An American Kodak Moment
In the late 1980s, the Eastman Kodak Company chose not to move into digital film photography, despite having developed some of the earliest digital technology. Other companies did and thrived, while Kodak stuck with analog film and saw its market share disintegrate.1 Kodak was neither the first nor the last corporation to miss a critical paradigm shift and see its legacy business crumble. This is exactly the pattern that has played out with many disruptive technologies, including digital cameras. Today, the same phenomenon may be happening in energy. With an emerging $2.3 trillion global clean energy market,2 the United States risks missing a global paradigm shift and experiencing the same economic downturn Kodak suffered twenty years ago if it clings to business-as-usual energy policies
Our nation was born of the pioneer values of self-reliance and independence. Yet, today, we are dependent on others, particularly for oil and financing our debt. Our policies seem increasingly designed to prevent change and protect the old order. Like the proverbial frog in a pot of boiling water, our inaction is our greatest threat. American politics is increasingly fixated on what we cannot do because of the growing national deficit. Whether it is improving public education, rebuilding our aging infrastructure, or modernizing our energy system, the answer is always the same: the United States can’t afford it right now.
What our nation’s leaders have missed is how closely this parallels debates that have taken place in the boardrooms of many of America’s greatest corporations over the last century—and that continue today. When leading companies’ market share and revenues decline in the face of smaller, more nimble competition, management and shareholders’ first reaction is typically to retrench and do less. They listen to the same types of naysayers and cynics who refused to believe that the horse and buggy, the radio or the typewriter, or the analog TV would ever be replaced by their newfangled competitors. In doing so, they miss the tipping points at which new technologies became poised to replace the old incumbents. They lose track of how quickly our world changes—at a pace increasing with every decade.
These corporate debates and lessons learned from history reveal strong warning signals and a few inspirational lessons for today’s policymakers as they struggle to address America’s intertwined energy and economic future. This nation can avoid the fate of Kodak and others who failed to make the switch to the next big thing, and we can reap the rewards of promising innovation. But to do so, we must act, and act decisively.
For Companies and Countries, it is Cannibalize or Die.
Everyone knows that Kodak dominated the film business. The venerable film company also developed the first megapixel digital camera sensor in 1975.3 But Kodak didn’t seize their early opportunity to dominate the digital photography industry. At the time, Kodak’s film business was still successful and growing, albeit slowly. Going digital would have meant spending a lot of money developing new technologies that ultimately were just going to take market share away from Kodak’s own film products. Spending money to cannibalize existing sales seemed neither profitable in the short run nor likely to please stockholders.4
By choosing against moving into digital, Kodak allowed others to dominate digital photography and surpass it as the leader in the imaging business. By the time Kodak realized the mistake it had made, it was too late. The company was not alone; a number of other historically successful companies, including Agfa, Contax, Minolta, and Polaroid, also disappeared with the rise of digital imaging.5 A few established players have done well over the last decade.6 But it was actually companies like Casio, with no prior experience in photography, that have prospered most by getting into the digital imaging market.7
The shift from film to digital was more than just a transition to a new way of doing the same thing. Going digital moved photography to new devices like cell phones and enabled photos to be stored and shared electronically. Soon the same capabilities followed for video. Had Kodak made the switch to digital in the late 1980s, it likely would have grown its imaging business to a size far greater than was ever possible for film alone.
The inability to see the opportunity represented by change is certainly not limited to Kodak. The result for all companies that ignore disruptive change and instead only focus on protecting legacy business is the same: a gradual decline ending in corporate death. In a world where competitors will ultimately exploit the new, embracing change with the rugged outlook of a pioneer is critical to corporate survival.
The “Innovator’s Dilemma”: A Recurring Challenge for Business Leaders
In staring down the digital revolution, Kodak experienced what professor Clayton Christensen describes as the “innovator’s dilemma."8 As innovation management professor Christian Sandström notes, it might seem hard to imagine a company pouring millions into R&D yet failing to recognize the technology revolution their own research could spur. But it is in fact very hard to get industry-leading firms to make large bets on new technologies when they can get larger near-term returns by continuing to do business as usual.
