The Innovation Ecosystem

Once a few years ago, when I was running OneWorld Health, a nonprofit that developed drugs for neglected diseases, I was visiting some remote villages in Bihar. Bihar used to be a major seat of Indian culture, and the place where Buddha attained enlightenment, but is now one of her poorest states (albeit still breathtakingly beautiful). At one village, I was brought to the village center, where a large crowd was gathered around singing dancers whirling in a riot of colors.

We had sponsored the performance. Not for entertainment but for education. Many of the villagers, including most of the women, couldn't read. OneWorld Health had developed a drug for a disease called black fever, and this was how we educated people about preventing and treating the disease. Dancers rather than pamphlets. The performers were singing about black flies, how they transmitted black fever, and how they could be treated. This was our Direct-to-Consumer ad.

We had to do those kinds of things because Bihar lacked many things we take for granted in the West.

In developed countries, you have doctors to diagnose the disease, pharmacies to sell the drugs, roads for patients to take to get to the hospitals, insurance companies to pay for the drugs (and if not, at least credit cards), and literate patients who can read instructions. Once you have a drug, you have a therapy.

Not so in impoverished parts of India, Kenya, or Namibia. There, patients sometimes have to walk for three days to get to a clinic, the clinics are often not staffed with trained doctors, the pharmacies sell counterfeit medications, and electric service is sporadic for the clinic refrigerators where the drugs are stored. In many places, patients can't read. There, even if you had the most innovative breakthrough drug, you had nothing if that was all you had.

In other words, in order for that drug to become a solution, a real therapy, we had to provide access, diagnosis, patient education, transportation, and so much more.

We had to provide not just the innovation but also what Ron Adner in his book, Wide Lens calls the innovation ecosystem and what economists often call complements.(1)

Innovation Ecosystem

Innovation ecosystem are all the things that are required before people can use an innovation. For example, if you invent an electric car, you need charging stations, you need a charger at home, and you need more capacity at utility companies to meet the increased electrical demand. If you invent coffee, you need someone to supply coffee grinders, coffee machines, electricity, water, coffee mugs, and so on.

When you don't have the right ecosystem, your innovation fails. And often, when you have a true breakthrough technology, the ecosystem is not ready.

One example was Michelin's PAX tire system, which was a revolutionary run-flat technology with superior ride and performance. It was expected to obsolete all other tires. Its market research was off the charts. Michelin's competitors were worried. (Most of the examples I use in this post are from Wide Lens, by the way.)?

Unfortunately, PAX tires required special equipment to service, which most service stations did not have. As a result, a simple flat often meant the customer had to replace rather than repair the tires. PAX tires ended up an almost total failure. Part of the tire ecosystem are service stations for repairing the tires. Without it, PAX couldn't succeed.

Another example is digital cinemas. In 1999, Star Wars: The Phantom Menace became the first movie in the world ever shown in a digital cinema. Excitement was running high for this new technology. It promised flicker-free, crisp, high resolution images to eager moviegoers. The movie studios stood to benefit from lower cost (the industry was spending $1 billion a year on producing analog film prints and even more shipping the heavy rolls) and better logistics. They stood to profit immensely from digital cinema.

But… the theater owners were not impressed. They would have to buy expensive digital projectors, and their profit margin wouldn't move at all.

For years, digital cinema gained no traction.

This was the classic co-innovation paradox. Digital films are of no use if cinemas don't have digital projectors. And digital projectors are useless without digital films. (Please wait for the denouement, I will return to this example below.) (2,3)

When someone talks about a killer app, innovation ecosystem is what they're talking about. More specifically, they are talking about co-innovation, two products that together work together to deliver a breakthrough.

Apple ]['s killer app was VisiCalc (first spreadsheet). Instead of a very very laborious process of calculating financial projections by hand, you could now change a single value and have it propagate throughout an electronic spreadsheet. What would previously take days could be done in seconds. People were buying $2,000 Apples just to run a $100 software.

Sometimes the innovation is so good and vital that people will go and buy what they need to make the innovation useful, like VisiCalc. But often, products that launch into a barren ecosystem stagnates until the rest of the ecosystem catches up. Or simply dies.

Often, when someone says a product was ahead of its time, this is what they're talking about. The product was there but the ecosystem was not. This is one of the greatest mistakes innovators make. What's the solution? Co-innovation and co-innovators.

