The Intangible Economy

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January 31, 2006

Visions of the future of "media"

One of the fastest changing industries is the one lumped together under that terrible label of "the media." Newspapers, radio, TV, movies etc etc etc are rapidly undergoing transformation as the means of delivery shifts to digital. No one knows where the industry will end up. But as Sunday's International Herald Tribune pointed out in a story "Road maps for the digital revolution", there are some interesting ideas.

One alternative is increased interactivity - taking the lead from gaming (as I have talked about before):

To Gerhard Florin, the mass media empire of the future combines a phone company the size of Verizon with a search engine as popular as Google and a video game company with interactive content like the one he works for, Electronic Arts.
. . .
"Media companies should learn from games because we totally absorb our players," he said. "Unlike music, for example, people playing our games are not also reading a newspaper."
. . .
"You may be able to do everything online, but we find people are still very attached to the idea of getting something physical," Florin said. "Downloading simply does not give people the same satisfaction." Advertising would only be a minor source of revenue, mainly in the form of credible product placements.

"Our players react very strongly against obvious advertising," Florin said. "But, interestingly, our players are quite positive about branded items placed in credible situations."

Another alternative is localization:

The Internet may reduce the cost of distributing content on a global basis, but Michelle Guthrie, chief executive of the Asian broadcaster STAR Group, is convinced that the next-generation media empire will be built using highly localized content.

"I know this sounds strange in the era of global communication, but you can already see this localization trend among our viewers," Guthrie said. "The top 10 television programs in every one of our markets are locally produced about local stories."

And there is the rise of content-as-king:

Shelby Bonnie, chief executive of CNET Networks, a technology-focused online news organization claiming more than 110 million unique visitors a month, said future media empires would center more on a broad brand name than on a means of distribution.
. . .
"The successful media empire of the future will regularly send their audience to the best stories by their competitors," Bonnie said. "The three-legged stool of content will be original, user-generated and aggregated."

Interesting ideas. And all very important for those in the "media" industry.

But we will see if any of them matters, at least to the end user. Remember TV was supposed to transform our lives. It did transform popular culture - but created what was labeled a "vast wasteland". Likewise cable was to give us expanded choices. But, as Bruce Springsteen said "57 Channels (And Nothin' On)."

As much as I like the "new media", sometimes the old visions are best. Over 30 years ago, Isaac Asimov wrote an essay entitled "The Ancient and the Ultimate" where he described the ultimate self-contained, portable, high-tech reading device of the future. You guessed it, it is the book.

So put me down as enjoying the old fashioned pleasure of a roaring fire, a stiff drink and a good book.

Posted by Ken Jarboe at 11:38 AM | Comments (0) | TrackBack

January 30, 2006

Music industry's new model - update

Monika Ermert has posted a great summary of the state of play on P2P music downloads on Intellectual Property Watch: "After Grokster, Industry Seeks Legal P2P As Mobile Music Takes Over".

The title says it all: legal P2P systems and mobile music:

Now industry is looking for the next model, one that will meet demand within the confines of the legal and policy environment which itself is changing.
There is a whole array of P2P services in the making, as British music consultancy MusicAlly found out in a study presented at Midem. "Most of these services have been around for several years already preparing for a start," says Paul Brindley, managing director of MusicAlly. "If they do not start this year, it is over."
. . .
The music industry, on the other hand, seems to place its hope on a different technology. The Midemnet in Cannes devoted a whole day of discussion to mobile music. "Mobile music may solve the piracy problem," said Brazilian lawyer Marcelo Goyanes. "Mobile might be the saviour of the music industry in China," added Richard Robinson, co-founder of Shanghai ISP and mobile content provider Linktone.
While the CD and Internet music market was 90 percent pirated, this was yet no problem with mobile phones. The combination of fast-growing numbers of handsets in countries like China (400 million), India (over 80 million) and Brazil (86 million) and a nearly piracy-free technology makes mobile very attractive.

The ongoing conductivity part sounds similar to the interaction model of gaming that has cutting down on video-game piracy (see my earlier posting). I'm not sure that the technology can be made piracy-proof, but if the nature of the commercial interaction is "right-now, just-for-me" it seem hard to see how pirates have an advantage. Unless of course the music industry follows to old movie industry practice of limiting initial distribution -- there is a reason why all those pirated videos are in hot demand and it has to do with availability well before the "official" video release, not just price. Interestingly we are now seeing movies with simultaneous release in multiple formats. Someone is learning that in the digital age, more (distribution channels) is better.

Posted by Ken Jarboe at 12:33 PM | Comments (0) | TrackBack

January 27, 2006

What happened to growth

This morning's GDP numbers for the 4th quarter of 2005 were quite a shock: growth slowed to 1.1% (a rate we used to call a "growth recession" -- still positive but not enought absorb the growing population). According to the BEA News Release: Gross Domestic Product:

The deceleration in real GDP growth in the fourth quarter primarily reflected a deceleration in PCE [personal consumption expenditures], an acceleration in imports, a downturn in federal government spending, and decelerations in equipment and software and in residential fixed investment that were partly offset by an upturn in private inventory investment.

Much of this was a large decline in purchases of durable goods (-17.5%) - especially autos. Spending on non-durable goods and services both increased (5.1% and 3.2% respectively). However, the biggest increase in services was in health care -- not necessarily a good sign from long term growth.

And while the trade figures for only two of the three months of the quarter are out, BEA estimates there will be a decline in services exports for the quarter.

One worrisome part is the slow down in investment by businesses in equipment and software -- down to only 3.5% compared to 10.6%. Most of that slow down was due to an absolute decline in purchasing of transportation equipment, but investments in IT equipment and software and in industrial equipment slowed slightly as well.

The stock market shrugged off the news but economists reactions were mixed. Some forecast high, rebound-type growth in the first quarter of 2006. Others predicted a continuing slow trend. Some even questioned the number, since this is the advanced estimate, and expect large revisions once more data is available.

I try not to read too much into a single data point. However, the projected decline in services exports will bear watching. This may be due to a decrease in tourism and travel - or due to a decline in our intangibles trade balance. Monthly trade figures for Dec 2005 (and consequently for the entire year) come out on Feb 10. I will be looking carefully at that data to see how our intangibles trade is holding up.

