September 2009 Archives

One of the reasons I am so fascinated with the Skype saga is that it hinges on the management (or mismanagement) of a key intangible asset. Joff Wilds over at his IAM blog asks the yet unasked question about the Skype deal:

If I were an eBay investor, I would be asking the company's board some very hard questions about all of this. And if I were sitting on that board, I would be thinking very carefully about how to ensure something like it never happens again.

Joff's answer to the latter question is the creation of a Chief Intellectual Property Officer (CIPO). That person would go beyond the IP council's role in the legal department to encompass all of the aspects of IP - "from strategic development and prosecution, through to litigation, exploitation and value creation."

I have some sympathy for the CIPO idea. But I think it too limiting. It could end up treating IP as something outside of the company's normal operations rather than a key asset. It also ignores the broader sweep of intangible assets. In truth, the job of fostering and exploiting company's intangible assets is the job of the CEO (and the COO). Intangibles needed to be baked into the company's DNA. The danger of the CIPO is that IP becomes seen as something over there that is someone else's responsibility. A CIPO could help the CEO and COO; it could also become just another corporate silo.

And as Joff points out, it is also part of the oversight job of the Board. Should the Skype deal fall about because of mismanagement of a key intangible asset, I think eBay management (past and present) and the Board will have a lot to answer for.

And speaking of securitization, Robert Shiller makes an interesting point in his a recent piece in the Financial Times "In defence of financial innovation":

New products must have an interface with consumers that is simple enough to make them comprehensible, so that they will want these products and use them correctly. But the products themselves do not have to be simple.

Intangible asset backed securitizations are likely to be complex. As we noted in our report Intangible Asset Monetization: The Promise and the Reality, such deals require a number of backstops. For example, a securitization of a trademark/brand needs to have an active management and marketed entity to ensure that the assets are protected and utilized to their fullest extent. Such deals are also likely to be "covenant-heavy" (in contrast to the covenant-lite deals of the recent bubble).

Thus, deals themselves are likely to be complicated. They don't have to be opaque, however. Those who structure the deals should take Shiller's point to heart. The deals need to be comprehensible. That will be the key to market acceptance: investors understand what they are buying.

It looks like there will be another attempt to clean up the financial system's toxic asset problem. According to a story in this morning's Washington Post (More Help Coming To Clean Up Crisis):

Since July, the Treasury Department has been working with a group of private firms to build investment funds that would combine public and private resources to buy troubled bank securities. The firms plan to buy the assets at bargain prices in hopes that they will turn profitable over time.
This week, the first round of financing from the Treasury is slated to go out the door, sources familiar with the program said. The department plans to commit more than $2.5 billion to match dollar-for-dollar what has been raised by the private firms, the sources said. The investment funds can then borrow another $5 billion from the Treasury in a form of leverage intended to provide a further incentive to the private firms.
The total size of the program is expected to eventually reach $40 billion and can be expanded if needed, administration officials have said.

As the reader of this blog know, I have long advocated such a step. If the program can take the assets off the books, it will go a long way to restarting the securitization market (see earlier posting). And that will help the financial markets for intangibles.

But, as I've also said, watch for the flood of red ink as the banks are finally forced to write off those assets at the prices that the markets set for them, rather than the assumed value of the mark-to-myth models.


UPDATE: According to a story in the Wall Street Journal, the IMF estimates that banks still have $1.5 trillion to write off. However the US is ahead of Europe in the process: "Banks in the U.S. have recognized about 60% of anticipated write-downs, the IMF calculated. Banks in the Britain and continental Europe have recognized only about 40% of their potential losses."

Last week, the IMF released an advanced chapter from its Global Financial Stability Report (the full report is due out on Oct 1). The released Chapter 2 of that report was on Restarting Securitization Markets: Policy Proposals and Pitfalls. According to the IMF, the secutization process remains a useful means of mobilizing illiquid assets, reducing credit costs and spreading risk. The problem, as has become widely recognized, was the slicing and dicing of the securities into highly complex transaction where the risk became almost unknowable, and then hiding that risk in off-book entities.

The report goes on to discuss various proposals to reform and restart the securitization market. These include the now standard items of credit rating agency reform, improving transparency, realigning regulatory capital requirements, and originator retention requirements. On this last point, they argue for careful implementation of policies requiring more "skin in the game" as those "can have dramatic effects on the incentives to improve loan screening, in some cases with the unintended effect of making some types of securitization too costly to execute, effectively shutting down these markets."

On the issue of transparency, the reports notes that American Securitization Forum has a Project on Residential Securitization Transparency and Reporting (Project RESTART) which is focused mostly on the mortgage backed securities process. That is a good step, but I strongly believe that such efforts are not enough.

There is another recommendation called for the report that would greatly strengthen the market: more simplification and standardization:

Most products could usefully be standardized at least to some extent. This should increase transparency as well as market participants' understanding of the risks, thus facilitating the development of liquid secondary markets. Although there will always likely be investors that demand bespoke complex products, securitization trade associations and securities regulators should encourage standardized building blocks for securitized products. It would also be useful if some standardization could be imposed on the underlying assets to maintain higher quality pools or at least verifiable pools (see the covered bond discussion below).
Valuation difficulties could also be alleviated if securitization products were simplified. Some of the product complexity was well intentioned, such as excess spread traps and triggers designed to bolster the creditworthiness of the senior tranches. Others, such as micro-tranching, were designed to game rating agency models. In any case, this product complexity has made some securities extremely difficult to value and risk-manage, and to the extent that regulation or market practices encourage such complexity, these components should be eliminated.

Those are good objectives: "facilitating the development of liquid secondary markets" and "alleviate valuation difficulties." The IMF report notes that the American Securitization Forum is also working on legal documentation standardization, but not on product standardization. Maybe they should.

For the intangible asset securitization process, simplicity is the key. Intangibles are already view with suspicion. As I have argued before, we need some plain vanilla transactions to make that case that these are not overly risky. With patents are becoming more accepted investment asset class (see earlier posting), maybe a few basic patent securitization deals could help get the market going again.

Basic, plain vanilla, uncomplicated. That is a formula for re-starting a market previously see by many (and with good reason) as rather dubious.

