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Schumpeter ColumnI’m thrilled to hear that the Economist has just launched a new column about business, innovation and entrepreneurship in honor of Joseph Schumpeter (1883-1950), the brilliant Austrian economist who,

argued that innovation is at the heart of economic progress. It gives new businesses a chance to replace old ones, but it also dooms those new businesses to fail unless they can keep on innovating (or find a powerful government patron). In his most famous phrase he likened capitalism to a “perennial gale of creative destruction”.

For Schumpeter the people who kept this gale blowing were entrepreneurs. He was responsible for popularising the word itself, and for identifying the entrepreneur’s central function: of moving resources, however painfully, to areas where they can be used more productively. But he also recognised that big businesses can be as innovative as small ones, and that entrepreneurs can arise from middle management as well as college dorm-rooms.

Schumpeter’s work on the dynamism of high-tech markets (later married with Clayton Christensen‘s concept of “disruptive innovation“) is one of the most persistent themes across cyber-libertarian thinking of all stripes on a wide variety of issues. You can listen to an interview with the new column’s author on the Economist podcast here (MP3). One important point the author makes is that Schumpeter realized that celebrating capitalism did not preclude criticizing individual capitalists when justified and vice versa—something all too often forgotten today.

Yale Clock TowerThe Wall Street Journal reports today that student loan borrowing for college “in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion,” with the average student borrowing $13,172 to pay for college. So it should come as an enormous relief that one Internet start-up, StraighterLine, has essentially made the university fully virtual, offering classes for just $99/month.  While this may seem like a boon for students, especially the millions of Americans for whom even community college tuition seems an insurmountable obstacle to climbing up the economic ladder, such “e-Learning” offerings are already, predictably, coming under attack by entrenched interests in “Big Ed” (the professoriat!) as the “media-software–publishing–E-learning-complex.”

In Washington Monthly, Kevin Carey explains why “The next generation of online education could be great for students—and catastrophic for universities.” In a nutshell, the story is the same basic theme of Chris Anderson’s book Free!: digital distribution of information will ultimately drive costs down to zero. Carey shows how universities are essentially facing the same sorts of pressure from disruptive innovation as newspapers—except with more capital costs:

Colleges are caught in the same kind of debt-fueled price spiral that just blew up the real estate market. They’re also in the information business in a time when technology is driving down the cost of selling information to record, destabilizing lows.

In combination, these two trends threaten to shake the foundation of the modern university, in much the same way that other seemingly impregnable institutions have been torn apart. In some ways, the upheaval will be a welcome one. Students will benefit enormously from radically lower prices—particularly people like Solvig who lack disposable income and need higher learning to compete in an ever-more treacherous economy. But these huge changes will also seriously threaten the ability of universities to provide all the things beyond teaching on which society depends: science, culture, the transmission of our civilization from one generation to the next.

Whether this transformation is a good or a bad thing is something of a moot point—it’s coming, and sooner than you think.

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Jerry Yang’s departure as Yahoo! CEO opens the door to a renewed bid by Microsoft to buy Yahoo!’s search business (or Yahoo! itself).  Such a merger could produce a significantly stronger challenger to Google in the search market.  With this possibility in mind, the WSJ just ran a fascinating history of the “paid search” The search marketbusiness—the placement of “contextually targeted” ads next to search engine results based on the search terms that produced those results.

In a nutshell, Microsoft failed to see (back in 1998-2003) the enormous potential of paid search—just as small start-ups (such as Google) were starting to develop the technology and business model that today account for a $12+ billion/year industry, which is twice the size of the display ad market and which supports a great deal of the online content and services we have all come to take for granted online.  Microsoft first put its toe in the water of paid search with a small-scale partnership with in 1999-2000.  But this partnership failed because of internal resistance from the managers of Microsoft’s display-ad program.  In 2000, Google launched Adwords and thus began its transformation from start-up into economic colossus.  By 2002, Microsoft realized that it needed to catchup fast, and approached (by then renamed Overture) about a takeover.  But Microsoft ultimately chose in 2003 not to buy the startup because  Bill Gates and Steve Ballmer “balked at Overture’s valuation of $1 billion to $2 billion, arguing that Microsoft could create the same service for less.” 

Microsoft, meanwhile, spent the next 18 months deploying hundreds of programmers to build a search engine and a search-ad service, which it code-named Moonshot. The company launched its search engine in late 2004 and its search-ad system in May 2006.

But Microsoft’s ad system came too late:

Advertisers applauded Moonshot for its technical innovation. But Microsoft had trouble coaxing people to migrate to its search engine from Google; advertisers were unwilling to spend large sums on MSN’s search ads. By building a new system instead of buying Overture, Mr. Mehdi says, “we really delayed our time to market.”

What’s most fascinating about the piece is that it seems to suggest that Microsoft missed its opportunities to get into paid search not because it was “dumb,” “uninnovative” or a “bad” company, but for the same sorts of reasons that big, highly successful and even particularly innovative companies fail.  The reasons companies generally succeed in mastering “adaptive” innovation of the technologies behind their established business models are the very reasons why such great companies struggle to encourage or channel the “disruptive” innovation that renders their core technologies and business models obsolete.   Continue reading →