• posted by Anindya Oct 8th, 2012

    Instagram-logoIn April this year Instagram, a wildly popular photo-sharing mobile app, was purchased by the social networking site Facebook for $1 billion in cash and stock consideration. Not an ordinary, business-as-usual acquisition, even by standards in the go-go tech space.

    From a valuation standpoint, Instagram’s acquisition is a fantastic outlier. One week before the headline-splashing deal, Instagram closed a $50 million venture capital round for an implied valuation of $500 million. Those financiers were then happy to be walking to the bank making twice their investment in a matter of days.

    The size of this deal may have prompted Silicon Valley to redo its math on the financing of a sizzling tech start-up, but it is the speed at which Instagram was ultimately snapped up by Facebook that suggests a paradigm-shifting development has unfolded. Founded in October 2010, this 12-person company took only 18 months to career from development stage to viral spread to eye-popping monetization.

    Just over a year after it was launched, Instagram was named the best app of 2011 by Apple. It is the fastest app in history to reach 1 million downloads, requiring a period of less than three months. It has over 30 million registered users spread globally who show a high level of engagement, generating 575 “likes” per second and more than 81 comments per photo.

    Across the sweep of the previous century, innovation followed what is said to be a 10/10 rule: a decade to develop a new platform and another for it to achieve critical mass. This was true for many household technologies, including radio, VCR, DVD, cell phones, desktop computers and GPS navigational devices. In this century, as not only Instagram but also the commercial trajectory of YouTube and FourSquare bear evidence, that rule of thumb has been compressed to one-to-one.

    Our new age dawns

    We are living in an age of innovation acceleration. It is a gross underestimation to attribute this development strictly to the power of the internet. Beyond a doubt, the internet – with its founding ethos valuing connectivity, open source, free expression and crowd-sourcing – has been a technology enabler. To search for information, exchange ideas and beta-test an initiative or expand upon an existing one now only remains a couple of clicks away.

    However, innovation’s source has always been people who bring solutions to problems. In Where Good Ideas Come From, Steven Johnson argues that certain environments are crucial in driving that process. While the internet is a virtual environment that sparks and sustains good ideas, the city is the natural landscape or physical environment where people, through strange and serendipitous interactions, form their first inkling of an innovative product or service.

    High population densities characteristic of urban dwelling produce a set of social problems that did not exist in rural areas. However, that swollen population gives rise to subcultures that enable distinct ideas to collide and combine in novel ways. Citing recent research by a physicist, Johnson notes that despite the noise, overcrowding, traffic and distraction, the surroundings makes the average resident of a city of 5 million people almost three times more creative than the average resident of a town of 100,000.

    Against this backdrop the prospects for indigenous innovation seem positive for Indonesia, where internet penetration and urbanization are taking place at a rapid clip. Indonesia had 50 million internet users in 2010 but this number will grow to 150 million by 2014. Also, in 2010 Indonesia’s urbanization rate was 52% but this share is expected to expand to 73% to more than 200 million urbanites by 2025.

    Nevertheless, the clincher for Indonesia is the ideological environment. Since the beginning of reforms in 1998, Indonesia has taken a crash course in democratization, decentralization and deregulation. One outcome from these parallel processes is a respect for civil liberties, particularly freedom of expression. Indonesia is an open and critical society and there is no reversing course on its reforms. Five million Twitter users from Indonesia now account for 15% of the world’s daily tweets, remarking on everything from pop culture to politics.

    As these three environments – technological, physical and ideological – further develop and start to converge, Indonesia is rapidly becoming a hotbed for innovation. According to the World Economic Forum’s most recent Global Competitiveness Report, Indonesia’s capacity for innovation ranks 30th amongst 142 economies and is considered a strong comparative advantage. Indonesia is punching above its weight on this score, outperforming developed economies such as Spain (36), Hong Kong (39) and South Africa (46). Tyranny of local preference

    For innovation, whether imported or homegrown, to entrench itself in Indonesia, it must be relevant to market-specific wants and needs. But Indonesia’s society has been experiencing a sea change in recent years. The young demographic is entering productive age, with 52% of the population in the influential 20-54 age bracket. This segment now makes up 80% of total employment and 75% of total gross income.

