Larry Downes: An interview by Bob Morris

Posted on: July 1st, 2011 by bobmorris

 

Larry Downes

Downes is a consultant and speaker on developing business strategies in an age of constant disruption caused by information technology. He is co-author with Chunka Mui of the Business Week and New York Times business bestseller, Unleashing the Killer App: Digital Strategies for Market Dominance (Harvard Business School Press, 1998), which has sold nearly 200,000 copies and was named by the Wall Street Journal as one of the five most important books ever published on business and technology. His new book, The Laws of Disruption: Harnessing the New Forces that Govern Business and Life in the Digital Age (Basic Books 2009) offers nine strategies for success in the emerging world of digital life. It combines Downes’s unique perspective on economics, law, and innovation in the digital age. He is also a Partner with the Bell-Mason Group, which works with Global 1000 corporations, providing corporate venturing methodologies, tools, techniques and support that accelerate corporate innovation and venturing programs. He has written for a variety of publications, including USA Today, Harvard Business Review, Inc., Wired, CNet, The Big Money, The Hill, CIO, The American Scholar, and the Harvard Journal of Law and Technology. He was a columnist for both The Industry Standard and CIO Insight.

 

Downes has held faculty appointments at The University of Chicago Graduate School of Business, Northwestern University School of Law, and the University of California-Berkeley’s Haas School of Business, where he taught courses on corporate strategy and technology law. He is currently a nonresident Fellow with the Stanford Law School Center for Internet & Society.

Morris: Before focusing on your books, here are a few general questions. Unleashing the Killer App was published in 1998. In your opinion, what has been the single most significant development in high technology since then? Why do you think so?

Downes: I think of the last decade as one that parallels a much-longer period during the industrial revolution.  There, a single invention—the steam engine—provided a platform for transformation across industries, geographies, and ultimately all human activity.  The steam engine was a machine that made other machines, including factories (manufacturing), railroads (transportation), and the infrastructures of power, communications, and water.

The steam engine of the last decade, of course, is the Internet, which created the environment for countless new applications that are effecting a similar transformation, in this case in much less time.

In the early years, the uses were largely commercial—what we used to call “business-to-business” and “business-to-consumer.”  But since the publication of Killer App, improvements in the performance and cost of information technology has made it possible for entrepreneurs to invent a new generation of applications that connect people with each other.  We now live a second, increasingly robust “digital life.”

I’m thinking here of all the social networking tools, including Facebook and Twitter, and also of the mobile Internet (which didn’t exist in 1998), including 3G and now 4G smart phones, wireless broadband, and machine-to-machine sensor technology.  Together, these applications have led to an explosion of new data at least an order of magnitude more voluminous than the early Internet applications of email and websites.

What’s next?  Finding valuable uses for all that new information.

Morris: To what extent, specifically, has the study of law proven valuable to your career in the classroom and in the business world as well as to writing books and articles?

Downes: I studied law ten years into my professional career, which meant I had a very different perspective on the subject than my classmates and even some of my professors, a few of whom were younger than I was and who had really had no life experience other than being in school.  (My contracts professor, unfortunately, had never signed, let alone negotiated, a contract.)  I also had the great fortune to attend law school at the University of Chicago, where some of the greatest legal minds have studied the relationship between law and economics.  This included Ronald Coase, who won the Nobel Prize in Economics while I was a law student, and most of all federal appellate judge Richard Posner, who I had the honor of serving as law clerk for a year after graduation.

So for one thing going back to law school gave me an education in the fundamentals of economic analysis I never had as an undergraduate.  It also gave me an appreciation for the subtle and not-so-subtle ways in which regulation influences business strategy and business operation, and the poor understanding most executives have about that relationship, particularly in high tech industries.

As a teacher off-and-on for the last ten years, I have been fortunate to have the classroom and some wonderful students to help me work out the details of what came to be a general theory of law and innovation that I finally managed to get down on paper in The Laws of Disruption.

Now, of course, I see that general theory in action everywhere.  There hasn’t been a day in the last few years that I haven’t printed out at least one news story (often several) that touches directly on the poor fit between traditional legal institutions and the fast-paced world of digital life.  As a blogger, I’m hopelessly behind.  I don’t even try to keep up—I just report on the biggest developments.

Morris: The protection of intellectual property seems to have become much more complicated, hence much more difficult, as globalization initiatives continue to accelerate and intensify. Is that a fair assessment?

