The Gravediggers of Innovation

The following is a guest post by Nicolas Colin, a co-founder at TheFamily and co-author of a report commissioned by the French Government on taxation and the digital economy. The article was originally published in French on his personal blog; you can follow him on Twitter at @Nicolas_Colin

It all starts as a sort of informative message. An employee at Orange comes to see his boss and presents him with an idea he’s quite proud of: “Sir, since we’re a media company but also an innovative business, we could dedicate one of our programs on the Orange Innovation TV channel to big bosses innovating within large companies. It would consist of interviews with truly innovative managers, showcasing their innovations compared to those of startups, who give us many lessons but little results. We already have a title for it: The Decision Makers in Innovation. We’ve created an intro à la Top Gun.”

http://www.youtube.com/watch?v=UVRUxtPKK-w

Delighted, the boss at Orange supports this idea: “Listen man, your idea is brilliant. I’m all in, I give you carte blanche. I also have some ideas for the first guests, let’s look at my address book together to see who I owe a favor to”.

The first group of guests just happens to include Nicolas Rousselet, head of G7 taxis (who by the way don’t operate only taxis, but also a conglomerate of car rentals, logistics, storage units, etcetera). The fact that this man is a guest of such an audacious and disruptive show as is The Decision Makers in Innovation is absurd: after all, he is currently committed to a vast lobbying effort to trample innovation in the field of individual passenger city transport, under conditions thoroughly detailed HERE and THERE. Anyway, in a recent and exceptional edition of The Decision Makers in Innovation, Nicolas Rousselet explains his vision of innovation.

At this point, it’s better to finish off with irony: Nicolas Rousselet’s take on innovation definitely deserves some attention, as it is ridiculous and wrong from beginning to end. Here are some excerpts and my comments:

“Innovation takes two forms: technological innovation, in other words technical, and innovation in terms of service, as in new services” (1’50’’)

Well, no. In the entrepreneurial age, innovation takes only one form: that of a new and valued offer in a mass market, through the development of a new business model.  Advances in technology without a change in business model nor traction are mere productivity gains from the multitude’s standpoint, and are commoditized in the blink of an eye, preventing the company from differentiating itself.

“As for the GPS, all that, on that field we’re really on the cutting edge. We’ve been geolocating our taxis for a long time now” (3’05”)

No, no. If we’ve been doing something for a long time, then we can’t really be on the cutting edge. These days, things change quickly in geolocation and related services.

“Bringing clients and drivers closer together requires high technology” (3’18”)

Not at all. It requires at most for the driver to be nice, and possibly a mobile application, which is available to basically anyone from a technological standpoint. Of course, it might also entail some innovation, namely a new business model: we improve the relationship between taxis and clients so much more that we create an alliance with the latter, encouraging customers to be more active and thus generate more data. This cannot happen without trust, and it becomes more valuable as the customer base grows in size, well beyond the value of premium customers (I’ll get back to that).

“Each subsidiary within the group is managed autonomously,  independently, by a manager interested in its results” (4’12”)

Which is precisely what characterizes non-innovating companies. Innovation is to combine the components of the company’s business in different ways, even if it means some will be worse off if it’s the price to pay for the development of the company as a whole. A subsidiary manager who’s only interested in its results will do everything he can to kill innovation within his branch, as well as the entire company, in order to protect his rent. Which is why, if the goal is really to innovate, a branch manager should be looking at the company’s global results. Steve Jobs, traumatized after reading The Innovator’s Dilemma, understood this well and put it in practice a long time ago at Apple, notably with the concept of unified P&L.

“We won the innovation award in 2010 from the professional chamber of self-storage” (5’00”)

It’s very practical to create your own little awards to make outsiders believe that you’re innovative. But no, it doesn’t work like that. Innovation in the age of the multitude is measured by exponential returns to scale and dominant positions in global markets. No other innovation contributes significantly to the development of the French economy. On the contrary, reinforcing comfortable rent-seeking situations contributes decisively to the stagnation of per capita income and rising inequality

“Management of our taxis has been fully digital for almost 20 years, with GPS” (6’50”)

If taxi management were fully digital, they would not have stuck to GPS and would have invented Uber before Uber. Let me remind you of the famous quote from The Social Network about the Winklevoss brothers.

