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The power of open innovation

Podcast episode 63

Openness offers a lot of promise to CSPs, but it is not a panacea. Henry Chesbrough, expert, author and professor at University of California Berkeley explains why you must embrace open innovation for 5G success and where all the pitfalls lie.      

Below is a transcript of this podcast. Some parts have been edited for clarity

Michael Hainsworth: Open Innovation isn’t a new idea — but it is for the telecommunications industry. For generations it siloed its departments and staked its turf. And where did it get them? Connectivity that was just taken for granted. That’s changing with 5G. Communications Service Providers recognize they need to rebuild their corporate culture and embrace partnerships to make the next generation wireless technology viable — and profitable for all involved. It’s also critical, according to the professor and faculty director of the Garwood Center for Corporate Innovation at the University of California Berkeley and author of three books on the subject, Henry Chesbrough to embrace Open Innovation. But what exactly is Open Innovation?

Henry Chesbrough: I define open innovation as a distributed model of innovation involving knowledge flows across organizational boundaries for both monetary and non-monetary purposes.

MH: All right. Now, what does that actually mean?  

HC: Well, it's one sentence, but you're right there's a lot in it. It means that organizations that used to do everything from the laboratory to the market, inside their own four walls, are instead doing things much more openly and collaboratively along that journey. And that has two primary flows. One from the outside in; from the outside to our own innovation process and markets. And then the second set of flows from the inside out; from our internal technology and research to other pathways to market. So those are the two main flows of open innovation. Outside in, inside out.

MH: I suppose at the end of the day what we're saying here is that if you really want to be an innovator, you have to open your organization to outside individuals. You can't accomplish your goals by yourself.

HC: That's right. I think the underpinning of this idea is that all of us know more than any one of us and that none of us on our own know enough, these days, to be able to achieve all that we can. And if we do embrace this more open model, we can get a lot more done, and we can often get it done faster.

MH: So then how has your thinking evolved over the course of the last 20 years of writing a series of books on this exact topic?

HC: Well, you're right. The first book came out almost 20 years ago, and at that time, my thinking was, I think there's been a shift in the models that we use. From a vertically integrated model, from a complete control from start to finish where we do it all ourselves, to a more open model. And then here are some examples of how that's working in different industries. And I thought, if I describe this and explain the change and the logic, then organizations will start to change. And some of that has been true, but the main development, in my own thinking, is the realization that the hard part of this is not describing the new model. The hard part of this is embracing the change throughout the organization, and that's a much more difficult task than I had understood when I got started on this path.

MH: So then, what needs to change in the environment and the culture to make any organization more open to open innovation?

HC: There's a certain amount of unlearning that has to happen. Many organizations with strong technical staff have this syndrome that is sometimes called the not invented here syndrome, meaning that if we didn't do it, it must not be very important or it must not be very good, because we are the ones that will do it right and we know the important things that need to be done. And that pride comes often from a track record of success. So, these departments have earned their reputation and their pride, but we have to unlearn some of that and let go of some of that, in order to take advantage of what's available on the outside. So that's, I think, one of the things that is a source of friction that gets in the way sometimes.

MH: So then if past is prologue, let's look back so we can look ahead as to what open innovation means in the future. The smartphone, for example. It predates the iPhone launch of the 2007 but is widely believed to have kicked off a wave of innovation that previously didn't exist. What was it about this particular handset that others in the past failed to accomplish?

HC: I agree with you that with the benefit of hindsight, the smartphone has been an amazing change in computing and in our daily lives. And so how did we get there? It didn't all happen at once. And it was several forces that came together. One would be the idea that on the phone that we used to make phone calls and send text messages, we could actually access video content. Another would be that things that showed and shared our archive of music and other things, that could all be there too, and all this could be in your pocket.  

A separate thing was this whole idea of an app economy, that we could have not one or two, but dozens, even hundreds of applications on our phone, and that companies would actually make businesses to create and sell us these applications. These were things that didn't all happen overnight, but over time, collectively, they really have shifted us to a sort of a smartphone centric world. And then I would also say, the young people get credit here because us old dinosaurs, we were dragged kicking and screaming into this world, but they embraced it with passion. And so, I think, all these things came together. 

MH: Well, it's fascinating you say that, because I remember when the iPhone first came out, Mike Lazaridis or Jim Balsillie at Blackberry, one of the two were quoted as saying that they thought it was a toy. And you could compare that device against any other, at the time, smartphone device. And under the hood, it wasn't any more or less powerful than anything else that was already available.