Downes: I’m not sure I would blame the problem on globalization so much as digitization.  For the last three hundred years, since the invention of copyright and other legal protections for information, the law worked reasonably well.  But only because of the need to embody information in physical media—books, newspapers, magazines, and later films and other recordings.  We protect information as “property,” but it’s always been a hack—a hack that worked so long as buying and selling information required physical copies.

When information becomes physical, it’s easy to treat it as we do other kinds of property.  To sell unlicensed copies, you needed printing presses, trucks, and access to the distribution channels of bookstores and the like—those features served as the real deterrents to illegal copying.  The law, to be sure, was waiting in the wings to handle the most extreme cases, but it largely worked because it wasn’t needed.

Now that we have completely disconnected information creation, distribution and consumption from physical media, it’s become clear how weak the metaphor always was to treat intellectual creations as property.   Since the law is built on that metaphor, the law is failing, and doing so, as you say, on a global scale.

Clearly we need a new legal system to maximize the value of information—starting with a new metaphor.

Morris: Here’s a related question. Double-entry bookkeeping first emerged in northern Italy in the 14th century and general accounting principles have remained essentially the same since then. Many of them now seem obsolete. In the global business world, to what extent have basic principles of law also become obsolete?

Downes: That’s a great example, because one of the reasons accounting has become so vilified in the last decade is that even as the nature of value creation and asset management has changed in business, the accounting profession refuses to adapt to that reality.  The value of many businesses is largely if not entirely the value of their information, but the balance sheet makes no provision to account for that value.  It’s too hard to value information, say the accountants.  But that’s not really an answer.

In truth, there’s a real fetishization of the tools of accounting and a nearly-religious conviction that they shouldn’t be changed, only enshrined.  When professions become so encrusted and ritualized, they are doomed to marginalization and ultimately become obsolete.  Think of the early practitioners of medicine and astrology—they didn’t evolve, they were replaced.

The same thing happens periodically in law, and for the same reason—disruptive technologies change the fundamental characteristics of the activities that law is meant to regulate.  As I quote from 19th century historian (and lawyer) Brooks Adams in the book, “The character of competition has changed, and the law must change to meet it, or collapse.”

Adams was talking about the challenges to law from the changes wrought by the industrial revolution, and he was right.  The law (largely based on principles of feudal society) was inadequate to deal with things like global commerce, instant communications, and revolutions in transportation and mass-produced goods.  There was a long struggle, a great deal of resistance, and outright collapse in places like Russia.  Elsewhere, ultimately, a new kind of law and new legal institutions like regulatory agencies emerged.

So that’s a long way of answering your question:  basic principles of law, which assume local interactions, physical exchanges of property, and jurisdiction based on fixed locations, have become hopelessly obsolete.  Many of the most significant problems we have in dealing with the reality of digital life—identity theft, privacy, information rights and valuation, globalization and human rights—are caused by obsolete laws and legal institutions that enforce (and perhaps enshrine) them.

Morris: Henry Chesbrough is one of my intellectual heroes. You and he seem to agree on the importance “openness” in terms of access to ever-expanding sources of information and applications of it. In your opinion, to what extent should there be limitation of that access?

Downes: Information, like water, prefers to flow along the course of least resistance.  Unlike traditional commodities such as oil and farm products, information is not what economists call as “scarce” or “private” good.  It is a “networked” or “public” good.  That doesn’t mean it has to be completely free and unregulated.  It just means that to achieve the maximum social good—the potential value of information—information has to be open.

Ever since Gutenberg invented moveable type, however, the problem has been figuring out the best (that is, cheapest) way to regulate information to ensure as much of it gets created as possible and spreads as quickly as possible.  Those have been the goals of civilization since the Enlightenment, which recognized for the first time that information had the greatest potential to improve human life of any commodity.

Why is there a problem?  Gutenberg and all the inventors since then that have given us new ways to create, distribute, and consume information have of course done a great service to those Enlightenment goals.  But for the most part valuable new information will only be created if there is some mechanism (again, preferably one that is easy to monitor and enforce) for compensating those who add value to it.

That was the genius of the copyright system—it advanced the goal of information freedom by granting a temporary monopoly on copying to whoever produced the new value.  In copyright, that person is known as the author.  (In patent, it’s the inventor.)  The monopoly gave the author a chance to profit from her efforts, and then let the information move without restriction once the monopoly ended.  (One alternative would have been to have governments pay for the production of information, which you can imagine would have been a much less efficient system to say the least.)