Jon Low (full disclosure alert and shameless plug: Jon is a member of Athena Alliance's Board) has a new three part series on reputations and brands as intangible assets over on Jonathan Salem Baskin's DimBlub blog:

From Pitchforks To Profits
Public Actions; Private Realities
Social Media In The Post-Crash World

As Jon notes:

Trust and reputation are intangibles; frequently taken for granted and not accounted for on traditional balance sheets or income statements. And yet, research suggests that as much as 50 percent of a company's market value may be attributed to them.

And they are fragile and in constant need of management attention - as these essays explore.

This morning Secretary of Commerce Gary Locke announced the creation of a new office for entrepreneurship and innovation. The announcement was first made during a CNBC interview (see below - note that the interview covered a number of other issues as well, including G-20 protesters and health care).



The official announcement will come this afternoon when Secretary Locke gives the keynote speech to the Council on Competitiveness's National Energy Summit the Inc. 500/5000 Conference.

UPDATE: Here is the link to the press release Commerce Secretary Locke Announces New Commerce Initiatives to Foster Innovation and Entrepreneurship.

Every G-20 Summit (formerly G-8 Summit) has two side stories. The first side story is about the protesters. The second side story is about where the meeting is happening. In this case, the story is about Pittsburgh's transformation from steel to the knowledge economy. For example, this morning's Washington Post has a story on Pittsburgh Shows How the Rust Belt Can Be Polished Up. The emphasis of these stories has been the rise of the educational and health care sectors of the city's economy. (See also this OurFuture.org blog posting on the coverage.)

But that focus may be misleading. A report from OurFuture - Pittsburgh: The Rest of the Story - offers a more detailed analysis:

First, manufacturing did not disappear entirely. In addition to steel, Pittsburgh industry diversified into products ranging from advanced metal alloys to surgical implants and sophisticated robotics. With roughly 100,000 workers, or 10 percent of the area workforce, manufacturing remains a vital part of the regional economy. Manufacturing jobs are generally unionized, so they pay well and generate economic activity beyond the company payroll.
Second, these changes didn't happen automatically. This wasn't an unstructured evolution from gills to lungs. It was the result of deliberate plans, of partnerships between government and private industry to achieve shared goals. It involved public investment in infrastructure, private and government subsidies, and express plans to "pick winners" and support them until they gained a lead. It is a story of industrial planning, a piece that has been missing from our national economic equation for the last 30 years.

Interestingly, that transformation includes metals:

The manufacture of steel grew and transitioned into the manufacture of specialty metals and sophisticated alloys. Allegheny Technologies Incorporated manufactures titanium, hafnium, tungsten, and cobalt. With 9,600 full-time employees and $5.3 billion revenues in 2008, the company forges custom fittings for the defense, aerospace, and nuclear energy industries. Over 300 other metals technology service firms provide steel production equipment, engineering services, parts, and supplies.

In other words, manufacturing in Pittsburgh is part of the knowledge economy.

That is a lesson we need to remember.

Duncan Bucknell - over at IPThinkTank - has an interesting posting The biggest issue in IP management? He argues that the biggest pool of IP and therefore the biggest challenge for IP management is in small and medium size enterprises (SMEs). As he notes, "The vast majority of IP management is done where there is no IP function." He call for the development of tools for IP management that can be applied to all size firms, like accounting.

Neil Wilkof over at IP Finance counters with the comment

that if we are to go about the "development of tools" correctly called for by Bucknell, we will first need to address the prerequisite question: What is the relationship between IP and innovation? Only after we have created a structured approach to answering that question can we then proceed to the "development of tools."

I'm not sure that I would go as far as Wilkof in that we have to spell out the precise relationship between IP and innovation. But he is correct in that we have to take a broader perspective. SMEs often don't just lack capacity for IP management, they don't have the capacity for any form on intangible asset management. The broader framework needs to go well beyond IP to embrace all their intangibles.

There are some models for developing the tools that Bucknell calls for -- and for disseminating those tolls to SMEs. In Scotland, for example, there is the Intellectual Asset Centre. Their mission is threefold:

• to raise awareness and understanding of intellectual assets among Scottish organizations
• to help those organisztions identify and exploit their intellectual assets
• to work with independent intellectual assets management specialists and encourage their sector to grow

The Centre provides direct support to companies as well as undertaking research and developing tools. There is a similar program in Hong Kong - the Asia Pacific Intellectual Capital Centre and the Intellectual Capital Management Consultancy Programme.

This is somewhat similar to the US manufacturing Extension Partnership (MEP) centers in the US. MEP, however, is limited to manufacturing firms and focuses on issues of quality and productivity. In my posting yesterday, I noted that as part of the next wave of innovation policies we need to expand MEP's services to include intangible asset management. But we need to do more.

We need a dedicated institution(s?) on the Scottish IA-Centre model with the sole purpose of intangible asset management. Placing IA management specialists at MEP centers is a good step. But MEP has a number of activities they need to focus on - and its narrow target is helping manufacturing companies. The focus of the IA Centre is both narrower and has much more broader target. It focuses on intangibles but goes beyond helping companies to also raising awareness and fostering expertise in the field. A US IA Center could undertake the same activities. It could feed into the MEP activities - as well as into other business assistance programs run but the federal, state and local governments as well as those by other organizations, such as universities. Such a center could be the catalyst for IA management activities.

Something worth considering.

I did want to draw special attention to one part of the Administration's new innovation strategy report (see earlier posting). At the end of the paper, there is a list of possible "Grand Challenges" of the 21st Century:

•   Complete DNA sequencing of every case of cancer; smart anti-cancer therapeutics that kill cancer cells and leave their normal neighbors untouched; early detection of dozens of diseases from a saliva sample; nanotechnology that delivers drugs precisely to the desired tissue; personalized medicine that enables the prescription of the right dose of the right drug for the right person; a universal vaccine for influenza that will protect against all future strains; and regenerative medicine that can end the agonizing wait for an organ transplant.

•   Solar cells as cheap as paint, and green buildings that produce all of the energy they consume.

•   A light-weight vest for soldiers and police officers that can stop an armor-piercing bullet.

•   Educational software that is as compelling as the best video game and as effective as a personal tutor; online courses that improve the more students use them; and a rich, interactive digital library at the fingertips of every child.