Posted by Ken Jarboe at 9:58 AM | Comments (2) | TrackBack

January 26, 2006

Competitiveness plans

Yesterday, a bipartisan group of Senators unveiled major competitiveness legislation. Entitled PACE - Protecting America's Competitive Edge, the legislation was crafted by Senators Bingaman, Alexander, Domenici and Mikulski. This set of three bills implements the recommendations of the recent NAS report "Rising Above the Gathering Storm" (which Bingaman and Alexander were instrumental in bringing about). The legislation includes provisions to increase funding for science and math education (including better training for teachers) and for energy research and development (including creation of a new agency in the Department of Energy similar to the Defense Advanced Research Project Agency - the famed DARPA). The legislative package also expands the R&D tax credit and, more importantly in my mind, creates a tax-credit for providing continuing education to current workers (rather than waiting for them to lose their jobs before they can get job training help).

This is the second major competitiveness bill. Late last year, Senators Ensign and Lieberman introduced the National Innovation Act of 2005 (S.2109) - which tracked the recommendations of the Council on Competitiveness's National Innovation Initiative.

Adding to the mix, earlier in the week, the Democratic Governors Association unveiled its "America Competes" plan

While I think these proposals are incomplete, they are steps in the right direction. One provision in the PACE package that may sow the seeds for greater progress in the future is an OMB and Treasury Department study on innovation incentives. Such a study could lay the groundwork for a much more comprehensive approach to innovation policy

I don't know whether to be optimistic or pessimistic about these initiatives. The growing drum beat over competitiveness is heartening. And the PACE legislation has the best chance of serving as a engine to get something through the Congress - since at its core is a set of energy policy proposals that are co-sponsored by both the Chairman and the Ranking Member of the Senate Energy Committee. Getting these big packages passed requires some sort of legislative vehicle. The last time Congress did a big competitiveness package, the engine was the need to give the President trade negotiating authority (which culminated in the creation of the WTO). This time energy policy, rather than trade policy, might be the spur.

However, a lot will depend on how the President reacts. Next weeks State of the Union address will be critical. There are some indications that the President will address these competitiveness issues - or so says a recent story in the Baltimore Sun "Bush weighs costs to U.S. of keeping up". In a recent interview with the Wall Street Journal, the President talked about competitiveness:

WSJ: Is competitiveness going to become more of a theme for you in this year?

Mr. Bush: Competitiveness has always been a theme for me, and I'm going to continue to make it one. Remember, in the campaign, I used to say, "How do you deal with jobs going overseas? Make America the best place in the world to do business." That is a competitiveness theme that basically says I recognize that we've got to compete. And we have a global economy. Some wish there wasn't a global economy, but there is a global economy. And we've got to have our young trained for the jobs of the 21st century or else [the jobs are] going to go somewhere else. That's what happens in a global economy. And there's been some interesting -- there is an interesting debate in America about, well, how do you react to a global economy? There are some who say, let's protect ourselves. And as you know, I believe in opening markets and enforcing trade law, which is the opposite of "let's protect ourselves." It's "let's compete, and by the way, let's make sure we have an environment within America that enables us to be competitive."

On the other hand, Bush's energy message could veer off into a messy fight over a plan to reprocess used nuclear fuel, as reported in today's Washington Post and Wall Street Journal. That fight could obscure other energy technology issues in a battle over nuclear waste and proliferation.

Presidential policy could also bog things down. Yesterday, Senator Clinton introduced her own energy technology bill - S. 2196 - to create an Assistant Secretary for Advanced Energy Research, Technology Development, and Deployment.

Like everyone else in Washington, I will be looking at the State of the Union address carefully - reading the tea leaves see the direction of our policy. More on my findings later

Posted by Ken Jarboe at 8:33 AM | Comments (1) | TrackBack

January 25, 2006

Power of ringtones to change the music market

This little story in today's Wall Street Journal underscores the dynamics of the music market today:

WSJ.com - How Cellphones Saved the Radio Star

The mobile-phone ring tone was more important in propelling Madonna's hit single "Hung Up" to the top of the charts than radio airplay, said a senior executive at Madonna's recording company, Warner Music Group Corp.

. . .

"I think it's not inaccurate to say that the mobile campaign, and the ring tone in particular, was more effective in launching the single than radio airplay," said Michael Nash, a senior vice president at Warner Music.

. . .

The growing importance of ring tones, along with other digital music products, is prompting changes in the way music companies identify new artists and bands and market music to consumers. Mr. Nash said the ring tone is now becoming a central part of the marketing strategy for an album or single.

He said Warner Music has charged its staff responsible for signing and managing artists with creating content in the studio that works as part of a whole digital package.

The International Federation of the Phonographic Industry said mobile phones accounted for nearly 40% of digital-music sales in the first major year that full songs were available over the mobile phone. Ring tones account for by far the largest portion of mobile-phone music revenue, according to research released by Informa PLC.

As I've pointed out before, the rise of digital technology is forcing the music industry to find new business models. It appears that innovation and creating new markets (rather than criminalizing users) might just be the future salvation of industry.

Posted by Ken Jarboe at 4:05 PM | Comments (0) | TrackBack

Invention of the automobile - and competitive advantage

This Sunday is a special day in the history of the world (no, the Super Bowl is the next week). As Business Week explains:

The automobile celebrates its 120th birthday on January 29, 2006, the anniversary of the date in 1886 on which Karl Benz applied for a patent for his motorized vehicle. With the German Reich Patent No. 37435a, granted in November of the same year, his Patent Motor Car, as this three-wheeled vehicle has since been known, received official recognition as the world's first automobile. It was the individualized technology that secured the Benz Patent Motor Car this status. Unlike other inventors, Benz did not merely install an internal combustion engine into an existing coach chassis, thereby making it capable of autonomous motion (Greek/latin: auto/mobil). His design extended to the entire vehicle: It was quite clear to him that a vehicle powered by an internal combustion engine was subject to engineering principles quite different from those applying to a horse-drawn carriage.

And I suppose you are one of those who, like me, were taught that Henry Ford invented the automobile.

Ford didn't invent it. What Ford did was much more important. He commercialized the auto through a series of innovations - technical, organization and financial. Before Ford, the automobile was a rich-man's toy; after Ford it was an everyday item. Mass produced to be cheap enough to be affordable by all. Simple yet strong enough to replace the horse for rural travel. Economically dynamic with linkages throughout the economy to help create the massive middle class.

As this history lessen shows, invention or great technical ideas are not enough. There is more to innovation than a smart engineer.

