The last 20 years have brought an unprecedented level of innovation in consumer electronics.  Processing speed has increased 15,000%, standard system memory has gone from 1 megabyte to 4,000 megabytes, and hard disk storage has increased by a factor of 12.  However, battery technology has stayed largely the same.  The lithium-ion battery, most commonly used in laptops, smartphones, and some automobiles, was invented in 1985 and made commercially available in 1991.  Since then, no significant improvements have come to market, save some modest and incremental increases in voltage and capacity

Today, batteries are the greatest limiting factor to mobile technology design and innovation.  Take an iPhone for example.  Its A5 CPU, the same one found in the iPad 2, is clocked down to reduce power consumption.  A look inside the phone shows a giant and heavy lithium-ion battery dominating the interior.  Despite this, the phone still barely lasts a day with normal use.  This device, and our use of it, is defined by its battery.  Most iPhones spends the majority of their lives plugged in at my desk or nightstand.

Think of how different the world would be if battery tech kept up with Moore’s law.  Your laptop and phone would last weeks, if not months between charges and would be a third their size and weight. Instead of constantly being tethered to an outlet and power adaptor, we’d be free to use the devices as intended.  Electric vehicles would be a reality and drivers could charge up in minutes.  We wouldn’t have an energy crisis because solar and hydro-electric energy generated during non-peak hours could be efficiently stored and used when we need it the most.  This is a completely different world that seems generations ahead of the one we live in today.

So what’s the holdup?  How come we’ve been able to make such strides in nearly every other area of technology?  It comes down to a combination of bad luck, loss of focus, and a flawed system of R&D.  Right now, we’re largely reliant on academic institutions for battery tech breakthroughs.  Though aware of the potential commercial impact, academics don’t face intense pressure for commercial viability.

Considering how much money is invested in areas like clean tech and consumer internet, one can only wonder why someone hasn’t stepped up to solve this problem.  Gather the worlds leading researchers, pump hundreds of millions of dollars into whatever resources they can fathom, and put deadlines, pressure and attention on the process.  It’s not a guaranteed bet, but surely we will see more disruptive innovation this way.  With enough money, human capital, and time, discoveries will be made.  Whoever solves this will be huge — Edison, Bell and GE huge.  Calling all billionaire investors and fund managers, who’s going to step up?

It seems as if this is a clear example of the power of network effects, and the danger to adoption and risk of abandonment when network effects are potentially strong but un-realized.  In the case of Harvard College, very few students were on LinkedIn to begin with, meaning there was little incentive for additional students to join.  Because students weren’t familiar with the platform, employers [evidently] didn’t make much use of it for screening or messaging, and thus, its value for students was limited.

This led to quite an interesting conversation on twitter, involving an undergraduate, Harvard’s Chief Digital Officer, and Jess and myself.

Original tweet

An undergrad (hidden account) points out that LinkedIn is making special efforts with the community.

via @PerryHewitt “.@andrewrosenthal agree they don’t use #LinkedIn but shd prob use what will connect them to ppl who will hire them. Better to work off API?

In the days of Mad Men, advertising was a far simpler game to play.  Big brands chose a message, and plastered it across TV, Print, Radio, and Outdoor advertising.  For the most part, you could hit your consumer with that message whether she wanted to hear it or not.  On TV, for example, there was no DVR, and channel options were limited.  As a result, marketers could easily reach greater than 50% of consumers with a mid-sized TV advertising campaign.  And whether a consumer consciously acknowledged it or not, the informative but boring spot about the newest flavor of Cheerios effectively drove purchase behavior.  The world has changed, of course, as consumers’ eyeballs are shifting away from TV and the dying print industry and heading online instead.   Within the online world, consumers are increasingly heading to Social Networking sites.  According to a Nielsen report from Q3 of this year, Americans now spend a quarter of their online time on social networking sites.  Facebook leads the pack, owning a mind-blowing 16% of total U.S. internet time.

