[Infowarrior] - Where Have You Gone, Bell Labs?

[Richard Forno]

The Future of Tech August 27, 2009, 5:00PM EST text size: TT
Where Have You Gone, Bell Labs? How basic research can repair the  
broken U.S. business model
By Adrian Slywotzky

http://www.businessweek.com/print/magazine/content/09_36/b4145036681619.htm

Name an industry that can produce 1 million new, high-paying jobs over  
the next three years. You can't, because there isn't one. And that's  
the problem.

America needs good jobs, soon. We need 6.7 million just to replace  
losses from the current recession, then another 10 million to spark  
demand over the next decade. That's 15 million to 17 million new jobs.  
In the 1990s, the U.S. economy created a net 22 million jobs (a rate  
of 2.2 million per year), so we know it can be done. Between 2000 and  
the end of 2007 (the beginning of the current recession), however, the  
economy created new jobs at a rate of 900,000 a year, so we know it  
isn't doing it now. The pipeline is dry because the U.S. business  
model is broken. Our growth engine has run out of a key source of fuel— 
critical mass, basic scientific research.

The U.S. scientific innovation infrastructure has historically  
consisted of a loose public-private partnership that included  
legendary institutions such as Bell Labs, RCA Labs, Xerox PARC XRX,  
the research operations of IBM IBM, DARPA, NASA, and others. In each  
of these organizations, programs with clear commercial potential were  
supported alongside efforts at "pure" research, with the two streams  
often feeding one another. With abundant corporate and venture-capital  
funding for eventual commercialization, these research labs have made  
enormous contributions to science, technology, and the economy,  
including the creation of millions of high-paying jobs. Consider a few  
of the crown jewels from Bell Labs alone:


• The first public demonstration of fax transmission (1925)
• First long-distance TV transmission (1927)
• Invention of the transistor (1947)
• Invention of photovoltaic cell (1954)
• Creation of the UNIX operating system (1969)
• Technology for cellular telephony (1978)

Decline in Lab Funding
In the decades after these initial discoveries, vibrant industries and  
companies were born. The transistor alone is the building block for  
the modern computer and consumer-electronics industries. Likewise,  
DARPA's creation of the Internet (as ARPAnet) in 1969 and Xerox PARC's  
development of the Ethernet and the graphic user interface (GUI)  
further developed the transformative computer and Internet industries.  
The basic research breakthroughs unleashed subsequent cycles of  
applied innovation that created entirely new sectors of our economy.

But since the 1990s, labs dedicated to pure research—to the pursuit of  
scientific discovery—have seen funding slowly decline and their  
mission shift from open-ended problem solving to short-term commercial  
targets, from pure discovery to applied research. Bell Labs had 30,000  
employees as recently as 2001; today (owned by Alcatel-Lucent ALU) it  
has 1,000. That's symbolic and symptomatic of the broken link in the  
U.S. business model. With upstream invention and discovery drying up,  
downstream, industry-creating innovation is being reduced to a trickle.

It's easy to ascribe current job losses in the U.S. to the deep  
recession or outsourcing. Both are to blame, but neither is at the  
root of the larger problem, which is lack of new, high-quality job  
creation. We are in the throes of the fourth recession since 1981. We  
have been outsourcing jobs for decades, but we have always bounced  
back with a new industry—a blockbuster industry. Discovery drives  
innovation, innovation drives productivity, productivity drives  
economic growth. But this time it's different, and whenever the  
current recession mercifully ends, the U.S. economy will not respond  
with the same job-creating vigor we have come to expect.

Job Creation a Huge Challenge
In the past, when the U.S. exported millions of high-paying jobs to  
low-wage countries, we replaced them with an even greater number of  
high-paying jobs in industries whose inception could be traced back to  
science done decades earlier. The PC, Internet, and cellular  
industries, born in the 1980s and 1990s, more than offset the loss of  
high-paying jobs in manufacturing industries like consumer  
electronics, steel, and others as the economy shifted from a  
manufacturing to a knowledge base. But in recent years, the software  
and manufacturing jobs lost have been largely replaced by millions of  
low-wage jobs in fast-food and retail or other service businesses.  
Finance has been a source of ongoing job growth, but recent events  
have proven that growth to be unsustainable. We've stopped creating  
new high-paying jobs.

