August 2007 Archives

Defending an intangible

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You probably know that the credit rating agencies are under attack for their role in the current credit problem (see for example How Rating Firms' Calls Fueled Subprime Mess - Now the agencies are fighting back. As this oped in the Wall Street Journal by Vickie Tillman, executive vice president of Credit Market Services for Standard & Poor's, (Don't Blame the Rating Agencies) recognizes, the agencies live or die by an intangible:

Most important: Reputation and integrity are our most valuable long-term assets, which would make it imprudent for S&P to provide anything other than fair, objective and independent ratings opinions.

Recognizing the importance of an intangible asset is one thing; managing it is another. As the sage unfolds, we will witness a prime case study in reputation management. Should be interesting.

Bernanke and the history of housing

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The press attention on this morning's speech by Fed Chairman Ben Bernanke is focused, rightly so, on reading the tea leaves as to the direction of monetary policy and interest rates (see Wall Street Journal, Reuters via, Associated Press via, the New York Times -- which split somewhat in their assessment of the possibility of a future rate cut).

However, the bulk of the speech is a history lesson, as befits a former professor. In this case, the lesson is on the development of the housing and home mortgage industries. Bernanke describes the role of the government and other institutional factors in the development of these markets and of public policy, especially monetary, in this area. For those interested in the long term direction of the Fed (rather than just the next interest rate cut), I would suggest paying close attention to his conclusion:

I hope this exploration of the history of housing finance has persuaded you that institutional factors can matter quite a bit in determining the influence of monetary policy on housing and the role of housing in the business cycle. Certainly, recent developments have added yet further evidence in support of that proposition. The interaction of housing, housing finance, and economic activity has for years been of central importance for understanding the behavior of the economy, and it will continue to be central to our thinking as we try to anticipate economic and financial developments.

Looking at the evolution of these institutional factors will be critical as we bring our policies in line with what is already happening in financing the I-Cubed Economy.

Mike Huckabee gets it

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From Candidate: Former Arkansas Governor Mike Huckabee Proposal: Focus on Arts and Music Education -

To hear Huckabee tell it, expanding arts and music instruction is not only a cure-all for much that ails America's schools, but also key to keeping the country competitive. The economy of the future, he says, will place a premium on creativity, and even scientists and engineers will need to be able to be inventive, in addition to knowing the periodic table of elements.

"I call it a weapon of mass instruction. It's a critical part of education," Huckabee said during a visit to Northern Virginia last weekend. "A lot of education today has become left-brain only. All we're doing is . . . nothing more than data download: taking data from the teacher and downloading it to kids. And we wonder why 6,000 kids drop out of school every day and why so many millions more kids sleep through the day with their heads down on the desk, taking the most expensive nap in America. The reason they're doing it is not that they're dumb but that they're bored."

He added: "If you don't stimulate both sides of a human's brain, you're simply generating half the capacity. This whole idea that music and art are great programs if you can afford them and have room for them -- that's utter nonsense. It's the stupidest thing we've done to education in the last two generations."

. . .

As governor, he pushed through a 2005 law requiring elementary schools to offer 40 minutes per week of music and art and requiring high school students to take at least a half-year of art, music or dance to graduate.

Now the tough questions: would President Huckabee do the same as Governor Huckabee and change the No Child Left Behind law to require more art and music? Would he increase funding for arts and music education? Apparently not, as Huckabee is a strong believer in leaving education most up to state and local governments.

However, he would not be the first President to change his tune on the role of the Federal government once inside the White House (the most famous being "small-government" advocate Thomas Jefferson's extraordinary use of Presidential powers to buy the Louisiana Territory).

At least Mike Huckabee understands the importance of stimulating all forms of creativity in the I-Cubed Economy.

New patent infringement case

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From Information Week -- Amazon, Google, Yahoo, And Others Sued For Automating Their E-mail:

Six major Internet companies have been sued for using computers to process their e-mail.

AOL, Amazon, Borders, Google, IAC, and Yahoo stand accused of violating a patent on automatic message routing held by Texas-based Polaris IP.

Attorneys representing Polaris IP filed a claim of patent infringement on Monday in U.S. District Court of the Eastern District of Texas in Marshall, Texas.

The lawsuit charges the companies with implementing systems that "comprise interpreting electronic messages with rule base and case base knowledge engines" as described in the patent held by the plaintiff, "Automatic message interpretation and routing system."

The lawsuit seeks an injunction against continued infringement. If granted -- a remote prospect at best -- the injunction would have a significant impact on the defending companies.

A more likely scenario appears to be a payday for the plaintiff. "It looks like Polaris IP is in the business of licensing patent rights and has no desire to enforce its requested injunction," said Dennis Crouch, associate professor of law at University of Missouri School of Law and the author of the law blog Patently-O, in an e-mail. "I expect that Polaris IP will be willing to settle these cases for what it believes is a reasonable six- or seven-digit figure."

Crouch pointed out that the message routing patent at issue has been involved in litigation many times. "There are no published opinions associated with these cases and they have all been settled," he said.

Polaris IP, Crouch observed, "appears to be part of a web of IP-related companies associated with attorney David Pridham." These companies include Orion IP, Constellation IP, IP Navigation Group, Cushion Technologies, CT IP Holdings, Triton, Circinus IP, and Firepond.

Pridham did not respond to a request for comment.

The method and system detailed in the patent describes a way "for automatically interpreting an electronic message including the steps of (a) receiving an electronic message from a source; (b) interpreting the electronic message using a rule base and case base knowledge engine; and (c) retrieving one or more predetermined responses corresponding to the interpretation of the electronic message from a repository for automatic delivery to the source."

The Eastern District of Texas has become a favored venue for filing patent lawsuits. Polaris IP has launched three other patent cases there in the past two years against numerous technology companies, including Art Technology Group, Oracle, and Sirius Satellite Radio. All three of these cases have involved the same patent, which has a long legal history.

"The Eastern District of Texas has seen a flood of patent litigation in recent years based on its reputation as a patent-friendly court," said Crouch. "Interestingly, that reputation is rapidly changing as the court invalidates more patents."

Legitimate licensing or patent troll? Without knowing the validity of the patent (whether it is overly broad, etc.) it is impossible to say. The patent has a "long legal history" but that could mean almost anything. And since the cases have all been settled, no court has ever ruled on the validity. One can presume that since the defendants settled, they thought the patent valid. But there is a history of cases being settled because the settlement is cheaper than the cost of winning the lawsuit, not even figuring in the possibility of losing.

To me, the case points out one big flaw in the current system -- the necessity of a lawsuit. Yes, I know there are lots of lawsuits on numerous frivolous ground (remember I live in DC, home of the infamous drycleaner pants suit). But it seems to me that there are an extraordinary number of patent suits, where the cases should be straight forward: either a patent is valid or it isn't. After all, there doesn't seem to be a number of lawsuits over the standard land claim. Unless there are unusual circumstances, it is pretty clear whether I own my home or not.

There is a lot of strum und drang over the pending patent legislation. I can't comment on each and every specific provision of the bill. I do know that the patent system needs to restore some sense of certainty to the process. Right now, it is coming to resemble "Lets Make a Deal."

The patent complaint is available on the New York Times website. Here is what the Time's technology blog has to say on the case:

Maybe they haven’t sued the whole Internet, just a good chunk of it. Polaris IP, a patent firm, has filed a patent infringement suit against Google, Yahoo,,, Borders, AOL and IAC/InterActiveCorp, which owns

Polaris is the owner of United States Patent No. 6,411,947, for an “Automatic Message Interpretation and Routing System.” It is not entirely clear what the patent covers or how Google, Yahoo, et. al. infringed on it. We’ve contacted the lawyers for Polaris for details.

The patent appears to cover a customer service system that can analyze incoming customer e-mail messages and decide whether they can be handled automatically or need review by a human. According to the complaint, Polaris claims that Google’s advertising systems, including AdWords and AdSense, which analyze electronic messages to determine which ads to place next to them, infringes on its patent. Yahoo and others similarly infringe on the patent, according to the complaint.

Patent claims, of course, are a dime a dozen. And this case was filed in the United States District Court for the Eastern District of Texas, Marshall Division, the nation’s preferred venue for patent plaintiffs.

But last year Polaris filed a suit against Kana Software alleging that it had infringed the same patent. Kana settled the case in March and agreed to license the technology from Polaris, though terms of the settlement were not disclosed.

The comments on the Times blog are very interesting.

Financial innovation

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When we think of innovation, the first thing that usually comes to mind are the "high-tech" industries -- IT, biotech, nanotech,etc. But one of the most innovative industries in the United States is financial services. Some of those innovations are turning out to be not so good, such as collateralized debt obligations (CDOs) backed by subprime mortgages. But, in the spirit of every cloud having a silver lining, other innovations are popping up because of the credit meltdown. Take, for example, this item from a Washington Post story Home Buyers Forced to Change Tactics about a woman whose nonconforming jumbo loan fell through:

Her loan officer advised her to apply for a piggyback mortgage, meaning two loans. She made a $350,000 down payment, as planned. Then she split the remaining $600,000 between a first loan for $417,000 and a second at a higher interest rate for the balance.
The combined rate of the two, 6.875 percent, was about half a percentage point lower than the jumbo loan would have been, the mortgage company said.

Not everyone qualifies for such a loan package, as the story points out. The woman needed to put up a large down payment and had a good credit rating which allowed her to get the second mortgage at an acceptable rate.

But the story does make the point. Financial services continues to be very innovative -- even when it is part of cleaning up their own mess.

