Open-source projects work similarly, but they can sometimes become unwieldy and unfocused when they grow too large. What's more, the open-source model can put off developers who—not unreasonably—are interested in some kind of reward for their work. The prize model solves those problems. Because there's a reward involved (not just money but also fame), teams have a natural incentive to stay focused on a goal and to closely monitor each participant's progress. The winning team—like several others that participated—worked out a formula to determine each member's share of the prize money. And, of course, the prize model works out much better for a sponsoring company like Netflix. By awarding a prize, the company gets to keep all the fruits of contestants' labors; if it had merely sponsored an open-source project, Netflix would have had to share all the innovations that resulted.
The Netflix Prize model will likely work a lot better in the software business than in other industries that depend on intellectual property. That's because programmers are used to collaborating with one another, even when they work for companies that are competitors. Netflix can be considered a rival to AT&T—both are working on ways to bring movies into people's homes—but employees of the phone company apparently had no problem helping out the DVD service. You'd be hard-pressed to find such cross-business collaboration in, say, the pharmaceutical industry, where secrecy prevails.
So which tech firms can benefit from setting up prizes? My first candidate is Microsoft. In trying to beat Google's search engine, the company faces a clear hiring disadvantage—the world's best search engineers want to work for the world's most committed search company, and that's not Microsoft. What's more, search engines have proved impervious to open-source development; Wikipedia's founder Jimmy Wales tried to take on Google with his wikilike search project in 2007, but the plan foundered and was eventually shut down, mainly for a lack of interest. How to spark that interest? Money. Microsoft could offer $10 million to the first team that figures out a way to improve its search engine by, say, 10 percent. The difficulty here would be in deciding how to measure the "improvement"; one way of doing so would be to discreetly test contestants' algorithms on a subset of search engine queries and then to analyze whether users respond to the results.
Google itself could also do well with a prize. The company is heavily invested in solving one of the world's hardest tech problems—machine translation. A prize would be useful here because translation requires a wide range of expertise—software engineering, linguistics, and a whole lot of math—and a high-profile award could get people from different disciplines to team up. Google could award $1 million for each 10 percent improvement in its algorithm for translating large bodies of text across languages. The improvements would be measured in accuracy—the team that writes code that best translates, say, Proust's oeuvre into English would win big.
What else? When you start thinking of problems that could be solved through competition, it's hard to stop. How about a prize for improving face recognition in pictures or videos? Or what about one for improving speech recognition, so that we'll finally get to talk to our computers instead of type? After all, movies are important—but perhaps Netflix has stumbled on to something much more useful than a way to tell whether you'll love Napoleon Dynamite.