« April 2006 | Main | June 2006 »
May 31, 2006
Biodiversity protection
For those of you who are interested, the Intellectual Property Watch blog has a posting on biodiversity protection, especially how Brazil (and other developing countries) see the issue - "Brazil Fights To Make Case For International Biodiversity Protection":
Brazil has arguably the earth’s richest source of biological diversity, and it is fighting to get help at the international level to protect those natural resources from what it says is unfair exploitation through patents by companies and others in and outside Brazil.
While industry argues that the Brazilian law regulating the use of genetic resources is sufficient to safeguard against misuse, the government argues that people - mainly foreigners - are still disrespecting the law and there is a need for an international regime regulating the use of genetic material.
I won't summarize the rest of the article. But, if you want to understand this topic, the posting is a good review of where the issue stands today.
Posted by Ken Jarboe at 03:11 PM | Comments (0) | TrackBack
Auditioning for a trademark
This quick note from the world of trademarks. 'Juan Valdez' is hanging up his poncho - Yahoo! News:
Juan Valdez is retiring. Long live Juan Valdez! The ambassador to the world for Colombian coffee, Carlos Sanchez, is hanging up his trademark poncho after four decades of playing the role of "Juan Valdez."
Now the national federation of Colombian coffee producers, owners of the Juan Valdez trademark, is searching for a man to inherit that poncho.
Sanchez and his trusty mule Conchita have promoted Colombian coffee since 1969 with a leather bag, bushy mustache and straw hat typical of rural Colombia. That Juan Valdez trademark has become one of the world's most recognizable, and the fictional figure has become one of the most famous Colombians of all time.
. . .
In searching for a replacement, the federation sent teams across the streets, farms and — of course — cafes in the coffee region in the west of the country. With the help of U.S. consultants, they narrowed down 400 contenders to 10. It will announce the new Juan Valdez, the third incarnation, by the end of June.
"Of course he must have a mustache," joked Gabriel Silva, the general manager of the federation. Sanchez nodded in approval and stroked his own impressive mustache.
"This is not a beauty contest," said Silva.
This was quickly confirmed when images of the casting call showed dozens of mustached men, some with notable paunches, doing their impressions of Juan Valdez.
Anyone out there interested in the role? Better act quickly - it is not often you get the chance to be a living legend.
Posted by Ken Jarboe at 01:50 PM | Comments (0) | TrackBack
Seeing the future - using information
We are told that we live in an Information Economy. “Business intelligence” is now the life-blood of a competitive enterprise. But, it appears that having current information is no longer good enough. The next wave of using information is to predict the next wave. According to InformationWeek “Businesses Mine Data To Predict What Happens Next”:
Real-time information, once a competitive differentiator that produced more timely and relevant business decisions, is now a commodity. Even midsize companies process transactions as fast as the New York Stock Exchange, while decision makers communicate and collaborate over broadband networks as if they were in the same office. Sheer speed isn't the advantage it once was.
So what's next? What's next is what's next--the ability to forecast where events are heading, then make informed decisions based on that assessment. Predictive analytics, the scientific name for using a data warehouse as a crystal ball, is where business intelligence is going. It involves running historical data through mathematical algorithms--neural networks, decision trees, Bayesian networks--to identify trends and patterns and predict future outcomes. Will product demand surge? Will a patient relapse? Will a customer take his business elsewhere? Our ability to make such educated guesses is key to improving service, cutting costs, and exploiting new market opportunities.
Much of this is what is now old-fashioned data-mining:
Alumni donations to the University of Utah's David Eccles School of Business increased 73% last year after the school used predictive analysis software from Kintera to determine which of the 300,000 people in its alumni database were most likely to respond to its annual appeal for donations. "It's always a question of who do we want to reach given the limited resources we have," says Erika Marken, development research director at the university.
But some applications do have real predictive capabilities:
Tom Wicinski, managing director of customer marketing analytics at FedEx, will happily take the 65% to 90% accuracy rate he says the package-shipping company's predictive analysis system is providing. FedEx uses SAS Institute's Enterprise Miner and other tools to develop models that predict how customers will respond to price changes and new services, which customers are at risk of jumping to a competitor, and how much revenue will be generated by new storefront or drop-box locations. Accuracy, Wicinski says, depends not just on a problem's complexity and the number of variables, but also on the amount and quality of the supporting data.
FedEx began using predictive analytics for customer prospecting in the 1990s. But the company has broadened its use of the technology, applying it to more complex business problems. Applications, including the customer-at-risk system, are relatively new. "It's becoming a more mainstream business process," Wicinski says.
FedEx next will deploy predictive analytics in real-time operational settings such as call centers, he says, helping customer service reps identify at-risk customers and take the necessary steps to make them happy. Today, FedEx call-center agents and other front-line personnel must alert a sales rep when red flags go up--and that process may not be fast enough.
The article notes other, somewhat more controversial applications – like predicting when someone’s health is too risky to fly an airplane or predicting where the next crime wave will occur. While such applications have a large public benefit, they raise potentials for abuse of information and questions of privacy. These are issues we will have to work through as all of public life becomes more data intensive.
But on the company-side, look for more and more usage of these predictive analytics.
Staying one step ahead your rivals has always been the competitive advantage of good information.
Staying one step ahead of your customers’ needs is a superior competitive advantage in the I-Cubed Economy. After all, isn’t that what innovation is all about?
Posted by Ken Jarboe at 08:53 AM | Comments (0) | TrackBack
May 30, 2006
Investing in intangibles - at tale of two cases
Here are two of the latest twists concerning investing in intangible assets: movies and universities.
First, movies. Hollywood has always attracted people willing to invest in that most intangible of intangibles - the "Hit" - just like Broadway (remember the plot of "The Producers"?). But as Steven Pearlstein writes in the Washington Post - "Big Deals Are Sequels to Tradition In Hollywood",
over the years, J.P. Morgan's office in La-La land has painstakingly built a $7.5 billion portfolio of movie loans with the help of a computer model that has been remarkably prescient in calculating box-office success and failure based on genre, actors, directors, target audience and the season of the year. By spreading its risk over scores of different films, imposing tight covenants on production spending and syndicating 80 percent of the loans to other banks, J.P. Morgan has enjoyed a steady stream of above-average profits for its movie-lending business.
