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The policymaker's dilemma

Here is an exchange with Robert van Apeldoorn, Journalist with Trends Tendances Magazine in Belgium. (www.trends.be/fr). The exchange took place in early September via e-mail.

Robert: -Information and Communications Technology (ICT) is considered in Europe as a way to push growth, and is a target of national and EU policies (digital growth,etc), but the result seems to be a failure: the European computer industry (hardware) is almost dead (ICL, Siemens computers bought by Fujitsu, Olivetti almost out of computer business, Nixdorf dead) since the 90’, and the telco industry seems to be in crisis. All European companies are out of the handset business (big and fading exception is Nokia, but with  American software), and Alcatel is suffering with telco equipement manufacturing. It seems that at best, Europe can be a good niche player, with companies like ARM (chips). Technology seems to be reduced to localized services (computer services), some software businesses. What do you thing about that point of view? Is it correct or exaggerated ?
What will remain to the European companies ?

The main problem is perphaps the creation of European platform/ecosystems. Almost all are American today: Apple IOS-iTunes, Android, Amazon,…

Why Symbian didn’t succeed as a competitive platform ?

Is it possible to create European platforms? After all, IOS succeed after a short period of time.

What are the European tech companies that could play an important role in the near future ?

My answer: You are correct in this observation. Europe has failed to generate growth on the basis of ICT. The reasons are that the rate of change in ICT is rapid and getting more so. If European businesses require intervention, support or other forms of assistance in terms of policy, the time for that coordination to take effect is longer than the cycle time of disruption.

Almost all growth has come from companies that entered the space. Google, Amazon, Apple and Facebook and even Microsoft came into positions of power from outside the industries they entered. Policy tends to offer means of sustaining incumbents or finding “logical” or defensible entrants. I should mention that the problem of industrial policy failing is not unique to Europe. Japan and to a lesser degree Korea are also facing crises of innovation due to policies designed to sustain rather than disrupt.

It’s understandable given the need to justify spending other people’s money. No policy maker wants to spend it recklessly. However, the process of unforeseen growth is, well, unforeseeable. It cannot be predicted and it’s very likely to come from somewhere other than where you expect it.

This quickly becomes a lengthy discussion, but fundamentally the innovation process is chaotic. It’s very similar to the process of artistic creation. The crisis in innovation comes from not having sufficient chaos. If Europe wants to preserve, sustain, nurture, and maintain it will do so at the expense of creative destruction. Nobody likes chaos but everybody wants innovation. Unfortunately they are concurrent things.

thank you very much for these interesting answer. Usually the answer is the lack of venture capital or the compartimented market.

So Nokia was an exception ?

If a lack of venture capital is the problem then what is the cause of a lack of venture capital? There is plenty of capital on the continent. Why should it not be allocated to ventures? Capital markets in Europe are quite free and liquid and capital will find the best opportunities. The problem is that there are few fundable opportunities.

I think Nokia was not an exception in the sense that it was not a “managed” success. The company (and Finland) emerged from a crisis in the early 90s. The crisis forced a re-evaluation of priorities and the success of Nokia could be attributed to a lack of emphasis in what was considered sustaining at the time (consumer electronics, TVs, natural resources, etc.) Entry into mobile phones was not what policy would have suggested was the biggest opportunity at the time. The market for mobile phones was projected to be insignificant in comparison to what was seen as success of the time (Sony, et. al.)

[Addendum: What are policy makers suggesting as the key investment themes? Which projects get funding today and which don't?]

  • http://alexandersmith.co/ Benjamin Alexander

    Are Chaos & Innovation really concurrent? Seems that chaos historically gives birth to innovation and vice versa, cyclically.

    “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is it’s natural manure.” – Thomas Jefferson

    • Panos

      I would say “symbiotic” rather “concurrent”.

    • dteleki

      So, instead of:

      “Nobody likes chaos but everybody wants innovation. Unfortunately they are concurrent things.”

      Perhaps better is:

      Nobody likes chaos but everybody wants innovation. Unfortunately, chaos is where innovation COMES from — and innovation causes MORE chaos.

  • masquisieras

    I think another problem is that Europe is not a big enough homogenous market most of this recent innovation are only economically viable in high volume. If you need a 10 million initial user/consumers is easier to get a 2.5% of a 400 million market with the initial product than a 25% market in one of the much smaller national ones in Europe because to reach the whole European market you have to appeal a wide number of languages , cultures and customs.

    • http://www.isophist.com/ Emilio Orione

      It’s a global market, especially for ICT.

      • masquisieras

        Not initially, at the beginning you should write your interfaces in some language you should give support in some language (initially in office hour so not too big hour difference between you and your user) and you should cater to the sensibility of your initial supporters that are different depending of culture.

        You can try to sell to everybody but your initial product can’t be directed to everybody unless you have infinite resources

        Your initial addressable market of your product is a fraction of ≈400 million in EEUU and the same fraction of ≈40 million in a country in Europe if you need the same amount of initial supporters to keep running for the first year it would be 10 time easier in EEUU that in any particular country in Europe.