The system was invented to give incentives for information production with the least transaction costs.  To incentivize information production, we need some way of limiting access, if only for a short period of time.  Otherwise, once the first copy enters the stream of commerce, anyone and everyone can (and does) make copies, leaving the author with no mechanism for recovering her investment.  The more that happens, the less likely it is that we will get the optimum amount of new information production in the future.

It’s true that the largely frictionless environment of digital life has led to the rise of non-monetary systems, notably the open source movement, where authors contribute to the information supply for reasons other than direct financial compensation.  Open source developers may be salaried by companies that make money peripherally, through hardware sales, software installation services, support, documentation and the like.  Some may find compensation in the form of enhanced reputations, which likewise may be monetizable in peripheral activities.  Those in universities and government-funded research institutions are compensated based on their intellectual contributions.

The open source model—which now applies well beyond software into the sciences—is attractive because it is very efficient, very inexpensive, and requires little in the way of legal support.  Perhaps we’ll migrate entirely to that kind of model, where the value you bring is compensated by the value you can extract from new combinations of information—where the sum is clearly more valuable than the parts.

In the meantime, technology has outstripped the ability of the old copyright, patent, and trademark systems to fulfill either its goal of protecting authors or of maximizing the public good value of information.  Serious reform is needed.

Morris: Now please focus on two of your books. For those who have not as yet read Unleashing the Killer App, what is a “killer app” and what are some of the most important examples of one?

Downes: A killer app is a new use of technology that upends core assumptions of an existing market or industry.  I’ve mentioned several already in this interview—everything from the steam engine and moveable type to email, the web, smart phones and social networking applications.  If you want to move back farther in history, consider the example I gave in both Killer App and The Laws of Disruption of the stirrup, which had a revolutionary impact on Europe in the Middle Ages, or other medieval killer apps including crop rotation, eyeglasses, and mechanical timepieces.

One striking feature of 20th and now 21st century life is that the pace with which new killer apps are introduced is increasing dramatically.  Think of how much daily life was changed by technology between 1900 and 1950 (telephone, television, atomic power, interstate highways), and how much faster that change happened between 1950 and 2000 (computers, cellphones, green energy sources, biotechnology, the human genome, the Internet), and then extrapolate that velocity another fifty years.  Of course we haven’t the slightest idea of what life will be like for our grandchildren, but it’s safe to say they’ll look at how we lived and find very little difference between that and the Stone Age.

Morris: To what extent does one of the examples you cite differ, let’s say, from the first leather stirrup or the separable type used by Johannes Gutenberg?

Downes: The most important differences are of frequency and velocity.  The pace with which new killer apps appear, and the speed with which they penetrate everyday life to become commodities, both increase exponentially.  Those differences have positive side-effects, of course, but they also put increased strain on social, economic and legal systems, which prefer to change incrementally.

Morris: I recently re-read the book and this time I gained a better understanding of how important “killer execution” is. In this context, I am again reminded of Thomas Edison’s comment, “Vision without execution is hallucination.” Presumably you agree.

Downes: One of the painful lessons for me as a consultant was to discover just how hard the execution part of the equation really was.  After Killer App was published, I was frequently invited by large corporations to organize projects to help the company find killer apps in their ecosystem, in the hopes of increasing the chances of profiting from them rather than being their victims.  I had imagined my real value in these projects was going to be generating the big ideas—the paradigm shifts to use Thomas Kuhn’s phrase.

But what I found again and again was that once the traditional blinders were lifted from the eyes of company managers and executives, the big ideas came tumbling out in a matter of a few hours.  In many cases, the company knew full well where the big inefficiencies in its value chain lived, and knew how they or a competitor could use technology to turn those gaps into killer apps.

Where finding killer apps turned out to be relatively easy, implementing them turned out to be much much harder than I ever would have thought possible.  Public companies are measured on quarterly performance, and managers had developed a remarkable array of corporate antibodies that rooted out and destroyed any initiative that had a long payback or anything approaching high risk of failure.  Those controls make perfect sense in times of relative equilibrium within an industry, but become toxic to the host when disruptive technologies are afoot.  That fact, I believe, explains most of the most colossal corporate failures of the last ten years.  Every industry is in the midst of dramatic transformation at the hands of digital technology.  The ability to adapt to that change even slightly faster than others is making all the difference between thriving, surviving, and expiring.

