June 2008 Archives

Is this a fancy patent pool?

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An interesting new development in the patent wars -- Tech Giants Join Together To Head Off Patent Suits - WSJ.com:

The new Allied Security Trust aims to buy patents that others might use to bring infringement claims against its members. Companies will pay roughly $250,000 to join the group and will each put about $5 million into escrow with the organization, to go toward future patent purchases, the people familiar with the initiative said.

Tech companies have tried various ways to protect themselves, including investing in Intellectual Ventures LLC, a patent-holding firm founded by former Microsoft Corp. executive Nathan Myhrvold. The companies provide money to help Mr. Myhrvold buy patents, and he in turn grants them a license to his portfolio. But some in the tech industry fear Mr. Myhrvold's venture, which has collected thousands of patents in areas such as networking and software, may itself become an aggressive patent enforcer down the road. Mr. Myhrvold has said litigation isn't part of IV's strategy, but hasn't ruled it out.

To head off such concerns, companies in the new group will sell the patents they acquire after they have granted themselves a nonexclusive license to the underlying technology. "It will never be an enforcement vehicle," said the group's chief executive, Brian Hinman, a former vice president of intellectual property and licensing at International Business Machines Corp. "It isn't the intent of the companies to make money on the transactions." He declined to confirm who the group's member companies are.

This last bit is the interesting twist. The companies won't own the patents but will sell them off to someone else. That someone else could very well be an investment trust type entity. Since the patents will have already been licensed, they will presumably have a royalty stream attached and therefore could be securitized. The trick here for the parent companies will be the pricing of the licensing royalties. Priced too low, then resale value is also low. The companies might have to sell the patents at a deep discount. Conceivably, the companies might have to either donate the patents or abandon them all together. They could also simply put them into the public domain.

Another issue will come up with the enforcement. Are the companies willing to enforce the patents against non-contributing companies? And what is the value of the patent resell if enforcement rights are somehow curtailed?

A patent pool with an investment twist. Very interesting.


The "Economy"?

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Today's Wall Street Journal is has a provocative op-ed by Zachary Karabell -- There Is No 'The Economy'. His point is that our conception of "the economy" is outdated - based on the nation-state:

In truth, what used to be "the economy" is just one part of a global chess board, and the data we have is incomplete, misleading, and simultaneously right and wrong. It is right given what it measures, and wrong given what most people conclude on the basis of it.

The world is composed of hundreds of economies that interact with one another in unpredictable and unexpected ways. We cling to the notion of one economy because it creates an illusion of shared experiences. As comforting as that illusion is, it will not restore a simplicity that no longer exists, and clinging to it will not lead to viable solutions for pressing problems.

Provocative, yes; correct, partly. Aggregate national statistics are what hit the evening news. But we also produce a torrent of disaggregated statistics on regional, local and sectors bases. The overall economic situation is carefully looked at from a regional perspective. For example, the well-known "Beige Book" of the Federal Reserve is a collection of regional outlooks. The reason why we use aggregate statistics is that the various micro-economies are tied together. And they are even more tied together than before. What happens in housing foreclosures in California affects stock markets in Hong Kong.

Rather than focus on the aggregate versus local story of what is wrong with our perception of "the economy," I think it is more important to focus on the nature of the economy itself. We all agree that we are no longer in an industrial age. Yet, our measures and mindset continue to think that way.

So, yes, there is "the economy" - but, no, it is not what everyone normally thinks it is.


How to kill an industry?

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From today's New York Times, Citing Need for Assessments, U.S. Freezes Solar Energy Projects:

Faced with a surge in the number of proposed solar power plants, the federal government has placed a moratorium on new solar projects on public land until it studies their environmental impact, which is expected to take about two years.

The Bureau of Land Management says an extensive environmental study is needed to determine how large solar plants might affect millions of acres it oversees in six Western states — Arizona, California, Colorado, Nevada, New Mexico and Utah. But the decision to freeze new solar proposals temporarily, reached late last month, has caused widespread concern in the alternative-energy industry, as fledgling solar companies must wait to see if they can realize their hopes of harnessing power from swaths of sun-baked public land, just as the demand for viable alternative energy is accelerating.

I'm all for having an effective environmental impact analysis. But this seems to be overkill. As I understand it, every project has to go through an individual EIS. I don't quite understand the need for a moratorium while they assess their methodology. If the EIS's are that suspect, are they going to also shut down the application for every new coal plant or oil rig as well? I doubt it.

Creating new intangible assets

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Today, ICANN (Internet Corporation for Assigned Names and Numbers) created a whole new set of top level web domain address (see stories in Wall Street Journal , New York Times, AP). The high level domains are the suffix to the addresses, like .com and .org. Only 21 have been used -- .edu, .gov, .mil, .info and certain countries, like .uk, .de . The new ruling by ICANN opens the gates to possible thousands of combinations.

In doing so, ICANN has also created thousands of new intangible assets. Each domain name is an asset -- as wide spread as a trademark. But without all the protection of a trademark. So a number of companies and organizations will now need to grab as many domain names as possible -- with an almost unlimited set to contend with. For example, who will get McDonalds.paris or Coke.berlin or Ford.car (or Ford.auto or Ford.brand? Here is ICANN's answer to that question.

What's to stop others registering my brand name?
Trademarks will not be automatically reserved. But there will be an objection-based mechanism for trademark owners where their arguments for protection will be considered.

An objection-based mechanism? Could get interesting.