Sandström notes that the inclination to protect existing technologies and markets is reinforced when, at the critical time of adoption, the new technology is typically still both expensive and not fully developed. Exponential improvements and costs savings for successful new technologies, however, can happen very quickly. “Timing such a shift is not an easy task,” concludes Sandstrom. “[But] failing to do so has often led to corporate extinction."9
Exxon and HP Had Their Own Kodak Moments
In energy, Kodak has an interesting counterpart in ExxonMobil. Exxon built the world’s first lithium battery in 1977, but ultimately abandoned it.10 About ten years later, Sony produced the first commercially successful lithium-ion battery. Exxon also did much of the early research work in developing zinc bromide flow batteries, a technology subsequently acquired by Premium Power, which finally developed the necessary flow control technology that could now allow that technology to become a mainstay for utility-scale grid storage.11
HP provides a second example. In the 1990s HP was a leader in light-emitting diodes (LEDs). An HP scientist developed the technology enabling red LEDs to become mainstays in automotive and traffic lighting. The company fully understood the market for these early LED applications but saw the bigger market for general lighting as being still decades away. As a result, the LED group was de-emphasized and then was sold to Philips, which is now turning LEDs into a core component of the general lighting market.12
Both Exxon and HP remain extremely profitable and successful companies. It is unclear whether Exxon ever fully appreciated the potential size of the energy-storage market opportunities that their early battery innovations could enable. HP simply did what incumbents do so often: they underestimated the speed with which the new technology would actually take hold. In both cases, the companies abandoned business units that could have been leaders in potentially $100 billion dollar markets.
The United States’ ”Kodak Moment”?
American scientists and entrepreneurs invented much of today’s information, communications, and life science technologies. For the last decade, the United States has also been the center of invention for new clean energy technologies. The risk is that our nation is having a future-defining “Kodak Moment” right now.
To date, the United States has decided to play it the Kodak way—prioritizing existing franchises over less familiar, newer innovations and hoping the future comes none too fast.
America’s traditional energy sources—our photo booth equivalents—like oil, coal, and natural gas, are economic drivers13 which still dominate the energy sector for both power generation and transportation. Though they are growing at a slower pace than a decade ago, the recent discovery of large new deposits of oil and natural gas in the United States is currently driving down prices, making continued reliance on fossil fuels seem even more attractive.14
By contrast, building significant businesses to generate clean energy or to use energy more efficiently requires a lot of money. And like Kodak’s looking at digital photography, a successful move to these new technologies will take at least some market share, profits, and jobs away from traditional energy businesses. Cannibalizing conventional energy industries is neither profitable in the short run nor appealing to companies or states that employ a lot of energy workers.
Meanwhile, our economic rivals, like China, India, Brazil, and Germany, are investing in rapidly developing domestic clean tech sectors.15 American companies invented the modern wind turbine and solar panel.16 Today, wind and solar companies from other countries are beginning to build manufacturing plants here in the U.S., much as Japanese and Korean car firms like Toyota, Honda, and Hyundai did with auto assembly plants in the 1980s. This marked a shift in the auto industry that helped accelerate the decline of American car companies.17 What if the stakes are far higher with clean tech than they were with the auto sector?
The Challenge of Predicting the Future Accurately.
Technology Skeptics and Their Mistakes
Our nation’s economic success has always depended on our willingness to seek out the new and to make it ours—in the 1800s that meant geographic expansion; in the early 1900s it was industrial expansion; the post-war period brought technological exploration; in the 1980s and 1990s it was information and communications technologies. The next frontier is likely to be in solar, industrial biochemistries, electric vehicles, and LED lighting. But how can we know if they are ready to deliver?