We should not underestimate the magnitude of the job creation  
challenge. Outsourcing and extended recessions are not the only job  
destroyers in our system. There is also the constant pressure of value  
migration (the flow of value from old business models to new), which  
continues to be the major force reshaping our economy and will  
eliminate a large number of jobs in the next decade. (Think of all the  
old business models you know, from newspapers, to printing, to  
landline telephony, to the mighty, but now vulnerable, PC).
As a consequence of exporting good jobs that are not fully replaced,  
the U.S. demand engine is broken. Of the roughly 130 million jobs in  
the U.S., only 20% (26 million) pay more than $60,000 a year. The  
other 80% pay an average of $33,000. That ratio is not a good  
foundation for a strong middle class and a prosperous society. Rather  
than a demand engine, it's a decay curve. As a nation, we have papered  
over our declining incomes by accepting the need for two incomes per  
household and by borrowing heavily, often against paper assets  
inflated by financial bubbles (dot-com and housing). In recent years,  
personal debt has grown much faster than personal income. In 1985 the  
ratio of household debt to household income was 0.7 to 1; in 2000 it  
was 1 to 1; in 2008, it was 1.7 to 1. We earned less, so we borrowed  
more. In 2007 we reached our limit.

This cycle looks only to be getting worse. The effects of the massive  
scaling back of American science and engineering research in the 1990s  
and 2000s may just be beginning. Unless reversed, it is likely to have  
its greatest impact a decade from now, when the missing discoveries of  
a generation earlier would have been expected to come to commercial  
fruition. It's time to identify—and fix—the root of the problem.

Rebuild Research Labs
The good news is that restarting the innovation engine is quite doable  
and doesn't require a massive investment relative to other spending.  
The return on investment is very high, especially if you consider the  
return across the companies and entire industries that are built on  
the foundation of the initial discoveries. The venture-capital and  
initial public offering components of the business model are still in  
place; we just have to rebuild the upstream labs that focused on basic  
research, the headwaters for the whole innovation ecosystem.

Science is funny. It's a crapshoot. It takes hundreds of people with  
high IQs, PhDs, and an incredible curiosity, work ethic, and  
persistence. It also takes critical mass, lab support, the right  
equipment and instrumentation, peer review, etc. It takes open  
communication among peers, and other subtle but critical cultural  
factors. It takes a tolerance for risk. A tolerance for failure. A  
willingness to think and apply innovation laterally (many of the big  
breakthroughs were originally aimed at other targets). It takes a  
culture that attracts, encourages, and rewards the best minds.

The innovation path emerging from success is equally unpredictable. In  
many cases, the economic payoff is a decade away. Sometimes a decade  
and a half. And the success can lead in unexpected directions. Who in  
1975 could have predicted how the PC would evolve, how it created  
networking, and giants like Cisco (CSCO), which enabled the entire  
online sector and already two generations of blockbuster businesses  
(from Amazon AMZN and eBay EBAY to Google GOOG and Facebook). Who in  
1980 would have envisioned that the work at Bell Labs on novel  
cellular communications technology would lead to the global mobile  
revolution that is reaching into the most rural and remote corners of  
the world, creating millions of jobs and raising productivity and  
incomes?


Many of the classic scientific research labs, such as Bell Labs and  
RCA Labs (now Sarnoff Corp.), were started and funded by companies  
with virtual monopolies and very strong, predictable cash flows. They  
were able to embrace the uncertainty and serendipity of pure research  
in the context of their business. But such companies don't exist  
today. With the increasing focus on shareholder value that began in  
the 1990s as global competition heated up, Fortune 500 companies could  
no longer justify open-ended research that might not directly impact  
their bottom line. Today, corporate research is almost exclusively  
engineering R&D, tending more toward applied research with a 3- to 5- 
year time horizon (or shorter). IBM, Microsoft MSFT, and Hewlett- 
Packard HPQ, for example, collectively spend $17 billion a year on R&D  
but only 3% to 5% of that is for basic science.

