Speech to Innovation Bay: Australian Business in the Online Economy

Thankyou very much Ian Gardiner and congratulations not just for the success of Viocorp but also for setting up Innovation Bay. And can I also thank Nick Abrahams and the partners of Norton Rose for hosting this event.

It’s a great pleasure to be with you all – a group of people whose common bond is an abiding interest in technology, entrepreneurship and high growth companies. You are really working at the very forefront of the type of businesses that Australia needs more of, if we are to remain a high-wage, developed economy.

The truth is that the globalisation phenomenon brought on by the Internet and associated technologies, has created many more opportunities than ever before. But it has also created a much more competitive world. And so we now face what used to be low-wage, low-skilled economies in the developing world, that are now lower-wage but very high skilled economies competing with us.

Technology has meant that so many industries and jobs that used to be not trade exposed are now trade exposed. There are so many examples – lawyers being one of them, accountants being others. If you had a dress shop a few years ago you would have thought your competitors were up the road or at the local Westfield. Nowadays it is the entire world.

The competitiveness is the biggest single feature of this from an Australian perspective. And that means of course that we have to be more innovative, more technologically advanced, more creative and above all, more productive. So we shouldn’t imagine that the great big digital world, the global village – whatever you want to call it – is all champagne and roses. It is not – there is a lot more competition as well as a lot more opportunity.

When the commercial Internet first got under way twenty years or so ago there was a view that because it annihilated distance, it had advantaged the periphery at the expense of the centre and that we would all be able to have our software development company on a mountain top in Alaska or Tasmania. And you could trade shares from anywhere so why did you need to be in a financial centre?

I remember being staggered in the mid-1990s, it would have been about 1995 just shortly after we started OzEmail. Not long after that I remember we had a legal issue that had come up in the course of my work – I was an investment banker in those days – and I wasn’t happy with the advice that the guys in Australia were getting. But I was in Colorado.

And I was amazed at how easy it was, even on the poor connectivity you had at the time, to haul up all the law reports and case law and statutes – even in those days. And of course that’s now commonplace. I’m sure most of the young lawyers here at Norton Rose wouldn’t know what a law report looked like. It’s a dusty thing they see on the partners’ bookcases. They probably assume there’s a small bottle of scotch contained within it. And they may well be right, of course.

But here’s the thing: All of that connectivity has not in fact benefited the periphery at the expense of the centre. If anything, it has benefited the centre at the expense of the periphery. The financial centres, the technology centres are more powerful than ever. And we can talk about that a bit more later. But this is a very significant issue.

And if you are interested in this, because it bleeds into the issue of cities and urbanism, I would commend to you Ed Glaeser’s book The Triumph of the City. Enrico Moretti’s very new book called The New Geography of Jobs. And there’s a lot of work being done on what makes an innovative city – Richard Florida of course has written extensively about this.

Why is it that Palo Alto is such an important hub of venture capital, technology development and all of those associated sectors and services and skills? And yet other parts of the United States or the world which have equally good universities in their area – because you can’t say the answer is simply Stanford – why don’t they have anything like the same innovative industries there?

One of the things that is very important to keep in mind too is that all politicians like to appear in hard hats and fluoro vests. Me somewhat less so. But I remember when Kevin Rudd was first Prime Minister, he was hardly ever not in a fluoro vest and a hard hat. And I asked once whether he was auditioning for a role in a remake or a re-run of the Village People. And speculating as to whether Wayne Swan would appear in the Indian headdress. But the truth is that our future of job growth in this country depends on innovation.

And this is why Moretti’s work is really very interesting, he’s a very smart economist at Berkeley and what he has done is quantify the job creation from innovative industries. And it’s not just geeks and techos and entrepreneurs and so forth – the truth is that every single type of job in centres which have a strong innovation culture are a) more numerous and b) better paid. And so it benefits everybody. Anyway I won’t do any more of the précis of Moretti’s book but I strongly commend it to you.

Now the challenge here in Australia, the conundrum here in Australia has always been this. We know it’s a great place to live. We know we’ve got good universities. We know we’ve got a well educated population. We are not by nature deferential, I think we need to be less deferential by the way you know I’ve often described Australia as having a non-deferential culture. I think it would be fair to say it is not non-deferential enough. There’s still too much of “not invented here” going on. You need – we need to embrace as a society, as a culture – we need to have the courage to embrace the creative destruction – or the destructive creation – that Schumpeter wrote about.

The fact that great businesses can be basically destroyed overnight and replaced by new ones, you’ve got to recognise that as an opportunity not a threat. And look at the risks that enterprises take when they don’t do that. I mean there are so many examples – Kodak, there’s a long list of them.

But just think about this city here, think about Fairfax. This was a business that actually totally owned the classified advertising business in the analogue era in Sydney and Melbourne. Totally dominated it. I remember talking to Kerry Packer decades ago about his regular musing on starting a new newspaper because he’d sold he Telegraph to Rupert Murdoch in the 1970s and his conclusion invariably was that Fairfax just had a lock, a monopoly on classified and without that you weren’t a contender.

So when the ability to provide classified advertising, offer classified advertising, on a much more cost-effective, much more functional platform, the Internet, when that became available did Fairfax embrace it? No they ignored it. Because they had managers and a board that said we don’t want to cannibalise our legacy business. We don’t want to compete with ourselves. And you know what happened? Someone else cannibalised their business.

So unless you’re prepared to cannibalise your own business, unless you are prepared to be as the owner of a legacy business as disruptive as the people that are taking you on, you will just be left behind. And so you’ve got mastheads now, the Herald and The Age, what are they worth? Not very much judging by the market cap of the company.

