Last Year, Google & Apple Spent More On Patents Than On R&D

from the that's-not-a-good-sign dept

We've already written about the NY Times' big article on our disastrous patent system, but there was one line in the article that deserves to be called out with a separate post. As almost an aside, the article notes how much Google and Apple are spending on patent related issues these days:

Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products, according to public filings.

That seems like a pretty big problem, and one we should all be concerned about. Now, both Apple and Google are cash rich companies, so they can spend a lot on patent issues, but all of that is money that isn't going into actual innovation or developing new products. And, for smaller companies, it's much worse -- since basically all of them don't have the kind of cash reserves we're talking about with Google and Apple. If even these big companies are spending more on patents than on R&D, can't we agree that the system is completely broken?

Filed Under: innovation, patents, r&d
Companies: apple, google

Chicago Taxi Companies And Riders Sue Uber For Targeting Cool Passengers

from the how-dare-they! dept

We've written about innovative car service company Uber a few times before, though mostly for its bizarre run-ins with local regulators, who often seem to think their job is to protect local taxi companies from innovative competition. Uber, for what it's worth, has used many of these attacks as marketing vehicles to get more attention to their service, and the local regulatory agencies almost always seem to back down. Of course, most people recognize that these agencies are often just doing the bidding of local cab companies. In Chicago, it appears that the cab companies have taken matters into their own hands and have sued Uber directly.

You really have to read the full complaint below, as it is a classic case of an industry being disrupted and lashing out at the disruptive player, repeatedly screaming "but you can't do that!" out of sheer jealousy and spite. It really is just a litany of claims about why they just don't like Uber. First, they whine that Uber "misleads" customers by comparing itself to taxi and livery services, even though it's somewhat innovative system is to actually empower independent drivers. But that's not actually hidden. And, um, I'm not sure why the taxi companies have any standing to complain about that.

Next, it argues that Uber charges too much, and adds a 20% gratuity. Again, all of this is clearly laid out to users of Uber's service. If they're willing to pay what Uber's rates are, then what's the problem? And again, if anyone has standing on that, it would be the users, not the cab companies -- and we'll discuss the fact that some users are suing too in a moment. There are a number of other complaints will all just seem like sour grapes.

My favorite part, though, is the claim that Uber "illegally discriminates against people without credit cards and smartphones." Did you know there was such a thing?

While Uber advertises itself as “Everyone’s Private Driver”—that is in fact a gross mischaracterization as Uber only chooses to cater to what it perceives as the technologically elite and well-off individuals. It is obvious that through Uber’s marketing it caters to young, hip, urban professionals, which is perfectly reasonable on the livery side. But using the publicly regulated (and limited number) taxis in order to create a two tier system— “high quality taxis” for the “haves” and the remainder for the “have nots”—runs contrary to the many ordinances enacted in Chicago to ensure non-discriminatory service for everyone in Chicago, not just those “cool” enough to use Uber.

The one area that does seem a little iffy on Uber's part is that it signs up cab drivers who work for some of these companies that are suing -- and Uber's website (in at least one place) seems to imply that it has "partnered" with different cab companies, when the reality is that it lets the drivers sign up themselves. I could see where the cab companies may have a legitimate beef if their brands are falsely implied to be associated with Uber's.

That said, all of this just really seems like jealous taxi companies. Uber offers a useful service for those who want it. It's actually somewhat expensive -- and that's why plenty of people I know don't use it. But if you're willing to pay for the convenience, many, many customers seem to like it. It really is quite convenient. Either way, most of these complaints seem like the ones that either consumers should be making... or that local regulators should be making. I don't see how the taxi companies have any standing on most of the issues -- with the one about the implied "partnerships" being a possible exception.

Of course, on that point about users having standing... in an amazing coincidence... some Uber users have also picked the same week to file a class action lawsuit against Uber in Chicago, claiming that its charges are "deceptive." Of course, the actual fees are not, in fact, deceptive. They're very clearly laid out on Uber's site. So, instead, the lawsuit claims that the deceptive bit is that they add a 20% gratuity (again, clearly disclosed on the site) but that the driver only gets half of that gratuity.