Now, if we can just get our policymakers to understand that lesson they might be able to craft a complete innovation policy.

Posted by Ken Jarboe at 3:28 PM | Comments (0) | TrackBack

January 24, 2006

Ford and our bankrupt economic policy

Two side notes to Ford's announcement of drastic cut backs illustrate how our economic thinking and economic policy is bankrupt.

The first is the failure of the American Job - NOT - Creation Act - some thing I've discussed before. As Allan Sloan points out - Ford Takes a Tax Holiday for 'Jobs Creation':

Right there, on page 2 of one of its news releases yesterday, Ford said that "repatriation of foreign earnings pursuant to the American Jobs Creation Act of 2004 resulted in a permanent tax savings of about $250 million."

Hello? How can you simultaneously cut jobs and benefit from the American Jobs Creation Act? Welcome to the wonderful world of Washington nomenclature.

Ford, understandably, declined to expand on its news release. But my calculations indicate that Ford last year brought into the United States about $850 million of profit that it had earned overseas but did not have to share with the Internal Revenue Service.

Let me hasten to say that I've got no problem with Ford bringing this money home. Ford is battling for survival, and every $850 million helps. It would have been remiss not to have taken advantage of the idiotic legislation that Congress adopted and that President Bush signed despite objections from his Treasury Department and Council of Economic Advisers.

My problem is with the legislation, and especially with its misleading name. Companies don't add jobs based on one-time chances to repatriate money from overseas.

Yet - that is exactly what our political leaders seem to think.

Nor do state tax breaks help. The Hazelwood plant is one of the plants scheduled to be shut, according to yesterday's announcement. Hazelwood had been targeted in earlier cutbacks. But, workers tried to turn the situation around. State and local governments also put up $17 million in incentives, according to a story in today's Washington Post - "Workers Lament a Plant's Falling Star". It worked for awhile, but ...

just last month, with workers still motivated to save their jobs, the factory was named the highest-quality Ford plant in North America and the one with the best cost controls, according to union and management officials.

. . .

After winning the two Ford performance awards, employees joked darkly that the company forgot to send the third award, the one for best plant closing.

One wonders why Ford was giving out these awards. Quality is no longer a competitive advantage. It is a minimal standard to stay in the game. And efficient mass production is no longer the name of the game. It too is a basic criterion.

Ford - and the rest of the country - needs to re-think its economic strategy. Quickly.

Posted by Ken Jarboe at 8:24 AM | Comments (0) | TrackBack

January 20, 2006

More on literacy

There is a new study of literacy of college graduate, this one by the American Institutes for Research funded by The Pew Charitable Trusts. The report finds:

there is no difference between the quantitative literacy of today's graduates compared with previous generations, and that current graduates generally are superior to previous graduates when it comes to other forms of literacy needed to comprehend documents and prose.

It also finds that college graduates are have higher literacy skills that the general population.

That is the good (or at least ok) news. The bad news:

Twenty percent of U.S. college students completing 4-year degrees -- and 30 percent of students earning 2-year degrees -- have only basic quantitative literacy skills, meaning they are unable to estimate if their car has enough gasoline to get to the next gas station or calculate the total cost of ordering office supplies.

Maybe OK for the Industrial Economy; a real problem for competing in the I-Cubed Economy.

Posted by Ken Jarboe at 12:20 PM | Comments (0) | TrackBack

Getting the metrics right - innovation and R&D

I was reading an article in Business 2.0 about how 3M has reconfigured its R&D process when one particular sentence touting their success hit me:

Product development cycles have shrunk from an average of four years down to two and a half, operating profits are up 23 percent, and R&D spending as a percentage of sales -- a key bang-for-your-buck barometer -- last year hit an all-time low of 5.7 percent.

Ok - shorter product development cycles; that's good. Higher operating profits; that is really good. Lower R&D spending as percentage of sales; wait a second - lower? Yes, lower - this is a measure of efficiency ("bang for the buck").

From a business point of view, this makes some sense. As the old saying goes, I know that half of my advertising [or R&D] budget is wasted, I just don't know what half. So a company needs to worry about its R&D efficiency.

But from a national competitiveness point of view, this is exactly opposite of what we should be doing. All of the various reports decry our declining R&D budget as a percentage of GDP. In fact, the OECD Science, Technology and Industry (STI) Scoreboard 2005 leads with data on the investments in knowledge as a percent of GDP. So, lower spending is bad - either absolute or relative.

Returning to the business point of view, it is not clear that measuring R&D as a percentage of sale is a good metric for a company as well. It takes the view that R&D is a cost/expense rather than an investment and it is too easy to game the number by lowering R&D expenditures. Investopedia has the following advice on "Buying Into R&D":

Measuring R&D

Financial expert/writer, Kenneth Fisher, touts the price-to-research ratio (PRR), which is the market value of the company divided by its research-and-development expenditure over the last twelve months. Fisher suggests buying companies with PRRs between five and 10 and avoiding companies with PRRs greater than 15. By looking for low PRRs, investors should be able to spot companies that are redirecting current profits into R&D, thereby better ensuring long-term future returns.

Technology investment guru Michael Murphy offers the price/growth flow model. Price/growth flow attempts to identify companies that are producing solid current earnings while simultaneously investing a lot of money into R&D. To calculate the growth flow, simply take the R&D of the last 12 months and divide it by the shares outstanding to get R&D per share. Add this to the company's EPS and divide by the share price.

Measuring R&D Effectiveness Is Key

Unfortunately, while the Fisher and Murphy models both do a great job of helping investors identify companies that are committed to R&D, neither indicates whether R&D spending has the desired effect - the successful creation of profitable products. When evaluating R&D, investors should determine not only how much is invested but how well the R&D investment is working for the company.

Companies often cite patent output as a tangible R&D success measure. The argument goes that the more patents filed, the more productive the R&D department. But, in reality, the ratio of patents per R&D dollar tends to represent the activity of a company's lawyers and administrators more than its engineers and product developers. Besides, there is no guarantee that a patent will ever turn into a marketable product.

One way, however, to perceive the proficiency of R&D is to calculate the percentage of sales that come from products introduced over a period of time, say the preceding three years. For the calculation, investors need annual sales information for specific new products. If lucky enough to get that kind of data from company reports, investors can do the calculation this way:

New product sales (previous three years) / Total sales (previous three years)

The resulting percentage gives investors a sense of R&D success as well as R&D output and offers a useful metric for comparing R&D performance with peer companies.