Changing the role of the rating agencies

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As expected, yesterday the SEC voted to change the requirements for certain investors to use credit ratings in their investment decisions. As SEC Chairman Christopher Cox explained in his Statement on Proposal to Increase Investor Protection by Reducing Reliance on Credit Ratings:

In preparing the staff recommendations to the Commission today, the Division of Trading and Markets, the Division of Corporation Finance, and the Division of Investment Management all have conducted thorough evaluations of the way credit ratings are used in the rules and forms within their areas of expertise. What those evaluations have found is that in some rules and forms, the reference to credit ratings isn't really necessary at all. In those cases, the proposed new rules would simply eliminate the reference.

. . .

All told, the three Divisions have examined the references to credit ratings in 44 of our rules and forms. The staff is recommending changes to 38 of them. Specifically, they are recommending the complete elimination of any reference to credit ratings in 11 rules and forms. They are recommending the substitution of a standard based on a more clearly stated regulatory purpose or other concept in 27 rules and forms. And they are recommending leaving the reference unchanged in 6 rules and forms.

The major impact of the rule changes appears to be on money market funds - which would now be required to make their own determination of the default risk and liquidity of their holdings. However, another change involves structured finance vehicles - with implications for the monetization of intangibles. As Andrew J. Donohue, Director of the Division of Investment Management, explained to the Commission in his remarks:

With respect to Rule 3a-7 [under the Investment Company Act], as part of this rulemaking initiative, we have reevaluated the use of credit ratings as a factor for excluding structured finance vehicles from the Investment Company Act and are recommending that you amend the rule to limit the type of investors that may participate in offerings of the securities of those vehicles to accredited investors and qualified institutional buyers to make the rule consistent with marketing practices relating to those vehicles. We also recommend that you substitute for the references to credit ratings in the rule certain procedures that are designed to protect the full and timely payment of outstanding fixed income securities and to require that cash flows from a structured finance vehicle's asset pool are deposited in a segregated account.

Structure finance vehicles are a standard mechanism for the securitization of intangibles (see our working paper - Intangible Asset Monetization: The Promise and the Reality). As the details of the proposed rules are made public, someone needs to take a close look at this to make sure that intangibles don't get caught up in and damaged by the needed tightening of other financial engineering abuses.

Future of Good Jobs?

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The W.E. Upjohn Institute for Employment Research has released a new study -- A Future of Good Jobs? America's Challenge in the Global Economy -- focused on improving middle-class jobs and upgrading low-income workers. Based on a conference last year, the report is a set of papers containing specific policy recommendations. (The introductory chapter, which provides an overview and summary of the recommendations is available online.) The list of policy ideas include many of the old standbys we have talking about for years: tie education and training closer to workplace needs; provide universal health insurance; expand employment and training programs; strengthen the unions; increase the minimum wage; expand the Earned Income Tax Credit. It also includes some newer ideas such as wage insurance and tax incentives for companies that create "good jobs."

There are two really new ideas. As the introductory chapter notes, in his chapter on employment and training Robert Lerman, almost as an aside apparently, "recommends changes in financial accounting rules so that firms count their workforces’ human capital as assets and thereby are encouraged to invest more in worker training." As regular readers of this blog note, that is something I support -- but it is something that is easier said than done.

The second new idea comes from Paul Osterman on encouraging job upgrading. Again, as the introductory chapter notes:

Osterman proposes that the U.S. Department of Labor establish a “Low Wage Challenge Fund” to assist employers in improving the skills of their workforce and thereby the quality of jobs. The Low Wage Challenge Fund would also provide matching funds to states for customized training programs oriented toward the low-skill workforce and would provide funding to community colleges to increase their involvement with employers and the low-skill workforce.

Getting companies to invest in their workforce, especially at the low end, is an ongoing problem. Both of these ideas might help.

Getting policymakers to understand that this is a public policy issue is another problem. As Kevin Hollenbeck points out in his new paper Is There a Role for Public Support of Incumbent Worker On-the-Job Training?, successful state programs already exist, but at a very low level of funding. In one state he studied intensively, "Primary sector jobs were created or retained at a public cost of less than $9,000 per job—a cost that rivals or bests most economic development initiatives." Thus, "Public subsidy of incumbent worker training, especially in export-based firms, may be an effective economic development tool for states." What is true on the state level is also true on the national level (although you may want to design the delivery system on the state level).

As we move more and more into the I-Cubed Economy, ongoing training and skill development will become more and more important. For all the talk about training, we need policymakers to start walking the walk.


High tech jobs

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The AeA (formerly know as the American Electronics Association) has released a report on high tech jobs -- Cybercities 2008:

* The leading metro areas by high-tech employment in 2006 were the New York Metro Area (316,500), Washington, DC (295,800), San Jose/Silicon Valley (225,300), Boston (191,700), and Dallas-Fort Worth (176,000).
* Seattle led the nation in net tech job creation in 2006, adding 7,800 jobs.
* The next largest net gains in tech employment between 2005 and 2006 occurred in the New York Metro Area and Washington, DC, adding 6,400 and 6,100 respectively.
* On a percentage basis, Riverside-San Bernardino saw the fastest job growth in 2006 at 12 percent.
* San Jose/Silicon Valley leads the nation in concentration of high-tech workers in 2006, with 286 high-tech workers per 1,000 private sector workers.
* Fifty-six cybercities had wage differentials higher than 50 percent and three cybercities – Austin, San Diego, and Sacramento – had differentials higher than 100 percent.
Of course, the New York Times technology blog had to gloat:
If you’re looking for a tech job in the United States, the best place to go is not Silicon Valley.
It’s New York.

The Wall Street Journal had a different take -- High-Tech and Happening in Huntsville:

Huntsville actually ranks third in the nation for its “concentration” of tech workers, or the percentage of the private-sector workforce employed in high-tech. Nearly 19% of Huntsville workers toil in high tech, compared with nearly 29% in San Jose/Silicon Valley and 23% in Boulder, Colo.

Unfortunately, the full report costs $250 -- beyond this blogger's budget for such publications. But press releases with information on individual cities are available.

