e.Digital Corporation (fka EDIG)

[murgirl]

OCTOBER 11, 2004

THE INNOVATION ECONOMY -- THE PROMISE OF INNOVATION

Scouring The Planet For Brainiacs
Worldwide innovation networks are the new keys to R&D vitality -- and competitiveness

Step inside the labs of Microsoft's advanced technology center outside Beijing for a lesson in 21st century innovation. In one lab, engineers have developed a program that simulates the movement of water around a tropical island, adjusting the lighting of the waves as they ripple over the reflection of a school of carp swimming at different depths. Technicians load a photo of a face into another program and the expression changes from a grin to a pout, down to the wrinkles on the cheeks and forehead. The lab also is doing cool things with speech -- computer-generated voices that speak English in natural-sounding sentences, or a "visual audio notebook" that rapidly searches tape recordings for specific words.



This $80 million center, with nearly 500 engineers, PhD students, and visiting professors, is one of Microsoft's most important facilities for developing graphics, handwriting-recognition, and voice-synthesization technologies. "One of the reasons we opened the Beijing lab was to tap into a great pool of talent," says Microsoft Research Senior Vice-President Richard F. Rashid. Among the 72 innovations that have already ended up in Microsoft products is the "digital ink" used in software for tablet PCs. Others will eventually reach the market years down the road in everything from electronic-game players to industrial-design software.

THE FLOATING LAB
The Microsoft lab is much more than a showcase for how far China has come in computer technology. It also illustrates how innovation is an increasingly global game. It can involve a worldwide research and development operation like that of Microsoft, or IBM, which has major labs in China, Israel, Switzerland, Japan, and India. Or innovation can be the product of a much more amorphous structure, something that consultants call global innovation networks. These often consist of in-house engineers, contract designers and manufacturers, university scientists, and dozens of technology suppliers big and small -- all pulled together ad-hoc for a particular product.

To many Americans, who assume that every engineer hired abroad by Microsoft, General Electric (GE ), Intel (INTC ), or Boeing (BA ) means one less high-paying job at home, this is a threatening trend. There's also growing angst that the rapid advance of Chinese, Indian, and Russian science is imperiling U.S. global economic leadership.

But such fears often are based on an outdated view of global competitiveness. Because technology now crosses borders faster than ever -- thanks to the Internet, cheap telecom links, and advances in interactive-design software -- the location of R&D facilities matters less and less. What matters is who controls these networks -- and where the benefits accrue in terms of products, jobs, new companies, corporate profits, and higher economic productivity. "The real challenge is to commercialize technology," says Boston Consulting Group Executive Vice-President James P. Andrew. "Increasingly, that means integrating outside technologies and orchestrating global value chains."

BOOSTING THE R&D BANG
The 2000 tech bust and subsequent recession also have spurred companies to look at ways to get products to market faster. "There is tremendous pressure on industry to innovate more -- and do it more quickly," says Krishna Nathan, director of IBM's 200-engineer Zurich Research Laboratory. The problem is, many companies also are finding their R&D efforts aren't producing enough bang for the buck. In a Boston Consulting survey of 250 senior executives, nearly seven out of ten cited innovation as a top priority and said they plan to hike R&D spending. Yet 57% also said they aren't satisfied with the return on their innovation investments. A Forrester Research Inc. (FORR ) study found similar frustration. "CEOs feel they are throwing money into a hole, but little comes out," says Forrester Vice-President Navi Radjou.

Thanks to the burst of global R&D, innovative companies can now shop the world for intellectual property needed for new products. Cities such as Bangalore, Tel Aviv, and Seoul are starting to have flourishing Silicon Valley-like tech clusters nurtured by venture capital, tie-ups between science universities and industry, and a critical mass of inventors and entrepreneurs adept at selling their intellectual property worldwide.

South Korea, for example, is a trailblazer in next-generation digital displays, memory devices, wireless telecom, and electronic gaming. In Taiwan, long known for churning out me-too electronics products, R&D spending has leapt fourfold, to $7.5 billion, since 1990. The island now boasts some of the world's most profitable chip and hardware designers. "Taiwanese companies used to be able to focus on low-end products and survive," says spokesman David Chen of Novatek Microelectronics Corp., a leader in chips for liquid-crystal displays used in high-end TVs, notebook PCs, and digital cameras that earned $98 million on $333 million in sales in 2003. "Now intellectual property is a serious matter."

A U.N. OF SUPPLIERS
To get an idea of how diffuse the innovation process has become, try dissecting your new PDA, digital cameraphone, notebook PC, or cable set-top box. You will probably find a virtual U.N. of intellectual-property suppliers. The central processor may have come from Texas Instruments (TXN ) or Intel, and the operating system from BlackBerry (RIMM ), Symbian, or Microsoft. The circuit board may have been designed by Chinese engineers. The dozens of specialty chips and blocks of embedded software responsible for the dazzling video or crystal-clear audio may have come from chip designers in Taiwan, Austria, Ireland, or India.