Chinese patents

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In one of yesterday's postings, I made reference to possible use of patent laws by Chinese companies against US companies. Today's entrepreneurship column in the Wall Street Journal - "Small Talk" by Kelly Spors - tells the following story about Chinese patents:

The big risk: If another company patents your idea first, it can turn around and sue you for infringement. It isn't as much about "getting a patent in China as preventing other people from getting one," says Siva Yam, president of the U.S.-China Chamber of Commerce, a Chicago-based organization that helps businesses navigate China. Mr. Yam says the Chinese government is trying to better enforce patents, so having a Chinese patent may be worth more in the future.

Mr. Yam recalls a few years back when a Pennsylvania company decided not to seek a patent in China since it was already selling the technology there. But a Chinese company later sought and received a patent on a similar technology and then sued the U.S. company, along with writing letters to its customers threatening to sue if they continued doing business with the firm. The Chinese company eventually backed down, but not before the U.S. company had spent ample time and money fending off the claims.

Oh, you say, but that is all about patents in China - not US patents law. True, but it illustrates my point that the Chinese clearly understand how to use patents as a defensive weapon.

And there is this Financial Times story, which ran last October - China asserts patent rights in US courts:

Chinese companies have begun to defend their patent rights increasingly aggressively in US courts, legal experts say.

“Within the past year or two, the Chinese have begun standing up for themselves and testing the limits of intellectual property rights that are asserted against them,” says Mark Hogge, a patent attorney at the law firm Greenberg Traurig. “They are learning the rules of engagement in the US marketplace and that includes intellectual property litigation.”

Some Chinese companies are even going on the offensive in the US for the first time, and filing their own patent lawsuits against US competitors.

This year, Netac, a manufacturer of computer flash memory products based in Shenzhen, China, brought a patent suit against a New Jersey rival in a federal court in Texas, in what is believed to be the first time that a mainland Chinese company has sued an American one for patent infringement.

“This could be a harbinger of things to come,” says Tony Chen, a US-trained patent attorney in the Shanghai office of the US law firm, Jones Day. “Chinese companies are treating intellectual property lawsuits as an effective competition tool in the marketplace.”

As a March 2007 story in EuroBiz Magazine - "Home and Way" put it:

As for the Netac case, it is uncertain how and when it will be resolved, but it does represent an important shift in the IP debate. With Chinese firms making more an effort to stand for their brainwork, multinationals will need to keep their guard up.

So, tell me once again how defending the current patent system (which is set up to encourage defensive patenting and litigation as a business strategy) is going to help US competitiveness?

Don't say you haven't been warned.

Patent reform snag?

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According to this morning's Wall Street Journal:

A bipartisan effort in Congress to overhaul the patent system -- a priority for some of the nation's biggest technology companies -- is hitting resistance because of concerns the U.S. might be exposed to greater foreign competition.

Patent overhaul appeared to be on a fast track earlier this summer. But plans for a quick vote got derailed last month after the AFL-CIO entered the debate, warning that innovation -- and union-backed manufacturing jobs -- might be at risk if the changes were adopted. The union has considerable clout in the Democratic Congress and expressed concerns with provisions that would expose patents to expanded challenges and might limit damages for infringement.

"At a time when the Chinese government is constantly being challenged to live up to its intellectual-property obligations, we do not want to take actions that may weaken ours," the AFL-CIO's legislative director, William Samuel, said in the pointed missive that was circulated on Capitol Hill.

I normally tend to agree with the AFL-CIO on a lot of issues. But on this one they are wrong, wrong, wrong. It seems they have fallen under the spell of the "more-is-better" “lock-it-up-tight” crowd of patents. And they have confused cracking down on counterfeiting with encouraging innovation. As far as I can tell, there is nothing in the patent reform legislation that will hinder attempts to crack down on illegal activities in China.

We made this mistake back in the 1980's with respect to Japan. In order to fight their tactic of patent thickets (the process of defensively patenting everything under the sun to surround a product with a wall of patents), we proceeded to create our own patent thickets. As a result, the culture of defensive patents grew to a point where it is now putting the culture of innovation at risk.

Going down the same path with the Chinese will only make matters worse.

And what does the AFL propose when the Chinese start filing a bunch of questionable infringement cases here in the US? We know that the Chinese strategy is to move up market in the innovation process. What will happen when they start using our own patent system against us? The answer is simple -- companies will move their innovative processes to China (or worse yet, be forced to license their technology) in order to get out from under the threat.

Is that really what we want to have happen?

Value of early education

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On this first day of school (at least here in DC), let me offer up these comments in today's Washington Post from Jeffrey Lacker, President of the Federal Reserve Bank of Richmond on "Children's Education Is a Smart Investment":

Early childhood development may seem like an odd topic for a Federal Reserve Bank president. But as a regional Reserve Bank in a federated central banking system like the Fed, we spend a good deal of time trying to understand the economies that make up our district, which includes Maryland, D.C., Virginia, West Virginia and the Carolinas.

Data on the growth of income per person across the United States and across cities and metropolitan areas reveal that at least one important measure of skills is consistently correlated with future growth. That measure is education, and a typical finding is that the share of the population of a U.S. city or state that had a college degree in 1990 was positively associated with growth in family income between 1990 and 2000. In other words, the more educated the population, the greater the subsequent growth in economic well-being. Furthermore, population growth is correlated with education levels, suggesting that places with highly skilled populations create opportunities that attract newcomers.

. . .

What does this have to do with early childhood? I mentioned that acquiring skills improves one's ability to acquire further skills. Could this logic extend back to the earliest investments in human capital -- those that occur between birth and age 5? I believe the evidence indicates that the answer is yes.

Economists like to think about investment in terms of rate of return, and there is reason to think that the rate of return on early childhood investment could be particularly high. Like any investment in human capital, some of the return accrues directly to the individual in increased lifetime earning ability. But a substantial share of the return -- perhaps as much as three-quarters of the total -- is a broader, social benefit coming from such sources as reduced costs of remediation and other special services in primary and secondary school, as well as from the reduced incidence of the array of social problems often associated with low educational achievement.

There are many explanations for the apparent high economic returns to early childhood education, but a key difference between early childhood investments and investments at primary and secondary education levels is the potential for compounding. That is, enhancing early childhood development appears to improve a child's ability to learn at later stages. This means the return on early education comes not just from the direct effects, say on the development of cognitive ability, but also from the fact that these early investments increase the productivity of later educational investments. Nobel Prize-winning economist James J. Heckman has emphasized this point in his writing on early childhood education.

This compounding effect means disparities in early childhood development have potential to exacerbate inequality within our society. People with limited means are more likely to have difficulty providing their children with high-quality early childhood environment, leaving those children less able to benefit from later investments in human capital. This possibility creates a legitimate public interest in helping people of modest means find and afford quality early childhood education. It holds the promise of expanding the development of human capital more broadly across our society and in so doing, widening our potential for skill-based economic growth.

Well said, although I have to take issue with one point. In his remarks, Mr. Lacker downplays the importance of on-the-job and experiential learning:

It is worth noting that the skills that have become most valuable over time seem to be general skills that come with higher levels of education -- as opposed to the very specific skills gained through experience in a particular job or occupation. This is an important distinction. It means that more than ever, the path to economic success lies in education rather than in on-the-job experience.
He does this, it appears, to emphasis the importance of formal education in the process of learning to learn. I agree that general skills are important. But much of formal education is about specific skills (especially at the higher levels when knowledge becomes much more specialized). And experiential learning, especially in childhood, is very much a part of the learning to learn process. In fact, some might even complain that formal education gets in the way of learning to learn.

That last criticism notwithstanding, early childhood education is one of the best ways to raise the knowledge level of our nation. DC has initiated a pre-K pilot programs to expand early childhood education beyond the traditional Head Start program (an initiative started by my good friend Councilmember Tommy Wells when he was on the School Board). Such pre-K programs are an example of cities and states across the nation understanding that an investment in the intangible asset of knowledge and kids is one that have a huge pay off in the future.

(FYI -- the Post is an excerpt from his remarks at the July 2007 Governor's Summit on Early Childhood Development in Virginia, see the full text of the speech.)

Determining value of an intangible

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Do intangibles have value? Of course they do. What a silly question, you might ask. But let me give you an example of how not so silly it is. Earlier this year, the VoIP company SunRocket closed down and began the legal process of liquidation (under the control of SunRocket LLC). Yesterday, SunRocket LLC sued another VoIP company, Vonage, for illegal use of its customer lists. (Vonage has its own problems with intangibles - specifically patents - but that is another story). According to today's Washington Post story :

SunRocket said that its customer list is "one of its single most valuable remaining assets," and that Vonage's use of the list has caused "immediate and irreparable harm and injury" to the company.

Here is the irony and the difficulty. While SunRocket was a going concern, the value of its customer list was official zero. That is right - worth nothing according to accounting rules. Only intangible assets acquired from outside the company can be put on the accounting books. But now, in liquidation proceedings a court will decide how much that asset is worth. In this case, we have to rely on the damages remedy under contract law to determine value. (Technically, that appears to be what SunRocket is doing - suing not for taken the assets but breaking a confidentiality agreement). The International Accounting Standards Board and the US Financial Accounting Standards Board are talking about a joint research project to extend accounting rules to internally generated intangible assets. A decision on the project timing and scope is due by the end of the year.

The sooner, the better.

Cashing in on an intangible

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There is a fun story in the Christian Science Monitor about a town cashing in on its one major intangible -- A rock 'n' roll revival in Winslow, Arizona. For those of you who don't immediately recognize the name of the town, Winslow has a walk on cameo appearance in the classic rock song "Take it Easy" by the Eagles: "Well, I'm standin' on the corner in Winslow, Arizona, and such a fine sight to see. It's a girl, my Lord, in a flatbed Ford, slowin' down to take a look at me."