•   Intelligent prosthetics that will allow a veteran who has lost both of his arms to play the piano again.

•   Biological systems that can turn sunlight into carbon-neutral fuel, reduce the costs of producing anti-malarial drugs by a factor of 10, and quickly and inexpensively dispose of radioactive wastes and toxic chemicals.

•   An "exascale" supercomputer capable of a million trillion calculations per second - dramatically increasing our ability to understand the world around us through simulation and slashing the time needed to design complex products such as therapeutics, advanced materials, and highly-efficient autos and aircraft.

•   Automatic, highly accurate and real-time translation between the major languages of the world - greatly lowering the barriers to international commerce and collaboration.

The list is generally a free standing section of the report tied only indirectly. Tom Kalil, Deputy Director of OSTP and also on the staff of the NEC, has long been a proponent of incentive prizes as a research funding mechanism (see his posting earlier this year on the White House blog). Could we be seeing the list of soon to be sponsored research prizes?

Yesterday, President Obama gave a speech on his innovation strategy and the National Economic Council released a white paper A Strategy for American Innovation. The speech reiterated the importance of increasing investments in education, infrastructure and scientific research - and of health care technology and clean energy/green technology. In his posting on the White House blog, Larry Summers stressed the importance of entrepreneurship (and lauded Schumpeter).

The plan itself lays out the case for innovation-led growth - as a sustainable (non-bubble) economic path - and the role of government in the process. In terms of specifics, the paper reiterates policies and programs already proposed or underway, as part of the Recovery Act , the FY 2010 Budget submission or as previous Presidential actions. One of the new actions was the President's support for FCC Chairman Julius Genachowski's pronouncements on "net-neutrality." Thus, rather than a new set of initiatives, the paper seeks to promote current proposals by tying them closely into a package to boost growth through innovation - and thereby remind everyone why the proposals are important.

While it is important to keep the focus on enacting these proposals (as Congress has not yet acted on the FY2010 appropriations bills), it is also not too early to be thinking of the next set of actions. Let me suggest a couple ideas from our earlier Athena working paper from last December Crafting an Obama Innovation Strategy:

•   Rename the Baldrige Quality Award the Baldrige Quality, Productivity, and Innovation Award. Over the years, the criteria for the Baldrige Award have changed with the times. As these criteria have shifted and broadened, the award has become much more productivity and innovation focused. Much of this shift, however, has not been recognized. The change in the name would both better advertise the broader nature of the award and provide an opportunity to review and modify the criteria to reflect this broader view. In addition to changing the name, the award should be given greater visibility by the President. By presenting the awards personally, the President could use it as an opportunity to showcase innovative American companies and collaborations. The National Science and Technology medal criteria could also be broadened to recognize a small number of individual contributions to innovation that are not solely technology based. .

•   Expand the Manufacturing Extension Partnership (MEP) program. The MEP program has been a successful mechanism for increasing quality and productivity in small- and medium-sized manufacturing companies. We should build on that success by expanding the scope of MEP's services to include innovation activities, including intangible asset management. Doing so would require a phased expansion of the program's budget and staffing into areas of marketing, finance, and business model development beyond simply new product development and process adoption. .

•   Enable the National Science Foundation's (NSF) Engineering Research Centers program to support the creation of Design Research Centers as well as promote research and teaching of integrated design thinking. Innovation success is heavily reliant on design as a key component but not simply involving the physical appearance of products. A new approach to applied problem solving and innovation is emerging under the rubric of design thinking. Successful models include the Stanford Design School and the Institute of Design at the Illinois Institute of Technology (IIT), among others.

•   Implement the America COMPETES Act call to study of how the federal government could support research and teaching related to the services industries and service functions in the manufacturing sector. Some suggest that there is already a well-defined discipline of "service science" that merits support and replication across more higher education institutions. Whether or not that is the case could be answered by such a study, which, like other provisions of the 2006 Act, has not been implemented.

•   Endorse, operationalize, and fund the recommendations of former Commerce Secretary Gutierrez's Advisory Committee on Innovation Measurement in the 21st Century. Among other things, this means supporting and accelerating efforts of the DOC's Bureau of Economic Analysis to revise the national economic accounts by converting intangible business assets (R&D, software, intellectual property, human capital, brand identification, and organizational capacity) from expenses to investments with future returns. Although Federal Reserve Board staff studies--corroborated by similar analyses in the UK and Japan--find that intangible investments exceed spending on plants and equipment and account for a significant portion of economic and productivity growth, that fact is unlikely to be given full weight in economic policymaking until reflected in the nation's official accounting.

•   The Securities and Exchange Commission (SEC) should be asked to undertake a study examining barriers to disclosure of intangible assets on corporate financial statements, assess past disclosure requirements (such as the 2003 guidance on the Management's Discussion and Analysis [MD&A] section in financial statements), and the merits of a safe harbor for limited disclosure of financial information on intangibles not currently allowed in financial statements.

•   As proposed at a June 2008 conference sponsored by the Bureau of Economic Analysis (BEA) at the National Academies, a broader study of intangibles could include (1) a survey of efforts in other countries to advance the understanding of intangibles and their role in corporate performance and economic growth, promote financial investments in intangible assets, and foster the utilization of intangibles; (2) an inventory of federally owned intangible assets and how to exploit them for economic growth; and (3) recommendations of policies to accelerate private investment in and management of the types of intangible assets most likely to contribute to growth.

•   To foster best practices for management of intellectual assets and intangibles in the United States, the relevant federal agencies--such as SEC, Department of the Treasury, and DOC--should establish an advisory committee to make recommendations on ways of providing investors with an improved method for assessing the impact intangibles have on the accuracy of a company's financial picture and supporting industry trade associations in an effort to adopt guidelines for intellectual asset management and intangible disclosure appropriate to particular industry sectors.

•   Undertake a budgetary cross-cut of government investments in intangible. The federal government is a major investor in intangibles, but we don't know the size of that investment or even where it really goes. For some time the federal budget, as prepared by the Office of Management and Budget (OMB), has included a capital budget that includes physical capital, R&D, and education and training. The budget documents also include a separate analysis of funding of statistical agencies, which is not included in the investment budget. These and other budget analyses already undertaken by OBM can serve as the starting point for a cross-cutting budgetary analysis of federal investments in intangible assets.

