September 2011 Archives

Here is an interesting story in the New York Times -- "Washington Considers Sale of Spare Properties to Raise Revenue." The story is mostly about selling of tangibles assets -- but:

It involves selling an island, courthouses, maybe an airstrip, generally idle or underused vehicles, roads, buildings, land -- even the airwaves used to broadcast television. [Emphasis added]

However, before we start going off on this, I suggest that we first figure out what intangible assets the government has, and craft a policy for better managing and where appropriate monetizing them. As I've written many time before in this blog, we don't have any sort of coherent policy. Our policy on government information is made up of various moving parts. We have a psedo-policy on government brands and trademarks. By law the government granted asset of FCC licenses cannot be used as collateral for loans. A few years ago, GAO ruled that airport landing rights were not assets that the government could auction off (in fact the NY Times story points out that auctioning off the airwaves requires passing a new law). And don't even get me started with the technology transfer system that deals with government patents and government-funded outside research.

There are bills in Congress to create a base-closing type of commission to make recommendations on which pieces of government property should be sold off. For intangible asset, why don't we create a commission to first figure out what we have -- and how best to manage it. Then, and only then, we can start talking about sale, license and/or retain.

Earlier in September Congress finally passed and the President signed the patent bill (America Invests Act). This of course does not mean that all the fights are over. Companies will continue to pursue IP legal actions as part of their strategies. And there are left over public policy issues. For example, the issue of patent fee diversion will continue to linger. In addition, people will continue to argue whether the bill is a good thing or a bad thing.

But as one commentator said, the bill closes out a policy agenda from 10 years ago. So now it is time to start thinking about the next set of issues. As was noted at our intangibles and economic growth conference (see earlier posting and Athena white paper New Building Blocks), the innovation ecosystem has moved to a collaboration model. It was also noted that the patent system, designed for the industrial era, is not necessarily up to the task of an open innovation/collaboration driven model.

A report from the Federal Trade Commission from March (The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition) takes direct aim at this shift to greater collaboration, in all its forms -- open innovation, technology transfer and the issue of ex post patent transactions.

The report lays out a fundamental intersection between patent and competition:

Competition among patented technologies at every stage of the innovation process helps generate lower prices, more choices and higher quality products for consumers. Products compete to be purchased by consumers. Developed technologies compete in technology markets to be chosen for incorporation into products. Early-stage technologies compete for development funding. By aligning the patentee's market reward with consumer preferences, competition in product and technology markets encourages investment in those inventions that are more likely to be valued by consumers. When patent law facilitates and does not distort this competition, it aligns with competition policy to the benefit of consumers.

The report focuses on two issues: notice (what I would call the transparency of the patent claims) and enforcement remedies. The report notes a number of problems with notice, including difficulty interpreting the boundaries of issued claims, dealing with claims that may issue from pending applications and difficulty of identifying and reviewing published patents.

As the report notes:

Trade-offs between notice and scope pose particularly thorny issues, and it is vital that they be approached with a full understanding of the notice implications. Divergence in the extent and nature of notice problems among industries also poses challenges. We look for ways to improve notice in problem areas without impairing the patent system elsewhere and without sacrificing the benefits of a unitary patent system, with doctrines applicable across technologies.

Effective patent remedies are critical to the patent system's incentives to innovate. Patent infringement interferes with a patentee's ability to realize its patent's value in the marketplace. Remedies protect the ability of patentees to earn returns in the market by stopping and deterring infringement in the case of injunctions, and by making patentees whole through damage awards when infringement has occurred. As explained in Chapter 4 [of the report], to perform that role, patent remedies should seek to replicate the market reward that the patent holder would have earned absent infringement.

I won't go into all the recommendations -- it makes a lot of technical suggestions. Most of them are aimed at the PTO and the courts. But if you want to understand the next wave of patent reform (if there is one), this report provides a good guideline to the issues and possible solutions.

Back ages ago when I worked for the Senate, I was at one time a staffer of the subcommittee dealing with government information policy [note: many subcommittee changes later, I'm not sure which subcommittee this would even be anymore]. It became very clear to me from that experience that dealing with the intangible asset of information is very tricky. For example, there is the recent case of Border's customer lists and privacy rights (see earlier posting).

Here is an example of the complexity of the issue -- a story from Federal Computer Week a couple of weeks ago -- "Census bureau clarifies its position on Title 13 confidentiality for addresses." Under Title 13 of the US Code, certain census data cannot be disclosed or shared with others, including state and local government. This includes addresses. A few weeks ago comments were made that this might be changing. Now the Census Bureau has clarified that this isn't really happening.

The issue is one of confidentiality of the government data (which is critical to the accurate collection of that data) versus the need to share the data for it to be useful. This issue is not unique to the census data. It cuts across much of government collected data (think "tax records") and private-sector collected data (think "customer information"). Yet our policies seem to be ad-hoc. As I've noted in at least 3 previous posts, we need a consistent policy that treats personal data as an intangible assets. An asset based approach would help both sides benefit from strong protection of the data - with the protection tied to the value. By looking at the use and value of the data as an intangible asset, a more nuanced and appropriate level of protection could be crafted. Current government policy -- such as Title 13 does not seem to allow that. We need to re-think that policy.

