A Shrinking Target

Last week, Business Week published a lament from business consultant Adrian Slywotzky about declining industrial research in the U.S., and what we could do about it. The decline is not a revelation, but he's right to wonder where future technological innovations will come from.

I do think he exaggerates in describing Bell Labs as "essentially gone." For example, he claims that Bell Labs had 30,000 employees in 2001 and has only 1000 today (disclosure: my wife is one of the latter). Certainly the labs shrank after the dot-com bubble--as did the company that pays for them. But the 30,000 number included tens of thousands of people doing advanced development aligned with business--certainly not the sort of basic researchers Slywotzky is worried about replacing. Even when I went there in 1985, the research area at Bell Labs was not much over 1000.

Still, no honest observer could deny that Bell Labs is not what it used to be. But I think Slywotzky neglects a critical cause for changes at Bell and other research labs: the moves of their corporate parents away from vertical integration.

Like Ford, which in the 1920s bought Amazon rubber plantations to assure a supply for tires, the AT&T that spawned Bell Labs did everything. At the low end, they drew their own copper wire and developed durable plastic materials for telephones. At the high end, they provided both local and long-distance service to millions of Americans. With this vertically integrated structure, research didn't have to worry too much about what part of the company their innovations might affect. If it affected technology, AT&T could take advantage of it.

Even the 1984 breakup of local and long-distance didn't change this integration. It did remove the monopoly subsidy for Bell Labs, a name that AT&T kept. But to the surprise of many, it was the part of Bell Labs funded by the still-monopoly local phone companies, renamed Bellcore, that quickly ran into trouble. Bell Labs, although it became more focused, continued to pursue speculative long-term--or infinite-term--research.

When AT&T spun off Lucent Technologies in 1995, it kept many math and computer researchers, but physical science research was left largely intact as part of Bell Labs in the new company. But the company no longer provided phone services. When Lucent decided to spin off Optical Fiber Solutions and Agere Systems in 2000, they no longer made fiber, lasers, or integrated circuits. Bell Labs physical scientists were discouraged from research that supported these technologies (making Hendrik Schön's orthogonal work seem much more attractive). These spinoffs transformed the formerly vertically integrated company.

With the increasingly narrow vertical scope of Lucent's business (now merged with Alcatel but covering much the same product space) Slywotzky's description of material physics and semiconductor research as having been Bell Labs' "last remaining areas of basic science," seems misguided. For one thing, Bell Labs is still researching such things as using semiconductor chips to process light, which is certainly as basic as the introduction of the graphical user interface by Xerox PARC that he cites. But it is hardly surprising that a lab would shift its focus over time toward things the company actually does.

Although the shift is not surprising, the lack of vertical integration is a bigger challenge for long-term research. By definition, revolutionary innovations don't match well with existing businesses, so they face huge barriers in an established company. But in a smaller company that is focused on only one tier of activity, it's even easier for research to miss the mark, raising the pressure to shorten the time horizon. No innovation in semiconductor device physics, however profound, is going to help the bottom line of a telecommunications equipment manufacturer. The narrower the company's focus, the harder it is to argue that research has a chance of helping it.

I suspect IBM's much more vertically integrated model--they still manufacture integrated circuits as well as providing services--has helped IBM research to survive after a near-death experience in the early 1990s. Just last week, they revealed a very cool image of the organic molecule pentacene (ironically, one that was also studied by Hendrik Schön).

But although Slywotzky overlooks an important contributor to the decline, I agree with him that the U.S. and the world need to explore new ways to encourage long-term research.