Basic Science Gives Way to Fast Payoffs
Consider what has been lost. The diminution of Bell Labs—the crown  
jewel of the innovation ecosystem—is most jarring. Bell Labs was  
founded in 1925 as a joint venture of AT&T T and Western Electric  
(AT&T's manufacturing arm) to develop equipment for the Bell System  
phone companies. Bell Labs scientists have won six Nobel prizes in  
physics. However, starting in 2001, funding and staffing at Bell Labs  
was drastically reduced due to budget cuts. In 2008, parent Alcatel- 
Lucent announced it would be pulling out of its last remaining areas  
of basic science—material physics and semiconductor research—to focus  
on projects that promise more immediate payoffs. The legendary Bell  
Labs, an engine of scientific discovery and industry creation for more  
than 80 years, is essentially gone.

A similar fate has befallen Sarnoff Corp. Born as RCA Labs in 1942 to  
support the war effort, it developed technologies such as improved  
radar antennas, radar-jamming antennas, and acoustical depth charges  
for maritime warfare. In the 1950s and 1960s, RCA Labs produced  
breakthroughs in numerous broadcasting and related fields, including  
color TV, tape recording, transistors, lasers, advanced vacuum tubes,  
solar cells, and infrared imaging. At its peak in the 1970s, RCA was  
generating more patents than rival Bell Labs. In 1986, RCA was  
purchased by General Electric GE, which spun off Sarnoff Lab as  
Sarnoff Corp., a wholly owned subsidiary of SRI International. Sarnoff  
is now a shadow of its former self, developing smaller technologies  
with a commercial focus on a drastically reduced budget.

If the 1950s and 1960s belonged to Bell Labs and RCA, the 1970s and  
1980s belonged to Xerox PARC (Palo Alto Research Corp.) and DARPA.  
PARC was the legendary Silicon Valley spawning ground of the Ethernet,  
movable real-time computer text, and graphical user interfaces.  
Companies such as Apple AAPL, Microsoft, and Adobe ADBE have built  
global businesses that have created hundreds of thousands of high- 
paying jobs, based in large measure on PARC's breakthroughs. Xerox  
missed most of these opportunities, but has created a multibillion  
laser-printing business based on work done at PARC. But PARC's  
research staff has shrunk drastically as Xerox's performance has  
forced dramatic budget cuts.

The Defense Advanced Research Projects Agency (DARPA), originally  
launched in 1958 as a response to the Soviet launch of Sputnik, is  
responsible for the Internet and numerous technologies with  
applications beyond the military. Threatened by Soviet technological  
advances, the Eisenhower Administration formed DARPA to ensure that  
American expertise in science and engineering would lead the world.  
The result: breakthroughs in time-sharing computers, computer  
graphics, microprocessors, very large-scale integration (VSLI) design,  
RISC processing, parallel computing, local area networks, and the  
Internet. DARPA progeny include Amazon, eBay, Yahoo YHOO, Google,  
Facebook, YouTube (GOOG), and hundreds of other companies that might  
never have come to life without DARPA's open-ended research that led  
to the Internet.

How to Reignite Innovation
In a post-September 11 world, DARPA's mission has shifted from science  
to tactical projects with short-term military applications, but it's  
not clear that shifting to a short-term applied approach will be as  
effective for the military as open-ended research. As military  
historian John Chambers has noted, none of the most important weapons  
transforming warfare in the 20th century—the airplane, tank, radar,  
jet engine, helicopter, electronic computer, not even the atomic bomb— 
owed its initial development to a doctrinal requirement or request of  
the military. Indeed, without DARPA's breakthroughs in information  
technology, military tools such as unmanned systems (drones) and  
global positioning systems would never have been possible.

