Innovation: Not Just for Products Anymore

It’s good to be the king. Pack leaders get to set the pace, choose which trail to take and be the first in line when everyone arrives.

Of course, it is important for pack leaders to constantly pay attention to the pack. Being in front often means being the last one to notice when the pack takes off in another direction. If a frontrunner forgets to periodically look behind, it may come as quite a shock to realize that being in front is not so good if it results in being lost and alone.

Sector Leaders

When it comes to commercial products, changes are relatively easy to track. IBM was once the undisputed leader in business computers — everyone else had to follow. Back then, booting up a business computer took several people working over several days.

Then, some upstart from way, way back in the pack came up with a business computer that sat on a desk. To top it off, only a flip of a switch was required to boot up the machine in a matter of minutes. That was the Apple II.

As the story goes, someone brought an Apple II to an IBM executive and flipped that switch for him. IBM realized there was a good chance that some of the pack behind it was about to head off in a different direction. So IBM decided to invest its resources in the emerging market of the desktop computer.

Disruptive Innovation

Innovation can be amazing, but it can also be disruptive. Some business models can be disruptive too, but they are easier to overlook than product innovations, which generally have more obvious impact. An innovative product can be bought and played with. A business model can just slide in under the radar, which is usually where the real disruption occurs. Of course, if you are on the side of the disruptor, that can be great news.

Consider all the disruptive innovation in the 12 or so years since the commercial use of the Internet became commonplace. Not a lot of it was in actual products. Sure, some improvements were made to hardware products and software, but the really important shifts were in revenue models. The underlying protocols for communications were developed early on, and for the most part, they are still in use. There is not much need for ongoing innovation.

For example, long ago we settled on HTTP for the protocol to transport Web pages and that is still in place. However, when we compare related business models from back then to those more common now, quite a bit has changed.

Funding and Mindshare

Funding and mindshare can be indicative of disruptions. There is money to be made in paradigm shifts and everyone feels a need to talk about it. Consider all of the innovation in the early days of commercializing the Internet. The bulk of the investment and mindshare went into ventures that proposed new business models rather than new products.

In those days, the primary source of revenue, investment and mindshare went into infrastructure. Products and services revenue came from selling the means to connect to the brave new world online. Then came the banner ad, and that entirely changed the landscape. There were no technical changes needed for banner ads; HTTP and HTML already supported placing images into Web pages. The difference was that now Web page providers could make money off of page views, turning Web servers into virtual ATM machines filled with unlimited supplies of cash.

The same is likely to be true in the future. The most disruption will not be in the products developed, or the software written, but in the innovative ways entrepreneurs create to generate revenue from their innovations.

Business Models

You don’t have to be a fortune teller to predict that the next wave of disruptions in software is going to be business model changes, and that the changes will be based on the licenses used for the software. We can already see several leading indicators of this trend.

One leading indicator is the fierce opposition coming from the current pack leaders. We’ve already seen a number of large software companies that rely on per-copy revenue attack open-source licensing in general. More specifically, the attacks are focused on open-source licenses with restraints on downstream restraints (such as the GPL with its “copyleft” concept). That leads me to conclude that copyleft-style licenses are likely to be at the core of the most disruptive new business models.

One company even went so far as to try and scare developing software industries in other countries into avoiding copyleft licenses. As the argument goes, copyleft licenses are predatory attempts by U.S. companies to require emerging economies to disgorge their developments. They benefit those rich U.S. companies and thus they should not be used. Thus, around the world, governments are toying with the idea of requiring or encouraging use of open-source software. This causes proprietary vendors to fight back. That’s disruption, pure and simple.

Novel Concepts

There are companies that are making money from open-source software, including software licensed under GPL-like licenses. Some use a business model that allows them to give away some software in return for the revenue they gain from selling other products. For others, the business model is to sell the software along with a relationship, as Red Hat does.

One entirely novel business model is the job-seeker model. Just create great software and get it out there. Your return will be a good job with a great employer.

This is the nature of innovation. Large, successful organizations will try to protect their position and use their energies to that end. Upstarts without institutional baggage will just create the next best thing without worrying about protecting their market share, because they don’t have any.

Expect to see that in other countries. While U.S. companies spend their energy trying to protect their market share, that may distract them from keeping up with others who are free to innovate without worrying about market share. Let’s face it, a small team of smart programmers dedicated to some open source project is practically unstoppable.

Proprietary Licensing Has its Place

Even the most strident open-source advocates have to — or at least should — acknowledge that proprietary, closed-source licensing has a place. Where the end user is necessarily a pure consumer of a product, there is no loss of flexibility if the end user does not have access to the source. This particular end user just wants a product. He or she will never write software. If that is the case, then perhaps the proprietary license is appropriate, as the developer can recoup the costs of development using a simple, tested business model.

Neither side in the debate can afford to ignore this reality. It means that we have to recognize when the proprietary model is appropriate and works well, but also when it is not appropriate and only works until new business models overcome the old paradigm.Good pack leaders can tell the best direction to take the pack. They also know don’t need to be reminded to constantly look behind them to see if someone else has come up with a better way to go.