They're arguing that this is really charging higher metered rates. But given that what the user pays is all completely disclosed, I'm still at a loss as to what the problem is. The user isn't deceived about the rates they pay. They're quite clear. Given the timing of the two lawsuits, it certainly feels like the cab companies may have helped "set up" users to complain.

In the end, the whole thing is unfortunate, and yet another sign of legacy industries unwilling to compete in the market. Uber offers a decent product. The price is high, and some people are willing to pay that price. If cab companies competed effectively (and they already have the price advantage), then there wouldn't be a problem. But, Uber's discovered that people like to pay for convenience and these cab companies apparently aren't well set up to deal with that. Rather than adapt, they're suing.

Filed Under: chicago, disruption, innovation, sour grapes
Companies: uber

Out With The Old, In With The New: How Innovation Has Completely Changed The Music Business

from the big-changes dept

Jeff Price, who was recently pushed out of TuneCore after building one of the premiere new tools for musicians to take control over their careers, is continuing to think deeply about the state of the music business, as he figures out what's next. He's penned a really fantastic piece that explores how technology and innovation have completely disrupted the old recorded music business hitting on a few key points. I'd recommend reading the whole thing, but I'll highlight a few key snippets. First up, he notes the general shift in the music business from a world where artists were completely at the mercy of gatekeepers to one where that's no longer the case, almost entirely due to technology.

Until recently, the music industry provided artists one path, and one path only, to reach and connect with their fans and monetize their pre-recorded music. Artists had to sign to a record label, transferring ownership of copyrights, relinquishing exclusive artistic control, and giving up most of the revenue from the sale of their recordings. Fans could only buy pre-recorded music in physical form from retail outlets from the limited number of artists that labels chose to anoint. Labels were aware of their unique position and took full advantage of it by gouging both artists and music fans.

He goes on to point out that the reason the labels were able to do this was because of four key factors that only the major labels could really provide:

Four main reasons: barriers to recording, manufacturing, distributing, and marketing music were virtually insurmountable.

However, he notes that all four of these areas have been disrupted by new technology, and that process is continuing, such that the key advantages that the major labels have continued to rely on are slowly disappearing as well:

First, it’s far cheaper to record now than it ever has been before. In addition, the level of expertise needed to record has dropped considerably. With a laptop, some one-time purchases of software and some hours to learn how to use it, a home recording studio can be created for the cost of one day’s recording at a high-end studio.

Second, in the digital world there is no up front cost or risk to manufacture inventory. The music is available in unlimited quantity as a digital file that replicates on demand only after it’s bought or accessed to stream.

Third, music fans have shifted from buying CDs in stores to buying/streaming music on-line. Now an artist, for a nominal fee and the click of a button on a website, gets an unlimited amount of self-replicating inventory with no up front cost into the world’s largest music retail stores (i.e. iTunes is larger than Walmart ever was), all while keeping their copyrights.

Fourth, there is now equal access to music discovery outlets – YouTube, blogs, Slacker, Pandora, Spotify, digital music stores’ discovery features, Twitter, Facebook and other social networking applications are open to everyone, not just the elite few artists signed to labels. The only media outlet not open to everyone is commercial radio, but with that going the way of the 8-Track over the next few years, the last stranglehold of the traditional music industry will be gone.

Because of this, you no longer are required to deal with a major label. The majors do still dominate radio play, but the piece also digs in (in great detail) as to why Price thinks terrestrial radio is about to be completely destroyed by technology as well (think: once interactive streaming is standard in cars and on phones...). But the major labels haven't done that much to adapt to this pretty massive change to their market. And that's caused them a lot of problems (as seen in their bottom line). Of course, rather than admitting their own failures in adapting, they've basically tried to blame pretty much everyone else. Price highlights the ways in which they've tried to cope:

• Sue music fans for copyright infringement
• Create more onerous agreements between labels and artists requiring them to give up even more of their copyrights, not fewer (the infamous “360deals”) while providing less value.
• Use antiquated royalty accounting systems and provisions to slow down or reduce royalty payments owed.
• Stifle innovation under the guise of “protecting” copyright (As one example, the majors made it a condition that they must own a piece of Spotify in order for Spotify to have access to their music).  
• Killed artist development and long term careers in a mad dash attempt to make money as quickly as possible.  
• Feed the media as much false information as possible (i.e. the entire music industry is dying) in an attempt to discredit, slow down and delegitimize the new emerging industry. 