Is the company obsolete?

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Stefan Stern raisies an interesting set of questions in his Financial Times column today - The nature of ownership:

Maybe business has changed for good, and companies are now barely even semi-permanent organisations, with their own ethos and identity.
He gets to this point through a discussion of the tensions between long-term managers and short-term investors (I suggest you read the entire essay). However, one could get to the same point through an analysis of modern management. It isn't financial engineering that is pushing the company to a more networked, and in some cases virtual, organizational structure. It is the nature of the economic enterprise. Open innovation, alliances, extended supplier/customer networks -- all are changing the nature of the corporation. And as the company changes, the nature of the ownership relationship is likely to change as well.

But, rest assured, the short-term financial engineers will find a way to speculate on companies, no matter what the organizational structure. Limiting the damage from that situation is Stern's central concern - and should be ours as well.

Older workers - a key intangible asset

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Steve Lohr's column in today's (Sunday) New York Times (Ideas and Trends - For a Good Retirement, Find Work. Good Luck.) is a good overview of a key subject -- what to do about the aging workforce. For two reasons, the answer may be "work longer." First, many workers may not have the funds with which to retire comfortably (or even uncomfortably). Health care cost being the biggest anxiety. The second reason is that those older workers constitute a key asset. Their skills and tacit knowledge represent a large investment. But, as Lohr points out, many employers are reluctant to higher older workers. And some public policies, such as early retirement incentives -- including an earlier but reduced Social Security payment -- work against retaining older workers.

That is not to say that some companies don't value their older workers. Take this example from Lohr's article:

Judy McCrickard, a 64-year-old administrative assistant in Racine, Wis., plans to retire at the end of 2010, when she will be 66. She works for S. C. Johnson, a household products company that the AARP rates as one of the best employers for workers over 50.

But Ms. McCrickard has also kept up her end of the implicit bargain, by regularly upgrading her skills. When she joined the company in the 1960s, there were no computers in offices. But through courses offered by the company, she has become fluent in budgeting, financial planning and project management programs. Today, she is essentially a project manager, not a secretary. Her latest project was to design and manage an internal Web site for contingency planning across the global company to prepare for emergencies like a pandemic.

The key, as much as anything, is attitude. Learning new skill, keeping up with the changes; all of this indicates a desire to continue. On there other hand, there are those who are simply putting in time until they can get that pension.

This is an example of a major attribute of the future workforce: diversity on all levels. For older workers, some will kick-back early and some will keep going forever.

In either case, it will be be important for the I-Cubed Economy to tap into and capture that intangible knowledge floating around in the heads of those older workers -- both retired and actively working. Thus, retirement may not be complete retirement. For some, it will be an opportunity to move to a role of mentor and "senior statesman." Along with the policies Lohr talks about, we also need a set of policies (public and corporate) to encourage this new (but actually traditional and ancient) role.

Organizational capability

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Earlier this week, the Government Accountability Office (GAO) ruled in the controversial Air Force tanker case. GAO's ruling sustained Boeing's protest over the decision awarding the contract to Northrop Grumman. (By the way, only the press release is available to the public. The full 69 page report contains confidential and proprietary information. A public version is expected to be released in the future.)

The case has been interesting to watch for a number of reasons, including the fight over what is an American company. But the GAO finding highlights the importance of a key intangible asset: organizational capability. The heart of the GAO report is that procurement procedures were not followed. The tanker case is not the only example of where the Department of Defense's organizational capabilities have been called into question. As the Washington Post points out:

The contract is an example of persistent overall problems with the way the Pentagon buys weapons, procurement specialists and government watchdogs say. As the government cedes more of its work to private companies and reduces the size of the workforce that oversees contracts, such problems are growing, according to a stream of government audits and reports.
. . .
Federal auditors in recent years have documented that major weapons system programs are routinely delivered late and over budget. According to a congressional review, about half of all federal contracts in recent years have been awarded without full and open competition, about triple the proportion in 2000.

The federal government faces huge organizational issues. Maintaining a high level of internal organizational capability is one of them. As Robert Goldenkoff, Director of Strategic Issues at GAO, said in testimony before Congress just last month:

The importance of a top-notch federal workforce cannot be overstated. The nation is facing new and more complex challenges in the 21st century as various forces are reshaping the United States and its place in the world. These forces include a large and growing long-term fiscal imbalance, evolving national and homeland security threats, increasing global interdependence, and a changing economy. Further, as we have pointed out in our High-Risk Series and other reports for Congress, some federal agencies continue to face persistent performance and accountability problems at a time when taxpayers have come to expect—and need—higher levels of performance and greater responsiveness by public officials and programs.

It is estimated that one-third of the current federal workforce will be eligible for retirement by 2012. Finding ways to not only replace that workforce, but to capture that treasure trove of tacit knowledge locked inside that workforce, will be difficult. It appears that maintaining organizational capabilities in key areas, such as procurement, is also difficult.


Beyond oil - transforming economies

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While some in the US are looking to more oil as the solution to the energy problem (see yesterday's posting), the oil-rich nations of the Middle East are looking to build a knowledge economy. Over the past year or so, more attention is being paid by the media on the transformation of some of the Gulf States. For example, this morning's Wall Street Journal is running a page one story on Oil States Sprout Financial Hubs.

The transformation has been going on for some time. As Joe Saddi, Karim Sabbagh, and Richard Shediac note in their report, Oasis Economies:

Research and development in high technology is booming; enterprise zones have attracted the likes of Hewlett-Packard, Cisco Systems, and Microsoft. Local companies are investing in streaming video and other technological applications. Manufacturing, too, is on the rise. Driven in part by growing demand from China, the region’s petrochemical sector is exploding, with more than 190 projects currently operating across the Gulf; its $28 billion biotechnology and pharmaceutical manufacturing industry has enjoyed double-digit growth each year. Many consumer packaged goods companies are opening factories in the region, in part to serve its growing middle class and in part to export goods to Europe and the rest of Asia. In short, the region — once an end consumer in the world market — has begun to transform itself into a supplier.

