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September 28, 2007
New R&D economic data - as an investment
This morning, the BEA released its latest R&D Satellite Account. No, it is not an analysis of R&D in space technology. The "Satellite" refers to the fact that it is a complimentary offshoot of BEA's regular analysis of the economic - focused on R&D activity. Here is the bottom line from the report - Research and Development Satellite Account:
GDP would be an average of 2.9 percent higher between 1959 and 2004 -- or $284 billion higher in 2004 -- if research and development spending was treated as investment in the U.S. national income and product accounts,
Right now, spending on intangible assets, such as R&D are counted as costs rather than investments. The BEA data shows how badly that treatment distorts our view of the economy. In fact, researchers at the Federal Reserve and the University Of Maryland have calculated that our economic statistics under count our business stock of capital by $8 trillion and our annual business investment by $800 billion (see our April working paper Measuring Intangibles: A Summary of Recent Activity).
And if you still don't think this mis-treatment of intangibles has serious consequences, see yesterday's posting on how the numbers sank the $8 billion buyout of Harman.
The BEA and Fed work is a good first step at correcting the problem. But there are still much more to be done to fully incorporate intangibles into our economic statistics -- and into our economic thinking and policymaking.
Posted by Ken Jarboe at 10:24 AM | Comments (0) | TrackBack
September 27, 2007
R&D and M&A - the Harman fiasco
For those of you who haven't been following it, last week the private equity (buyout) arm of Goldman Sachs and Kohlberg Kravis Roberts (KKR) walked away from a $8 billion deal for Harman International (see KKR, Goldman Cancel $8 Billion Harman Deal). The action sent shock waves through Wall Street. Now we are beginning to see the details. Did an increase in R&D spending scuttle the buyout of Harman? That is what it sounds like - according to the Wall Street Journal's "Deal" column -- Are Goldman, KKR Out of Harman's Way?:
The Harman release gives a bit of a better sense of why KKR and Goldman told Harman that “a material adverse change in Harman’s business has occurred.” Harman said today that it would have little or no earnings growth next year. Analysts have been forecasting 12% to 13% growth. They blamed the shortfall in part on higher R&D costs, which apparently is one of the reasons the buyout firms decided to walk.
This is what the press release said:
"In light of increases in material costs and faster ramp-up of R&D resources to work on new business awards, equaling the record operating performance of fiscal 2007 is an achievement. The benefits of common platform synergy and scalability will be realized in fiscal 2009 and beyond. Those benefits will strengthen our operating profits," said [Dinesh] Paliwal [Vice Chairman and Chief Executive Officer]
This is absolutely incredible! Can Wall Street really be so short sighted? Do they only look at current earnings? Do they really believe that R&D is a cost? I thought private equity funds touted their ability to create long-term value. Maybe all they really do, as some claim, is create short-term financial engineering at the expense of long-term value?
Or maybe KKR and Goldman were just looking for a way out of this deal and the lack of growth in earnings this year was the excuse? Or maybe the deal was so leveraged that it couldn't work without the projected growth in earning?
One of the things this episode highlights is the absolute reliance on growth in earnings. Remember, Harman isn't saying that earnings will go down. Just that earnings will be flat. In other words, Harman is saying that they are going to take their earnings the projected future growth in earnings for next year and reinvest them in R&D. For that, Wall Street ran away like skittish mice!
The other thing this highlights is the need to start treating R&D and other intangible investments as investments (rather than costs) (see our working paper Reporting Intangibles). I don't know what Harman's financial accounts would look like it if they were allowed to book their R&D as an investment. But I can almost guarantee that they would not have ended up with flat earnings.
Sydney Harman has just become the poster child of what is wrong with our 18th Century accounting system.
Posted by Ken Jarboe at 09:03 AM | Comments (0) | TrackBack
New reports
Just a quick note on a couple of interesting new reports:
National Policies for Creative Industries
Fair Use in the U.S. Economy: Economic Contribution of Industries Relying on Fair Use
The Globalization of White-Collar Work: The Facts and Fallout of Next-Generation Offshoring
Too much to read!
Posted by Ken Jarboe at 08:04 AM | Comments (0) | TrackBack
September 21, 2007
Light blogging next week
I've off to three conferences next week -- including two Athena Alliance is co-sponsoring (see our website for details on the big one: The Dragon and the Elephant: Understanding the Developing Innovation Capacity in China and India).
So little blogging next week.
Posted by Ken Jarboe at 03:54 PM | Comments (0) | TrackBack
Economic flow of rights to intangibles assets
As I noted in my earlier harangue, there is some interesting information on intangibles that can be teased out of this morning, BEA released its Benchmark Input-Output Accounts of the U.S. Economy, 2002 report. One category in the I-O tables is "Rights to nonfinancial intangible assets". Total intermediate output (i.e. that going into other industries – or essentially other industries paying for the rights) is $87.5 billion.
Thinking of these rights to intangible assets as input commodities, the largest flow of royalties is from the oil & gas industry. This is probably because the category includes oil royalty companies and oil royalty leasing companies. The next larges was to the category of “Management of companies and enterprises.” This sounds like the internal structuring of royalty holding companies into separate entities. Then comes retail trade, food services & drinking places, and wholesale trade. Probably due to franchising agreements. Then comes the broad category of “Internet service providers, web search portals, and data processing” followed by the categories of electronic instruments, telecommunications, and basic chemical manufacturing. I think that makes sense. Those categories account for over 50% of intermediate production.
But there are others that seem a little strange. For example, “monetary authorities and credit intermediation and related activities” gets over a 1% ($930 million). Is that all the securitization process?
All of this is probably worth further investigation.