•   As part of the effort to enact a permanent R&E tax credit, adding an incumbent worker training tax credit that would transform the provision into a knowledge generation and acquisition incentive. We already support training of unemployed workers, but not for those who have a job. A corporate tax credit would reduce the incentive firms now have to lay off workers in a recession and rehire different workers with higher skills when the recovery comes, with an attendant loss of company-specific knowledge. Instead of sending some workers to the unemployment line in a recession, we could be sending them to the classroom.

Longer term actions might include:

•   establishing an analyze capability for reviewing regulatory activities with an innovation impact;
•   better managing the allocation of R&D spending among and within federal agencies through a joint OSTP and OMB review agency spending plans in key areas with an eye to making mid-course adjustments;
•   strengthening the White House role in reviewing and balancing intellectual property policy as broadly defined;
•   consider establishment of a National Foundation for Science, Technology, and Creativity patterned after the United Kingdom's National Endowment for Science, Technology and the Arts (NESTA);
•   greater use of government procurement to push new business models, including use of new collaborative work tools, such as Virtual Worlds.

These short and longer term actions would move the innovation agenda to the next level and bring in the element missing so far from the Administration's proposals: intangible assets.


One somewhat disturbing note. When the speech was given, Senator Orrin Hatch, chair of the Senate Republican High Technology Task Force, immediately attacked it (see also Obama Innovation Plan Gets Mixed Reviews). That the Senator felt compelled to issue an attack is of concern. Innovation policy should be a bipartisan activity. If it gets caught up in the current raw politics that has seemed to grip the nation, then the chances of any meaning full action are greatly diminished. And we all lose.

In another side note, it was interesting to see the media's coverage of the speech and the report. There have been a number of online stories, but not much in what I would call the general print media. For example, the Washington Post ran an online article Monday afternoon but didn't have anything in the Tuesday morning print edition. Much of the coverage was on the Letterman appearance and the how the President and the New York Governor were getting along. Looks like those two stories, and Genachowski's statements, trumped coverage of the speech.

So, enough about Skype already. Now there is this story about how the $4 billion intangibles play by Disney may face an unexpected glitch in securing those intangible assets (see Disney Faces Copyright Claims Over Marvel Superheroes):

Heirs to the comic book artist Jack Kirby, a creator of characters and stories behind Marvel mainstays like "X-Men" and "Fantastic Four," last week sent 45 notices of copyright termination to Marvel and Disney, as well as Paramount Pictures, Sony Pictures, 20th Century Fox, Universal Pictures, and other companies that have been using the characters.
The notices expressed an intent to regain copyrights to some of Mr. Kirby's creations as early as 2014, according to a statement disclosed on Sunday by Toberoff & Associates, a law firm in Los Angeles that helped win a court ruling last year returning a share of the copyright in Superman to heirs of one of the character's creators, Jerome Siegel.

Did Disney do a complete enough job in its due diligence? According to the story:

Even before the Kirby family sent its notices, Disney was facing criticism from some Wall Street analysts who expressed concern that Marvel's complex web of copyright agreements might prevent Disney from capitalizing on some Marvel assets.

Given that Disney has been one of the savviest copyright protectors, this comes as a bit of a surprise to me. However, the story notes that:

Disney said in a statement, "the notices involved are an attempt to terminate rights 7 to 10 years from now, and involve claims that were fully considered in the acquisition."

We will have to see how this all turns out.

A couple of recent articles highlight the issue of increasing the commercialization of good ideas.

Steve Lohr at the New York Times writes on the growing use of patent auctions (Now, an Invention Inventors Will Like):

Wrangling over patents is beginning to move out of the courtroom and into the marketplace. A flurry of new companies and investment groups has sprung up to buy, sell, broker, license and auction patents. And venture capital and private equity is starting to pour into the field.
The arrival of these new business-minded players, according to patent experts and economists, could lead to a robust marketplace for patents, where value is determined not so much by court judgments but by buyers and sellers, perhaps, someday, like eBay.

Well, Steve, maybe not like the eBay/Skype deal -- but you have the right idea.

Vivek Wadhwa and Robert E. Litan have an piece over at Business Week that focuses on the technology transfer problem (Turning Research into Inventions and Jobs):

Rather than wait decades for the new basic science to trickle out of the Ivory Tower and into products, a mechanism to quickly assess inventions and build associated companies with real potential would show real returns and major job growth within as little as one or two years.

Their solution is to turn scientists into entrepreneurs:

If we want to create jobs, we must first train scientists how to start companies. Tom Katsouleas, dean of Duke University's engineering school, has a potential solution, called PhD+. For PhDs who wish to start companies and have marketable technologies, Katsouleas proposes that the federal government provide funding for training in entrepreneurship to teach the lab geeks how to get along better in the startup world.

Interesting, but I think a third-best solution. Yes we can do a better job at helping those scientists who also have the aptitude and willingness become entrepreneurs. But beware of simply invoking the Peter Principle of promoting people beyond their competence. A second best solution is to ramp up the patent auctions, as describe above.

The best solution comes at the end of the Wadhwa and Litan piece:

We also need to rethink the importance we ascribe to technology licensing. It should be subordinated to entrepreneurship as a scheme for pushing technology into the world. Instead of being rewarded for generating license revenue, technology transfer offices should be measured on the number of startups they help spawn, and by the employment and revenue created by these startups.

This solution attacks the problem at multiple levels. It puts the emphasis on the outcomes (spin-offs) rather than the intermediate product (more researchers as business people). It widens the focus to multiple activities -- licensing and patent sales are part of the spin-off process. Finally, it is applicable to non-science based innovations as well as science-based ones.

In my view, anything that broadens the technology transfer mindset to innovation-creation is a good thing. That includes both increased patent sales (and other alternative financing mechanisms) to spur commercialization and encouraging more entrepreneurship. Neither is the silver bullet. Both are a step forward.