Earlier this week, the Brookings Institution held an event on Building a Knowledge Society in the Arab World. That meeting highlighted a recent Brookings report on the subject. The report was an assessment of where things stand five years after the United Nations Development Programme's study, Arab Human Development Report 2003: Building a Knowledge Society. The assessment is best characterized as guardedly optimistic:

Our conclusion is that Arab countries, as a group, have made significant progress in most of these areas, especially compared with their own history. Yet, other regions have advanced even faster and tremendous challenges—such as creating 100 million new jobs for the region’s mushrooming youth population—loom ahead. The Arab world must reinvigorate its efforts or be left behind. Many new initiatives are underway, but it is too soon to assess their impact. Success, ultimately, will be judged by what is achieved, not by what is invested.

Last January, the Arabian Knowledge Economy Association held its first annual conference on the Arabian Knowledge Economy.

The Gulf states figured out a long time ago that they can not sustain their economies simply on oil. In the past, they have tried diversifying in a number of ways. Primarily has been to move down stream in the energy production process with more refining capacity, other petrochemical facilities and even ownership of gasoline retail establishments. Now they are clearly moving toward the I-Cubed Economy with huge investments in education and in research.

There is no guarantee that they will be able to make this transformation. However, they are clearly moving in the right direction.


Drilling our way out of the energy crisis?

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By now, many people have heard of Newt Gingrich's petition to expand oil drilling as a solution to the energy crisis. The slogan is "Drill here; drill now; pay less". Sounds appealing. But the result, I'm afraid, will be "drill here; drill now; feed the addiction."

Newt has gained a deserved reputation as a future oriented thinker. Now that we are at a critical point in redefining our energy policy and using it as a springboard for future economic growth, it is disappointing to see him come out with such a simplistic and backward thinking solution. Apparently, he still feels more comfortable going after 20th Century solutions than pushing 21st Century ideas.

---


Update:

Here is a thought exercise. Which is better for lowering the cost of driving, more oil (greater supply) or more efficiency?

Currently, the average motorist will spend $1920 annually for gas: 12000 miles average @ 25 mpg @ $4 a gallon.

Under last year's legislation (Energy Independence and Security Act of 2007), the fuel economy standards will rise to 35 mpg by 2020.
At 35 mpg, the average motorist would spend $1370 annually for gas -- or the equivalent of what they would be paying today if gas was $2.85 per gallon.
At 50 mpg, the average motorist would spend $960 annually for gas -- or the equivalent of what they would be paying today if gas was $2 per gallon.

Is any one claiming that if we drill more, the price will drop to $2.85? If not, then the most effective way to "pay less" is to push for higher fuel standards and more efficiency as quickly as possible.

Budget woes

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We are now beginning to see the results of the recent years of fiscal irresponsibility showing up. Having wasted money, we now have to cut back on needed spending. For example, the Bureau of Economic Analysis has announced that it is cutting back on certain statistical programs, including the work on the R&D satellite account. I've mentioned that statistical program in at least three earlier postings.

Two stories in today's Washington Post also emphasize the general problem. First, GAO is releasing a report on how the Federal Protective Service is cutting back on security patrols. The second story talks about the $350 million in deferred maintenance work needed on the National Mall.

These may be minor points. But they illustrate the budgetary bind we are in. Last year, Congress and the President came together to enact the America COMPETES Act. It was never funded.

Just when we need to be investing in the infrastructure -- physical and intellectual -- to compete in the I-Cubed Economy, we don't even have the money for routine maintenance and operations.


Workforce as an intangible asset

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We hear a lot about manufacturing closing in the US and moving elsewhere. But there are stories about manufacturing facilities opening in America. Case in point is the opening last month in Danville, Virginia of a furniture plant.

Furniture, you say? Isn’t that an industry we lost a long time ago? Yes, but. IKEA's manufacturing arm, Swedwood decided to build a new manufacturing facility in Danville.

The reasons for Danville were many, but the intangible asset of a skilled workforce was key. As Virginia Business Magazine explains:

Manufacturing in Danville will significantly cut down on transportation costs, which, with diesel prices high and the value of the dollar low, are "the most expensive part of home furnishings," said Joseph Roth, Swedwood's director of public affairs.
. . .
"The available work force here (that is) knowledgeable about manufacturing" is part of the reason the company was interested in the region, Roth said. Swedwood offers "highly skilled manufacturing jobs. We're very thrilled to be bringing them to Danville and Pittsylvania residents."

From a loss of manufacturing jobs, Danville is managing to build upon its intangible asset of history of manufacturing knowledge. And the Swedwood plant isn't the only new development in Danville. Another IKEA supplier, Com.40, is planning a plant in Danville. The Danville Community College offers manufacturing technician certifications and associate degrees.

Advanced technology companies are also locating in Danville. Luna nanoWorks, a division of Luna Innovations, has a nanotechnology facility in Danville.

While Danville does not seem to be completely back to the scale of economic activity when textiles and tobacco where king, it has staged a remarkable come back by leveraging its tangible and intangible assets.

(For more on Danville's economic turn around the Virginia Business Magazine story -- Diversified economy brings jobs, and the Washington Post story -- Ikea Helps a Town Put It Together).