Of course, the emergence of a company or a country that dominates clean energy is predicated on the bet that clean energy is a critical and valuable sector. Skeptics echo a Wall Street Journal opinion article dismissal of solar PV as “a speculative and immature technology that costs far more than ordinary power."18 Royal Dutch Shell’s executive director of gas and power said, “We are businessmen and women. If there were renewable [opportunities which made money] we would put money into it."19 Others simply conclude, “There is no way America can end its addiction to fossil fuels,"20 (including Christian DeHaemer, Editor of Wealth Daily).
To assess whether today’s clean energy naysayers may be right, it’s worth taking a look back through history to see how equally strong predictions held up in the past. A few fun examples:
“This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.”
“The horse is here to stay, but the automobile is only a novelty, a fad.”
“While theoretically and technically television may be feasible, commercially and financially it is an impossibility, a development of which we need waste little time dreaming.”
“Transmission of documents via telephone wires is possible in principle, but the apparatus required is so expensive that it will never become a practical proposition.”
“There is practically no chance communication space satellites will be used to provide better telephone, telegraph, television or radio service inside the United States.”
The Sudden Arrival of Transformational Tipping Points
Even when one can see the future coming, it’s hard to get the timing right. American venture capitalists have long searched for the evidence that it is time to stop riding one technological wave and move on to the next. Historically, the tell-tale sign has been an early marginal one: when unit sales of the new technology begin to outstrip unit sales of the old technology.
In energy, this critical tipping point can be harder to notice, given the long useful lifespans of many energy technologies26 (often 30-50 years versus five years or less for consumer technologies like digital cameras and laptops) and the very large installed base of old technologies. By the time a new energy technology has grabbed significant installed-based market share, the key tipping point is long past. With the rapid evolution of technology today, the tipping point can happen when the market penetration of a new technology is still tiny (i.e. less than 5%).27
Moreover, at the moment when a new technology approaches and crosses the tipping point—when it is out-selling the old—the new technology is almost always more expensive. This was true for digital vs. film cameras in 2005, CRT vs. LCD televisions in 2007, wireless vs. wireline phones in 2008, and LPs vs. CDs in 1990.28 History shows us that the new technology’s price will drop very rapidly as unit volumes in sales increase. It will then quickly reach parity or a lower price point than the old technology.29
And it never seems likely at the outset that a new technology will surpass the incumbent. We often hear the same kinds of dismissive comments about companies behind disruptive new technologies. Industry pundits screamed that companies like Microsoft, Cisco, Google, Amazon, were valued at levels ridiculously higher than their metrics would merit at the time of their respective IPOs. In hindsight, the real success stories all turned out to be very cheap at their IPO price.30 We just couldn’t see then how large their markets would become or how complete their dominance of those markets was going to be. Analysts forgot or ignored the fact that learning curves and increases in economies of scale allow new technologies to reach cost points far lower than anyone predicted when that technology first arrived in the market.
U.S. Analog vs. Digital Camera Sales31
That is happening with the first wave of clean technology companies going public today. Commercials from leading oil and gas companies over the last few years have included comments that essentially say, “Let’s face it, clean energy is very important, but it will never amount to more than a few percentage points of our national energy requirements.” That may be true at this moment; but even as some of these ads were being released, the addition of new renewable energy generation capacity was starting to equal and outpace new installations of fossil fuel plants in the U.S. and other countries.32
Perhaps the greatest difference between clean energy today and the rise of disruptive technologies of past decades is that it may be that entire countries rather than individual companies could follow trajectories like Microsoft’s or Google’s. China, India, South Korea, Russia, and Brazil could leverage rapid technology development to scale wind, solar, biofuels, LED lighting or other clean tech industries to the scale of global leadership like Microsoft did in the 1990s to dominate computing or Google did in the 2000s to dominate search.33
Surviving in a World of Increasingly Rapid Change
Over the last two hundred years, major industry-changing innovations have unfolded in “waves.” As the global economy becomes more integrated and technology evolves, each wave of change emerges faster than the last. Karlson Hargroves and Michael Smith of The Natural Edge Project illustrate this well, showing how each technological leap in the last 200 years is adopted more quickly than the last, from water power and iron to steam and steel to electricity and chemicals and now renewable energy and nanotechnology.34
The pace of change in the global economy is increasing, year after year—including both the rise of new companies and demise of the old. Most corporations and government entities are struggling to adequately respond to this quickening rate of change. Economist Joseph Schumpeter described this process of companies rising and dying through fierce competition as waves of innovation roll through industries as “creative destruction."35
Waves of Innovation: The Accelerating Pace of Technological Change36
Companies, individuals, and governments that prefer to stand still in the face of this increasingly rapid change ignore a grave threat. Even the industry-leading companies listed on the S&P 500 are vulnerable to the pressure of accelerating creative destruction. The turnover rate of companies on the S&P has accelerated every decade since 1920.37 In the 1920s, the average tenure of a company on the S&P was anticipated to be 65 years. By the 1990s, it was down to 10 years.38 That’s because, as management consultants Richard Foster and Sarah Kaplan found, even the best-run corporations are unable to sustain market-beating levels of performance for more than 10 to 15 years.