That is intangible asset investing the old fashioned way.
But, according to Pearlstein, new money has come to town:
Now, in the latest remake of "The Carpetbaggers," hedge funds and private-equity boys have arrived noisily in Hollywood. Having already bid up the price of stocks and junk bonds, real estate and commodities, and with cash pouring in at the rate of $12 billion a month, they are about to create another bubble, this time in "entertainment assets."
Pearlstein is skeptical of this new wave of investment:
by the time the movie theaters take their 50 percent of ticket proceeds, and the studios take their 15 percent distribution fees, and the banks get their loans back with interest, and the insurance companies are paid 3 percent of production costs to insure against cost overruns, and the studios are reimbursed the $150 million it takes to produce and market the average film -- and once the big-name actors and directors and their agents take their "points" off the top -- there's not a whole lot left over for the equity partners.
It will take years before the last of the DVDs is sold and the last check received from Showtime to determine how it all comes out. But my guess is that when that day is reached, the returns on these movie investments will turn out to be rather mediocre, and that the flood of hedge fund and private-equity money will have simply bid up the incomes of Tom Cruise, Steven Spielberg and their agents.
The big lesson I take away from this is that it is not the intangible which is risky; it is getting caught in the wrong deal.
But, then again, isn't the ability to structure the deal the real intangible asset here?
The second example of investing in intangibles is universities. As the Economist - "An education in finance" relates, universities have been more comfortable hitting up rich alumni than going to the bond market. But this is changing:
Poor schools were worried about being unable to service debt. Rich schools with huge endowments ($25 billion at Harvard, $12 billion at the University of Texas, $4 billion at Cornell) may have seen no need. And college administrators may not have considered that their institutions' primary assets—reputation, inspiration and insights—were suitable as collateral.
So much for an academic perspective. A growing number of investors saw things differently. Those lovely buildings on rolling campuses, the better universities' reputations, taxpayers' backing of state-owned institutions: all this looked to them like a deep pool of assets against which lots of money could be borrowed. The money raised could be used to attract more customers, who are choosy about the product and whose demand varies little with the price (loudly though they may complain).
The idea has flourished. Colleges throughout America are building classrooms, stadiums, theatres, climbing walls and whatever else it takes to hold teenagers' imaginations. This costs a lot and much of it is financed by debt. So far, credit quality has been excellent.
Investing in "reputation, inspiration and insights"? What a novel idea.
Posted by Ken Jarboe at 03:24 PM | Comments (0) | TrackBack
May 25, 2006
Future of books
One of the things I did read on my mini-vacation was the now-famous New York Times Magazine article by Kevin Kelly - "Scan This Book!". In it he lays out the case for the end of the physical copy as the dominate feature of what we call the "book":
Authors and publishers (including publishers of music and film) have relied for years on cheap mass-produced copies protected from counterfeits and pirates by a strong law based on the dominance of copies and on a public educated to respect the sanctity of a copy. This model has, in the last century or so, produced the greatest flowering of human achievement the world has ever seen, a magnificent golden age of creative works. Protected physical copies have enabled millions of people to earn a living directly from the sale of their art to the audience, without the weird dynamics of patronage. Not only did authors and artists benefit from this model, but the audience did, too. For the first time, billions of ordinary people were able to come in regular contact with a great work. In Mozart's day, few people ever heard one of his symphonies more than once. With the advent of cheap audio recordings, a barber in Java could listen to them all day long.
But a new regime of digital technology has now disrupted all business models based on mass-produced copies, including individual livelihoods of artists. The contours of the electronic economy are still emerging, but while they do, the wealth derived from the old business model is being spent to try to protect that old model, through legislation and enforcement. Laws based on the mass-produced copy artifact are being taken to the extreme, while desperate measures to outlaw new technologies in the marketplace ''for our protection'' are introduced in misguided righteousness. (This is to be expected. The fact is, entire industries and the fortunes of those working in them are threatened with demise. Newspapers and magazines, Hollywood, record labels, broadcasters and many hard-working and wonderful creative people in those fields have to change the model of how they earn money. Not all will make it.)
The new model, of course, is based on the intangible assets of digital bits, where copies are no longer cheap but free. They freely flow everywhere. As computers retrieve images from the Web or display texts from a server, they make temporary internal copies of those works. In fact, every action you take on the Net or invoke on your computer requires a copy of something to be made. This peculiar superconductivity of copies spills out of the guts of computers into the culture of computers. Many methods have been employed to try to stop the indiscriminate spread of copies, including copy-protection schemes, hardware-crippling devices, education programs, even legislation, but all have proved ineffectual. The remedies are rejected by consumers and ignored by pirates.
As copies have been dethroned, the economic model built on them is collapsing. In a regime of superabundant free copies, copies lose value. They are no longer the basis of wealth. Now relationships, links, connection and sharing are. Value has shifted away from a copy toward the many ways to recall, annotate, personalize, edit, authenticate, display, mark, transfer and engage a work. Authors and artists can make (and have made) their livings selling aspects of their works other than inexpensive copies of them. They can sell performances, access to the creator, personalization, add-on information, the scarcity of attention (via ads), sponsorship, periodic subscriptions -- in short, all the many values that cannot be copied. The cheap copy becomes the ''discovery tool'' that markets these other intangible valuables. But selling things-that-cannot-be-copied is far from ideal for many creative people. The new model is rife with problems (or opportunities). For one thing, the laws governing creating and rewarding creators still revolve around the now-fragile model of valuable copies.
