October 3, 2012 6:38 pm
Innovation drives America’s reinvention
©Ingram PinnIt is bizarre to come back to London after seven years in New York to find the UK struggling to launch 4G high-speed mobile services and European companies lagging behind the US. “If we do nothing in Europe, all the innovation will fly away,” José María Álvarez-Pallete, chief operating officer of Spain’s Telefónica, told an FT conference this week.
When I moved homes in 2005, Europe was far ahead of the US in 3G and Nokia, and Research In Motion of Canada were the biggest smartphone makers. Meanwhile, the US agonised over its energy crisis – it depended on the Middle East for oil and faced the need to import liquefied natural gas.
Since then, America’s talent for technological innovation has risen to both challenges. It has seized the lead in mobile broadband – Apple’s iPhone, Google’s Android and Microsoft’s Windows Mobile have 65 per cent of the global market, versus 5 per cent in 2005 – and launched 4G services before others. Fracking and horizontal drilling for natural gas, invented in the US, could support its energy needs for 100 years.
It has economic problems, as Edward Luce pointed out recently. It is struggling to solve its fiscal deficit amid acrimony in Washington; it is short of well-paid jobs for the middle classes; its infrastructure is ageing; and the number of visas for the educated immigrants who fuelled the rise of Silicon Valley has fallen.
But I am struck by its amazing, enduring capacity to reinvent itself through technology, a tradition reaching back to Benjamin Franklin and George Washington’s science experiments. It has often surprised with inventions such as aircraft, automobiles and computers.
It should not be a shock that it still can, despite the worries about its comparative decline. “The US lacks a strategic approach to science and technology but the environment for innovation is very fertile,” says Daniel Sarewitz, a professor at Arizona State University. “It is a question of scale – we still invest more and have more people involved in it than anywhere else.”
Public and private investment in innovation remains high – about 2.8 per cent of US gross domestic product in 2008, compared with 1.9 per cent in the EU. A lot comes from federal programmes that have provided the foundation for many inventions. The Maps service for which Apple has just apologised would not exist at all except for military investment in global positioning satellites.
The US has an unparalleled structure for private investment in technology, flowing from venture capital-backed companies. That ecology has produced most of the world’s biggest technology companies, from Google to Apple, and constantly spawns new rivals eager to take on the big beasts of Silicon Valley.
That leads to intense competition, with companies fighting to overturn each other. “It is hard to see the barriers to technology innovation here, whereas there are often obstacles such as access to finance or education in other countries,” says Robert Shapiro, chairman of the consultancy Sonecon.
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As a result, technological change can sweep through the US economy rapidly, not merely in technology but in other sectors. Apple’s 2007 launch of the iPhone restructured entire sectors in a few years – it battered RIM and Nokia, outshone Microsoft, and wrested control from mobile network operators.
Having achieved all of this, it faced an immediate counter-attack from Google, which acquired Android and ruthlessly used it to replicate the iPhone’s features – taking a 52 per cent share of the US smartphone market in July, according to ComScore. Nokia’s effort at rivalling Apple’s iOS software, Symbian, had less than 1 per cent.
The shift in power in the mobile industry toward the US is illustrated by the fact that Apple has launched the iPhone 5 in the UK without any network yet able to support its 4G services. Other European operators are also rushing to acquire the right kind of spectrum. In the past, they chose their standards and handset makers had to follow.
It is a similar story in the US natural gas industry and for fracking technology. Hydraulic fracking has been available since the 1940s in local gasfields but its economic potential was later transformed by public-private research projects backed by the US Department of Energy. That technology was then developed by smaller companies such as Devon Energy and Chesapeake, rather than by the global oil majors.
This isn’t to say that American technological drive and ambition is an unalloyed blessing. Fracking has environmental risks and the freedom to innovate free of obstruction and regulation that benefits the US can equally have nasty side effects. Natural gas companies rushing to inject chemical-fuelled water into shale can poison aquifers.
Indeed, one of the biggest US-led technology innovations of recent years – the invention of credit derivatives that emerged from options research at the University of Chicago and was used to package subprime mortgages – led to the 2008 financial crisis. The US passion for invention can outstrip society’s capacity to use it for good.
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However, the US usually finds a way to correct excesses after the fact, even if the process of regulatory reform is more democratic and unpredictable than in other countries. By the time those countries have caught up, US companies own many of the patents, know how to apply them and enjoy a dominant position.
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The remarkable thing is how rapidly the US has managed to turn the technological tables in two of the most important global industries. For a few years, it looked lost in both telecommunications and energy, then it recovered and raced ahead. It hasn’t lost its touch.
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Copyright The Financial Times Limited 2012.
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