Here is the entire list for your own perusal:
Industry and percent of total intermediate production
Oil and gas extraction 16.64%
Management of companies and enterprises 10.18%
Retail trade 7.86%
Food services and drinking places 5.02%
Wholesale trade 4.37%
Internet service providers, web search portals, and data processing 2.62%
Electronic instrument manufacturing 2.47%
Telecommunications 2.39%
Basic chemical manufacturing 2.37%
Motor vehicle body, trailer, and parts manufacturing 1.43%
Software publishers 1.39%
Food manufacturing 1.38%
Educational services 1.33%
Management, scientific, and technical consulting services 1.30%
Computer systems design and related services 1.08%
Monetary authorities, credit intermediation and related activities 1.06%
All other administrative and support services 1.06%
Resin, rubber, and artificial fibers manufacturing 1.00%
Semiconductor and other electronic component manufacturing 0.95%
Scientific research and development services 0.95%
Architectural, engineering, and related services 0.92%
Legal services 0.82%
Accommodation 0.75%
Radio and television broadcasting 0.75%
Plastics and rubber products manufacturing 0.74%
Aerospace product and parts manufacturing 0.74%
Other miscellaneous manufacturing 0.71%
Other professional, scientific, and technical services 0.70%
New nonresidential construction 0.69%
Ambulatory health care services 0.68%
Beverage manufacturing 0.68%
Insurance carriers and related activities 0.67%
Medical equipment and supplies manufacturing 0.66%
Accounting, tax preparation, bookkeeping, and payroll services 0.65%
Cable networks and program distribution 0.63%
Other transportation equipment manufacturing 0.63%
Other chemical product and preparation manufacturing 0.63%
Securities, commodity contracts, investments, and related activities 0.62%
Performing arts, spectator sports, museums, zoos, and parks 0.62%
Petroleum and coal products manufacturing 0.58%
State and local government enterprises 0.56%
New residential construction 0.52%
Printing and related support activities 0.52%
Architectural and structural metals manufacturing 0.50%
Paint, coating, and adhesive manufacturing 0.48%
Support activities for mining 0.47%
Converted paper product manufacturing 0.45%
Employment services 0.41%
Advertising and related services 0.41%
Waste management and remediation services 0.41%
Apparel manufacturing 0.39%
Audio, video, and communications equipment manufacturing 0.38%
Other electrical equipment and component manufacturing 0.35%
Travel arrangement and reservation services 0.35%
Pharmaceutical and medicine manufacturing 0.33%
Nonmetallic mineral product manufacturing 0.33%
Electric power generation, transmission, and distribution 0.32%
Coal mining 0.28%
Pulp, paper, and paperboard mills 0.27%
Forging and stamping 0.26%
Manufacturing and reproducing magnetic and optical media 0.26%
Agricultural chemical manufacturing 0.25%
Amusements, gambling, and recreation 0.24%
Consumer goods and general rental centers 0.20%
Boiler, tank, and shipping container manufacturing 0.19%
Nonmetallic mineral mining and quarrying 0.17%
Commercial and industrial machinery and equipment rental and leasing 0.15%
Lessors of nonfinancial intangible assets 0.15%
Textile mills 0.15%
Real estate 0.15%
Maintenance and repair construction 0.15%
Air transportation 0.15%
Wood product manufacturing 0.14%
Crop production 0.13%
Furniture and related product manufacturing 0.13%
Electric lighting equipment manufacturing 0.12%
Personal and laundry services 0.12%
Soap, cleaning compound, and toiletry manufacturing 0.12%
Iron and steel mills and manufacturing from purchased steel 0.11%
Motion picture and sound recording industries 0.11%
Nonferrous metal production and processing 0.11%
Owner-occupied dwellings 0.10%
Tobacco manufacturing 0.10%
Household appliance manufacturing 0.09%
Foundries 0.09%
Social assistance 0.09%
Federal Government enterprises 0.09%
Motor vehicle manufacturing 0.09%
Specialized design services 0.08%
Cutlery and handtool manufacturing 0.08%
Electrical equipment manufacturing 0.07%
Automotive repair and maintenance 0.06%
Automotive equipment rental and leasing 0.06%
Leather and allied product manufacturing 0.05%
Civic, social, professional and similar organizations 0.05%
Water, sewage and other systems 0.04%
Natural gas distribution 0.03%
Metal ores mining 0.03%
Support activities for agriculture and forestry 0.02%
Electronic, commercial, and household goods repair 0.02%
Ordnance and accessories manufacturing 0.01%
Other information services 0.01%
Internet publishing and broadcasting 0.00%
Religious, grantmaking, giving, and social advocacy organizations 0.00%
Forestry and logging 0.00%
Hospitals 0.00%
Nursing and residential care facilities 0.00%
Fishing, hunting and trapping 0.00%
Funds, trusts, and other financial vehicles 0.00%
Animal production 0.00%
Private households 0.00%
General Federal nondefense government services 0.00%
General state and local government services 0.00%
General Federal defense government services 0.00%
Textile product mills 0.00%
Note that this category of royalty rights all activity (see the Census Bureau's definition - 2002 NAICS Definitions: 533 Lessors of Nonfinancial Intangible Assets (except Copyrighted Works):
Industries in the Lessors of Nonfinancial Intangible Assets (except Copyrighted Works) subsector include establishments that are primarily engaged in assigning rights to assets, such as patents, trademarks, brand names, and/or franchise agreements for which a royalty payment or licensing fee is paid to the asset holder. Establishments in this subsector own the patents, trademarks, and/or franchise agreements that they allow others to use or reproduce for a fee and may or may not have created those assets.It does not include establishments primarily engaged in producing, reproducing, and/or distributing copyrighted works; it does not include independent artists, writers, and performers primarily engaged in creating copyrighted works; it does not include establishments that allow franchisees the use of the franchise name, contingent on the franchisee buying products or services from the franchisor are classified elsewhere.
Also note that it captures only establishments that are primarily engaged in assigning rights -- not all the leasing activities of companies whose main business is something else (although many of them have set up their own separate leasing entity which should be captured in this data).
Posted by Ken Jarboe at 11:18 AM | Comments (0) | TrackBack
Economic data and intangibles
This morning, BEA released its Benchmark Input-Output Accounts of the U.S. Economy, 2002 report. Input-output tables show the flows among the various sectors/industries in the economy. The BEA table details over 400 industries.
Yet, these tables are out of date. Like all other industry-level data, the tables use the current classification system. That system provides great detail in the manufacturing and manufacturing-related areas. But in the intangible and service areas, activities are lumped together. For example, "Flat glass manufacturing "; "Other pressed and blown glass and glassware manufacturing"; "Glass container manufacturing"; "Glass product manufacturing made of purchased glass" are all separate categories with their individual input contributions and output flows from every other industry individually measured. "Internet service providers and web search portals" are thrown together -- no recognition that ISPs are a different, though related, from search portals -- and that ISPs are different among themselves (dial up versus broadband, simple email versus websites). "Hotels and motels, including casino hotels" are a single category -- as if all of those serve exactly the same customers. "Food services and drinking places" are one category – McDonalds, that top-of -the line expense-account restaurant and your local pub are all the same. "Management, scientific, and technical consulting services" are combined in one category. Retail trade is one category. Of the over 400 industries tracks, over 300 are in manufacturing, agriculture, and mining (over 275 in manufacturing). Yet those industries provide less that 30% of total economic output. So three-quarters of the detail of the models are devoted to between one quarter and one third of the economy.
The purpose of I-O models is to understand the connection among economic activities: so much steel goes to auto production, building construction, etc. This is useful in helping policymakers understand both the national economy and regional economies. If auto production declined by 10%, we can see what will happen to the steel industry. But if activities are all lumped together, it is impossible to track those activities precisely. It is as if our measure for the steel-auto example above was simply metals and durable goods.
The economist at BEA and elsewhere understand the problem. It is not their fault. The problem is that updating the model to reflect the shift to the I-Cubed Economy from the Industrial Economy is a huge – and expensive – undertaking. Right now, this is not a priority for either Congress or the Administration. Until it is, BEA will have to do the best it can in updating and revising the numbers. And the rest of us will have to tease out what relevant information we can for the date we have.
More on that in my next posting.
Posted by Ken Jarboe at 09:39 AM | Comments (0) | TrackBack
September 20, 2007
License as an intangible asset
One of the categories of intangible assets is government licenses and rights. For example, everyone in the West knows the value of grazing rights on government land. Here is an example of a very expensive government license here in Washington DC -- NewsChannel 8 - The $1.2M Liquor License:
A piece of paper is going on the auction block in the District of Columbia and the opening bid is $1.2 million.
D.C. liquor license 74942 is one of only twenty permits allowing nude dancing and alcohol in the city.
Club Rendezvous owner Eric Whitehead bought the license last year for $200,000. Auction experts expect the license to fetch between $2 million and $6 million.
Not a bad profit margin.
Posted by Ken Jarboe at 10:07 AM | Comments (0) | TrackBack
IP in magic -- or is it magic in IP
First it was fashion, now it is magic. This week's Economist gives us a heads up about how IP works in the world of magic -- The capitalism of magic:
The traditional view is that IP can be protected only by the long arm of the law. But magicians rarely rely on the law, as the very act of describing what they want protected would reveal their secrets. Strong IP laws are supposed to be essential to encouraging innovation, but magicians are extremely innovative, constantly coming up with new tricks. To traditional students of the economics of innovation, this state of affairs seems as improbable as successfully sawing in half the beautiful assistant and then putting her back together again.