Kelly has got it right - but many will dismiss, criticize and misinterpret his central point. Apparently at last weekends BookExpo America conference here in Washington, the backlash had already begun. According to the Washington Post - "Explosive Words":
The clash is between what you might call the technorati and the literati. The technorati are thrilled at the way computers and the Internet are revolutionizing the world of books. The literati fear that, amid the revolutionary fervor, crucial institutions and core values will be guillotined.Heading up the literati was John Updike who "heaped scorn on Kelly's notion."
While I understand the fear and concern by authors and publishers, these critics dismiss the transition at their peril. For authors, the states are not as high as it may seem since for them the important feature is the words, not necessarily their physical embodiment. Publishers are much more vulnerable, since they have a huge stake in the form in which the words are disseminated. Literary forms have followed the type of published materials (for example, short stories thrived in the heyday of magazines) and authors have adapted. For authors to link themselves to a particular media seems to me to be creatively short-sighted.
The "book-as-copy" will always be with us - it will be one of many physical embodiments of ideas and words. But there will be other forms of "books" - such as the ones I already carry around with me in my laptop.
So let the cry go forward - the book is dead, long live the book!
And as Kelly points out, we will all have to adjust to the new regime.
Posted by Ken Jarboe at 07:40 AM | Comments (1) | TrackBack
May 24, 2006
Innovation - on so many different levels
Check this out:
The Business Innovation Insider: For VISA, a breakdancing worm is a symbol of corporate innovation
It is a great illustration of innovation at a number of levels - new financial products and creative advertising!
Posted by Ken Jarboe at 04:17 PM | Comments (0) | TrackBack
Why immigration reform
One of the other hot items of debate last week, and this week, is immigration reform. I've already commented on the need for legislation that facilitates, not retard, the development of the I-Cubed Economy. A story in today's Washington Examiner - "Woman works to keep others in the U.S., even if she has to leave" reinforces that need:
Immigration reform might not occur in time to prevent Marie Gonzalez from being deported, but she hopes to convince lawmakers that they can save other undocumented students who have grown up in the United States.
Gonzalez, 20, a freshman at Westminster College in Missouri, will be one of about 100 students who will lobby members of Congress today and try to put a face on the immigration issue that has divided the country.
The Senate is debating a bill that would give some of the estimated 11 million illegal immigrants here a chance to become U.S. citizens, while the House passed a version that would make felons of them.
Gonzalez immigrated to America legally at age 5, but her family’s visas ran out while they thought they were in the process of becoming citizens, she said. She’s scheduled to be deported to Costa Rica six weeks from now. Her parents were deported in July after opening a restaurant in Jefferson City, Mo., and living in the U.S. for 14 years.
“It’s been tough seeing them start over, seeing them sacrifice what they had come to this country for,” said Gonzalez, who was named a Woman of the Year by Latina magazine in 2004.
Even if Congress passes a law to give citizenship to illegal immigrants who have lived here for longer than five years, the law likely won’t be enacted by July 1, Gonzalez’s deportation date, she said. She is trying to get an extension. If she is deported, she said, she will be barred from returning for 10 years.
Let me see if I got this right:
• entered the country legally?
• parents owned and operated a small business - and were then deported?
• Women of the Year?
• barred from returning for 10 years?
And we are trying to compete in a global economy where one of the key factors is talent????
Talk about shooting ourselves in the foot.
Posted by Ken Jarboe at 02:49 PM | Comments (0) | TrackBack
Attention Economy
One of the other hot discussions I missed last week concerned the Attention Economy. For those of you whose might not remember, the concept first arose in an article by Michael Goldhaber in 1997- The Attention Economy: The Natural Economy of the Net" in the online journal First Monday:
If the Web and the Net can be viewed as spaces in which we will increasingly live our lives, the economic laws we will live under have to be natural to this new space. These laws turn out to be quite different from what the old economics teaches, or what rubrics such as "the information age" suggest. What counts most is what is most scarce now, namely attention. The attention economy brings with it its own kind of wealth, its own class divisions - stars vs. fans - and its own forms of property, all of which make it incompatible with the industrial-money-market based economy it bids fair to replace. Success will come to those who best accommodate to this new reality.
(FYI - click here for additional information on the Attention Economy on the web.)
Apparently, attention was drawn to the Attention Economy (pun intended!) by Esther Dyson. John Hagel's blog -
"Edge Perspectives with John Hagel: Paying Attention" has a good summary of the discussion:
An interesting discussion surfaced over the past week among some bloggers, precipitated by comments from Esther Dyson in a debate with Vint Cerf in Wall Street Journal Online.
Esther reminded us that recent references to the attention economy are heavily influenced (directly or indirectly) by a seminal article on "The Attention Economy and the Net" by Michael Goldhaber on the subject many years ago. In the process, she made the great point that many of the recent references focus on only half of Michael’s attention economy.
I think I agree with John's bottom line on this: it is not about attention for attention sake; it is about how attention drives sharing of knowledge.
We all find ourselves in a globalizing world where we must find ways to develop distinctive and rapidly evolving capabilities. That is the only way to carve out sustainable livelihoods in the face of intensifying competitive pressure.
In this context, what we know at any point in time has diminishing value. We all need to find ways to tap into a broader set of experiences and perspectives to refresh our understanding of the changing world around us. To do this effectively, we need to receive the deep and sustained attention of those who have the most to offer and we cannot do this unless we can offer compelling value in return. If we cannot build deep and sustaining networks of attention (in other words, networks of relationships), we will find it more and more difficult to remain relevant and productive.
As such, the "Attention" Economy doesn't replace the real monetary economy - any more than open source or free software will completely replace paid-for software. Attention is part of the new I-Cube Economy where information and intangibles are major inputs to the production process. But ultimately there must be the production of something that someone will pay for. That is the trick that everyone is still grappling with.
