks were designed mostly for voice, not sending data. When Simon was conceived, a Web browser had yet to be released. IBM was hemorrhaging money and people, losing $16 billion and over 100,000 jobs in the years from 1991 to 1993. In the end, technical limitations, product delays, a world-class corporate meltdown, revolving-door management, and bad business decisions conspired against Simon.
Plastic mockups of memory cards show how additional features (today's apps) could make Simon versatile
IBM and BellSouth chose to drop the phone and abandon a next-generation version of Simon that would have been closer in size to an iPhone. Motorola (MOT), a supplier of the cellular smarts for the prototype, passed when it came time to build the product, concerned that it would be helping IBM become a future competitor. Mitsubishi (6503:JP) replaced Motorola and built the commercial product.
Simon’s short lifespan also illustrates how truly original tech products feed so many other creative efforts, if not those of its creators—at least directly. “The innovations of the Simon are reflected in virtually all modern touchscreen phones,” writes Bill Buxton in an e-mail. Buxton, a computer scientist at Microsoft (MSFT) Research, has been collecting groundbreaking tech gadgets for 30 years. He has two Simons, including one in its original box.
It’s somehow fitting that Simon is nowhere in the credits of The Net. IBM has no record of Simon in its archives. The company passes inquiries on to BellSouth, which merged with AT&T (T) in an $86 billion deal in 2006. The original engineers that worked on Simon still refer to themselves as “Simoneers.” In over 20 conversations and e-mail exchanges I had with the BellSouth and IBM team members about the project, some memories had faded over time. But the team discussed its technical accomplishments with pride, despite Simon’s belly flop in the market.
Frank J. Canova Jr. is the IBM engineer who came up with the original concept for Simon. With 51 patents logged over the course of his career, he always had a few ideas banging around in his head. In the early ’90s, he was thinking chip-and-wireless technology was becoming small enough to put in the palm of your hand. He described his concept to colleagues, including his boss Jerry Merckel, who was on an industry task force working up specifications for a now defunct device (the PCMCIA card) that could plug into a laptop computer for extra memory—the grandfather of today’s thumb drives. Merckel realized the cards could be used to launch other apps or services for Canova’s phone. He just needed approval to build a prototype.
Paul C. Mugge indirectly put all this in motion after he became director of the Florida Research Lab in late 1988—long after the glory days of the IBM Personal Computer Co.—with a mandate to re-energize development. Mugge put together a small team of engineers including Canova and Merckel to explore ways to use ever-smaller, more powerful electronics to build new products.
One day in Mugge’s office, he listened to Merckel’s pitch. “This is the phone of the future,” Merckel said, reaching into a sleek black aluminum box to pull out plastic cards, all in different colors. (Those cards didn’t function and were purely for show; they had been created by Hunter T. Foy, who headed a small group of industrial designers attached to the lab.) Merckel explained to Mugge that you plug the card into the phone to get directions or music. One card, labeled “ZZ Top’s Greatest Hits” (with a picture of the group), was Merckel’s personal favorite. On reading the label, Mugge asked: “Who’s ZZ Top?” He approved the project anyway.
The applications on those cards became the core of IBM’s first services, code-named InTouch. “We knew services would make or break Simon,” says Mugge, now executive director of the Center for Innovation Management Studies at North Carolina State University. “As you see with Apple, without apps [the iPhone] is just a device. It all came to pass—unfortunately 15 years later,” he says.
To give the concept form, IBM turned to Frog Design, a rare move because the computer giant never went outside for design work. When Foy projected it would cost $80,000 to create the prototype, he says, Merckel and Mugge “threw up on it.” When Frog didn’t come up with anything radically different from Foy’s early sketches, he was soon back on the project. IBM paid Frog $49,760 for its sketches, according to an unsigned copy of the agreement.