For any institution—whether an individual company or government agency— 
cutting back on investment in basic science research may make great  
sense in the short term. Economic realities and shifting agendas force  
trade-offs. For a time, you can free-ride off the investments of  
others. But when everybody makes the same decision society suffers the  
"tragedy of the commons"—wherein multiple actors operating in their  
self interest do harm to the overall public good. We've reached that  
point. We're just beginning to see the consequences. We need to  
reverse the cycle, and we need to do it quickly.

As we consider reigniting the innovation engine, there are precedents  
that we can examine to show how the process of innovation can be  
speeded up. Given the current crisis and the urgency of generating  
high-paying jobs on a large scale, reducing the time lag between  
research and commercialization will be critical.

While the timeline for translating research efforts to tangible  
outcomes is typically 15 years or longer, that cycle can be  
accelerated. We've done it twice: First, the Manhattan Project, which  
responded to intelligence reports of Nazi research and created the  
atomic bomb in six years; and second, the Apollo Program, which landed  
a man on the moon eight years after President John F. Kennedy  
responded to Russian cosmonaut Yuri Gagarin's successful space flight.  
These examples provide a useful template we can to consider in  
responding to today's crisis.

Strong Leadership is Key
Spurred in part by a letter from Albert Einstein, President Franklin  
D. Roosevelt authorized a military program to explore the development  
of an atomic weapon as early as 1939. But despite a handful of  
scientific breakthroughs, including the discovery of plutonium at the  
University of California, Berkeley in 1941, the project languished for  
three years under lackluster leadership. In 1942, with the war in  
Europe going badly, theoretical physicist J. Robert Oppenheimer  
convened a meeting of leading atomic scientists at Berkeley, where the  
experts debated the conceptual options—fission vs. fusion, uranium vs.  
plutonium, and various ways to organize the fissile material—and  
reached a broad consensus about the design for the bomb.

Shortly thereafter, President Roosevelt named a new leader for the  
project, General Leslie Groves of the U.S. Army Corp of Engineers, who  
had just overseen the rapid construction of the Pentagon. Groves  
ordered the purchase of 1,250 tons of high-quality Belgian Congo  
uranium ore to be stored on Staten Island, N.Y., purchased 52,000  
acres of land in Tennessee to be the future site of Oak Ridge National  
Laboratories, and named Oppenheimer the project's director. Based on  
the Corps' tradition of naming projects after the headquarters' city,  
Groves named the effort the Manhattan Project.

With as many as 130,000 employees (including thousands of brilliant  
engineers and physicists), the project conducted research at more than  
30 sites in three countries (including Canada and Britain) and spent  
close to $2 billion (equivalent to $24 billion today). By mid-1945,  
six years after Roosevelt first laid down a marker and less than three  
years after Groves took over, two atomic bombs were constructed and  
used at Hiroshima and Nagasaki to force Japan's surrender and the end  
of the war.

No comparable scientific project of similar scale and urgency was  
pursued in the U.S. until the Apollo Program of the 1960s. When  
President Kennedy vowed in 1961 to land an astronaut on the moon and  
return him to earth "within the decade," only one American (Alan  
Shepard) had traveled into space. The difficulties were daunting, but  
the number and variety of technical innovations developed for the moon  
mission were remarkable. To power the instruments and computer on  
board the spacecraft, the world's first fuel cells were invented. To  
fabricate the structural components of the spacecraft with sufficient  
precision, computer-controlled machining was conceived and implemented  
for the first time. Insulation barriers to protect delicate  
instruments from radiation, "cool suits" to keep astronauts safe  
during space walks, water purification systems, freeze-drying of  
foods, innovations in integrated-circuit design and robotics, and  
digital image processing (later incorporated into computer-aided  
tomography (CAT) and magnetic resonance imaging (MRI)) all were  
technologies developed by NASA during the Apollo Program.