Posted by Ken Jarboe at 08:59 AM | Comments (0) | TrackBack
May 23, 2006
Ebay patent ruling
I've been away from my computer (and the news, etc) for the past week and am just catching up. One of the more important events from last week that I missed was the Supreme Court's ruling on E-Bay vs. MercExchange. That case involves whether an injunction is mandatory. A unanimous (but split) Court ruled that judges have discretion as to whether they grant an injunction in a patent infringement case. As the ruling states:
Held: The traditional four factor test applied by courts of equity when considering whether to award permanent injunctive relief to a prevailing plaintiff applies to disputes arising under the Patent Act. That test requires a plaintiff to demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law are inadequate to compensate for that injury; (3) that considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. The decision to grant or deny such relief is an act of equitable discretion by the district court, reviewable on appeal for abuse of discretion. These principles apply with equal force to Patent Act disputes.
The Wall Street Journal - "EBay Ruling Changes Dynamic In Patent-Infringement Cases" noted:
Justice Thomas likened the justices' opinion to a century of doctrine in the companion field of copyright, where "this court has consistently rejected invitations to replace traditional equitable considerations with a rule that an injunction automatically follows" a finding of infringement.
. . .
But two terse concurring opinions, one signed by three justices and another by four, seem to offer contrary guidance for trial judges.
An opinion by Chief Justice John Roberts, joined by Justices Antonin Scalia and Ruth Bader Ginsburg, suggests that venerable court precedents should limit the discretion of lower courts in denying injunctions. But a separate concurring opinion by Justice Anthony Kennedy, joined by Justices John Paul Stevens, David Souter and Stephen Breyer, seems to point to the future rather than the past. Justice Kennedy wrote that traditional "discretion is well suited to allow courts to adapt to the rapid technological and legal developments in the patent system." He also cited concerns raised by critics of the system, including those that "use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees."
I especially found the Kennedy/Stevens/Souter/Breyer concurring opinion of interest, as it began to take on the issue of patents as a stand-alone asset:
In cases now arising trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases. An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees. See FTC, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, ch. 3, pp. 38 39 (Oct. 2003), available at http:// www.ftc.gov/os/2003/10/innovationrpt.pdf (as visited May 11, 2006, and available in Clerk of Court's case file). For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent. See ibid. When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest. In addition injunctive relief may have different consequences for the burgeoning number of patents over business methods, which were not of much economic and legal significance in earlier times. The potential vagueness and suspect validity of some of these patents may affect the calculus under the four factor test.
The equitable discretion over injunctions, granted by the Patent Act, is well suited to allow courts to adapt to the rapid technological and legal developments in the patent system. For these reasons it should be recognized that district courts must determine whether past practice fits the circumstances of the cases before them. With these observations, I join the opinion of the Court.
This is the first of a number of patent cases before the Court. It is likely that before the Court recesses this summer, it will have significantly clarified the scope and operation of patent law. What that means for the on-going patent reform legislation is unclear.
Posted by Ken Jarboe at 08:53 AM | Comments (0) | TrackBack
May 12, 2006
March trade in intangibles
This morning's BEA trade data confirmed what we had suspected: last month's downturn in our intangibles trade surplus was a one time fluke. After declining to $6.5 billion in February, the intangibles trade surplus return to its normal level of $7.2 billion.
(As noted last month, the February decline may have be due to a one-time royalty payment to China for the Olympic broadcast rights).
That is the good news. The not so good news is that the intangibles surplus is holding basically constant - still below its peak of almost $7.5 billion in December 2004.
The other good news is that the overall trade deficit declined in March by 5.6% to $62 billion as imports declined and export grew. According to the Wall Street Journal "Trade Deficit Narrowed To $62 Billion in March":
U.S. exports increased by 1.9% to a record $114.66 billion in March from $112.52 billion in February.
Exports increased by $510 million for capital goods, including industrial machines and computer accessories. Exports rose by $181 million for consumer goods, like diamonds and toys. Sales of industrial materials like fuel oil were up $1.25 billion. Exports of foods and beverages increased by $213 million. Foreign sales of autos and parts fell $377 million.
Imports fell by 0.8% to $176.66 billion.
Consumer goods imports -- including pharmaceutical preparations -- climbed by $884 million, and imports of capital goods like computers increased by $1.5 billion. But purchases of cars and parts made abroad tumbled $751 million. Purchases of industrial materials from overseas shrank by $3.3 billion.
But the not so good news was that the deficit in Advanced Technology Products increase in March to $2.5 billion after declining significantly in February. A surge in export of aerospace and electronics was more than offset by an increase in imports in information & communications and life sciences.
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 08:42 AM | Comments (0) | TrackBack
May 11, 2006
Taxing creative works II
Late last year, I posted an entry about a proposal to change the taxation of a specific intangible asset: music rights. According to press report, Washington Post - House Passes $70 Billion Tax Package, that provision is one step closer to becoming law:
At the request of the Nashville music industry, tax writers allowed music companies to write off their musical advances in five years, a $13 million break over the next decade. Songwriters would be able to treat the sale of their creations as capital gains instead of income, a break worth $20 million.
The Senate is expected to pass the bill, in a close vote, later today and send it on to the President.
The argument for the change was fairness, since the taxation of music rights was somewhat different from other assets. So it is unclear whether this will set a precedent for other intangible assets. I doubt it will cause any wholesale reevaluation of the taxing of intangibles. But, we will see.
Posted by Ken Jarboe at 03:02 PM | Comments (0) | TrackBack
May 10, 2006
EU and IPR - and what innovation is really all about
The European Union recently put out a press release about the need for strong intellectual property rights:
The European Innovation Scoreboard 2005 provides empirical evidence that a lower level of patenting to a large extent accounts for the difference in innovation performance between EU countries and to the innovation gap between Europe, the US and Japan. However, leading Member States have a patenting activity similar to US one; they register twice as much EPO patents as the US, and the US registers twice as much USPTO patents as them. The available data clearly shows that patent indicators are highly correlated to countries global innovation performance. Countries doing well in terms of innovation performance also score high in patenting.
On further investigation, this is a less than startling finding - and somewhat disingenuous. One of the major parts of the European Innovation Scoreboard is intellectual property. So, it should come as no surprise that an innovation index based in part on the level of patents is correlated with the levels of patents.
