Crossroads

At the intersection of technology, finance and the Pacific Rim.

Thursday, November 06, 2008

Innovation

Last week we were discussing HTC, the mobile phone company that is basically a Chinese company headquartered in Taiwan. I was taken aback by the comment "So what are we supposed to do? Learn Chinese?" It was a very good comment--one that suggests that identifying a problem is the easy part and coming up with a solution is something different. Critics who can see problems are a dime a dozen.

And unfortunately, I have no answer except "innovation"--staying one step ahead until China (inevitably) becomes higher cost and the arbitrage of labor cost even out. And sometimes this innovation comes from the outside--take Netflix. I saw a program on CNBC that discussed Netflix--this is a company people had a hard time understanding. They deliver video DVDs through the mail and took off (see the impressive growth here). Many people's first reaction (including mine) was "what kind of business is this?", "how can they possibly be successful?"
And the reason was that such people (including me) did not understand the business--the fact that there was a real demand for people to see "niche" video DVDs that suited their individual taste.

And the key to meeting this demand was not the US Postal system; rather it was the recommendation engine--you ordered the movies online and if you picked out "Titanic" it would also recommend that some other heart throbbing movies for you to choose, if you picked Frankenstein they would recommend the latest Dracula or other monster movies to also rent. And there were Indian, Chinese, Korean, Latino and many other such movies. It was the recommendation engine that formed the heart of the company--60% of the DVDs rented came from this recommendation system.

You would think that a company would go to all strides to protect their "crown jewels". Just the opposite--they opened their system up, made all of the data related to their recommendation engine available online--and offered USD 1 Million to any person or team that could improve their recommendation software by 10%. Today there are over 20,000 people working part-time on this project. None have yet reached the 10% target, but some are getting close--see the leader board here. When this was announced in November 2006, some called it a publicity stunt--but to have 20K people working to improve your software (all presumably on their free time) would cost how much? Innovation does not come from great technical advances--as said before there is innovation in technology and design of product, innovation in channels and also innovation in organization--or in this case--no organization.

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