Investors should also pay attention to R&D expenditure/sales. According to Michael Murphy, good growth-flow companies spend at least 7% of their sales revenue on R&D. On the other hand, what is deemed a healthy R&D/sales ratio depends on the industry and the company's stage of development.

Pharmaceuticals, software, and hardware companies, for instance, tend to spend a lot on R&D while consumer product companies typically spend proportionately less. In 2003, Johnson & Johnson, for example, reported spending about 10 cents per sales dollar on R&D, but drug company Pfizer spent 15% of expected sales on R&D; software giant Microsoft spent 16%; and network-equipment maker Cisco Systems spent 18%. For smaller, early-stage software and biotech companies the number can easily stretch as high as 80%.

Yet, the story gets even more complicated in that recent research shows that R&D spending does not deliver profits:

Companies which invest heavily in research and development may be wasting their money. According to a new study, there is no direct relationship between R&D investment and significant measures of corporate performance such as growth, profitability, and shareholder return.

But despite the absence of a clear return on investment, the pace of corporate R&D spending is accelerating, suggesting that many executives continue to believe that enhanced innovation is required to fuel their future growth.

According to consultants Booz Allen Hamilton, who analyzed the world's top 1,000 corporate research and development spenders, innovation spending is still a growth business. This 2004 Global Innovation 1,000 spent $384 billion on R&D in 2004, representing 6.5 per cent annual growth since 1999.

And the pace is accelerating. Measured from 2002, the annual growth rate jumps to 11.0 per cent.

While the top 1,000 corporate R&D spenders invested $384 billion in 2004, the second 1,000 spent only $26 billion - only an additional 6.8 per cent beyond the top 1,000 spenders.

Yet as the study also points out, being large is an advantage when it comes to R&D. Larger organisations are able to spend a smaller proportion of revenue on R&D than smaller one with no discernable impact on performance.

But while spending more doesn't necessarily help, spending too little will hurt. Companies in the bottom 10 per cent of R&D spending as a percentage of sales under-perform competitors on gross margins, gross profit, operating profit, and total shareholder returns.

However, companies in the top 10 per cent showed no consistent performance differences compared to companies that spend less on R&D.

And, as Ben McClure writes in the Motley Fool - Ruminations on R&D

Great companies invest in innovation. Those that roll the dice on research and development (R&D) programs tend to generate bigger profits than those that don't. But take note, Fools: The world of R&D is full of questionable spending, unqualified results, and payoffs that can be hard to measure. Factoring R&D into stock evaluations and analysis is not a simple affair.

The dilemma for those of us looking for good metrics of the I-Cubed Economy is clear. Right now we have a black-box approach: money goes in and patents come out. We need better measures of the process, including a measure of efficiency - not all R&D spending is productive. Yet that productivity is hard to grasp and we don't want to reward the view that cutting R&D is a good thing.

One of the measures propose in the Investopedia article -- the ratio of new products sales to total -- is an excellent measure. It is also a variation that is used in OECD surveys of innovation (as codified in the Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd Edition).

Unfortunately, the US does not conduct such an innovation study. We should (as I've said before). We need real metrics of innovation -- not the ones left over from the industrial era.

PS - the Business 2.0 article has other interesting insight about how 3M moved its research away from "mini-alignments with old markets" and tied it basic nanotech research to marketable products. Interestingly, nothing in the article about the "lead user" theory that Eric von Hippel developed through his study of 3M. I wonder how that fits with the problem of aligning R&D with old markets?

Posted by Ken Jarboe at 8:50 AM | Comments (0) | TrackBack

Misleading indicators

The EU's European Innovation Scoreboard was released last December, but there was small flurry of excitement last week when the European Commission sent out a press release "Innovation scoreboard: Mixed results that mentioned the "innovation" gap between the US and Europe. For example, the Financial Times and MSNBC ran this story: Europe's record on innovation '50 years behind US':

The European Union's record on innovation is so poor that it would take more than 50 years to catch up with the US, according to a survey presented by the European Commission on Thursday.

The Innovation Scoreboard compares the performance of the 25 EU countries with the US, Japan and several other nations, and ranks them according to factors such as the number of science and engineering graduates, patents, research and development spending and exports of high-tech products. The survey finds that only four EU countries -- Sweden, Finland, Denmark and Germany -- can compete with the US and Japan in terms of their innovative abilities.

However, this supposed comparison with the US is based on only partial data. As I have lamented before, the US does not have an innovation policy or a set of innovation indicators. We have a set of science and technology indicators. But that is not the same thing. Our S&T indicators measure R&D funding and the number of scientists and engineers as inputs and the number of patents as output. The US does not measure actual innovation, in the form of new products - nor do we measure non-technological innovation. European nations do, following the OECD Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data.

The Scorecard measures five areas. The first three are input measures:
* Innovation drivers measure the structural conditions required for innovation potential,
* Knowledge creation measures the investments in R&D activities,
* Innovation & entrepreneurship measures the efforts towards innovation at the firm level,

The last two are output measures:
* Application measures the performance expressed in terms of labor and business activities and their value added in innovative sectors, and
* Intellectual property measures the achieved results in terms of successful know-how.

These areas are broken down into a total of 25 specific statistics, such as number of science and engineering graduates, amount of public R&D expenditures, amount of private R&D expenditures, high tech exports, etc. In a number of specific statistics, there is no data for the US. This includes the key statistics of sales of new-to-market products and sales of new-to-firm not new-to-market products -- both of which are major indicators of innovation. Also missing from the US data are statistics on SMEs using non-technological change and employment in high-tech services -- again, some key measures. In all the US is missing 10 out 26 data points.

How can anyone compare the EU and the US when over a third of the data points -- and some of the most important data points are missing! To say that the EU is 50 years behind the US on innovation based on this study is absurd.

Yes based on R&D spending and the number of patents, Europe may very well be behind. But given that a large percentage of government R&D spending in the US is defense-oriented and given the problems with the US patent system turning out patents for anything and everything, I'm not even sure that statement holds up.

Apparently, politicians on both sides of the Atlantic (and even in Canada) are eager to raise the specter of falling behind the competition to press for more funds for S&T. I am all for increased funding. But let us not be blind to the fact that S&T is not innovation. And that increasing funding for S&T will solve our innovation problem. There are many other areas of innovation and many other innovative activities that need to be fostered and encouraged -- such as design and creativity -- if our nation is to succeed in the I-Cubed Economy.

