U.S. Economy

The contributions these institutions made to science, technology, and the economy—including the creation of millions of high-paying jobs and entire industries—are both enormous and difficult to quantify.

Consider Bell Labs, for example. Founded in New York City in 1925 under the leadership of research director Frank B. Jewett as a joint venture of American Telephone & Telegraph and Western Electric to develop equipment for the Bell System telephone companies, the labs grew to include facilities in New Jersey, the Chicago area, and several other locations. Supporting both pure scientific research and technological developments with immediate applications to telecommunications, Bell Labs spawned or supported a startling number of scientific breakthroughs that played pivotal roles in the history of twentieth-century technology and that created entire new industries with millions of high-paying jobs. The invention of the transistor by Shockley, Bardeen, and Brattain is only the most dramatic and important example. Some others:

• The first public demonstration of fax transmission (1925)
• Invention of the first synchronous-sound movie system (1926)
• First transmission of stereo signals (1933)
• First electronic speech synthesizer (1937)
• Research underpinning the development of the photovoltaic cell (1941)
• First description of the laser (1958)
• Development of metal oxide semiconductor field-effect transistor, basis for the large-scale integrated circuits that make modern IT possible (1960)
• Creation of the UNIX operating system (1969)
• Development of cellular network technology for cellular telephony (late 1960s to 1971)
• Creation of C programming language (1973)

Seven Nobel Prizes in physics were awarded for work completed at Bell Labs. And the number of companies and entire industries built on the foundations laid at Bell Labs is almost incalculable.

However, over the last two decades, funding and staffing of Bell Labs has been drastically reduced. The number of researchers has fallen from 3,400 to fewer than 1,000. And in August 2008, its parent company, Alcatel-Lucent, announced it would be pulling out of some of its last remaining areas of basic science—material physics and semiconductor research—to focus on projects that promise more immediate payoffs.

Financial pressures made this decision inevitable. But it cost our economic system a unique asset whose value is literally incalculable, since pure scientific research often has long-term benefits that are impossible to predict.

Here’s one example. In 1948, Bell Labs scientist Claude Shannon, who is widely acknowledged today as the founder of modern information theory, published his paper “A Mathematical Theory of Communication” in the Bell System Technical Journal. At the time, it was a piece of “pure science,” with no obvious or immediate practical payoff. But years later, physicists applying Shannon’s ideas to the mathematics of data transmission discovered ways of sending digital information at ultrafast speeds over copper wires, making DSL connections possible. Today those connections bring high-speed Internet service into 160 million homes.

Thus the downsizing of Bell Labs isn’t simply a loss for scientists interested in knowledge for its own sake. It eliminates one powerful mechanism for pursuing new concepts whose potential practical benefit we will never know.

In similar fashion, the other great U.S. research institutions of the twentieth century, such as RCA, DARPA, and PARC, have also been downsized and redirected.

Formed in 1935 and based since 1942 in Princeton, New Jersey, RCA Labs (formally known as the David Sarnoff Research Center) was even more focused on wireless communication than Bell Labs. RCA Labs helped to perfect the science of black-and-white TV and laid the technical foundations for both the color television broadcast network and its system components. This new industry generated enormous demand and millions of jobs in programming, advertising, manufacturing, and TV station operation. RCA Labs went on to make discoveries that enabled space communication, satellites, disc recording, low-power MOSFET and CMOS technology, liquid crystal displays, and a host of other breakthroughs.

Today, DARPA’s [Defense Advanced Research Projects Agency, the Department of Defense's agency for the development of new technology] focus and methods have changed dramatically. Partly in response to the trauma of 9/11, DARPA has shifted its emphasis from broad-based scientific inquiry to projects with short-term military applications. Funding has been moved from universities to military contractors; publicly available research designed to spur further advances by others in the field has given way to classified programs conducted in secrecy.

PARC, Xerox’s Palo Alto Research Center—the original gestation place for the technology that ultimately gave rise to E Ink, the Kindle, and a growing array of related products—offers another, somewhat different example of the challenges now facing America’s discovery and innovation machine.

In the 1970s, PARC thrived thanks to generous funding by its corporate founder and sponsor, as well as a hands-off philosophy that encouraged independent, farsighted work regardless of immediate applications. Note that PARC was established in 1970 some three thousand miles away from Xerox’s headquarters in Connecticut—a move that both symbolically and practically emphasized its freedom to establish its own direction.

In its heyday, PARC employed some 280 researchers. It was a powerful magnet for many of the most brilliant and creative minds in its fields. And as at Bell Labs, the discoveries and breakthroughs made at PARC fed on one another, creating a uniquely valuable upward spiral of creativity and innovation. Fueled by the extraordinary talent that had grown up doing DARPA projects in the 1960s, PARC produced perhaps the greatest set of discoveries in the shortest time of any innovation engine in history: the graphical user interface, the personal computer, the Ethernet, WYSIWYG (what-you-see-is-what-you-get) design software, laser printing, and many others.