Of course, when I was involved in a re-thinking of government information policy 25 years ago, we ran into a buzz-saw. Maybe the thinking process has evolved somewhat. Once can hope.

Here is an little item from BVR's IP Management & Valuation Wire -- "Trade secrets protections continue to flourish". Bottom line, they wonder if under the new patent system, trade secrets might become more important in protecting intellectual property. I think that is unclear. Trade secrets require a high level of vigilance, and once opened up are hard to put back in the bottle. Nor can they be stockpiled as easily as patents.

The ultimate test of the two might be if someone used a trade secret defense against a patent infringement. "You violated my patent. No your patent steals my trade secret." Could be an interesting fight.

In an earlier posting on the sale of Borders' intangible assets, I noted that a key intangibles was the retailer's customer information, such as contact information and purchasing history. Now comes word that the sales of this assets has hit a snag. According to a story in the Detroit Free Press ("Borders intellectual property sale delayed"), the judge in the case is concerned about whether the sale violates privacy laws. A hearing on the specifics is scheduled for today.

According to the story, when the judge asked the question (centering on email op-out provisions) "Borders' lawyers said they hadn't considered the option." Clearly here is a case of the blind-men and the elephant, as we discussed at our New Building Blocks for Jobs and Economic Growth conference (see earlier posting). Someone was not talking to someone who they should have been talking to. And no one apparently understood the entire issue of the company's intangible assets.

Lesson learned -- I hope.

PS -- Just to refresh your memories, here is the story about the blind men and the elephant, from our report New Building Blocks for Jobs and Economic Growth: Intangible Assets as Sources of Increased Productivity and Enterprise Value -- Conference Observations:

In that parable, a number of blind men try to describe an elephant--each believing that the small part of the elephant that he can feel constitutes the whole. Like the blind men, people experience intangibles from different points of view depending on their role and expertise, whether they are business managers, accountants, lawyers, risk managers, investors, or public policymakers.

I was at an event this morning featuring Treasury Secretary Geithner speaking about the global economy. I was please to hear him use the phrase "innovation" a number of times. To paraphrase, he basically said that the goal was to have an economy where we made and crate things here in the US. I applaud that goal. However, I was more concerned about his emphasis on the types of policy used to get there. Maybe this is a case of "where you sit determines where you stand" (i.e. you're role limits your policy position). But Secretary Geithner could not break out of the narrow box of the role of government: education; infrastructure; basic science; using tax reform to boost investment in the US. He did not that there were exceptions to this generic governmental role for energy and defense (which implies the national security argument). So it was a little disheartening to hear the goal of "innovation" being thrown about without a full understanding of how to promote that goal.

One another note, he succinctly summarized the Chinese strategy: if you want to sell here, you have to produce here; if you want to produce here you have to give us your technology; and if you want to produce here you have to export from here. I was a little concerned about the narrowness of his policy response: get the exchange rate right and protect intellectual property. While both of those are important, they miss the point that he articulated so well. For example, the issue is not just about "stealing our IP" as is often phrased. That implies if they just pay us for our DVDs and patents, everything will be fine. The problem is not simply "stealing" but the broader issue of their policy of a forced technology transfer. This is the "if you want to sell here, you have to give us your technology".

Part of the problem I see is the difficulty in moving beyond a vision of intangibles & technology as IP. The issue with Chinese policy is one of transferring know-how. This is a very complex process. The simply way this process gets translated into policy-speak is "protect IP." And then the action item is patent enforcement. Such a narrow focus will not end up addressing any of the underlying problems.

One final note. Secretary Geithner mention the political situation in passing a couple of time. He noted that one of our strengthens has always been our ability to respond forcefully and creatively to economic challenges. The implication was that we are losing that ability. I would agree. The political dysfunctionality, where you have Congressional leaders asking (telling?) the Federal Reserve not to act to help strengthen the economy, is a major concern. I fear that we are losing an major national intangible asset: our ability to act pragmatically and practically on issue of public policy.

Tuesday morning the Senate Finance Committee held a hearing on tax incentives for innovation. The kick off of the hearing were statements by Senators Baucus and Hatch that they were introducing legislation to make the R&D tax credit permanent (S.1577). It is good to see bipartisan support for making the tax credit permanent, but we have been down this road many times before. Everyone seems to agree that the credit should be permanent, but then baulk when it come to finding the out year money to pay for it. It is earlier to do a short term extension that looks less expensive when it comes time to totaling up the bill.

The budgetary politics of the issue are unfortunate. They limit the effectiveness of the program. They also focus the debate on the time extension -- rather than on any improvements. We should be on version 4.0 of the tax credit by now. For example, there is the problem of applying the credit to cooperative research. As was noted at our intangibles and economic growth conference (see earlier posting and Athena white paper New Building Blocks), the innovation ecosystem has moved to a collaboration model. But it is not clear that our tax system has caught up.