Thankfully for Facebook’s sales team, users have taken to interacting with brands on its platform.  The problem for marketers of boring brands is that they aren’t interacting with ALL brands, just the fun and/or sexy ones.  According to Fanpagelist.com, the products with the most Facebook fans include fun, irreverent brands like Red Bull, Oreo’s, Skittles, and Play Station.  A couple of recent posts from the Skittles Facebook page:  “One of these days the fire hydrant is going to get back at my dog, and it’s not going to be pretty.” and “There’s a first time for everything except déjà vu.”  Admit it- those are pretty funny. These brands have tens of millions of fans, many of whom interact with the brand regularly.  Charles Schwab’s page? 17,000 fans.  Granted it’s not an apples to apples comparison (different sizes of target markets, advertising budgets, etc.), but the contrast highlights an important dichotomy.

Additionally, the online world has fundamentally shifted the economics of advertising’s holy grail: The super bowl.  According to Ad Age, TV spots that aired during the super bowl were watched more than 360 million times on the web, driven primarily via posts that occurred in social media websites.  This year’s forecasted figure, 500 million, will mean that reach online after the game will actually surpass the reach of the original airing during the game itself.   According to Ad Age, the single most important characteristic of those ads which are most-shared?  Entertainment value.

It would be awkward and inconsistent branding if Charles Schwab created a humorous video with the hope that it goes viral.    It’s a predicament that some of the nation’s best marketers and ad agencies have been thinking about, but no one’s cracked the code yet.  In an increasingly social media-centric world, what’s a boring brand to do?

While transportation, communications and virtually every other field of human endeavor have taken similarly large strides in the last 100 years, in the classroom little has changed. The education experience of a child in the 1890s looks remarkably similar to the experience of a child in 2011. The vast majority of students still attend a brick and mortar school from early morning to mid afternoon for nine months a year, where they sit in a classroom with a single teacher who imparts information.

This inertia is not because the system is working well.  The US spends more than any other nation bar Switzerland, an average of $91,000 to educate each child between their 5^th and 16^th birthdays, but has little to show for it. The country is ranked 25^th amongst industrialized nations in Science and 21^st in Math. Sixty-eight percent of eighth graders can’t read at their grade level, and most will never catch up.

Several non-profits have begun to address the problem, the most notable of which is Khan Academy, an online library of almost 2,700 education videos on topics ranging from Math to Physics, History and Finance. The site draws approximately 2 million unique viewers per month, has 57,275 subscribers, and is the 98th most subscribed YouTube channel. They have been lauded by parents, educators, students and celebrities from Bill Gates to Bill Clinton. What’s more they have achieved all of this with total funding of only $11.5 million and a small (but highly impressive) team headed by Sal Khan, an HBS and MIT graduate that produces most of the videos.

While this success is admirable, they are really only scratching the surface. The approximately 13.5 million hours students have spent watching Khan Academy videos represents less than 0.03% of the 64 billion hours K12 students spend in school each year, and this is not counting time spent doing homework and with private tutors. Furthermore, while the videos have undoubtedly had a major impact, they remain quite low tech. It is easy to imagine the impact that a higher quality, high budget offering could have. This fact is not lost on Sal Khan, who I spoke to as background for this blog post, and who recognizes that scaling as a non-profit will be a significant challenge for the organization. It may not be possible to source enough top people willing to work for a non-profit, and private sector financing, in some form or other, may be the only way forward.

Taking a similar line of thinking, in 2010 I founded a sort of “premium Khan Academy” called RevisionBox.com, targeted at the UK market. We reasoned that the healthy UK market for private tutors and the ability of a superior product to create significant value made this a highly viable business. Specifically our product was:

·         Premium: we sourced some of the best teachers in the country, used a professional film crew and utilized the latest in graphics technology for a high end look and feel

·         Focused on the UK curriculum: which required students to know a very specific set of things that were often not covered on non UK specific YouTube videos

·         Accurate: all of our videos were reviewed multiple times by qualified educators to screen for mistakes

While our product was highly differentiated and the value we were creating undoubtedly justified our price point, selling to consumers proved difficult. This was because they perceived they could get a similar product for free or that they “should” be getting this product for free, an issue encountered by premium content producers across the internet. Furthermore, selling to school districts was equally problematic, with teachers unions having tight control on where budgets could be allocated and centralized purchasing agreements already in place with textbooks manufacturers and other materials providers.

