An Era of Non-Innovation

Business models, technology, and a tolerance of monopoly power thwart innovation

An Era of Non-Innovation

The Internet has been a platform for innovators, where a simple idea can take on vast scale and change the world.

But what happens when a few firms achieve that vast scale, and in so doing chill any further attempts at innovation?

What happens when economic dominance closes the doors on digital entrepreneurship?

This very real problem was the subject of a recent interview with Scott Galloway, a business and marketing professor at NYU whose thoughts I follow. He was interviewed on a recent Recode podcast and spoke about what he calls our “era of non-innovation”:

The media loves writing about these little winners. However, it masks a much more disturbing trend, and that is if you look at seed funding across all the different sectors in our economy, it’s dramatically down in about half of all sectors. If you look at those sectors, they all have one thing in common — they’re competing with Amazon, Apple, Facebook, or Google, and can’t get funding. I challenge you to start an e-commerce company now and get funding. . . . There were twice as many new businesses being started every day in the Carter Administration than are being started today. We bought into this bullshit notion that we live in an era of innovation. We live in an era of non-innovation . . . because the fastest growing parts of our economy are controlled by one or two players. . . . It has a terrible chilling effect on the economy, and it’s cauterizing all kinds of innovation, and we don’t know what we’re missing. Twenty years ago, 15% of all companies were less than one year old. Now, it’s 7%.

When it comes to scholarly publishing, is the same affliction detectable? Is capital locked up in a few firms? Are the only winners “little winners”?

With nearly all the non-profit publishers  sitting on their retained earnings, the flows of capital into our market are already constrained. The billions of dollars in these accounts could be pushed into innovation, but the various boards governing them must feel better about playing the markets than investing in their own businesses. That’s a sign of a chilling effect right there.

It’s been a long time since a new publishing company of any magnitude has launched. F1000, PeerJ, and a few others have danced around the edges of the spotlight, but PLOS and BioMedCentral and Hindawi are mainstream successes that are now relatively long of tooth. The innovations — preprint servers, access brokers, analytics companies, and things like ResearchGate — are essentially ride-alongs, and none so far has scaled a business that goes beyond what Galloway calls “little winners.”

As I wrote in 2018 on “The Scholarly Kitchen,” part of the issue is that there aren’t enough new revenues or markets to create incentives for innovators, as so many stakeholders are committed to making things free or cutting costs. This has a desultory effect on innovation:

The changes to scholarly publishing over the past 20 years can be largely attributed to a system dealing with rising costs based on a rising volume of inputs without the commensurate increases in spending to support the volume and variety of outputs. Some of these changes have propelled some innovations, but I’m actually finding it difficult to think of any that have truly worked. What has worked are these following responses, which are still occurring:
  • Outsourcing editorial, production, and technology work to markets where labor is cheaper
  • Eliminating middle-management staff and substituting consultants as needed
  • Freezing salaries, reducing benefits, or both
  • Eliminating quality steps (copyediting, proofreading) and associated staff
  • Eliminating clerical, entry-level, and support staff
  • Acquiring companies with better margins to maintain overall profitability as core businesses are challenged on the expense side

This week’s announcement of Annette Thomas’ and Samantha Burridge’s departures from Clarivate throws yet another light on this issue. During their tenure, Kopernio and Publons were acquired. However, all the wording around their departures suggests an organization rationalizing expenses and trimming scope and ambitions. The burst of innovation Thomas and Burridge caused may have ended — leaving a formidable metrics company nonetheless. Its main competition in the journals metrics space is Elsevier (with Scopus and Plum Analytics, to name two), another large corporation. Who is going to be able to compete well against these two? Who is even going to try?

The problem is a lack of funding, not necessarily a lack of ideas. This limitation takes two forms — reluctance to fund start-ups at a level that’s sufficient to bring them to market and give them enough time to prove their worth; and, acquisition as the tacit or explicit “exit,” rather than an IPO or a standalone business.

This latter point is what Galloway refers to as “cauterizing all kinds of innovation.” Imagine if Clarivate had left Kopernio and Publons alone, or simply purchased a minority stake in the companies at a high valuation rather than acquiring them? The companies could have remained independent, innovated outside a large corporate structure, and perhaps could have competed against Clarivate. We’ll never know. That blood flow was staunched upon cautery — um, acquisition. The same could be said of Mendeley and other notable startups that were acquired. While their corporate parents certainly pump a lot of resources and funds into the newly acquired properties, the scope of innovation is heavily bounded by corporate cultures, strategies, and expectations. In many cases, the acquired property is digested — broken down into constituent parts, with the least valuable or compatible elements jettisoned or simply ignored.

In the bigger picture, what’s leading to all this M&A is a permissive environment where there is no fear of antitrust prosecution. The “Chicago school” mentality — that anti-trust should only be pursued when there is consumer harm (i.e., higher prices) — has fueled the emergence of major firms that charge the end-user nothing (e.g., Facebook, Google) to use their products. How could these companies be harming consumers if their products are available at no charge?

The answer is “opportunity cost” — the loss of potential gain from other alternatives when one alternative is chosen, according to one definition. What if instead of one Amazon, we had five companies — AWS, Amazon Apparel, Amazon Logistics, Amazon Media Group, and Amazon itself? The value created by these in both capital and jobs could dwarf the value of Amazon currently.

Never embraced in the EU, this philosophy toward antitrust seems to be eroding rapidly within the US, with 50 states and territories announcing earlier this month an investigation into Google’s market dominance. As the news coverage states:

Google’s parent company, Alphabet, has a market value of more than $820 billion and controls so many facets of the internet that it’s almost impossible to surf the web for long without running into at least one of its services.

We’re in a trough of innovation broadly due to market dominating firms, and in a major M&A phase in scholarly publishing for similar reasons. With business models designed to cap or cut revenues in scholarly publishing across the board — for companies large and small — we will continue to see large companies gobbling up smaller ones with better margins or interesting technologies, while innovators flee or cater to the M&A market.

We will continue to live in an era of non-innovation until the incentives improve.

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