Now, the mystery has been solved: Jacob Loshin of Yale Law School has written a fascinating paper, “Secrets Revealed: How Magicians Protect Intellectual Property Without Law”. This will appear next year (out of thin air, presumably) in a book called “Law and Magic”.
According to Mr Loshin, magicians labour in what has come to be known as IP’s “negative space”: creative endeavours to which traditional legal protections of ideas do not apply. Fashion and haute cuisine are among several industries that share this negative space, the study of which has become a hot area in economics.
In fashion, it seems, top designers may not want to protect their IP. When their ideas are copied, they become passé. This in turn creates demand for new ideas from the top, and so on—a process known as “induced obsolescence”.
Magicians, by contrast, very much want to protect their IP, but not through a disclosure-based legal process. To do this, says Mr Loshin, the “magic community” has developed a “unique set of informal norms and sanctions for violators” that protect IP without resorting to the law. These allow magicians to maximise the amount of sharing of ideas and methods within their community, whilst minimising the exposure of their IP to the outside world of their customers.
In a working draft of the paper Secrets Revealed: How Magicians Protect Intellectual Property without Law available online, Loshin warns that this system may not last:
Norms may not always be a reliable savior to the woes of law. Consider the magic community’s imperative of controlling access to its common pool of magic secrets. Without controlling access, the magic community would be vulnerable to outsiders who could misappropriate secrets without being subject to the magic community’s norms. But the easy and growing availability of information on the internet makes it harder to control access than ever before. Wikipedia, for example, already explains the secrets to numerous tricks.
However, these norms seem to me to be rather stable. As Loshin points out, "popular" magic has been available to the public for a long time. It is the high art that is protected by group norms. And that high art is constantly evolving through group innovation.
Another important point is missed in this discussion, however. The value of an intangible asset is not just in the codified knowledge but in the tacit skill. The physics of the curve ball is well understood and commonplace for those who care to look it up. Being able to throw one against a major league hitter for a strike is still a relatively rare skill. Knowing how a magic trick is performed is very different from being able to carry off the illusion.
And even if the trick is understood, the magic of the performance can be intoxicating. After all, to go to a magic show is to suspend disbelief at the outset. Simply because we all know it is a trick does not necessarily lessen the astonishment.
Posted by Ken Jarboe at 06:28 AM | Comments (0) | TrackBack
September 19, 2007
WIPO discovers IP financing
The World Intellectual Property Organization's (WIPO) education division normally concerns itself with legal and policy issues on the protection on intellectual property. But now, it is wading into the finance area by offering a course on Strategic IP Finance. The description is as follows:
IP has emerged as a strategic corporate asset and a critical value driver in the contemporary knowledge economy. Private firms in the United States of America are reported to be investing over one trillion dollars annually in IP and other intangible assets. Estimates of the portion of corporate value associated with intangibles vary but most professionals ascribe the figure to over fifty percent.
Sophisticated companies have recognized the value of IP and have developed systems, structures and capabilities to harvest rich financial rewards, establish superior market position and enhance company performance. Unlocking the hidden value in IP requires teamwork. Finance executives are playing an increasingly central role in the strategic management of IP assets.
Finance professionals who have mastered the art of IP finance are usually more successful in the valuation and accounting of the firm’s intangible assets, in the optimal allocation of corporate resources, in minimizing risks, in IP securitization and in sustaining investor confidence.
Recent developments in financial regulations and accounting standards, combined with the increasing curiosity of shareholders, investors, analysts and tax authorities, is encouraging companies to provide a more transparent and reliable disclosure of a company’s intangible assets either on the balance sheet, in the Management Discussion and Analysis section of the financial reports, or in a voluntary intangibles report.
Managing IP as a major business and financial asset is a new area of business competence. It is essential that executives and managers develop a good conceptual framework as well as a practical understanding of IP and how it contributes to the firm’s business operations. Effective use of IP as a business asset is one of the keys to corporate sustainability.
Much of that statement I agree with. However, I don't know about the how recent developments are "encouraging companies to provide more transparent and reliable disclosure." Yes, there has been progress, but it seems to me that we still have a long, long way to go on that. I am finishing up a paper on the monetization of intangibles assets which will have more on this issue (see also my earlier paper on Reporting Intangibles).
In any event, WIPO's de facto seal of approval on the topic of IP financing lends a certain air of respectability. Given all the machinations of other new financial instruments (i.e. collateralized debt obligations backed by subprime mortgages), such a discovery by WIPO may be timely indeed.
Posted by Ken Jarboe at 08:35 AM | Comments (0) | TrackBack
September 18, 2007
Fashion and piracy
Earlier this month, I posted a piece on how fashion designers are seeking intellectual property protection fro their designs. In that posting I ended by asking the following tough, or what I thought were tough, questions:
Unfair counterfeiting or healthy competition? Stifling creativity or encouraging it? Good for consumers or bad for consumers?
James Surowiecki in this week's New Yorker (issue dated Sept 24) answers those questions and argues why protecting fashion designs might be the wrong thing to do - The Piracy Paradox:
Designers’ frustration at seeing their ideas mimicked is understandable. But this is a classic case where the cure may be worse than the disease. There’s little evidence that knockoffs are damaging the business. Fashion sales have remained more than healthy—estimates value the global luxury-fashion sector at a hundred and thirty billion dollars— and the high-end firms that so often see their designs copied have become stronger. More striking, a recent paper by the law professors Kal Raustiala and Christopher Sprigman suggests that weak intellectual-property rules, far from hurting the fashion industry, have instead been integral to its success. The professors call this effect “the piracy paradox.”
The paradox stems from the basic dilemma that underpins the economics of fashion: for the industry to keep growing, customers must like this year’s designs, but they must also become dissatisfied with them, so that they’ll buy next year’s. Many other consumer businesses face a similar problem, but fashion—unlike, say, the technology industry—can’t rely on improvements in power and performance to make old products obsolete. Raustiala and Sprigman argue persuasively that, in fashion, it’s copying that serves this function, bringing about what they call “induced obsolescence.” Copying enables designs and styles to move quickly from early adopters to the masses. And since no one cool wants to keep wearing something after everybody else is wearing it, the copying of designs helps fuel the incessant demand for something new.
Here is the description from Raustiala and Sprigman's article in The New Republic in August -
How Copyright Law Could Kill The Fashion Industry:
The fashion industry responds to our desires by churning out new designs at a rapid clip. But fashion designers don't maroon themselves on a desert island to create their work. Designers pay close attention to the work of their peers, and they love to mine the past for ideas. When they see something that they like, they copy it--or, in the argot of the industry, they "reference" it. That doesn't mean that they copy point-for-point, although sometimes they do. Much more often, designers take an element of an attractive design, work with it, and turn out something that is in the same style but not identical. Flip through any major fashion glossy and you will see what we mean. In the fashion industry's copyright-free zone, designers and fashion firms are free to take a design they like, put their own creative spin on it, and jump on board what they hope will be a money-maker.
