The Future, This Week 28 April 2017

Introduction:  The Future, This week, Sydney Business Insights. Do we introduce ourselves? I'm Sandra Peter, I'm Kai Riemer. Once a week we're going to get together and talk about the business news of the week. There's a whole lot I can talk about. OK let's do this.  

Kai: Today on The Future, This Week: what we can learn about innovation from copying in Silicon Valley, the NBN and an overpriced Wi-Fi connected juicer.

Sandra: I'm Sandra Peter. I'm the Director of Sydney Business Insights.  

Kai: I'm Kai Riemer. I'm a professor here at the business school. I'm also the leader of the Digital Disruption Research Group.  

Kai: So Sandra you're joining us from Prague today where you were attending a conference.

Sandra: Yes. It's 2:00 a.m. in the morning here. So Kai what happened in the future this week? 

Kai: Our first story is from the Australian Financial Review published yesterday and it's about Mark Zuckerberg and Facebook how ruthless Mark Zuckerberg keeps Facebook King. Facebook just recently announced at their fate F8 conference all the new features that will make it into Facebook and its ecosystems of platforms such as Instagram and WhatsApp and the like and it's all about camera it's all about augmented reality overlaying pretty artificial pictures into photographs and video to make those platforms more engaging. And they of course work off the success of their competitors such as snapchat and the article comments on the blatant ways in which soccer work and Facebook have interpreted we should say or just copied the features that made snapchat so successful.

Sandra: Now let's call it what it is copying and it's not the first time they have done it.

Kai: No that's right. And they're also not the first ones who have done it.

Sandra: So the entire idea of Facebook is predicated on copying the idea of social networks but they weren't the first ones to have the idea. And then they integrated various other inventions that others come up with to make their product more successful. So it's copying wrong?

Kai: Well that's a good question. The article actually says that there's a rich history in the tech industry of taking someone else's idea and adding your own spin or improving on their copying. And the author suggests that we shouldn't get all hung up on the copying aspects which is a little bit bizarre given how much emphasis we always put on originality and patents and that we discourage plagiarism at university and in schools in Silicon Valley there seemed to be different rules.

Sandra: Indeed so in Silicon Valley there is as you've mentioned quite a rich tradition. So if we look at Steve Jobs. There's a famous story of how he copied the mouse that Xerox had developed. 

Kai: He made it work right? 

Sandra: Yes. And I think that is the key to what's actually happening. So there seems to be a number of concepts. First is that quite often this copy is not full I'm copying that we see in that Facebook case but it might be a question of the invention of something vs. the actual innovation that comes with it. So Xerox might have invented the idea of the mouse but what Steve Jobs has done has moved that from invention to innovation to something that was 300 or 400 dollar mouse that Xerox had developed it, made it cheaper and made it work for the consumer.

Kai: Yes so the article actually traces back some of those innovations Apple interpreting and making work Xerox technology and windows taking Apple's ideas of a graphical user interface and rolling it out to the masses, Apple coming up with the iPhone, Android is basically creating a similar operating system giving it away for free. Samsung literally copying Apple's hardware getting into trouble for it's a little bit. But by and large the article says that innovation in this industry and making these technologies available to all of us is not just a matter of inventing things but innovating on business models and rolling things out cheaply to everyone.

Sandra: Exactly. And that's quite a nice article I want to bring up here in the New Yorker a couple of years ago and I think it was Malcolm Gladwell who actually goes back and goes through all of this examples and tries to see how do you move from the innovation to building a profitable venture around these products and services. And I think we're quite enamored with inventors in general. So we always talked for instance about the Wright Brothers inventing the airplane. But the Wright brothers got so caught up in protecting it with patents that they never actually made it work. It took people like Greg Curtiss and so on to turn it into an actual industry but that's not the story that we have.

Kai: So what is needed to make innovations work is also the power to roll this out into a marketplace? The article talks about Facebook's size and power in the market of being the largest network and therefore having not only the ability of getting away with stealing. So there are some questionable ethics there but to making those features available to everyone and therefore normalizing innovations and broadening them out to the wider market something that is not possible when you are a smaller start-up or a niche player. So of course the problem here is that innovations or inventions that are introduced into a marketplace by smaller companies are often just brazenly copied by the larger players who of course also have the market power to get away with things in the courts or the financial backing of making it prohibitive for a smaller company to take them to the court if ever they can prove that it was literal copying. So it's a double edged sword. On the one hand it's a lesson in maybe a form of power bullying but also in the way in which many innovations rely on dominant market leading players to introduce features to the broader masses.