I remember when they were worth billions, over $1 billion each and that is an incredible destruction of value and that’s an example. So we are innovative, we are well educated, we’re not deferential, though we should be less deferential. Why is it that more of our GDP is not generated from our own IP? Is it because we’re not risk takers?

Well we are risk takers. Look at the Australian investment in the mining sector, maybe that is where all the venture capital – or perhaps in some cases the adventure capital – goes. So we haven’t had until recently what you could describe as a dynamic innovation focused business culture and that provided all of the elements that provides incentives for researches to commercialise their work, that encourages businesses to invest continuously in innovation, and channels capital towards high-risk high-reward opportunities by funding and valuing world class scientific and technical skills.

Now that is starting to develop, but we need to do more of that and I’m very keen to hear from you as to what are the levers we can pull, what more can we do in Government to promote that more innovative culture?

Now I’ll just give you a statistic that I think is very interesting from the US. The Kauffman Foundation pointed our recently that over the 25 years to 2005 “nearly all net job creation in the United States occurred in firms less than five years old …. without start-ups, net job creation for the American economy would be negative in all but a handful of years.”

Now having said that we all know that most start-ups don’t make it. Roughly a third close by their second year. Only half make it to age five. I have invested in start-ups where I’ve lost the entire investment in less than 180 days which I regard as being extremely discourteous. I think you’ve got to have some manners and I think if you’re going to lose your investor’s capital you really shouldn’t lose all of it in less than 12 months. There’s got to be some dignity.

The challenge for us therefore is what is going to make the difference here? Some people say the tax system, our taxes are too high. I guess they are but just watch this space, they’re going to go up in the United States. In the US in 2012 the US raised 16 per cent of GDP in revenues and spent 23 per cent of GDP. So obviously Americans are going to have to pay more tax and they’ll have to spend less too. Certainly taxes are going to have to go up. So I don’t know whether the tax advantages in the United States are going to be that much greater.

There is clearly an issue with employee options. I think the settings there clearly are not working — they’re not appropriate and not effective, and Nick and I were talking about that earlier, and that’s something that we are looking at pretty closely. I’m very keen to hear more from you about what we might do. I think a big part of it, however — and this is where organisations like this can make a real impact — is by doing more to publicise the success of investments in innovation.

And you can’t just leave it to the media. I’m not here to complain about the media. Winston Churchill once said, complaining about the media is like complaining about the weather. There’s nothing you can do about it. Whatever you say will have no effect. But the truth is, there is not enough prominence given to the successful investments, because that’s really what the investors need to know about. They need to know that this is a line of activity, a line of investing, that is actually going to pay off.

Unfortunately, all too often the failure, or the lack of success, gets one thousand times more press than the successful investment. And I think networking is absolutely critical. You know, when you boil it all down, that is what makes Silicon Valley work. That is what makes Silicon Alley works. It is the proximity, the connectedness of good lawyers, financial people, programmers, entrepreneurs.

That is why if you were starting a new technology business in the United States, even though taxes in California are higher than just about anywhere else, you would in all probability move to the Valley. Why would you do that? Because you are going to be closer to people who are likely to give you money but also there’s a big pool of people that you can hire. This is why we are seeing the triumph of the city.

There are a whole lot of other social changes that lead into that which I won’t go on with. But cities are more and more important than ever. We thought technology would benefit the periphery at the expense of the centre but it hasn’t. So we are, if you like, at the periphery and what we have to do is make ourselves a centre. Not the centre, there’s always going to be several centres but we have to make ourselves a serious technology innovation centre. And that’s what I’d like to discuss with you and hear your views.

Now, I’m just going to say something on the NBN. You’ve all heard me speak about this a thousand times. It’s almost becoming tedious repetition but firstly, we the Coalition see ubiquitous, affordable, very fast broadband as a bedrock requirement for a successful digital economy. And a successful economy, full stop.

We are absolutely committed to delivering the NBN sooner, cheaper and more affordably than the way Labor is going about it. We would not have set up a government-owned company to do it but it’s there and the job has to be completed. Leaving aside all the issues about competition and government ownership – happy to discuss them if you wish – the fundamental problem that the NBN has at the moment is that the network is being built far too slowly and at far too great an expense. And that’s an issue both for the people that are paying for it, that’s you in your capacity as taxpayers, and the people that will ultimately use it, that’s you in your position as consumers or business-people who are purchasers of the connectivity.

So how do you do that? Is there anyone from the technology media here, by the way, anyone? No? We are so let down. Again, I’m going to complain about the media. We are so let down by the so-called technology media, here in Australia. The commentary about the NBN and the issues associated with it is just so unbelievably uninformed. I find it extraordinary—when did you last read a piece anywhere that goes into some depth about what’s being done in other countries – in comparable countries, whether it’s the United States or Britain or continental Europe or East Asia?

You don’t see that and there is a sort of cheerleader approach to the NBN which is actively, actively misleading people. The truth is there is no country in the world that is spending the sort of money – anything remotely approaching the sort of money our Government is spending on broadband. There is no country in the world that is building a new Government monopoly customer access network.

The commentary here is just terribly, terribly ill-informed. So I’m happy to talk about that if you’re interested. But it’s one of the things that we struggle about, where you ask yourself, ‘Why is it that the most parochial part of our media is in fact our technology media?’ It’s an incredible paradox because everywhere else – you know in the business pages, you are reading about what is going on in the international economy. You pick up the financial pages and you can get a very, very comprehensive run down of what’s happening in Europe and what is happening with the fiscal cliff in the United States. But with technology it’s just so inward looking. Anyway on that not-so-cheerful note, over to you and look forward to your questions and feedback.