HC: Yeah. In fact, I was working at the time with another cell phone manufacturer, and we'll leave their name out of this, but they had done a tear down analysis, buying an iPhone and taking it apart to see exactly what was inside. And they told me that their overall feeling was one of relief because all of the piece parts were things they already knew about, from companies they were already working with. And in fact, they were buying in much larger quantities at the time.  

So, they were getting better pricing on the same stuff. So, their assessment of this was, (sigh) nothing we can't handle. No real challenge here. I don't think they saw it as a toy necessarily, but the truth is, like the first iPhone, it wasn't that great a phone. The antenna wasn't that good. The battery life wasn't that long. The software was better, but it was a little bit kludgy, and you had to learn how it worked. So, it wasn't beautiful from the very beginning. It took time.

MH: But what's interesting to me about the iPhone as the example, is when it was in fact released, not only from the hardware perspective, nobody was particularly impressed, but they didn't even have the App Store at the time. They themselves had to open themselves up to the broader community for success.

HC: That's right. And we're talking here about the value of openness. And so, at the time that the iPhone was announced, in the New York Times article that announced the iPhone, Steve Jobs was quoted as saying, you know most of what you're going to need on this phone is being provided by us at Apple. And we've made it possible for a few of these other apps too, that maybe we didn't get to yet, but you're not going to need very many of them and it's not going to be that big a part of your experience.

Well, with the passage of about a year's time and the App Store does get opened, there were hundreds of thousands of applications that developed for the iPhone. So, Jobs was spectacularly wrong at the launch, but the architecture was there to open up at launch. And so even though the people leading the charge didn't think it was going to be very important, the rest of us got a vote too. And we decided, you know what, we really like the idea of getting different things on our iPhone and each of us have a different configuration of apps even to this day.

MH: The thing is though, first-mover advantage isn't always an advantage. Sure, iPhone quickly realized they needed to open up to the developer community. Netscape Navigator is the foundational software package that created the worldwide web, but we don't use it today. I mentioned Blackberry; the first commercially successful smartphone. Nobody uses that anymore. Microsoft owns Skype but Zoom ran circles around them during the pandemic lockdowns. How can a company capitalize on open innovation?

HC: I completely agree with your observation that getting there first is neither necessary nor sufficient to winning the game. What is necessary, and perhaps sufficient, is to come up with new and better business models to commercialize those great technologies. So, we were already mentioning with the iPhone, the ability to have all these apps and the entire app economy that was there. And then the business model for the App Atore itself evolved over time. And I think in the one of the meetings that I was told about by a guy named John Riccitiello of Electronic Arts, Jobs and Apple were presenting the App Store and saying, hey, we're doing all the marketing, we're delivering the customer, we collect the money. And for these reasons, we think we should take 70% of the revenue and we'll give you, the app developers, 30%. And the app developers didn't like it, but more fundamentally, they said, listen, if you want us to bring new apps and develop new technologies for this platform, you've got to give us a bigger piece of the pie.

So, as Riccitiello tells it, in that meeting, Jobs flipped the entire formula and gave 70% to the developers and Apple took 30%. And that was enough to stimulate a lot of interest and a lot of creation. So that was, in a sense, tuning the business model to make it something that became commercially much more successful. And then another quick example would be in the browser wars, you were mentioning Netscape Navigator. Google was by some measures, and Chrome, these were things that were the 18th, 20th, 25th browser, but it's the dominant one today.

And I think it's because there's a better business model behind it to collect all the data, to package it and understand it, sell it on to advertisers in a very efficient auction mechanism. These were all pieces of the business model that really allowed the Chrome browser to do what Netscape Navigator was unable to do.

MH: There's a difference though between capitalizing on innovation, as we had seen Jobs do. He first kept this as a closed device, recognized the need to open it up, opened it up, but still had that firm control until the industry basically said, as you point out, this isn't going to work for you unless you are more open, and so, he was more open with the iPhone. But that's capitalizing on innovation. How do you extract value from it?

HC: Value extraction begins with value creation. I think too many companies skip the value creation part and go to the value extraction first and foremost. And we, as customers, we can sense that. And if we see real value for us, we are often very willing to let our suppliers make some money off of us as long as we're getting something we really want and need and can use. What really grinds my gears is when I see somebody trying to take money out of my pocket and they haven't given me much yet. And then it feels much more zero sum you win, I lose. So, I think that's the first thing to say. The second thing to say is in the value capture piece of things, can you create a new stream of value? So that in using Facebook for our social media, we ask our friends to get on Facebook.