There wasn’t much leeway for Frog to come up with a different look. The phone could be only so small. The memory cards dictated a certain width. The touchscreen had a set thickness. And you needed a battery with enough juice to power the device. The finished prototype is the Shaq of phones, standing 8 inches high, 2.5 inches wide, and 1.5 in. thick. Pull out your smartphone and you’ll see the difference.
Everything about the phone required something unique, from the motherboard housing an Intel (INTC) chip to the operating system and on to the way all its features interrelated. At first there was no rush to produce the prototype, but IBM decided 14 weeks before Comdex that it wanted to display the device at the trade show. The race was on. Canova and other engineers worked 80-hour weeks, including weekends, right up to the last day.
The prototype at Comdex displayed a map of the Las Vegas strip, plus stock quotes. There was no website for Canova to download that information, so he scanned the maps into the prototype’s memory from printed sources and punched in sample ticker data. “It was hard for people to believe back then you would carry maps or stock quotes in your phone,” he says. “As we know now, it was just the tip of the iceberg.”
When the team finished the prototype—it wasn’t clear they’d make the deadline until two weeks before the show—IBM sent a manager to Florida to make sure “Angler” worked as advertised. (A substitute was ready if it didn’t.) It worked too well: The company made the team encase each of the three prototypes for Comdex in bulky, see-through plastic housing to make clear that these were not finished products. “IBM was afraid people would want to buy it,” says Canova.
In truth, IBM wasn’t sure it wanted to be in the phone business. Alan Testani recalls showing Jack Keuhler, then IBM’s top technologist, a prototype. Keuhler, an internal critic of IBM’s already troubled communications effort, called it “a World War II walkie talkie.” It wasn’t a compliment.
Early prototype designs. The yellow one, which was never produced, got all the attention in presentations
The effort moved forward, anyway. Deep within IBM’s DNA was the eternal belief that the multiplication of electronic gadgets—cell phones or PCs—would fuel demand for big, powerful mainframe computers. Jim Cannavino, then a senior vice president responsible for IBM’s Personal Systems division, recalls telling the board: “Whether you want to build them or not (cell phones), you really want them to happen. That was the air cover to get Simon out the door.”
Canova has a video taken by one of the Simoneers as they’re setting up in Las Vegas before Comdex opens. The narrator approaches the mustachioed engineer as he’s intently working on the prototype. Then in his early 30s, Canova is wearing a white, short-sleeved shirt. He seems genuinely surprised as he reports that everything is working smoothly. There’s a hint of pride when he says colleagues like the device.
Later, Canova walked out into the cool Las Vegas night to call Gary Wisgo, the project’s engineering manager. Wisgo had booked too late to get a hotel room anywhere near the convention center. “Here I was, talking to someone with access to my calendar, e-mail, and much more, with only a phone in my hand. For the first time, no computer was needed,” recalls Canova. “That simple moment is when I realized the world was about to change.”
When the show opened the next day, Canova and the other engineers demonstrating the product were swamped. The prototype was a hit. Wisgo remembers awakening to a ringing phone at 6 a.m. An excited engineer was calling to tell him the project had made the front page of USA Today’s Money section, with a photo of Canova holding the prototype. The positive reaction convinced IBM’s senor management to build a real product. It helped that BellSouth wanted in on the action. IBM pumped money into the effort and the team grew from five engineers to 32. This was one of the rare parts of IBM that was hiring.
The timing was perfect for Jim Thorpe, senior vice president of marketing for BellSouth Cellular, whose boss wanted to know what they could do to differentiate the company. Thorpe had set up a research and development lab, run by Dan Norman, to devise innovative products. It was BellSouth that came up with the name Simon, following an internal debate over whether the phone should have a science fiction-sounding name (Merlin and Wizard were suggestions.) Others wanted something easy to remember that would evoke simplicity. One of the marketing managers had seen his kids play with the popular electronic memory game, Simon, which asked you to repeat a series of tones that got progressively more difficult in order to win. He suggested Simon, as in “Simon says simplicity.” An ad campaign was born.