But first, we need to get the damn statistics right. As they saying goes, that which is measured is managed. So, getting the measures wrong invariably means getting the policy wrong.

And so we stumble on in the darkness -- looking for answers in the wrong places like the drunk looking for his keys under the lamp post.

Posted by Ken Jarboe at 8:10 AM | Comments (0) | TrackBack

January 19, 2006

What Innovation Advantage?

In our current don't-worry-be-happy mode of economics, the tendency is to shrug off the growing competition from China, India and others. The story line goes like this - yes, they are low cost producers, but we're the innovators and designers. Not so says Roger Martin, Dean of the Rotman Business School at the University of Toronto, in a provocative essay in the most recent issue of Business Week - "What Innovation Advantage?":

There is a romantic notion in North American business that its future lies in design and innovation, while India and China will be the home of less skilled, lower-paying operations churning out the products and services the U.S. comes up with. It is a nifty twist on David Ricardo's seminal 19th century theory of "comparative advantage," which explained why cloudy and cool England exported woolen goods to sunny and hot Spain, which in turn exported wine to England.

The problem is that the theory didn't ring true when I rode through the streets of Hyderabad, Bombay, and Bangalore on visits to major Indian companies. At Tata Consultancy Services' 23-acre campus in Bombay, for instance, I learned about its central goal of providing customers with not just an acceptable-quality service but also a user experience that delights and surprises. To accomplish this, its tech professionals also are taught how to manage client change.

. . . These globally oriented outfits are not entrusting all creativity, design, and innovation to "first world" opponents while they huddle over their workstations. True, they have staggering cost advantages over traditional competitors. But that doesn't mean they are incapable of design and innovation. (Their North American rivals just wish they were.) The Ricardian logic, based on so-called natural endowments, simply doesn't apply.
. . .

Assuming that capabilities are static and advantages are permanent is a mistake. Natural endowments of climate, location, and mineral resources may be enduring, but company-generated capabilities are quite fluid. It is as much an error to assume that competitors won't attempt to develop a capability because it seemingly conflicts with an existing one -- in this case low cost vs. innovation expertise. The general rule: If the opposite of a capability sounds stupid, competitors won't try to acquire it -- they'll pursue the reasonable one. For example, the opposite of choosing to be "customer-oriented" is to elect to ignore your customers, a truly daft proposal.

Since lackluster design and staid conformity are obviously bad ideas, it is safe to assume that compelling design and potent innovation are going to be almost universally sought. So North American companies, many of which have pretty dreary design, are wrong if they assume their Asian rivals will pay no attention.

Professor Martin is right on target. While the future of competitiveness is in innovation and design, the US is not necessarily winning that fight. Nor is that high-end/low end division of labor turning out in our favor. Every month I publish in this blog an analysis of trade data in intangibles (which includes high-end professional services, royalties, fees, etc.). That data shows the US with a modest surplus of $6.9 billion - but one that has been essential flat. In other words, our small surplus in high-end services is not growing to cover our huge deficit in low-end goods. And the US has not had a surplus in advanced-technology goods since June 2002.

Policy makers need to wake up and understand that the future of the US economy is in serious jeopardy.

Posted by Ken Jarboe at 8:35 AM | Comments (1) | TrackBack

January 18, 2006

Changing economics of knowledge - a top 10 trend

The consulting firm McKinsey & Company has just released its Ten trends to watch in 2006. The trends are a thoughtful look at macro and micro changes occurring in the economic environment:

1. Centers of economic activity will shift profoundly, not just globally, but also regionally. The story is not simply the march to Asia. Shifts within regions are as significant as those occurring across regions.
2. Public-sector activities will balloon, making productivity gains essential.
3. The consumer landscape will change and expand significantly with almost a billion new consumers entering the global marketplace
4. Technological connectivity will transform the way people live and interact. More transformational than technology itself is the shift in behavior that it enables. We work not just globally but also instantaneously. We are forming communities and relationships in new ways.
5. The battlefield for talent will shift, with a focus toward importance and scarcity of well-trained talent.
6. The role and behavior of big business will come under increasingly sharp scrutiny.
7. Demand for natural resources will grow, as will the strain on the environment.
8. New global industry structures are emerging with nontraditional business models flourishing. In many industries, a barbell-like structure is appearing, with a few giants on top, a narrow middle, and then a flourish of smaller, fast-moving players on the bottom. Similarly, corporate borders are becoming blurrier as interlinked "ecosystems" of suppliers, producers, and customers emerge.
9. Management will go from art to science.
10. Ubiquitous access to information is changing the economics of knowledge.

While all of these are of significance, I found the last especially interesting:

Access to knowledge has become almost universal. Yet the transformation is much more profound than simply broad access. New models of knowledge production, access, distribution, and ownership are emerging. We are seeing the rise of open-source approaches to knowledge development as communities, not individuals, become responsible for innovations. Knowledge production itself is growing: worldwide patent applications, for example, rose from 1990 to 2004 at a rate of 20 percent annually. Companies will need to learn how to leverage this new knowledge universe -- or risk drowning in a flood of too much information.

Many of these trends are part and parcel of our shift into the I-Cubed (Information, Innovation, Intangibles) Economy: technological connectivity, the role of talent and the new industry structures. However, learning how to manage information and knowledge is the underpinning of the entire transformation. It is not just the danger of drowning in information, it is also the problem of not being able to utilize the key information and intangibles. The easiest way to prevent drowning is to stay away from the water. Unfortunately, that may be the reaction of many -- to shut out the flood and fall back on the old ways (and the old industrial age paradigms). That will be the road to disaster for some.

The other reaction to managing information will be to filter based on narrow criteria. However, narrowing the information flow is a sure-fire way of stifling innovation. A rich flow of diverse information is needed for the creative process. The old saying of separating the wheat from the chaff is only partly applicable. What is need are ways to think creatively about what to do with both the wheat and the chaff.

Key is the word "leveraging" -- the ability to leverage knowledge will determine the success stories of the I-Cubed Economy. What that means, however, is yet to be completely revealed. We are still in the transformation -- with most of us trying our best not to drown. As we learn to swim in -- and then sail over -- this sea of information, creativity, innovation and productive economic growth will flourish.