This dates me now, because this was a while ago that this was going on, but Facebook has grown to over 2.4 billion users around the planet and they have spent no money on marketing because we have done it all for them, and we've done it for them because it makes that tool more useful for us. So, we are creating the value for ourselves and then Facebook has found a way to monetize that community with the advertisers. So that's, I think, a very not so appreciated secret of capturing value in the open domain. It is finding new streams of revenue from all the data in usage that openness enables.

MH: All right. Let's unwind the last 14 minutes of our conversation by me asking you about a quote from something you've written. You wrote, open innovation is not a panacea. What do you mean by that?  

HC: I am excited about openness as anybody, but having looked at it for some time now, it has to be said that more openness does not always win and organizations that are sometimes very open and other times are not so open. So, it is not a panacea; an answer to all of your problems. There is the challenge, that if you're trying to capture some value somewhere in your system, you are going to need some control point somewhere that isn't completely open for everybody else, or else you will become commoditized by others who are copying directly with you and from you. So that's the first thing. But the second is that this means that openness becomes a strategy rather than a religion. And so, we now think about when to be open and whether to be open, versus always being open, all the time.

Tesla would be an interesting example here. Out in their charging network, they have announced that they're going to provide all of their patents for others to use in the charging systems. And what they're really trying to create is an interoperable system of vehicle recharging. Now, so far a lot of the other companies haven't taken them up on the offer, but that offer is out there. They're trying to be very open. But when you look at their battery technology in the car, they've got a joint venture with Panasonic and they're doing some new research on new kinds of batteries on their own. It's very closed, it's very controlled, because it's a fundamental part of the value of the vehicle. So, the same company is being open in some parts of its business and pretty protective in other parts of its business.

MH: Then let's apply that to the telecommunication sector. Telecom companies provided the backbone for innovative products and services like Facebook and the Apple App Store but have spent the last 10 years being called dumb pipes. How did that happen?  

HC: It's a very good point. I think with the advent of openness and the spread of technologies, and I would say also technical standards have helped here, things that the Telcos used to do that would deliver dial tone wherever you wanted it, that became a commodity. And dial tone became taken for granted. Now the legacy Telcos still have to work very hard and invest a lot of money to deliver the dial tone, but consumers expect that now. And then it's like, okay, I've got dial tone, now what can you do for me? And indeed, the Telcos for decades have been collecting all of this data from us in our daily usage, but they did not know what to do with it. And in some cases, the regulators might have constrained what they could do with it as well. So, the regulatory environment may be a piece of the action.  

By contrast, most of the innovation in the telecom sector has happened higher up the stack in the services that are enabled by, you need the dial tone. But once you've got it, now you can do a whole bunch of new things. Facebook being an old example, a newer example might be TikTok and all these short little videos that people are using. A third example might be going to places like any coastal city in China, where your smartphone is your entire life. Your credit card, your bank, your whole communications network, everything in China can be done on your smartphone now. So that the amount of services that are being delivered is amazing. And so that I think is where the action is now. And with that openness, you now have new ways to try to differentiate and new ways to try to delight your customers. 

MH: The foundation for 5G wireless is built on ecosystems, the types of things we've been talking about. It feels a lot like the App Store model that allows a CSP to turn to an enterprise and provide a bunch of different features and technologies that leverage 5G, because it's got that ecosystem platform. How do we apply the lessons of open innovation to the ecosystems that will provide CSPs with the ability to offer new services to enterprise and avoid that dumb pipe moniker of 3G and 4G LTE?  

HC: I am also very excited about 5G. It's going to enable even different kinds of computer architectures, where more and more processing and computing can be done at the edge. But because it's so robust and so powerful, it isn't entirely clear what the key uses will be initially. And so, companies trying to roll out 5G and trying to build on top of 5G are going to have to take some risks and do some experiments to see which things customers want and will pay for early on. I think with 4G, if you think about when that came out, there was all this capability and performance at the time, and people didn't quite know how it was going to be used.  

And it turned out that things like video were really important to getting 4G embraced. And the video in turn meant things like Instagram or TikTok or these other services that didn't exist when 4G was just getting started. So, I think we're going to see something like this in 5G. It might be IoT related, industrial automation related, but as we were talking a moment ago, you're also going to need business models to sustain that. And in machine-to-machine communication, machines don't read advertisements. So, we need a different way to monetize in that world, and it's going to take trial and error and experimentation to find it. But I think five or 10 years from now, we won't even remember how we lived without it. 