At the hearing, the witness (such as Scott Wallsten and Dirk Pilat from the OECD) spoke about the need for an R&D tax credit because of spillover's generated that produce a public good from research that goes beyond what the private companies capture. Thus, companies will tend to under invest in research compared to what would be social optimal. I would note that this was the core message of Fed Chairman Ben Bernanke at our intangibles conference (see earlier postings).

However, I was especially interested in the testimony by Michael Rashkin and Annette Nellen. Rashkin talked about how to create an incentive system that keeps research, IP and jobs in the US -- as opposed to the system he says encourages companies to move their research and "park the resulting intellectual property in tax havens". Nellen talk about other provisions in the tax code beyond the R&D tax credit, such as Section 179 which allows expensing of depreciable equipment (including R&D equipment) and Section 1235 that treats sales of certain patents as long term capital gains rather than income.

Specifically with respect to Section 179, she notes the following:

Section 179 expensing ignores intangible assets: Section 179 helps small and medium size businesses by allowing a specified dollar amount of tangible personal property to be expensed rather than depreciated. The benefit is simpler recordkeeping and a lower after-tax cost for the equipment. On a temporary basis, Section 179 also applies to off-the-shelf software purchases. Both tangible and intangible assets are crucial to businesses operating in today's information age. Section 179 is out-dated for only applying to tangible personal property.
Possible solution: Expand Section 179 to apply to both tangible and intangible personal property.
[emphasis in original]

I would note one other item. As the hearings pointed out, expensing of R&D investments for tax purposes is an incentive in and of itself. Allowing companies to immediately write off the cost of R&D goes back to 1954 -- and is a way for companies to lower their tax bills (thereby providing an incentive). We often talk about accounting measure that call for R&D investments to be treated as an investment and depreciated over time. We should not lose sight of the tax implications of that proposed change -- and not inadvertently remove a current innovation incentive.

I've written a number of times before on the use (or non-use) of non-compete agreements. But here is an interesting twist: J&J is using a non-compete agreement to prevent the new CEO of Boston Scientific from begin a full-time CEO. As the Wall Street Journal ("J&J Put Squeeze on Rival's Hiring") explains:

Johnson & Johnson's insistence on enforcing a non-compete agreement to keep senior executive Michael Mahoney from joining archrival Boston Scientific Corp. as chief executive led to unusual employment terms at the medical device maker, according to people familiar with the matter.
J&J agreed to allow Mr. Mahoney to join Boston Scientific only after the company promised the 46-year-old won't supervise competing businesses or become its chief executive until late 2012 and agreed to have its general counsel personally monitor compliance, those people said.

The Journal story goes on to note:

"This whole scenario is more than a tad unusual," said Larry Drapkin, a partner at Mitchell, Silberberg & Knupp LLP in Los Angeles who co-heads its labor and employment department. "Everybody wants to choose a CEO and have him up and running [immediately] rather than sit on the sideline," Mr. Drapkin added.

A tab unusual to say the least. Interestingly, the story does mention that non-compete agreements are less of a factor in fights between companies in Silicon Valley because of the difficulty of enforcing such agreements under California law (as I've noted before). I wonder if it was "Stanford Scientific" rather than "Boston Scientific" would we even be reading this story?

On May 16 and 17, 2011, Athena Alliance organized a conference on the role of intangible assets in job creation and economic growth (see earlier postings). Co-sponsored by the OECD, The Conference Board, Kauffman Foundation, and US National Academies and hosted by the Georgetown Center for Business and Public Policy, the conference drew a diverse group of academics, business leaders, and policymakers. The purpose of the conference was to raise public awareness about the growing importance of intangibles in driving economic growth and job creation and to identify key research and policy areas that can help governments and businesses develop growth strategies that better utilize intangible assets. As with many such gatherings, the conference yielded a richness of conversations and insights that are impossible to completely convey. However, a white paper we are publishing today -- New Building Blocks for Jobs and Economic Growth: Intangible Assets as Sources of Increased Productivity and Enterprise Value -- Conference Observations -- aims to highlight some of those discussions based on my personal observations. (A one-page summary of the paper is also available.)

From the beginning, the conference discussions highlighted the importance of intangibles. As Chairman Bernanke said in his opening remarks, the topics of innovation and intangible capital "are central to understanding how we can best promote robust economic growth in the long run." The conference embraced a broad perspective of intangibles--from worker skills, reputation, organizational structures, and relations with suppliers and customers to patents, copyrights, and trademarks.

Another key insight was the acknowledgment of the need to view intangibles from multiple perspectives and frameworks. Great progress is being made on macroeconomic measurement, such as the inclusion of intangibles in gross domestic product (GDP) measurements. Yet, as was said at the end of the conference, the intangible framework is "too important to be left in the hands of macroeconomists." There is a need to integrate the macroeconomic analysis, based on available data on corporate spending, with the business strategy and corporate reporting view. This, in turn, is driven by the imperative to understand the resulting assets created by corporate investment and how these assets can help finance innovation and economic growth.