Sandra: And I would say that another interesting thing to consider there is that what you have described is actually the way the ecosystems work in places like Silicon Valley. So this idea that the large players are the ones who copy and then who can bring it to the market it's something that we see play out quite differently if you look at places like China. So in a place like Shenzhen everything gets copied and it gets copied not by the big guys but by the little guys. So there were some nice articles in The Financial Times last year and the year before that tried to analyze this idea of you know people coming up with good ideas on Kickstarter and before your campaign is finished China is actually selling your products already. So everything from wearables to phones to cases to every kind of hardware that we can consider cameras and whatnot is being developed in large ecosystems like the one we have in Shenzhen. And I think it was Jack Ma the founder of Alibaba who was saying last year that many of these are actually of better quality and with better prices than the real named ones. Of course not all of them and many of them are cheap copies and not bad copies. But these people managed to improve because of the ecosystem that they have quite quickly they're using the same factories or some of the same manufacturers and the networks to improve on the authentic goods so to say. So counterfeiting has this unexpected benefit of actually driving innovation in places like Shenzhen.

Kai: Well benefit for whom right? Maybe for consumers who get access to these technologies in decent quality much faster than if it was left to one company to exploit an idea. But what you're describing is pretty much a cut throat business right. Where the ones that are brazen enough and fast enough get away with things.

Sandra: Absolutely. So it's the move from originality to speed and execution that actually works in those places making things open source without wanting to.

Kai: Yes. In this cutthroat world it raises questions for the role of smaller companies’ right. If you're a startup and you have a great idea that is potentially interesting to a large business I think it comes down to trying to build your idea prove its worth and then potentially selling your business to the large company before they have an incentive to just steal it which of course feeds into a spiral where the large companies are getting ever more larger. And it's very hard to challenge their position in the market. I mean incidentally snapchat actually had the chance in the past to sell the business to Facebook...

Sandra: …To sell itself.

Kai: Yeah. They offered three billion U.S. dollars for the business. They refused at the time and the article says that right about now with Facebook basically taking away the advantage that Snapchat has and limiting its growth potential it might be worth much less than the offer that was previously on the table. So a word in which you can have an idea but you need to sell at the right point in time because the large ones will not let you get away with becoming a competitor. They will either buy you or they will steal from you. Is that what we're talking about? That seems to be quite a bleak outlook in terms of ever challenging those large Internet platform based businesses.

Sandra: I think that is a scary world. I think what we're seeing especially out of places like China and so on is that some of this copyright protection process just cannot be enforced in those places. The pace at which this is happening is so fast and so quick that it cannot happen. One ray of hope in this story is that there are actually a few industries out there where there is no protection for inventing new things that have managed to make that work. Industries like the fashion industry where in US copyright protection is not extended to fashion designs and they are being copied but that just means that consumers get familiar with this faster and faster. The fashion cycle speed up and there has been a lot more innovation because of that and the industry thrives on it. There is also an argument to be made that because of that they sell things faster which would increase their profit. But the same thing happens in the restaurant industries where you can't copyright recipes you can copyright the steps in it. But you cannot copyright the ingredients or the quantities or anything like that.

Kai: So as always in life it's a matter of balancing different interests the interests of the people who have new ideas and the ones who want to get access to new ideas fast us as consumers and the ones that gets to actually make money from it in the midterm. And of course the whole copying and stealing debate is then contrast that with the debate around patents and patent trolls who are often appropriate quite trivial ideas that were patented and then they make money off things that by any commonsense standard should be open and free for everyone to use. And they're appropriating money from sitting on those patents which are basically trivial in nature. So it's a messy business this whole technology innovation caught up between patent trolls copying and the protection of new ideas that are legitimately new and not just trivial patents.

Sandra: And as much value as we derive from having innovators we need the inventors as well.

Kai: Now talking about messy business brings us to our next story which is the NBN.

Sandra: A big story by all measure.

Kai: An ongoing story - the roll out of the National Broadband Network in Australia which is well underway but has had quite a politicized but also messy history. The latest article on the topic is an essay in The Australian politics magazine The Monthly "It's called Network Error- what will be the cost of a patchwork NBN". The author asks a lot of questions of what has happened so far but also outlines quite beautifully the history of the NBN so far. The article is far too long for us to discuss every detail. But in short the NBN started out in 2000 and nine as a reaction to really the ageing broadband infrastructure in Australia. But then government decided to roll out a fibre to the premise of fibre to the home network which would replace the old copper networks owned by the former state owned Telstra to come up with an entirely new network based on fibre optic cables which would transport Internet to people's homes at the speed of light.