All of this led me to conclude that despite the massive potential for online start-ups to create huge value in this sector, it will be very difficult for any to gain traction until one of two things happens: Either consumers need to become much more willing to pay for premium online services (something that could conceivably be on the horizon) or governments need to change the way they allocate education spending, with far more power devolved to local school leaders. Until this happens, success will remain elusive in K12 and will be confined to those that can deliver an entire qualification from end to end, such as the University of Phoenix with its online MBA.

As most anyone can imagine, ad revenues have taken a nose dive over the last 4 years. With the economic troubles, we seem to have been crowded out of our advertisers’ wallets. This is troubling because The Harbus has a historical dependence on that sole source of revenue.

The trends that are conflating to sting the newspaper industry include digital media, social networking, “virality” in general, and the ever-expanding amount of content being posted, streamed, and downloaded over the internet. As with any innovative industry, commoditization means a wealth of options to the customer and diminishing margins for the producer.

On this end, The Harbus’ problems are exacerbated because we are particularly reliant on one type of advertiser: Corporate Recruiters. There are two sides to this problem. First, corporate recruiters have realized that they have a great deal of options for reaching out to HBS students. Sponsoring a SA TGIF event exposes the company to hundreds of thirsty RC students in search of free beer and snacks on a Friday afternoon. Because The Harbus as an organization has not provided companies with a higher value proposition, due to lack of analytics, content quality concerns, and decreasing student engagement, companies have begun questioning our sales claims.

The second problem has been on the content side. Informal reader interviews have pointed out that, over the last few years, quality has suffered. The exact reason for the, which is mostly a thesis at this point, is that students have become much less engaged since the start of the 21^st century. Which brings us to a classic network effects discussion: if the content is good, more and more students want to be involved with and passionate about The Harbus, making the content all the better, in turn attracting more students to get involved. When this cycle is broken at some point, reviving the spirit takes tremendous time and effort.

The core question reveals itself: How does The Harbus offer greater value to advertisers while engaging student interest? A big part of the answer, we believe, is leveraging the power of digital media. I believe that the physical newspaper will always be a part of HBS culture, but this is not to say that we cannot complement that with a strong online presence. Huge strides have been taken to increase usability of our website, by making design and content distribution changes. We have also taken steps toward monetization through Google AdWords and are researching direct sales possibilities. Social networking has become an important initiative, through standard channels like Facebook and Twitter and through syndicating our content to other websites. We believe the exposure increases, we offer more incentive to students to get involved in our operation. We also attract a broader audience and can engage the HBS community through multiple channels. Because the online side makes it easier for us to compile data, we become able to offer advertisers a more attractive service.

By strengthening The Harbus brand and the related network effects, we see a way to make our newspaper a sustainable institution. In the future, we also see possibilities for ancillary products that utilize The Harbus’ human resources and position on campus.

To get involved, contact me at publisher@harbus.org

Visit our website at www.harbus.org

But so-called paywalls are a fad among newspaper sites, and not just for publishers trying to recover shrinking advertising revenue. Media companies are balancing the need to mobilize web audience, and the online advertising they bring, with the preservation of print readership.

Consider the curious, more-for-less deals offered by the New York Times and Boston Globe to lure web readers to their print editions.

Last spring the New York Times started charging for access to its website, www.nytimes.com. The Times asked readers to pay $3.75 to $8.75 per week for digital subscriptions, depending on level of access. (The most expensive, “All Digital Access” choice included use of the website as well as access to a smartphone application and the tablet app.)

Anyone who takes the Times in print – including Sunday-only subscribers who pay $3.75 per week – also get full-boat digital access. That means the Times creates an incentive – savings of at least $5 per week – to subscribe to the Sunday paper.

The strategy seems to work, at least from a print perspective.

