This is a guest post by Vijay V. Vaitheeswaran, who is the China Business Editor of The Economist and author of the just-published book Need, Speed, and Greed: How the New Rules of Innovation Can Transform Businesses, Propel Nations to Greatness, and Tame the World’s Most Wicked Problems.
The Rise of the Prize
By Vijay V. Vaitheeswaran
Could the incentive prize be the most powerful and yet most underutilized tool we have to tame the wicked problems of the twenty-first century?
Prizes in themselves are nothing new, of course. The Longitude Prize — a purse of up to £20,000 — was offered by the British Parliament in 1714 for the discovery of a practical means for ships to determine their longitude. This was an enormous problem on the high seas, as the inability to work out longitude on the sailboats of the age often led to costly and deadly errors in navigation. The greatest minds of the British scientific academy wrestled with this problem, but could not crack it. Sir Isaac Newton, for example, was convinced the answer lay in astronomy.
Happily, the Board of Longitude set up to administer the prize did not favor those with fancy credentials or, for that matter, those with British passports. This was a true global exercise in open innovation. And in the end, it was a self-educated English watchmaker, John Harrison, who found a down-to-earth solution. His invention, a marine chronometer, ultimately transformed ocean transport.
Nearly a century later, Napoleon offered a prize of 12,000 Francs for an invention that would preserve food well so that his army could march on a happy stomach. He had found on his earlier campaigns abroad that locals often refused to sell his army food, or that there was simply not enough to feed his troops even if it was seized at the point of a gun. Nicolas Appert, the son of a vintner and a purveyor of bonbons, took the prize in 1809 with a disarmingly simple solution. He put food in champagne bottles, which he then sealed and threw into vats of boiling water. Though he could not explain why, it turned out that food trapped in airtight containers did not spoil if it had been heated. This insight led to related advances, such as using tin cans instead of bottles, which directly led to a surge in the amount of vegetables, meat and fruits eaten by the growing urban masses of Europe—a huge boost to public health. It remains the basis of canned food today.
Perhaps the most dramatic such incentive prize in history was the Orteig Prize, which ushered in the age of long-distance air travel. Raymond Orteig, a flamboyant hotel magnate, sent a letter in 1919 to the head of the Aero Club of America, offering a $25,000 prize to “the first aviator who shall cross the Atlantic in a land or water aircraft (heavier than air) from Paris or the shores of France to New York, or from New York to Paris without a stop.” Nobody even dared attempt such a flight in the five years Orteig stipulated, so he extended the deadline by another five years. As technology had advanced by then, numerous teams poured in vast amounts of money into the effort.
All in all, nine aviators joined the fray, and spent a combined total of $400,000. The winner was, of course, Charles Lindbergh, an airmail pilot and mechanic, who pulled off the feat of daring in May 1927.
That prize demonstrates how incentive prizes can spur innovation in cost-effective ways. For one thing, the total investment far exceeded the actual value of the purse, offering a huge bang for the buck. Also, such prizes often turbo-charge the tinkering process that leads to breakthrough innovations. Lindbergh, for example, started with a conventional plane but modified its fuselage, wings, cockpit, and various other features to withstand the journey. Another element of such prizes is that they attract enormous amounts of publicity to a given grand challenge. When Lindbergh’s plane went on a national tour after his victory, it is claimed that one quarter of the country came out to gaze in wonder at the Spirit of St Louis. The Orteig prize and the resultant Atlantic crossing kick-started the aviation industry, argues Peter Diamandis, founder of the X Prize Foundation (an innovative charity aiming to revive incentive prizes) and led directly to the development of today’s $250 billion aviation business.
Alas, incentive prizes then fell out of favor in subsequent decades, especially among governments. There were still of plenty of prizes around, but mostly these—like the Nobel—rewarded accomplishments after the fact. The problem is that there is little evidence that such recognition prizes actually spark innovation. T.S. Eliot famously remarked after receiving his Nobel that it was like getting “a ticket to one’s own funeral… no one has ever done anything after he has got it.”
Before I’m dead, please…
The big news is that incentive prizes are back in fashion. McKinsey did a thorough global review of prizes and awards, and found that a big shift is underway away from recognition prizes to incentive prizes in recent years. Its experts also catalogue a surge in prizes offered for science and engineering, climate change and space—a departure from the dominance of arts and literary prizes of the past.
There is now also evidence that such incentive prizes actually spur innovation. A study led Liam Brunt of the Norwegian School of Economics scrutinized agricultural inventions in nineteenth century Britain, and found a link between prizes and subsequent patents. The Royal Agricultural Society of England (RASE) awarded nearly 2,000 prizes from 1839 to 1939, ranging from prestigious medals to purses worth £1 million in today’s money. They found that not only were prize winners more likely to receive and renew patents (a useful if imperfect proxy for innovation), but that even losing contestants went on to seek patents for more than 13,000 inventions.
Incentive prizes spark innovation in several important ways that go beyond mere money. The academics studying the agricultural prizes in Britain, for example, thought that the prestige involved with winning such a prize was a more powerful force than money. Many inventors, including one who founded a company that later became International Harvester, a well-known manufacturer of agricultural machinery, proudly advertised the fact that their inventions won RASE medals.
Another feature of well-designed incentive prizes is that they can attract enough investment and invention to create entirely new industries. The key lies in the power of a provocative prize to inspire by transforming what people believe is possible.