The result is the fashion industry's most sacred concept: the trend. Copying makes trends, and trends are what sell fashion. Every season we see fashion firms "taking inspiration" from others' designs. And every season we see trends catch on and have a moment of wide appeal, only soon to become overexposed and then die. This fashion cycle is familiar; what is less commonly recognized is that it is accelerated by longstanding legal rules that allow designers to mimic, play with, and improve upon their competitors' designs.
By allowing the copying of attractive designs, current law fits well with the industry's basic mission--to set new fashion trends and then convince us to chase them. And the trend-driven copying of attractive designs ensures that those designs diffuse rapidly in the marketplace. This, in turn, makes the early adopters want a new style, because nothing is less attractive than seeing your carefully chosen clothes on the backs of the hoi polloi. In short, copying is the engine that drives the fashion cycle.
Their full paper, The Piracy Paradox: Innovation and Intellectual Property in Fashion Design, was published in the Virginia Law Review last summer. It is a much more extensive discussion, including such tidbits as how Burberry uses its trademarked distinctive plaid as a means of protecting its designs and how Dooney & Bourke was able to use Louis Vuitton’s distinctive repeating “LV” design by substituting “DB” instead. They also have this to say of the EU system of registered designs:
Europe thus presents a situation of pervasive but unutilized regulation. Despite a regime that permits registration of designs, few choose to register. If design protection were an important element of success for fashion firms competing in the European Union, we would expect to see a higher rate of registration under the E.U.-wide scheme, both because registration in the E.U. database provides a unitary right that applies across all twenty-five member countries, and because the law of the European Union provides patent-like protection that simply proscribes any subsequent design that is substantially similar to the registered design. As a result, if fashion firms competing in the European Union valued design protection, the current legal system would strongly incentivize registration in the E.U. database.
It nonetheless could be argued that the low registration rate might simply suggest that fashion firms are content with national design protection laws, but the industry does not appear to make much use of the national laws either. The United Kingdom has a statute, the Registered Designs Act of 1949, which establishes rights in registered industrial designs and includes protection for registered apparel designs. Our search of this U.K. database104 yielded results similar to what we found for the E.U.-wide registry—few designs are registered.
This suggests that in the quickly changing fashion industry, design registration and lawsuits to enforce that protection are seen as not worth the effort.
The difference between the regimes in the United States and the European Union creates a natural experiment: one would expect to observe some difference in the industry’s conduct or perhaps variances in industry outcomes on each side of the Atlantic. More pointedly, if strong IP protection were a sine qua non of investment and innovation in fashion design, we would expect to see the European industry flourish and the U.S. industry stagnate. Yet, we observe no substantial variances in conduct. Instead, we see widespread design copying in both the European Union’s high-IP environment and America’s low-IP environment. That fashion firms do not exhibit marked differences in behavior despite these very different legal environments is consistent with our claim that the industry operates profitably in a stable low-IP equilibrium. For E.U. fashion firms that wish to stop copyists, the law is in place. Yet in practice, designers rarely employ E.U. law to punish copyists.
Raustiala and Sprigman end their paper with a description of numerous industries which have their own variation on intellectual property protection - some strong, some weak. That discussion should raise an important question about the design of an IP system as a one-size-fits-all. Arguments have been made during the recent patent reform legislation about the importance of maintaining a unitary patent system. But there are clearly differential effects -- most notably on the drug versus IT industries. There are industries, such as fashion, which have thrived in a different system. And there are IP protections crafted specifically for a single industry -- such as semiconductor chip masks and boat hull designs.
Given this, isn't it time to have a serious discussion about an intellectual property system that can take into account the complexities of the I-Cubed Economy? Some of those discussion have taken place -- such as a 2006 conference at the University of Michigan on Patents and Diversity in Innovation. But the debate has not yet entered the political sphere. It should.
Posted by Ken Jarboe at 08:26 AM | Comments (0) | TrackBack
September 14, 2007
Countersue a troll?
A new twist is appearing in the patent wars - the countersuit. The Wall Street Journal's "Law Blog" recently ran this posting - Patent-Holding Company (A Troll?) Stung By Own Litigation:
In 2003, Verve, a Texas-based patent-holding company, acquired control of a number of patents owned by Omron, a Japanese electronics outfit. It then filed patent-infringement lawsuits against 10 U.S. companies that make point-of-sale terminals — machines that process credit cards, alleging patent infringement. Most of the companies settled, with Verve collecting more than $900,000.
But one of the targeted companies, Phoenix-based Hypercom, successfully defended three suits brought against it by Verve and filed countersuits in federal court in Arizona. Hypercom alleged that Verve’s claims were filed with malice and that Omron was a conspirator in the scheme.
Hypercom won and collected $700,000. They then went after Omron. Omron settled for $1.5 million (see Hypercom wins key fight with patent lawsuit - The Business Journal of Phoenix).
That is beginning to look like real money - enough to start attracting the lawyers. This could be the start of a new wave of litigation. I wonder if someone will now be looking for legislation to reign in the countersuit?
Posted by Ken Jarboe at 08:34 AM | Comments (0) | TrackBack
September 13, 2007
Declining US brand?
I've posted a number entries that deal with national brands. Part of my concern has been that the US brand is declining in the view of people around the world. The latest concern come from this story in the Financial Times of London - "US suffers decline in prestige":
The US has suffered a significant loss of power and prestige around the world in the years since George W. Bush came to power, limiting its ability to influence international crises, an annual survey from a well regarded British security think-tank concluded on Tuesday.
The 2007 Strategic Survey of the non-partisan International Institute for Strategic Studies picked the decline of US authority as one of the most important security developments of the past year – but suggested the fading of American prestige began earlier, largely due to its failings in Iraq.
The report was released in the UK yesterday and is being released in Washington today (see IISS website).
The report focused on the international security aspects (International Institute for Strategic Studies - Strategic Survey 2007 Press Statement):
In general, Strategic Survey argues that during 2007 the US suffered a loss of international authority as a result of the failure to impose order in Iraq. Leaders and groups around the world sought to take advantage or to protect themselves from the consequences of this loss of prestige. A few countries flexed their muscles regionally more confident in their relative power, while radical groups sought to discredit the leaders of those countries who maintained solid relations with the US. Other countries appeared to hedge their diplomatic relations with the US by strengthening their links with regional powers.
This shuffling in the international power and influence balance made it difficult for strong initiatives for conflict resolution to be undertaken, just as it complicated the diplomatic coordination needed to address some security crises.
A few intriguing advances took place in the Six-Party Talks with North Korea, and the UN was able to approve a Security Council resolution on Darfur. That said, the year saw the world seized by a bout of strategic arthritis, with movement on a number of key fronts disabled by a lack of diplomatic agility and pace.
The report doesn't look at the economic side of the equation. But other surveys have shown that declining view of the US affects exports. The group Business for Diplomatic Action has a collection of the latest - I have posted earlier stories.
That decline is not inevitable, nor is it tied specifically only to Iraq. As I mentioned in an earlier posting, there are thing that came be done to help reverse the negative perception of the US in some quarters. Companies can also push to buildup their own reputation - given that company brands can be somewhat separated from national brands (see an earlier posting). But specific actions need to be taken with respect to the US brand. The work of Business for Diplomatic Action is especially important. Any one concerned about our declining brand should looking to and join the work of that organization.
Posted by Ken Jarboe at 10:25 AM | Comments (0) | TrackBack
Building on local intangible assets
One of the themes of this blog has been local economic development using local intangible assets. Economic development practice is slowly moving away from the idea of trying to attract big factories or call centers or research parks to looking more at local strengths and build on those assets. An example I gave earlier was of Winslow Arizona cashing in a brief mention in a classic rock song. Here are a few more stories about towns building on local assets, in very different ways.