Creative Destruction is Accelerating: Anticipated Lifetime on S&P 500 (Years)39
“Corporations are built on the assumption of continuity; their focus is on operations. Capital markets are built on the assumption of discontinuity; their focus is on creation and destruction,” explain Foster and Kaplan. They warn that, unless companies become more open to new ideas and adjust to the changing speed of the market, they will get caught in a cycle of decline. The rate of scale and change in the market is only likely to accelerate over the next 20 years. Companies that cannot navigate this change will be destroyed by it.40 As Gunnar Branson, a leading corporate marketing executive specializing in commercializing innovation explains, “[Innovation] takes more time, more money, and more humility than anyone really wants to risk...And yet, playing it safe may be even more dangerous."41
Achieving Continuous Innovation from the Top
It is difficult for leading corporations and governments to overcome the “Innovator’s Dilemma” and keep changing to stay ahead—but it is not impossible. Apple Inc. represents one company that was briefly lulled into typical leader-incumbent behavior but managed to reclaim visionary innovativeness and leadership.
In 1997, Dell Computer CEO Michael Dell told the ITxpo97 audience that if he ran Apple, he would “shut it down and give the money back to the shareholders."42 Despite the clarity of its technological vision and its early leadership in personal computing, Apple was a slow-moving corporation by the mid-1990s. Its founders, Steve Jobs and Steve Wozniak, were replaced by a series of “professional” managers who focused the company on retaining its core customers and incremental change. By 1997, Apple’s share price had so stagnated that there were serious questions about its remaining an independent company.43 Michael Dell’s comment was not that far off. Dell founded his company only twelve years after Apple, based on the notion that the entire computer supply chain could be re-engineered. He rode that notion to stardom and wealth through the late 1990s.
Apple Revenue by Segment44
Post-2000, Dell did exactly what caused Apple to stagnate in the 1990s: It focused on consolidating its gains and incremental improvement over transformational change. It became a mature company, and its stock performance reflected that.45 Meanwhile, Apple returned to innovation with a vengeance. Starting in 2002 with the iPod, and soon thereafter with iTunes, the iPhone, and iPad, Apple has reeled off a string of winning products. Each new product also brought with it a steepening adoption curve, as each new technology was embraced more quickly than the last.
Clean Energy, Today’s Disruptive Technology.
A Moore’s Law for Energy
Naysayers of clean energy ask whether we can ever make clean energy cheap enough to compete with conventional energy. Solar prices’ decline in the past decade is one instructive case worth examining: it bears quite a strong resemblance to what Kodak discovered (too late) about the quickly declining cost of digital photography. But where Kodak missed only on one technology, the United States is at risk of making a similar mistake with a whole host of clean technologies—from wind and solar to LED lighting, electric vehicles, and beyond.
For more than a decade, opponents of emerging clean energy technologies have argued that there is no Moore’s Law for energy. They note that energy relies on electrons rather than bits and bytes and that only bits and bytes fall into the Moore’s Law phenomenon. Reality tells a different story.