The Ansari X Prize, offered to the first spacecraft to return passengers safely from trips to space twice within a few days, attracted over $100 million in investment into the (previously non-existent) private-sector space industry—and all that for a prize worth only $10 million. The technology developed for the winning spaceship is now being used by Virgin Galactic, part of Richard Branson’s business group, in its new commercial space travel service. For a mere $200,000 or so, Virgin Galactic will soon whisk you into sub-orbital space from its Spaceport in New Mexico. Many of the losing contestants have formed companies and are now profiting from the burgeoning sector.
The most striking benefit is the opening up of the innovation process. Firms increasingly turn to InnoCentive and its online rivals. After all, everyone has had an Aha! moment—but usually, nothing comes of it. The democratic nature of online prize platforms may be making the world a smarter place, by connecting grand challenges with hitherto untapped human potential.
A study co-authored by Karim Lakhani of Harvard Business School, which reviewed many thousands of problems solved on InnoCentive, confirms this. It found that outsiders not from the scientific or industry discipline in question were more likely than subject-matter experts to solve a challenge on that web platform. Intriguingly, women were more likely than men to be successful solvers—which Lakhani thinks may indicate that brilliant women are often sidelined at their corporate or academic jobs, leaving them with the time and incentive to pursue outside prizes.
Companies are waking up to this notion that incentive prizes are a powerful way to attract clever outsiders to a thorny problem. NetFlix, an American company that rents DVD or digital copies of movies to customers online, decided in 2006 that it wanted to improve the algorithms that help it match available movies with customer tastes. It offered a $1 million prize to anyone that could beat the model developed by its in-house experts by 10%. The firm was stunned to receive entries from over 55,000 people in 186 countries. Not only did the contest tap open innovation, but it also benefited from online networking and collaboration. Astonishing as it may seem, the winning team’s seven members all met together for the first time during the prize ceremony in 2009.
Inspired by such successes, governments are now growing keen on prizes. Britain and several other countries, in cooperation with the Gates Foundation, are funding the Advanced Market Commitment (AMC), a massive prize for development and diffusion of vaccines for neglected diseases of the developing world. The first such prize, at a cost of $1.5 billion, was offered to the drugs firms that can deliver vaccines for pneumococcal disease (a big killer of children in the poor world) at low prices. Merck and Pfizer are now shipping this vaccine.
Government agencies ranging from NASA to the city of Chicago are now using online prize platforms to offer prizes, and international governments are making enquiries too. Thanks to a big push by the Obama administration, Congress passed legislation at the end of 2010 that grants every federal agency the authority to run incentive prizes. This matters, because before the law passed, only NASA and the Department of Defense had clear legal authority to run such prizes.
Grand or booby?
This all is very exciting, but there are some tradeoffs and limitations. Nobody should care if a plutocrat tries to spend his fortune on fanciful prizes—as one Robert Bigelow, heir to an American budget-hotel fortune, did on an overly ambitious $50 million space prize that failed miserably. But government resources are scarce, and taxpayer money spent on prizes may come at the expense of other policies, such as grants to universities or tax credits for corporate investment in research. What is more, prizes used as public policy can be vulnerable to political manipulation. In one case, an American government prize for environmental performance saw the winning firm suppress its breakthrough when the losers lobbied Congress to relax the relevant regulations in their favor.
Thomas Kalil, a science advisor to Barack Obama and a long-time advocate for the use of incentive prizes by government, acknowledges the potential pitfalls. Still, he argues that the very process of dreaming up challenges will sharpen up the bureaucracy’s approach to big problems: “I like prizes because they force agencies to think clearly about outcomes.”
One success was NASA’s Lunar Lander prize, which delivered a much greater bang for the buck than the traditional procurement process. Robert Braun, the agency’s chief technologist, points to the example of its recent prize for the design of a new astronaut’s glove. The winning entry came not from an aerospace firm, but from Peter Homer, an unemployed engineer and one-time sail maker in Maine. He used the $200,000 in winnings and his well-deserved fame to launch a new firm in this area. Kalil insists that prizes make for good policy because they can generate a “diversity of ideas from experts in many different disciplines.”
Fine, but not every problem can be solved with a prize. Where the objective is a technological breakthrough, clearly-defined prizes work well. Other perils can also trip up prizes. Netflix tried to run a second prize after its wildly successful first, but encountered a fierce public backlash over privacy rights: it turned out that the “anonymized” customer data given to contestants was not so anonymous after all. The firm was forced to scrap the effort. Reed Hastings, Netflix’s chief executive, reports that his firm has not used this mechanism again: it’s just one tool in the toolbox, he now says, albeit a highly effective one. Even in areas where other open innovation approaches seem promising, prizes may be inappropriate. And as governments drift toward using prizes for policy ideas rather than technical challenges, as Chicago recently did to increase use of its mass-transit system, the results may get woollier and less useful.
Some politicians have even talked of setting up funds worth billions to spur drug development. Ah, but prizes may not be as useful for that purpose, warns Tachi Yamada of the Gates Foundation. He has credibility in this area. Not only was he formerly the head of research and development at GlaxoSmithKline, one of the world’s biggest pharmaceutical firms, but his current foundation is also a big believer in incentive prizes in other areas of development. It offers millions of dollars in small and big prizes to people coming up with radical new ideas to tackle various global “grand challenges”.
But developing a new drug and bringing it to market takes 15 years or more, and Yamada thinks even the AMC’s carrot of $1.5 billion may not be enough incentive. Incentives prizes clearly can do a tremendous amount to focus the world’s attention on the century’s grand challenges. We must make much more use of them. Even so, given that no purse can match the $20 billion or so a big blockbuster pharmaceutical drug can earn in its lifetime, it may turn out that the best prize of all for innovators remains market success.
For more on incentive prizes, listen to our Freakonomics Radio podcast on the topic here.