Today Winslow has become a tourist draw with the "Standin' on the Corner Park":

In the center of town, the first thing you notice is a large trompe l'oeil mural covering the western wall of an aging brick building that shows what appears to be the reflection in a window of the girl in the flatbed Ford slowing down to take a look at a bronze statue of a young man – wearing jeans, shirt, boots, and vest – on the corner with his guitar.
Doesn't sound like much, but the good folks in Winslow have worked it for all its worth:
When travelers get about 20 miles from Winslow in either direction, they see highway signs suggesting that they tune their radios to a local station for town information. When they do, they hear about the site, get directions to the park, and are invited to have their photos taken with the girl in the Ford truck.

The result is people bypassing I-70 so they can ride into Winslow the old fashioned way -- on Route 66.

Shops sell everything from reproductions of Route 66 highway signs and newly mastered DVDs of the old television series to Eagles CDs, hats, key chains, shoulder bags, and refrigerator magnets, as well as prints of the mural. Every store in town sells "Standin' on the Corner" post cards. Business is once again booming in Winslow.

And never more so than each September, when, for the past eight years, the annual Standin' on the Corner Festival has brought thousands of tourists to town. This year's festival will take place Sept. 28 and 29 and features the tribute band "Hotel California, a Salute to the Eagles."

That is what I call making the most of your intangibles! Bravo Winslow.

Economic humility

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Pity poor Ben Bernanke. A scholar of the Great Depression and of the Fed's response, he is getting hit from both sides for his reaction to the recent financial turmoil. Half of the professional economists are blaming him for acting too slowly and the other half are blaming him for acting at all. The third half (remember, each economist gets two opinions - "on the one hand and on the other hand") doesn't know what to think -- they are waiting for the empirical evidence.

Even two of my favorite economic columnists are split. James Surowiecki of the New Yorker worries about moral hazard (where investors act recklessly knowing that someone will bail them out) and argues against the move (Beware Bailouts):

Cutting the discount rate is not going to help subprime borrowers get new loans, nor will it get the housing market moving again. What it will do is reassure investors and save some money managers from well-deserved oblivion. It may be that the risk of a full-fledged credit crunch was high enough to make this worth doing. But there is something unseemly about watching the avatars of free-market capitalism rely on the government to pay for their bad bets. And there is something scary about contemplating the even bigger bets they’ll make in the future if they know that the Fed is there to bail them out.
Steven Pearlstein of the Washington Post retorts (A Bailout for Investors? Good.):
Here's a question for all those carping about how the Federal Reserve, in offering to pump cash into the financial system last week, was bailing out lenders and investors from the full consequences of their bad decisions:
Why have a central bank, if not to do precisely that?

The original purpose of the Fed was not to try to manage the ups and downs of the business cycles or prevent the outbreak of inflation, though those have become the central focus in decades since World War II.

Rather, it was for the government to step in when investors and lenders get so fearful that they begin to pull back from making even sound loans and investments, draining from the economy the credit that is its lifeblood. That's what happened during a series of financial panics in the late 19th and early 20th centuries. And it was to prevent a recurrence of those panics that the Fed was created.

My own sense is that the moral hazard concept is one of those ideas that is better in theory than in practice. It has too long been a crutch used to argue against any government action -- such as bank deposit insurance. The personal history of those who have made bad financial mistakes is not full of forget-and-forgive stories. As one manager was quoted as saying about the risk of not playing it conservatively and switching to safe short-term Treasuries, "we will lose our bonus and may get fired."

We won't know for awhile whether the Fed's recent move was the right thing to do. In fact, I doubt there will even be consensus. We have just seen a new revisionist history of the Great Depression that says Roosevelt got it all wrong (and apparently extols the virtues of Andrew Mellon - the great liquidator whose solution was to just let the collapse happen -- “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . Purge the rottenness out of the system.” as Surowiecki quotes). I will leave it to economist who have studied history, such as Brad DeLong, to articulate the other side. Re-fighting the Great Depression is just the economists version of one of our great American past times, just like some people like re-fighting the Civil War.

We certainly won't agree on economic ideology. What the current argument over the Fed (and the never ending argument about the Great Depression) should teach us is a little economic humility. If we can't agree about what happened almost 70 years ago, if we are still fighting over interpretations of facts and theories of events those past event, then how in the world can we be so certain about our interpretation of events from less than a week ago.

Economics, lacking the controlled experiment, will always be a matter of interpretation. And that is just another word for "after the fact rationalization of a guess." Add on the uncertainty of understanding the I-Cubed Economy. Then layer on the political and ideological dimension. With all that, it is amazing that any decisions get made at all.

Given the circumstances, the best we can hope for is some economic humility. Let’s just admit that we really don’t know – and get on with it.

Then again, that would put all commentators (including this author) out of business.

Make or sell

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Are patents a defensive tool to ward off competitors or an offensive means of generating new revenues? That is a debate in the business community. Some see intellectual property as a vast new source of revenues through licensing (remember the popular business book from 1999 Rembrandts in the Attic: Unlocking the Hidden Value of Patent). But in most cases the defensive nature of patents wins out -- since as the lawyers keep telling us, patents are not positive right (a right to exploit) but a negative right (a right to exclude).

Today's Washington Post has a good illustration of this tension. Ford brags about its advanced intellectual property management system and licensing system in Ford Global Technologies. But Ford makes no excuses for an aggressive in the defense use of patents. According to their 2006 financial SEC filing (10-K):

Our policy is to protect our competitive position by, among other methods, filing U.S. and international patent applications to protect technology and improvements that we consider important to the development of our business.
The Post story (Cindy Skrzycki - Ford Sees the Light, and It's Not a Generic Import) reports on the latest:
Is the headlight of a Ford F-150 pickup truck a unique design protected by patent or an easily replaceable generic part? The answer to that question will determine winners in the $16 billion-a-year U.S. market for vehicle replacement parts.

So far Ford, the second-largest U.S. automaker, has the upper hand, using patents as the latest tool in a 20-year battle to keep imported parts out of the country. On Aug. 7, the Bush administration let stand a ruling by the U.S. International Trade Commission that bans imported versions of headlights and six other patented parts for the F-150.
Ford claims that its original equipment is the result of extensive design and engineering work and therefore subject to patent protection. Predictably, the insurance companies and the makers of replacement parts are upset:
"This attack using patents is using a different mechanism to achieve monopoly pricing," said David Snyder, vice president and assistant general counsel for the American Insurance Association, a District trade group that took the importers' side in the case. "It's a battle in a long-running war."
(By the way, this case is not over, as it now before the US Court of Appeals for the Federal Circuit.)

To me, it serves as a perfect illustration of the due nature of the patent system -- to foster innovation through creating monopoly rights. As the old joke goes, the genius of Detroit is to take parts individually worth $50,000 and turn them into a car selling for $20,000.

It also serves as an illustration of the tension with in a company over licensing out the technology or making it inside. The old business decision used to be make or buy. But the value of the product is in the IPR, not the production process. So the inside versus outside decision is now in terms of make versus sell (license). In such an environment, the "lets-hold-it-close" mentality still holds sway today.

But business process in the 20th Century eventually moved away from the fully integrated Rouge plant where Ford shipping in iron ore and other commodities at one end and spit out finished cars at the other. As the I-Cubed Economy unfolds, the same process is likely to happen with intellectual property. More and more, companies will end up looking at the make versus sell decision, and sell.

The trick for national economic policy, of course, will be whether the people they sell to are still making the product in the US.

The Dragon and the Elephant: Understanding the Developing Innovation Capacity in China and India
September 24th – 25th, 2007
National Academies’ headquarters, 2100 C Street, NW, Washington, DC 20418

The National Academies' Board on Science, Technology and Economic Policy, in collaboration with the State University of New York Levin Graduate Institute, Woodrow Wilson International Center for Scholars, Urban Institute, and Athena Alliance, will host a conference comparing and contrasting the 2 countries’ growing science and technology capacity, broadly and in key industrial sectors such as software, pharmaceuticals, and telecommunications, and energy.

Confirmed speakers include: Sam Pitroda, Chair, Indian National Knowledge Commission; V.S. Ramamurthy, Chair, Indian Institute of Technology; Mu Rongping, Institute of Policy and Management, Chinese Academy of Sciences, Beijing; Edward Luce, Financial Times Washington Bureau; K. J. Dewoskin, PriceWaterhouseCoopers; Pete Engardio, Business Week Senior Writer; Nicholas Lardy, Peterson Institute for International Economics; AnnaLee Saxenian, UC Berkeley School of Information Management; Lee Ting, WR Hambrecht and Lenovo; and Ashok Vermuri, Infosys Technologies.

A preliminary agenda and registration is available on the STEP Board website.

For additional information please contact Mahendra Shunmoogam, or (202) 334-2823.

The real benefits of arts education

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The standard rationale for teaching arts in schools is under attack. But the authors of a new book Studio Thinking: The Real Benefits of Visual Arts Education have found a much more profound reason for including visual arts in the curriculum. Ellen Winner and Lois Hetland explained in a recent Boston Globe article Art for our sake:

One justification for keeping the arts has now become almost a mantra for parents, arts teachers, and even politicians: arts make you smarter. The notion that arts classes improve children's scores on the SAT, the MCAS, and other tests is practically gospel among arts-advocacy groups. A Gallup poll last year found that 80 percent of Americans believed that learning a musical instrument would improve math and science skills.

But that claim turns out to be unfounded. It's true that students involved in the arts do better in school and on their SATs than those who are not involved. However, correlation isn't causation, and an analysis we did several years ago showed no evidence that arts training actually causes scores to rise.