The first is the story of Fayetteville Arkansas -- Green Valley In Wal-Mart's Back Yard - washingtonpost.com:
A wave of start-ups developing the technology to help suppliers prove their green credentials has swept into this sleepy college town, half an hour from the company's headquarters in Bentonville. [Entrepreneur Daniel] Sanker is looking at ways to improve fuel efficiency in shipping. Others are developing agricultural-based alternatives to petroleum or studying how electronics can function at higher temperatures, thereby cutting energy use. The University of Arkansas has established the Applied Sustainability Center at the campus here using a $1.5 million grant from Wal-Mart.
It may seem an unlikely place for a green revolution, far from such traditional environmental strongholds as Portland and Seattle, but local officials hope Fayetteville will become to sustainability what Detroit is to the automotive industry and the Silicon Valley is to technology. In fact, they've coined their own term for the vision: Green Valley.
The key is Wal-Mart's new commitment to buy green, which will provide a ready market for green entrepreneurs. Those entrepreneurs want to be near their client - and Fayetteville is cashing in on that desire.
The second story is about Evart, Kentucky -- ATVA Riding -- Harlan County, Evarts, KY:
Do you know how to turn an old coal mine into a GOLD mine?
A very enthusiastic group of local politicians, community leaders and volunteers are planning on doing just that with thousands of acres in Harlan County, Kentucky.
The group of visionaries formed the KY Mountain Trails Development Coalition to develop and manage the trails with thousands of hours of volunteer help from a local ATV club—the Harlan County Ridge Runners— and the Kentucky Mountain Crawlers, a 4x4 club.
Currently, the coalition has agreements signed to allow riding on 7,000 acres, which currently includes an estimated 150 miles of trails.
Another 30,000 acres is close to being incorporated, with additional acreage under consideration. And this is all in Harlan County.
The result is a mini-boom with two RV parks and a set of cabins, a new restaurant and pizza parlor, an expansion of the grocery store, and ATV repair and rental shop (according to the magazine Rural Matters.) That may not sound like much. But for a community of 1100 people with a poverty rate over 20%, this is a big deal.
It is also a great example of how a community can take a negative (old coal mine trails) and turn it in to a positive (tourism), building on local intangibles.
Then there is this story - One Midwest City Picks Condos Over Industry - WSJ.com:
For decades, Waukegan has suffered economically and environmentally. There's been an exodus of manufacturing and industrial jobs from the area, and its lakefront has been contaminated by toxic chemicals. Now the city wants to transform its decaying lakefront, which stretches for about four miles, into a waterside haven of parks, upscale condos and retail stores. But city officials see two longtime employers as blots on their pristine vision: a hulking National Gypsum Co. wallboard plant and a Lafarge SA cement distribution center.
I have mixed feelings about this. Revamping waterfronts is a great way to create better amenities - a key intangible. Just blocks from where I sit, the Anacostia River waterfront in Washington DC is undergoing a major transformation.
But we still need heavy industry - especially if it is doing well in global competition. The history of urban renewal is full of misguided plans to teardown in hopes of creating something more attractive. Too many communities apply a cookie-cutter approach to development (more high prices stores and condos) without looking at how to support those shops (and whether those shops are really what the community needs). I don't know the entire story of Waukegan - the Journal article mentions that its plan was development in conjunction with the Urban Land Institute, who is generally pretty sophisticated on these issues. I don't know if a creative solution is possible here - heavy industry and waterfront dining don't unusually mix that well. But the case does raise the trade offs inherent in such plans and should cause at least some contemplation.
Posted by Ken Jarboe at 08:07 AM | Comments (0) | TrackBack
September 12, 2007
And the patent wars continue
NTP sues wireless carriers over patents - Yahoo! News:
NTP Inc., the patent-owning entity that got $612 million out of a suit against BlackBerry maker Research in Motion Ltd., has hit the nation's top four wireless carriers with similar lawsuits.
The cases, filed last Friday in the federal district court in Richmond, contend that the carriers infringe on eight patents related to wireless e-mail that were granted between 1995 and 2001 to Thomas Campana, whose inventions became NTP's portfolio. The defendants are AT&T Inc., Deutsche Telekom AG's T-Mobile USA, Sprint Nextel Corp. and Verizon Wireless, a joint venture of Verizon Communications Inc. and Vodafone Group PLC.
. . .
These eight patents are contentious — the U.S. Patent and Trademark Office is reviewing their validity. Even so, RIM settled with NTP in 2006 after losing court rulings that threatened to shut down the popular BlackBerry network. And NTP has won licensing deals with other mobile-computing companies, including Nokia Corp., Visto Corp. and Good Technology, now part of Motorola Inc.
NTP is also suing Palm Inc., maker of the Treo handheld computer, though that case has been stayed pending the Patent Office's ruling on NTP's patents.
Posted by Ken Jarboe at 12:41 PM | Comments (0) | TrackBack
Bernanke on global imbalances
The financial analysts (and press) generally blew off the Fed Chairman's speech yesterday (for example see A Warning From Bernanke, but No Hint of a Rate Cut - New York Times and Bernanke Cites a Rise in Risk Aversion - WSJ.com). But Mr. Bernanke had some interesting things to say about our current account balance (FRB: Speech--Bernanke, Global Imbalances: Recent Developments and Prospects--September 11, 2007):
the large U.S. current account deficit cannot persist indefinitely because the ability of the United States to make debt service payments and the willingness of foreigners to hold U.S. assets in their portfolios are both limited. Adjustment must eventually take place, and the process of adjustment will have both real and financial consequences. For example, in the United States, the growth of export-oriented sectors such as manufacturing has been restrained by the shifts in relative prices and foreign demand associated with the U.S. trade deficit. Ultimately, the necessary reduction in the trade and current account deficits will entail shifting resources out of sectors producing nontraded goods and services to those producing tradables. The greater the needed adjustment, the more potentially disruptive and costly these shifts may be. Similarly, external adjustment for China and other surplus countries will involve shifting resources out of the export sector and into industries geared toward meeting domestic consumption needs; that necessary shift, too, will likely be less disruptive if it occurs earlier and thus less rapidly and on a smaller scale.
Many economists and commentators treat the current account deficit as simply a macroeconomic event -- the impact of a deficit on GDP, exchange rates, etc. Bernanke points to the bottom financial line -- debt services payments. As the debt increases, we have to pay more and more just to stay even. The little secret that economist seem to gloss over in the discussions of the deficit is that you have to earn income (export) in order to buy (import). Everyone talks about the benefits of imports - without asking how they are paid for. That is like talking about the benefits of consumer spending without looking at the rising credit card debt (which, unfortunately is exactly what some macroeconomists do -- but that is another problem).
As Bernanke points out, reducing the current account deficit will require shifting resources from non-tradable sectors to tradable. But that is exactly the opposite of what others are saying is the only way to maintain worker incomes. For example, see Alan Blinder's comments about the safe jobs being in the non-traded sectors and Meyerson' Shoring Up the Middle - washingtonpost.com:
Rebuilding mass prosperity in America will require two epochal shifts in the way our nation does business. First, non-manufacturing jobs not subject to global competition -- in transportation, construction, health care, sales -- must be upgraded and upskilled the way many of their counterparts in manufacturing have.
