Silicon Valley Tries to Remake the Idea Machine

Silicon Valley Tries to Remake the Idea Machine

JUNE 10, 2014



Like any supersecret lab that’s supposedly trying to invent the future, Google X looks rather nondescript from the street. Besides the occasional hot pink driverless car parked out front, the facility is an archipelago of unmarked, low-slung, redbrick buildings, more Sunset Park than Silicon Valley. Inside, however, whiteboards offer clues about what exactly the future — at least as Google sees it — might look like. And while some diagrams — including one with parts labeled “snooze” and “set time” — suggest more mundane inventions, others, like one outlining a “space elevator,” seem a bit more ambitious.

Silicon Valley, where toddler-aged companies regularly sell for billions, may be the most vibrant sector of the U.S. economy, fueling a boom in markets from housing to high-end toast (how many $4-a-slice artisanal bread bars does a place really need?). But as recent innovations — apps that summon cabs, say, or algorithms that make people click on ads — have been less than world-changing, there is a fear that the idea machine is slowing down. And while Silicon Valley mythology may suggest that modern-day innovation happens in garages and college dorm rooms, its own foundations were laid, in large part, through government research. But during the recession, government funding began to dwindle. The federal government now spends $126 billion a year on R. and D., according to the National Science Foundation. (It’s pocket change compared with the $267 billion that the private sector spends.) Asian economies now account for 34 percent of global spending; America’s share is 30 percent.

Perhaps more crucial, the invention of much of the stuff that really created jobs and energized the economy — the Internet, the mouse, smartphones, among countless other ideas — was institutionalized. Old-fashioned innovation factories, like Xerox PARC and Bell Labs, were financed by large companies and operated under the premise that scientists should be given large budgets, a supercomputer or two and plenty of time to make discoveries and work out the kinks of their quixotic creations. Back then, after all, Xerox and AT&T, their parent companies, made so much money that few shareholders cared about the cost. “It’s the unique ingredient of the U.S. business model — not just smart scientists in universities, but a critical mass of very smart scientists working in the neighborhood of commercial businesses,” says Adrian Slywotzky, a partner at Oliver Wyman, the global management consulting firm. “Then that investment was cut way back.” By the ’80s, AT&T was being taken apart by the government; Xerox PARC, like other labs, was diminished by impatient shareholders and, in some cases, the very technology it helped create.

Most of the insurgent tech companies, with their razor focus on advancing the Internet, were too preoccupied to set up their own innovation labs. They didn’t have much of an incentive either. Start-ups became so cheap to create — founders can just rent space in the cloud from Amazon instead of buying servers and buildings to house them — that it became easier and more efficient for big companies to simply buy new ideas rather than coming up with the framework for inventing them. Some of Google’s largest businesses, like Android and Maps, were acquired. “M. and A. is the new R. and D.” became a popular catchphrase.

But in the past few years, the thinking has changed, and tech companies have begun looking to the past for answers. In 2010, Google opened Google X, where it is building driverless cars, Internet-connected glasses, balloons that deliver the Internet and other things straight out of science fiction. Microsoft Research just announced the opening of a skunk-works group called Special Projects. Even Bell Labs announced this month that it is trying to return to its original mission by finding far-out ways to solve real-world problems.

All of their parent companies, however, are determined to learn from the mistakes that Xerox and AT&T made, namely failing to capitalize on their own research. It’s Valley lore, after all, that companies like Apple and Fairchild Semiconductor built their fame and fortune on research done at Xerox and Bell. Instead of focusing on basic science research, “we’re tackling projects that advance science and solve significant problems,” says Regina Dugan, the former director of the Defense Advanced Research Projects Agency (Darpa), who now runs a small group inside Google called Advanced Technology and Projects. “What this means is you’re not compromising this idea of doing really important and interesting science and this sense of it really mattering.” To put a finer point on it, Astro Teller, who oversees Google X, told me: “We are not a research center. We think of ourselves as a moonshot factory, and the reasons for using that phrase is the word ‘moonshot’ reminds us to be audacious, and the word ‘factory’ reminds us we have to industrialize it in the end.”

There is a decidedly 21st-century quality to Google X. Teller dismisses the old “academics on steroids model.” (He would know. One of his grandfathers, Gerard Debreu, won the Nobel Prize in economics, and the other, Edward Teller, was an early physicist on the Manhattan Project.) Instead, Google X does the inverse: It picks products to make, then hires people specifically to build them: artists and philosophers and designers, many of whom don’t even know what they’ll be working on until they join. (Sample job interview question: “Do you like yellow?”) The idea, in other words, is to recreate the institutionalized and research-predicated model of Bell Labs while also trying to get rich off it.

There is worry, however, that if no major company is doing the basic science to invent new things, there will be nothing left to invent in a decade. “A big part of research is just chipping away at a problem,” says Peter Lee, the head of Microsoft Research, which is a more academic-minded R. and D. group. “At some point, maybe it’s a decade, you suddenly pass a tipping point and completely change the world.” Teller agrees but says it’s not his concern: “It’s absolutely the case that many of the projects we’re working on rely on the academic work of the last 30 or 40 years,” he said. “But I don’t think places like Google X should necessarily be responsible for basic research. The word ‘basic’ implies ‘unguided,’ and ‘unguided’ is probably best put in government-funded universities rather than industry.” It may take decades to see who is right.

A new idea, once it finds some guidance, typically travels along a path from germination to manufacturing to commercialization. The United States is good at selling stuff, but so are other countries. When Bell Labs was in its heyday, America was still very much a manufacturing nation; we made cars and steel and everything from televisions to sneakers to processed foods before sending them to consumers worldwide. Now, by and large, we make ideas. Apple’s big invention wasn’t making a better phone; it was coming up with the idea in the first place. Google’s founders thought of a better way to search the web and created a service that no one else could replicate. Now the big Silicon Valley companies find themselves in the same vulnerable position as the incumbents whose business models they once overturned. They know it is only a matter of time before the next big idea puts them out of business — unless they are the ones to come up with it.



About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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