The Times reported 771,000 print subscribers on the average weekday from May to September of this year, according to Audit Bureau of Circulations data reported by a Nov. 1 Associated Press story. Including online subscriptions, the Times’ counted 1.2 million weekday subscribers. (The ABC, which verifies the circulation numbers newspapers give to advertisers, doesn’t count readers of a free website as subscribers.)

The ABC report showed the Times’ overall circulation growing 25 percent from the previous six months, the AP reported. Unsurprisingly, the newspaper reported slight growth in Sunday sales, according to AP, as “many people bought or kept a print subscription because it comes with free digital access.”

The Boston Globe, owned by New York Times Co., makes a similar pitch to its readers.

The Globe owns Boston.com, the granddaddy of news websites in New England with 3.5 million monthly unique visitors. But Boston.com is no longer the online home of the Boston Globe. As of September, that distinction belongs to BostonGlobe.com.

Boston.com continues to deliver news, sports, entertainment and opinion for free. The new BostonGlobe.com offers news, sports, entertainment and opinion – from the pages of the printed Globe – for a price.

That price now is $3.99 per week (not counting promotions.) But access to BostonGlobe.com also comes with a subscription to the Sunday newspaper. That costs $3.50 per week.

So, even as the Boston Globe mobilizes an audience for its paid site, and maintains an audience for its free site, it really wants people to read Sunday’s edition the old-fashioned way, with sections of newspaper spread over the kitchen table.

Jon Chesto, business editor of The Patriot Ledger in Quincy, Mass., credits this pricing scheme as the reason the Globe’s Sunday circulation inched up during the past six months. The Globe sold more than 360,000 copies of its Sunday paper on average from April through September of this year, according to the Audit Bureau of Circulations.

Chesto writes: “With the heavy preponderance of ads in the Sunday edition … the Globe’s management has every reason to shore up Sunday sales. It looks like they finally found a way.”

Sunday’s edition is important not just because of the large number of ads in newsprint. The fat stack of coupons, specials and circulars inserted into the paper each Sunday is a major source of revenue.

Subscriber numbers are also important. Those dictate how much a newspaper can charge advertisers – for ink-on-paper ads or the inserted variety.

Whether this tactic succeeds – for the Globe or Times – will be in the eye of the beholder. Will success be measured by web audience? Or is it stable Sunday print circulation with digital subscribers paying for access to news?

Complicating matters for the Globe is the challenge of running two news websites – one free, the other paid – side by side.

Globe Editor Martin Baron said dual sites makes perfect sense because they give readers choice. And he doesn’t apologize for asking readers to pay.

“We have a paywall around our journalism already. It’s called what people pay for the newspaper,” Baron said during a panel discussion sponsored by the Nieman Journalism Lab at Harvard in September.

For the Globe, anyway, success will not be either a large online audience or stable circulation. It will be both.

Zynga makes money off friction

A common misconception is that Zynga makes its money off of advertising.   While advertising revenue does power some (mostly mobile) games, like Words with Friends, the vast majority of Zynga revenue comes from in-game purchases.   Players can spend real money for in-game currencies like “farm cash” (Farmville) or “crowns” (Castleville).  These currencies can then be spent in the game.   Often these currencies are spent on special décor items that look unique or give a player a special advantage (an example might be a special statue that prevents your crops from rotting).  These items, for the most, part, don’t add friction to the game.

But the second, and increasingly prominent, source of revenue does:  players spend money to get through “gates.”   A “gate” is a general term for a sort of barrier game designers build into a game.     Zynga often uses these.  The image below from CastleVille, one of Zynga’s latest games, shows an example:

http://www.flickr.com/photos/71210987@N02/6439187535/in/photostream

(I had difficulty inserting images into this blog, so you’ll have to use the link to a public flickr account…)

Here, I (I’m currently at level 11 in the game) am following a quest given me by one of the games characters to improve my kingdom.  I needed to do 3 activities to get past the quest.  As you can see, I’ve completed the first two: I did built a Chateau and collected taxes from it 3 times.  But the third task, collecting mystery meat to feed the Duke, remains undone.  Why?  Because I can’t complete it alone.   I have to ask my friends to send me “mystery meat” through a post on facebook.  In fact, I’ve asked 3 times already, but by some combination of facebook platform changes that push these feeds down in priority and the fact that most of my in game friends are busy people themselves and don’t take time to help, I am stuck.