In an age of global wage competition, shifting resources into tradable sectors may be necessary to correct the currant account deficit but may not be the path to general economic prosperity -- unless we can do a lot more to make those jobs and sectors much, much, much more competitive at the high end.
The Bernanke speech talked about other problems associated with the current account imbalance. If your are interested in the direction of the economy, as opposed to what the stock market is going to do today, I suggest you might want to read the entire speech.
Posted by Ken Jarboe at 11:02 AM | Comments (0) | TrackBack
Cost of bad patents
A new report is out from the Phoenix Center for Advanced Legal and Economic Public Policy Studies, authored by George S. Ford, Thomas M. Koutsky and Lawrence J. Spiwak on Quantifying the Cost of Substandard Patents:
Abstract: The purpose of patent policy is to balance the incentive to invent against the ability of the economy to utilize and incorporate new inventions and innovations. Substandard patents that upset this balance impose deadweight losses and other costs on the economy. In this POLICY PAPER, we examine some of the deadweight losses that result from granting substandard patents in the United States. Under plausible assumptions, we find that the economic losses resulting from the grant of substandard patents can reach $21 billion per year by deterring valid research with an additional deadweight loss from litigation and administrative costs of $4.5 billion annually. This brings the total deadweight loss created by our “dented” patent system to be at least $25.5 billion annually. These estimates may be viewed as conservative because they do not take into account other economic costs from our existing patent system, such as the consumer welfare losses from granting monopoly rents to patent holders that have not, in the end, invented a novel product, or the full social value of the innovations lost.
An interesting analysis. They do end with an important caveat:
We encourage proper caution in interpreting our findings. The models we use are simplified in many respects. As a consequence, our cost estimates should be viewed as preliminary or approximations. Further, we make no effort to “prove” either theoretically or empirically that the United States patent system is defective since there appears to be consensus on that point. Given the recent attention placed upon patent reform, our purpose is to provide estimates of the costs that the defective system imposes on society. In that, our preliminary estimates show that these costs are substantial, and the severity of the problem indicates that additional research and study of this important public policy topic is warranted.
One other calculation in the paper caught my attention. In 1988, Cockburn and Griliches estimated the average economic value of a patent as $1 million (in 1988 current dollars). Ford, Koutsky and Spiwak update that value to $2.4 million adjusting for both inflation and economic growth.
I think that is a useful update, but I would be careful in reading too much into it. The 1988 Cockburn and Griliches study is based on imputing value from the stock market and was done at a time when patents may not have been given as much market attention as they are now. Second, given the problem of a "loose" patent system that Ford, Koutsky and Spiwak describe, I'm not sure that an average means in 2007 what it did in 1988. An average from 1988 (when there were presumably fewer loose patents) has a much value as an average in 2007. What are you averaging -- the good patents and the bad? That hardly seems like a valid average.
So, where does that leave us? To quote the standard conclusion to any academic paper "more research is needed." In this case, that is really true.
Posted by Ken Jarboe at 08:56 AM | Comments (0) | TrackBack
September 11, 2007
July trade in intangibles
For the second straight month the US trade deficit fell slightly according this morning's BEA trade data. But the surplus in intangibles went in the wrong direction.
The overall trade deficit declined in July by $183 million to $59.2 billion after dropping by $186 million in June (revised figures) as, once again, exports grew faster than imports. Exports were up by $3.6 billion, due to increases in farm products, capital goods, auto, and consumer goods. [But while capital and consumer good exports were up, advanced technology exports declined - leaving one to wonder about a situation were exports of civilian aircraft are up but exports of aerospace technology are down and exports of computers, computer accessories and telecommunications equipment are up but exports of electronics and information and communications technologies are down.] Imports also rose by $3.4 billion. As the Wall Street Journal noted:
The July trade gap came was in line with Wall Street expectations. Economists surveyed by Dow Jones Newswires ahead of the report had predicted a $59.20 billion deficit. Demand abroad for American-made products has been an important contributor to U.S. economic activity this year and Tuesday's report indicated that trend continued into the third quarter.According to the Washington Post:
Economists believe the trade balance will finally shrink this year after setting five consecutive records as American exporters benefit from strong economic growth in many countries overseas and a weaker dollar against many currencies. That makes U.S. products cheaper on foreign markets and imports more expensive for American consumers.
Unfortunately, that dynamic doesn't seem to be playing out with respect to intangibles and advanced technology products. Our intangibles surplus declined by $228 million in July to $10.1 billion. A decline in exports of business services combined with an increase in imports of business services and an increase in royalty payments (imports). Receipts (exports) of royalties increased only slightly.
In addition, revised figures for the first six months of 2007 show that our surplus was not at big as first reported, with payments (imports) of royalties revised upward and receipts (exports) of royalties, exports of business services and imports of business services all revised downward.
The deficit in Advanced Technology Products increased dramatically, worsening by over $1.6 billion in July to $4.9 billion. The deficit increase across almost all advanced technology sectors (expect life sciences and slightly in weapons) but was mainly driven by decreased exports in aerospace, biotechnology and information and communications technologies. 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.
Just like last month, the generally good news in the overall deficits stands in stark contrast to that of intangibles and advanced technology products. With these key areas moving in the wrong direction, the overall picture is mixed.
Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows:
Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes.
Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.
Posted by Ken Jarboe at 12:59 PM | Comments (0) | TrackBack
September 10, 2007
Valuing intangibles - NY Times
Sunday's New York Times had a story article on something that a regular reading of this blog would already understand: the problem with accounting for intangibles. According to the story (When Balance Sheets Collide With the New Economy):
Today's sophisticated knowledge economy is stuck with the equivalent of an abacus for measuring the actual financial value of corporate assets and liabilities.
At issue is a growing collection of crucial resources known as intangibles: assets or liabilities that have no obvious physical presence, but that represent real value or vulnerabilities.
Patents, trademarks, copyrights and brand recognition are most commonly recognized as intangibles. But as the nature of doing business has changed, the list has grown.
For example, the most valuable assets of an innovation-based company today — its intellectual property, software investments, staff and managerial expertise, research and development, advertising and market research, and business processes — have no natural home on the balance sheet.
The story mentions the work of the Intellectual Asset Finance Society and Social Venture Technology Group. There are many groups and organizations working on the issue of measuring and valuing intangibles. Included in that list are the International Accounting Standard Board (IASB) and the Financial Accounting Standards Board (FASB) -- the two organizations (international and US respectively) who draw up the accounting rules. Current accounting rules require the disclosure of intangible assets acquired in a business combination (see FASB’s Statements of Financial Accounting Standards (SFAS) 141 and 142 and IASB's International Financial Reporting Standards (IFRS) 3 and International Accounting Standard (IAS) 38). IASB and FASB are in process of defining a joint project to extend those rules to internally generated intangibles. And a few years ago, the SEC issued guidance to allow for greater disclosure of non-financial information in companies' financial statements.
Still, the issue of valuation and measurement continues to be problematic. Since many intangibles are not easily transferred, it is hard to determine their market value. Even those which are transferable, such as patents, markets are relatively thin. In the absence of market measures, standard methodologies are needed. Valuation measures and methodologies currently exist, but they are seen as too broad in their range of estimates. And there is no general agreement on which non-financial measures are the most appropriate. As the Times story points out, much more work is needed.
For more, see two Athena Alliance working papers: Reporting Intangibles: A Hard Look at Improving Business Information in the U.S. and Measuring Intangibles: A Summary of Recent Activity.