Of course, almost every one of these moves actually does more to hurt their longterm sustainability than to help it. Basically, every one of these moves has been bad for both consumers and artists -- and that's no way to adapt to the digital era. Price notes that the transformation from the old era to the new digital era is now "complete," as the key things that made the old record labels so powerful is almost entirely whittled away by technology. That doesn't mean that innovation is over, by any means. As is typical in times of disruption, many many artists are still struggling greatly to figure out how the new world works. The rules have changed drastically (with many new ones being written and rewritten on the fly). There are plenty of failures, but a growing number of success stories. And that should only increase as more people learn to harness these new technologies and services, realizing they're not quite as scary have some have made them out to be. But there is a learning curve and it's a painful curve for some.

Either way, it's great to see Jeff lay out all of this in one place, and it shows that he's still thinking about the nature of the industry and where it's heading next. While many from the old industry still look at the future and try to figure out how to hold it back, more and more are realizing that the right play is to move forwards, quickly.

Filed Under: changes, evolution, innovation, jeff price, music industry

Appeals Court Realizes Samsung Injunction Is For A Patent It Didn't Infringe On, Sends Case Back...

from the oops dept

There continues to be a flurry of activity and motions and such around the Apple/Samsung patent fight, and we're avoiding most of the play-by-play until something "big" happens. But today there was an interesting ruling from the appeals court, concerning the original injunction that Judge Lucy Koh issued, blocking Samsung from selling the Galaxy Tab 10.1 device (which is already a bit obsolete anyway). She had issued that injunction earlier in the case, before the jury ruled, and that actually has presented something of a problem. Among the patents that the jury said Samsung did not infringe was the one that Koh relied on to issue her injunction. Given that, the appeals court has sent the injunction back to Koh to reconsider. Of course, all this really reinforces is the ridiculousness of the patent system today: a judge can assume that an entire product line can be blocked because it's infringing on a particular patent... only to have a jury (which in this case clearly mostly sided with Apple anyway) decide that the patent didn't apply. When a system comes up with such arbitrary results, it's a sign that the system itself is broken.

Filed Under: appeals court, galaxy tab, injunction, lucy koh, patents
Companies: apple, samsung

Former Copyright Boss: New Technology Should Be Presumed Illegal Until Congress Says Otherwise

from the wtf dept

One of the reasons why we live in such an innovative society is that we've (for the most part) enabled a permissionless innovation society -- one in which innovators no longer have to go through gatekeepers in order to bring innovation to market. This is a hugely valuable thing, and it's why we get concerned about laws that further extend permission culture. However, according to the former Register of Copyrights, Ralph Oman, under copyright law, any new technology should have to apply to Congress for approval and a review to make sure they don't upset the apple cart of copyright, before they're allowed to exist. I'm not joking. Mr. Oman, who was the Register of Copyright from 1985 to 1993 and was heavily involved in a variety of copyright issues, has filed an amicus brief in the Aereo case (pdf).

As you hopefully recall, Aereo is the online TV service, backed by Barry Diller, that sets you up with your very own physical TV antenna on a rooftop in Brooklyn, connected to a device that will then stream to you online what that antenna picks up. This ridiculously convoluted setup is an attempt to route around the ridiculous setup of today's copyright law -- something that Oman was intimately involved in creating with the 1976 Copyright Act. The TV networks sued Aereo, but were unable to get an injunction blocking the service. Oman's amicus brief seeks to have that ruling overturned, and argues that an injunction is proper.

But he goes much further than that in his argument, even to the point of claiming that with the 1976 Copyright Act, Congress specifically intended new technologies to first apply to Congress for permission, before releasing new products on the market that might upset existing business models:

Whenever possible, when the law is ambiguous or silent on the issue at bar, the courts should let those who want to market new technologies carry the burden of persuasion that a new exception to the broad rights enacted by Congress should be established. That is especially so if that technology poses grave dangers to the exclusive rights that Congress has given copyright owners. Commercial exploiters of new technologies should be required to convince Congress to sanction a new delivery system and/or exempt it from copyright liability. That is what Congress intended.