The only way in my case to progress through this now after 3 fruitless days of un-responded to mystery meat posts is to spend 18 crowns, the premium currency.   How much is 18 crowns worth?  At least $1.80, if you go by today’s crown prices:

http://www.flickr.com/photos/71210987@N02/6439187623/in/photostream

Now, I’m a patient man.  So I’ll keep waiting.  But $1.80 isn’t that much, right?  Wouldn’t it be nice just to pay it and move on?  I think that sometimes.  But I haven’t cracked yet.  But with ~200 million active monthly players, even if only a small percent does, that adds up to serious revenue.

But remember, even if I were one of those individuals who paid through this, I wouldn’t be happy about it.

Deep down, I and every other paying player knows:  Zynga makes money by purposefully building in barriers to its games.  Said another way, it could make its games better, but chooses to build in these defects so that they make money.

Why this is a problem

You could look at Zynga’s meteoric rise and say: why is this a problem?  Even if these gates exist, no one is forcing people to pay!  Players could always vote with their time and quit playing.  They haven’t.  Millions still play Zynga’s games.  They’ll make over a billion dollars in revenue this year.   How can this be a problem?

One word: burnout.

Search any Zynga game’s forum for the word “quit” and I guarantee you’ll find threads with quotes like these:

http://www.flickr.com/photos/71210987@N02/6439187671/in/photostream

Of course with millions of players, some will quit and complain.  Doesn’t necessarily mean it is a problem.  I’ll grant that I don’t have evidence to quantify the magnitude of the problem.  But I’ve done consumer research long enough to know that the passion with which their best, paying customers write these sort of things is definitely something to worry about.

From another angle, Zynga’s games have been in decline in terms of active users.   Are you going to tell me this isn’t related?

(Link: http://www.gamasutra.com/view/news/38772/Analyst_Zyngas_Castleville_Success_Offset_By_Other_Declining_Titles.php)

It is inevitable given Zynga’s structure

What compounds all of this is what has made Zynga so successful: a culture of management by numbers.  Four years ago, traditional gaming companies would never have thought to build games like Zynga’s.  But Zynga was willing to experiment, to see what worked, and to relentlessly iterate.  That is what led them to try selling 100 dollar packages of virtual poker chips.  To try selling people purple cows. They tried it. People responded.  So they kept doing it. Great business.

The problem?  There is little on the other side to stop it from going too far.

Imagine you’re a product manager at Zynga.  You have a goal for your game: increase revenue.   You have a clear set of tools to do it:  add more and ever harder gates.   Of course, as you do this, people complain, and some of them quit.  But you’re very metrics driven.  And the revenue you make is immediately and very accurately measurable.  The effect on player quit rate? Isn’t.   A player may not quit right away.  And even if they did quit right away, could you really tie it to raising a viral gate? Or maybe they just quit naturally because they got bored.  It is really hard to accurately measure the “cost” of making gates ever higher.

And so over time, per good, measurable business practice, the games get harder and harder.   Players eventually get angry, make posts like the one shared above, and stop paying, then stop playing.  Some vow never to come back to Zynga games again.

A potential, disruptive business mode alternative

The opportunity to disrupt this is clear, bring in a second party to subsidize the players.  With a heavy emphasis on in-game advertisements, a game could almost completely eliminate many of the gates described (some may be necessary to encourage viral growth… but again, if the game were fun enough, like Angry Birds, it could spread without it).  Imagine a city builder game where every commercial building was not generic, but sponsored.  No more burger joint, hello McDonalds.  No more local bank, hello Bank of America branch.  Etc.  Zynga does some of this, to be sure, but for some reason advertisers only engage temporarily  (Best Buy stores, for example, reverted to generic “electronics stores” after about a month)  Synergistically, these real-world representations would improve game play.  People want to be able to represent real world examples and things they like in their game.     The brands too, would benefit from the awareness created by in game interaction.  You could even allow them coupons and other in-game promotions to sweeten the deal.    A game could act as a two sided platform, bringing players and brands together for mutual benefit.