Posted by Ken Jarboe at 08:57 AM | Comments (0) | TrackBack
September 07, 2007
Politics of patent reform - update 2
The House of Representatives passed the Patent Reform Act of 2007 by a vote of 225 to 175. For comment from the two side of the debate, see the Coalition for Patent Fairness (pro) and the Coalition for 21st Century Patent Reform (anti).
Unclear when the Senate may take up the bill.
Posted by Ken Jarboe at 04:30 PM | Comments (0) | TrackBack
Politics of patent reform - update
From today's Wall Street Journal on the White House position on the patent reform bill -- Washington Wire - WSJ.com : Patently Worried:
The White House statement came as supporters of the bill appeared to be gaining momentum.
Notably, the AFL-CIO, which had voiced strong concerns over the summer, softened its opposition to the legislation. In a letter sent this week to Capitol Hill, the labor group welcomed a series of changes that are expected to “improve the bill” as it moves through the House floor. However, the AFL-CIO described the bill as “far from perfect” and raised concerns with proposed limits on damages, saying the issue “requires further attention.”
The AFL-CIO was not expected to work against the bill on the House floor, but vowed to “reserve judgment at this point” on the final version of the legislation, once both the House and Senate have acted. “We would not be able to support legislation that weakens patent protections for American manufacturers or undermines their ability to protect their innovations from either domestic or foreign infringement,” the AFL-CIO said.
Looks like my scenario 1) or 2) is in play (see earlier posting). The House is in the middle of debating the bill, with votes later today.
By the way, the White House's concern is over limiting judicial discretion in awarding damages (see OMB Statement of Administration Position)
(what was that about opposing activist judges?)
Posted by Ken Jarboe at 01:54 PM | Comments (0) | TrackBack
What about the small inventor
Yesterday's posting mentioned the concerns of the small inventor in the patent reform legislation. I still don’t understand why the small inventors think the status quo is so great. It appears their biggest fear is that the large companies have the resources to overwhelm them when it come to patent enforcement litigation. But the status quo system is one that facilitates that litigation where big companies have the upper hand in resources. Right now, patents have become another form of trade secrets, where it is really is not a patent until a court says it is. (In the case of trade secrets, this is part of the law since trade secrets are a form of tort law. In the case of patents, it as just devolved that way). One defender of the status quo even pointed to the fact that half of the patents that are litigated are upheld. I hardly think that this is a strong defense. In other words, half of the patents are thrown out in court. So, the small inventor has a 50-50 chance under the current system of losing, after spending millions of dollars. This is a system worth defending?
The point is made by independent inventors that investors will not fund bad patents. And that a post-grant review system will add to uncertainty. For example, Steven Frank, in IEEE Spectrum: Patent Reform Cacophony, argues that:
A post-grant opposition system, no matter how finely tuned, would suddenly make patents a far dicer proposition. Even if European statistics give a patent a 92 percent chance of escaping opposition, all eyes would lock onto that vulnerable 8 percent.
It only makes sense: recent studies confirm that the more valuable the patent, the more likely it will face opposition. Because investors assume they are investing in the winners—that is, in research likely to be profitable and therefore to invite patent oppositions—values placed on technology companies will probably fall as perceived risk, expense, and delay increase. Inventors, for their part, may fear that the visibility of professional investment can turn otherwise unobtrusive patents into targets.
I would argue just the opposite. Investors really have no way of knowing whether are investing in a good patent or not. They assume. And that assumption is more and more under attack. They can get an independent patent evaluation company. But until an infringement action is taken, the patent is just an assertion. The investor has to be based on weighting the risk of having an invalid patent with the possible rewards from licensing (or infringement damages). A legal system that rewards me with triple-damages and the ability to shut down a company through injunctions skews the risk/reward calculation toward the decision to invest in a bad patent (potentially low cost/high reward). That calculation is also skewed toward overly broad patents. A narrow patent has a better chance of being upheld, but have much lower licensing potential. A broad patent might be thrown out, but if it is upheld it can go after a much larger income base.
So, unless you are actively in the business of licensing and/or suing, there is little incentive to invest in patents. An investment in a CDO backed by subprime mortgages look more certain that an investment in a patent portfolio. As a result, the nascent market in securitizing patents could be still-born. Securitization would be a big step forward for independent investors, opening up a whole new avenue of financing. But unless there is more certainty on patent validity, the door to that market will remained closed.
From the point of view of the inventor, as Abril and Plant, point out in “The Patent Holder’s Dilemma: Buy, Sell or Troll,” (available by subscription only) the options are build, license or troll. The pressure, they argue, is to troll:
Imagine being a recent graduate in computer science, having invented a new and improved method for displaying browser plug-ins. With help from some generous friends and the last bit of your life savings, you are successful in patenting your invention. You’re on top of the world. Now what? You consider starting up a corporation to commercialize your innovation—except that you are hoping for an academic career, not an entrepreneurial one, and do not have the $2 million in capital funds necessary to start the business. Since the innovation necessitates being embedded in other components to go to market, you consider licensing or selling your patent to Big Tech Co.—except you don’t think you have much leverage and will probably get sold short. Exhausted by the proactive approach, you consider selling it to an attorney who promises to find and litigate any infringement suits on a contingency basis. What’s an innovator to do to reap the rewards of the patent?
The key to this argument is the part about "Since the innovation necessitates being embedded in other components to go to market." Herein is the gist of the differences in industries. In IT industries, there are very few stand- alone patents. Embedding is the norm. So licensing is key. In some other areas, there is a greater possibility for small entrepreneur to actually make the product. The folks who have a possibility of making have a different mindset and business model from the folks who have to license or sell.
One of the other arguments used in the debate is about strengthening US manufacturing -- and how the small manufacturers are put at a disadvantage. But even if you decide to make, that doesn't mean that you are going to be contributing to the US manufacturing base. The Licensing Executive Society's guide, The Licensing Decision, suggests that you consider make the product abroad:
If you decide to start your own business or take on a new product line based on your invention, production can be a very expensive undertaking. Many companies look to foreign manufacturing as a way to reduce costs. Countries and regions that have been active in this type of outsourcing include China, India, Pakistan, Mexico, Lain American, Asia and Eastern Europe.
Given that advice, I’m not sure that the competitiveness and US manufacture argument holds much weight.
And then, as I discussed in an earlier posting, there is the whole issue of what happens when non-US manufacturers start using our patent system against us.
All in all, I think the evidence is that the patent system is seriously flawed -- and that everyone, including the independent inventor and small business, would be best served by fixing the problem. The status quo is a continuing drag on US competitiveness and innovation.
Posted by Ken Jarboe at 11:22 AM | Comments (0) | TrackBack
Patent bill -- House amendments
For those of you who like to watch the legislative sausage machine in action, the House Rules Committee has posted the list and text of the amendments that will be allowed when the Patent Reform Act comes to the House floor -- see COMMITTEE ON RULES - H.R. 1908 – Patent Reform Act of 2007. This includes a substantial manager's amendment.
Posted by Ken Jarboe at 11:14 AM | Comments (0) | TrackBack
September 06, 2007
Politics of patent reform
Ever since the story came out last week about the AFL-CIO opposing the patent reform bill (they really aren’t opposing the entire bill, just two provisions – but I’m getting ahead of myself), I’ve been looking more closely at the politics of the issue. And it is fascinating. While Washington normally slumbers in August, opponents of the legislation have been marshalling a blitz. Part of this has been a demonization of the legislation as anti-small inventor and US manufacturers and pro-multinational corporation (an interesting tactic since big pharma is a leading opponent of the bill). Hence the opposition of anti-corporation groups like the labor unions.