But we must move beyond issues of measurement. As one participant explained, our task is to help "managers organize information on intangibles" and then learn how intangibles "lead to innovation, service improvements, reputation, and improved business performance." To accomplish these tasks, both the public and private sectors need to see how the intangibles framework links to business outcomes and economic growth. Business needs better tools to understand and manage intangibles. Financiers and investors need better valuation standards so the financial system can treat intangibles as a recognized asset class. Public policy analysis needs to better identify market failures and understand the microeconomics of intangibles (e.g., the social return on investment) and the complementarities among intangible assets.

With respect to innovation, the conference conversations highlighted the shifting ecosystem, especially the move to a collaboration model. Crafting policy in this new ecosystem will require a better understanding of the flows of knowledge, including the tacit knowledge of workers. Greater study is needed of institutions and framework conditions that are supposed to foster collaboration. In addition, case studies that detail successes and failures must be generated. The intersection of large firms and startups should be looked at more closely, especially how innovation can be facilitated through information exchange, supplier relations, and other interactions. Finally, in this era of collaboration, the patent system can and should work better.

Also today we are publishing the final report documenting the conference: Intangibles Conference Report September 2011. This report, and other conference documents are available at the New Building Blocks Forum.

According to BusinessWire, there was a vigorous auction for Border's intangible assets last week:

Ten bidders participated in the robust proceedings, including booksellers, major publishing companies and internet only retailers. The auction included more than 50 rounds of bidding before the winning bidders emerged.

Earlier court documents also listed Borders's membership lists, customer information, including contact information and e-mail addresses and other purchasing history and related information, as among the assets to be auctioned.

Other assets went to overseas parties that had operated Borders stores in different parts of the world: Pearson Australia Group Pty Ltd. paid $450,000 for Borders trademarks in Australia and New Zealand; Popular Holdings Ltd. paid $100,000 for the Singapore trademarks; Berjaya Books paid $825,000 for trademarks in Malaysia; and Al Maya International paid $500,000 for trademarks in "certain Gulf countries including the United Arab Emirates."

Details of exactly who bought what will be revealed at a court hearing on Sept. 20. And then we will have to wait for the Barnes & Noble's SEC filings to see how they book those intangibles - and for how much.

Over the years, I've posted a number of pieces on 3D printing as a (not the) manufacturing technique of the future (to be correct I should say fabrication technique). The New York Times is running a great graphic on how one version of these printers work -- see "A Machine That Gives Shape to Your Ideas". Note that this is similar to the output of a metal stamping or plastic molding machine -- a single piece. The strength of 3D printing is it flexibility. Thus, it open the door for less expensive customize pieces. But assembly of more complicated structures is still required.

This morning, Education Secretary Arne Duncan is announcing the launch (finally) of the Digital Promise initiation. Digital Promise (technically the National Center for Research in Advanced Information and Digital Technologies) was originally authorized in the Higher Education Opportunity Act of 2008 (see earlier postings).

Today's announcement (see the White House fact sheet Digital Promise Initiative) is more than just the Digital Promise organization. The initiative includes creation of a League of Innovative Schools to help with rapid deployment, new awards from the NSF for learning technologies, and the launch of 2012 National STEM Video Game Challenge -- among other things.

It may sound like a series of small steps. But there is a crying need to revamp the way people learn. In that regard, I hope that Digital Promise does not focus solely on the technology. As I've said before, we need to move debate away from its techno-centric focus ("what is the effect of the technology") to a learning focus ("what information/skills do people need and what is the best way for them to learn"). Note that I said learning, not teaching. Teaching is the means - learning is the goal. New methods (and technologies) for teaching are fine. But it should be all about what the learners need (I hate to call them students, because that puts them in the passive situation) - not what the teachers need.

An interesting story from the BVR's IP Management & Valuation Wire on government-created intangible assets -- "FCC licenses have private economic value, including goodwill". As the story points out, by law FCC licenses cannot be used as collateral. However, the story describes how a recent court case In re Terrestar Networks, Inc., 2011 WL 3654543 (Bkrtcy. S.D.N.Y.)(Aug. 19, 2011) allows a note holder to have a secured interest in the "economic value" of the license - apparently without impinging on the FCC's authority over any transfer of ownership. Thus, the economic value of the license can be used as collateral, but not the license itself.

As I've noted before, we do not necessarily have a coherent policy toward the management of government intangible assets. Nor do we seem to have a coherent policy on government-created assets -- such as FCC licenses. A couple of years ago I pointed out a GAO ruling that airport landing rights were not an asset under the government's regulations for disposal of assets -- even though accountant view such licenses as assets. The FCC license is just one more example of why we need a review US government policy on intangibles.

Here is an interesting thought from Derek Singleton on How Manufacturing Can Attract Young Talent Again:

Gamification of manufacturing - Gamification is a hot topic in many aspects of business at the moment - one driven by the idea that adding gaming elements to non-gaming activities encourages action and participation. It's a movement that seeks to capitalize on our youth's obsession with video games as well as our competitive nature. According to Diana Miller and Simon Jacobson's recent Gartner First Thing Monday Morning newsletter, Invensys has been using 3D gaming technology to teach new hires how to operate oil refinery equipment for the past few years. In the same vein, Siemens recently released Plantville, a program designed to teach manufacturing processes and technologies to young people and new hires. I haven't played it yet but it's apparently similar to Farmville - without the productivity loss.