This is, to put it mildly, crazy talk. He is arguing that anything even remotely disruptive and innovative, must first go through the ridiculous process of convincing Congress that it should be allowed, rather than relying on what the law says and letting the courts sort out any issues. In other words, in cases of disruptive innovation, assume that new technologies are illegal until proven otherwise. That's a recipe for killing innovation.

Under those rules, it's unlikely that we would have radio, cable TV, VCRs, DVRs, mp3 players, YouTube and much, much more. That's not how innovation or the law works. You don't assume everything innovative is illegal just because it upsets some obsolete business models. But that appears to be how Oman thinks the world should act. Stunningly, he even seems to admit that he'd be fine with none of the above being able to come to market without Congressional approval, because he approvingly cites the dissent in the Betamax case (which made clear that the VCR was legal), which argues that the VCR should only be deemed legal with an act of Congress to modify the Copyright Act. You would think that the success of the VCR in revitalizing the movie industry would show just how ridiculous that is... but in Oman's copyright-centric world, the rules are "first, do not allow any innovation that upsets my friends."

Elsewhere, he argues -- quite correctly -- that Aereo's design was clearly done with the help of lawyers to stay on the legal side of the line, but he gets the exact wrong lesson out of that:

The Aereo system was not designed for the purpose of speed, convenience and efficiency. With its thousands of dime-sized antennae and its electronic loop-the-loops, it appears to have been designed by a copyright lawyer peering over the shoulder of an engineer to exploit what appeared to Aereo to be a loophole in the law and shoehorn the Aereo business model into the Cablevision decision.

In other words, he's admitting that the system was designed carefully to remain on the right side of the law... but he's somehow upset that this is possible. In his incredible worldview, you should not be able to design around the contours and exceptions to copyright law -- because anything that upsets Hollywood is, by default, illegal.

Perhaps we've learned who put the clause in the '76 Act that explicitly says that the law should be used to stop disruptive innovation if it gets in the way of the status quo.

Either way, he goes on at length, claiming that his efforts in helping to put together the '76 Act and his other work on copyright were continually focused on benefiting the copyright holder. He never mentions that this is not the purpose of copyright law. It is the means. But the intent is to benefit the public. Oman does not ever seem to take that into consideration.

Indisputably, Congress drafted the Copyright Act to prevent the creative efforts of authors from being usurped by new technologies. That core principle is at the heart of the Copyright Act. Congressional intent would be undercut by any decision that would sanction the use of technologies which could be used indirectly to undermine its goals. Congress enacted a forward-looking statute that would protect those who create precisely so they have incentives to create.

Actually, that's quite disputable. The Copyright Act can only be designed to benefit the public. The means of doing so is by creating the ability of copyright holders to exclude, but that is hardly the only incentive to create. Allowing new technologies that disrupt old business models does not necessarily remove the incentive to create. Instead, as we've shown over and over again, the incentive to create appears to have increased greatly, even as respect for copyright has weakened tremendously over the past decade. So I fail to see how Congress' "intent" could possibly be undermined by new disruptive technologies coming along -- without permission -- and creating new and expansive markets that both help the public and provide new opportunities for content creators.

Filed Under: copyright, disruptive innovation, innovation, performance, ralph oman
Companies: aereo

DailyDirt: Unusual Human-Powered Transportation

from the urls-we-dig-up dept

Walking is such a boring way to travel for some folks. All kinds of gadgets to help people move faster with less effort have been tried, and some products (like skateboards and roller blades) have survived an initial fad to become somewhat useful means of transport. But some things haven't quite proven their worth beyond being fleetingly-popular toys. It doesn't hurt to keep trying to come up with better ways to get around, so here are just a few other examples of things designed to move people.

• The German-designed FLIZ is a modern take on the velocipede -- and it looks pretty dorky. Riders of this bike are hanging from a harness, and they "pedal" by simply walking... so there's not that much mechanical advantage. [url]
• Normally, kids on skateboards go down the handrails of stairs, but a skateboard design called the Stair Rover tackles stairs head on. But the Stair Rover probably solves a problem that few people really wanted to fix.... [url]
• The pogo stick isn't exactly a means of transportation, but it's become an extreme sport. The Guinness Book of World Records has recorded the highest jump at 9 feet 6 inches (over a bar). [url]

If you'd like to read more awesome and interesting stuff, check out this unrelated (but not entirely random!) Techdirt post.

