Innovation Battle: Software V/S Physics

"We wanted flying cars. Instead we got 140 characters,” says Peter Thiel, the co-founder of PayPal and an early investor in Facebook. Thiel made billions from PayPal and Facebook, but he says the pace of innovation in the broader world has slowed way down.

Is Thiel right? The answer depends on whether you mean innovation in the world of atoms (physical things) or innovation in the world of bits (software).

• Atoms: Slowing. The Boeing 747 first flew in 1969, yet it still is the main jet carrying people across oceans. Automobiles still travel 70 mph on our highways. They use less fuel and are safer, but the pace of improvement is nothing like it was 100 years ago.
  
  

• Bits: Accelerating. The cellphone was the size of a brick 30 years ago. Six years ago it was much lighter, though still mainly a phone. Today it’s a camera, radio, television, credit card and disease diagnostic tool.
  

The most fertile areas for innova-tion become clear in this atoms versus bits view. If the atom world is slow to change, how can bits replace atoms or change the way we use them? News- papers have transitioned from atoms to bits. Trickier are classrooms and health diagnostics, but they’re
moving, too. Finally, bits will never replace such things as cars or airplanes, but they’ll change the way we use those things.

I predict that 50 percent of colleges will fail during the next decade. The high return on investment that a diploma once guaranteed is no longer certain. Employers now have other and cheaper ways to test intelligence and drive.

Online education got serious in 2012. Two open-enrollment online colleges—Coursera and Udacity—each raised more than $10 million in venture capital. Coursera plans to make money by selling certificates for around $100, verifying course completion. If you can earn a certificate for completing an artificial intelligence class taught by a Stanford professor, where does that leave the math professor at the under-funded liberal arts college?

A second, less noticed kind of edu-cation revolution is aimed at replac- ing traditional corporate training. The Apollo Group, which owns the University of Phoenix, has made a big bet to create the Innovator’s Accelera- tor and has signed up noted Harvard Business School professor Clayton Christensen and others to teach cor- porate teams how to become more innovative. I was allowed a sneak peek at Innovator’s Accelerator; it looks like something George Lucas would have cooked up had he turned his creative talents to education. The Innovator’s Accelerator will soon change the $50 billion corporate training market.

A third way bits can transform atoms is to change the way we con- sume and value atoms. An example in air travel is XOJet, which has made private-jet travel cheaper.

XOJet, owned by Texas Pacific Group (TPG), was able to use Group’s credit to buy scores of late-model jets on the cheap after the financial crisis. XOJet’s chief, Blair LaCorte, then imported strategies and tactics from two other businesses owned wholly or in part by TPG: Low-cost air carrier Ryanair and resorts operator Harrah’s.

“We got people to think of private jets as nice hotel rooms to rent, not resort homes to fractionally own,” LaCorte says. XOJet owns 75 jets but has only three types: The Challenger 300, the Hawker 800XP and the Ci- tation X. “We know how to maintain these three types,” he says. That’s crucial, because XOJet gets 1,200 annual hours of use from each jet, as opposed to 600 hours for the average fractional jet and 250 hours for the average privately owned jet.

XOJet’s volume means that you can rent a Challenger to go from Van Nuys, California, to Teterboro, New Jersey, for as low as $23,000. The more custom your needs, the more the price will go up. But thanks to the internet and some clever analytics, XOJet is able to price each request, offer a smart deal and make money. Yes, it’s still a jet, but bits have trans-formed how the jet is being used.

(Rich Karlgaard is the publisher at Forbes)