Singleton outlines a number of other possible activities, but the gamification idea is the one that really caught my attention. As the use of "serious gaming" begins to take hold in STEM teaching, there might be an opportunity for manufacturing to tag along. Although I don't know if running a factory will have the same appeal as building a world (ala SimCity).

Back in June, the Work Foundation in the UK published A Plan for Growth in the Knowledge Economy. That report laid out a vision of a possible economic future for the UK:

By 2020 we will have:
•  An economy where productive entrepreneurship can flourish, and our potential high growth firms are not held back by local conditions or systemic weaknesses in management and leadership skills;
•  A world class pool of knowledge workers - driven by a sustained expansion in the graduate workforce, improvements will have been seen across all disciplines, but the quality of science, technology, engineering, and maths (STEM) graduates will have received particular attention;
•  A strong reputation for commitment to investment in a world class science base as well as research and development, creativity and design; and
•  A strong understanding of how to make the most of our public services - this will fully recognise their role within the knowledge economy, both as knowledge economy sectors in their own right and as anchor institutions at the heart of public private innovation ecosystems.

Four key knowledge economy sectors will have been prominent within this growth:
•  Low Carbon - growing global demand for activities which reduce or mitigate against the release of carbon dioxide in the atmosphere will have successfully been translated into private demand for innovative new British manufactured goods and service offers.
•  Creative Industries will have responded to pressures to develop new business models, maintaining their position as a major creator of expressive value for the whole economy, as well as significant employer and exporter;
•  Manu-services - the majority of British manufacturers will have adapted to a new business model, in which they generate as much value from the innovative services they sell to their clients as from the goods they produce; and
•  Knowledge-based business services - the UK will remain the world leader in business services, and will have a plethora of innovative companies that drive innovation and act as the infrastructure of the knowledge economy.

The knowledge economy is often misrepresented as favouring services over manufacturing, as destroying jobs, as creating money from thin air. All of these misconceptions are wrong; in fact, the knowledge economy is as much about manufacturing as services, and is the most productive and valuable part of our economy.

At its heart, the knowledge economy refers to activities which create value from exploiting knowledge and technology rather than physical assets and manual labour. It has grown because we now buy different types of products and services, and because the methods involved in making them have changed. New technologies and business processes may have destroyed some jobs, but they have also created new, highly skilled jobs in managing and applying these knowledge-based assets.

there are real limitations to how far we should prioritise STEM skills as a driver of innovation. Their relationship to invention is undeniable, but this reflects only a portion of innovation processes - a broad range of skills can be identified as important here. For example:
•  Design skills - The Cox Review [study by the UK Design Council] defined design as shaping 'ideas to become practical and attractive propositions for users or customers'. This is of clear relevance for innovation since these are the key skills through which new knowledge can be translated into a form where it is of maximum value to businesses and consumers;
•  Commercial skills - innovation depends on understanding how products will sit within and lead the development of new markets, the understanding how business and markets operate will be of particular relevance; and
•  Communication skills - The ability to transmit information, thoughts or opinions is of clear relevance for all aspects of innovation - humanities courses that have an explicit focus on communication, may therefore be of great relevance for supporting innovation.

There has been a lot of ink and bandwidth devoted over the last 12 hours to the President's jobs plan (see text of last night's speech and White House fact sheet). The comments run the range of Goldilocks & the Three Bears -- too small; too big; just right.

But in all cases, it has been pretty standard economic and ideological rhetoric. Interestingly, the White House is attempting to go beyond that to tie the bill to specific areas. The tie to small business is obvious -- and if you don't understand that, the head of the SBA has a White House blog posting to explain it. And there is a posting by the Chair of the Council of Environmental Quality on how it will help create cleaner communities.

Of specific interest to me is a posting by OSTP officials Aneesh Chopra and Tom Kalil on The President's American Jobs Act: Fueling Innovation and Entrepreneurship. They point to a number of provisions in the plan, specifically: increase access to capital for high-growth companies through regulatory changes; use unemployment insurance funds help entrepreneurs start businesses; expand high-speed wireless; modernize schools with new science labs and Internet-ready classrooms; fund the NextGen air traffic modernization; create new National Infrastructure Bank; and support skills-based training for low-income youth and adults.

I'm not sure this all adds up to an innovation package. But it is good to see that at least some of the innovation policy ideas got into the package, especially the unemployment insurance changes. Now we will see how many of them get through the Congressional process. And what might be added. Let the sausage making begin.

A recent study by Deutsche Bank Research finds that "companies with an R&D intensity 50% higher than their industry average boast a 14-21% higher market capitalization." As the study points out, however, increased R&D isn't an automatic path to higher market valuation. Investors look at a number of additional factors, including assessing whether the company can capitalize on that R&D investment. But the study does point to the fact that investors are looking at investments in intangible assets, such as R&D, as a positive -- not just an expense.

I've long argued that the US government needs to do a better job of managing its intangible assets, including its brand.
For example, we should have a budget crosscut of how much the federal government invests in intangible assets. And we should have a coherent policy on utilization of those assets. As I've noted before, in 2007, the French government created the Agence du patrimoine immatériel de l'État (APIE) -- the Agency for Public Intangibles of France. APIE's role is to work with other government ministries to leverage their intangible assets. They help with areas ranging from branding and trademarks to the reuse of government information.

