Netflix And Innovation
There's news out today that we've finally got a winner of Netflix's much publicized contest to award $1 million to whatever team of computer scientists could improve its movie recommendation system by at least 10 percent. And not only that -- they liked the results so much that they're holding another contest to better analyze their customers' preferences based on demographics data. I think contests like these are great on several levels.
These competitions are just smart business. If you set a goal that you deem important to your firms' competitive advantage, you probably know what you're willing to spend to accomplish that goal. Most companies might hire more employees to accomplish such innovation. Then, of course, you have to worry about how hard those employees are working for their virtually guaranteed salaries. If they fail, they might claim that it will just take more time, or that a solution could not be found.
But what if, instead, you just have a contest? Then you don't have to take the risk of hiring those employees at all. If the goal truly wasn't possible, then it costs you nothing to find that out. You've also got people working as hard and as quickly as possible because their reward is entirely incentive-based. Finally, you don't have to worry about overhead, infrastructure or benefits costs to employee additional people.
Contests like these are also good, cheap advertising. When someone hears about an initiative like this, it gives them a favorable view of the company. It shows that the company is serious about innovation -- offering a prize for someone who can provide it. In reality, all companies strive to be innovative, but you rarely hear about those efforts, since they're mostly in-house. That provides consumers with a possibly false belief that companies with such competitions value innovation more than others. Of course, when it comes to consumers, perception is everything.
Netflix obviously isn't the first company to hold competitions. In 2007, Warren Buffet selected a few protégés to compete in a "The Apprentice"-like competition to find someone to run Berkshire Hathaway by letting them each manage $5 billion for two years (nice period in economic history they had to work with!). Then there's the infamous Sir Richard Branson inspired "Earth Challenge" contest where a global warming solution is sought, and the prize is a whopping $25 million. I'll be curious to see how those turn out.
In a society where information, education and robust technology are widely available, such competitions are easier to hold than ever, and more likely to succeed. I think we'll continue to see these sorts of contests in the years to come. We should. After all, what's nearer to the heart of a capitalist economy than competition?