Filed Under: bike, fliz, pogo, skateboards, stair rover, toys, transportation

The Copyright Act Explicitly Says Disruptive Innovation Should Be Blocked

from the isn't-that-a-problem? dept

A few weeks back, we wrote about a proposal by Rep. Jerry Nadler, which we referred to as the RIAA Bailout Act of 2012 because it sought to change the nature of satellite radio royalties to put them on par with the absolutely ridiculous and unsustainable royalty levels for internet radio. In case you don't know, there are basically three very different tiers for the royalties that need to be paid to musicians (separate from songwriters) for broadcasting the tracks on which those musicians played. If it's played on the radio, the stations have to pay nothing to the musicians, as Congress long ago decided that radio play was the equivalent of advertising (a viewpoint that is pretty accurate, given the decades of payola that have shown that radio play is so valuable that labels will pay stations and djs to get their songs played). Then there are the satellite radio guys (basically Sirius XM at this point). They pay a rate that they already think is too high and pass those rates directly on to consumers. In preparation for a new rate-making process, they're already seeking out legal ways to get away from having to pay statutory rates.

But what the satellite guys have to pay completely pales in comparison to what internet streaming companies like Pandora have to pay. There, the rates are so crazy that it's become clear that Pandora has little likelihood of ever being profitable unless something drastically changes. Matt Schruers, over at Project DisCo, has an absolutely fascinating look back at why these rates are so bad, and it comes down to this simple, but positively scary point:

When the Copyright Act of 1976 was passed, it was so taken over by regulatory capture by a few key industries, that they explicitly put into the Copyright Act that it should be used to stop disruptive innovation from challenging legacy businesses. I've read the Copyright Act many times, but have to admit that I'd never quite noticed this line from 17 USC 801(b)(1)(D), which explicitly states that the role of the Copyright Royalty Judges on the Copyright Royalty Board that sets the rates for internet radio are there:

To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.

Yeah. Their job is to set rates that basically kill off disruptive innovation in favor of "prevailing industry practices." As Schruers notes, this goes against absolutely everything we understand about the importance of disruptive innovation in driving forward the economy:

That’s right: employees of the U.S. Government who dictate price inputs for entire industries are statutorily charged to resist change. While the CRT / CARP / CRB has always had other statutory guidance as well, for example, maximizing availability of works, affording copyright owners a “fair return” and users a “fair income under existing economic conditions”, Congress enshrined this explicit rule that no one be permitted to upset the existing players’ apple cart. There is no pretext here, no cynical appeal to some higher objective that justifies minimizing disruption of the prevailing industry — change is inherently bad. The statute gives no consideration of whether a better business model might come along, and in fact affirmatively discourages any — not only because the statute aims to minimize any “disruptive impact”, but also because this license was limited solely to “pre-existing” services by the Digital Millennium Copyright Act in 1998. New arrivals were out of luck.

How the hell did something so explicitly corrupt and so clearly a form of crony capitalism get directly into the Copyright Act? Take a wild guess:

So how did this “minimize disruption” language wind up in the Copyright Act of 1976, given that it so clearly violated the First Rule of Defending the Status Quo? The “minimize disruption” requirement is a vestige of a copyright legislative process that stretched over many years, starting in the 1960s, at a time when fewer people appreciated copyright and fewer still understood the contours of the legal system that created those rights. Much of the initial drafting of the ‘76 Act was by the Copyright Office, which chaired a series of meetings with prominent industry copyright lawyers throughout the 1960s.

Counsel for publishers, the recording industry, broadcasters, were well represented in these discussions. The future, as the saying goes, had no lobbyist. It is not surprising, therefore, that the multi-factor test that determines the rates paid by services like satellite radio under the Copyright Act’s statutory licenses would reflect the perspectives of the existing parties to the arrangement. The standard from the ‘76 Act remains today (although at the time, the statute was focused on regulating “coin-operated phonorecord players”.)