“Our taxi drivers are all independent. It’s a true partnership, where the quality of service is the leitmotif” (8’00”)

There are entire forums that show otherwise – both by foreign tourists and Parisians themselves, who comment on the bad experience of Parisian taxis. The latter also proves that taxis being independent isn’t necessarily the silver bullet to guaranteeing a maximum quality of service. As Apple’s triumph has largely demonstrated for 10 years, unification of the user experience (or a well-designed platform, like Amazon’s) are the the best options to ensure high quality service.

“We launched the premium business club in December 2011, and now we even have iPads, we have water, we have tissues” (8’10”)

We are all very impressed, but there is little innovation in enhancing the offer exclusively to customers who pay very expensive premium subscriptions. The flight to the premium – and the consequent abandonment of mass markets – is one of the phenomena that diverts French companies from innovating in the age of the multitude – and there are many other examples besides the G7 taxis. It’s a good thing Nicolas Rousselet shamelessly admits that all it takes is some tissues and some more water bottles: we are definitely very far from innovation.

“We can see that traffic does not flow well, we still have a long way to go to improve traffic conditions in Paris” (8’40″)

The reason why roads are congested in Paris is precisely because too many people, frustrated with public transportation and unable to afford the Premium Business Excellence Platinum of G7 taxis, choose to take their own vehicle to travel in the city. New business models developed around city vehicles (car-sharing, minicabs – called Tourist Vehicles with Chauffeur or VTCs in France, etc.) aim to discourage individuals from taking their car and will eventually result in the decongestion of Parisian traffic. The fact that G7 taxis find the current conditions “bad for business” is shameful: first of all, bad traffic allows them to keep their taximeters running (taxis can take their sweet time, clients are the ones in a hurry); secondly, the regulatory barriers that they defend at all costs are the very reason why it is impossible to improve traffic conditions in this city that is becoming more and more difficult to live in.

Anyway, as summed up so brilliantly by this journalist, particularly tough during interviews, “the wheels are turning for innovation” when it comes to G7 taxis. I would add two things about Nicolas Rousselet and the regulatory conditions for innovation in urban transport:

“VTCs (minicabs) must stay within the field that they were created for” he declared in July, as quoted in an article published by Le Figaro. Wrong again: once more, when it comes to innovation, the goal is precisely to move the lines that separate the different activities and to synthesize them into a new business model, centered around the user – the condition of alliance with the multitude. The deployment of a quality offer on a very large scale is the strategic goal in the entrepreneurial age and the only core business of a disruptive startup, as Steve Blank and Paul Graham constantly remind us. It make no sense at all, in a world where technology is constantly evolving and the multitude is continuously revealing new needs, to ask a company to remain in the business for which it was originally created. We can do this, of course, but then we’d have to assume that we’re giving up on innovation – a driver of economic development, a factor in job creation and inequality reduction and, incidentally, a decisive contribution to improving the lives of customers;

We also learn today, in an article published in Le Monde (or here on The Rude Baguette), that “the 15-minute delay [between the booking time and the time of arrival] will be applied to all VTC clients, except for high-end hotels and trade shows”. A fine victory for lobbying, conflicting in every way with the public interest, and almost unbelievable when one considers that it has been granted by a leftist government. So basically, the wealthy clients of the Royal Monceau and the VIP car shows will be served without delay. The less wealthy, on the other hand, will wait or take the bus, and innovative entrepreneurs will simply disappear. (Let’s remember once more that breakthrough innovations happen almost always in activities with low-margins on low-margin markets. If we restrict innovative offers to premium customers, there won’t be enough critical mass to impose a disruptive innovation.)

Innovation is dying from being misunderstood.

There is no better counterpoint to Nicolas Rousselet’s vision than the points hereafter on what innovation is, why it is important and how to promote it.

