A few weeks ago, the Register ran an article complaining that the capital markets destroy research
because they won't fund True Engineering. MJ wrote in asking what I thought of this.
From my time hanging out around tech companies, I've noticed that engineers beleive salvation lies in the Right Technology and have little patience for whatever those MBA marketing guys waste their time doing. I would argue that history demonstrates how having the Right Technology rarely determines who wins, but distribution (what marketers call "channel") does.
No piece of engineering is an island--it sits in a "solutions stack", all of which must be in place, to deliver something useful that a customer is willing to pay for. Engineers might recognize a hardware, OS, application stack, but from a customer perspective it actually extends all the way up through education, training, service, technical support, etc. Now, this stack can be provided by one company or many. Apple integrates alot of it, while the PC market has Microsoft monopolizing the OS layer (and Office software) while having competitive markets for hardware, education, training, service, technical support etc. The guys who own the scarce parts of the solution stack get all the profit in the industry
By the way, did I mention that distribution was part of the solution stack too?
My point is that financial markets only care about money, not technology or distribution, but don't knock how important the distribution part is to making money. This single minded focus on lucre is a good thing because it means they're quite happy funding anything consumers will buy (like Napster of TiVo) without getting bogged down in nostaligia. It so turns out that technology and its distribution channel need to coordinate quite strongly (ie. distribution and technology are often co-specialized assets). IBM research has invented lots of neat stuff over the years, but its distribution was often optimized for other things so they were never able to capitalize on their inventions. Xerox invented the future of computing at PARC, but again had no co-specialized distribution assets that could take it to market.
So don't underestimate distribution. Commercializing technology is hard
. Really really hard. Hard hard hard. It often makes sense to build a whole new company, essentially one big specialized distribution asset, to get that technology to market. Which brings us back to the capital markets. While people accuse Wall Street of being short sighted it really isn't (although it gets over-emotional--just look at how far it was looking into the future when valuing Internet stocks!) The market is very hard nosed and will evaluate R&D spending by 1) will it come up with anything useful and 2) when it does come up with anything useful, will the company make money off of it? Sadly the answer to 1) is: probably not (Microsoft) and to 2) is: almost certainly no (Xerox, IBM, Apple, IBM, Motorola, IBM).
But do not lose heart. The above just means that public financial markets are not a good source of financing for speculative technology investment, although they support developmental applied research (Intel) handsomely. But this is the way it should be -- you really don't want lots of start-ups working on crazy ideas to try and IPO so they could test them out (and despite what anyone thinks, speculative technology does not suddenly become free if it is inside a big company). Fortunately, there are lots of financing sources standing by to develop speculative technology, including government grants, VCs, Private Equity, Angel Investors, etc. If financial markets seem to favor distribution these days it's only because distribution makes more money. If HP wants to withdraw from systems research and focus on becoming a Microsoft VAR that's fine with me -- their R&D didn't bring great products to market.
What's really killing the technology sector right now isn't lack of financing (remember, VC firms are struggling to make good investments and are having to give money back
because they can't find opportunities) it's lack of demand. Consumers are not that excited about PDA/Phones, PVR/DVDs, or digital media/PC combos (not that *some* consumers aren't excited, but it's not an Internet-esque stampede). Business are not excited about CRM, ERP, EAI, or ERM, and are struggling to make their numbers at a time when the bottom line really matters to shareholders. There is lots of patient capital out there funding new technology, but right now, dissatisfied, burnt out customers aren't buying.