Such a business model would admittedly be challenged by having less cash to spend on customer acquisition (presumably, the ad-only model wouldn’t make enough, at least initially, to overcome the foregone revenue from not using Zynga-like gates).   But an “always free” marketing pitch would resonate strongly with players burned and annoyed by the friction of Zynga-style games.   If you could tap into their discontent with a free promise, customer acquisition could come efficiently.

And while the suggested model above is something Zynga could technically do.  I bet the temptation to earn more through gates will prove too much.  Especially once they become public and face pressure from external investors.

But if I were in charge, this sort of problem would keep me up at night.

]]> http://www.onlineeconomy.org/friction-money-at-zynga/feed 3 http://www.onlineeconomy.org/ontornet-to-internet http://www.onlineeconomy.org/ontornet-to-internet#comments Thu, 01 Dec 2011 21:14:46 +0000 Dina Sidani http://www.onlineeconomy.org/?p=793  After returning to Lebanon this past summer, I realized what I appreciated the most about the US was its “online economy!” No more one-click purchases, no more choosing what I wanted to watch on Hulu and Netflix, no more flash sales in Lebanon! Let’s not forget about downloads; movie downloads on iTunes had to be planned days in advance. If I wanted to watch a YouTube video, I opened the video before leaving the house and let it load so I could watch it without interruption when I returned. Google maps could show me roughly where Beirut, the capital, is. The internet in Lebanon was recently dubbed “ontornet” – ontor meaning “to wait” in colloquial Arabic. It is currently ranked 163^rd out of 174 in the world on the speed of internet there. Hopefully, this is all slowly changing.

The most significant impediments to a more progressive online economy in the Arab region are behavioral issues: lack of awareness, lack of training, and a lack of trust in the online world. While “googling” something is second nature in the US, many Arabs are not aware of the benefits of using the internet. My father (a US-educated surgeon) still pulls out the Encyclopedia Britannica from our library sometimes to get information or to prove a point even though he has a laptop and a smart phone! The language barrier is also an obstacle in Arab countries, particularly those like Yemen or Iraq where Arabic is the only official language of the majority of people, and only 1% of websites are in Arabic.

As mentioned earlier, the slow speed of the internet, particularly in developing countries such as Lebanon, has been a substantial problem in internet usage. This problem is a result of infrastructure issues, one which the government in Lebanon has promised to solve for a while now.  Costs of high bandwidth in the region are still steep, if available at all.

The lack of an online payment infrastructure is also a huge hurdle to improving e-commerce in the region.  In addition to the lack of trust in the available payment systems, there are no risk management systems to prevent fraud. Only 6% of internet users in the region shop online as a result. To add to the poor payment infrastructure, delivery systems are also very unreliable in most of the region. I don’t even know my address in Lebanon; to me it’s “the building after White House Suites with Hugo Boss downstairs.”

Although there are many obstacles to overcome, the region has recently witnessed an improvement in internet usage. Internet penetration in the Arab world has increased over the past five years from approximately 15 million out of 350 million people to 70 million. While this is still low, it is a significant improvement and is expected to reach 150 million users by 2015 (these numbers vary from one source to the other – another barrier to entrepreneurship is the lack of data to guide business planning).  This increase in users has triggered an entrepreneurial response in the online industry.  There are several promising factors that signal a better future for the online economy in the Arab world:

1. 2011 experienced a jump in investments in the industry: 48 investments took place in the first 8 months of 2011 vs. 17 investments in all of 2010.
2. Yahoo acquired Maktoob for USD 165 million in 2009, surprising many people in the Arab business world and playing a large role in improving investors’ appetites for internet startups.
3. In 2010, group buying websites were attracting a large number of users, giving e-commerce a big push in the region. About 8 sites, including Groupon, and locals such as GoNabit started up in 2010.
4. The emergence of many technology incubators and supporters of entrepreneurial startups has helped play a big role in providing the ecosystem that is highly lacking in the region.
5. While there is debate around the impact social media had on the revolutions that have been going on in the Arab world, there is no doubt that the internet’s ability to catalyze these events has brought a lot of awareness to the benefits and potential of the internet in the region.
6. Although rankings of internet speed such as Lebanon’s are still very low, they are moving up. The UAE for example is ranked higher than the US. 

And while I won’t be enjoying one-click shopping anytime soon in Lebanon, I believe we have come a long way in the past few years.  As internet penetration picks up and infrastructure is improved, the incentives for entrepreneurs to start up online companies are growing and will hopefully result in better quality sites and in turn even more active users.

1.       A general framework for innovation protection: Advantages and downsides

Society, predominately through its legal frameworks, attempts to protect certain types of innovation in order to allow the benefits of the said innovation flow to the innovator.  The rationale for this is clear: if innovation was not protected, any idea could be copied and the player with the most resources would consistently win through quick development and commercialization.  Legal protection is a way to maintain an incentive to innovate for all potential inventors through a guaranteed temporarily monopoly.

However, there is a downside to this policy: it prevents effective competition from coming into the market.  The absence of competition is often synonymous with suboptimal product development, suboptimal product diffusion across markets, and suboptimal prices.

2.       The case of business model innovation

As things stand, such protection is not afforded to business model innovation.  This raises the question whether such protection should also be extended to this form of creation.

A first argument against such protection is whether there is something precise enough to protect. Contrarily to a pharmaceutical company that can patent the physical structure of a newly developed molecule, business model innovation can be very vague and difficult to patent.  A website “where people can post information about themselves and make it accessible to others” already existed when Facebook was created, for instance.  

Secondly, if business models were protected, customers would have a suboptimal access to innovation.- especially so in the case of a business concept that requires significant resources to roll out and adapt across markets.  Compared to a molecule that can easily be replicated independently of the market, business concepts are much slower to expand, and resources-constrained start-ups are not always the best platform to develop an idea simultaneously across different markets.

Lastly, there is a strong argument to be made in regards to innovation itself.  If business concepts were protected, it would be very easy to protect various forms of theoretical business models without a bona fides intention to act upon it in order to reap financial rewards in the future (much as we have seen through domain name grabbing, for example).
Furthermore, true business model innovation is often subtle and takes its inspiration from others (Google from Yahoo, Birchbox from book of the month etc.). Viewed from this lens, innovation may be stifled if wide and comprehensive protection was afforded to a comparatively small range of ideas.
Often the initial innovator is not the one with the best version of an idea. The existing competitive dynamic allows not only new but also the best business models to survive, with the ultimate winner being the consumer.

Indeed, successful business models can seek other forms of protection through Trade Mark laws.  This arguably is a better method of protection as it centres the scope on consumer perception and only extends to businesses consumers deem worthy.

For many reasons, it seems not only difficult but also non-desirable to protect business concepts from being replicated.  But is there a risk that this ability to clone business concepts endangers actual innovation? Recently we have the emergence of several platforms that specialize in cloning business concepts in different markets, often provoking angry reactions from the initial innovators (see airbnb reaction to cloning by the Samwer brothers: http://techcrunch.com/2011/06/09/airbnb/).  The question is therefore how best to manage these divergent demands of the consumer and entrepreneur in an equitable manner.

 3.       What is the best way to address the specific problem of business cloning?

Transfer of business models across geographic boundaries appears initially to offer little in the way of true or differentiated innovation.  However, it does allow consumers in other areas of the globe to benefit from the invention in a timelier manner as we saw previously.  Ultimately the clone in this example must also modify its offering to the local market in order to succeed.  It must actually differentiate itself sufficiently from the original concept to be successful as there are virtually no barriers to entry to prevent the original innovator into the market aside from time and resources.  Arguably this in itself can be considered an innovation and, indeed, the initial business may also learn significant lessons from the clone in order for it to win out in its domestic market.

