Counterparties: Why big companies are bad at innovating

July 19, 2012

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Today Nokia announced that it lost $1.7 billion in the second quarter, its fifth quarterly net loss in a row. Just a few hours before the announcement, the WSJ published a great piece revealing how, as early as 2000, the Finnish phone maker had designed a proto-iPhone – complete with a color touch screen and geo-location, gaming, and e-commerce capabilities. The phone, though, never moved into the mass production phase because of ”a corporate culture that lavished funds on research but squandered opportunities to bring the innovations it produced to market.”

While it’s not surprising that a lumbering, oversized multinational corporation failed on the innovation front, it’s clear that Nokia does not suffer from a dearth of ideas: It spent $40 billion on research and development over the past decade, almost four times what Apple spent over the same period. Nokia also developed and ultimately discarded not one but two operating systems, Symbian and MeeGo. Nokia’s deficiency lies in what Vijay Govindarajan and Chris Trimble call “the other side of innovation,” or the problem with executing new ideas, not just thinking them up.

If you believe Peter Thiel, this is also an affliction Google suffers from. At a debate at Fortune Brainstorm Tech this week, Thiel told Eric Schmidt that the $30 billion in cash Google has sitting idly on its balance sheet demonstrates that the company is “out of ideas” that are worthy of scaling up:

[T]he intellectually honest thing to do would be to say that Google is no longer a technology company, that it’s basically – it’s a search engine. The search technology was developed a decade ago. It’s a bet that there will be no one else who will come up with a better search technology. So, you invest in Google, because you’re betting against technological innovation in search. And it’s like a bank that generates enormous cash flows every year, but you can’t issue a dividend, because the day you take that $30 billion and send it back to people you’re admitting that you’re no longer a technology company. That’s why Microsoft can’t return its money. That’s why all these companies are building up hordes [sic] of cash, because they don’t know what to do with it, but they don’t want to admit they’re no longer tech companies.

After reading this exchange, Tyler Cowen noted that ”the revealed preference of our technological leaders is the best and most depressing argument for the great stagnation.”

At least some of tech’s big companies are trying to remain small or may have to downsize (see: Yahoo). Brad Stone wrote last spring about how Facebook’s Sheryl Sandberg believes that the Internet companies like Google that vastly expanded their staff during boom times “eventually came to regret the innovation-killing bureaucracy that resulted.” For that reason, she has favored automated systems, so Facebook can avoid increasing headcount. In capacity its new headquarters maxes out at 6,600 employees and it’s currently occupied by only a third of that total. – Peter Rudegeair

On to today’s links:

Slowing down
The world’s largest retirement community – “Disneyworld for adults” with 23,000 acres and 88,000 residents – Huffington Post

Beefs
“Krugmenistan vs. Estonia”: How a blog post ignited an international economic spat – Businessweek

‘Liebor’
Simon Johnson: The Fed thoroughly failed the financial system by missing the Libor scandal – Baseline Scenario

Alpha
The latest weapon in hedge fund divorces: bringing RICO cases against your spouse – New York Observer
Get used to generally crappy pension fund returns – Barron’s

Alien Equity
One-third of Bain Capital’s early investors were wealthy foreigners, most of whom invested through shell companies in Panama – LAT

EU Mess
A graph of euro doom – foreign capital’s flight from Italy and Spain – Telegraph
Spain’s 5-year debt costs hit new euro-era highs at an auction – Reuters

Defenestrations
Duke pins CEO swap on problems at nuclear plant – WSJ
“It seems odd to me that if these issues were burning issues, I never heard about them from anybody” – WSJ

Banks
Morgan Stanley’s earnings drop 50%, and the company plans to cut an additional 800 jobs by year’s end – Bloomberg

Bad News
Nobody seems to be talking about the looming $500 billion in cuts to Head Start, childcare and AIDS programs – Politico

Check in the Mail
The Postal Service is going to default on a $5.5 billion healthcare fund payment – NYT

Welcome to DC
“The astounding thing … was the extent to which unemployment went unmentioned” – American Prospect

Regulations
Blankfein: If there was an undo Dodd-Frank button, I wouldn’t push it – DealBook

Who Doesn’t
Rick Ross loves cheese – Bon Appetit

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