Solution

The successful innovators think ahead and pave the path for success. For example, Amazon insured that there would be books for Kindle. They insured that co-innovation (books) would be available, unlike Sony, which failed to secure the same for its e-Reader. Don Valentine, the legendary founder of Sequoia, funded disk drive companies and peripherals companies when he funded Apple because he realized that reliance on cassette tape storage would hold back the success of the Apple computer.

One example of an innovator securing co-innovation is Ted Turner and his WTCG station. WTCG was the nidus around which Turner grew Turner Broadcasting System and CNN. When he acquired the station, which was broadcast on UHF band, most people couldn't even tune into the station because they didn't have a UHF antenna. UHF stations were fuzzy and generally featured low-quality shows that couldn't get onto regular TV network stations.

Recognizing that it didn't matter how good the shows were if no one could watch them, Turner purchased the rights to broadcast the Atlanta Braves games. As he expected, the games turned out to be the "killer app" for his station. People who previously had no interest in fuzzy UHF broadcasts changed their tune. People went out and bought the UHF antenna solely to watch the Braves games and then realized they liked the other shows on the channel.

Let's return to the story of digital cinemas. The industry was locked in a stalemate because theater owners didn't want to buy digital projectors. When you have an innovation, and even one of the players in the innovation ecosystem is disincentivized, then the innovation is dead in the water.

The stalemate was broken by the invention of the digital print fee and the digital theater integrator. The integrator agreed to buy the digital projectors and lease them to the theaters, and the movie studios paid the integrators a fee per each movie that was shown. The movie studios shared part of the extra profit they made to incentivize the theater owners. Bydoing so, they converted the theater owners into co-innovators.

True Innovation is a Team Sport

Innovation ecosystems are really important if you're working on true, breakthrough innovation. That's because for minor, incremental innovation you can typically just rely on the pre-existing ecosystem. If you're developing a new gas-powered car, you can use the existing roads and gas stations. But if you're developing a fuel cell car, you'd better think about what part of the ecosystem you're going to have to build or convince someone else to build.

Almost by definition, great innovations create an ecosystem, and spawns new industries. Some of the greatest internet innovators create and tie together ecosystems, like eBay, Uber, Amazon (with its marketplace). eBay isn't much use without buyers and sellers. Neither is Uber. Same thing with iPhones and apps.

Some of the greatest innovations need co-innovations. And some of the greatest innovations are great because they empower other innovations that grow and flourish, sometimes far beyond the initial innovation that spawned them.

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(1) Complements are opposite of competition. Complementary goods increase the demand for each other. Web browsers and web servers. Gas powered cars and gas stations. 5G phones and 5G cell towers. You want your complements to be as widely available as possible and as cheap as possible (ideally free, which is why Netscape gave away browsers and sold servers).

Startup founders, especially if they have business experience, often spend a lot of time thinking about competitors. We should really be thinking more about complements, because more innovations fail because of complements, or lack thereof, than competitors. There should be a slide in every pitch deck about complements.

(2) Another example was Nokia's race to build the first 3G phone. Overcoming Herculean odds, and almost breaking the laws of physics, they launched the first 3G phone, the 6650, beating their nemesis, Ericsson, to the market. Only to have it flop because the networks, the compressions algorithms, and content was not available. Instead selling the projected 300 million handsets in 2002, they sold 3 million.

This fiasco led Nokia CEO Steve Elop to write in his “Burning Platform” memo that “the battle of devices has now become a war of ecosystems, where ecosystems include not only the hardware and software of the device, but developers, applications, ecommerce, advertising, search, social applications, location-based services, unified communications and many other things.”

Steve Jobs, on the other hand, didn't even build 3G into his first iPhone. He was a master of waiting until the ecosystem matured before he launched his product. He launched his 3G phone at the exact right time, which is to say, much later.

(3) Similarly, there was a lifesaving lymphoma drug called Bexxar. I worked on a competing drug called Rituxan. Many of us on the team thought Bexxar was a better drug, but Bexxar was commercial failure and was eventually pulled from market while Rituxan reached peak sales of almost $9 billion in 2016. The critical issue was that oncologists would not refer patients to nuclear medicine specialists for treatment. https://www.nytimes.com/2007/07/14/health/14lymphoma.html?pagewanted=all