The Simon Personal Communicator had its coming-out party on Nov. 2, 1993, at a telecommunications trade show at Disney World (DIS) in Orlando. Before an audience of 150 analysts and journalists, Norman and Rich Guidotti, a product development manager, did their interpretation of Alexander Graham Bell’s celebrated moment. On stage, Norman sent Guidotti a fax: “Rich, Simon looks great. Dan.” Thorpe has the fax framed in his house, along with the stylus Norman used.
To promote Simon at trade shows and to distributors, BellSouth made a video. Norman says the company was concerned customers would think Simon was too complicated because it could do so much. (This was right after Apple’s Newton bombed.) They hired an actress to have a little fun with Simon, playing a character named Christy. She is shown in situations you might not think to use Simon, but could: Send a fax while on a picnic, or check e-mail at the opera. As the video progresses, Christy starts making outrageous claims such as, “It’ll wash your car,” and “You can talk to aliens.” Norman appears in the video as the voice of reason, denying you can do those things. The video even veers into late-night infomercial territory: “What would you expect to pay for a machine that does all this, $5,000, $10,000, or more? How about under $1,000?”
The video drummed up interest, but Simon wasn’t ready for its scheduled release in May 1994. Customers couldn’t get one until Aug. 16. IBM was still wrestling with the device’s short battery life. Its engineers reworked some software, but the ultimate solution was to provide a second battery, as a lot of video cameras did at the time. That was just one issue. Consumers were then enthralled by the popular, less expensive, $500 flip cell phones. They were small and cool. (And they looked much more like those communicators on Star Trek.)
Norman, who has one of the original Simon prototypes from Comdex, conceived what would have been a first for the cellular industry—activating a cell phone “wirelessly over the air.” (AT&T now holds the patent.) At the time, cell phones had to be programmed at the store. It was a laborious, manual process that could take two hours. Norman planned to include with every Simon the software that would let BellSouth handle everything. Simon was off the market before the feature was ready. “That was actually a bigger deal than anything else that Simon was capable of doing,” he says.
There was a second generation of Simon, code named Neon—thinner and shorter—that also didn’t make it out. The design, sans fax, was to be closer in shape to the eventual iPhone. IBM even made a logo for Neon with the name running both vertically and horizontally around the letter O; it would say Neon, no matter how it was held. “We actually rotated the screen like the iPhone,” says Canova.
By now, IBM was closing plants and offices around the world. The company moved PC operations out of Florida, sending the Simon design work to Raleigh, N.C. Many Simon engineers didn’t want to move north, so they left. Canova eventually departed after trying to work with the team in Raleigh.
Merckel, now a professor of engineering at the University of North Florida, had more features in the works, too, including a card that would turn the phone into a radio. He also tried to convince Advanced Micro Devices (AMD) to supply the chip for future products. Those efforts went nowhere. “I threw it in the trash,” he says of the working prototype for the radio. “IBM was disappearing.”
By early 1995, Simon was off the market. IBM decided not to pursue the business. BellSouth put money into improving its own communications network.
Today, BellSouth executives say Simon was worthwhile. Tech companies began to think about how they could use cellular technology in their products. BellSouth received recognition and attracted partners such as Microsoft, which had never before called on their company.
For Mugge, the lesson of Simon is a familiar tale for many pioneers: “Don’t invent one of these things before they invent the Internet or fiber optics with tremendous bandwidth.”
Enterprise Technology: Revenge of the Nerdiest Nerds
When Eric Frenkiel started an engineering job at Facebook (FB) in 2010, he encountered one of the world’s biggest databases: a stash of hundreds of millions of users’ likes, messages, and photos. After just a year, Frenkiel realized that he could use his experience to build a better data storage system for companies less tech savvy than his employer. He and Nikita Shamgunov, another Facebook engineer, left the social network in February 2011 to create—bravado alert—“the world’s fastest database,” according to Frenkiel, 26. “People thought we were crazy because we left before Facebook went public,” he says. “There we were, just two guys and a dog.”