"Fair use" and the blogsphere

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There has been a little dust up recently in the blogsphere. Apparently last week, the Associated Press went after the Drudge Report for posting extensive quotes from AP stories. By the end of the week, AP had backed off a bit and is now in the process of coming up with a policy. As the New York Times reports:

The A.P.’s effort to impose some guidelines on the free-wheeling blogosphere, where extensive quoting and even copying of entire news articles is common, may offer a prominent definition of the important but vague doctrine of “fair use,” which holds that copyright owners cannot ban others from using small bits of their works under some circumstances.

As regular readers have noticed, this blog uses extensive quotes. My purpose is not to simply report what other people are saying - but to use those remarks to underscore and illustrate larger points. That is considered the heart of the "fair use" doctrine in copyright law. Many blogs use extensive quotes in this way. But many others are simply sending on a piece of information -- implicitly or explicitly saying "read this -- this is important."

The tension in the latter case is between the free flow of information and the free-rider economic problem. News reporting has always been bedeviled by both. Many news stories will spread from outlet to outlet -- but with credit given to the original source, e.g. a TV or radio news broadcast or email starting with "the New York Times reports that . . .” On the other hand, aggregators services with just pass along other sources reporting can be free-riders: they get the advertising benefits without having to actually paid the cost of unearthing the story. Without someone paying for the actual journalistic effort, it is not clear that effort will continue. Already, major news organizations are cutting back on their staffs.

There may be a new form of reporting emerging out of the blogsphere. An open source/wiki model may emerge. The problem there is issue of verification and trust. The loss of Tim Russert is a grim reminder of the importance of trust in reporting.

But the reporting of his death is also a lesson on the verification system. The story was first broken by the New York Post -- or at least I first saw it on the blog DCist which was linked to the New York Post story. No other news source was running a story - including NBC. Shortly thereafter, the New York Times ran the story with confirmation from the family. Then every other news organization picked it up.

As the information tide turns into an information tsunami, the role of filters and aggregators will grow. How many times have you gotten an email story from a friend that sounds a little strange or just too cute? My first reaction is to check with one of the many "urban myth" websites. It may be that our trusted news sources turn into verifiers as opposed to original reporters.

That model will, however, leave the job of original reporting to the blogsphere. In that case, AP may find itself on the other side of the fair use question -- as a user of someone else's information rather than a producer of that information. Setting up a solid policy on information sharing -- which goes beyond the concept of "fair use" -- will be that much more important. Such are the emerging rules for the I-Cubed Economy.


Reversing the offshoring trend?

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The Wall Street Journal is running a story today that suggests the offshoring trend is reversing --Stung by Soaring Transport Costs, Factories Bring Jobs Home Again:

The rising cost of shipping everything from industrial-pump parts to lawn-mower batteries to living-room sofas is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas.

But the point of the story is more than just shipping costs:

Edward Zaninelli, vice president of trans-Pacific westbound trade at Orient Overseas Container Lines in San Ramon, Calif., a major shipping line, says he's heard from customers who are moving production back to the U.S., including a maker of steel pans for car engines.
"I believe a decent amount of production could come back into the States within five years, not everything," he says. "But it won't be because of transport costs -- it'll be because other production costs have gone up and companies have realized they can have better control over their production when it's closer to home."

The question of production location is a complex one. Shipping costs are only part of the equation (admittedly a large consideration). Everyone talks about needing to be close to their markets (see earlier posting on the distributed company and "gateway" sites). In addition, companies tend to cluster in the certain areas. As the Journal story notes, Asia has become an electronics cluster which gives it a competitive advantage beyond low cost production.

Yesterday, the Brookings Institution held a conference on metropolitan America. One of the sessions on innovation stressed the importance of economic clusters. During the discussion, it was noted that clusters may be the way to bring production back to the US.

I tend to agree. As the I-Cubed Economy develops, production will become more information and knowledge intensive. It will also become more customer-driven. That will give the competitive advantage to companies who are simultaneously closely tied into innovation networks and into their customer base. This argues for locating facilities in multiple clusters rather than searching for the lowest cost production site. Low cost production (with shipping costs figured in) will continue to be a factor in some production. But more and more production is likely to be based where there is access to key resources: ideas and customers. Such is the economic logic of the Intangible Economy.


Arts workforce

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The National Endowment for the Arts today released its new report Artists In The Workforce. The report looks at a wide range of occupations under the category of "artists" -- from actors to architects. Under this definition, the total number of artists working in the United States is almost 2 million (1,999,474 by the NEA's count). That is roughly 1.4% of the total labor force. In metropolitan areas, the percentage is much higher (almost 3.5% in Washington DC, according to the Washington Post). Interestingly, the big jump in the number of came between 1970 and 1990. Since 1990, the proportion of artist in the workforce has remained steady.

By far the largest category is designers, followed by fine arts and then architects:

Actors: 39,717
Announcers: 55,817
Architects: 198,498
Fine artists, art directors, and animators: 216,996
Dancers and choreographers: 25,651
Designers: 779,359
Entertainers and performers: 41,128
Musicians: 169,647
Photographers: 147,389
Producers and directors: 139,996
Writers and authors: 185,276

ArtistFigure1.jpg
From Artists in the Workforce (Research Report #48), courtesy of the National Endowment for the Arts


Some highlights from the report:

• Artists are entrepreneurial – 3.5 times more likely to be self-employed.

• Artists are underemployed – one-third of artists work for only part of the year.

• Artists are more educated. Artists are twice as likely to have a college degree as other U.S. workers.

• But artists generally earn less than workers with similar education levels. The median income from all sources in 2005 was $34,800 for artists, higher than the $30,100 median for the total labor force, and lower than the $43,200 for all professionals.

• Women remain underrepresented in several artist occupations. Men outnumber women in architecture, announcing, music, production, and photography. Women outnumber men in the fields of dance, design, and writing.

• Opportunities for artistic employment are greater in metropolitan areas. More than one-fifth of all U.S. artists live in Los Angeles, New York, Chicago, Washington, and Boston. Half of all artists live in 30 metropolitan areas.