      • http://www.isophist.com/ Emilio Orione

        Of course you initially have to address a niche, but this niche can be everywhere not in your backyard. It can because transport costs are low and manufacturing usually is in other countries.

      • masquisieras

        But where will be easier and cheaper to operate, support and distribute to, advertise in your own backyard or at the other end of the world with a different language, culture , law …, so if you can find the niche in your own backyard is a huge advantage. Any innovative new company will hit internationalization trouble much early in its growth process in Europe than in EEUU.

  • http://www.isophist.com/ Emilio Orione

    Disruption happens in a mature environment and causes a period of chaos from which a new increased market with new incumbents can emerge. Chaos, in this case non linear evolution with accelerated movements, is the result of disruption. It’s like the advent of new paradigma in science, everything seems settle down, then the new ideas take over and a period of chaotic explosion of new ideas take over.
    Policy tend to maintain the status quo, try to avoid chaos so disruption can not have its result.
    Movements in a managed market are slowed down by external forces and things happens at a slower pace, so slow in certain conditions that disruption fails to acquire enough moment to succeed.

  • http://noblepioneer.com/ Tyler Hayes

    Nobody likes chaos but everybody wants innovation. Unfortunately they are concurrent things.

    Should really frame that somewhere.

    • http://www.techmansworld.com/ Michael Hazell

      You should put it on the Disqus quote wall once you guys put that back up. And while you’re at it, can you put one of my quotes on the wall?

      • http://twitter.com/jimhirshfield JimHirshfield

        I think we’ll use this one ^—

    • John Rich

      Wow, that is exactly the quote that wacked me over the head. T-shirts now available at my CafePress store;-)

  • http://twitter.com/fabnet_be Fabian Tilmant

    Advantage of the US is that they have an homogeneous market, which has a critical mass of “middle class”. Thanks to another (lighter, review the Bell Curve) critical mass of Early Adopters/Innovators, Innovation can get traction. No other market in the world has that (hint, look east for next ones) cheers!

    • http://www.asymco.com Horace Dediu

      In technology and communications European Union has caused most if not all barriers to be strictly localization issues rather than market access issues. Europe is (a) a bigger overall market than the US, (b) more concentrated geographically and (c) arguably has better infrastructure for logistics.

      • masquisieras

        but that localization issues are going to be big at the beginning in EEUU you create a product in English and get some person with English knowledge to answer questions and you can reach the whole market.

        To get the same market in Europe you need to operate in English,French,German,Spanish,Italian,Portuguese,Polish,Greek …
        So or you multiply your initial cost or you restrict your initial market

  • Jed Harris

    Horace’s analysis is that the problem is that “there are few fundable opportunities.” But why is that? Certainly academic computer science and practical ability, measured for example by open source contributions are strong in Europe. Very little capital is required to get to a fundable level now, especially since one can host in the cloud.

    Perhaps the answer is cultural factors but I don’t know what those are. If so they must operate to actively suppress ventures, not just fail to support them, or more of them would grow organically (internally funded).

    Is there an identifiable institutional opposition to new ventures? Perhaps support for incumbents somehow suppresses new ventures? Or they have no exit options?

    This really puzzles me and I think it is an extremely important issue in European business dynamics.

    • http://www.isophist.com/ Emilio Orione

      A new venture company must fight with economic rules (the market) and with policy rules that sustains the status quo giving advantage to incumbents. It is often too much to succeed. Things change at a slower pace.

      • Jed Harris

        Not surprising. Is this a cultural difference? Due to more entrenched incumbents? Or what?

        Also, is it subject to change? My second comment addresses this question. If this is the problem then it seems that the real policy maker’s dilemma is that they can’t implement the policy they know would work, due to political barriers.

      • http://www.isophist.com/ Emilio Orione

        Disruption creates new growth and fuels the economy, but disruption cannot be created by policy even if it can be incremented by for instance diminishing taxes on long term investments that are required to capitalize venture companies.
        Current policies seems oriented in sustaining the actual economy, fueling consumption. But that is a zero sum game for the global economy. Consumption does not grow the economy it only maintains the engine in motion.
        Companies are oriented toward cost reduction and optimization limiting long term investments for the sake of short term income that maximizes their indexes and manager’s income but does not create real innovation.
        This is a general trend but in the european market thing are a little worse because the market is divided by local protection policies created by a greater and more deep bureaucratic burden.

    • http://www.asymco.com Horace Dediu

      Of course, I imply a difference between “good ideas” and “fundable ideas”. Fundable ideas are those which meet the criteria of institutional investors. Good ideas are those which create opportunities. Fundable opportunities are good ideas that meet the criteria for institutional investors. That turns out to be very rare indeed. [I might even add here that when I applied for an entrepreneurial grant in Finland I was rejected. I was told that 80% of applications succeed. Since on average most businesses fail I would assume that most of those receiving grants fail however I wonder if the odds are better for those who are rejected.]

  • http://www.noisetech-software.com/Home.html Steven Noyes

    OK. I am going to go out on a limb with a view that will be very unpopular with many.

    One of Europe’s main failings in being able to monetize innovation in ICT is simple. Europe does not respect or acknowledge software patents. Period.

