The Texas Fire Ant Puzzle: Innovation And The Recession

A huge population of red ants has bedeviled Texas farmers for years. By some estimates the insects cost state businesses close to $1 billion a year due to crop and machinery destruction. Killing the ants and their nests has not proven easy.

Texas A&M researchers have discovered that the phorid fly from South America will lay eggs on the fire ants and the maggots which are hatched eat away at the ant’s brains, eventually causing their heads to fall off. Someone at the university was willing to underwrite the work to solve a problem. That investment was almost certainly much less than the $1 billion a year that fire ants cost businesses in the state.

A recession does not stop advancements in technology. It just makes companies so frightened of risk that they choose not to make the investment in the fire ant projects.

In the last week, the two most successful technology companies in the world, IBM (IBM) and Google (GOOG) have announced major new products.  These are developments that will probably help the firms take business away from their competitors.  The scope of the products’ applications is broad enough that the R&D investment to create them must have been extensive.

IBM released “stream computing” applications that allow businesses to look at and analyze huge amounts of data in real time. Describing the product, IBM said “System S is built for perpetual analytics – utilizing a new streaming architecture and breakthrough mathematical algorithms, to create a forward-looking analysis of data from any source – narrowing down precisely what people are looking for and continuously refining the answer as additional data is made available.” The ability to have access to that kind of information will undoubtedly be valuable to governments, the financial industry, and large multinationals with thousands of retail outlets. The new software is unique and does not appear to have any direct competition.

Google also announced a new set of products. The most important one allows the company’s customers to take very large amounts of search data and organize it into spreadsheets. As it released the new tools and several other innovations, Google said they would “open up whole new ways of searching that haven’t previously been available.” Yahoo! (YHOO) does not have anything to compete with the new technology. Microsoft (MSFT) does not either, despite its unparalleled access to capital and software engineering talent.

The shares of Google and IBM have handily outperformed those of all the other large tech companies based in the US such as Hewlett Packard (HPQ), Microsoft (MSFT), Cisco (CSCO), and Oracle (ORCL). Each of the companies is blessed with substantial earnings and technology staffs in the tens of thousands. But, the firms are not all viewed the same, at least by investors who trade tens of millions of their shares each day.

In most ways, IBM and Google are not like one another at all. IBM makes its money selling expensive hardware, client services, and software to companies, most of which are very large, and to governments. Google has millions of customers who pay nothing to use its services. It has millions of advertisers who spend money to reach people who look at search results and most of these marketers are very small.

What the companies do have in common is a willingness to take risks, probably risks with long odds in order to launch new products. These products may be failures, but they are well enough researched and designed that they have a good chance of keeping IBM and Google ahead of the competition even if that does not immediately involve significant new revenue.

The fire ant problem never goes away. Unsolved problems in every industry cost companies money. Sometimes companies do not even know that their problems can be solved. The phorid fly is an obscure species. So is software that can analyze huge amounts of data in real time.

Douglas A. McIntyre