Of course, patents aren't the only dimension of innovation covered. The index is made up of 5 key dimensions:
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, Application measures the performance expressed in terms of labour and business activities and their value added in innovative sectors, and Intellectual property measures the achieved results in terms of successful know-how.
The first three (innovation drivers, knowledge creation and innovation & entrepreneurship) are inputs while application and IP are output measures. From my point of view, it is the applications outputs that really matter. The application outputs included 5 measures: employment in high-tech services as a % of total workforce; exports of high technology products as a share of total exports; sales of new-to-market products as a % of total turnover; sales of new-to-firm not new-to-market products as a of total turnover; and , employment in medium-high and high-tech manufacturing as a % of total workforce. Of the five, three of these are focused on high-technology.
Most of the inputs are also focused on high-technology, basically the number of scientists and engineers and the level of R&D funding. The innovation & entrepreneurship dimension was somewhat boarder, including: SMEs innovating in-house as a % of all SMEs; innovative SMEs co-operating with others as a % of all SMEs; innovation expenditures as a % of total turnover; early-stage venture capital as a % of GDP; ICT expenditures as a % of GDP; and, SMEs using non-technological change as a % of all SMEs. This last one - non-technological change - finally begins to look at innovation broadly. It is swamped by all the high-tech measures, however.
In other words, the index is a measure of science and technology not innovation. Again, no surprise that is correlates with levels of patents. And the Scoreboard proves nothing about the importance of strong IPR to the innovation process.
What was most interesting in the scoreboard, however, was the correlations among the factors. The only input factor correlated with the output of "applications" was "innovation & entrepreneurship"! "Innovation drivers" was correlated with "intellectual property." To be glib about it, more scientists and engineers create more patents, while more innovative entrepreneurs create more new products.
That should not be a surprising finding, either.
Posted by Ken Jarboe at 08:34 AM | Comments (0) | TrackBack
May 09, 2006
Disappearing dark matter
Brad Selzer explains why there is no "dark matter" in "RGE - Searching for the origins of dark matter." Dark matter refers to missing US assets abroad or other reasons why the US earns a positive income on its negative international investment position. As Selzer explains:
By my calculations, stripping out the difference in reinvested earnings and the effect of low US rates from the 2004 data reduces the amount of US dark matter from $3270b to around $300b. Put a bit differently, if foreign firms reinvested in the US at the same rate as US firms (reinvested earnings accounted for 4.7% of the 7.1% return on US FDI abroad in 2004 and only 1.7% of the 3.9% return on foreign direct investment in the US; my calculation effectively upped reinvested earnings to 4.7% and the overall return on foreign investment in the US to 6.9%) and if the average interest rate on US debt had been 5% rather than 2.63%, the US would have had an income deficit of around $122b in 2004, not a surplus of around $36b. And no one would be talking about dark matter.
In other words, "dark matter" is partly due to the difference in the reporting of reinvested earnings (US companies report their reinvested income abroad - which shows up as investment income in the US international accounts whereas foreign companies in the US do not necessarily report their reinvestment here - so it does not show up as the concomitant payment in the accounts) and partly due to low US interest rates.
Selzer's calculations show a residual "dark matter" of $300 billion. That is in the ball park of my estimate of $640 to $785 billion as the net value of our intangibles assets abroad (as opposed to the estimates of $3-4 trillion in "dark matter").
My explanation for why we continue to earn a net positive income on our international investments as we sink deeper in debt: volume. The size of our investments continues to grow at such a large rate that the income stream remains positive. If the size of our international portfolio had stayed constant we would have sunk into a negative payment position. We haven't yet, but there is no reason to believe that we can continue on our present trajectory. As some point the size of our debt will overwhelm the size of our investments. And then, the proverbial payment to the man with the pipe will be due.
Posted by Ken Jarboe at 07:35 AM | Comments (1) | TrackBack
May 08, 2006
The immigration debate
Two pieces recently in the Washington Post highlight some of the issues in the immigration debate. The first is a front page story - more an essay - about past debates - "U.S. Immigration Debate Is a Road Well Traveled." The piece describes the saga of the industrial era's age of migration - as it affected New York City.
The bitter arguments of the past echo loudly these days as Congress debates toughening the nation's immigration laws and immigrants from Latin America and Asia swell the streets of U.S. cities in protest. Most of the concerns voiced today -- that too many immigrants seek economic advantage and fail to understand democracy, that they refuse to learn English, overcrowd homes and overwhelm public services -- were heard a century ago. And there was a nub of truth to some complaints, not least that the vast influx of immigrants drove down working-class wages.
Yet historians and demographers are clear about the bottom line: In the long run, New York City -- and the United States -- owes much of its economic resilience to replenishing waves of immigrants. The descendants of those Italians, Jews, Irish and Germans have assimilated. Manhattan's Little Italy is vestigial, no more than a shrinking collection of restaurants.
The second piece was in Sunday's Post - an article by Richard Florida on the rise of creative economy in the Washington area - "A Creative Crossroads." Not surprisingly, he ranks the area's tolerance, diversity and openness as a great strength:
Open and diverse, the region has long been a bastion of great black thinkers, writers, musicians and business people. It's a lure for recent college graduates and young singles; 25- to 34-year-olds make up 15 percent of the population. New immigrants are flocking to outlying suburbs in Montgomery, Arlington and Fairfax counties.
According to Florida's data, the Washington area ranks 9th in the percentage of foreign born population.
Immigration powered the US rise as industrial nation. Now, they are helping to push the US into the I-Cubed Economy. Let me repeat what I said earlier: it is usually the more ambitious, better skilled, more entrepreneurial persons who come to the US. This was pointed out in another Post front page story today - "Vibrant Village Quieted As Salvadorans Go North." These workers (and their children) represent an important pool of talent. If we treat them as throw-away labor, the opportunity to harness that talent will be wasted. We need to find away to make all jobs - not just the "brainy" jobs - contribute to the I-Cubed Economy.
Immigration is one of those stealth competitiveness issues. We need to get it right. And one of the ways to get it right is to learn from - and not simply repeat the angry rhetoric - from the past. The story in today's Post is a good way to start learning.