The engineers set up shop in a San Francisco loft where they lived and worked. “Nikita, God bless his soul, would sleep next to our servers,” Frenkiel says. “He literally slept next to his code.” They named the company MemSQL, in reference to a popular database language, and hired additional engineers to complete a mad dash to debut their first product. In June, the company started selling software that runs about 30 times faster than traditional databases made by Oracle (ORCL), IBM (IBM), and others, according to Frenkiel.
The MemSQL crew had reason to hurry. Their database software needs to stand out among the offerings of dozens of competitors that have appeared in the last five years. Computer scientists have been perfecting data-center technologies that help the biggest Web services—think Google (GOOG)—serve millions of users. The innovations include not just database software but servers, storage systems, switches, and security hardware. Now they’re making their way into non-Web businesses, many of which are struggling to process huge amounts of data or serve smartphone-toting customers and employees who demand on-the-go access.
This burst of innovation has led to something of a golden age for infrastructure technology. A horde of enterprise-focused startups, fueled by surging demand, could go public this year in a trend that trumps the dot-com buildout in scale. “It’s going to be about 10 times larger than what the Internet did,” said Ted Schlein, a managing partner at the venture capital firm Kleiner Perkins Caufield & Byers, during a recent Bloomberg event held in New York. “Just the fact that we have that many more people online with so many more devices…. That’s what is getting everyone excited.” That, and the huge amount of money that could change hands. The market for data-center hardware totaled $100 billion in 2011, according to the research firm Gartner (IT), which predicts that number will surpass $120 billion by 2015. Software represents an enormous sales opportunity as well: Databases alone brought in about $24 billion in 2011, says Gartner.
During the dot-com boom of the late 1990s, the undisputed kingpins in these markets were Cisco Systems (CSCO), EMC (EMC), Oracle, and Sun Microsystems. They sold top-of-the-line gear first to Web pioneers such as EBay (EBAY) and Yahoo! (YHOO) and then to just about every major company readying itself for the Internet era. But after the bubble burst, many big companies decided they’d overindulged and dramatically cut spending. The pace of innovation slowed. “I think enterprise technology kind of sucked for about 10 years,” said Schlein.
Cut to 2012: Net infrastructure is again being upgraded, this time so companies can do computing in the cloud and provide tools to mobile users. Over the last decade, big Web services like Google and Facebook have learned they don’t have to buy expensive gear from Oracle or EMC. Instead, they shackle together cheap hardware and write software to smooth over any rough spots. That’s changed the economics of crunching large datasets or providing “like” buttons for millions. “I look at those companies rhetorically as the Fords and GEs of the Information Age,” says Jim Whitehurst, the chief executive officer of Red Hat (RHT), a major infrastructure software maker.
The modern-day Fords have made much of their work open-source, so that other technologists can use it for free—and that’s restarted data-center innovation. Some of the most promising new enterprise-tech companies borrow techniques from Google or Facebook, tweak them, and sell gear or software to non-Web businesses. Cloudera, a hot enterprise company, makes data analytics software that helps the oil and gas industry, for example, uncover insights from large sets of information. It relies in large part on Hadoop, an open-source technology created by Google and Yahoo.
The enterprise startups are just at the beginning of an IPO wave similar to the one that washed across the consumer Web sector over the past year, when Zynga (ZNGA), LinkedIn (LNKD), and Facebook all went public. Business-computing startups including Splunk (SPLK) and Infoblox (BLOX) have already made their stock market debuts this year. ServiceNow, a modern take on managing data-center operations, is firing up its IPO roadshow machine. Next will be Palo Alto Networks, which makes a smarter firewall capable of coping with security holes introduced by Web services such as Facebook. There’s a handful of other infrastructure players set to follow, as these business-computing stars attempt to give their consumer Web counterparts a run for the money. “That’s what we’re loving,” Schlein says
The bottom line: Open-source technology from Google and other companies has enabled startups to shake up the enormous data-center market.