Clearly "The Arts" claims a major piece of the economy. Others have come up similar findings. For example, last year, Americans for the Arts published a report on the size of the "arts economy" (see earlier posting). According to that study, the nonprofit arts and culture industry generated $166.2 billion in total economic activity and 5.7 million full-time equivalent jobs. And then there is all of the work of Richard Florida and others on the "creative class" -- a much broader category that claims 30% of the U.S. work force.

The studies use different numbers and definitions. The conclusion is the same: this isn't your grandfather’s workforce.


- - -



The NEA report uses the following definitions:
Actors—stage, television, radio, video, or motion picture.
Announcers—radio, television, public address systems, events.
Architects—private residences, commercial buildings, landscapes.
Fine artists, art directors, and animators—art directors; craft artists; fine artists include: painters, sculptors, and illustrators; multi-media artists; animators. This category is called “artists and related workers” in the census coding scheme. In this report, it is often abbreviated as “fine artists” or “painters”.
Dancers and choreographers—in this report, it is often abbreviated as “dancers”.
Designers—commercial and industrial designers, fashion designers, floral designers, graphic designers, interior designers, merchandise displayers and window trimmers, set and exhibit designers.
Entertainers and performers—comedians, puppeteers, rodeo riders, stunt performers, ventriloquists, jugglers, and others. The category includes all entertainers, performers, sports and related workers not specifically categorized. The many individual job titles within this category are overwhelmingly entertainers and performers rather than athletes. (The vast majority of athletes fall under a separate “athletes” category.) In the report, this artist group is often abbreviated as “entertainers”.
Musicians and singers—music directors, conductors, composers, musicians, and singers. In this report, it is often abbreviated as “musicians”.
Photographers—includes scientific photographers, aerial photographers, and photojournalists.
Producers and directors—stage, television, radio, video, or motion picture. In this report, it is often abbreviated as “producers”.
Writers and authors—scripts, stories, novels, poems, plays, biographies, advertisements, speeches, and other material. Does not include technical writers, editors, or journalists. In this report, this artist group is often abbreviated as “writers”.


IP in WTO update

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Yesterday, I posted a piece from Intellectual Property Watch (IPW) on how IP issues seemed to be moving at the WTO as part of the Doha Round. Today, IPW has a piece on how some countries are objecting (Opponents Say Inclusion Of IP Issues Would Set Back WTO Talks):

“We … wish to express our strong opposition to this proposal, and our conviction that it would substantially set back efforts to arrive at a viable way forward for the Doha negotiations,” the group said in the new non-paper, issued 6 June. “We are united by a joint concern that the current delicate stage in the DDA [Doha Development Agenda] negotiations should not be unnecessarily disrupted by efforts to rush, revisit, reinterpret or change our existing negotiating mandates.”

The non-paper was signed by Australia, Canada, Chile, El Salvador, Korea, Mexico, New Zealand, Taiwan, and the US.

So - the debate continues.

April trade in intangibles - and further revisions

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The economic bad news seems to just keep coming. This morning's BEA trade data showed a jump in the deficit of $4.4 billion— to $60.9 billion in April from March’s revised $56.5 billion. Both imports and exports increased, but imports grew faster than exports. Analysts blamed much of the increase in imports on the almost $7 per barrel rise in oil prices that occurred in April. But, as New York Times pointed out, "Although oil accounted for much of the increase, imports of autos and capital goods bounced back from a drop in March." The increase in imports was somewhat expected. The Wall Street Journal notes that "Economists surveyed by Dow Jones Newswires estimated a $60.00 billion shortfall for April."

The bad news extended to the intangibles surplus as well, which was down in April by $65 million. A decline in exports of business services accounted for most of this drop. (Note: the overall "services" trade surplus grew slightly because of increases in the travel and transportation categories.)

The deficit in Advanced Technology Products also jumped in April to $5.3 billion, up from $3.3 billion in March. The deterioration was across the board -- only biotechnology showed a slight improvement. 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.

The other big news this month was another set of revisions to the data - this time going back to 2005. As I noted in three months ago when the January data was released, BEA is undertaking a number of activities to improve the data on intangibles and the knowledge economy. As a result, I expect to see continued revisions to the intangibles data.

The biggest change in this latest set of revisions is to royalty payments and license fees. Once again royalty receipts (exports) revised by a significant amount (as high as 20% in some months) and royalty payments (imports) revised significantly downward (by as much as 17%).

As a result of these revisions, I am once again updating the charts I published earlier for annual growth in intangibles trade (see chart 2 below) and the percentage of intangible trade in our total international trade (see chart 3 below).


Intangibles trade for Apr08

Intangibles trade – 2007 revised 2

Total trade in intangibles -2007 revised 2.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.



Update on IP at the WTO

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Intellectual Property Watch has just posted a good update on two continuing IP issues at the WTO: geographical indications (GIs) protection (e.g. Parma ham) and biodiversity. New papers on these items have been circulated as part of the ongoing Doha Round process. This may be an indication of possible movement on the main area of contention in the Doha Round: agriculture. Then again, it may be an attempt to clear up some other lingering areas in lieu of a larger settlement.

In any event, it shows that may more countries are taking IP seriously - and looking for ways to protect their own intellectual assets.

Latest Supreme Court patent case

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This morning the Supreme Court overturned yet another decision by the Federal U.S. Circuit Court of Appeal on a patent case. In this case (Quanta Computer Inc. v. LG Electronics - see earlier posting), the issue was whether a patent holder could collect royalties by the first sale. According to the Wall Street Journal:

The unanimous decision stops LG Electronics, which holds computer chip and system patents used in Intel Corp. products, from demanding additional royalties from Quanta Computer Inc. and several other companies. LG had already licensed its technology to Intel, which then used the technology in computer parts it sold to the other companies.