Sandra: And the disclaimer at this point should be that both of us are actually enjoying the benefits of this.

Kai: We can talk about our own experiences. I've actually had a journey through the various technologies that are in play here. Not all of them are great but the basic promise back then was to give everyone in the country fibre to the premise that has drawn a lot of criticism back then not just from the opposition party at the time but also from the general public. We thought this would be way too expensive and did we really need those speeds that were promised up to 100 gigabits per second or at least a gigabit per second in the near future. So people said really we don't need this this is way too much tax money that we're sinking into this. This is way over the top can we not find a cheaper solution which is what then became policy later on when the government changed hands. And what was a fibre to the premise rollout was peeled back to merge into what is now called a multi technology mix which will give some people fibre to the premise especially newer developments newer homes which was always planned to connect people in rural areas via satellites and wireless NBN. But most importantly the vast majority of homes will only be connected to what is called fibre to the node where fibre will be run to a box that sits somewhere in the street in the neighbourhood and then copper will be used to for the last few hundred meters to connect homes. So the promise of this mix of technologies that we wouldn't have to access people's houses to actually run fibre to the house. We could just use the copper there would run fibre to the street which sounds sensible at first sight but comes with a whole lot of problems. As it turns out now which some people predicted at the time but it seems to be not as straightforward and it seems to lock us into a lot of costs down the track.

Sandra: So why are nodes more difficult than fibre to the premise?

Kai: Well first of all if you run fibre to the house it's just a glass cable lying in the ground. There's no more technology needed in the neighbourhood and you can run the optical signal the light signal into people's houses which also is futureproof because you can upgrade the interchanges and progressively roll out faster speeds without actually accessing the infrastructure. Such copper has limitations so you cannot possibly get the same speeds ever. But those nodes those boxes that are sitting in the street, they are complicated because they have to convert an electric signal into an optical signal and vice versa. So they're essentially computers that need a lot of electricity and they have to be cooled down so they are fridges that are just sitting out in the street. My dad actually worked for Deutsche Telekom back in Germany and after reunification they rolled out fibre across Germany and he tells me now that those nodes they are really prone to overheating and that is back in Germany. So you imagine what this does here in the Australian heat. So those things will break down and they need a lot of maintenance. But most importantly they need a lot of electricity and they will cost a lot of money down the track.

Sandra: Exactly. And that makes it also very difficult to predict how much this will cost since this is locking people in not only in negotiation with people who provide you access to the internet but also people who would have to make sure that these boxes are properly cooled and properly powered and would have to negotiate access to that. And we've covered I think energy quite extensively over the past few podcasts and there's a whole heap of trouble there.

Kai: So it's not exactly building something that is futureproof not in terms of speed but also not in terms of sustainability when you need electricity for those boxes which to the best of my knowledge is not generated by our Solar at the point where it's needed but actually connected to the grid.

Sandra: So we are undertaking this because it is sensible to think that having access to high speed Internet will enable everything from streaming ultra-high definition 8K TV or the latest Netflix show to driving business innovation health care and so on and so forth.

Kai: Yes it's hard to imagine 10 years 15 years from now that we live in a world where high speed Internet access is not essential to how we live our lives and other jurisdictions other countries are building high quality networks and Australia has been falling behind and is now listed 55th in terms of Internet speeds in the population in the world and if you think about our geography and where we are in the world and with fossil fuel it's only becoming more expensive then really we need to stay connected to the world as best as we can in an electronic fashion with high quality Internet infrastructure.

Sandra: You mention the word infrastructure. So this has been labelled as an infrastructure project. However it seems to be treated as a product.

Kai: Exactly. So there's two things I want to talk about and I've actually written about this previously. The first one is that we seem to have a hard time making decisions about infrastructure because while it is reasonably straightforward to imagine the cost for the rollout of an infrastructure it is much much harder to imagine what the benefits of a new game changing infrastructure such as the NBN and fibre to the premises would be. So we naturally tend to extrapolate what we know about technology into the future and then we talk about higher download speed and watching more videos and maybe we talk about the odd business application but really we are unable to imagine what this technology could do for us which is the point about those infrastructure. So if we think back and we think about a world 15 years ago before we had smartphones and tablets and cloud computing and apps would anyone back then have imagined the kind of innovation that was unlocked by these technologies. I don't think so. And so what this tells us is that it's pretty hard to imagine the benefits of an infrastructure like NBN...