In the US, we tend to put these functions in different silos and basically leave it up to the agencies to figure out what to do. So we have a technology transfer policy dealing with government owned patenting, an information policy dealing with the use of government generated data, and a non-well understood de-facto trademark policy. All of which operated with conflicting goals and objectives. No where do we take a coherent view of these area as government assets.

Now comes a front page story in today's Washington Post of how the military is marketing and licensing its brands:

For years, the services worked with private companies that sold items such as T-shirts and mugs. But those agreements were governed by relatively informal permission letters, and the services didn't charge fees or collect royalties. Then in 2004, as the all-volunteer force was going through a recruiting crisis, Congress passed a law allowing the military to keep the revenue it generated by issuing licenses and trademarks.

As a result, the services have created offices dedicated to issuing licenses and making sure that slogans such as "The Few. The Proud" and emblems such as the Corps' eagle, globe and anchor are registered trademarks with legal protections, just like "The King of Beers" and the Nike swoosh.

The agreements the military now has with companies are much more detailed and robust, ensuring, for example, that the firms are reputable and that the products are tasteful -- no sex, politics or booze -- and made without child labor.

. . .

With a more formal procedure in place, an increasing number of companies have signed up to do business with the Defense Department in recent years, military licensing officials said. In fiscal 2007, private retailers sold an estimated $5 million in Army branded products. This year, officials expect to sell $50 million worth, already generating more than $1.2 million in fees and royalties for the Army. By law, the money pays for the operations of the licensing program. Anything left over is mandated by Congress to go to military morale and recreation programs.

So -- what about the rest of the government (all those FBI and CIA mugs)? And where is the uniform overall policy?

Here is the Washington Post video on the story:

Good news on the July trade deficit released this morning: the deficit dropped by $6.8 billion to $44.8 billion, far better than economist had expected. Exports rose by $6.2 billion while imports dropped by $0.5 billion. The deficits in both goods and petroleum improved.

Our intangibles trade surplus increase ever so slightly as well in July - up by $93 million. Exports of both business services and royalties increased. Imports of business services were down slightly, while royalties paid out (imports) were up slightly.

However, our deficit in advanced technology gods increased slightly in July by $309 million. Both exports and imports declined, with exports falling slightly more than imports. The aerospace and biotechnology sectors saw the biggest declines. 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.

This being the first report of the second half of 2011, the data contains the revisions for the first half of 2011. The revisions show that our intangibles surplus for January through June was greater than originally reported. Exports were larger each month in the period and imports smaller during April, May and June. Interestingly, while imports of business services were revised downward, royalty imports (royalties paid out) were revised upward. The biggest upward revisions were to royalty export (royalty income), by almost 5% in June 2011.

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.

Here is a great blog posting by Steven Blank -- "Why governments don't get startups". He makes a point that I heartily agree with (and have been trying to articulate) -- there are different types of start-ups and that government policy needs to understand which type it is seeking to foster. Too often from what I've seen, policy tries to be all things to all entrepreneurs. But different forms of entrepreneurship have different impacts on the overall economy -- and have different needs. Our policies tend to confuse "small business" with "entrepreneurship" with "growth businesses." Blank's typology is one way of cutting through the confusion:

Six Types of Startups - Pick One

There are six distinct organizational paths for entrepreneurs: lifestyle business, small business, scalable startup, buyable startup, large company, and social entrepreneur. All of the individuals who start these organizations are "entrepreneurs," yet not understanding their differences screws up public policy because the ecosystem in supporting each type is radically different.

For policy makers, the first order of business is to methodically think through which of these entrepreneurial paths they want to help and grow.

Lifestyle startups: Work to live their passion

On the California coast, where I live, we see lifestyle entrepreneurs like surfers and divers who own small surf or dive shops or teach surfing and diving lessons to pay the bills so they can surf and dive some more. A lifestyle entrepreneur is living the life they love, works for no one but themselves, while pursuing their personal passion. In Silicon Valley the equivalent is the journeyman coder or Web designer who loves the technology, and takes coding and U/I jobs because it's a passion.

Small business startups: Work to feed the family

Today, the overwhelming number of entrepreneurs and startups in the United States are still small businesses. There are 5.7 million small businesses in the U.S. They make up 99.7 percent of all companies and employ 50 percent of all non-governmental workers.

Small businesses are grocery stores, hairdressers, consultants, travel agents, Internet commerce storefronts, carpenters, plumbers, electricians, etc. They are anyone who runs his/her own business.

They work as hard as any Silicon Valley entrepreneur. They hire local employees or family. Most are barely profitable. Small business entrepreneurship is not designed for scale, the owners want to own their own business and "feed the family." The only capital available to them is their own savings, bank and small business loans and what they can borrow from relatives. Small business entrepreneurs don't become billionaires and (not coincidentally) don't make many appearances on magazine covers. But in sheer numbers, they are infinitely more representative of "entrepreneurship" than entrepreneurs in other categories --- and their enterprises create local jobs.