There is, however, a very good reason to teach arts in schools, and it's not the one that arts supporters tend to fall back on. In a recent study of several art classes in Boston-area schools, we found that arts programs teach a specific set of thinking skills rarely addressed elsewhere in the curriculum - and that far from being irrelevant in a test-driven education system, arts education is becoming even more important as standardized tests like the MCAS exert a narrowing influence over what schools teach.

The implications are broad, not just for schools but for society. As schools cut time for the arts, they may be losing their ability to produce not just the artistic creators of the future, but innovative leaders who improve the world they inherit. And by continuing to focus on the arts' dubious links to improved test scores, arts advocates are losing their most powerful weapon: a real grasp of what arts bring to education.

A New York Times article last month - Book Tackles Old Debate: Role of Art in Schools outlined some of the debate:

“We feel we need to change the conversation about the arts in this country,” said Ms. Winner, a professor of psychology at Boston College and a senior research associate at Project Zero. “These instrumental arguments are going to doom the arts to failure, because any superintendent is going to say, ‘If the only reason I’m having art is to improve math, let’s just have more math.’ “

“Do we want to therefore say, ‘No singing,’ because singing didn’t lead to spatial improvement?” Ms. Winner added. “You get yourself in a bind there. The arts need to be valued for their own intrinsic reasons. Let’s figure out what the arts really do teach.”

In their Boston Globe article, Winner and Hetland go on to explain their findings:

In our analysis, we identified eight ``studio habits of mind" that arts classes taught, including the development of artistic craft. Each of these stood out from testable skills taught elsewhere in school.

One of these habits was persistence: Students worked on projects over sustained periods of time and were expected to find meaningful problems and persevere through frustration. Another was expression: Students were urged to move beyond technical skill to create works rich in emotion, atmosphere, and their own personal voice or vision. A third was making clear connections between schoolwork and the world outside the classroom: Students were taught to see their projects as part of the larger art world, past and present. In one drawing class at Walnut Hill, the teacher showed students how Edward Hopper captured the drama of light; at the Boston Arts Academy, students studied invitations to contemporary art exhibitions before designing their own. In this way students could see the parallels between their art and professional work.

Each of these habits clearly has a role in life and learning, but we were particularly struck by the potentially broad value of four other kinds of thinking being taught in the art classes we documented: observing, envisioning, innovating through exploration, and reflective self-evaluation. Though far more difficult to quantify on a test than reading comprehension or math computation, each has a high value as a learning tool, both in school and elsewhere in life.

All of those skills - observing, envisioning, innovating through exploration, and reflective self-evaluation - are exactly what are needed in the I-Cubed Economy. Reading comprehension and math computation are necessary, but not even close to sufficient. The danger, of course, of focusing only on math and reading is that you cut other areas. Art is one area begin cut. Geography and history (important to understanding the world around us) is another. I hope Congress takes a good look at this latest research as it moves ahead with reauthorizing the No Child Left Behind Act - and move to building a more balanced system of educational incentives.

Credit contagion and intangibles

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Just how far with the collapse go? That is the question on everyone’s mind. So far it has reached the commercial Euro market (see Banks Again Feel Pinch Selling Short-Term Paper) and even the commodity market (see Markets Fear U.S. Woes Will Hit Global Growth). Earlier this week, the Wall Street Journal (How Rating Firms' Calls Fueled Subprime Mess) and the Financial Times (Rating agencies hit by subprime probe) ran overview pieces on the problems with the credit agencies' rating of the subprime mortgage debt. European leaders are already calling for an investigation of the credit agencies (see (see Trouble Tracks Far and Wide - And just this morning, the Fed cut the discount rate. As Steven Pearlstein puts it in his Washington Post column today:

What we have on our hands here, folks, is a full-blown, global financial crisis comparable to the junk bond collapse of 1987, the S&L crisis of 1990 or the Asian financial crisis of the late '90s.
So how does this affect intangible? In some cases directly. For example, the Financial Times reports that plans for a $1 billion fund to finance future MGM films has be shelved (while MGM is going ahead with a $500 million deal arranged by a different lender).

More importantly, the collateral damage may be in the use of intangibles as . . . collateral. There is a small but growing market in the securitization of intangible assets. That process is the same model of asset-backed securities (ABS) that is used in the mortgage secondary market. Assets are bundled in to a fund-like structure and bonds sold back by the revenues raised by that bundle of assets.

This is exactly the market which has collapsed. As subprime mortgages head to default, the bonds backed by the revenue of those mortgages become shaky. And everyone heads for the exit. As everyone tries to sell, the price drops to the point of being worthless. That fear then spreads to other market.

I'm sure that the mortgage secondary market will come back (already we are seeing the firebreak in the market where the smaller, high quality loans backed by Freddie Mac and Fannie Mae are doing fine). Likewise, the overall ABS market will come back. The problem here is that investors might stay away from the more esoteric ABS - like intangibles. As the Financial Times points out, investors "have lost confidence in their ability to value complex structured credit products that include some exposure to subprime bundled up with exposure to other underlying assets." Also, the much-needed tightening of credit standards in the mortgage ABS area may make intangible deals too expensive (by either giving such deals a worse rating thereby increasing the interest rate demanded by the market or by requiring greater levels of insurance).

On the other hand, intangible-backed deals tend to be overcollaterized with extensive credit enhancement (insurance and performance covenants) structures. Such enhancements may make these deals attractive to investors still smarting from the covenant-lite deals backed by no-document loans.

Ultimately, the issue will come down to trust in the valuation models. Again, as the FT puts it:

The loss of confidence in valuation may take longer to fix. If investors do not know how to value a security, the classic “price discovery” process by which sellers and buyers settle on a new equilibrium price may not function. Markets – for instance for complex structured derivatives and some asset-backed securities – could remain closed for some time.

Valuation of intangibles is especially tricky. But if the rocket scientist in the financial community can figure out a transparent and credible model, the intangibles-backed securities market may end up benefiting in the long run from the current melt down.

Taxing Capital Gains

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Earlier this month I called for a re-look at capital gains (see Taxing carried interest). Looks like Alan Auerbach agrees, according to his op-ed in the Wall Street Journal How to Tax Capital Gains - "While it's relatively simple to change the way we treat carried interest, it would be far better to undertake an overall reconsideration of the way we tax capital gains." He has some interesting comments on how to change the system - which I can generally agree with. He doesn't, however, raise one of my favorite ideas - the sliding scale rate.

One of the issues he raises is the problem of "lock-in": "Higher tax rates delay sales, causing investors to be 'locked in' to their current holdings, unable to balance their portfolios as they would wish." Part of the problem is the large step function nature of the rates. Investors are encouraged by this to game the system by waiting that one extra day required to shift to a lower bracket before selling. If the sliding scale was smoother, there would be less incentive as the marginal impacts would be much smaller. And marginal change is what modern economics is all about. Conceivably the rate could be adjusted on a day basis -- Yes I can hear all the complaints about complexity - but come on, you are going to tell me that most investors who would be taking advantage of the capital gains rate don't already either use a tax program or have an account who uses a tax program? And a simplified version could be put in for the small investor.

If we are going to take the time and spend the political capital need for such a tax change as Auerbach suggests, I think we need to examine all option, including the sliding rate. Of course, if we are going to do that, we may as well go the whole way at look at major tax reform such as moving to a border-refundable VAT. That would be fine with me.

Financial Competititveness - part 9 - UPDATE 4

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Back in June, I posted a number of entries on an upcoming Supreme Court case on investor fraud (see here, here, here and here). Yesterday, the Solicitor General finally weigh-in (Bush Sides With Business Over Lawsuits -

Treasury and administration officials rebuffed the SEC's argument, and yesterday the Justice Department's representative, the U.S. solicitor general, filed a friend-of-the-court brief on behalf of business.
(See also In High Court Filing, It's U.S. vs. Investors - and Gov't supports business in investor case - Yahoo! News).

The next step -- see you in Court.

Trading an intangible

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Carbon offsets are generally touted as a market-based mechanism for reducing carbon-dioxide emissions. Some one who is undertaking an activity to reduce emissions gets a credit for that reduction, which they can sell to others. The market started as a way for dirtier companies to pay for overall reductions in emissions while not specifically reducing their own. The rationale being that reducing their own emissions (car exhaust, coal fired plants, etc) might be too costly but we still wanted to force this high emission activities to do something. More recently, offsets have become a way for individuals to reduce their personal "carbon footprint" - which critics dismiss as simply buying "feel-good" certificates to avoid actually changing behavior of lifestyle.

The Washington Post is running a story on the difficulties of such trades -- Cost of Saving the Climate Meets Real-World Hurdles:

The offset is among the most unusual of commodities. Its substance is intangible, the absence of something. Some pollution would have existed, somewhere, sometime, the seller says, but now it won't.

I have to take exception to their definition of an intangible as the absence of something. Intangibles are not the null-set but something very real and in existence. But the article gets the rest of the story right. It is not an issue of the nature of intangibles or of the impossibility of trading intangibles. Financial markets do that all the time (although recent problems caused by the subprime mortgage debacle are showing how these markets can go south quickly). The issue is the standards. As the Post story goes on to say:

Tom Arnold, chief environmental officer for the San Francisco-based company, said TerraPass is doing the best it can but has been hampered by a lack of agreement about what an "offset" is supposed to mean.
"The real problem is that there is not even a consensus among environmental groups" about how to define a worthwhile project, Arnold said. "Companies like TerraPass are kind of stuck in the middle."

Even the Wikipedia definition has this warning: "Due to their indirect nature, many types of offset are difficult to verify."

There may be some changes on the horizon. Congressman Ed Markey, who chairs the House Select Committee on Energy Independence and Global Warming has asked the FTC to looking to issue (see Markey Probe into Carbon Offsets Nets FTC Actions).

In the meantime, the trading will continue. But, maybe the Sierra Club has the best answer for those worried about climate change (as quoted in the Post story):

"We would recommend that, instead of taking that $100 and buying a carbon offset, that you take that $100 and invest in something" such as energy-saving compact fluorescent light bulbs or an insulating blanket for a home water heater, spokesman Joshua Dorner said.

Of course, given the way this market operates, you could probably turn around and sell a carbon offset certificate based on those actions.

Copyright infringement or viral advertising

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It used to be called "word of mouth" - that invisible but powerful buzz created about something -- "you gotta see/hear/buy/do this." But with the communications amplifying power of the Internet it is now called viral advertising. And as Wikipedia (see Viral marketing), it feeds off of the new technology:

Viral promotions may take the form of funny video clips, interactive Flash games, advergames, images, or even text messages.

The power of viral advertising for the item in question appears to be YouTube's defense in its copyright case against Viacom. And is it bringing in two of the heavy weights - Jon Stewart and Stephen Colbert (A Comic Twist in YouTube Lawsuit -

"YouTube is perhaps one of the best marketing conduits for folks like Jon Stewart and Stephen Colbert," said Mitch Weinstein, an intellectual-property lawyer at Levenfeld Pearlstein in Chicago. "These guys are going to stand up there and say YouTube is great. And they're going to say it while they're on the Viacom payroll, and that's what YouTube wants."
(See also YouTube Wants to Talk to Jon Stewart -

So, is it copyright violation? Or is it the twisting the fair used doctrine for marketing purposes? Looks like the courts will decide.

Taking it private

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A new private trading market is set to open tomorrow. This market is only open to what the SEC calls "Qualified Institutional Buyers - QIBs" which are investing institutions with at least $100 million in assets. The new market, called Portal Market, will be run by NASDAQ and will trade in shares of private companies. Since the market is only open to QIBs, it does not fall under the regulatory oversight of most securities laws. I'm sure a lot of ink will be used to explain why investors will flock to this non-regulated market -- and why companies will seek to go private using this and other vehicles. But, one of the major factors is not the regulatory burden, it is investor behavior. As today's Washington Post story -- Nasdaq Gives High Rollers A Market Free Of Regulation -- points out:

These markets are creating an alternative and exclusive investment world buffeted from the turmoil that has roiled the major stock indicators in recent weeks. In the public markets, investors dumped stock during a credit crisis caused by the deteriorating mortgage industry. Private-market traders generally are sophisticated financial groups that take a long-term view of their investments.

"One of the problems that business faces in America today is what I would call 'short-termism,' " said Howard S. Marks, chairman of Oaktree Capital, an investment firm that was the first to list on the private market developed by Goldman Sachs called GSTrUE.

The short-term focus of existing equity markets is a strong pull to go private. Some argue it is easier for private companies to sustain innovation - compared with public companies who have to show results every quarter (for example, see The Gartner Fellows: Clayton Christensen's Interview Part 1). Maybe this new market will put pressure on the public markets to take a longer term view. Then again, should the new private market be dominated by hedge funds seeking the short-term alpha, it might just end up like a rich man’s version of what some see as the casino on Wall Street.

June trade in intangibles

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The US trade deficit fell slightly by $1.1 billion to $58.1 billion in June, according this morning's BEA trade data, as exports grew faster than imports. Exports were up by $2 billion (due to increases in farm products, semiconductor chips and autos) while imports rose only $0.9 billion -- both reaching record levels. May’s trade deficit was also revised slightly lower from last month’s reported figure. As the New York Times reports: "The decline caught analysts by surprise. They had been looking for a small increase reflecting the fact that global oil prices have been rising." According to the Wall Street Journal, "the median estimate of 22 economists surveyed by Dow Jones Newswires was a $61.00 billion deficit."

Our intangibles surplus continued to grow, but not as much as last month. The June surplus in intangibles grew by $189 million to $10.6 billion as exports grew faster than imports (in both royalty payments and business services). Both receipts (exports) and payments (imports) of royalties rose as did both imports and exports of business services.

The deficit in Advanced Technology Products grew by $204 billion to $3.3 billion from the May level of $3.1 billion. The change was mainly due to higher imports of information and communications technologies – although exports and imports were up generally across all sectors. 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.

While the news is generally good, the contrast of intangibles and advanced technology products serves as a stark warning. Any improvement in our trade balance due to a steady increase in our intangibles surplus was more than erased by a slight worsening in our deficit in advanced technology products. Intangibles are the tail, and they are in no way even close to ever wagging the dog.

Intangibles trade-Jun07.gif

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.

Productivity and services

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This morning's Wall Street Journal has a nice piece on productivity -- Is Productivity Growth Back In Grips of Baumol's Disease? The story is one of the more sophisticated discussion for the layperson of services and productivity than I normally see. The standard discussion lumps all services together and subjects them to Baumol and Bowen's standard example:

Their famous example was a classical string quartet -- there are always four players in a quartet and it always takes about the same amount of time to perform a set piece of music. You can't get any more music out of the same number of musicians over that same period of time. Broadening that to other types of services, the implication is that rich countries such as the U.S. that tend to veer toward services would face higher prices as wages and costs rise.

This is known as Baumol's Disease - labor intensive services have inherently lower productivity.

But, as the piece points out, and I have been saying for years, you need to know what you are measuring. For example, the nature of that string quartet's performance has changed:

The information-technology boom led to rapid efficiency gains not just in the production of high-tech equipment, as expected, but also in services such as retailing -- which had long been assumed to have little prospect for much improvement. The quartet can now be heard on iPods and even cellphones, meaning that even if musicians themselves aren't more productive, the methods of distribution are.

So, if the measure of productivity is notes produced per musician, then productivity in string quartets is stagnate. But if the measure is number of notes per musician reaching a listeners ears, then the productivity has increased a staggering among from the couple of dozen in the King's drawing room to the millions who can hear it live over telecommunications to the billion and billions who can hear it over the ages due to recording technology.

Thus, understanding what productivity is and getting the measures right becomes critical. So does understanding those services where productivity can be increased and where it can't. The Journal article makes the distinction between high productivity services and low productivity services, which is why I say it is more sophisticated than most discussions of the subject.

Unfortunately, it never really gives us a good discussion of why the high is high and the low is low. That is not the fault of the author, but is due to our lack of a good analytical framework. For example, we know that retail and wholesale trade have become highly productive. But, those are far different from the standard high-productivity story in the areas of finance and business services. Or are they? We know that retail and wholesale have become more productive due to inventory control and materials handling. Hasn't the same occurred in financial and business services where processes have been come more automated and IT allows for mass customization.

The real question will be health care and personal services, as the story points out. On the one hand, health care services can be the most labor intensive - therefore the most susceptible to Baumol's disease. On the other hand, applications of IT in record keeping, telemedicine etc. have the potential to greatly increase productivity. And improved health care has the side benefit of improving productivity in the rest of the economy as a whole.

One of the ways to look at how productivity might be increased is to get rid of the “services” categorization all together. Rather, look at the tangible and intangible features of the activity. In the tangible areas, productivity will be increased by better materials handling and increased automation. In the intangible areas, better IT and information handling.

In some areas, the answers may be counter productive. For example, haircuts. This is the classic atom-moving tangible service. But, it is unlikely that automation (the standard productivity enhancing activity in the tangible area) will help much. Better scheduling information, especially in the smaller shops, would.

In other areas both could work together. For example in transportation, the standard method of increasing productivity is to increase capital equipment. This could take the form of replacing taxis with buses (after all, buses carry many more people than cabs) and replacing buses with subways (since subways don’t get stuck in traffic like buses). But it is unrealistic to think you are going to get rid of taxis. Then the issue becomes, how to make the individual taxi more productive (rather than making the system more productive). That could include both more productive (i.e. more energy efficient) vehicles and better information flow (better scheduling).

In health care, it will be especially important to separate the tangible from the intangible. What helps in the x-ray room may be very different from what is needed in the nursing home.

These are but a few of the questions we need to address as we seek to understand productivity in the I-Cubed Economy. The new emerging area of “services sciences” is dedicated to this subject. However, they need understand that “services” are not all the same – and therefore increasing productivity depends on which “service’ you are looking at.

President signs America COMPETES Act

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Lost in all the coverage of President Bush's press conference yesterday was the fact that he called it to announce he was signing the America COMPETES Act -- See White House press release President Bush on Signing America COMPETES Act.

In President Bush's remarks at the press conference, the focus was on the positive:

Today I'm going to sign into law a bill that supports many of the key elements of the American Competitiveness Initiative. This legislation supports our efforts to double funding for basic research in physical sciences. This legislation authorizes most of the education programs I called for in the initiative I laid out at the State of the Union. These programs include Math Now proposals to improve instruction in mathematics, and the advanced placement program my administration proposed, to increase the number of teachers and students in AP and international baccalaureate classes.

But he did lay down a marker for the funding fights to come:

Yet the bill Congress sent to my desk leaves some of the key priorities unfulfilled, and authorizes unnecessary and duplicative programs. I will continue to focus my budget requests on the key priorities in the bill I outlined, and will work with Congress to focus its spending on those programs that will be most effective.

He also made a statement that seems to contradict what his Administration is saying about corporate tax reform:

I believe Congress ought to make the research and development tax credit a permanent part of the tax code, to encourage investment.
At the Treasury Department summit (and in the paper), the R&E tax credit was specifically highlighted as something that could be gotten rid of in order to lower corporate rates (see earlier postings). Later in the press conference, President Bush did make clear that he thought the discussion on the corporate tax rate were just in the "very early stages of discussion."

So, a major step forward but much more work to do - both in funding and in thinking about the best policies for an I-Cubed Economy.

Chinese exports

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Today, the Wall Street Journal reported that China's Trade Surplus Surges in July : "China's trade surplus soared to its second-highest monthly level on record in July, according to data reported Friday, amid mounting pressure by U.S. lawmakers to sanction Beijing over trade and currency disputes."

Interesting, because earlier this week the Journal ran this story - China Exports Could Start to Slow:

China's export juggernaut is likely to show signs of slowing, but the shift is likely to come from a change in tax policy rather than from mounting concerns about the safety of Chinese goods, economists say. . .
The expected slowdown in export growth could start to appear in July trade data to be released as soon as this week, economists say. . .
Instead, the anticipated slowing of export growth likely came from Chinese exporters front-loading their shipments in recent months to minimize the impact of a Chinese tax change. That change, which took effect July 1, reduces longstanding rebates on taxes paid by exporters -- in effect raising their costs. . .

Maybe now we can admit that we really don't know what is going on with our international trade.

Counterfeit Harry

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The New York Times has an amusing editorial today Memo to the Dept. of Magical Copyright Enforcement outlining some of the fake Harry Potter books available in China. It is said that imitation is the sincerest form of flattery. On the other hand, it raises a serious point. These books are illegal and their acceptance says a lot about Chinese IPR (which, of course, is the point of the editorial).

However, most of these books are not straightforward copyright violations – they are not unauthorized copies of real Harry Potter books. They are completely made up stories using the Potter characters and situations, including an original take of “Harry Potter and the Chinese Overseas Students at the Hogwarts School of Witchcraft and Wizardry” featuring students from China's Nine Mysteries School of Sorcery.

Fictional characters are generally protected by copyright or trademark, especially if they are well known and whose use by others would therefore clearly infringe on the owner’s rights – think Mickey Mouse. But there are some exceptions. For example, fair use allows certain copying for purposes of education and/or parody. Stanford University's Fair Use Project has produced "A Fair(y) Use Tale" using Disney characters to describe copyrights.

And there is still some confusion as to the degree of copyright protection – at least according to UConn Law Professor Jasmina D. Zecevic - Distinctively Delineated Fictional Characters Who Constitute the Story Being Told: Who Are They and Do They Deserve Separate Copyright Protection?:

Literary characters are protected within the copyright of the original work in which they appear, but the law is less clear when a character is separated from the original work and leads an independent life. The two main tests articulated by courts to deal with the phenomenon of an independent character, the “distinctly delineated” and “story being told” tests have not been particularly helpful. The tests are mainly used after a decision has already been reached to give the decision additional validity by uttering the magic words “distinctly delineated” or “story being told”.

A better alternative is to rely on the copyright protection in the original work since it will be difficult to copy a character without copying a substantial amount of the original author’s expression. The substantial similarity test is well suited for determining when so much has been taken from the original so as to constitute infringement. Furthermore, trademark and unfair competition laws protect the character that is so well known that an infringer need only mention the name without copying the expression.

Granting fictional characters independent protection would go against the purpose of copyright law since it would limit creativity and the dissemination of new works to the public. For years, authors have borrowed from each other and used these building blocks to create new inspiring and enriching works. Offering independent protection to fictional characters would limit the pool of raw material and would do a great disservice to the public. The main concern of copyright law should be to promote the progress of the arts, not to secure an everlasting source of income for character owners.

So, Harry Potter and the Chinese Students at Hogwarts may be a literary rip off. But what happens when a Chinese author publishes a book about a magical student named Harry who travels to China to study at the Nine Mysteries School? Is that a literary rip off or a legitimate derivative work? Carefully defining that line will be important for the development of intellectual property protection in China -- and in the US as well.


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The Wall Street Journal has an commentary from Thomas Healey (retired partner of Goldman, Sachs & Co., and currently a senior fellow at Harvard University's Kennedy School of Government - formerly assistant Treasury secretary under President Reagan) -- Sarbox Was the Right Medicine:

Considerable attention has been given to the fact that U.S. companies spent an estimated $6 billion in 2006 complying with the provisions of Sarbox, according to AMR Research.

That's not an insignificant expense, but critics should weigh this against another incontrovertible fact: The cost of compliance pales in comparison to the $60 billion stockholders lost on Enron alone. Equally revealing is a report from Moody's showing that Section 404 is having a positive impact, as evidenced by the dramatically fewer companies experiencing weaknesses today in their internal controls and procedures (55 companies after three years of Sarbox versus 97 after the first year).

As for the cost of Section 404, a survey by CRA International found that 404 audit fees declined more than 20% in the second year of Sarbox, while another survey by Financial Executives International (FEI) found that Section 404 compliance cost less in year three than in each of the first two years.

How about looking at these costs as investments -- investments in new information systems? Or do we just assume that getting better information is not important? There is some evidence that SOX is working as a driver of better information systems. According to CIO Magazine:

Companies that have deployed new systems to comply with government regulations such as the Sarbanes-Oxley Act are finding these investments can do double duty by helping them to improve business processes, according to a survey of 332 companies by AMR Research. Nearly 75 percent of respondents plan to use their compliance investments to support other activities, such as streamlining business processes.

In addition, when Sarbanes-Oxley first passed, there was some speculation that it would force companies to do a better job of tracking their intangible assets. Five years later, there is anecdotal evidence that some companies are actually doing this. But, as of yet, nothing concrete on SOX and intangibles.

Before we write-off SOX, or promote major changes, shouldn't we first look at the evidence?

Taxing carried interest

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This morning's Washington Post has an editorial on the issue of taxing "carried interest" income, especially of private equity and hedge fund partners (Taxes Owed - Carried interest is the technical term for income that is deemed to be a capital gain (even though it is from a fee) rather than earned income. The editorial commends the House approach:

Sen. Charles Schumer (D-N.Y.) criticized the Senate bill for singling out private equity and hedge funds without raising taxes for other industries that use similar tax structures. On Wednesday, he came out in favor of the House bill, which he says is "broader" and "fairer," and he said he probably will introduce a bill modeled on the House legislation. Other Democrats should join him, supporting the principle of fairness rather than their bankrollers.

In general, I agree that this is more like earned income and should be taxed at normal rates. Even the Economist has taken that position. But I also think that Schumer is right -- we need to look at the entire tax structure in this issue, not just hedge funds and private equity.

Likewise, we need to take a careful look at how the tax structure affects the creation of intangible assets -- and taxes on the income from those assets. There is something to be said for the fact that input of skills and knowledge is as important a factor in the success of long term growth as the input of risk capital (an argument made in defense of carried interest). The purpose of a lower tax rate for capital gains is to promote risk capital. But it is a blunt instrument that does not do a good job of differentiating between short term speculation, long term patient capital or simply general market gain (such as the value of your house). The standard income/capital gain distinction also does not allow for a clear understanding of rewards for risk taking and the importance of intangible inputs in that process.

It is time to rethink the tax code on the entire capital gains concept. I realize that this is exactly what some are hoping to avoid. But the logic of the debate over the carried interest provisions – and the rise of the I-Cubed Economy – inextricably point to that as the proper conclusion.

That is not to say that it will happen, given the political realities. But it is important to keep raising the question. The President has raised the issue of corporate tax reform (see Bush May Try to Cut Corporate Tax Rates - and Bush Aims to Pacify Investors, Touts Economy - This follows on Secretary Paulson's summit and the Treasury Department's white paper. I say: let the debate begin. But let's put everything on the table, especially an understanding of how the economy has changed and that the tax code needs to change with it.

Clashing intangibles

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Brands/trademarks/logos versus reputation. The two should be synonymous. As the work of (my Board member) Jon Low points out, the value of the brand rests on the strength of the company's reputation. But here is a story where the two are in conflict -- Red Cross Is Sued by J&J Over Signature Emblem -

Johnson & Johnson filed suit against the American Red Cross and some of its licensing partners claiming the charity misused the cross design that is its signature emblem, which also appears on J&J's first-aid kits and bandages.

The health-care products company alleges that the Red Cross licensed the eponymous design to for-profit companies that sell medical products -- such as first-aid kits and hand sanitizers -- and infringed J&J's trademark. The suit was filed yesterday in Southern District Court in New York.

The issue is really over who has the rights to use the label on commercial products. The Journal's Health blog goes into detail:
Health Blog : Red Cross Gets Crosswise With J&J:

John Crisan, general counsel for J&J’s consumer unit, told the Health Blog: “We know the American Red Cross gave (the licensees) the right to use the cross, but we don’t think the right is theirs to give. We think they’re misusing (the cross) in the commercial arena in violation of our longstanding right.” J&J’s said the lawsuit was a last resort after negotiations and an offer to work with a mediator failed.

As the Washington Post - Johnson & Johnson Sues Red Cross Over Trademark - - points out:

Johnson & Johnson began using the red cross design as a trademark in 1887 -- six years after the creation of the American Red Cross but before it received its congressional charter in 1900. The lawsuit contends that the charter did not empower the Red Cross to engage in commercial activities competing with a private business.

"After more than a century of strong cooperation in the use of the Red Cross trademark . . . we were very disappointed to find that the American Red Cross started a campaign to license the trademark to several businesses for commercial purposes," Johnson & Johnson said in a statement.

This is a very dangerous move for J&J. For the sake of some additional revenues, they run the risk of looking like a big bully - not the caring compassionate health care company they strive to be. On the other hand, there is a long standing feud between for-profit and non-for-profit companies over commercial activities. I'm sure the intellectual property guardians at J&J felt compelled to take action. After all, there job is to protect the company's intangible assets. Time will tell however, whether defending the narrow IP interests of the company will damage their broader reputational asset.