Innovation cannot thrive in the presence of barriers that stiffen the economy and protect existing positions. The mere existence of these barriers, particularly legislative and regulatory ones, deter any capital allocation to activities that move the lines within the sectors concerned. What’s the point of investing in an innovative French company working in the field of VTCs if the ROI will be degraded or even eliminated by the regulatory obstacles that protect the rent of taxis? It is much more profitable to allocate capital to an American company, which will in turn overcome regulatory hurdles and conquer a huge market.

Under such conditions, U.S. companies thrive, while the French are literally prevented from being born. And when French users (or tourists) will get fed up with the poor service of individual passenger transport in Paris, and will finally obtain the lowering of regulatory barriers, only American companies will have the service quality and the necessary infrastructure to take over the French market. (Likewise, when the media chronology finally adapts to new online forms of consumption of cinematographic and audiovisual content, only Netflix, not Canal +, will be able to roll out its service to French users).

With a legal framework hostile to innovation, it is clear that a public policy of financial support for innovation is futile. We can allocate all the money we want to OSEO, to BPI France, to the sanctuarization of the CIR and the Young Innovative Company status, but companies funded in this way fail to raise capital as fund managers can perfectly identify the legal barriers to entry on the different markets and thus conclude that an investment in these companies will never be profitable. In the presence of legal barriers protecting the rent of incumbents, public money spent to support innovation is like cold water that is poured over a white-hot plate: it evaporates instantly.

The disease is spreading…

The problem would be limited if such legal obstacles existed only for VTCs. But, far from being confined to one area, they multiply. Creative industries face longstanding barriers to innovation. Hotels deploy a large-scale lobbying strategy for laws to be toughened and so that they are protected on three fronts: first, already existing intermediaries within the market for booking hotel rooms; second, Google’s Hotel Finder; and third, AirBnB, which intensifies competition in the accommodation market by making available rooms and houses that are placed on the market by individuals. Booksellers seem poised to get a ban on the free shipping for books ordered through distance-selling applications. You get the idea. As technology eats the world, fires are reported pretty much everywhere and the response is always the same: erecting a regulatory barrier that discourages the allocation of capital to innovative activities, thus preventing the emergence of future French champions in these sectors.

On all these issues, we pay dearly the lack of a French lobby for innovation. It is not at all clear that such a lobby can even exist. In the United States, this lobby was formed and is able to deploy its power due to a double anomaly: companies can finance political campaigns, and the richest companies, whose market capitalization is the highest, are also the most innovative. The lobbying activity of these companies is complemented by that of the National Venture Capital Association, an organization which defends the interests of venture capital funds, even against the interests of private equity, investment banks and depository banks.

There is nothing like that in France: none of our larger companies is an innovative company, nor a high-growth company as are the Californian digital giants; our venture capital funds are scarce, scattered, diluted on the institutional front in the French Association of Private Equity and finally, innovative entrepreneurs and managers of venture capital funds are largely unknown or ignored by senior officials from the Treasury Department, members of ministerial cabinets and, of course, parliamentarians.

There can only exist a single comprehensive public policy for innovation. Its motive is that innovation is the main driver of growth and economic development. Its cardinal rule is that all public policy decisions, without exception, must be taken in a direction favorable to innovation: in financing the economy in terms of industry regulation, in terms of taxation and social security. No other public policy can be conducive to innovation.

If exceptions are increasing, if innovation is only another priority among many, if we do not lower the regulatory barriers to business model innovation, then our fate is sealed: our economy will soon be held exclusively by people who, although they claim to be the decision makers in innovation, are actually its gravediggers.

Nicolas Rousselet, G7 taxis, and all those who support them in Parliament or in the administration, represent only a small taste of a bleak future: soon, our economy will resemble that of Third World countries, where the richest man in the country, who happens to be the head of state’s brother or brother-in-law, made a huge fortune through an ill-gotten monopoly on importing used Mercedes. In such a setting, we win everything: market distortions, atrophy of local production, added value reduced to naught, slowing growth and increasingly unbearable inequality.

Is this what we want? And if not, then what are we waiting for?