Scalable startups: Born to be big

Scalable startups are what Silicon Valley entrepreneurs and their venture investors aspire to build. Google, Skype, Facebook, Twitter are just the latest examples. From day one, the founders believe that their vision can change the world. Unlike small business entrepreneurs, their interest is not in earning a living, but rather in creating equity in a company that eventually will become publicly traded or acquired, generating a multi-million-dollar payoff.

Scalable startups require risk capital to fund their search for a business model, and they attract investment from equally crazy financial investors -- venture capitalists. They hire the best and the brightest. Their job is to search for a repeatable and scalable business model. When they find it, their focus on scale requires even more venture capital to fuel rapid expansion.

Scalable startups tend to group together in innovation clusters (Silicon Valley, Shanghai, New York, Boston, Israel, etc.) They make up a small percentage of the six types of startups, but because of the outsize returns, attract all the risk capital (and press).

Just in the last few years we've come to see that we had been building scalable startups inefficiently. Investors (and educators) treated startups as smaller versions of large companies. We now understand that's just not true. While large companies execute known business models, startups are temporary organizations designed to search for a scalable and repeatable business model.

This insight has begun to change how we teach entrepreneurship, incubate startups and fund them.

Buyable startups: Born to flip

In the last five years, Web and mobile-app startups that are founded to be sold to larger companies have become popular. The plummeting cost required to build a product, the radically reduced time to bring a product to market and the availability of angel capital willing to invest less than a traditional VCs -- $100,000 to $1 million versus $4 million on up -- has allowed these companies to proliferate and their investors to make money. Their goal is not to build a billion-dollar business, but to be sold to a larger company for $5 to $50 million.

Large company startups: Innovate or evaporate

Large companies have finite life cycles. And over the last decade those cycles have grown shorter. Most grow through sustaining innovation, offering new products that are variants around their core products. Changes in customer tastes, new technologies, legislation, new competitors, etc. can create pressure for more disruptive innovation -- requiring large companies to create entirely new products sold to new customers in new markets (i.e. Google and Android). Existing companies do this by either acquiring innovative companies (see Buyable Startups above) or attempting to build a disruptive product internally. Ironically, large company size and culture make disruptive innovation extremely difficult to execute.

Social startups: Driven to make a difference

Social entrepreneurs are no less ambitious, passionate, or driven to make an impact than any other type of founder. But unlike scalable startups, their goal is to make the world a better place, not to take market share or to create to wealth for the founders. They may be organized as a nonprofit, a for-profit, or hybrid.

Non-compete agreements are seen as a standard tool for protecting intangible assets. Under these agreements -- which are a form of contract law -- an employee (or someone selling a business) agrees not to compete against their former employer (or the people who have bought the business) for a certain period of time. Non-compete agreements are even recognized by the accountants as an intangible asset (although I'm sure there are interesting valuation issues).

However, it is unclear whether such agreements are effective or not. The classic counter-argument is Silicon Valley. As I noted in Intangible Asset Monetization, noncompete agreements are considered illegal under California's Business and Professions Code Section 16600 as a restraint of commerce. Many have argued that the lack of such restrictions on the free flow of information and people is a hallmark of the Valley's innovative culture. A number of other states also tend not to enforce non-compete agreements.

Now comes word that the Virginia Supreme Court will look at the issue. According to the Washington Post, the Court will be taking up two cases involving enforcement of non-compete agreements. Neither case (Home Paramount Pest Control Cos. Inc. v. Justin Shaffer, et al. and BB&T Insurance Services v. Thomas Rutherfoord Inc.) involves technology or intellectual property. They both involve another intangible asset: customer relationships. In both cases, the issue is one of "poaching" customers from their former employers.

The Virginia Supreme Court has ruled before on this issue, but apparently only on a case specific basis. We will have to see if these cases set a more standard interpretation of the law. In any event, it will be interesting to see whether any of the Virginia innovation policy players weigh in -- and on which side.

UPDATE:
In November 2011, the Virginia Supreme Court ruled that overly broad non-compete agreements could not be enforced (see story in the Washington Post and the Court's written opinion).

The first Labor Day (celebrated in New York City in 1882 -- made a national holiday in 1894) holidays were billed as the "workingman's holiday." In more recent years, the emphasis has been more as the end-of-summer celebration rather than paean to workers. This Labor Day has been an occasion for an outpouring of concern over the current jobless economy. With the recent news of zero job creation in August (see earlier posting), this concern is well founded. But some have also used this to bemoan the passing to the industrial economy. The idea seems to be that only a resurgence of the industrial model of the past can save "labor" and that this knowledge-based intangible economy is triumph of capital over labor. Nothing should be further from the truth.

Workers are at the very heart of the intangibles economy. We hear this all the time from business leaders who mouth the mantra of "people are our most important asset" (even if they don't practice it).

Of course, the idea that workers are at the heart of the economy is really nothing new. Adam Smith famously made the point that labor and the production process (division of labor) was the real wealth of nations -- not their stocks of gold and silver. In Smith's day, however, that labor was physical and that production process was taken to its logical conclusion in the Taylorist/Fordist system of wringing out any skill contribution of labor to the process.