Morris: Now please focus on your most recently published book, The Laws of Disruption. In it you assert that there are three laws of digital life. Together, they comprise “the laws of disruption.” They are Moore’s Law (i.e. the number of transistors on a chip would double every year or two without increasing the cost to users), Metcalfe’s Law (i.e. the more people you reach, the more reasons you find to reach them), and the Law of Disruption (i.e. “technology changes exponentially, but social, economic, and legal systems change incrementally…In some sense, the Law of Disruption codifies what we have already learned from a thousand years of killer apps. Their initial impact can be dramatic – even revolutionary. But the real change may come years later.”

Here’s my question. As briefly as possible and in layman’s terms, what are the most serious implications of these three separate but interactive “laws”?

Downes: Dramatic change is unavoidable.  Dramatic new value is being created, but at the cost of constant chaos.  Assets become liabilities even as new assets—far more valuable—emerge.  The new assets are based on information, which operates under very different economic principles than traditional commodities.

That was 45 words!

Morris: At one point, you observe that when confronted with the weird economics of information, the core principles of public law, private law, and in formation law are being turned upside down.” How to cope with this extensive as well as intensive disruption?

Downes: In many respects the best coping mechanisms here are the same as they are for the killer apps themselves.  First and foremost, senior executives, especially those outside of the legal department, need to be aware of that fact that law is now the single greatest impediment to innovation in every industry.  Next, they need to understand why, and that requires much greater appreciation both for the fundamentals of law as well as the ways digital technology is undermining those fundamentals.  Then, just as with killer apps, organizations (including governments and consumer groups) who find ways of adapting even slightly more quickly than everyone else will stand to gain the most from the new reality.

Frankly, most governments are firmly stuck in the “denial” phase of transformation.  Corporations are slightly better.  Consumers, on the other hand, are leading the charge here in a way they’ve never been able to before the availability of the “collective action” tools the Internet and particularly social networking tools give them.

Morris: Given your response to the previous question as well as what you recommend in the concluding chapter of this book, it seems that what Joseph Schumpeter’s concept of “creative destruction” is relevant to the challenge of harnessing what you characterize as “the new forces that govern life and business in the digital age.” Is that a fair assessment?

Downes: Absolutely.  What we’re experiencing is precisely what Schumpeter talked about.  The only difference is that the cycle time between periods of “creative destruction” and what Kuhn called “normal science” (or “business as usual”) keeps getting shorter.  Essentially, information technology has created an environment of constant creative destruction.

Think for just a moment of the impact that fact has on the traditional process of strategic planning, which assumes relatively stable markets and predictable responses from competitors.  In many ways companies are better off not to have a strategic plan at all.  But what I’d prefer to see is the emergence of new tools and methods that reflect the chaotic reality of a Schumpeterian world.

Of course when we talk about legal institutions like governments, regulators, and courts, the very idea of a strategy is completely alien.  Getting legal institutions–whose goal is to minimize unpredictable outcomes and penalize chaos–instead to embrace creative destruction is a daunting proposition.  My guess is that rather than reform existing forms of regulation, digital life will evolve its own, organic forms of law that will better suit its unique properties.

Morris: Eric Wexler’s Engines of Creation is one of the books that have made a significant contribution to my understanding of what is generally referred to as “the Era of Nanotechnology.” In 1986, he suggested, “The coming years will bring the greatest turning point in the history of life on Earth. To guide life and civilization through this transition is the great task of our time.”

Here are two separate but related questions: how close are we to reaching “the greatest turning point” to which Wexler refers, and, do you share his faith that we will prove equal to the challenge of steering the “technology race toward a future with room enough for our dreams”?

Downes: I don’t really have any expertise that’s useful to determine when the next great technology advances will arrive, or how long they will take to reach their true potential for changing human life.  Moore’s Law, for example, is quite predictable, but how legal systems will respond to it in ways that change its course, its destination, or its result (often unintentionally) cannot be predicted.  We just know that it won’t be a straight line or a smooth path, and that the bumps and turns will make for some of the most interesting dramas of digital life.

As for the second question, I have only my intuition, which tells me we will certainly prove equal to the challenges posed by the technology we invent.  We have a long history of doing so, for one thing—going back to the invention of fire and the wheel.  But I suppose your choice of words is ultimately astute—it is a matter of faith.

Morris: What question had you hoped to be asked during this interview – but weren’t – and what is your response to it?

Downes: Honestly, nothing comes to mind.  I seem to have gone on quite a bit in my answers in any case, so perhaps in the interest of your readers’ attention spans, I won’t try too hard to come up with more questions for you!

*      *      *

You are cordially invited to check out the resources at these Web sites:

http://larrydownes.com/

http://cyberlaw.stanford.edu/blog/larry-downes

http://www.bellmasongroup.com/index.shtml

 

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