And the saga continues . . . From the Wall Street Journal

Two companies owned by the founders of Skype have filed another lawsuit that could complicate eBay Inc.'s $2 billion deal to sell the Internet communications company to a group of investors.
The suit from Joltid Ltd. and Joost N.V.--both owned by Skype founders Niklas Zennstrom and Janus Friis--was filed Friday in a Delaware court. The suit claims that former Joost chief executive Mike Volpi breached his fiduciary duty by using confidential information to broker a deal announced recently by eBay, which owns Skype, to sell a 65% stake in company to private investors.

I know that there is an ongoing debate whether quality methodologies like six sigma are antithetical to innovation (because they stress standardization and elimination of variation). But take a look at BusinessWeek's recent article Six Sigma Makes a Comeback - and more importantly its slideshow of examples Six Sigma Goes Shopping. If we define innovation as doing something differently and better, most of these examples could be considered process innovations.

Call it Six Sigma, call it process reengineering (remember that term?), call it process innovation, call it what you like -- bottom line it is doing things differently and better. To me, that is what it is all about.

I especially liked the last paragraph in the story:

For a sense of the new approach to Six Sigma, consider Target. It hasn't enforced its program with the rigor common in manufacturing. "Some companies require their employees to use Six Sigma," says spokesperson Beth Hanson. "You don't have to be a black belt or green belt or be certified at all to use Six Sigma [here]. We just offer employees the tools."

Innovation today isn't about people in white coats in labs making breakthrough research findings - although it still a part of the game. Innovation is more about front line workers coming up with a better way. We used to call that high-performance work organizations. It sounds like that is exactly what Target is trying to do.

Last week's Economist ran an interesting story on Patents as financial assets. However, there is a tone to the article (aided and abetted by a misleading title "Trolls demanding tolls") that is unfortunate. While the article discusses a number of activities on patents, it leaves the impression that the main reason for investing in patents (and other intellectual property) is to become a troll. Yes, there be trolls here. But the vast majority of intangible asset investments is done for other reasons. Operating companies have long bought and sold patents for both operational and strategic reasons. As the article points out, companies can gain extra revenue by selling or licensing out unused technology. Patent brokers also play an important role in helping the small inventor, who may not have the resources or capability, to commercialize their idea.

Nor are pure investments in IP necessarily an infringement play (aka trolls). Investments in revenue-generating IP can be a bonus for the careful investor. For example, both Sir Paul McCartney and Michael Jackson invested heavily in the copyrights of other peoples' songs. Patent investment companies, such as Royalty Pharma, have provided investors with an investment mechanism as well as providing financing to companies for future R&D.

(Side note: Athena is working on a report on case studies of investing in intangibles - look for this to be published in a month or so.)

Having said that, the fact that the Economist is even paying attention is a good sign. The article ends by saying "IP is moving out of the lab and into the financial mainstream." I hope that is true.

In some earlier postings, I discussed the pending case against Skype filed in the UK concerning key VoIP technologies. The main point was that eBay did a less than perfect job of gaining control over key intangible assets when it bought Skype. Now the battle has heated up as the former owners - through their new company Joltid Limited, which controls the software code - have filed a new lawsuit here in the US for copyright violations.

This new lawsuit includes the investors who have agreed to buy a majority stake in Skype from eBay. As the Wall Street Journal notes:

Those investors include private-equity firm Silver Lake, venture-capital firms Index Ventures and Andreessen Horowitz, and the Canada Pension Plan Investment Board. The suit alleges that the investors were aware of Skype's copyright violation when they were negotiating their deal.

EBay's filing with the SEC notes that the deal is contingent "no settlement of the pending litigation with Joltid Limited having been effected without the consent of the Buyer (subject to certain limitations)." The New York Times notes that:

A person briefed on the buyers' due diligence ahead of the deal, but not authorized to speak publicly on the matter, said that the venture capital firms hired a private investigations firm to examine the Skype founders' business practices. The firm produced a lengthy report that explored the founders' litigiousness, among other matters, this person said.

The lawsuit also has one interesting new twist. According to the Journal:

Wednesday's suit also names as a defendant Mike Volpi, a general partner at Index Ventures who previously served as chief executive of Joost, another company owned by Skype's founders. Last week, Joost said it had removed Mr. Volpi from its board of directors and was conducting an investigation into his actions during his tenure there.

Given that, one has to ask the question as to what the potential new buyers thought about the merits of the original litigation - and the possibility of a technical work-around. One also has to ask whether they have done a much better job of looking into the issue of control of the intangibles than eBay did originally.

In any event, this will make a fascinating case study on intangible asset management once all the dust settles.

You may have heard recently about a small law suit between Bank of America (BofA) and the SEC -- the case where the Judge angrily through out the proposed settlement. This action has thrown the legal and financial communities into a tizzy -- for example see the Wall Street Journal piece BofA Ruling Questions an SEC Weapon and Steven Pearlstein's Washington Post column What Kind of Judge Stands Up For Truth and Justice?.

Given all this, you would think that BofA violated scores of securities laws and undertook huge nefarious transactions. The substance of the case is much simpler; it concerns disclosure.

As the Judge notes in his decision:

In the Complaint in this case, filed August 3, 2009, the Securities and Exchange Commission ("S.E.C.") alleges, in stark terms, that defendant Bank of America Corporation materially lied to its shareholders in the proxy statement of November 3, 2008 that solicited the shareholders' approval of the $50 billion acquisition of Merrill Lynch & Co. ("Merrill"). The essence of the lie, according to the Complaint, was that Bank of America "represented that Merrill had agreed not to pay year-end performance bonuses or other discretionary incentive compensation to its executives prior to the closing of the merger without Bank of America's consent [when] [i]n fact, contrary to the representation ..., Bank of America had agreed that Merrill could pay up to $5.8 billion -- nearly 12% of the total consideration to be exchanged in the merger -- in discretionary year-end and other bonuses to Merrill executives for 2008."

The Judge found the proposed $33 million settlement to be unfair, unreasonable and inadequate. It would, he said, penalize the shareholders who have already been victimized by the false disclosure while not penalizing those responsible for the decision. He order the case go to trial.

It is interesting to see a disclosure issue rise to this height of attention. Of course, this was a crime of commission, not omission. The allegation is that BofA consciously said something that was untrue rather than simply failing to disclosure some important information.