The anti-bill group is an interesting coalition (as most coalitions are) of groups with different agendas. There are the hard core that want to kill the bill and any other changes. They think the status quo is just fine. (For good articulation of this point of see the thoughtful comment by Steve Wren in Techdirt: Unions Make Ridiculous Arguments Against Patent Reform.)
The other part of the coalition are groups like big manufacturers (and the industrial labor unions) and big phrama. It appears that they don’t want to kill the bill – just gain enough leverage to change it more to suit their interests. For example, the AFL-CIO letter raised two objections about post-patent review process and apportionment of damages. The letter doesn't seek to kill the bill, just amend it: "We urge you to take the concerns of the manufacturing sectors of these issues into account in developing the final version of the Patent Reform Act of2007, H.R. 1908."
For a scorecard of who is on what side, see Tech vs. Tech: The Patent War - Chris Frates - Politico.com.
This coalition could come apart on some issues, such as international harmonization – which means switching from our current system of “first-to-invest” to the “first-to-file” system the rest of the world uses. First to invent is a sacred principle for the small inventor. The rest of the coalition actually wants to change. For example, see the letter from James Greenwood of the Biotechnology Industry Organization - In Rebuttal: The U.S. patent system works
The Patent Reform Act includes provisions that would improve patent quality and harmonize U.S. patent law with international patent law -- worthy goals everyone can support.
. . .
The truth is, despite the legitimate concerns raised by the biotech industry and other stakeholders, we are close to meaningful reform of our nation's patent system. We can agree across industries on many basic principles and can negotiate many of the remaining complex issues.
So there are three ways that this could go – 1) the pro-bill forces are strong enough that the bill goes through, 2) enough changes could be made to defuse the concerns – specifically big manufacturers and big pharma – that the bill passes or 3) the anti coalition kills the bill.
My guess is that it will be either 2) or 3). My hope is that it is 1) or 2) – if this bill dies, then I think we will not see legislation for probably a decade. The status quo prevail – as modified by the Supreme Court.
So, we will see. The House Rules Committee is scheduled to meet this afternoon to consider what amendments will be allowed to the bill. The key lies in that middle group seeking leverage. Are they willing to live with the status quo for a long time or are they willing to compromise? And how far is the pro-side willing to go? As the old saying goes, be careful what you wish for, you may get it.
Posted by Ken Jarboe at 10:19 AM | Comments (0) | TrackBack
September 05, 2007
Snippets from the I-Cubed Economy
Two stories from this week's Christian Science Monitor that illustrate the shifts taking place as the I-Cubed (Information-Innovation-Intangibles) Economy evolves. The first is about the rise of China as an innovative economy -- China ready to leap from industrial to information-age economy:
After 30 years of securing China's role as the cut-rate factory to the world, its central planners are pouring money and political will into becoming an innovation economy.I think the story is too pessimistic about China's shift. By focusing on the top-down view of China, they (and other observers) may be missing the bubbling entrepreneurial activity coming from below. Remember, we said the same thing about the Japanese economy -- before they took over the consumer electronics industry.
But like other Asian tigers before it, China is finding making the shift from textile mills to Silicon Valley isn't easy. The biggest challenge is nurturing technological creativity in a society run from the top down, says a chorus of foreign and local experts.
The second story is about the Great global shift to service jobs:
For the first time in human history, more people are laboring in service trades than in food production, according to data gathered by the International Labor Organization (ILO), an agency affiliated with the United Nations.
As recently as 1996, agriculture accounted for 42 percent of world employment, with another 21 percent of workers in goods-producing industries and 37 percent in services. By last year, the ILO says in a report released over the weekend, 42 percent were in services, 37 percent in agriculture, and 22 percent in industry.
Most of the story talks about the opportunity this shift presents for developing countries. On this, I think they may be too optimistic. India has been able to capitalize on the offshoring of services, but that is because of a large English-speaking, well-educated, technically trained set of workers (large by industry standards, but still a small percentage of the Indian population). Other countries may not be able to repeat that success (Singapore and Ireland as special cases). Offshoring of services will remain a challenge for US competitiveness, but not necessarily a huge breakthrough for most developing countries.
By the way, the ILO report - “Key Indicators of the Labour Market (KILM), fifth Edition” shows that the US is the world leader in productivity.
What’s more, the report also shows that the productivity gap between the US and most other developed economies continued to widen. The acceleration of productivity growth in the US has outpaced that of many other developed economies: With US$ 63,885 of value added per person employed in 2006, the United States was followed at a considerable distance by Ireland (US$ 55,986), Luxembourg (US$ 55,641), Belgium (US$ 55,235) and France (US$ 54,609).
However, Americans work more hours per year than workers in most other developed economies. This is why, measured as value added per hour worked, Norway has the highest labour productivity level (US$ 37.99), followed by the United States (US$ 35.63) and France (US$ 35.08).
So, the French are almost as productive as the Irish - home of the Celtic Miracle. And on an hour by hour basis, the French are almost as productive as the Americans. Interesting.
Posted by Ken Jarboe at 07:20 AM | Comments (0) | TrackBack
September 04, 2007
Copying designer fashion
Should knock-off fashion designs be illegal? That is the latest intellectual property issue, as the New York Times relates in Before Models Can Turn Around, Knockoffs Fly:
A debate is raging in the American fashion industry over such designs. Copying, which has always existed in fashion, has become so pervasive in the Internet era it is now the No. 1 priority of the Council of Fashion Designers of America, which is lobbying Congress to extend copyright protection to clothing. Nine senators introduced a bill last month to support the designers. An expert working with the designers’ trade group estimates that knockoffs represent a minimum of 5 percent of the $181 billion American apparel market.
Outlawing them is certainly an uphill battle, since many shoppers see nothing wrong with knockoffs, especially as prices for designer goods skyrocket. Critics of the designers’ group even argue that copies are good for fashion because they encourage designers to continuously invent new wares to stay ahead.
. . .
The designers seek to outlaw clothing that looks very similar to their originals but is sold under someone else’s label. They want to extend laws that already ban counterfeit handbags and sunglasses with designer logos, which reportedly account for as much as $12 billion of sales. A reliable estimate of knockoffs cannot be determined because designers and retailers disagree on which clothes are copies and which are merely “inspired” by a trend, a normal part of the fashion food chain.
Unfair counterfeiting or healthy competition? Stifling creativity or encouraging it? Good for consumers or bad for consumers?
All tough questions in the I-Cubed Economy.
Posted by Ken Jarboe at 03:29 PM | Comments (0) | TrackBack
Ed McGaffigan
It is with great sadness that I post the following obituary from this weekend - Nuclear Regulatory Commissioner Edward McGaffigan Jr.. I worked with Ed during the competitiveness debates of the 1980's when we were both on the staff of Senator Jeff Bingaman. That including working together on the creation of Sematech and watching Ed steer a successful course for the creation of many DoD technology programs while I looked after the civilian side. While much has been said about Ed's work in the NRC, his time on Senate staff was extremely productive and of great benefit to the nation, even while he was living out is own personal tragedy of his wife’s illness. He was an exemplary public servant - as an earlier story from last year about his staying on illustrates - A Public Servant to the Last. He will be missed.
Posted by Ken Jarboe at 03:14 PM | Comments (0) | TrackBack