This new age is built on a different kind of labor than in the industrial age. It is less muscle and more brainpower. It also means a new form for the production process. As Peter Drucker has said:

Increasingly, the human being does not work in mass production, but in what might be called "team production." And that means that increasingly the producing human being is a knowledge worker. Workers as they did before the Industrial Revolution, own the means of production. The means is between their ears.

Now, I realize to some this implies less making and more thinking. And, unfortunately, those who try to advocate for this new economy often describe it that way. They are also wrong.

Drucker's point is not that production workers are being replaced by knowledge workers. Rather, his point is that production workers are becoming knowledge workers. The difference is profound. Too many has simplistically assume the former. This leads to the notion that manufacturing is dead, replaced by "services" (an overly broad term). The public policy consequences of this line of thinking is the re-training scenario: turn factory workers into health care workers.

The idea that production workers are becoming knowledge workers leads to a completely different line of thinking. Rather than dying, manufacturing is transformed. Rather than retraining workers to move into some other (service) sectors, the public policy focus is on continuous on-the-job training to improve worker skills.

This transformation is also opportunity to alter the working condition of production workers The industrial revolution turned workers into parts of a machine driven production process. The division of labor that Smith celebrated vastly increased the productivity of unskilled/lower skilled workers while downgrading the productive contribution of highly skilled craftsmen. The new transformation creates the opportunity to empower more workers. These high performance work organization rely on increased worker involvement to embed more workers skill and knowledge into the production process.

Think this can't happen? Take a look at Germany and think again. As I've noted before, the German manufacturing success is based upon selling knowledge, not just hunks of fabricated metal. In fact, the modern manufacturing factory is a collection of knowledge-based intangible assets -- from the technology imbedded in the machines to the skills of the operators to the knowledge embodied in the layout of the factory floor and the production process.

So, as we get back to work after this Labor Day weekend, let us focus on what it is we need to do. Our task is not to turn back the clock to some mythical industrial past. Rather, it is to grab the forces of the economic transformation and shape them into an economy that works for all. This is not the era of the decline of labor; it is the rise of workers in their new empowered state. That itself should be cause for celebration.

Oracle and SAP are in copyright battle. SAP has admitted that a former subsidiary violated Oracle's copyright through an illegal download. The only question in the fight is how much SAP owes Oracle in damages. Thus, the case is an interesting pure insight into the way that the value of an intangible is calculated. Yesterday, the case took an interesting turn. A jury had awarded Oracle $1.3 billion; the judge is now saying $272 million. A story in the Wall Street Journal (Judge Overturns $1.3B Penalty SAP Was to Pay to Oracle) explains:

SAP appealed the jury's damage award, and U.S. District Judge Phyllis Hamilton on Thursday concluded the amount "was contrary to the weight of the evidence" and "grossly excessive." The jury largely based its award on the amount SAP would have had to pay for rights to the software in licensing negotiations with Oracle.
During a hearing in July, SAP argued that that methodology was flawed because Oracle never would have sold SAP rights to the software. The judge sided with SAP, granting its motion for a new trial to set damages in the event Oracle rejects the proposed $272 million award. She said such a trial would base any damage award on the profits that Oracle lost and SAP gained through the infringement.

So, the value of an intangible is not what the owner is charging for it, but what the market profit is from using that intangible.

Interesting.

Stagnate. That is the best way to summarize August's employment data released this morning:

Nonfarm payroll employment was unchanged (0) in August, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major industries changed little over the month. Health care continued to add jobs, and a decline in information employment reflected a strike. Government employment continued to trend down, despite the return of workers from a partial government shutdown in Minnesota.

The news on involuntary underemployed was even worse. The total number of workers part-time for economic reasons, the number of workers part-time because of slack work and the number of workers who could only find part-time work all increased. The increase in slack work is especially worrisome as it indicates a fall off in production in August.

Lots of stories this morning about the bankruptcy filing of solar panel maker Solyndra. Most of the attention is on the fact that the company received a $535 million loan guarantee from the Department of Energy.

As I noted in an earlier posting, the Department of Energy likes to have companies put up their intellectual property as collateral on these loans. The DOE's suggestions on how to make application stronger includes following:

Access to IP in a default scenario. Where proprietary technology is essential to the operation of a project, a willingness to assign those intellectual property rights to the DOE as collateral in the event of default also strengthens the application. The purpose of providing DOE access to the company's IP is to allow DOE to continue operating the project in a default scenario.

So, my question is: as Solyndra goes through the bankruptcy process, who gets the IP? Did Solyndra put up their IP as collateral? Will DOE step in and assume operational control? I doubt that. It may be in this case, the IP was not considered "essential" to the project. But it will be interesting to see whether the IP shows up in the bankruptcy filings.

One other point, the regulations also require a "listing and description of assets associated, or to be associated, with the project and any other asset that will serve as collateral for the Guaranteed Obligations, including appropriate data as to the value of the assets . . ." If the IP does show up in the bankruptcy filing, it will be interesting in see how it is valued versus what it was valued at in the loan application.