The difference is important when it come to thinking about intangibles. False and misleading statements are one thing. Nondisclosure is another. As regular readers of this blog know, I have argued for increased disclosure of intangible assets. In an earlier working paper Reporting Intangibles: A Hard Look at Improving Business Information in the US, I supported more mandatory disclosure. But right now the standard is whether the information is considered "material" -- as was the case in eBay's disclosure of the Skype patent license problems (see earlier posting).

So when does the nondisclosure rise to the level of false and misleading statements? And what does the Judge's decision mean for the SEC going after those who make such statements? Does it raise the bar - making cases less likely since they well need to go through an uncertain trial process rather than a settlement?

It seems to me that new guidelines will be needed. And as part of those guidelines, "bright line" guidance should be included as to what information on intangibles needs to be disclosed. In other words, is lying actual lying - or is it also just not telling the whole truth? In the case of intangibles, we know that financial statements don't tell the whole truth. Let us hope that this incident on the importance of disclosure can help change that situation.

Joff Wild over at IAM Magazine has an interesting new posting on his blog - To get boards of directors to take IP seriously learn the lessons that Philips teaches. He specifically cites the comments by Ruud Peters, CEO of Philips IP & Standards, at the recent CIP Forum on innovation at Gothenburg. The bottom line: your need to treat IP as part of the business. As Joff puts it:

By and large, the IP community is made up of lawyers and attorneys. They have a very specific way of seeing and explaining the world. One that is full of legal and technical jargon. But as Peters made clear in Gothenburg, senior executives do not want to hear that. If they are going to be interested in IP, it has to be made real in terms they can relate to - top line, bottom line, value creation, risk and reward.

Good advice - and good posting, Joff.

The Booz & Company magazine Strategy+Business has an interesting new article on A Better Model for Health Care which asserts that:

Unlike other industries, in which products and processes tend to be about 80 percent standardized, and a purchaser has a reasonable sense of what to expect, the U.S. health-care industry is full of fragmentation, friction, unnecessary customization, and excessive costs. Reducing those costs would require holistic change in the practices and structures of the industry.
. . .
The health-care industry--in the U.S. and around the world--is the only industry whose products and services are virtually always custom-built, that is, independently engineered for each customer. If reform efforts simply expand coverage and make the system work faster by installing electronic medical records, costs will only climb further.

So while other industries are moving to more customization, their solution is to move to more standardization.

I understand the point (which has been made by others), but I'm not sure this is quite right. Part of the health care delivery problem may be that it needs to be custom build but the current system is closer to a one-size fits all. If you have a common condition, the system processes are fine--in fact, medical centers thrive on high volume standardized procedures (as much of the discussion of the medical tourism sites indicates)--even if these procedures are individually dramatic, such as a heart transplant. But anyone who has had a non-common problem can testify to the frustration of being routinely shunted into the standard protocols. We all either have or know of the all too common complaint of "assembly line" treatment.

I do strongly agree with the article's authors that the solution is organizational--as they put it "structures, relationships, and incentives". The trick here will be to invest the new organizational process based on the emerging collaborative models. Turning back to the Taylorist/Fordist assembly line standardization of the industrial age is likely to fail. A more productive route would be creating better tools kits and components that can be mixed and matched to provide the building block for a customized solution.

Health care has the possibility of being the template for the 21st Century organization. It will be a mix of standardization, customization and collaboration. But just exactly what is the formula for mixing those ingredients is still unclear. Years of evolution and experimentation lie ahead. So look at the current turmoil over health care reform as one step in a very long process.

I know some folks have made a big deal out of the fact that the latest World Economic Forum's Global Competitiveness Report shows the US now number two behind Switzerland. They shouldn't. I've always be skeptical of these composite rankings (although I understand why they are necessary). In this case the difference between Switzerland and the US is the difference between 5.60 and 5.59 on their competitiveness scale. Close behind are Singapore, Sweden, Denmark, Finland, Germany, the Netherlands, Japan, and Canada.

I'm also skeptical of some of the indicators used. For example, as far as I can tell, the number of patents grant is a good indicator of . . . the number of patents granted. It tells us nothing about the quality of those patents (for example if they are junk or overly broad), the technical significance of the ideas embodies in the patent, or the commercial relevance.

Far more interesting are some of the subjective measures gauged through a survey of business executives. Take for example the follow question on innovation, "In your country, how do companies obtain technology? (1 = exclusively from licensing or imitating foreign companies; 7 = by conducting formal research and pioneering their own new products and processes)". Japan and Germany top the list at a score of 5.9 with the US sixth with a score of 5.5. Ireland is 30th with a score of 3.8 and India is 35th with a score of 3.6. Another interesting question was "How numerous are local suppliers in your country? (1 = largely nonexistent; 7 = very numerous)". Japan and Germany had the highest scores, followed by India and Qatar. The US was 7th. Then there is this question: "How well do companies in your country treat customers? (1 = generally treat their customers badly; 7 = are highly responsive to customers and customer retention)." not surprisingly Japan came in on top with a score of 6.3; the US was 9th with a score of 5.7.

The country profiles give an interesting snapshot of where a nation is relative to others. For the US there are some surprising results. For example, the US is 39th with respect to the strength of auditing and reporting standards, 22nd on ethical behavior of firms and 26th on judicial independence. (There are also some answers I would expect from a survey of businessmen.)

I could go on and on with the specific of the measures, but I think you get the point. I'm not sure I completely believe the numbers, but it is interesting to see how countries rate themselves on such measures.

So, all in all an interesting report. But don't take the rankings all that seriously. Best to look carefully under the hood, where things are much more interesting.

This morning's trade data from BEA contains some good and bad news. The deficit spiked upward by $4.5 billion in July as imports surged by $7.2 billion and export grew by only $2.7 billion. The good news is that the level of trade increased and the rise in imports is a sign of a recovery. The bad news is more long term. After making progress in correcting the trade deficit things made be reverting to the pre-2008 normal of digging an ever increasing hole in our current account balance. Much of the increase in imports was due to increased oil prices and auto sales. However, as the chart below shows, the balance in non-petroleum goods declined more than in petroleum goods. Imports in industrial supplies, capital goods, and consumer goods also rose. The increase in the deficit was about twice what economist had expected, which according to the Wall Street Journal, was for a $27.5 billion shortfall.