Posted by Ken Jarboe at 08:06 AM | Comments (0) | TrackBack
May 05, 2006
April employment
Quick take on the April employment numbers:
While the unemployment rate remained steady at 4.7%, the increase of only 138,000 new jobs was well below the expected 200,000.
Biggest gainers were in financial services (20,600), professional and business services (28,000), health and education services (35,000) and leisure and hospitality (20,000) [with food services and drinking places alone gaining 18,000].
Good news was that manufacturing increased by 19,000: durable goods production was up 24,000 while non-durable goods was down 5,000. Much of the gain was due to an increase in automotive jobs.
The big loser was retail trade - down over 36,000!
A weak report compared to past months - but not all that bad given the increase in manufacturing and what seem to be high-end services jobs.
Posted by Ken Jarboe at 09:35 AM | Comments (0) | TrackBack
Creation Nets and information flows
John Hagel and John Seely Brown (authors of the important book on innovation and business strategy - The Only Sustainable Edge) are working on a new concept called creation nets. As Hagel explains in his blog -
Edge Perspectives with John Hagel: Creation Nets, creation nets are:
forms of open innovation that involve sustained relationships across large numbers of participants collaborating together to create new knowledge across traditional institutional boundaries. These are much more demanding forms of open innovation, but they offer much greater potential for both rapid incremental innovation and breakthrough innovation than the more limited forms of open innovation that seem to be the focus of much media and pundit attention.
. . .
There’s a lot of talk about product innovation and there is some attention to process innovation and business model innovation. But most executives do not fully understand the institutional innovation that explains the emergence and growth of creation nets.
As they acknowledge, this is not necessarily an entirely new idea:
We’ll no doubt encounter some criticism for introducing a new label - creation nets - when there are already a lot of buzz words competing for attention - innovation networks, innovation ecosystems, open innovation, value networks, social networks, etc. We hesitated to introduce yet another term to the innovation brew, but we became convinced that the other terms have been used too broadly and too loosely to be helpful in focusing on the elements that have greatest potential to drive innovation - sustained and rich relationships, large numbers of participants across traditional institutional boundaries and distinctive governance mechanisms to focus and integrate diverse innovation initiatives.
I think the concept is worth pursuing, for one important point: it focuses on flows of information. Most other concepts think about the innovations themselves. Or they assume that the flows of information will just happen spontaneously.
Unfortunately, much of the coverage of open innovation tends to emphasize self-organizing and emergent behavior, leaving executives with the impression that there is nothing that can be done to shape or focus efforts in this arena. While creation nets critically depend on emergent practices for their success, we found that these creation nets display an interesting blend of managed and emergent activity. By understanding the management techniques that contribute to the success of creation nets, executives in fact can shape the direction of creation nets and generate and capture more value from these networks.
Hagel and Seely Brown's work has been on capabilities and flows. As they point out in the more detailed white paper Creation Nets:
Stocks of knowledge become progressively less valuable while flows of knowledge - the relationships that can help to generate new knowledge - become more and more valuable. Rather than jealously protecting existing stocks of knowledge, institutions need to offer their own knowledge as a way to encourage others to share their knowledge and help to accelerate new knowledge building.
If we could just get people involved in re-writing the patent laws and the strong IP rights crowd to understand this key point, we might come up with an IPR regime that facilitates innovation rather than threatening to block it.
Another point they make about the flow of knowledge (which, again, has been made before) is key:
Now, of course, knowledge does not “flow” - it tends to be, in fact, very “sticky”, especially outside very narrowly defined communities of practice. Unlike information which can be more readily codified and disseminated, knowledge tends to reside in individuals and it is very context specific. For this reason, knowledge sharing typically requires trust-based relationships and a sharing of practice. Arms length market transactions work great when existing products or codified information are at stake; they are much less useful in accessing, valuing and leveraging knowledge. Knowledge-sharing is amplified when these relationships are grounded in some form of collaborative creation effort. Knowledge-sharing and shared understanding become even more effective when participants come together on a regular basis to undertake new collaborative creation efforts. Thus, creation nets, with their focus on building long-term relationships around sustained collaborative creation efforts and concrete action points, become very powerful vehicles for the catalyzing and participating in flows of knowledge.
This stickiness of knowledge is something that is not reflected in our technology and education policies - which tend to be built upon the transmission of codified knowledge. There is some tacit understanding of tacit knowledge in the process - as reflected in the emphasis on face-to-face interactions in some programs, such as mentoring programs. But the entire "book learning" system of education and the linear model of innovation (where information is passed off from one stage of development to another) are based on this free flow of codified knowledge.
By better understanding how knowledge is created and flows (or does not flow), as exemplified in how these creation nets work, we may be able to craft better build policy to facilitate their operations. That would be a big step forward in our innovation policy.
Posted by Ken Jarboe at 08:58 AM | Comments (0) | TrackBack
May 04, 2006
Access to Knowledge Conference
For those who are interested in the latest ideas on IPR, the blog Intellectual Property Watch has posted a summary of last week's Access to Knowledge Conference organised by the Yale Information Society Project.
Posted by Ken Jarboe at 12:36 PM | Comments (0) | TrackBack
Linear model of innovation
I recently came across a fascinating paper: The Linear Model of Innovation: The Historical Construction of an Analytical Framework by Benoit Godin.
The basic linear model of innovation posits a process that moves from one stage to another:
Basic Research --> Applied Research --> Development --> Diffusion/production.
There are countless variations, which differing descriptions and titles for the stages. There are also variations that employ feedback mechanisms. But they are essential the same: science goes in and products (innovations) come out.
In the paper, Godin argues that the linear model is the construct of managers, business schools and economists -- not derived from science and technology policy report such as Vannevar Bush's Science: The Endless Frontier.
One would be hard pressed, however, to find anything but a rudiment of this model in Bush’s manifesto. Bush talked about causal links between science (namely basic research) and socio-economic progress but nowhere did he develop a full-length argument based on a sequential process broken down into its elements, or that suggests a mechanism whereby science translates into socioeconomic benefits.