So, the Supreme Court continues to make patent law while the Congress stalls.

WiMax patent pool

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The Wall Street Journal is reporting that later today six major technology companies will announce the formation of a patent pool for WiMAX technology. WiMAX is the long range version of WiFi wireless technology.

I have long been an advocate for patent pools as a means of cutting through the patent thickets which can keep a technology on the shelf. Patent pools have a long history in the wireless industry - going back to the very beginning and the formation of Radio Corporation of America (RCA).

With multiple patents covering a technology, getting every patent holder to agree can be a daunting task. In the WiMAX case, it is not clear that all of the players are included. According to the Journal story Motorola is still "evaluate the merits and risks" and Qualcomm prefers use individual licensing agreements. This need not be a stumbling block to the patent pool, as both companies appear very willing to license out their technology. Last year, both Motorola and Qualcomm agreed to submit patents to a third-party clearinghouse to determine wireless standards (see earlier posting). So today's announcement should be another step toward the roll of the next generation of wireless.


Software innovation

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We often get stuck in the trap of thinking about innovation and "technology" as gadgets. But innovation is simply a new way of doing things. That may involve a new physical object, such as a faster microprocessor creating a new supercomputer. Or it may be just a new arrangement of existing ("old") technologies, such as the iPod.

Here is the case where the mega-gadget -- that supercomputer -- more resembles the iPod story. According to a story in today's New York Times (Military Supercomputer Sets Record), I.B.M. and Los Alamos National Laboratory have created a new supercomputer -- the Roadrunner -- that broke through the petaflop milestone. For those of you who don't speak computerize, that is a quadrillion calculations per second. The Roadrunner is twice as fast as the previous world's fastest computer (at Lawrence Livermore National Laboratory).

And here is the kicker: Roadrunner used cellphone and video game technology. The breakthrough was on the software side -- getting all the of the microprocessors coordinated.

Innovation comes from a number of directions. Our innovation policy needs to keep that simply fact in mind.


Krugman discovers the digital age

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From today's Paul Krugman NY Times column -- Bits, Bands and Books, Paying for Creativity in a Digital World:

Bit by bit, everything that can be digitized will be digitized, making intellectual property ever easier to copy and ever harder to sell for more than a nominal price. And we’ll have to find business and economic models that take this reality into account.

Glad to see that Paul has discovered that the digital age didn't die with the dot.com bubble.

All sarcasm aside, Krugman apparently has gotten himself a Kindle and thinks it will changed the publishing business, as much as music downloads have rocked the music industry (pun intended).

I agree that the Kindle is likely to change how we read (see earlier posting).

I disagree with his assessment, however, that the publishing industry is likely to go the way of the music industry. The model that the music industry is trying to pursue is free downloads to promote paid concerts. The model in the publishing industry has been just the opposite: free readings (performance) to promote paid books. We are used to "free" music -- via the radio. Free downloads are in many way psychologically the same. But everyone expects to pay for a concert. But only rarely are we willing to pay for a lecture or reading by an author (Krugman's passing reference to Charles Dickenson's successful lecture tour notwithstanding).

But even in the music case, it is unclear that "free" is the dominate mode. The iPod (or more to the point iTunes) is an example of a successful business model built on the "paid" model.

And Krugman's "nominal price" may be more than enough to sustain the publishing industry when the physical costs of publishing disappear (the costs of producing and shipping books -- and of destroying the left over copies).

We just have to wait and see.


Those bad job numbers

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It looks like the economic downturn may finally be showing up in the employment data. This morning's BLS announcement that the unemployment rate jumped to 5.5% and payroll employment declined by 49,000 (for a total job loss of 324,000 so far this year) point to continued problems. If not for a 33,900 increase in health care, the situation would have been even worse.

The other part is our silent employment problem (see earlier posting). The involuntary underemployed (part-time for economic reasons) continued to rise, although by only 13,000. It may be that employers have done a much cutting back on hours that they can do -- and now the problem shifts from under- to un-employment.

The distributed corporation

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The online version of Strategy + Business magazine is running a new paper from C.K. Prahalad and Hrishi Bhattacharyya on the distributed corporation: Twenty Hubs and No HQ. They argue that the emerging new markets require a new form of corporate organization:

What if a company’s executives truly took seriously the new middle class emerging in so many countries? How would they organize their companies to provide products and services for those new consumers? They could start with the 20 countries in the world that best serve as gateways to nearby regions. Drawing on capital, talent, and resources from those gateway countries, companies would establish their own corporate hubs in each of them: offices with enough capabilities in marketing, manufacturing, and logistics to maintain a powerful presence in all the markets of that region. Companies would then integrate these hubs into a global network that distinguished their company from its competitors around the world.

This is, in there view, very different from the current model, which I would characterize as more a hub-and-spoke model. They also see it as an alternative to the decentralized model where each country subsidiary essentially acts independently in their own market.

Here is the core of the model:

Each hub would take primary responsibility for serving the gateway market, plus other markets in the regional footprint (often five to 10 other countries), all with local logistics expertise and cultural awareness that a faraway corporate staff could not provide. For example, the German hub might manage Switzerland, Austria, and Hungary; Brazil might support Argentina, Uruguay, Paraguay, Bolivia, and Chile; and Mexico might cover Colombia, Venezuela, Peru, and Ecuador. In the non-hub countries, there would be only a front-end organization for customer contact and service. Everything else would be handled through the hubs. For example, a hub might oversee 15 or 20 manufacturing locations — providing cost and scale advantages while retaining enough local autonomy to succeed in local markets. Some hubs, like that in India, might cover all aspects of corporate activity — marketing, manufacturing, research and development, logistics, and shared services — for a region, whereas other hubs, such as those in Turkey or Indonesia, might start with a customer-centric supply chain and gradually build capabilities in other functions. Hubs in the largest markets, such as the United States, Brazil, or China, might create their own regional brands. Mozambique and Kenya might receive products developed in South Africa, just as Austria and Denmark currently accept products developed in Germany.