Posted by Ken Jarboe at 12:48 PM | Comments (0) | TrackBack

January 13, 2006

A positive indicator of New Orleans' future - Tulane

After Katrina devastated New Orleans, I observed that how Tulane University responds will be a leading indicator of the city's economic future:

For the Fall semester, Tulane students will be dispersed across the nation. How many return (either in January if that is possible or next Fall) will determine New Orleans' future as a dynamic creative city.

Well, it's January and the new term is starting -- and the news is good! According to a story in this mornings Washington Post -
"Interrupted by Hurricane, Tulane's Orientation Resumes for Freshmen":

Nearly 90 percent of Tulane's 6,700 undergraduates are returning, the university said, and more than 80 percent of freshmen -- a significant accomplishment considering college officials initially wondered if they would break 60 percent. It is also a big boost for the city, where Tulane is the largest private employer and returning students will amount to a noticeable population increase.

The return of Tulane's students, along with the earlier announcement of keeping their medical research programs while cutting back in other areas, keeps alive the hope that the University can spark an innovation and creativity-led economic revival of the city. Only time will tell, but the signs are good. As they say, stay tuned.

Posted by Ken Jarboe at 8:26 AM | Comments (1) | TrackBack

January 12, 2006

November trade in intangibles

This morning's BEA trade data contained some good news as the overall trade deficit declined slightly. However, the surplus in our balance of trade in intangibles remained flat at $6.9 billion in November. The intangibles surplus is almost exactly what it was a year ago in November of 2004 and is still below the peak surplus of almost $7.5 billion in December 2004.

Even with the improvement in this month's deficit, the total deficit for the first 11 months of 2005 ($661.8 billion) is already significantly above the total for all of 2004 (at a record setting $617.6 billion). At this rate, the deficit for 2005 could run as high as $720 billion.

The deficit in Advanced Technology Products declined slighly in November to $4.8 billion, as exports grew slightly while imports were basically unchanged. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.

Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes.

Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Posted by Ken Jarboe at 8:51 AM | Comments (0) | TrackBack

January 10, 2006

Improving patent quality

I have to give the US Patent and Trademark Office credit for trying to improve patent quality after reading this in today's New York Times - "U.S. Office Joins an Effort to Improve Software Patents":

At a meeting last month with companies and organizations that support open-source software (software that can be distributed and modified freely), including I.B.M., Red Hat, Novell and some universities, officials of the patent office discussed how to give patent examiners access to better information and other ways to issue higher-quality patents.

Two of the initiatives would rely on recently developed Internet technologies. An open patent review program would set up a system on the patent office Web site where visitors could submit search criteria and subscribe to electronic alerts about patent applications in specific areas.

The third initiative is focused on the creation of a patent quality index that would serve as a tool for patent applicants to use in writing their applications. It is based on work done by R. Polk Wagner, an intellectual property expert at the University of Pennsylvania.

This is a good step forward in the type of industry-specific patent review processes we may need if we are to solve the quality problem.

Now if we can just get the legislative reforms moving as well . . .

Posted by Ken Jarboe at 4:30 PM | Comments (0) | TrackBack

Innovation and the environment

Yesterday, the OECD released its review of US environmental protection efforts over the past decade (the last review was in 1996). Depending on who you talk to the glass is half full or half empty. According to the EPA, the US is doing a great job: "EPA Press Release: International Panel Concludes U.S. has Improved Environmental Performance":

The United States has significantly improved its environmental performance in the last eight years even as its economy and population have grown substantially, according to a report from the Environmental Performance Review Program of the Organization for Economic Cooperation and Development's (OECD).

However, others, such as the Financial Times see the story differently - "US could do better on green issues, OECD concludes":

As other nations increased their energy efficiency further in the face of rising fuel prices, the US risked falling behind in its international competitiveness if it failed to keep up, the report's authors said. Using energy more efficiently would also help to combat climate change.

What the OECD environmental report card for the US actually said was, not surprisingly, more between this two:

A new OECD review of environmental policy in the U.S. recommends more efficient use of energy and water as a way to safeguard economic prosperity while protecting the environment and human health. Despite progress in some areas over the past decade, more effort is needed in others. The OECD recommends that the U.S. play a more proactive role in dealing with global environmental concerns.

What U.S. Ambassador to the OECD, Connie Morella, told me yesterday morning was that innovation was one of the reasons why the US came out as good as it did on the review. Many of those innovations are not new technologies, but management processes. For example, the report's conclusions and recommendations specifically cites Massachusetts's pesticide tax and Oklahoma's tax credit for manure management as innovative economic instruments to reduce water pollution.

Now, manure management may not top the charts when it comes to the sexiest innovations. But given that farm run-off is one of the major sources of water pollution, manure is a major issue.

Other examples include the introduction of ecosystem management approaches for the Great Lakes, Chesapeake Bay, the Florida Everglades, the Gulf of Mexico and numerous watersheds; introduction of sustainable forestry practices on public lands; and the Government Performance and Results Act which has promoted co-ordination among government programs.

The report does tip its hat to technological innovations. But it real focus (and benefit) is on the management changes that would be useful if we are to continue to make progress. As the OECD press release concludes:

Overall, the OECD report urges the United States to increase the efficiency of its environmental management and energy use, projecting that doing so would yield economic benefits.

Innovative new technology and innovative management techniques -- sounds like the classic winning approach to me.

Posted by Ken Jarboe at 4:14 PM | Comments (0) | TrackBack

January 9, 2006

Linking production and engineering

What is the locational link between production/manufacturing and research/engineering/product design? That is a key question underlying the I-Cubed Economy (and much of the debate on offshoring). Is product design and engineering tightly linked with the manufacturing process - as was argued a few years ago under the rubric of manufacturing matters? In other words, if production moves offshore, will product design and engineering naturally follow? Or is distance dead - and given information and communications technologies, engineering and design can be anywhere and production someplace else?

Economic history is ripe with examples of both. Clearly, the globalization of manufacturing over the past few decades (actually during the entire 20th Century) has shown that for mass produced goods, production and engineering can exist literally world apart. But a finer grain analysis of the globalization phenomena has also shown a strong local design/customization component to the process.

Far from being an academic question, this issue forms the implicit foundation of many views of our economic future and the economic growth process. Can the US economy survive as a "service" economy, where we handle the high-end engineering, research and product design portion of the production process? Or having lost the manufacturing portion, are we destined to lose the design part as well? Or, alternatively, has competition shifted from the mass manufacturing paradigm to solely a design/innovation paradigm -- where the US maybe losing its competitive edge in innovation completely independent from what has happened in manufacturing?