Today, the number of researchers at PARC is about 165. The focused profile and business goals of today’s PARC typify the fate of America’s once-enormous, well-funded research institutions. Although smaller versions of the great industrial labs continue to operate, the gigantic research infrastructure filled with freewheeling, visionary scientists has been dramatically reduced.

The decline of the twentieth-century discovery engines forces the question: Who is going to produce the scientific breakthroughs that will create the new industries on which tomorrow’s demand will be based?

The hopeful news: The creative spark once embodied in places like Bell Labs still burns — on a smaller scale, but as intensely as ever — at a handful of institutions that are pioneering new approaches to scientific discovery and technological innovation.

The first is a twenty-first-century microcosm of Bell Labs—a corporate-sponsored research institution that is focused not on projects with obvious commercial viability and short-term payoff but on open-ended exploration of diverse technological challenges. Honda Research Institute (HRI), a division of the automaker with facilities in the United States, Japan, and Europe, is the group behind ASIMO, a humanoid robot that boasts an amazing array of capabilities. Why would a car company be involved in such a project? And what does this have to do with demand?

Today the Honda Research Institute focuses on open-ended exploration of diverse technological challenges, with the explicit goal of “contributing to society.” Top researchers are recruited and given the resources to pursue their own projects, even if they have no direct value to the corporation’s current product line—or bottom line. ASIMO’s systems for monitoring and controlling robotic movements have yielded technologies now being used in developing Honda’s Walk Assist devices to improve the mobility of people who are elderly, frail, or disabled, such as hip/leg pads that respond to signals from the walker to provide support as needed. Just count the number of people over the age of seventy-five, and you can begin to sense the magnitude of the potential.

ASIMO also spawned DiGORO, a robot that learns how to clean and keep house by imitating human movements glimpsed through a camera on its head. And back in the auto industry, ASIMO technology has also led to Honda’s Lane Keeping Assist System, which uses cameras and steering controls to help keep cars from drifting. Thus ASIMO and the other projects under way at HRI have the potential to solve consumer hassles and human problems on a global scale—and to unlock a series of huge streams of twenty-first-century demand for Honda.

Another effective discovery-producing model for the twenty-first century is the “demo or die” research model exemplified by the famed MIT Media Lab. In the Media Lab’s new glass building, researchers working on a range of projects, including cars, robots, biomechatronic limbs, hyper-instruments, and early education projects can all watch and interact with one another—a “fish-scale model” of overlapping disciplines that reinforces the multidisciplinary nature of the lab.

Considering its relatively small size—an approximately $35 million operating bud get supporting some 40 faculty members, senior researchers, and visiting scholars, and close to 140 graduate students—the lab’s output is prodigious and broad. In twenty-five years, more than eighty start-up companies have been spun out of it. The lab’s E Ink spin-off (1997), for example, is the key to legible, low-power-consumption e-readers. One Laptop per Child, a Media Lab spin-off, was the spark that inspired ASUSTeK’s Eee netbook. Another spin-off, Sense Networks, uses cell phone data to map the real world, much as Google indexes the Internet. Harmonix (the music technology behind Rock Band video games) and TagSense (RFID and wireless sensing) also came from the lab. Other products and projects have been co-developed with industry, including WebFountain, an architecture for text analysis of billions of pages for IBM, and wireless mesh networks for Nortel.

The Media Lab is, in many ways, the antithesis of a corporate R&D lab. It focuses on human needs, but has no blinders—no time constraints or deadlines, no shareholders to please. It celebrates openness and collaboration between different disciplines and entities. But it winnows ideas quickly because of the emphasis on testing concepts through prototype building. The discoveries that work find their way into the world, with E Ink as exhibit A.

And then there is SRI. Founded in 1946 in Menlo Park, California, as the Stanford Research Institute, it is now the largest nongovernmental lab in the United States, with roughly $500 million in government-and corporate-funded projects. Like the Media Lab, SRI stretches the R&D horizon far beyond the typical corporate three-to-five-year view. But SRI shows that a research lab armed with a system for commercialization of ideas can successfully cross the so-called valley of death that separates the lab from the marketplace—a route littered with unread papers and long-forgotten patents describing products that never connected with customers.

Siri, a virtual personal assistant for the iPhone, is one of SRI’s latest spin-offs. When users speak to their phones, Siri understands the question or command, performs research, and responds. Over time, Siri adapts to users’ individual preferences, making a tailored, concierge-like experience possible.