And... believe it or not, that's not even the end of the story! That part of the Copyright Act is the part that impacts the satellite guys. But the streaming internet folks? For them it's even worse, as the statute takes things even further to create even more incentives to further kill off these new innovations -- by basically saying that a "proper" license is one with which a "willing seller" is happy. In other words, it sets the statutory rates almost entirely based on the interests of... the existing, entrenched players.

And that's why Pandora may never be profitable if nothing changes. Because we've actually built into copyright law that disruptive innovation is bad and should be minimized at the interests of the legacy players.

Filed Under: copyright, copyright royalty board, disruptive innovation, innovation, internet radio, royalties, satellite radio, webcasting

Turning An Accidental Launch Into An Opportunity For Success

from the roll-with-the-punches dept

Many times, when a company has an early release of their work leaked in the wild, it responds in much the same way that Fox responded when an unfinished version of the movie Wolverine was leaked. It complained about the leak. It got the FBI involved. It fired one of its own reporters who reviewed the leaked copy. Eventually all this lead to the arrest and sentencing of the man who leaked the film. Throughout the whole ordeal, we tried to explain how Fox could have turned this leak to its advantage by using the leak as a promotional opportunity.

When you compare that string of events to this latest report of an early release of Double Fine's newest mobile game, Middle Manager of Justice, you can see that Double Fine has a better grasp of reality than Fox and many other companies.

"So I was on the train heading to work this week, and I get a call from our tech director saying, 'Hey, um, so it looks the game is live in every territory.' And I just went, 'What!?'" Looking back on it, Chi laughs, but for a time he was worried about how this early launch could affect his game's reputation. 

"It wasn't what I wanted the world to see quite yet," he said. "At Double Fine, we pride ourselves on putting a solid product out there, so having something out there that was buggy and not quite ready yet was really frustrating."

At this point, Chi had a number of options. He could have followed Fox's example and complained about the early release and told all those people who downloaded the game to stop playing it because it was unfinished. He could have threatened those players if they released any video or screen shots of the game. Or he could have done what we tried to tell Fox it could do, use it as a promotional opportunity. And that is exactly what Chi did.

"I guess it kind of just turned into a beta test," Chi said. "I mean, if people find bugs that we haven't found internally, I'd love to know about them so I can fix them," Chi said.

Even just a few days later, Chi says he's received a ton of valuable feedback that's helped Double Fine eliminate bugs, and make the game's free-to-play elements less restrictive for non-paying players.

"If anything, I welcome these suggestions from people, because we're still learning and we plan to work on this well after it goes live to make the game deeper, and luckily this means we'll get an early start on that process," he said.

While the game was not meant to be in the hands of players, Chi did what he did as a way to preserve the integrity of the company as well as strengthen its relationship with its fans. He used the early release as a way to help fans become more invested in the company by becoming early testers. He didn't have to do this. He could have had Apple remove the game from those players' accounts. Yet, he didn't because having a healthy relationship with consumers is more important than a mix up in the release schedule. Hopefully, more companies will take notice of how Double Fine handled this affair and will respond in kind.

Filed Under: leak, middle manager of justice
Companies: double fine

The Math Says HBO Shouldn't Go Direct, But They Left Innovation Out Of The Equation

from the take-it-to-the-bank dept

There's been plenty of talk about HBO and its ongoing refusal to offer a standalone internet offering for its content (unless you happen to live in the lovely Nordic region). A few months ago, this discussion took something of a viral turn with the website TakeMyMoneyHBO.com, which tried to calculate how much people would pay for standalone internet/mobile access to HBO content -- which suggested people would be willing to pay an average of about $12 per month. Now, we can all take online internet surveys with a pretty big grain of salt, but there clearly is a lot of interest in people getting such a service. The straight math says that at $12, it would be a good deal for HBO, which is rumored to actually get about $7 or $8 per subscriber via cable and satellite. But... as Ryan Lawler at TechCrunch wrote at the time, it's not that straightforward, and you can show how the math doesn't quite add up:

More importantly, it wouldn’t include the cost of sales, marketing, and support — and this is where HBO would really get screwed. Going direct to online customers by pitching HBO GO over-the-top would mean losing the support of its cable, satellite, and IPTV distributors. And since the Comcasts and the Time Warner Cables of the world are the top marketing channel for premium networks like HBO, it would be nearly impossible for HBO to make up for the loss of the cable provider’s marketing team or promotions.