Rather, he argues, the linear model of innovation originally gained acceptance and continues to this day because of the availability and power of the statistics used in the model. The model took hold as part of the general mindset - and the statistics were development to reinforce the model. No other rival concept had (and has) the available statistic to operationalize the model.
Thus, our view of research owes more to the continuing power of "scientific management" than to the actual study of science.
On another point, I noted with interested that early definitions of what counted as "research" were vague -- just like today's measure of "innovation" are criticized as too vague. The 1963 adoption of the OECD Frascati Manual on science and technology metrics helped standardize the definitions. Maybe the latest OECD Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd Edition (part of the Frascati series) may help provide the needed clarifications.
However, Godin goes on to argue that the current "innovation" surveys - with their inclusion of new product development measures as the end point - actually reinforce the linear model.
In a sense, we owe this continuity to the very simplicity of the model. The model is a rhetorical entity. It is a thought figure that simplifies and affords administrators and agencies a sense of orientation when it comes to thinking about allocation of funding to R&D. However, official statistics are in fact more important in explaining the continued use of the linear model. By collecting numbers on research as defined by three components, and presenting and discussing them one after the other within a linear framework, official statistics helped crystallize the model as early as the 1950s. In fact, statistics on the three components of research were for a long time (and still are for many), the only available statistics allowing one to "understand" the internal organization of research, particularly in firms. Furthermore, as innovation came to define the science-policy agenda, statistics on R&D were seen as a legitimate proxy for measuring technological innovation because they included development (of new products and processes). Having become entrenched in discourses and policies with the help of statistics and methodological rules, the model became a "social fact".
Bottom line: our current model is a remnant of our industrial age mind set. As Lord Keyes stated, "practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." In this case, we are slaves to a defunct idea.
Time to change the mind-set, and the statistics, and the methodological rules.
Posted by Ken Jarboe at 08:27 AM | Comments (0) | TrackBack
May 03, 2006
R&D is not the same as innovation
The April issue of the Harvard Business Review (subscription required) contains an interesting article on innovation by Larry Selden and Ian C. MacMillan: "Manage Customer-Centric Innovation -- Systematically." The New York Times recently ran a summary of the article - "Solving the Innovation Shortfall":
It will happen several times this earnings season, because it always does. A company will report strong sales and earnings, only to have its stock drop sharply because investors were expecting more.
"This growth gap, as we call it, springs from the fact that companies are pouring money into their insular R.& D. labs, instead of working to understand what the customer wants and then using the understanding to drive innovation," argue Larry Selden and Ian C. MacMillan in the Harvard Business Review.
Mr. Selden, professor emeritus at Columbia Business School, and Mr. MacMillan, a professor at the Wharton School, lay out a three-step process for closing this gap. Their main idea is to move "the innovation effort away from headquarters and the traditional R.& D. lab out to those closest to the customer."
Step 1 in the process is identifying and developing "a deep understanding" of the core customers. For the luggage maker Tumi, the core market was male frequent air travelers. And it turned out that ease of packing and unpacking and mobility were far more important to them than size or style.
Once the company knew what its core customers wanted, they created it, instead of first designing products that the company then hoped to sell.
Step 2 is to enlarge the core business by satisfying the customers' other needs — for example, Tumi's core customers also need bags for laptops — and looking for customers who have needs like those of the core customers. The obvious choice for Tumi was women who travel frequently.
Step 3 is to "stretch segments," that is, find customers beyond the core who can be served with your expertise. For Tumi, this would be young male travelers who are much more interested in style.
In each case, customers, and not R&D, drive innovation.
The paper is a damning critic of the traditional pipeline model of innovation: research to development to product design to marketing. The Selden-MacMillan innovation model does not eliminate the role of R&D. It does place it in the context of focusing on customer needs.
This customer driven model of innovation is similar to other bottom-up views of innovation.
While I am a critic of the linear pipeline model of innovation, I recognize that there are multiple models of innovation which may all be valid in certain situations. Science-based R&D is an important part of the innovation process. And the most important critique of customer driven models is that it is more likely to produce incremental rather than breakthrough innovations.
But, the customer-drive models have a point. After all, eventually the innovation has to succeed in the marketplace by meeting customer needs. Remember, Henry Ford did not invent the automobile. The innovation of the Model T was the development of a vehicle that the average person, especially a farmer, could use. The Model T was highly customer focused.
The customer-driven models also continue to point out the failings of our innovation metrics. If traditional R&D is not the key to economic success, why are all of our economic competitiveness measures still focused on traditional R&D? Every time we discuss competitiveness the conversation is dominated by the number of patents, the number of scientists and other traditional R&D measures. We desperately need to develop new measures.
Posted by Ken Jarboe at 10:38 AM | Comments (0) | TrackBack
May 02, 2006
Here we go again - Blackberry patents
From DealBook at the New York Times - BlackBerry’s Legal Deja Vu:
Do not bother hitting the “reload” button or clearing the cache in your Web browser — it will not help. Tuesday’s hauntingly familiar headlines about a patent-infringement lawsuit against BlackBerry maker Research in Motion are, in fact, new.
The lawsuit, filed by software company Visto, seeks to shut down the popular (and, for some, near-addictive) BlackBerry wireless e-mail service less than two months after a similar suit from patent holding company NTP was settled. Research in Motion agreed to pay NTP $612.5 million to resolve that earlier case, averting the possibility that its service would be shut down by court order.
For those who thought NTP’s lawsuit lacked merit, the large settlement raised concerns about what are known derogatively as “patent trolls” — investment companies that acquire intellectual property and then sue businesses that use similar technology. In recent months, Research in Motion chairman James Balsillie has been urging United States lawmakers to reform the nation’s patent law immediately so that similar legal troubles will not afflict another company.