    The middle class is also rising, doubling in size from 2007 to 2012 and expected to reach 150 million by 2014, suggesting that more Indonesians will have more discretionary income.  More importantly, Indonesians are now using technologies in ways that do not follow the paths and experiences of developed markets. On one hand, Indonesia has leapfrogged right into the smartphone and social media era of modern-day computing. On the other hand, it is using these technologies for social ends. While in other markets technologies are used to facilitate transactions and e-commerce, Indonesians are using them to build up a community and clearly distinguish themselves within it.

    The much-cited success of Starbucks, 7-11, Facebook and the BlackBerry Messenger service in Indonesia is owed to the local consumer preference for a close-knit community, whether online or offline.

    Although communities form primarily for social reasons, opportunities for commerce trail not that far behind. Kentucky Fried Chicken is the fast-food chain of choice where Indonesians not only eat but also nongkrong, an equivalent term to the colloquialism “hang out.” Record labels see the captive audience and market their offerings accordingly to secure 30-40% of total CD sales through this outlet.

    In any community, some members derive deep satisfaction from differentiating themselves and Indonesians are no exception. Unlike developed markets where consumers change cell phones every three years, Indonesians try to sport the latest models. They would also seek a secondhand smart phone rather than purchase a new cell phone because of its perceived association with cosmopolitanism, refinement and leading-edge technology. The device has become a signal of individuality within the larger community.

    Perhaps more fascinating is the fact that Indonesia is one of the world’s leading markets for ringback tones (RBT), a mobile service that plays music instead of the call-connecting tone. Around 15 million Indonesians pay about $1 per month, in the process handing record labels a second win and an additional revenue stream that is four times greater than CD sales, for a utility they do not get to enjoy themselves. The popularity of the service returns to the view that the natural desire of Indonesians to express themselves is a driving force of technology adoption and thereby the seedling of innovation.

    High speed, high impact

    Indonesia’s potential for innovation is in its infancy but its development can be accelerated if relevant stakeholders recognize its predisposition toward community and differentiation and apply focus on unleashing greater productivity. Currently the ecosystem for this task is critically absent, leaving much of the gains to be had from alignment of the three mutually supporting environments on the table.

    First off, the government is slow to enter this space because of its political process, replete with competing claims on prioritization and checks and balances. Traditional financiers are risk-averse because of discomfort with the regulatory regime and the desire to see proof of concept.

    Academia is in sore need of reform. Progression to tertiary education in Indonesia remains low at 16.7% compared to 28.8% in the Philippines, 32.4% in Malaysia and 43% in Thailand. Indonesia’s curriculum is also behind the times, focused on rote learning and not conducive to forging habits of innovative thought and action.

    By a process of elimination, this suggests that entrepreneurs should pick up the slack. For the biggest bang for their buck, they could help kick-start the emergence of this ecosystem for indigenous innovation by providing venture capital to allow good ideas to blossom and by building vocational schools to equip labor with relevant skills that innovating organizations can “plug and play,” so to speak.

    Where these two most crucial shortages can be fulfilled to the greatest demonstrative effect are in the underserved markets – the bottom quintile of household incomes, most probably among the urban masses – that are desperate and thus offer fertile ground for novel solutions.

    Whether the spread of indigenous innovation occurs through the platform of the ubiquitous pre-paid cell phones or increasingly popular handheld tablets, one thing remains certain: it will strike like a bolt of lightning, targeting a particular social want or need. But for that high-speed, high-impact innovation to create wide ripples throughout the economy, it must take root within a broader ecosystem that would spark increased productivity from related spin-offs, spin-ons and endless transmutations.

    The promise of this age of innovation acceleration is that such gains do not only spread fast and deep but they could spawn anywhere, as technology increases and intensifies contact between people and ideas. In Indonesia these conditions are ripe for indigenous innovation to thrive but our entrepreneurs must step up and blaze the path.

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