Protection across geographies would effectively allow the original innovator to enjoy a free option as to whether to pursue the opportunity or not.  While it seems fair that the original innovator should be entitled to financial gain in other regions, the best way to do so may be through redefining the problem and viewing such cloners as potential partners as opposed to allowing consumers in these foreign markets to be subject to the whims of the expansion plans of the original entrepreneur.  As alluded to above, the major hurdle of capacity and resources can be addressed by such partners, allowing all participants to capture the upside of a global footprint.  The partners would offer their resources and market expertise in exchange for the processes and trademarks already developed by the original inventors.

Business success has always required timely execution to avail of the window of opportunity.  By reframing the problem as an opportunity of partnership, the most important constitutes in this picture – entrepreneurs and consumers – can both be best served.

 To name a few:

Regulatory hurdles:  As large public entities that deal with children, the public school system faces heavy and complex regulation from federal, state, and local authorities.  As a result, one of the most challenging areas to navigate is procurement.  Schools and school district employ time-consuming, bureaucratic processes that select vendors largely on cost.  It is enormously difficult for start-ups to sell innovative solutions into these systems.

Local control and siloes: Furthermore, these systems vary district to district.  Despite the fact that public education has clear system of organization, that system is largely local and thus more difficult to access.  On the surface, these 15,000+ school districts look similar and have similar responsibilities, but in reality they operate very differently.  Simply figuring out who in the district has decision making responsibility for both the purchase and implementation of a new model is a challenge in and of itself.  Furthermore, many, particularly small districts, are insular and therefore it is unlikely that exciting innovations will move virally from district to district.  Marketers will need to push user adoption onto individual districts, schools, and teachers – a costly proposition.

Limited capacity for change:  Perhaps the biggest barrier of all is the culture of public education.  Public education is resistant to change and innovation.  Our public schools look largely the same as they did a century ago.  It has a culture that supports the status quo, lacks competitive incentives to improve, and has powerful political interests that are invested in the current system.  It’s a scary industry to sell real change to.

But there is hope.  While I am skeptical about the ability of network-based business to take root within the public schools, I am bullish on their ability to take root in education at large.  This is not at all a subtle distinction.  Education is not consumed only in formal schooling but in many more informal shapes and contexts.  In fact the nature of public schools may actually drive the success of these businesses outside the formal constraints of public education as students and teachers thirst for ways to consume more content and connect with each other.  It’s no wonder that the most successful education network to date, Khan Academy, is actually a consumer-based network that exists entirely outside of the public education system.  To date, Khan Academy’s online lectures have been delivered over 80 million times, all through direct to consumer means.  The value of the network is in the content itself and the almost non-existent barriers to access (i.e., it’s free, simple, and open to everyone).  If Khan Academy had been established as an inside the system model where the modules were used in classrooms, it would have captured only a miniscule slice of its current user base.

Another successful education network that is taking off is driven by Teach for America (TFA).  While started in the offline world, TFA is quickly moving its presence online to connect its alumni with each other and with relevant content.  But again this network is built outside of the system.  They have targeted a smaller group of like-minded and demographically similar individuals (recent graduates of elite colleges) that have shared experiences (participation in the TFA corps).  The public school system plays no part in the model.

While it seems impossible to start building a network-based business inside the public schools, I wonder if businesses will be able to move inside the system after demonstrating success outside of it.  This borrows from Clay Christensen’s theories of seeding disruption in non-consumption – you avoid the pain of going head to head with incumbents by targeting users who have no alternatives.  Khan certainly took this approach and now they are actually beginning to move inside by launching their first pilot program in the Los Altos public school district.

Note one final thing – both Khan Academy and Teach for America are not-for-profits, bolstered by foundation money.  As such, they value sustainability and impact over profit and are willing to be more patient for growth.  Those investors and entrepreneurs looking for profits should consider the sad truth of public education: everything moves slowly.