Energy and competitiveness

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The Council on Competitiveness is starting up a new Energy Security, Innovation & Sustainability Initiative:

Together, energy security and sustainability are key U.S. competitiveness issues because of their direct impact on the productivity of U.S. companies and the standard of living of all Americans. Over the next 18 months the Council on Competitiveness will conduct a series of high-level, expert dialogues to examine the competitiveness implications of today's energy challenges and opportunities. The dialogues will highlight the critical role private sector demand will play in moving the nation forward to a more secure and sustainable energy future.

This is a welcome step forward as we attempt to work through our energy problems. This project joins the National Commission on Energy Policy and the recent work of the Congress on trying to craft bipartisan energy legislation. Given our huge energy bill and the drag of energy imports on our trade deficit, the more work on the issue the better.

A wireless patent pool

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Speaking of patents, Intellectual Property Watch has posted a story on a step forward in wireless standards: Intellectual Property Watch » Mobile, IT Industries Form Patent Pool-Style Scheme.

Some of the biggest names in the mobile phone industry have joined forces to share intellectual property but have stopped short of establishing the mobile industry’s first patent cooperative, known as a patent pool.
Intel, Ericsson, Motorola, Nokia and Qualcomm are among the manufacturers that have agreed to submit patents to a third-party clearinghouse that will analyse patents and decide which are essential to new wireless technology standards.

Interesting -- especially given the history. In 1919, then Assistant Secretary of the Navy Franklin D. Roosevelt pushed to create a patent pool for a new wireless technology called radio -- a key new military technology. That led to the formation of the Radio Corporation of America. Two years earlier, Roosevelt had been instrumental in creating another patent pool, the Manufacturers Aircraft Association.

For an excellent overview of past and current patent pools, see Knowledge Ecology International - Survey of Patent Pools Demonstrates Variety of Purposes and Management Structures.

Patent update

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When is a patent not a patent? When a judge says so. The common belief, even in the court room, is generally that once the Patent Office issues a patent, it’s a patent. Wrong, because the Courts can always (and do) overturn that decision. There are two examples in today's papers. The first has to do with Alcatel-Lucent's against Microsoft over the MP3 patent, where a jury awarded $1.52 billion in damages -- Jury Verdict Overturned In Microsoft Patent Case -

U.S. District Judge Rudi M. Brewster in San Diego said in a 43-page order yesterday that the jury's damage award couldn't stand because one of the two patents wasn't infringed. Ownership of the second disputed patent was questionable, and a new trial may be needed, Brewster said.
(See also Microsoft Damage Award Voided -

The second case involves Qualcomm -- Judge Rules Against Qualcomm In Patent Fight With Broadcom -

A federal judge has ruled that two Qualcomm Inc. patents related to video transmission technology can't be enforced because the company deliberated concealed the patents from a standards-setting group.

Bottom line: right now that patent is worth as much as the paper it is printed on, unless you can convince a judge that it really is valid. Now, most patents will stand up in court. But there may be just uncertainty there to cause three things to happen: 1) companies are willing to pay of patent trolls because of the expense and uncertainty of a trial, 2) companies don't bother to get a patent or even check to see that a patent exists, and 3) companies don't get into the specific technology space to begin with. All three are bad outcomes for innovation.

The patent reform legislation tries to create a system with more certainty with a limited post grant review (see earlier postings. The US PTO has also instituted a pilot program to gain more pre-grant information ("prior art") (see earlier postings). These will help.

But, ultimately the courts will always decide. A patent is, by definition, a negative right. It is the right to exclude. And the ultimate test of that right is when you take some one to court to try to enforce that right.

Of course, finding the right court always helps and there are limits on what actions courts will take. For example, the drug company Novartis got turned down by an Indian court on the grounds of lack of jurisdiction -
Novartis Case Furthers India Patent Debate -

Novartis filed a lawsuit in court in Chennai, arguing that the laws underpinning India's decision violated World Trade Organization rules and should be removed. India joined the WTO in 1995.

The court ruled yesterday that it wasn't the proper forum for deciding whether the laws were compliant with WTO rules. The court said the WTO should decide such matters. A Novartis spokeswoman said she didn't know whether the issue would be discussed at the WTO. Only governments -- not companies -- are allowed to raise disputes at the WTO.

So go the patent wars.

A manufacturing economy?

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Joel Kotkin sings the praises of manufacturing in today's Wall Street Journal - The Myth of Deindustrialization

It's been a quarter-century since author John Naisbitt blithely described manufacturing as a "declining sport" that Americans could easily offshore to Asia. Since then obituaries for U.S. manufacturing, both mournful and enraged, have been written many times.

The reports of death are premature. Many of the most vibrant economic regions in this country -- from the deep South to the Pacific Northwest -- are still making and transporting real goods. The success of America's "material boys" suggests that the old economy and its blue-collar workers -- so often patronized and pitied -- can still more than hold their own in today's global economy.

It's a nice song -- but Kotkin gets the tune wrong, partly because he doesn't understand the verses. He mistakes blue collar jobs for production jobs, mostly because he equates logistics for manufacturing. He is right to point out that some of our major "industrial" centers are our ports. But that is a service - not production/manufacturing. And part of it is reliant not on US production but all those imports.

This is not to say that his overall thesis isn't correct. The manufacturing success stories he points to are real (expect maybe for the Boeing example where much of the work has been offshored and only the final assembly remains in the US). He is also correct that there are still lots of blue collar jobs in the Intangible Economy. As I've pointed out just last Friday, there a huge number of tangible service jobs that involve the movement of atoms rather than bits. And there are a lot of intangible service jobs that are tied to the movement of atoms (for example, all those engineers and product designers who are part of the "creative class").

But setting it up as a blue-collar/white collar - old economy/new economy - working class/creative class clash is just picking a fight where there really isn't any. Kotkin's article is just one more example of how our old industrial era mindset hampers our understanding of what is really going on, however inadvertently.

Competitiveness legislation - passed!

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Before getting out of town last week, Congress passed the America COMPETES Act, H.R.2272. The final House vote was 367 - 57; the Senate passed it by unanimous consent. The bill wraps in the five House bills (H.R. 362, the 10,000 Teachers, 10 Million Minds Science and Math Scholarship Act; H.R. 363, the Sowing the Seeds through Science and Engineering Research Act; H.R. 1867, the National Science Foundation Authorization Act of 2007; H.R. 1868, the Technology Innovation and Manufacturing Stimulation Act of 2007; and H.R. 1068, to amend the High-Performance Computing Act of 1991) and the Senate bill (S. 761) -- see earlier postings.

The legislation contains a number of important changes: increases funding for STEM education and basic research; creates a Technology Innovation Program (TIP) at NIST to replaces the existing Advanced Technology Program (ATP); establishes an Advanced Research Projects Agency for Energy (ARPA-E) at DOE; and makes a number of changes to the Manufacturing Extension Partnership (MEP), including setting up a new grants program to help MEP Centers address new and emerging manufacturing problems (which I hope that this can be used to address the link between design and manufacturing in SMEs). In a move I am not so happy about, the legislation eliminates the Technology Administration in the Commerce Department and the Under Secretary for Technology.

It also contains two more minor provision in the bill I mentioned before: the creation of a Cabinet-level Council on Innovation and Competitiveness (see our 2005 letter of support on this) and a request that the National Academy conduct further studies on barriers to innovation. These actions should lay the foundation for the next step in crafting a more comprehensive innovation strategy.

There are two other provisions in the bill that I would also like to highlight. The first is a requirement that the BEA report to Congress on the ways to better collect data on the exports and imports of services. This would be an important step in updating our trade data.

The second is a little known section of the bill (Section 6401) to provide grants to states for the “alignment of secondary school graduation requirements with the demands of 21st century postsecondary endeavors.” Including in the authorized activities is “incorporating 21st century learning skills into the State plan, which skills shall include critical thinking, problem solving, communication, collaboration, global awareness, and business and financial literacy.” Done right, this program will help states re-invent their schools!

For a complete summary see the House Committee on Science and Technology: Legislative Highlight.

While the bill had wide bipartisan support, there is still some politics here. House conservatives made an attempt to cut the funding in half, complaining that it created too many new programs and was too expensive (ironically, the motion to recommit also included a provision to specifically strengthen one program on liquefied coal). And while the Administration has not said anything about the bill, it has threatened a veto of the two appropriation bill H.R. 2641, the Energy & Water appropriation bill, and H.R. 3093, the Commerce, Justice, Science & Related Agencies appropriation bill which raise the level of spending to that authorized in the America COMPETES Act.

So, still some possible fireworks ahead on the actual funding -- we will see.

But a major step forward.

The culture of defense patenting

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From a story in PC World (via the Washington Post) -- Vendors say patent system needs work:

IT vendors are stockpiling patents and using them as weapons against rivals' patent claims -- or potential claims. But David Hayes, an intellectual property lawyer at Fenwick & West LLP, said he advises startups to do the same as they develop their technology. Google's Lee agreed it's needed in case another company claims some of your technology and demands you license it.

"When they come knocking at your door, you want to come back with something other than a check," Lee said.

A perfect description of the patent thicket problem we have gotten ourselves into -- and how the patent system can thwart innovation rather than encourage it.

Patents and drug prices

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Yesterday, the US Court of Appeals for the Federal District struck down a DC law that would have allowed citizens to sue drugs companies if the prices of patented drugs were "excessive" - see D.C. Cannot Control Prescription Drug Prices, Court Rules - The Court ruled that patent law overrides the ability of DC to control prices. According to the opinion:

It is unquestioned that the District has general police power within its borders and that “[w]hatever rights are secured to inventors must be enjoyed in subordination to this general authority of the State over all property within its limits,” Webber v. Virginia, 103 U.S. 344, 348 (1880). But general state power must yield to specific Congressional enactment: “any state law, however clearly within a State’s acknowledged power, which interferes with or is contrary to federal law, must yield.” Felder v. Casey, 487 U.S. 131, 138 (1988) (quoting Free v. Bland, 369 U.S. 663, 666 (1962)). Furthermore, this Act is in no way general, affecting only patented products. The Act’s operation stands largely—indeed, exclusively—within the scope of the patent laws, and its effect is to shift the benefits of a patented invention from inventors to consumers.

By penalizing high prices—and thus limiting the full exercise of the market power that derives from a patent—the District has chosen to re-balance the statutory framework of rewards and incentives insofar as it relates to inventive new drugs. In the District’s judgment, patents enable pharmaceutical companies to wield too much market power, charging prices that are “excessive” for patented drugs. The Act is a clear attempt to restrain those excessive prices, in effect diminishing the reward to patentees in order to provide greater benefit to District drug consumers. This may be a worthy undertaking on the part of the District government, but it is contrary to the goals established by Congress in the patent laws. The fact that the Act is targeted at the patent right is apparent on its face. It applies only to patented drugs. D.C. Code § 28-4553. The District has thus seen fit to change federal patent policy within its borders. The underlying determination about the proper balance between innovators’ profit and consumer access to medication, though, is exclusively one for Congress to make. As the Supreme Court has noted, “[w]here it is clear how the patent laws strike that balance in a particular circumstance, that is not a judgment the States may second- guess.” Bonito Boats, 489 U.S. at 152; see also Webber, 103 U.S. at 347 (noting that sale of patented articles “cannot be forbidden by the State, nor can the sale of the article or machine produced be restricted except as the production and sale of other articles, for the manufacture of which no invention or discovery is patented or claimed, may be forbidden or restricted”).

The Act stands as an obstacle to the federal patent law’s balance of objectives as established by Congress. Accordingly, we conclude that it is preempted by federal patent law.
(Note also their was a minor errata sheet also issued with the opinion)

It is unclear whether DC will appeal, but the law's author, Councilmember David Catania disputed the Court's ruling in the Post story.

"It implies that patents would ban any legislation that affects the ability of patent holders to charge whatever they please, which is absurd," Catania said. "The Supreme Court has already upheld legislation that mandates price discounts to participate in Medicaid formularies. And no one has argued that states cannot enforce antitrust and other rules that limit monopoly prices of drugs indirectly -- although the full logical thrust of the opinion would do just that."

So, we could be headed for another interesting Supreme Court case.

Employment and intangibles

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The opening line in the Wall Street Journal's story on today's employment numbers (Payrolls Growth Slowed in July As Unemployment Rate Rose) is a follows:

U.S. employment growth slowed and the jobless rate ticked up last month as job losses in manufacturing, construction and government offset healthy gains in many services industries
A quick read of that analysis would simply confirm the general impression of an ongoing switch from manufacturing to services. But closer analysis of both this month's employment numbers and the overall trend suggest a much different picture.

The quick "manufacturing down; services up" take on today's numbers misses that employment in some services, specifically retails and education were down. Within the "services" sector, employment in business services was up, but so was employment in bars and restaurants. To me this is one more indication that we need to move way from the old manufacturing versus services categorization. Long ago economists figured out that there was a difference in economic impact between durable and non-durable goods production. It is time that we do the same for services.

Last year, I put together a presentation on the intangible economy in the Greater Washington DC area. I divided economic sectors into whether they were tangible goods/services or intangible goods/services. A tangible service is one involving the movement and/or processing of energy and physical matter. For example, a cab driver or a barber are tangible services. It was a very crude approximation. But my findings were surprising. In the DC Metro area which is one of the most intangible driven areas in the world, 43% of employment was in tangible sectors. Tangible economic activities -- the movement of atoms rather than bits -- continue to play a huge role in the Intangible Economy.

As we move forward in crafting policy for the I-Cubed Economy, we need to keep this fact in mind. It is not simply a shift from manufacturing to services. It is a shift within manufacturing and services, between tangibles and intangibles. Both atoms and bits play a role.

Manufacturing in China - the Japanese way

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Apparently, US and Japanese manufacturers have a different approach to China, according to the Economist - Japanese companies in China: Questioning the Middle Kingdom. While the story does not mention US manufacturers, it does highlight a stay-at-home Japanese strategy:

Japanese electronics firms all have operations in China, for example, but mostly for low-end assembly work rather than high-end production. The reason has little to do with protecting the jobs of Japanese workers (most of whom are actually part-time staff who lack the generous perks provided to full-timers). Instead, it is to prevent intellectual-property theft and boost innovation by keeping development and manufacturing close together—at home.

As competitiveness increasingly comes from manufacturing efficiency and more intellectual property is applied to the production process, it makes sense to keep operations at home. Besides, sophisticated manufacturing tends to be less labour-intensive, reducing the appeal of low-wage countries. And regional governments are offering generous incentives for firms to open new factories in Japan.

We have long heard that Japanese companies are leery of Chinese intellectual property protection and that Japanese regional governments provide incentives (just as in the US and in China). But I have to take issue with the statement that manufacturing efficiency is the key to competitiveness and the reason why companies stay at home. Efficiency is always a factor, but creativity and design are more and more important. Likewise, it is not the lack of IP protection elsewhere that is necessarily a major reason for production to stay put. The immobility of the last 10% of those processes is a contributing feature. Advanced production processes are usually dependent upon a high level of tacit knowledge. That knowledge is built up in the incumbent workforce. It can be very difficult to transfer.

There was one other very curious statement in the story:

Yet part of the problem for Japanese firms is that their business practices do not work well in China. Managers are invariably Japanese and are promoted on the basis of seniority rather than merit, so prospects for local staff are poor. (Chinese executives joke that if you want to learn about communism, work for a Japanese firm.) Worse, Japanese companies are used to dealing with a few long-standing partners. Mori's Yoshimitsu Isoi says his firm found it hard to put everything into a written contract in China, rather than relying on verbal agreements as in Japan.

If this is such a problem, why are Japanese companies doing so well in the US? Don't US companies require contracts?

I think the conclusions of the story point more to the trend of China as a manufacturing base rather than how Japanese companies keep the crown jewels at home. Japanese firms are increasingly looking to other Asian nations, especially India and Vietnam, as this chart from the Economist shows.


I do believe that Japanese manufacturing companies are following a different strategy. But that strategy includes shifting of manufacturing outside the home country – just like manufacturers in almost every other advanced country.

Copyright push back

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From today's Wall Street Journal - Google, Others Contest Copyright Warnings -

Diehard baseball fans can recite by heart the familiar copyright warnings that run with every game on television.

Now, a computer-industry trade group is crying foul, saying those warnings and others like it on movies and books are trampling over consumers' rights to fair use of copyrighted content.

Today, the Computer and Communications Industry Association -- a group representing companies including Google Inc., Microsoft Inc. and other technology heavyweights -- plans to file a complaint with the Federal Trade Commission, alleging that several content companies, ranging from sports leagues to movie studios to book publishers, are overstepping bounds with their warnings. The group wants the FTC to investigate and order copyright holders to stop wording warnings in what it sees as a misrepresentative way.

The issue is all about "fair use". Fair use used to mean you were able to publish portions of a copyrighted work for purposes of commentary or parodies (see my earlier postings). However, some have argued that the fair use doctrine has been squeezed over the years (see NYU School of Law's report Will Fair Use Survive?).

This case is a step in sorting out what is and is not allowed under fair use -- and what rules apply. As the Journal story points out:

A difficulty with the concept of fair use is that while the Copyright Act establishes what fair use is, the application of the rules is still somewhat subjective, said Mr. [Justin] Hughes [a professor of law at Cardozo School of Law at Yeshiva University in New York]. They call for courts to consider several factors ranging from the nature of the use -- such as whether it is public or private -- to whether the reproduced work had any effect on the market for the original.

Who knows, maybe the next round of IP cases to be heard at the Supreme Court will be about copyright, rather than patents (notwithstanding Eldred v. Ashcroft where the Court upheld the constitutionality of the Copyright Term Extension Act and Kahle v. Gonzales which has made it to the Ninth Circuit Court.)

Radio and copyright - part 2

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As a follow up to my earlier posting on how broadcast radio doesn't have to pay musicians royalties, here is this story on yesterday's House hearing on the subject - Intellectual Property Watch: US Congressional Panel Mulls Royalty Right For Songs On Radio:

Well-loved American performers, members of Congress and the US Register of Copyrights squared off Tuesday against the country’s powerful broadcast lobby in a bid to change US copyright law to reward artists for songs played on terrestrial radio stations.

The House Judiciary Subcommittee on Courts, the Internet and Intellectual Property is examining whether performers whose songs are played on AM/FM radio should be entitled to the same sort of statutory royalties already received not only by songwriters but by performing artists on satellite, cable and Internet radio in the US and many other countries.

The National Association of Broadcasters (NAB) opposes such a move, saying the fee would amount to a “tax,” and that performers already receive ample benefits from the free promotion their songs receive on the radio.

Proponents for change rely on three major arguments, noted subcommittee Ranking Member Howard Coble (a Republican from North Carolina). They say that the exception was never justified by copyright law, the US Copyright Act requires satellite, Internet and cable broadcasters to compensate performers, and the US is alone is denying royalties to artists and performers.

As I said before, I am shocked that NAB seems to be anti-property rights.

    Note: the views expressed here are solely those of the author and do not necessarily represent those of Athena Alliance.

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