A new study of the notebook PC industry in China sheds some light on this question:

China has become the world's largest producer of computer hardware, driven by large scale investment by multinational and Taiwanese companies. At the same time, computer hardware production and employment in the U.S. have fallen by about one-third since 2000. A new concern is that knowledge activities such as new product development are being pulled along with manufacturing to China. Based on a study of the notebook PC industry, it is concluded that production is pulling some product development activity to China, although the shift is also driven by the availability of low cost engineering talent. While the U.S. has retained its role in marketing, concept design, and product planning, it has lost many of the engineering jobs associated with notebook design. The number of jobs affected is relatively small, but the movement of knowledge work may portend similar changes in industries with larger numbers of jobs at stake.

In other words, those parts of the process that require tacit knowledge of the market - product concept and product planning - are remaining in the US (as a major market for notebook PCs). But more and more of the activities that are related to the physical production process, including design and prototyping, are moving to China.

It is not clear whether this middle-portion of the process (design and prototyping) necessarily needs to shift to be near the production facilities. However, as the study authors explain, there are economic reasons for the shift:

Production and sustaining engineering clearly benefit from proximity to manufacturing, as production problems can be addressed immediately on the factory floor and engineering changes in existing products can be tested in production models from the assembly line. It also makes sense to move pilot production to China rather than maintain an assembly line in Taiwan just for this purpose. Then the question arises whether to move the expensive test equipment from Taiwan to China. If so, then there is more reason to relocate the design review and prototype processes as well.

The location-specific activity in this process is the front-end concept work. This is remaining in the US not because we are necessarily theoretically the best at it, but because we are a major market and it requires on-the-ground market intelligence. Other major markets, such as Japan, are also locations for this front end work. This may the future of China as well:

as China's PC market continues to grow, and its users become more demanding, it may become the leading market at least for the Asia-Pacific region, and definition and planning of products suitable for the region may be done there.

The study ends with the following conclusion:

Product development, design, R&D and other innovative activities account for many jobs in industries such as software, IT services, electronics, aerospace, automobile, clothing, and pharmaceuticals. In some cases, these activities may be pulled along with manufacturing, or they may move to places where engineering and other creative skills are abundant and cheap. If so, our research suggests that China will attract a good share of the knowledge work associated with manufacturing industries, given its large pool of engineers and its role as a manufacturing center.

A sobering thought. But, issue might not just be how many US jobs will be shifted because of design following manufacturing. Rather it might be how many of the high-end knowledge jobs of the future will be created in other countries, rather than the US, to service those increasingly sophisticated markets.

If high-end design and product concept jobs require localized knowledge, then there is no reason to believe those jobs that service the US will leave the US. By the same logic, however, there is no reason to believe that US-based workers in these jobs will be able to service other markets. Americans will be designing for the US market, Chinese/Japanese for the Asia market, and Europeans for the European market.

This scenario completely contradicts the view that many, I suspect, have of the future of our economy. Under that view, the US will maintain its economic competitiveness by exporting design services, innovation and other intangibles. My tracking of our intangibles trade shows that this view is not sustainable. The increasing dispersion of design and innovation capacity - either following or independent of manufacturing capability - means that we need to seriously re-think our vision of the US economic future.

And the sooner we undertake that re-thinking, the better.

Posted by Ken Jarboe at 8:46 AM | Comments (1) | TrackBack

January 6, 2006

France rediscovers the apprentice

I recently came across this interesting tidbit in a story about the French apprentices in the International Herald Tribune:

Germanic cultures preserved the traditions and spirit of apprenticeship while revolutionary France destroyed the guilds and the apprentice system with it in the 1790s. The system was re-established in France but remains much less widespread than in Germany.

Might this fact explain Germany's rise as an industrial power? Maybe, maybe not. As I understand it, the German apprentice system is more advanced than the British system as well the French. The US has always lagged in our apprenticeship programs.

The apprenticeship system is an important mechanism for passing on tacit knowledge. Such knowledge is key in skilled areas; less so in mass production activities. So a country whose economic development was based on precision engineering, such as Germany, is more likely to benefit from an apprenticeship system than an economy build more on the mass production of consumer goods, closer to the British and American experiences

The transfer of tacit knowledge is also important in innovation and creative activities. But in the I-Cubed economy, formal apprenticeships may be much less important that informal mentoring and networking. A formal apprenticeship passes down very specific skills in a defined context. There is also often a rigid hierarchy and an end point of learning that defines "mastery" - although in truth, the real masters of a craft never stop learning. The ability to absorb tacit knowledge from multiple sources in an ever changing context is more important in the I-Cubed Economy. Multiple mentors are common, with different sets of skills learned at different points in one's career.

So, rather than emulate the German apprentice program, France may do better in the future by emulating the American networking model. As much as that may pain my French friends to hear.

Posted by Ken Jarboe at 12:18 PM | Comments (0) | TrackBack

January 5, 2006

Innovation legislation - what about design?

I have been a strong supporter of the efforts of Senator Lieberman on competitiveness, and most recently with the National Innovation Act of 2005. In fact, Athena Alliance wrote a letter of support for the legislation, calling it "a step forward in addressing this challenge [of coping with the new I-Cubed Economy]." We specifically based our support on two provisions in the bill. The first is a study on valuation of intangibles. As our study on Reporting Intangibles pointed out, we are flying blind when it come to understanding and accounting for intangibles. This study will move us in the right direction.

The second provision is the creation of a President's Council on Innovation. We believe that, properly focused, this Council could take a broad view of innovation and knowledge diffusion to include policies to foster non-technological ingenuity and creativity as well as science-based research and development - and in all sectors of the U.S. economy, particularly those in which rates of productivity and innovation have lagged, and in U.S. companies of all sizes, particularly small and medium-size companies. As such, it could serve as an important analytical and policymaking body, similar to that which was envisioned in Senator Lieberman's previous legislation to create a Commission on the Future of the U.S. Economy (which we helped formulate).

However, I have always felt that the bill is only a step in the right direction - not the complete answer. It addresses the S&T issues, but not the broad innovation issues.

Niti Bhan, writing two weeks ago in Business Week - "A Competitive Nation, by Design" makes a similar point:

There can be no argument against the importance and validity of these initiatives, . . .