Presidential Support Crucial
Neil Armstrong landed on the moon on June 20, 1969, just a little more  
than eight years after President Kennedy's speech. Five more Apollo  
missions landed on the moon, the only occasions on which human beings  
have set foot on another heavenly body. The cost: $25 billion (about  
$135 billion in today's money), the largest commitment of resources  
ever made by a nation during peacetime. At its peak, the Apollo  
Program employed 400,000 people. And they accomplished the impossible.

Both Manhattan and Apollo delivered on their primary objectives. Both  
also created substantial new scientific discoveries that fueled new  
innovations across many other domains. Their success can be mapped to  
five crucial success factors: 1) full and sustained Presidential  
support; 2) effective leadership with a clearly defined mandate; 3)  
access to resources; 4) parallel paths/processing to save time; and 5)  
private sector outsourcing. Distilled, that means leadership,  
management, and money—not rocket science.

The Manhattan and Apollo programs offer important lessons as the U.S.  
government confronts huge social and economic challenges—energy,  
health care, infrastructure, transportation, communications, water  
supply, and climate change. Perhaps the most important lesson is the  
simplest one—it can be done—and the most difficult task may be  
singling out one or two challenges on which to focus. But when the  
will, resources, and energy are harnessed, human ingenuity is capable  
of converting mind-numbing challenges into mind-boggling achievements.

Today's challenges require the government to unleash a series of  
highly focused, aggressively managed projects supported by a growing  
research investment in a dozen or more leading companies that in the  
aggregate reproduce the cumulative impact of Bell Labs, RCA Labs,  
Xerox PARC, and others. In essence, this approach combines reliance on  
the broad ecosystem of industrial and national labs with the  
accelerated urgency of the two major national programs. Congress and  
the Obama Administration have begun the dialogue on energy and health  
care, which is encouraging, although we're far from consensus on an  
approach.

Critical Mass of Labs Needed
But repairing the missing link in the innovation infrastructure cannot  
be solved by government alone; corporate labs, collaborating with  
universities, are needed to shorten the path between discovery and  
commercialization. The alliance between DuPont DD and the  
Massachusetts Institute of Technology exemplifies this model: Funded  
by $60 million since 2000 to study biotechnology, biomaterials, and  
catalysis, the alliance is now expanding beyond bio-based science to  
include nanocomposites, nanoelectronic materials, alternative energy  
technologies, and next-generation safety and protection materials.  
Such an arrangement enables the corporation to leverage the  
intellectual capital of top universities. Conversely, the university's  
connection to real-world needs provides a quicker path to market  
testing and commercialization.

Collaboration is necessary, but the real key is achieving critical  
mass, in essence replacing Bell Labs' force of 30,000, and then some.  
Science has lost its allure as the domain for our best and brightest.  
Much of the best technical talent has been drawn to the promise of  
riches from Wall Street and financial engineering. We need to  
reestablish a culture that rewards and celebrates the scientist who is  
willing to work on tough problems even if the commercial return is  
less certain. Given that the U.S. economy is so much bigger than it  
was 40 years ago, and so much less competitive internationally, 10 or  
more equivalent corporate research labs are needed for critical mass.  
The most likely candidates are the top research corporations today— 
IBM, Hewlett Packard, Cisco, Google, Exxon Mobil XOM, DuPont,  
Microsoft, Apple, 3M MMM, General Electric, Boeing BA, and others.  
Many of these companies already have hundreds of PhD researchers and  
scientists on staff, and while their labs mostly focus on shorter-term  
development goals, they still retain the spirit of scientific pursuit.

Even in an era of budget constraints, it's important to recognize that  
money is not the central problem. True, many of the cutbacks in  
research have resulted from budget cuts, but the fact is that the will  
and the strategic commitment to basic research is the more difficult  
part of the equation. It may be counterintuitive to create this kind  
of long-term investment when we have so many pressing immediate needs  
both in the private sector (protecting jobs and profits) and the  
public sector (finding ways to pay for health care, spending to repair  
crumbling roads, paying teachers, unemployment benefits). But we need  
exactly this kind of approach if we are going to reverse the cycle.