Solar Technology Learning Curve46
As recently as 2008, peak solar panel prices averaged $4.80 per watt.47 Even then (just 4 years ago) it was widely assumed that prices would never get below $1.00 per watt. Today, solar panel prices are already below the $1.00 per watt of output level.48 New technologies coming out of labs and into pilot production indicate that solar panel prices nearing $0.25 per watt may be achievable not too long from now.49 As solar technology progresses down the learning curve, the rate of change has been so significant it has made cost forecasts consistently inaccurate, if not useless.
The technology underlying today’s cutting-edge solar and LED lighting inventions are based on both semiconductor and flat screen television innovations. It was less than a decade ago that the U.S. television industry was fiercely lobbying against the move to digital televisions, arguing that we shouldn’t transition too quickly because most Americans couldn’t afford extremely costly flat-screen televisions. Today, flat screens are ubiquitous and relatively cheap. Many of us have not only replaced perfectly functional cathode-ray tube (CRT) televisions, but actually increased the total number of televisions in our homes.50
As with digital imaging vs. film, the new technology allows us to do more with it, so we expand our usage and markets grow. As with the camera industry before it, the core of the new flat-screen television business has moved to Asia.51 American television manufacturers like Emerson, Magnavox, Motorola, Philmore, RCA, Sylvania, or Westinghouse did not make the shift and they or their television units are now just faint memories.52
The Challenge—and Huge Opportunity—at our Doorstep
We in the United States have grown accustomed to dominating industries that come easily to a wealthy nation-like advanced finance, the Internet, and social networking. Yet our nation’s economic future might be most promising if we pursue a path that may feel risky, difficult, uncertain, and perhaps even ill-advised. These are, in fact, the very words frequently used to describe some of the most promising new 21st century businesses.53
Indeed, many of the industries that could dominate the 21st century, such as clean energy technology, are not easy to master. They require significant education investment to graduate more engineers, physicists, chemists, and other scientists. It also means creating new opportunities for workers to put steel in the ground, pour concrete, and operate and maintain large facilities and factories.
But the opportunities are as real as the challenges. Expanding clean energy could rebuild American manufacturing and showcase our talent for innovation. As important, it would help American businesses capture a significant share of the $2.3 trillion clean energy market that is emerging globally and that, to date, the United States has largely ignored.
Achieving in Energy What We Have Achieved in Information Technology
In the past two decades, we have seen how the combination of the personal computer, the Internet, and the cell phone has dramatically expanded individual freedom across the planet. These technologies have turned everyone with an electrical outlet or battery and the Internet into a potential media outlet, political power source, or national library.
Now, we must get there in energy.
Energy is where many people are now most closely tied to centralized power. The system created in the United States as early as the 1910s for transportation54 and 1930s for electricity55 has left most Americans with very few choices and little flexibility when it comes to energy. To upend this, we must re-realize the dream of the American farmer and pioneer—the ability to rely upon one’s self. Just as in telecommunication and media, this means developing a highly distributed system of energy production and ownership. Solar panels, micro-wind turbines, and efficiency technologies could bring Americans the same freedom, independence and choice that the personal computer, the car, and cell phones have made possible. All of these latter, now-familiar products started out as expensive, not-fully-realized versions of what we know today.
Virtually all of the first movers in clean energy continue to accelerate away from those countries and states stuck in the 20th century paradigm. Germany and California were ridiculed when they first pushed ahead with renewable energy and the resultant “high prices that their citizens pay for that energy.” The same is true for virtually every nation, state, or community that has accelerated down the path of self-determination through renewable energy.56
But the pioneers are not wavering; they are leaving the rest of us behind. California has increased its Renewable Portfolio Standards from 20% by 2020 to 33% by 2020.57 Germany has made a post-Fukushima commitment to increase its already leading levels of investment in renewable energy generation.58 In China’s most recently released Five-Year-Plan, a majority of the “strategic industries” that are emphasized are “clean technology” industries.59 Brazil is moving ahead aggressively with building its local renewable fuels economy.60 None of these pioneers have started and then scaled back.