Sandra:...And this takes us back to actually our very first podcast where we talk about the great horse manure crisis of 1894 where London and New York and Sydney were full of shit. We were trying to design cities that would account for that amount of manure. At the same time that Karl Benz was beginning production of his first series of cars and we had the development of asphalt. So when we think about the infrastructure products we need very long time horizons and we have no idea how to assess this. So for instance there is a lot of talk right now about download speeds and about how good the download speeds are. However this infrastructure comes with a download speed and an upload speed.

Kai: Yes of fibre to the premise NBN. So unlike the copper technology which can give you a decent download speed but pretty meagre upload speed with fibre to the premise you can potentially have the same upload speed as download speed so you can essentially run a TV studio from your bedroom. Do we need this? No. We don't need this no. We didn't need cars. People wanted faster horses at the time, no one needed a computer when it was new and people said there was probably a demand of five computers worldwide. We're making the same mistakes of failing to imagine what infrastructure can do for us. And therefore under investing and treating them as if they were products. So what is happening now is that the NBN is treated as a product in terms of having to recover its own cost. So the plans that are being given to people and the money that has recovered from their willingness to pay has to cover the cost which means even people who are on fibre to the premise NBN are given contracts with much lower download and upload speed as possible. And of course they're not willing to pay for more if it costs them more to get more download speed because there's no services that they could use those download or upload speeds with. But that leads us into a chicken and egg problem if people do not have access to a full fibre to the premise network with high download and upload speeds there is no incentive for people and businesses to innovate and to create the kind of services that would then require this network which means that countries forgoing a huge opportunity to innovate and then reap the, we call the secondary and tertiary benefits from this innovation. The benefits from new products that make use of this high speed network and the kind of societal benefits in improved health care, living standards, not having to commute to work, being able to work from home and all of the kind of benefits that might flow from a country that is connected...

Sandra:...Where everybody is connected. It is wherever there is an incentive for companies to actually innovate in that space.

Kai: Yes exactly. So by rolling it out in this way and by treating it as a product and therefore under investing into the infrastructure we have hamstrung the whole product and we're left with something that is complex now, that is very expensive to run and that doesn’t even give us the kind of speeds that would technically be possible. So we might end up with something that is more expensive than a full rollout of fibre to the premise would have been and we forego all the benefits.

Sandra: Speaking of complex and expensive to run I think this brings us to our last story of today.

Kai: Which is really my favourite story of the week because it’s just so silly. It was triggered by an article in Bloomberg on the startup company Juicera which sells a product by the same name. The article is titled "Silicon Valley's Four hundred dollars juicer may be feeling the squeeze." So what is this all about Sandra?

Sandra: So Silicon Valley indeed has a juice maker that used to cost six hundred ninety nine dollars. It's now down to four hundred dollars and it promises to squeeze juice out of a packet. Now what Bloomberg did last week is that Bloomberg did its own squeeze test, that is hand squeezed, the exact same packet and it did the job quicker than the four hundred dollars machine. The device was slightly more thorough but the hands did the job a little bit more quickly and the reporters from Bloomberg were actually able to squeeze out the juice in a minute and a half while the machine took about two minutes to do the same job.

Kai: We have to say at this point that if you buy the machine you have to have a subscription of those bags which cost five to seven dollar apiece, they are delivered to your house and they are to go into the machine that will then squeeze juice from those bags. Now the fact that you can squeeze those bags by hand means you don't need the machine. But my question would be do you need the bags in the first place. Do people not have access to juice? What are we talking about here?

Sandra: We are talking about the company that was the wet dream of every investor in Silicon Valley. We're talking about 120 million dollars. Companies like Alphabet, Google investing in this. It was this sweet spot for venture capitalists, we're looking at food, we're looking at technology, clean living, healthy eating. And we had companies like Nespresso in the background to say that this actually works.

Kai: There is something that is connected to the Internet so you get the Internet of Things. Its building a platform that is Wi-Fi connected, you have QR codes, you have the health benefits and the health story around juice and healthy living. You have Apple like design visions beautifully manufactured products. You have the promise of a business model that will lock in customers and make them buy those food bags forever which is something that is very appealing to investors. And of course you have the promise of industrialized delivery of food that would not leave a mess when you make a freshly squeezed juice so what can possibly go wrong?

Sandra: It was innovation by the numbers. Everything that we tell young entrepreneurs that they should do something that is beautifully crafted that looks at the need in the market that has a clever idea that has an already built in customer base one which they can tap and they can lock in. It was beautifully made. The only problem was...

Kai: …its way too expensive and it actually competes with any other way of getting juices. It's not like this is solving a problem that hasn't been solved before it's not like people do not have any other way of getting access to juice.