The trend for trade in intangibles was also not good. Our surplus was essentially unchanged at $11 billion (actually declined slightly by $94 million). Imports were up slightly as was income from royalties (an export). Exports of business services were down slightly. Our intangibles trade surplus has been essentially flat, with an ever so slight downward trend, for over a year. Figure 1 below shows the intangible trade balance, figure 2 puts that surplus in the context of our goods deficit and figure 3 breaks the goods deficit into petroleum and non-petroleum goods.

Like the overall trade deficit, our deficit in Advanced Technology Products jumped dramatically in July. The deficit grew by almost $2 billion as imports increased in almost ever area (but interestingly not in information and communications technologies) and exports of aerospace declined. The situation is even worse that reports, as BEA notes in a footnote that due to non-disclosure requirements, total exports are overstated by $431 million. 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 big news is the once again large revisions in the royalties and business services numbers due to, according to BEA, "more comprehensive and revised quarterly and monthly data." As a result, exports of intangibles have been overstated by $6.3 billion, imports overstated by $2.6 billion, and the overall trade balance in intangibles overstated by $3.7 billion over the six month period. The revised data shows that the trade surplus was overstated by approximately $600 million each month. These are revisions average about 5%, with revisions of almost 9% to the royalty income (exports) data. While I appreciate BEA's efforts to improve the data, I remain concerned about these revisions. We really need a better way of incorporating the data into the monthly figures, rather than revising the numbers a half a year later.

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.

One of my indicators of whether an issue has hit the mainstream is when it starts showing up in the comics (beyond the standard politically oriented ones such as Doonesbury). So, check out this morning's Dilbert:

Yesterday, President Obama announced the appointment of Ron Bloom as Senior White House Counselor for Manufacturing Policy. It was a fitting announcement for Labor Day. Bloom is well situated to take on this responsibility, having been both a union advisor and an investment banker. The job is essentially an expansion of his role as senior advisor to the President's Task Force on the Automotive Industry.

However, while the manufacturing czar job is a follow on to his role as the auto czar, it will call for a broader vision. The auto task force was focused on the viability of two companies. The manufacturing policy job requires looking at ways to transform an entire production process.

As I've said before, manufacturing is in the process of being transformed into a much more knowledge-intensive activity. The process is analogous to the transformation of agriculture. Agriculture did not disappear from the US, to be shifted to some other nation that continued to do things the way it had always been done. Agriculture was transformed; it mechanized (industrialized, if you prefer).

The key is not the output ("agriculture," "manufacturing," "service"). It is the production process that is important. During the industrial revolution, machine power replaced human and animal power. The key input was energy. Today, knowledge has become the key input (factor of production).

Transforming manufacturing will take more than restructuring a couple of companies. It will take restructuring the entire production process. One of transformations is through a "high road" strategy that puts its emphasis on all upgrading of the inputs to the production process: technology, worker skills and cooperative/collaborative organizational structures (see previous posting).

It also means changing the manufacturing mindset. As I have argued many times before, the line between manufacturing and services has blurred. But many companies seem still fixed in the industrial age mentality of turning out a large volume of a commoditized product. The very nature of the supply chain forces 3rd and 4th tier suppliers in to this mode. These companies are not involved in product design and innovation; they simply respond to specs and price. Changing that structure will be painful and disruptive. Trying to revive that structure will be futile.

Thus, one of the major tasks for our new manufacturing policy needs to be focused on the lower tiers. How does the policy help these small companies re-orient themselves to the 21st Century?

It will take a multi-fold approach. Let me suggest one set of activities--by no means a complete list, but some ideas. We need more research on the service-manufacturing linkage to understand the transformation. That would be an excellent part of the "services sciences" agenda. We also need to find creative ways that the smaller supplier can move up the value-chain to take advantage of this shift. We then need to instill this notion of the fusion of manufacturing and services into the Manufacturing Extension Partnerships. The MEPs were on the front lines helping small and medium size companies during the quality revolution. They need to be on the front lines of the innovation and "customer solution" revolution.

Mr. Bloom has a big job ahead of him. His task is made that much harder by the transformative nature of the challenge. If it was simply a case of restarting the machinery, that would be hard enough. Instead, he has to finds ways to change the machinery around - while it is still running.

I wish him all the luck in the world. He will need it.

This morning's employment data from BLS was a little better and worse than expected. The unemployment rate jumped to 9.7% -- a big jump up for July's 9.4%. But nonfarm payroll employment declined by only 216,000. According to the Wall Street Journal, the economists' consensus forecast had expected a 9.5% unemployment rate and a 233,000 decline in payrolls.

Of concern to me is the fact that the number of involuntary underemployed (part time for economic reasons) rose in August. While the increase was small enough for the BLS to say the situation was "little changed" (up to 9.1 million from 8.8 million in July), it is a reversal of the recent slight trend downward (see chart below). So the situation may be in that static middle ground right now as far as involuntary underemployment is concerned--not getting worse, but not yet improving. At some point soon, however, we need to see an upturn.

Speaking of using IP as a trade sanction (see earlier posting), the blog IP-Watch has this story on a new twist to the previous WTO ruling on gambling and Antigua - Company Pushes Debate On Implementing WTO TRIPS Cross-Retaliation

A website providing unlimited music and movies for a token price is seeking to take advantage of a 2007 World Trade Organisation ruling between the Caribbean nations of Antigua and Barbuda and the United States, which granted Antigua the right to suspend some US intellectual property rights obligations. The action raises questions about implementation of cross-retaliation rulings, in which the complaining country can seek damages in a different sector than that in which the harm was incurred.
The government of Antigua and Barbuda on 17 July released a statement saying that the website, named Zookz.com, was not operating under the authority of the government and was not authorised either by the government or by the WTO to operate under the 2007 ruling. Zookz.com's legal adviser said a court action was being prepared to force the government to apply the WTO ruling.

I still have a problem using IP as a retaliatory tool. Could be that this action will, in fact, spur on the debate.

