Open Innovation - Time to Broaden Your Perspective

Last week I had the pleasure of attending and speaking at the Open Innovation Forum hosted by the UC Berkeley Center for Law and Technology and Chadbourne and Parke LLP. The forum had a broad base of attendees and speakers ranging from consumer products (e.g., Clorox), to telecom (e.g., T-Mobile), to educational institutions (e.g., UC Berkeley professors in law and business), to technology foundations (e.g., Mozilla), and other technology companies (e.g., Genentech, Microsoft, IBM, Cisco, Oracle and others). The diverse background of the participants greatly expanded how I think about “innovation” and the benefits of openness. Here is a summary of interesting points I noted throughout the day. I will write a separate post with more details on the panel on which I participated, “Recent Revolutions: Open Source, Open APIs, and Web Services.”


The forum agenda highlighted the concept of “open innovation” by tracing the foundational models of innovation, recent changes, emerging trends and forward looking prospects. Some important themes that came up throughout the day included:

• The parallel existence of open innovation and commercialization models - open innovation models can indeed lead to commercial success 
• Definitions of innovation - the application of new ideas to create value 
• Definitions of value - “value” varies under the circumstances and could include quality of products, consumer welfare, promotion of competition, and other measurements 
• Economic analysis on the true commercial value of open innovation models is lacking even though many organizations have employed such models with success

Dr. Henry Chesbrough, author of several books on open innovation and source of the term “open innovation” itself, gave the opening keynote. He started with the historical sources of innovation: individual inventors, imitators, and R&D shops (large firms). Here, he introduced the “Chandler Paradigm” in which firms control the flow of innovation from R&D within their own organizations, with no inputs into our out of the firm except for the end products. Under this scenario, intellectual property is relative easy to manage. In recent history, Dr. Chesbrough continued, innovators grew to include users of technology, startups (small- to medium-sized enterprises), and non-profit organizations and enterprises (e.g., universities, standards boties, open source foundations, etc.). Innovation in these entities requires that intellectual property flow more freely than under the traditional large-firm model. As a result, from 1981 to 2005, the share of R&D produced by large firms fell from 70% to 37%, while the share from small enterprises grew from 4% to 24%.


The larger number and growing types of R&D players has led to greater openness in innovation models out of necessity. Specifically, the traditional single-firm input/output model from R&D to product has changed so that innovation at both the research and development phases can occur and flow both inside and outside the firm. The emphasis is less on having great ideas because ideas are everywhere. It is now more important to identify value by productizing ideas rather than inventing them. Venture capital firms are one prominent example of entities that create a mechanism for productization of underutilized intellectual property for commercial gain. Dr. Chesbrough also used patents to further illustrate this point. Many entities now hold patents without producing any products based on them. We even see NPEs (non-practicing entities) that hold patents solely to profit from the use of patents by others without producing any innovation of their own.


With this foundation, the discussion moved to traditional means of fostering innovation in collaboration with others. Specifically, the first panel discussed joint ventures, standards bodies, patent pools and cross-licensing. To frame the discussion, the panelists focused on the prevalence and necessity of standards, while highlighting the importance of patents and difficulties in creating an environment for open exchange. Without getting too much into the technical details, some of the important points were:

• FRAND (free, reasonable and non-discriminatory) promises may not provide the level of protection parties would hope without difficult negotiations between patent holders 
•  patent pools, cross-licenses and joint ventures are all important tools that can serve to ease concerns over patent claims and provide for a more free flow of technology

The next panel emphasized that innovation can come from virtually anywhere in its discussion of small inventor product development funnels and consumer products. Some of the non-standard examples of innovation included:

• a technology company gains access to a new market acting as a middleman between small-developer inventors and OEMs for ad hoc open innovation opportunities where the technology company would not otherwise have the expertise or interest in bridging the market need directly 
• clearly defining a technology provider’s core value proposition and expertise to determine when M&A of related technology providers is preferred to a joint venture or other arrangement 
• a consumer products company fostering an online community and working with a venture capital firm to manage the flow of new product ideas from the public and evaluate the value of such ideas under a standardized program that rewards participants

Marshall Phelps, former Microsoft VP of intellectual property management and author of “Burning the Ships” spoke about his experience in the changing role of intellectual property management and commercialization of IP over the last few decades. Picking up on Dr. Chesbrough’s theme that many intellectual property assets (specifically patents) go unused, Phelps noted the great commercial opportunities such intellectual property holds. Taking patents as an example, not only can companies license them for a fee, but they can be licensed in cross-license arrangement to minimize or eliminate possible infringement threats. In addition, collaborations with all types of intellectual property can lead to open innovation and creation of de facto standards. Phelps emphasized that companies must learn how to value their intellectual property portfolio distinct from the rest of their balance sheet assets and look for ways to monetize it aside from pure product development, including by spinning out R&D that will not be used within the organization. In closing, he noted that harmonization of patent laws across national boundaries is, in his view, one of the most important goals in achieving open innovation.


In the final session I attended at the forum, Matt Ocko from Archimedes Capital gave an enlightening description of his view of the role of open innovation today. In short, he was somewhat pessimistic that open innovation has or will result in a great technological leap. Specifically, he used open source as an example: startups spin out open source only when it is not core to their value because they don’t have the resources to maintain it; large companies spin it out to gain competitive advantage rather than from altruism under community ideals. In other words, while open source might lower the cost of disruption, it doesn’t necessarily result in open innovation. Finally, he gave his very interesting macro view of innovation -- open innovation in technology R&D will become less relevant over time as the world reverts to a 19th-century state in which scarcity of physical resources is a barrier to product development.


A lot to think about...


My next post will go into detail on my panel’s discussion on “Recent Revolutions: Open Source, Open APIs and Web Services”