2006 Product Innovations to Watch

6 March 06

       In this, my fifth annual Update on innovations to watch, I’ll highlight a few innovations that will be particularly interesting in 2006, either because of the offering itself or because of the business model underlying it.  As an economist, my focus will be on the business prospects for these innovations, rather than on their features or technical specs.

          I’ll review my selections late in the year, to see what became of the products and services that seemed so intriguing in the first months of 2006.

Innovations to Watch - 2006

        This week I’ll discuss the products.  Next week, the services.

1.                        E-85 Ethanol and distribution economics

“… We'll also fund additional research in cutting-edge methods of producing ethanol, not just from corn, but from wood chips and stalks, or switch grass. Our goal is to make this new kind of ethanol practical and competitive within six years.”

President George W. Bush, 31 Jan 06

       Even before President Bush looked to ethanol as a way to reduce US dependence on foreign oil, the fuel had demonstrated its utility as a partial substitute for gasoline.

       Brazil, for example, makes ethanol from sugar.  Virtually all the cars sold in Brazil are flex-fuel, able to run on either gasoline or ethanol. 

       The country expects to be energy-independent in 2006, due in large part to its ethanol industry, according to a recent article in The Wall Street Journal.  But the development of a robust ethanol industry took Brazil more than thirty years.  The US is aiming to do in six years what it took Brazil thirty to accomplish.

       The challenge is that E-85 is a networked innovation.  Its success in the US will require significant changes in the automotive, agricultural, and fuel distribution industries. 

       Some of these sectors are already changing.  General Motors has recently been running ads urging customers to “live green, go yellow” by buying a new GM flex-fuel vehicle.  Corn prices are moving in line with oil prices, reflecting the increasing linkages between corn and fuel. 

       The biggest barrier to large-scale E-85 adoption in the United States is the lack of an ethanol distribution infrastructure.  Of the more than 180,000 gasoline service stations in the US, only 600 sell ethanol.  Most of these are clustered in the Midwest.  If you live in Massachusetts, for example, you’d have to travel to Pennsylvania to find a filling station that sells ethanol.

       Service stations themselves have little reason to switch one of their pumps to ethanol.  Most cars in the US don’t run on ethanol, so pump volumes could go down if a service station switched.  The gas distribution companies that supply the service stations have even less reason to provide ethanol, as initial volumes would be low.

       Thus, while automakers and government officials would like Americans to use more ethanol, we can expect its spread to occur slowly from the Midwestern center, because distributors will expand by increments from their current bases.  For the Bush Administration’s 6 year timeframe to work, we’d expect to see significant geographic expansion of ethanol distribution in 2006. 

2.                        The emerging ecosystem around Apple’s Video iPod

“The new iPod is its own little addictive medium…. The ability to download programming of my choosing gives me a new kind of private, restorative time, a virtual third place between a frantic workplace and a home brimming with activity.”

David Carr, in The New York Times, 18 Dec 05

       Like E-85 Ethanol, the video iPod is a networked innovation.  The video capabilities of the iPod are useless if there is no content available.  Apple’s iTunes service provides distribution, but Apple has looked to broadcasters to make content available.

       In contrast to the economic problems facing E-85, releasing content for the video iPod appears to be an attractive proposition to content providers.  Broadcasters get revenue and additional viewers when they sell their episodes on the iTunes store.  iPod users pay for the ability to watch videos (on a tiny screen) where and when they want to.

       The product is already a success.  Consider:

·        Total iPod sales increased 207 percent over the year-ago quarter in q4 05, to over 14 million units sold. 

·                    Business Week ran a story in November speculating that video iPod demand was outstripping Apple’s ability to supply. 

·                    There were three million downloads of video programs between the time the iPod was introduced, in October, and the end of 2005.

       The question for 2006 is: “How will Apple build out this new channel?” The video iPod represents a new platform that allows Apple and the media industries to expand in ways both predictable (TV series, music videos) and unknown (video podcasts).   Perhaps the new venue provided by the video iPod will enable smaller content providers, like jib-jab.com, to emerge.

       Much of this will happen over the course of this year, so stay tuned (or podded). 

3.                        Pfizer’s Exubera – inhalable insulin

       More than 194 million people in the world have diabetes.  Many of these people could benefit from insulin, but do not take it because they don’t want to inject the drug.

      On 27 January 2006, the US Food and Drug Administration approved Pfizer’s inhaled insulin product, called Exubera.  Analysts expect this product to be a blockbuster for Pfizer, with potential sales of over $2 billion by 2010.  After a strong run in the 1990s, Pfizer has been a poor performer over the last six years, with a stock price that has declined about 50 percent from its $50 a share price in mid-2000.

      While it’s reasonable to expect Exubera to be a success for Pfizer, the product is not risk-free. 

        Demand may materialize more slowly than Pfizer expects.  Determining the appropriate dose of inhalable insulin is tricky, and the product itself will be priced at about three times the price of injectable insulin when it launches in June. 

          And competition may emerge more quickly.   The compound itself is not protected by patents, and there may be other delivery mechanisms that are equally effective. 

          The uncertainties around Pfizer’s Exubera make it an innovation to watch in 2006.

More Information:

1.             To find out where you can buy E-85 fuel, go here.

2.             Previous updates provide more detail on the development of the ethanol industry.

3.             A recent update on Exubera is here.