valuing innovations “the most important discoveries of the next 50 years are likely to be ones of...

VALUING INNOVATIONS“The most important discoveries of the next 50 years are likely to be ones of which we cannot now even conceive.” - John Maddox

Importance of Innovation• Innovation creates a competitive advantage in business.

• Can be the difference between success and failure.

Difficulties• Short Lived Advantage

• Rapidly changing digital world• Competitors can easily copy innovation

• Risky• No guarantee technology will be successful• VHS vs. Betamax

• Organizational Requirements• Firms must work together in harmony• Need many skilled workers to deploy new IS

Predicting Future Technology is Hard

Disruptive Innovations• A product that surpasses the dominant technology to become the norm.

Innovation Process

1. Choose Emerging Technologies• Create processes that are dedicated to

discovering disruptive innovations

2. Match Technologies to Opportunities• Determine the purpose served by the

emerging technology

Innovation Process

3. Execute Business Innovation for Growth

• Select the emerging technology.• Act on opportunity to increase customers and

market share.

4. Asses Value• Assess value of the technology used.• Continuous.

e-Business Innovation Cycle

CANDY CANDY

CANDYHypothetical situation

Hypothetical situationChoose one:

$.14 $.01@poll 337503 @poll 337504

Hypothetical situationChoose one:

$.13 FREE@poll 500507 @poll 500508

Background to experimentConducted by MIT professor Dan Ariely

The original study found that:27% selected Hershey73% selected Lindt

Background to experimentThe second study found that:69% selected Hershey31% selected Lindt

Why?

Understanding the power of free

When Free is Dangerous

FREECONOMICSOnline, there is such a thing as a free lunch.

HOW DO WE VALUE IT…..

…when we increasingly give it away for free?

Gordon MooreCo-founder of Intel

Published an article in Electronics magazine on April 19th, 1965.

This article became known as Moore’s law

Moore’s Law

The number of transistors in a processor will roughly double every 18 to 24 months.

Moore’s lawIn 1961, a single transistor cost $10.00In 2010, you can get 2 billion transistors for $1,100.00

or one transistor costs $0.00000055

Freeconomics as economics

What happens when the marginal cost is essentially

$0.00?

Free! Why $0.00 is the future of business

http://shar.es/gCAoJ [/twitter]

Different freeconomic models

Type

Advertising

Cross Subsidies

Zero marginal cost

Gift economy

Known example

Google’s pay per click

Comcast

YouTube Videos

Wikipedia

1. Consumer Google’s something…

2. Consumer clicks on a sponsored link (an “ad”)

3. Consumer is redirected to advertiser’s website

4. Consumer gets advertiser’s product, and the advertiser pays Google.

Different freeconomic models

Type

Advertising

Cross Subsidies

Zero marginal cost

Gift economy

Known example

Google’s pay per click

Comcast

YouTube Videos

Wikipedia

A single DVR costs Comcast $250.00, and they give them away to each new customer.

How does Comcast make their money back?1. Subscription fees2. Faster internet speeds 3. Pay-per-view movies

Different freeconomic models

Type

Advertising

Cross Subsidies

Zero marginal cost

Gift economy

Known example

Google’s pay per click

Comcast

YouTube

Wikipedia

How can you charge people effectively for watching YouTube?

In 2010, it cost Google $0.25 to have someone stream HD video for one hour

In 2011, it was $0.15

2012 projection – less than $0.10

Different freeconomic models

Type

Advertising

Cross Subsidies

Zero marginal cost

Gift economy

Known example

Google’s pay per click

Comcast

YouTube Videos

Wikipedia

All content is user generated with non-monetary returns for those who invest in it…

How can this exist?

Remember Chris Anderson’s video on Free!

FREEMIUM CASE STUDY

Background Founded in 2007 by Drew Houston, a forgetful MIT graduate.

Dropbox has only received $7.2 million in venture capital

What is the pricing structure of Dropbox?

Dropbox - The business model of freeDropbox rents users space in the cloud, similar to how students rent apartments or dorms from the Temple.

However, unlike Temple dorms, one of Dropbox’s options is free, for everyone.

Dropbox pricing scheme:2 GB – Free50 GB – $9.99 / month100 GB - $19.99 / month1000 GB – $100.00 / month

How can Dropbox make

any money when its main product is

free?

Dropbox newsAs of October 2011, Dropbox has over 50 million users.

Over 96% of Dropbox’s users use their services for free.

In 2009, Steve Jobs offered to buy Dropbox for a reported $800,000,000.00.

Dropbox declined.

Today, Dropbox is valued at over $1,000,000,000.00

So, what’s the secret?

Moore’s law and freeconomics!

Freemium in a boxCost of adding a user to Dropbox is essentially zero.

However, as users use the product, some will become paying users.

The profit from paying customers, less than 4%, is enough to make Dropbox a wildly successful company.

Dropbox can offer its product for free because of the marginal cost is essentially $0.00.

Drop

Profitability of:

Profitability of: