The more significant gaps in Australia's innovation system

This week I had a column published in the AFR in which I noted that what is missing in Australia's start-up funding marketplace is risk takers, the lack of risk takers then results in some of the best opportunities looking elsewhere, and thus the return for start-up investing is low.

The AFR also reported on a debate on innovation at The Australian Financial Review/Crawford Australian Leadership Forum in Canberra. In a different take on the financing issue former institutional investor Doug McTaggart told the forum that there was plenty of money available for innovative business ideas, "But we have a huge gap in term of capable experienced personnel who can take an idea from the cradle to the early stages of commercialisation. The US has them in spades."

These "capable experienced personnel" seem to be the magic missing ingredient. Perhaps McTaggart and I are both right - but the important missing part of the skill set of the personnel we bring to the task of taking ideas to commercialisation is the willingness to fail.

The importance of embracing failure had featured in another AFR column reporting on research by Experian. Experian Australia & New Zealand managing director John Merakovsky said, "The key thing, which was pleasantly surprising in the research, is the emergence of, particularly in the progressives, of some acceptance and tolerance of failure. The idea of one big strategy without getting market feedback and getting it right is extremely risky, but being able to go down this path, try things, fail, try things, win, is really important."

The importance of being prepared to fail isn't new in management literature. It was one of the concepts promoted by Peters and Waterman in In Search of Excellence, and captured in the phrase "Ready, Fire, Aim!"

(source see slide 11 here)

At the same Leadership Forum, former IBM Australia CEO Andrew Stevens said "I don't think we have a disruptor mindset" and that as a nation we need to understand this as an issue about jobs "This issue of future jobs for our young people…is one of the central issues for our generation...automation and autonomous systems will have an impact." CISCO's Irving Tan (predictably) said the next wave of digitisation would involve the industrialisation of the internet caused by connecting robots and sensors.

And maybe between these two we might also find our path to experimentation and failure. Disruption isn't a goal directed activity solved by deductive reasoning, it is a creative task that uses skills in "lateral thinking." You learn by doing. As Gretzky says you miss 100% of the shots at goal you never take. But also, to get better at shooting goals you take lots of shots at goal (and OTHER training).

Elsewhere former chief futurist at CISCO Dave Evans wrote "Here's what policymakers need to understand: Each individual device hooked up to the Internet is a kind of experiment, and any given product might succeed or fail. But in aggregate, this is an advance so large it's hard to grasp as a single thing."

Finally though we have to confront the question of whether there is a problem, more specifically does digital disruption really create growth and jobs. That was the question the AFR's Jennifer Hewitt posed after this year's Leadership Forum.  Hewitt at least believed that we should give it a go, concluding "And although it's true no one can predict the relative significance of the internet compared with say, electricity, it seems reasonable to take out a form of national insurance policy."

But interestingly that question featured at last year's forum and I answered it almost a year ago in the pages of the AFR. In brief, the digital revolution is only one of the factors influencing our growth rate; its impact is masked by factors pulling growth down, especially growing inequality.

One of the themes of my writing here and elsewhere is "what can Government do to drive Australia in benefiting as a digital economy." But often the question is also "what can industry do."

A separate item in the AFR this week got me very angry. Under the heading "Research students must be trained for jobs in industry" the executive director of the Australian Technology Network makes a case for the  Industry Doctoral Training Centre in Mathematics and Statistics model. It teams each PhD student with an industry partner to work on an industry problem applying mathematics and statistics. We are told that students also receive course work in technical and business skills such as leadership, communication, project management and commercialisation. The national student group also gets brought together regularly for conferences and networking events.

This is all very interesting, but the piece is otherwise confused. On one hand industry employs only a third of Australia's researchers, but we are told the PhD program doesn't train researchers for jobs in industry where "many of them will be employed." I get particularly annoyed when the article cites the Global Innovation Index and Australia's "innovation efficiency rank" of 81st as some kind of validation that the "problem" is all about not having researchers "industry ready." My anger is two-fold.

Firstly because the GII is a piece of unscientific gobbledygook (this is true of almost all published Indices - see this discussion that refers to the ITU ICT Development Index). It's starting premise is that the number of patents is the important output. It correlates the index to GDP/capita but never attempts a correlation to growth. The former correlation is to be expected - rich countries spend more on inputs like education, the causal flow is from wealth to investment in innovation. The valuable question is to devise an innovation index that has predictive power on growth!

Secondly because it makes the huge assumption that industry doesn't employ researchers because they are not "industry ready". The reality is that industry simply has no interest in research in Australia, but thinks it does. The latter point comes from the difference between Australian businesses self-assessment of university research collaboration as measured by the WEF Global Competitiveness Index and the data provided by the OECD (see note below).

Industry is forever banging on about students from first degrees not being "job ready", this pitch about research degrees is just another variant. What we need is a national conversation about the difference between education and training. The former prepares the individual by providing base level knowledge and skills ready to be trained. Medical practitioners provide the best model - the degree provides the foundation, two years in hospitals followed by specialist (including GP) "training" creates the skilled practitioner. But that is only the start of a career that demands life-long learning.

So - the gaps in our system - a lack of risk takers and managers who know how to fail fast, a jaundiced view of ICT, and industry that has a mistaken belief about its own participation in research and training.

Note: 
Australia is rated last in the OECD for firms collaborating on innovation with higher education or public research institutions both SME and large firms. The World Economic Forum Global Competitiveness Index (I have used the 2014-15 report) includes as one of its indicators of "innovation" (12.04) "University-industry collaboration on R&D" which is derived from a survey question "In your country, to what extent do business and universities collaborate on research and development (R&D)? [1 = do not collaborate at all; 7 = collaborate extensively] |
2012–13 weighted average".  To derive a single rank for the OECD the expenditure in the OECD data is weighted 70% to large firms and 30% to small as this weighting generated the highest correlation between the two ranks. Australia is ranked 33 out of 33 on the OECD data but its managers rank itself 15th in the OECD. (Note the OECD data is collaboration expenditure as a percentage of product i.e. revenue)

Will aerial cable rules plague the NBN?

The proposal announced last week to amend the Low Impact Facilities Determination (the LIFD) to increase the size of cable used for aerial telecommunications deployment raises the question of whether the NBN will face a new round of controversy.

People of a certain age will recall the public consternation that followed the deployment of the Optus and Telstra HFC networks. This consternation received a bit of a public revival when NBN Co first advised that it might include an aerial component in its rollout. (An example including a summary of the history is provided in this Senate committee submission by Ross Kelso and Peter Downey). See also this story about Haberfield.

Dr Kelso says of himself that he "successfully lobbied on behalf of local government for major changes to the Telecommunications Act and associated Codes for reduction of carrier powers and immunities." Dr Kelso also refers to a report for the Department "Putting cables underground : report of the review of options for placing facilities underground, as required under clause 49 of schedule 3 of the Telecommunications Act 1997 / Putting Cables Underground Working Group" which unfortunately doesn't seem to have been captured in the appropriate archiving of the Department website.

Those earlier concerns about NBN aerial deployment were assuaged by the agreements with Telstra and Optus. The Telstra agreement provided access to Telstra infrastructure and reduced the potential use of aerial deployment. More importantly the agreement with Optus saw one of the two HFC networks being completely retired - which would have included its removal. So Labor's NBN was going to reduce the amount of aerial infrastructure over all.

The decision to retain BOTH HFC networks under the MTM deployment already means that there was to be no improvement. The proposal introduced last week means it will get worse.

The consultation paper outlines exactly how it is that the MTM has introduced this problem:

In limited circumstances, such as when NBN Co adds an extra cable to an existing 42mm bundle, the diameter of the HFC cable bundle will be 48mm. Typically, HFC cable bundles will be much smaller than this. In addition, NBN Co has advised that in very limited circumstances, individual copper cables of up to 40mm in diameter will need to be used to augment the copper network for FTTN. Further guidance on the limited use of such cabling will be provided in the Explanatory Statement to the amending Determination and other documents as required.

The question is how much attention will be paid to the issue BEFORE the LIFD is amended, or how much it will simply be after the infrastructure is augmented.

Certainly one politician has previously sought to make the greater use of aerial infrastructure for communications an issue - that is the Parliamentary Secretary to the Minister for Communications, Paul Fletcher. The video below is from his original by-election campaign in Bradfield.

But Mr Fletcher came to this late.

When the Optus cable was being deployed the Member for Warringah was highly vocal on the topic.
Here are some excerpts.

Grievance Debate (“Information Superhighway” ) 18 September 1995

I have to say that I am not against pay TV. I just think that pay TV, if delivered by cable, should be delivered by cable underground. It should be delivered by cables which enhance our life and do not detract from our life. We have more than enough clutter overhead. We have more than enough space junk in our cities already; we do not need any more to deliver us pay TV via cable.
….
This is an absolute outrage. It shows that this system of rules that the government has in place is completely meaningless. It shows that Austel is a watchdog which does not even bark let alone bite. It shows the need for the government to get serious about telecommunications regulations straight away.

Statements by Members, 6 March 1995

I support the introduction of pay TV but not at the expense of the local environment. Telecommunication companies now propose to deliver pay TV by cables draped from existing power poles: that is, cables of the diameter of a one-dollar coin draped from pole to pole with a signal amplifier the size of a briefcase suspended from the wire every 200 metres. Maybe some communities will be prepared to accept overhead cabling even more cluttered and ugly than it is at present, but I suspect that the vast majority would object to having the information superhighway dangling overhead right outside their front doors.

Adjournment 27 November 1995

I am not here to apportion blame; I am here to appeal for reason. Telstra say they cannot give Optus access to their wires at anything other than what Optus think is an extortionate cost. Optus say that they cannot afford to go underground. Sydney Electricity say they cannot put all their wires underground because the profits have to be high and the prices have to be low. If that is economic rationalism, it does not make much sense to me. 

I call for a local summit of Sydney Electricity, Optus and Telstra, in my electorate, to try to ensure that 21st century technology is not delivered by 19th century means.

The Member for Warringah kept at it when the Coalition formed Government in 1996.

Second Reading Appropriation Bill no.1 10 October 1996

Earlier this week in my electorate corporate rights and environmental concerns came into head-on collision. Optus commenced its cable rollout in the municipality of Manly and many of my constituents feel that they are now threatened with a form of technological home invasion. The reason for this is the former government's telecommunications regime, which put telecommunications carriers in effect above the law. You and I cannot put a flagpole in our backyard without getting council permission first, yet these carriers can do virtually what they like. They can put a 30-metre-high phone tower virtually wherever they want.
…
I commend the new Minister for Communications and the Arts, Senator Alston, for his draft telecommunications national code, which gives councils significantly more say over infrastructure. . ...It is very important that we have a national plan to ensure that, sooner or later, all the overhead infrastructure goes underground. ...

It is my understanding that the minister is looking into the possibility of a national burial fund for overhead infrastructure and that he is considering bringing the various parties to this issue together to see whether a sensible compromise can be hammered out. I strongly support those efforts and they cannot happen a moment too soon for the people in my electorate.


I wonder what position Mr Fletcher and Mr Abbott will take on the proposed amendment to the LIFD!

RBA Governor Glenn Stevens bells the cat on infrastructure policy

Many thanks to Bernard Keane and Glen Dyer of Crikey who neatly summarised the political message in Glenn Stevens speech yesterday.

Having outlined the bank's disappointment about private sector investment not filling the gap left by the collapse of the mining boom, Stevens effectively said the solution was in more effective infrastructure spending.

In particular he said "it would be confidence-enhancing if there was an agreed story about a long-term pipeline of infrastructure projects, surrounded by appropriate governance on project selection, risk-sharing between public and private sectors at varying stages of production and ownership, and appropriate pricing for use of the finished product."

In some ways he was reflecting the earlier criticism of the Productivity Commission that there is too much emphasis on big tendered projects rather than ongoing infrastructure programs.

But a "meta-analysis" of the problem comes down to the move over the last twenty years from having Government Departments that had their own construction capability and instead outsourcing the work to the private sector.

The public sector model was criticised for being inflexible (unable to ramp up and down to deal with priorities) and for high labour costs (through sweet heart deals by managers who don't confront market pressure). Both have proven to be spurious.

The "optionality" that was supposedly created by contracting out ignored the fact that there aren't really other activities that can be turned down and up counter-cyclically to a major contract. So the so-called competitive tendering market just includes the cost of this optionality (the cost to ramp up and then close down) for each project. Maintaining a standing workforce and planning projects around the availability of resources turns out to be a cheaper way to do things.

External contracting has been successful in driving down wages, but that hasn't flowed through to cost. Much of our construction industry is now foreign owned and I'm prepared to take a bet that large scale corporate tax avoidance is rife, and probably occurs at multiple levels in the tiered contracting model. So the country is bleeding money with every contract.

I know Stevens talked about "risk sharing between the public and private sectors" - but this is such a hard concept. The only risk the private sector is potentially best at is managing execution risk on the contract - but the game constructors play is to see how much they can interpret out of scope of the original work and then bill as a variation. The alternative of build-operate-transfer (such as the LCT and CCT) fail because the private sector is least well placed to absorb demand forecast risk.

The nature of the problem is now very clear. The destruction of the public sector construction capability is causing lasting damage to the economy.

Unfortunately it isn't doing lasting damage to the law firms, accountants and banks that generate enormous transaction fees from the private sector model. Together they not only constitute the most effective lobbyists in the country, they are also increasingly the source of Government's contracted advice.

It would be hoped that the left wing Think Tanks like the Chifley Research Centre or McKell Institute might find the time to pursue this. Unfortunately, McKell's recent report on Transport Infrastructure didn't dare touch it. Similarly NBN Co never considered the prospect of a direct employment model for building their network.

It is most frustrating that endless repetition of a mantra about the efficiency of the private sector is supported despite all the evidence to the contrary.

The Rich are Getting Richer - but more equal with each other

The BRW Rich list is out for another year. Apart from the headline that Gina Rinehart is supposed to have gone from wealth of $20 to $14 billion what can we learn?

Well apart from that move at the top we can also reveal that the bottom entry has gone from $250 million to $286 million. However, the BRW is quite confusing in its list construction. Some wealth amounts are listed for families but occupy one place, whereas others might be listed in two names but the list for some reason gives them two places. As a consequence there are actually only 185 "wealth pools" listed, not 200. The average pool has gone from $1000 million to $1053 million. That's a growth of a bit over 5% and hence better than inflation.

Unsurprisingly if the bottom has increased and the top massively decreased the wealth distribution is ever so slightly more even as shown in the chart of proportion of population measured against cumulative proportion of wealth.

However the change is very slight. Statistical analysis of the list over the last ten or more years could be a fun exercise. I'll just add it to the long list of fun exercises I have to do.....

When research isn't

I have a weekly Google Alert on the term "Digital Economy"to keep track of what is happening in the policy space.

This week I got VERY EXCITED (yes I want that emphasis) when I saw two stories (Computer Business Review and  Information Age) that said over half of all UK businesses don't understand the digital economy.

You can understand my excitement, because getting business to understand the implications of the economic transformation we are in is a critical part of reaping the benefit.

One of the two handily linked to the media release issued by the company that commissioned the research. The release started:

A study released today has found over half (57%) of business leaders do not understand the Digital Economy, highlighting that organisations are not yet fully prepared to deliver the digital experiences and access buyers desire and require.

Reading the release I realised that both stories were simple cases of "churnalism" - faithful reproduction of the release as if it is an actual story. More importantly the release contained no link to the "study."

So I went to the website of the company that conducted the research, OnePoll, hoping to find it there. I was immediately concerned once I read the description of the company that came up on the Google search for OnePoll.

And down at the bottom of the homepage I found this delightful piece of text.

pr surveys for brand exposure
Generate content and news angles with a OnePoll PR survey, and secure exposure for your brand.
Our PR survey team can help draft questions, find news angles, design infographics, write & distribute your story.

The "study" was the creation of an agency that specialises in the creation of surveys that have only the purpose of securing brand exposure. I have emailed the contact on the press release and asked if there is a study that has actually been released, or whether the word "release" was a circular reference to the media release itself. (I recently had this conversation with an Australian PR firm over a similar claim of the release of a study).

These kinds of surveys are not new. As Kristen Drysdale explained in a recent episode (Serises 3, Episode 1) of ABC TV's The Checkout they are the source of most of the "clinical studies" claims made by the beauty industry.

My view is that in a data saturated world the last thing we need is bogus data that we need to wade through.

Joe Hockey got into a blather having used the term "disintermediation" to describe the disruption in the economy, but it has been around a long time and refers to the removal of the "middle men" in transactions. Shopping and the media are great examples.

If journalism is to have a future in mediating the information flow, it needs to understand that its job is to validate the claims made in a media release. It isn't hard to do. Simply Googling the name of the firm that conducted the research revealed that there should be concerns.

If a company claims research has been "released" but the details of the research haven't been released, then simply don't report the survey. Or even better write the real story that starts "today firm X tried to con the public and gain brand exposure by claiming to have released a study that wasn't released."

If the worst that happens to the commissioning firm is that they spend money and get no coverage, then one employee might not get their bonus. If the firm gets negative coverage as a consequence then management might care what marketing gets up to.

Telco competition hasn't reduced prices

Ever since the open market structure for telecommunications was adopted in 1997 in Australia, the ACCC has been required to publish an annual report reflecting on the state of competition.

As part of that report the ACCC has developed a price index to show the movement in prices. Every year it shows a real price decline.

In the media release to accompany this year's report the ACCC Chair Rod Sims states:

Competition is driving substantive reductions in the price of telecommunications services, significant infrastructure investment to improve the quality and coverage of services, and technological innovation. Consumers are seeing lower prices and improved services as a result of the vigorous competition that began in the 1990s.

 Unfortunately for the ACCC their price index isn't the only one available.

As part of the data collection for the Consumer Price Index the ABS also publishes data on the groups of goods used to derive the index. Communications data is available from 1972 and so the real price movement (Group Index/CPI) can be derived. The chart below shows the real price movements over that period as reported at the September 2014 quarter.

Communications is the red dotted line - and the decline has been relatively consistent since the 1975 spike. That spike (I think) was due to a massive increase in stamp prices when Post and Telecom were split from the PMG.

Since 1980 the ABS has kept a separate sub-series on telecommunications and postal prices. This shows that post prices have been stable in real terms while telecommunications prices just continue to drop.

There are two small blips in the 1988-91 period and around 1997 but neither of these periods of reform result in a fundamentally new trajectory.

I have previously undertaken a rudimentary econometric analysis of the data to 2009 and was able to demonstrate that scale and experience effects explained the price movements better than did the reduction in industry concentration as a consequence of competition reform.

It is a great pity that the competition regulator continues to claim benefits for a set of reforms that cannot actually be credited to them. In particular, infrastructure competition cannot be claimed to be the source of price declines in Australian telecommunications.

Turnbull's Triumph? Not really.

Christmas has come early for NBN Co and the Minister for Communications Malcolm Turnbull. Not only have they been able to announce the renegotiated deals with Telstra and Optus. The bigger present has been the mostly uncritical adoption of the company’s and the Minister’s messaging.

The AFR took the first prize by heading an Adele Ferguson column “NBN deal is Malcolm Turnbull’s triumph.” Elsewhere in the paper we were advised that “Telstra is primed to win a bigger role building and maintaining the national broadband network under a deal with the government-owned NBN Co.”

We need to just step back from this hype.

Firstly, let’s just note that Mr Turnbull always said the negotiation with Telstra, which started in September 2013, would be concluded quickly. In February this year he said they would be completed by “the middle of the year.”

If taking twice as long to complete the first significant task is a triumph, failure must be spectacular.

And despite descriptions of a “side deal” for Telstra in designing, building and maintaining the network, the reality is that both NBN Co and Telstra have simply said discussions are continuing.

The six month delay might be understandable if that more tricky negotiation was concluded, but it hasn’t been.

The next issue is to consider what Telstra is actually agreeing to. The Telstra announcement is thin on details. While Telstra is “kept whole” there is no detail on whether the specific amounts for duct leases and disconnection payments have changed. For the former we are advised that the payments deliver “equivalent NPV on a simplified basis.” For the latter the announcement merely says “payment construct preserved.”

We do know that NBN Co has taken on some extra costs. The first is a cap on duct remediation costs. The second is that NBN Co will bear the burden of duct remediation and maintenance costs in FTTN and HFC regions.

The announcement is totally silent on what the agreement says about the state of the copper before it is handed over.

It is well known that there are many cables that have suffered damage from a misguided earlier plan to seal the network with gel-filled joints. The gel has reacted with the cable sheath in many places, the only permanent solution of which is a new cable.

These are the joints that are currently ‘protected’ by inclusion in plastic bags.

Outside of the nit-picking on detail, the important point is that Turnbull’s renegotiation was only possible because there was a negotiation in the first place, and that only occurred because of a thing called “strategic commitment.”

Game theorists identify strategy as the move you make taking into account all the possible moves of your opponent. The question then comes down to how your opponent plays his strategy.

A good example is the story of the Optus Pay TV cable (HFC). As the second carrier Optus paid Telstra for access to the copper network for the origination and termination of each long distance call (originally called ingress and egress). Telstra was charging something like 4.5 cents per minute, and Optus thought it should be lower.

So Optus devised a plan to build an HFC network to also carry voice. But Telstra ignored the plan.

Optus then created a joint venture (OptusVision) with Continental Cablevision to build the HFC network. Telstra now realised the threat from Optus was real. Then CEO Frank Blount approached Optus offering to reduce the interconnection price, but by then Optus had a partner who told Optus they couldn’t do a deal because their voice traffic was now committed to the JV.

Telstra’s only response left was to build its own HFC network.

The move by Optus to sign a partner is a case of strategic commitment. An irrevocable act that will convince your opponent you are serious about the strategy.

Back in 2008 Telstra refused to submit its full bid for the original (fibre to the node) NBN unless the Government abandoned its requirement for structural separation. The Government’s advice was that there was no way to force Telstra to hand over its copper, and no rival bidder had a strategy for acquiring it.

The decision to proceed with a fibre to the home network was made on the advice of the Expert Panel and others that FTTN was not a cost-effective pathway to FTTP. However, it had the additional benefit of being a credible commitment the Government could make without needing Telstra’s co-operation.

Announcing the NBN in April 2009 as a decision rather than a plan added to its value as a strategic commitment. In reality it was only a proposal until the Implementation Study was completed in May 2010. It was never really a decision made in a rushed eleven weeks.

It was only when it was faced with this commitment and the proposed separation legislation (that only would have achieved functional separation and restricted Telstra’s mobile growth) that Telstra changed its strategy. They also, as a consequence, changed management.

It was only through these actions that the original negotiations occurred, and hence that Mr Turnbull has been able to conclude this new deal.

Whether it is a good or bad deal is yet to be seen. But so far it is nothing more than a transfer of the copper and HFC assets, though duct ownership stays with Telstra.

Clearly FTTH zealots will see it as a bad deal on principle. But that is a different discussion. NBN Co now presumably has all the information it needs to prepare a properly and fully costed Corporate Plan for MTM. That needs to be released in its entirety without redactions.