This morning, I listened to an interview of Jon Gertner who has published a chronicle of Bell Labs called the Idea Factory. In his book and the interview, Gertner highlighted points about the Bell Labs that relate to Clay Christensen’s recent New York Times editorial, the Capitalist’s Dilemma.

Bell Labs was a house of magic - a place of prodigious invention and innovation. In a single year, Bell scientists and engineers developed the transistor, satellite communication and information theory (the theory that underpins all digital technologies). The advances pioneered by Bell have created 100 years of massive economic growth: the Internet, digital communication, semiconductors for the US.

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In the Capitalist’s Dilemma, Christensen divides innovations into three types: empowering innovations (the transistor, the engine, fiberoptics) which create new markets, industries and jobs; sustaining innovations (hybrid cars, electric toothbrushes) which replace existing products with marginally better ones; and efficiency innovations (minimills and GEICO, SaaS) which reduce the market size and jobs through automation or other efficiency gains.

Christensen laments that American innovation has transitioned from empowering innovations to sustaining innovations to efficiency innovations - hollowing the job market. But I think it’s too narrow a view.

Monopoly drove innovation at Bell

Bell Labs was able to focus on long-term empowering innovations for one reason: they were a government sanctioned vertically and horizontally integrated monopoly that benefited from massive guaranteed cash flows for decades. Bell controlled 90% of the telephone lines and service in the US. They would count on the subscription revenue growing as the market grew and without much competition, none of their customers would churn.

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Because of the predictability of their revenue, they could afford to take a very long term view of product development and invest $50M into a project that wouldn’t succeed. Or invest $100M in a 15 year project to upgrade all mechanical switches in the telephone infrastructure to electric ones. Their enormous balance sheet enabled them to undertake the large risks that are essential to building empowering innovations.

In addition, researchers at Bell Labs moved freely between academia, government and the labs. Because of the cross-pollination of research across disciplines, they were able to advance very quickly.

Startup balance sheets limit empowering innovations

Christensen argues we’re pursuing the wrong kind of innovation because of system challenges. Startups lack the cash to afford long term technology development. Sometimes startups build empowering innovations by commercializing research from universities - OpenFlow networking is powering companies like BigSwitch. Other times venture investors may invest ten or twenty million for technology developments at great risk. But this happens too infrequently and at too great a risk to the investor. It’s the same argument that no startups are working on hard problems anymore.

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Other times big companies with huge balance sheets produce these empowering innovations like Yahoo/Google with MapReduce or Google’s Fiber initiative. These are more reminiscent of the Bell Labs innovation. But these are scant in number.

Sometimes the government gets involved like they have with solar power and electric cars.

The great hope is the circle completing itself

In my view, the the most exciting possibility of large scale and real empowering innovation creation isn’t any of these because they all drive only very small volumes of innovation.

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Instead, my hope is that the efficiency innovations allow new startups to create empowering innovations. Faster processors and server management tools (sustaining and efficiency innovation) enabled cloud computing, an empowering innovation. This cycle drives the valley and the economy forward.

To despair that we aren’t building important or truly disruptive innovations is to have a very short term view of innovation. Every step forward is a step forward. Some are bigger, some are smaller. Sometimes these steps occur within monoliths and sometimes they occur within startups. Sometimes they occur three in the same year, sometimes it takes thirty years to make a breakthrough. The most important thing is that the ecosystem (government, education, private enterprise, capital) continues to foster innovation. The rest will take care of itself.