I'm not sure that this is very different from the regional-based organizational structure I used to teach about in "Introduction to International Business." What appears to be different is the network approach - with no one global corporate headquarters. Unfortunately, they don't spend any time describing how the network would work -- other than to say how great it would be in creating a diverse top management team. To me, this network approach is the most important feature of the model.

Networking is clearly the best way to go in many cases -- and has been an emerging organizational form for some time. Management experts have been arguing for years that networks and alliances rather than acquisitions are a better way for companies to create value. These alliances, however, are usually built around competencies. The distributed corporation seems like a geographical alliance. It is an interesting idea, but I would like to hear more about how this would work in practice.

Update - internet sales tax

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Here is an update on my previous posting of the battle over collecting sales taxes on internet purchases. According to the Technology - New York Times Technology Blog (Let the Tax Collection Begin):

Last Sunday, many but not all online retailers started to collect sales tax on goods shipped into New York. Most significantly, Amazon.com, the largest online store, was one of them.

Overstock.com, however was not one of them. Rather, Overstock sopped doing business with affiliates in New York and has now filed a new lawsuit for an immediate injunction. But, this is a risky strategy. Companies who registered with the New York Tax Department and start collecting the sales tax by June 1 are not liable for past taxes. By not registering, Overstock may be setting itself up for a big tax liability on past sales.

While I've often said that not collecting sales tax on Internet purchases is a tax subsidy for e-commerce, I have to disagree with the retroactive part of this law. You set a date and you apply the rules from then on. If Overstock wants to get out of the New York market as of June 1 because they are not longer getting that tax subsidy, that is fine. But they shouldn't be punished for having benefited from that tax subsidy in the past.


Stock prices and intangibles

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Here is a great study from Alex Edmans at Wharton - Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices:

This paper analyzes the relationship between employee satisfaction and long-run stock performance. An annually rebalanced portfolio of Fortune magazine's "Best Companies to Work For in America" earned 14% per year from 1998-2005, over double the market return, and a four-factor alpha of 0.64%. The portfolio also outperformed industry- and characteristics-matched benchmarks. Returns continue to be significant when extending the sample back to 1984, before the list was published in Fortune. These findings have three main implications. First, employee satisfaction is positively correlated with shareholder returns and need not represent excessive non-pecuniary compensation. Second, the stock market does not fully value intangibles, even when independently verified by a publicly available survey. This suggests that intangible investment generally may not be incorporated into short-term prices, underpinning managerial myopia theories. Third, certain socially responsible investing ("SRI") screens may improve investment returns.

In other words, intangibles matter. In this case, employee satisfaction matters.

By the way, Edmans' paper won the 2007 Moskowitz Prize for Socially Responsible Investing, given by the Center for Responsible Business, Haas School of Business at UC Berkeley. For more, see Edmans' research website, including summary of the paper and the slides of a recent talk.

Thanks to Mary Adams' blog posting at The Hybrid Vigor Institute and to Empirical Finance Research Blog for alerting me to this study.

Market failure and investing in intangibles

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I think everyone would agree that one of our major investments in intangible assets is education. Part of our investments in education is the student loan program. These loans to cover part of the cost of higher education -- made by the private sector -- can be justified on economic grounds as a sound investment since college graduates earn higher incomes. Because of concern over the risk of such loans and to further the public policy of making such loans available to everyone, the government guarantees the loans. The private sector serves as the processing mechanism.

But now we are seeing a new form of market failure in the student loan process. Companies are cutting back on student loans not because they are risky -- but because they are not as profitable as they could be. The issue is especially pronounced with community colleges. According to the New York Times (Student Loans Start to Bypass 2-Year Colleges):

The banks that are pulling out say their decisions are based on an analysis of which colleges have higher default rates, low numbers of borrowers and small loan amounts that make the business less profitable. (The average amount borrowed by community college students is about $3,200 a year, according to the College Board.) Still, the cherry-picking strikes some as peculiar; after all, the government is guaranteeing 95 percent of the value of these loans.

Mark C. Rodgers, a spokesman for Citibank, which lends through its Student Loan Corporation unit, said the bank had “temporarily suspended lending at schools which tend to have loans with lower balances and shorter periods over which we earn interest. And, in general, we are suspending lending at certain schools where we anticipate processing minimal loan volume.”

This is a very worrisome trend -- especially almost every study of US competitiveness calls for strengthening our community college system. Policymakers have been pushing for more direct involvement by the Federal government in the student loan process (see Statement from U.S. Secretary of Education Margaret Spellings and U.S.Secretary of The Treasury Henry Paulson). This market failure of cherry-picking is likely to accelerate the process.

Investing in intangibles that promote economic growth but where the market has failed has been a long standing role of government. Here is another case where the government needs to step in and help the market along.

But rather than set up a new government bureaucracy, let me suggest a “market-based” solution. Large financial institutions have for a long time stayed away from the small loan business for the same reasons cited above: low balances and shorter time periods. To fill that gap, micro loan institutions have emerged – most notably in the third-world and based on the work of Noble Laureate Muhammad Yunus and Grameen Bank

As the big institutions pull out of the community college business, micro loan institutions should move in. They need not be microfinance in the traditional sense (as being loans of a few hundred dollars and based on solidarity lending). They can be larger - but informed by the micro loan experience.

What they will need is regulatory and certification help from the government. Education Secretary Spellings, call Mr. Yunus.


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


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