    Like them. Hate them. Whatever. I do not think it is an accident the most powerful players in software:

    1) Google
    2) Microsoft
    3) Apple
    4) Amazon
    5) Facebook
    6) Oracle

    are all companies that are based in the United States, a country that has acknowledged software patents as a means to protect your IP and I do not believe this is a coincidence. If you take away this protection, this limits the chances a company will be able to raise capital to come to market with a new idea.

    Given ICT is becoming more and more driven by software and protocols, unless Europe recognizes the validity of software as an invention, they will loose all competitiveness in this space.

    • http://profiles.google.com/simon.hibbs Simon Hibbs

      You are putting the cart before the horse. None of those companies became successful due to their patents, rather they gained large patent portfolios because they were successful. patents defend incumbents, just as they were designed and intended to do. They do not promote disruption.

      • http://twitter.com/WalterMilliken Walter Milliken

        Overall, I’d agree that these companies succeeded for reasons other than patents.

        However, a key patent (or the promise of patentable technology) is one of the things venture capitalists look for before they invest. Basically they’re looking for something they can sell in a buyout that a large buyer can’t easily duplicate themselves, or more rarely, something that provides a defensible business against competing startups on the road to IPO.

        So it may be that there is a secondary influence on the creation of new businesses in the EU. However, my own suspicion is that the number of languages (and distribution chains for physical products) that needs to be supported across that “uniform market” is more of a barrier.

      • http://profiles.google.com/simon.hibbs Simon Hibbs

        >a key patent (or the promise of patentable technology) is one of the things venture capitalists look for before they invest

        And may they have much luck with that. The best I can say for that strategy is that at least if the company fails they might be able to make a few bucks selling the patent. However the cost and time invested in filing and protecting patents is a huge distraction for startups, for whom time and money are life’s blood.

      • http://www.noisetech-software.com/Home.html Steven Noyes

        Actually, some very big companies, like Google, have that very thing to point to.

        It is simple (and popular) to say patents are evil and serve no purpose for software but the location where successful software enterprises spring up strongly disputes that idea.

      • http://www.noisetech-software.com/Home.html Steven Noyes

        Oh…

        And Amazon with their “One Click” patent. Even FB has multiple patents to protect their IP. All these came before these companies were wildly successful.

      • http://www.noisetech-software.com/Home.html Steven Noyes

        Patents are the horse.

  • Jed Harris

    I guess another point is that the policy maker’s dilemma as you describe it exists only if they want to frame “first order” policy — policy that directly supports specific businesses or well defined growth areas. (This would include well defined growth areas that are not yet represented by real businesses — that has been tried and all of the examples I can think of have failed as well. DARPA could be considered an exception but they don’t try to support businesses built on their technology.)

    If instead policy makers are willing to carry out “second order” policy — to create an environment that supports disruption — I think they can succeed, through tax and business law, and even through direct subsidies that don’t depend on any business definition, and that recognize that most businesses subsidized will fail.

    But this is politically risky, since incumbents will dislike it, and since failure can be used against the policy and the policy makers (e.g. Solyndra). Subjectively it seems to me that programs in Europe — even academic programs — are failure adverse.

    Maybe entrepreneurs are also too failure adverse, which could explain the lack of fundable attempts at new businesses.

    So there is a dilemma, but I think your description could be better focused.

  • http://profiles.google.com/simon.hibbs Simon Hibbs

    > IOS succeed after a short period of time

    I don’t think this is at all true. The majority of the code in iOS is Cocoa code from MacOS X, which is based on NextStep, which started development in the 1980s. Deep, rich, optimised and well tooled platforms like that don’t happen overnight. These things are hard.

    The nearest thing we have to that in Europe is Qt, the software platform acquired but then dumped by Nokia. The problem was it was too late to re-purpose it in time as the competition from Apple was so sudden, and in any case Nokia seemed culturally unable to switch to becoming primarily a software company.

    I still think Qt is a fantastic opportunity being wasted. Licensing Android or Windows Mobile is quicker, easier, cheaper than developing your own platform, but just makes you beholden to someone else’s business plans.

    Edit – I should add KDE to that. It’s a truly European desktop computing platform, based on the truly European Qt.

  • http://twitter.com/WalterMilliken Walter Milliken

    This strikes me as being a simple outgrowth of optimization algorithms — you often get stuck in localized minima, unless you add a fair amount of randomness to the points you explore in the overall state space. But that is generally inefficient, since the large majority of those points are less optimal.

    So you have a tension between optimization process efficiency (which is relatively predictable but may miss better states further away in the state space) and finding significantly better solutions. I doubt there are many political entities that could advocate being deliberately inefficient, at least for very long…

  • Thirsty Brooks

    This is how Japan succeeded in small cars and transistor radios. It’s how Microsoft grabbed IBM’s core business. And if you remember who Ted Levitt was, tell him it’s how the Durant family got into the car automobile business without dragging in people with railroad connections ==>

    “Entry into mobile phones was not what policy would have suggested was the biggest opportunity at the time. The market for mobile phones was projected to be insignificant in comparison to what was seen as success of the time (Sony, et. al.)”