MH: It's fascinating, you made a statement a little bit earlier, and I want to come back to that. A lot of what we've been talking about when it comes to open innovation has been very consumer-centric, very consumer facing, and in the telecommunications space, by and large, with the exception of the individual subscribers to a service, 5G is going to be more about enterprise. And how do we, as you have said, delight and thrill the enterprise customer who will build on 5G, versus the individual end customer?  

HC: I think one way to really engage the B2B world, the industrial world, is to be more transparent and open in your architecture. This means things like including application programming interfaces, software development kits, reference designs, standards, ways that companies can take and build on top of what you've given them. And then in turn, they're going to take that set of services to particular markets and uses. And so, for the 5G providers you don't know which of those uses are going to be most important first. So, the smart thing to do is to enable many experiments to be done in parallel at the same time, and then pay very close attention to what's showing up and what's getting used, and then you can then do more to sustain and penetrate further in those areas. So, I think this openness really works well in the B2B world too, but I agree with you that it works a little differently. 

MH: And I can just imagine a legacy telecom executive, say the old dinosaur type, getting a pit in their stomach just hearing you say, you need to open your 5G wireless network to experimentation. Something that would never have been possible for the end enterprise under previous generations.  

HC: It can be terrifying from a certain point of view. It can also be tremendously exciting from another point of view. Many of the Telcos actually have corporate venture capital programs. And these corporate venture capital programs are investing in new startup companies, very much probing some of these new areas. So, if they actually go and spend time with their own internal staff in those programs, they're going to see a lot of those experiments already underway. And once they start to see some of this, it might be a little more comforting to realize, okay, if we open this up, will anybody come? Will we give a party, and nobody shows up? But if you see that there are already a lot of people out there partying and yeah, they'll be glad to come to your party. But here's what you got to do to get them to come to your party. I think that might be more comforting for many of them. 

MH: So, if we can't always predict what will delight and thrill an enterprise customer, but must be agile enough to respond quickly to these experiments, what are some of the best practices from within the telecom industry that should be applied to open innovation?

HC: One practice that's true in telecom and it applies also outside of telecom is large capable companies have to learn how to work with startup companies. And that might seem like an odd combination, but the startups are bold and fearless. And they hustle. They move really, really fast. They turn on a dime, and these are things that very large companies really cannot do internally for the reasons we've already been discussing. But that's okay. If you can work with outside companies that can do this and then engage with them, you can still get some of the benefit of all that. But you have to change your internal processes to work well with these external startups. Two quick examples, one intellectual property, the startup does not want you to steal their idea. So, you have to figure out a way where you can give the startup protection for what they're trying to do, and still find ways to protect what you're trying to add or build on top of it.

So that's one set of things that have to be discussed, and there's usually a good talent in the organization to do that, but you have to prioritize it and put that at the head of the queue rather than the 13th or 20th thing you're going to work on. The second one's a little trickier. The things that once collaborations are underway, startups tell me their biggest frustration is the company takes too damn long to make a decision. It can be Yes, it can be No, we can work with either one. What we can't work with is we'll get back to you. And we'll get back to you in two weeks. And in two weeks the meeting happened, well, somebody wasn't able to make the meeting, so we need another meeting. And so, weeks go by and in startup world, that is a long time.

And so, companies working with startups have to create a set of processes that abbreviate and accelerate their internal response. And oftentimes what startups are doing, and it's being done at very small scale, and the amount of money involved is quite small. And so, the opportunity is to push down to the frontline organization, the ability to make small decisions quickly. And then if you're going to do something that's going to involve tens of millions, hundreds of millions of dollars, sure, that can be reviewed in a more typical corporate process. But the mistake is to bring the big company processes to bear on every little decision that the startup needs to have made. 

MH: I was going to ask you, what do companies get wrong when adopting open innovation principles? But it sounds like you've also answered that question.

HC: Which gets back to your first question, what's been really hard about open innovation? It isn't about the model itself. It's about all the internal changes that have to happen to get the model to be used successfully. And if I may, I'll add one more category of those changes. When you have a lot of these external ideas show up on your doorstep because of open innovation, they need to be evaluated. And that means the legal people. That means your technical people. It means your procurement people. And all these support functions typically don't get any extra resources in their budgets, but suddenly there's all this new work to do. And this is another example of the challenges that can sink a good open innovation program is you can create so much internal congestion in those reviews, particularly in the support organizations, that instead of getting more innovation, you can actually throttle the very innovation you're trying to achieve.  

There's a lot of promise in open innovation. Instead of the lab being your world, the world can become your lab. But it doesn't come for free. It's not a panacea. It will change the way you have to do business in order to get real value out of it. 

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