An update on my earlier posting on the Skype deal. Joff Wild over at IAM Magazine has a good discussion from an IP lawyer over on his blog: eBay pulls a rabbit out of the bag, but it could have been so much better. Turns out the problem may be worse that thought. According to Ted Sabety:

Joltid holds at least one patent independently from Skype, which issued in January, for a "distributed database". If this patent is relevant to the underlying technology Skype licensed in, replacing the licensed software does not get Skype out of the woods on the patent front.

His advice:

The lesson here is that it is important for acquirors (eBay) always to obtain sufficient rights in a software acquisition to build the business and possibly to sell it: either by obtaining the right to modify source code or, at a minimum, obtaining sufficient patent rights independent of the existing software code in order to permit independent development.

Thanks to Joff for tracking this down.

In an earlier posting, I mentioned the preliminary WTO ruling on the Brazil-US cotton dispute. In that case, the WTO authorized Brazil to impose retaliatory sanctions ("countermeasures") on services and intellectual property. In other words, Brazil could violate US intellectual property rights with WTO blessing. This followed an earlier WTO ruling that Antigua could use intellectual property rights as a retaliatory sanction in a dispute with the US over Internet gambling.

Monday the WTO issued it's "Decision by the Arbitrator" as to exactly what sanctions Brazil may impose -- and they backed off a bit. The arbitrator awarded Brazil a much lower total amount subject to retaliatory sanctions. Brazil wanted $2.5 billion in sanctions; US said $30million; arbitrator awarded $295 million. (See stories in the Wall Street Journal, the New York Times, and Business Week).

More importantly, the arbitrator did not give Brazil the right to impose countermeasures involving intellectual property rights. This victory, however, should not be taken as an signal that IP is off limits in the trade wars. The arbitrator did not rule that IPR is inappropriate as a sanction. They merely ruled that the size of the damages were not large enough to justify using IPR as a sanction -- that there was no reason to go beyond sanctions on trade in goods.

So the concept of using a "relaxation" of intellectual property rights as countermeasure is still in force. But it is a target of second resort -- to be looked at only when "the suspension of concessions in the goods sector is not practicable or effective."

From the New York Times/Reuters:

U.S. billionaire Warren Buffett intends to raise his stake in Chinese electric car and battery maker BYD Co Ltd, BYD's chairman said on Monday, sending shares in his company up 8 percent.

Why - maybe because Chinese electric cars may be coming to the US soon:

BYD has ambitious plans for its hybrid and rechargeable electric vehicles, aiming to sell as many as 9 million units by 2025 to take on heavyweights like General Motors and Toyota Motor Corp.
It launched a gasoline-electric hybrid electric car, F3DM, in China last year and expects to sell its all-electric car e6 to the United States in 2010, a year earlier than its original 2011 target. BYD says the e6 is capable of driving 400 kilometers (249 miles) on a single charge.
"e6 will be launched in the United States by the end of 2010 and they are now being tested under U.S. regulations," [BYD Chairman] Wang [Chuanfu] said.

But, will they be made here?

An earlier posting brought up the subject of Skype's patent problem -- pending litigation in the UK over alleged violation of the terms of a licensing agreement. At that time, I speculated that eBay has miscalculated when if failed to secure all the intangible assets of the company when it acquired Skype. Now it turns out that some very savvy investors are willing to pay a lot of money for Skype. Do they know something that the rest of the world doesn't?

Maybe.

And it may be contained in the end line of the Wall Street Journal report on the deal:

A potential spin-off of the company has been clouded by ongoing intellectual property dispute with Joltid Ltd., a company owned by Skype's founders that has the rights to some of its core technology. Joltid alleged that eBay violated its licensing agreement for the technology and has threatened to end the agreement. EBay asked a U.K. court to find that it isn't in breach of the license, but proceedings could stretch on for months. Meanwhile, eBay said it was undertaking an "expensive" effort to develop a work-around for the Joltid software.

I wonder if the deal is contingent upon that work-around?

In a number of previous postings, I have referred to the program created by Senator Jeff Bingaman to provide tax credits for domestic clean energy technologies. In mid August, the Energy Department posted the notice of funds, with applications due by mid-September (see Advanced Energy Manufacturing Tax Credit (48C)).

The program has $2.3 billion of tax credit to award--providing up to a 30% credit for "new, expanded, or re-equipped advanced energy manufacturing projects" for a total investment supported of $7.7 billion. Types of project eligible include:
 •  Technologies that create energy from renewable resources (sun, wind, geothermal and other renewable resources)
 •  Energy storage technologies (fuel cells, microturbines or other energy storage systems used in electric vehicles)
 •  Advanced transmission technologies that support renewable generation (including storage)
 •  Renewable fuel refining or blending technologies
 •  Energy conservation technologies (advanced lighting, smart grid)
 •  Plug-in electric vehicles & vehicle components (motors, generators)
 •  Property to capture and sequester carbon dioxide
 •  Other property designed to reduce greenhouse gas emissions
DOE has also provided an illustrivative list of projects.

The program is forward looking: "Projects must be completed within 4 years of their tax credit acceptance. Eligible investment credits cover future expenditures and do not award past investment."

As good as the program is, however, let me suggestion the next step. One of the problems that companies trying to start up these types of facilities often face is the high up front costs. Manufacturing is a capital intensive undertaking. Tax credits only come later, when there is a profit to be taxed.

The same funding limitations have affected clean energy generating projects. In recognition of that problem, the stimulus bill included a provision to essentially monetize already existing tax credits. The Treasury Department has now up and running its program authorized under Section 1603 of the bill for Payments for Specified Energy Property in Lieu of Tax Credits.

Congress should seriously consider a similar type of program for the Advanced Energy Manufacturing Tax Credit. At the very least, Congress should take a close look at the regulations to ensure that private market monetization options are available. Under the existing regulations, the gaining the tax credit requires the taxpayer to execute an agreement with the IRS. Any "successor in interest" must execute a new agreement with the IRS. While the agreement is rather standardized, it is not clear that a purely financial "successor in interest" - as opposed to one actually taking over control and operation of the manufacturing facility - would qualify.

Private sector monetization of tax credits is an accepted, although not completely noncontroversial, practice. Done right, it could be a useful way to provide financing for US companies in the green technology manufacturing race.