Think about it: Every time someone signs up for cable or satellite service, one of the inevitable perks is a free six- or 12-month subscription to HBO. And those free subscriptions are rarely, if ever, cancelled once the trial period ends.

Lawler insists the math doesn't add up because without that marketing push, the number of subscribers would be much lower. HBO claimed that Lawler's math was right. And it may be. For now. But that's really dangerous thinking.

We've pointed out before that it's quite tempting for legacy players to think that they can wait out disruptive innovation. They talk about how the new products and services aren't good enough or don't make enough money to bother getting into that space. Often they'll directly talk about how the new services don't make the same amount of revenue as the old ones (or they'll make some crack about "dollars into dimes.") And, of course, they insist that when the money is there they'll make the switch. But, if you understand anything about the history of disruptive innovation, you know that if you wait until that point, you're already behind. Someone else has already taken over that market, and your "switch" is often seen as way too little, way too late (not to mention that it's often accompanied by massive bungling, as the slow entrance also means not really understanding enough about how that market works, while all your competitors spent all that time perfecting their solutions).

MG Siegler has a great post talking about this very concept as it relates to HBO, responding to Lawler (again) and his recent interview of an HBO exec during a panel at TechCrunch Disrupt. Once again, HBO insisted that Lawler was right and that "the math didn't make sense." But Siegler points out, correctly, that innovation beats math every single time. Siegler basically highlights the key point of Clayton Christensen's Innovator's Dilemma: it's really really tough for legacy players to eat their own cash cows and bet on something new. He points to another excellent article, by Farhad Manjoo at Slate, about how Apple actually does this really well, specifically how it totally cannibalized its cash-cow iPods with the iPhone:

Put it all together and you get remarkable story about a device that, under the normal rules of business, should not have been invented. Given the popularity of the iPod and its centrality to Apple’s bottom line, Apple should have been the last company on the planet to try to build something whose explicit purpose was to kill music players. Yet Apple’s inner circle knew that one day, a phone maker would solve the interface problem, creating a universal device that could make calls, play music and videos, and do everything else, too—a device that would eat the iPod’s lunch. Apple’s only chance at staving off that future was to invent the iPod killer itself. More than this simple business calculation, though, Apple’s brass saw the phone as an opportunity for real innovation.

That, in a nuthsell, is what most companies fail to do. It's why Clayton Christensen's book sells so well, even though very, very few companies have any idea how to do what Apple did and "eat its own." But the point is there. If you focus on "the math," you're going to miss the market and be way, way too late. Back to Siegler:

Moore's statement about HBO is correct. The math is not in favor of selling HBO access directly to consumers. But if we're just thinking about this from a pure product perspective, I don’t think anyone would disagree that this is what we all want. HBO is choosing not to build the service we will love, they're choosing the short-term money. The safe bet. The math.

But if they don’t diverge from this path, it will lead to their demise. Innovation always beats math, eventually. That, you can take to the bank.

He's right. And the more you look at the economics of innovation, the easier it is to understand why innovation always beats math. It's because "the math" that people do is of a static world, for the most part. They use past performance and metrics built on a different market. They don't understand how quickly a new market grows, and how much larger its overall potential is. And that's because we have difficulty in mentally dealing with non-zero sum markets, preferring to think that it's a one-for-one switch. But, it's not. Innovation expands markets in new and unexpected ways, often quite rapidly (though also, deceptively slowly at first, because the growth is often in a tangential market that people don't even recognize).

So they come up with spreadsheets and "models" that try to predict when the math says it's time to switch. And all of that time they're not innovating. But since the disruption is brewing in a much faster manner, and in a different spot than they really think it is, the time to switch is usually as soon as you realize the innovation is happening, not when the spreadsheet tells you to. It's not just about choosing "the safe bet" vs "the service we love." It's about how disruptive innovation guarantees that those who don't build for the markets of tomorrow, don't really have much of a market tomorrow.

Filed Under: disruptive innovation, economics, hbo, hbo go, innovation, math
Companies: apple, hbo, time warner