The development of this super-sophisticated virtual assistant would not have been possible without almost $200 million in DARPA funding for artificial intelligence research spread over twenty-five universities. Then the disparate research findings were pulled together under the auspices of SRI’s CALO (Cognitive Assistant that Learns and Organizes) project. One application born from the research project was shaped for the market by Dag Kittlaus. A former research engineer at Motorola who was frustrated by the slow pace of commercialization in a large corporate environment, Kittlaus found SRI a fast and effective launch pad for vanguard products. After roughly half a year at SRI, Kittlaus spun off Siri in 2009 with $24 million in venture capital backing; a year later, the company was bought by Apple for an undisclosed amount thought to be in the $200 million range.

SRI held a stake in Siri and enjoyed one of its best investment returns ever. It’s an unusual financial model for a research lab, but one that SRI has perfected. In the last fifteen years, SRI has spun off more than forty companies, creating new industries and billions of dollars in market value. Three of the spin-offs—Nuance, Intuitive Surgical, and Orchid Cellmark—have been taken public, with a combined market cap of nearly $20 billion and more than six thousand employees.

Each quarter, an SRI Commercialization Board meets to pore through dozens of the best market-ready ideas, looking for disruptive market opportunities and a “golden nugget” solution that meets SRI’s criteria for value creation—and has a champion who has assembled a team. Once an idea is selected, SRI recruits an entrepreneur in residence—someone like Siri’s Kittlaus—who works on-site for three to eight months to prepare the venture for funding and spin-off. Throughout this period, SRI’s nVention advisory board provides close ties with Silicon Valley venture capital funds, a set of connections whose value is difficult to overstate. Out of many candidates, the Commercialization Board moves about ten opportunities a year through its pipeline—winnow, winnow, winnow—and actually launches two to four ventures.

Two very different business creation myths have long coexisted in Silicon Valley’s business culture. The better-known narrative is that of the venture-funded entrepreneur in a garage whose invention leads to an IPO. The older, now largely forgotten, story is one of the government-funded initiative, like the DARPA projects that led to personal computers, networking, and the Internet. SRI has helped build companies following both pathways, and is arguably the first institution to meld them into one coherent and potentially more powerful narrative of innovation for the twenty-first century.

Carlson sometimes worries about the long-term future of the SRI model. One reason for his concern is America’s flagging production of new scientific talent. “If it were not for our foreign-born researchers,” he observes, “America’s growth would stop.” And he points out that China today has more honor students than the United States has students. Partly as a result, America’s strategy for innovation is “inadequate.” “Solar cells were invented here,” he says, “but most of the value is going to China. Compared to America, China is buying forty-one times more manufacturing equipment for solar cells.”

Part of Carlson’s response would be a shift in national immigration policy: “I would let in all the smart, educated folks I could find,” he recommends — and he adds with a smile, “. . . and all the chefs.”

According to hoary legend, Charles Duell, commissioner of the U.S. Patent Office, is supposed to have said, in 1899, that “everything that can be invented has been invented.” Researchers have failed to unearth evidence that Duell said any such thing, and in fact he appears to have been quite bullish about the prospects for twentieth-century technological innovation—and rightly so.

But there’s this much truth in the Duell myth: Despite the brilliant work of today’s great demand creators, we are living largely off inherited riches. Many of the breakthroughs on which today’s demand is based came from four sources: RCA Labs, Bell Labs, DARPA, and PARC. The transistor, on which so much of today’s demand depends, was invented way back in 1947.

There’s no shortage of challenges that have large-scale human, social, and economic implications and—equally important for the true scientist—offer fascinating lifelong work for those who choose to tackle them. The list of Grand Challenges for the twenty-first century created by the National Academy of Engineering testifies to that. But exactly when and where will tomorrow’s big breakthroughs finally appear? The answer is still unknown—and it depends, in part, on our readiness to do two things: rebuild the engines of industry creating discovery, and make science prestigious again, in a way that encourages the best minds to take up the challenge that only they can meet—to make the basic discoveries that lead to tomorrow’s new industries and tomorrow’s new forms of demand.

Excerpted from “Demand“ by Adrian J. Slywotzky with Karl Weber © 2011 Oliver Wyman. Reprinted by permission of Crown Business, an imprint of the Crown Publishing Group.

Adrian J. Slywotzky is the author of “The Profit Zone,” (selected by BusinessWeek as one of the ten best books of the year), “Value Migration,” “How to Grow When Markets Don’t” and “The Upside.”  The Times of London has named him one of the top 50 business thinkers, and Industry Week has named him one of the six most influential management thinkers.

Karl Weber is a writer specializing in business, politics, and social issues. He has collaborated with Adrian Slywotzky on four previous books, including “The Upside” and “How Digital Is Your Business?”