Tax Incentives Could Help
Consider that the Bell Labs budget peaked at $1.6 billion in 1982  
(about $3.6 billion in today's dollars), and $20 billion would fund,  
say, three large labs and five smaller ones. Split in some ratio  
between public and private sources, $20 billion is not a large number.  
As noted earlier, IBM, Microsoft, and HP already spend $17 billion  
annually on R&D. If leading companies committed 5% to 10% of those R&D  
budgets to pure research (up from 0% to 5% today), in exchange for a  
tax credit or a government match, a new innovation ecosystem would  
quickly begin to build critical mass. From the government's  
perspective, the money put toward innovation today is the highest- 
return investment it can make.

Just as a company's success is driven by blockbuster products, the  
exceptional economic growth of the U.S. has been driven by blockbuster  
industries—cars and petroleum in the 1920s, movies and radio in the  
1930s, defense in the 1940s, appliances and television in the 1950s,  
pharmaceuticals in the 1960s, aerospace in the 1970s, PCs in the  
1980s, the Internet and cellular telephony in the 1990s.

What's next? Biotech, genomics, and life sciences? Alternative energy  
and synthetic fuels? Preventive medicine and health-care delivery?  
Each can be the source of millions of high-value jobs. We need them.  
Soon.

The choice facing the country is to do nothing and risk the inevitable  
decline of innovation, which will weaken an already sputtering demand  
engine, or act boldly by reasserting its faith in scientific inquiry  
and discovery. That will give the U.S. a shot at holding or increasing  
market share of the highest-value jobs in the world in electronics,  
biotech, aerospace, energy, nanotechnology, and materials—and at  
creating 15 to 17 million high-paying new jobs over the next decade.

How to Get Back on Track
We can't do this as a series of half steps that are expensive but  
ineffectual, that don't reach critical mass or critical rate of  
change. This middle-road approach might well describe NASA over the  
past 30 years—not a good model.

The better model is the previous U.S. business model, with a dynamic  
public-private network of labs and a venture-capital industry waiting  
downstream to commercialize ideas and turn them into large public  
companies that create hundreds of thousands of new jobs. Here's what's  
needed to get that model back on track:


• Clear national goals in two or three key areas, such as carbon-free  
energy and preventive medicine.
• Government commitment of $10 billion a year above and beyond  
spending for national agencies to jump-start new industrial research  
labs
• Government tax credits for corporations that commit to spending 5%  
to 10% (or more) of R&D on basic research

Government can do a lot by, for example, refocusing DARPA on  
increasing energy security. But it cannot do it alone. A single page  
from our economic history, in 1946, might illuminate what needs to  
happen, and why.

A Lesson from RCA Labs
In 1943, Elmer Engstrom was put in charge of RCA Labs in Princeton,  
N.J. After the war, as he reflected on the task before him and his  
team, he came up with a few extraordinary observations. He talked  
about "the depletion of basic knowledge" resulting from the years of  
shifting resources away from basic science and towards war-related  
applications. He said that universities were great institutions, but  
"you couldn't count on them alone" to close the knowledge gap.

Engstrom believed that is was an obligation, a duty of the great  
industrial labs, to "rebuild the war-depleted inventory of basic  
scientific knowledge." He also believed, however, that "by doing work  
in this field [fundamental research] of a quality which will command  
the respect of scientific investigators in universities, we will  
stimulate work there which will, in effect, enlarge the scope of the  
work done within RCA Laboratories and thus bring about more rapid  
progress."

Although the causes are different, Engstrom could be providing a  
precise description and prescription for our situation today. He could  
be calling out from 1946 to our business leaders today, articulating a  
challenge and a solution. If only a dozen major companies respond to  
that challenge they can, in collaboration with the government, solve  
our jobs problem within a decade. If they don't…

Slywotzky, a partner at management consultants Oliver Wyman, has  
written several books on profitability and growth.