However, one must raise the concern: What about design? Is any of the increased funding to the National Science Foundation and other basic research focused on design methodology and tools, the building blocks of innovation? We've all heard the success stories in which design-led innovation has directly increased existing market share, grown new markets, added value to the bottom line, and raised the visibility of brands.

Take Google's design philosophy of simplicity or Procter & Gamble's (PG) emphasis on user needs -- both examples of global giants recognizing the value of design. Yet there is no mention of design or the design industry in the National Innovation Act.

Yes, as I have railed about only yesterday, we don't have the government programs focused on design. And we desperately need them.

Maybe we can all work together to make that the next piece of legislation.

Posted by Ken Jarboe at 8:35 AM | Comments (0) | TrackBack

January 4, 2006

UK innovation and creativity report

In my essay on innovation and creativity policy (UK leads; US lags), I mentioned that Chancellor of the Exchequer Gordon Brown commissioned a study by the British Design Council on the link between creativity/design and business. That Review of Creativity in Business was released early last month. Nicknamed the Cox Review, after Sir George Cox, chairman the British Design Council who headed up the study, the recommendations from the study are expected to show up in the next government budget submission to Parliament. According to Business Week - "Renewing Britain's Legacy of Innovation", one recommendation is moving ahead quickly:

. . .a program to encourage businesses and design students to think and work together. The government is now helping to set up higher-education centers to create pilot courses that combine business, engineering, technology, and creative disciplines in a similar way to Finland's International Design Business Management program or the new Hasso Plattner Institute of Design at Stanford University in the U.S.

So, where are the US programs? Where are the programs to replicate the Stanford D-School?

Sadly, the answer is that the US is still fighting the last war. We are focused on innovation as S&T - not innovation as creativity.

The Cox Review uses the following definitions:

'Creativity' is the generation of new ideas - either new ways of looking at existing problems, or of seeing new opportunities, perhaps by exploiting emerging technologies or changes in markets.

'Innovation' is the successful exploitation of new ideas. It is the process that carries them through to new products, new services, new ways of running the business or even new ways of doing business.

'Design' is what links creativity and innovation. It shapes ideas to become practical and attractive propositions for users or customers. Design may be described as creativity deployed to a specific end.

Technology is part of those definitions - but only part.

With the Cox Review, the UK has at least conceptually made the leap from looking at a technology-led economy to an innovation & creativity-led economy

We need to do the same.

Posted by Ken Jarboe at 10:35 AM | Comments (0) | TrackBack

January 3, 2006

Expanding patents

While the Supreme Court is wrestling with the issue of patents, the PTO seems to be actively expanding the scope of what can be patented. First, in September, the PTO (or more specifically the Board of Patent Appeals and Interferences) ruled that a business process need not be tied to a computer program in order to qualify for a patent (Ex parte Carl A. Lundgren). According to IP attorney Barry Schindler,

The Lundgren decision swings the door wide open for businesses to apply for patent protection for any novel business method. As a result, businesses should now seek U.S. patent rights for any unique business method covering every conceivable business operation, such as methods of billing clients; hiring employees; marketing products or services, such as financial services and banking products; or simply obtaining funding.

Meanwhile, a Washington area attorney - Knight and Associates - is pressing the PTO to issue "Storyline Patents" to cover the story plot:

Like software, a fictional story may include two valuable features: the underlying storyline and the particular expression of that storyline. Like software, the latter is clearly protectible under copyright law. And, like software, the former should be protectible under patent law.

And the Blackberry patent battle continues, as the Wall Street Journal reports (NTP Wins Time To File Defense In RIM Dispute) with NTP plotting its next move:

NTP shareholder and co-founder Donald Stout said that the company's lawyers aim to get their response filed before the 30-day extension is up. "We're not trying to slow it down," he said. "Our view is, let's get on with it. We want to go as fast as possible." Stout said the company asked for the extra 30 days to allow one of its experts to help craft the response.

Even if NTP's patents are all rejected, NTP still has the right to appeal within the patent office, a process that would take until late 2006, Mr. Stout said. He says that while he expects the patents to be rejected, he believes that NTP will be vindicated when it appeals through the patent office's Board of Appeals and Interferences.

The most recent issue of Business Week calls all this "The Patent Epidemic." They point to the lowering of the obviousness standard as the root of the problem:

How to determine when an invention is "obvious" is one of the most critical and contentious issues in patent circles. Over the past two decades, critics say, the hurdle for passing the obviousness test has been steadily lowered, and the U.S. is now awash in a sea of junk patents. Some are just plain silly, such as a patent for "a method [of] exercising and entertaining cats" (basically teasing them with a laser pointer), or another for "an animal toy that a dog may carry in its mouth" (which not only sounds suspiciously like a stick but also looks like one in the patent drawings).

But many perceive a serious threat. A coalition of businesses, including Microsoft (MSFT ), Cisco Systems (CSCO ), VF, Hallmark Cards, and Fortune Brands (FO ) has jointly filed its own brief in the KSR case asking the Supreme Court to take corrective action. Two dozen intellectual-property law professors have made a similar filing. Massive overpatenting, the professors say, "creates an unnecessary drag on innovation," forcing companies to redesign their products, pony up license fees for technology that should be free, and even deter some research altogether.

In the above mentioned case, Teleflex vs KSR, the companies are asking the Supreme Court to review whether a combination of two technologies is obvious (and therefore non-patentable) or novel (and therefore patentable).

KSR's defense is simple: U.S. law does not allow patents for inventions that are "obvious." Nothing could be more obvious, KSR says in court filings, than a combination of "preexisting, off-the-shelf components" that each perform "exactly the same function" for which they were originally designed. In essence, KSR's argument is that Teleflex may as well have patented the combination of the refrigerator and the light bulb. Rodger D. Young, Teleflex's attorney, counters: "The fact that Device A and Device B exist does not make it...obvious that they should be put together."

If this case is accepted by the Court, it will join a number of other patent cases under review, such as eBay vs MercExchange (see my earlier posting "patent litigation"). With patent reform legislation stalled in Congress, the Court may end up re-writing the patent law. Let us hope that they can strike the right balance: continuing to provide the protections needed to produce and utilize intangible assets while reigning in the overpatenting which threaten the Intangible Economy.

Posted by Ken Jarboe at 10:46 AM | Comments (0) | TrackBack