Sandra: So why did it work? People were buying this machine especially companies bought this as you buy a Nespresso machines for your employees. People who used it loved it. They said it's a beautiful thing to behold. It even reads the QR code to tell you if your juice is off by a couple of minutes and you need to buy a new packet.

Kai: Yeah look I want to bring up something that has made the rounds a few years ago which I remembered. It's actually a couple of articles that we're talking about the echo chamber effect in Silicon Valley. An article in The New York Times back in 2013 was talking about a whole slew of apps and services that were built to solve problems that people in Silicon Valley have. So this might be just one more of those products that are very appealing to the people who are building these technologies who are investing in these technologies. But that leaves the entire rest of the world scratching their heads as to the problem that is being solved there. So yes it might be appealing to a certain market but will it actually scale and find a marketplace outside of the demographic that appreciates expensive gadgets that solve a miniscule problem and roll this out to the wider population to recover anywhere near the money that has gone into developing it in the first place.

Sandra: So maybe at this point the story brings us kind of full circle to the beginning where we talked about copying.

Kai: Yes it does in a certain way. Now why is this product so appealing to investors? Part of the reason is that it builds on the idea of selling a widget and then locking customers into buying the accessories the juice bags. And this device comes with a sophisticated mechanism. To make sure that it can only be used with the bag supplied by the company because guess what. The machine only makes juice when it's connected to the Wi-Fi network and can read off the bag, the QR code and check back with the cloud based server whether this is a genuine bag, whether it is not past its expiry date and then it will squeeze juice. So it was actually a nifty platform for locking in customers into a service that will generate an income stream for the company which is very appealing for investors. It's akin to buying a printer and having to buy expensive cartridges or having a razor or having to buy the razor blades or the electric toothbrush with one core difference though. The machine was expensive. The so-called razor and blade model in marketing rests on the fact that you basically give away the widget and then generate your income stream from the accessories. In this case the Bloomberg article has shown that you can use the accessories without the machine so you can actually buy the bags and just squeeze your juice from the bags. And then of course you can just buy fruit and squeeze it by other means. Or you could just go to the supermarket and buy juice. So while on paper this is buying into a great business model that will generate income streams, I think they forgot to really figure out a problem that hasn't been solved before.

Sandra: The main problem is a good one but not a problem that anyone has. So maybe in this case the inventors would have benefited from innovators from maybe someone in China taking up this idea and trying to figure out how to make it work better cheaper.

Kai: Yes there was actually an article in Bolts which asks why Juicera's press had to be so expensive and so this guy pulls apart the machine and shows all the beautifully manufactured parts that went into producing the machine. He's quite taken aback by the craftsmanship and all of the kind of custom made parts that are beautifully machine plastics that have gone through eight different stages of production are custom made gearbox that is needed to apply the pressure. The fact that it is built on a design where pressure has to be evenly applied to the entire bag rather than to you know what you would do when you squeeze it with your fingers. So there's a whole lot of things that are what he calls very wasteful. So he asks the question - Did the investors actually do this company a favour when they gave him that much money. He basically says these designers able to indulge. They were able to tap into expensive manufacturing processes. They had no need to cut corners. Be nifty be inventive in the execution having to come up with smart and clever ways to produce something cheap. So they were not forced to do what the companies in China actually really good at.

Sandra: And what they push companies to consider.

Kai: Absolutely. So this is maybe a great example for why it's not always good to have that much venture capital funding which left them with a genius piece of technology, beautifully crafted, very nicely designed, that however does not really solve a problem that anyone seems to have at least not outside of Silicon Valley.

Sandra: So maybe if no one is copying your product you should be worried.

Kai: Yes maybe. And that's probably all we have time for today. Thanks Sandra again for joining me from Prague today where it is now three o'clock in the morning. That's dedication to the podcast.

Sandra: Yes well it was dedication to the podcast, but I just had to be here to give a keynote at the CEMS Reimagining Business conference and the University of Sydney Business School is of course part of the global alliance in Management Education which brings together world leading business schools, universities, multinational corporations and NGOs.

Kai: Dedication to the school, dedication to the podcast. Thanks Sandra for being online and of course again a great example of what we can do with technology these days.

Sandra: See you all next week.

Kai: Thanks for listening.

Sandra: Thanks for listening.

Outro: This was The Future, This week, brought to you by Sydney Business Insights and the Digital Disruption Research Group. You can subscribe to this podcast on SoundCloud, iTunes or wherever you get your podcast. You can follow us online on Twitter and on Flipboard. If you have any news you want us to discuss please send them to sbi@sydney.edu.au.