The color display likely came from South Korea, the high-grade lens from Japan or Germany. The cellular links may be of Nordic or French origin. If the device has Bluetooth technology, which lets digital appliances talk to each other, it may have been licensed from IXI Mobile Inc., one of dozens of Israeli wireless-telecom companies spun off from the defense industry. IXI has developed a package of software allowing users to wirelessly zap images, audio, and data from digital cameras to e-mail accounts to PCs. Among the products using IXI's package is ATT Wireless' new Ogo device for instant messaging.

This spreading out of R&D is a boon to innovation. By mobilizing global R&D teams around the clock, nimble companies can accelerate development cycles, bringing new technologies to consumers and industry faster, cheaper, and in more varieties. Multinationals can reach deep into once-cloistered university labs in Shanghai or Moscow for help in advancing everything from genetics and molecular research to alternative energy. Besides employing several thousand in India, France, Germany, and the U.S. to develop chip sets and software, Texas Instruments taps brains at 100 info-tech companies from Berlin to Bangalore. This has been vital to maintaining TI's dominance in the $5 billion global market for digital-signal processors for cell phones and consumer electronics. "The more we can leverage outside talent and companies with great ideas, the more product we can get out," says Doug Raser, who oversees TI's global strategic marketing.

Just as important, the global innovation supermarket lowers entry barriers for dynamic new players. A good example of the new breed of technology networker is Austin (Tex.)-based Motion Computing Inc. With just 110 employees, Motion is the No. 3 seller of slate style tablet PCs, a market that research firm IDC predicts will near $7 billion in three years. Motion shipped 25,000 of the $2,000 machines last year, mainly to health-care and financial-service companies in the U.S. and 14 other nations. Motion's latest M1400 PC, which allows users to write directly on the screen, display articles as they appear in a magazine, and transmit documents wirelessly, is loaded with cutting-edge applications sourced from outside suppliers. The digital pen comes from Japan's Wacom Co. and the software for digital sketches from Toronto's Alias Systems Corp. The 12-inch pen-based screen, which can be viewed in bright sunlight and while tilted at a 160-degree angle, was developed by Korea's Boe Hydis, the world's leading supplier of tablet PC displays. The machines are made in China by Taiwanese contract manufacturer Compal Electronics Inc. "This business model lets us bring core technologies from around the world to market faster than our competitors," says CEO Scott Eckert.

The digital convergence has sped the global tech scramble, because it means that many of today's gadgets now need to incorporate video, telecom, imaging, computing, and audio. "Very few companies can afford to invest the time and effort to stay at the forefront of so many technologies," says Srini Rajam, chairman and CEO of Bangalore-based ITTIAM Systems. "By licensing our design innovations, they can cut the time it takes to launch a product by nine to 12 months."

Founded in 2001 by seven veteran Texas Instruments executives, the 125-engineer company has found growing demand for its embedded software and systems designs for decoding highly compressed audio and video content on the MPEG4 format. ITTIAM's 50 clients in the U.S., Europe, and Asia have used its designs in everything from a hand-size $199 camcorder to a "digital-media album" that can store up to 130 hours of video and thousands of songs.

One customer is e.Digital Corp. The San Diego outfit develops multimedia appliances such as the digEplayer, a portable in-flight entertainment system used by 11 carriers, including Ryanair, Alaska Air Group Inc., (ALK ) and Hawaiian Airlines Inc (HA ). The machine, sold by Tacoma (Wash.)-based APS Inc., stores up to 30 highly compressed movies. Economy passengers rent the player for around $10 to watch what and when they please. "We're constantly scouring the world for high-performance technologies that are already out there," says e.Digital Senior Vice-President Robert Putman.

`YOU HAVE TO BE TIRELESS'
Indeed, the challenge is to keep up with the ever-quickening pace of innovation. Design houses such as San Francisco-based IDEO are specialists at just that. The firm collects data on thousands of chip, software, and manufacturing outfits in more than 100 nations via trade shows, Web sites, and word of mouth -- all information that can speed product development. "You have to be tireless about updating these databases because the half-life of most of the information is about four weeks," says Dave Blakely, leader of IDEO's smart-products unit.

Last year, IDEO was hired to develop a device to show patients what their smile would look like after a tooth-whitening process by Walnut Creek (Calif.)-based BriteSmile Inc. It found the digital image-compression algorithm from a Vancouver, B.C., company and an outfit in Amedabad, India, that specializes in making such algorithms work on TI's DSP chips.

Such blending of technologies will become even more common as innovation networks extend their reach. Many corporations have been obsessed with improving quality in the 1980s, boosting productivity in the 1990s, and slashing costs in the wake of the 2000 tech bust. Now, companies are zeroing in on how to innovate more efficiently. "The fallacy of innovation was that it was all about spending on R&D or information technology," says Diana Farrell, director of the McKinsey Global Institute. "Instead, it has more to do with execution and getting products out better and faster." The answers are out there, waiting for the quickest and smartest to find them.






By Pete Engardio
With Dexter Roberts in Beijing, Neal Sandler in Tel Aviv, and Matt Kovac in Taipei

http://www.businessweek.com/magazine/content/04_41/b3903409.htm