There is an important difference between the NTP suit and the latest suit against Research in Motion. Unlike NTP, an entity that lacked business operations, Visto actually competes with Research in Motion, as Forbes.com points out. This relationship, and the following quote from a Visto executive to The New York Times, suggest that Visto may see a BlackBerry shutdown as its ultimate goal:
“We’re not seeking a royalty, we’re seeking an injunction,” Visto’s co-founder and senior vice president, Daniel Méndez, said. “Unlike NTP, we are a company with 400 employees and a viable business to protect. That’s what we’re trying to do with these actions.”
(link to NY Times story)
The Visto patents were the subject of a $3.6 million Texas court judgment on Friday against Seven Networks. What DealBook doesn't mention (from that same NY Times story) is the following:
At Seven's request, one of Visto's patents was reviewed by the United States Patent and Trademark office and upheld. A second patent is still under review.
So this maybe a very different case. And may highlight more the monopoly role of patents - rather than the troll aspect.
Posted by Ken Jarboe at 01:01 PM | Comments (0) | TrackBack
Museums as pork?
If you want to know what the hot new trend in local economic development, look at what the politicians are lining up for. Right now, the pork-o-meter is pointing to cultural and arts development. As the New York Times - "Pork Under Glass? Small Museums and Their Patrons on Capitol Hill" reports:
This year, government watchdog groups have held up small museums as symbols of ridicule. Besides the teapot museum, a glass-blowing museum in Ohio and a federally financed parking lot for an art museum in Omaha have been singled out by budget hawks in Congress in speeches and press releases.
Citizens Against Government Waste, a budget watchdog group, is trying to keep track of them. It has identified 1,030 museum-related projects approved since 1995, worth $527.4 million; 79 have appeared in the current fiscal year, for $27.3 million.
Compared with skyscraping sums given to highways, the military and social programs, the museum grants are governmental loose change. Many recipients enjoy broad public support as beloved historical icons and popular local attractions; for politicians, they are hoped-for economic engines as well as political plums.
Some defend earmarks to small cultural groups in rural or disadvantaged urban areas as essential for their survival. While the Metropolitan Museum of Art can tap big benefactors for support, the Museum of Glass in Tacoma, Wash., can’t.
But critics say that some of these organizations and museums have significant private backing, and even if they don’t the funds should not be based on the whims of powerful lawmakers who happen to be on appropriations committees.
In the last appropriations cycle, it was the same story with Citizens Against Government [to use what their correct title should be] and others going after a proposed grant for the Punxsutawney Weather Discovery Center -- home of that renowned weather forecaster Phil.
Other spending in the last spending bill that were highlighted by the fiscal guardians of the Republic include: Country Music Hall of Fame in Nashville; the Alabama Sports Hall of Fame; the Rock and Roll Hall of Fame in Cleveland; the Merry Go Round Playhouse, Auburn, N.Y.; the American Cotton Museum; the B.B. King Museum; High Falls Film Festival in Rochester, New York; the Blowing Rock Performing Arts Center in Blowing Rock North Carolina; and the Graveyard of the Atlantic Museum in Hatteras, North Carolina.
In all fairness, Citizens are not simply cultural philistines. They hate any government spending (other than defense). But they have provided a great leading indicator of what is hot.
Pork used to be, and still is, about roads and dams. These were (and are) justified as economic development investments. At some point, research and development projects were added as favorite earmark targets. Now, we have museums and performing arts centers. What is going on?
Members of Congress routine defend their pork as being responsive to local priorities. My point is not to defend -- or condemn -- the process of Congressional earmarks. But if the Congressmen’s assertions are even partially correct, the increased attention to arts and cultural activities as economic development may be an indicator of a shift in the local outlook.
As I've noted many times, we now live in the I-Cubed Economy: Information, Intangibles and Innovation. Information, knowledge and other intangibles now power economic prosperity and wealth creation. Intangible assets – worker skills and know-how, informal relationships that feed creativity and new ideas, high-performance work organizations, formal intellectual property, brand names – are the new keys to competitive advantage. Intangibles and information drive our innovation process, a combination of formal research and informal creativity. These elements combine to produce productivity and improvement gains needed to maintain prosperity. Part of this shift has been the rise, as Richard Florida and others have argued, of new creative industries.
Since economic activity is no longer merely a process of combining capital, energy, materials and labor, local economic requires identifying and utilizing that there intangible assets. One of the major economic intangibles that a community possesses is its unique cultural and historic resources. It is important not just as part of the multi-billion dollar tourism industries. It is also important for creating the environment for attracting high-talent, high creative workers to populate those creative industries.
Thus, Congress has heard from their constituents about the importance of cultural intangible assets. More and more, home-town leaders understand the role of these assets as a foundation upon which communities can build their local economy. In Liverpool, England it was the new Beatles museum that helped spark an economic revival. In Moose Jaw, Saskatchewan, it is it Al Capon’s smuggling hideouts. In New York City, it’s Broadway. And in Punxsutawney, it’s Phil.
Now, having raised the problem, let us see whether the critics can come up with a solution to make these types of investments in a systematic, rational and transparent manner. We have routinely created programs for these types of government investments that used to be handed out piecemeal. A classic example is patents, which used to be handed out one at a time by the Crown. (I know, there are those of you who would dispute whether the patent process is rational and transparent -- but it is a process rather than a Congressional earmark.)
I suspect that those who are crying the loudest against earmarks for museums are not against earmarks -- they are against any government investment, period. That is too bad -- and very short sighted. If we are to have a successful and prosperous I-Cubed Economy, we need to make public investments in the types of assets that will grow that economy.
But that investment should be public and made through an open process. For that reason, I have advocated a Federal intangibles investment budget. This analysis of the budget would highlight those areas of Federal spending which go directly to the creation and maintenance of intangible assets: R&D, arts, information creation, etc. Which such information we could at least begin to have an informed discussion about how and where and how much we should be investing in intangible assets. Otherwise, we are simply in the dark and investing blind -- through the earmark process. We can do better.
Posted by Ken Jarboe at 10:26 AM | Comments (0) | TrackBack