Shale Gas: A Polaroid Analogy?
In a Land of Shale Gas, Do We Need Clean Energy?
Some energy analysts argue that the discovery of vast resources of shale gas and shale oil have extended the life of fossil fuels indefinitely. They argue that shale gas, accessible through cost-effective methods like hydraulic fracturing, are sufficiently plentiful and cheap that most renewable energy sources will not be able to compete for decades, and that we should instead focus our national energy priorities on exploiting our newfound domestic shale gas reserves.61
In this context, it might be wise to keep in mind the fate of Polaroid, the former instant camera company. As digital imaging began to grow in popularity, Polaroid offered a product that made film as instant as digital. The theory was that “instant film” would extend the life of film and compete effectively with digital photography. Yet, Polaroid, like Kodak, seemingly failed to see that the rise of digital imaging was going to lead to broader applications than just “instant” results; it would enable entirely new markets—new ways of creating, managing, and interacting with photographic images (including emailing them, posting them online, creating shared albums, etc.). By failing to identify and seek the vast new opportunities unfolding due to emerging digital technology, Polaroid suffered the same ultimate fate as Kodak, and on October 12, 2001, Polaroid filed for bankruptcy.62
Is Shale an Extender of the Old Order or Long Term Opportunity?
The perfection of horizontal drilling and hydraulic fracturing for shale oil and shale gas has jumpstarted U.S. oil and gas production. There could be as much as 2,600 trillion cubic feet (tcf) of natural gas available domestically.63 The U.S. currently uses approximately 22 tcf per year.64 If the shale deposits meet their potential, these finds will certainly help accelerate the retirement of coal power plants and reduce our dependence on foreign oil and our foreign exchange imbalance. In and of themselves these developments represent the U.S. oil and gas industry’s use of innovative technologies to take a giant leap forward at a time when it risked a significant decline in domestic production.
Shale gas could provide significant benefits in reduced pollution compared to coal and current extremely low prices. Yet while important for our economy, environment, and security, it does not present the same scale of economic opportunities and global leadership offered by the emerging $2.3 trillion clean energy market. It also still emits more pollution than clean energy sources like solar, wind, and nuclear energy.65
Natural gas can help us reduce our reliance on coal and imported oil and can play an important role in utility-scale renewable energy generation. Its contribution to our national economy might also serve as a catalyst to allow us to make appropriate investments in the next generation of energy technologies. However, it is critical for us to recognize, as a nation, that new, cleaner energy technologies represent the inevitable forward march of technology and innovation. Much like the digital camera or flat-screen televisions, these new technologies will continue to improve in quality, decrease in price, and ultimately take over, with or without subsidies. We should take care to avoid turning domestic shale gas into our version of Polaroid cameras: temporarily useful to serve some current needs well, but it won’t help us become pioneers and leaders in the as-yet-to-be-seen new energy markets of the future. As with digital imaging, clean energy technologies will enable entirely new ways of creating, managing, and interacting with energy… in ways that no one can fully imagine or know today.
Americans are capable of reaching the levels of self-determination and reliance aspired to by the Founding Fathers when they formed our country. But to get to the desired result, we need a clear and unwavering vision of what we are trying to achieve. On energy, that is not happening. Instead, we see constantly changing policymaking in Washington that creates and eliminates energy investments, incentives, and policies as often as the sun rises and sets.
The truth is that the United States government and American businesses need a much clearer and steadier vision of why we must proceed on the path toward clean energy. Like the early settlers moving westward, clean energy innovators, companies, and investors joined the sector for a variety of reasons. But the cause that must now reunite us in a pioneering resolve is that we collectively realize that change is more than just good, it is an absolute necessity for our nation’s economy and future. The more certain our nation’s energy policy is, the more private resources will flow, on their own through the market, to make it happen—as long as government doesn’t get in the way and slow down entrepreneurial efforts.
We need a national policy platform that encourages change and innovation rather than preserves the status quo. We can’t “save our way to prosperity,” but we might well be able to pioneer our way to prosperity.