January 2012 Archives

Baruch Lev has a new (published last November) book (Winning Over Investors) and Harvard Business Review article on corporate financial reporting ("How to Win Investors Over"). Bottom line: "Corporate managers who don't share relevant information face a substantial share price discount, a higher cost of capital, and a more volatile stock price."

He doesn't get in to a lot of detail in the article about reporting of intangibles. But he does advocate the use of pro-forma accounting as a compliment to the required GAAP accounting:

I see nothing wrong with managers' honest attempts to improve on GAAP earnings by releasing alternative numbers, particularly after the 2003 SEC requirement that non-GAAP measures included in earnings releases and statutory filings be reconciled with GAAP numbers. Because pro forma earnings are disclosed along with, not in lieu of, GAAP earnings-- and the differences between the two measures are highlighted--investors cannot be worse off with pro forma earnings. On the contrary, they are better off.
. . .
GAAP is particularly deficient at satisfying investors' information needs about "change" companies. These include innovative, intangibles-intensive enterprises; high-growth and early-life-cycle businesses; and organizations undergoing strategic restructuring. If your company has any of those characteristics, you should give serious thought to systematically releasing pro forma earnings and other non-GAAP information, such as the number of patents granted during the period specified, the churn rate of customers, and the gains from online activities.

I would go a little further and argue for some standards on that pro-forma accounting - so that it can be used to make year-to-year, company-to-company, and industry-to-industry comparisons.

But I like the strategy of going around the deficiencies of GAAP accounting using the allowed mechanism of pro forma reports.

Here is a very sobering story from Silicon Valley from the New York Times a couple of weeks ago -- "Tech Valuations Defy the Restraints of Reality." The story mentions three points that I find especially troublesome:

1) money seems to be chasing ideas (good, bad or indifferent):

Some investors no longer even need to hear about a company to hand out money. Jakob Lodwick, an entrepreneur and co-founder of Vimeo, recently raised $2 million simply on the promise that he might have a good idea for a company in the near future.

2) VCs seem to be playing games as to what they are really backing:

Paul Kedrosky, an investor and entrepreneur, explained in an interview that one reason valuations are so wildly inflated is that venture capitalists want to be associated with a potentially successful start-up just so it looks good in their portfolio. This, he said, has driven absurd buying on the secondary private market, where stocks are bought and sold before a company goes public.
"There is massive buying on the secondary market by venture guys just for the showmanship of it," he said. "These buyers are much less price sensitive and just want a company in their portfolio so they can stick the logo on their Web site."

3) smart money seems to be betting against the VCs:

"I have never seen such a generation of people shorting tech stocks," Mr. Kedrosky said, noting that he too has chosen to bet that Groupon, Zynga and LinkedIn will fall significantly in value. "Usually the short community is more nervous about it, but there is a monolithic view that this generation of technology I.P.O.'s is completely broken"

Not a good state of affairs.

So -- yesterday there were stories about how 4Q GDP would hit 3%. This morning, the BEA announced a 2.8% growth in GDP in the 4th quarter. And all of a sudden good news is bad, as the Wall Street Journal noted: "Stock Futures Take Hit After GDP". This, even though as the Journal noted in another story, "The U.S. economy grew at its fastest pace in more than a year and a half in the final three months of 2011, signaling a sturdier recovery took hold despite troubles in other parts of the world."

And I would note that this is the "advanced" estimate of GDP. It is subject to revisions, to be release on February 29 (second estimate) and March 29 (third estimate). So the number will change - guaranteed.

By the way, the same thing happened yesterday with respect to the Index of Leading Indicators -- as the Wall Street Journal reported: "The December increase was half the 0.8% increase expected by economists surveyed by Dow Jones Newswires, but the index has increased for three consecutive months, indicating a strengthening domestic economy, the [Conference Board] report said."

Maybe we should stop asking economists for their predictions.

I will stick to what the numbers say, not economists guesses as to what they might say. The economy grew by a modest but increasingly larger amount in the 4th quarter of 2011. And the biggest drag on the economy was the cuts in government spending.

The jobs and economic growth crisis remains central in the current U.S. political debates. But new solutions -- geared for the 21st Century Knowledge Economy -- are needed. As Federal Reserve Board Chairman Ben Bernanke noted at a May 2011 Athena Alliance event, the topics of innovation and intangible capital "are central to understanding how we can best promote robust economic growth in the long run." To help promote job creation and economic growth in the United States, Athena Alliance is announcing the formation of an Advisory Committee to advance its work on intellectual capital and intangible assets and their central role in the economy.

"The future of the U.S. economy is knowledge intangibles. This is where we enjoy a competitive advantage second to no other nation. Yet we continue to cling to industrial-era conventions that ignore and devalue these critical assets," explained Mary Adams, co-chair of the advisory board, principal of Trek Consulting and author of Intangible Capital: Putting Knowledge to Work in the 21st Century Organization. "Athena's work is unique in helping promote approaches to management and innovation that will tap the intangible capital lying fallow in American communities and companies."

The mission of the Advisory Committee is to expand Athena Alliance's understanding of these changes taking place in the US and global economy and to offer ways to meet the economic challenges arising from the emerging interconnected knowledge intensive world. With the advent of the new year, the Advisory Committee is aggressively starting to build support for the policy issues that will drive positive change and to create collaborative relationships and develop partnerships to bring national attention to the critical issues surrounding intangibles.

"Now is the time to take the work of the Athena Alliance to the next level," said Andrew J. Sherman, co-chair of the advisory board, partner at Jones Day and author of the newly-released Harvesting Intangible Assets. "The proper management and harvesting of intangibles can be an engine for job growth and economic recovery, at a time when all companies and the government need to be capital efficient in its strategic planning."

The Committee members comprise a wide range of individuals with hands-on experience with the measurement, management and monetization of intangibles.

"The Advisory Board will significantly advance Athena Alliance's programs as it reflects a broad spectrum of individuals from a variety of backgrounds and experiences," said Richard Cohon, Athena Alliance's Chairman of the Board. "These Advisory Board members have proven track records of understanding and utilizing intangibles assets to create competitive advantage and finance innovation."

Advisory Committee Members: (affiliations for identification purposes only)

Mary Adams, ICapital Advisors -- co-Chair
Mary Adams is a co-founder of Trek Consulting, co-author of the breakthrough book, Intangible Capital: Putting Knowledge to Work in the 21st Century Organization and founder of the 300+-member ICKnowledgeCenter on-line community. Prior to co-founding Trek in 1999, Ms. Adams worked for 15 years in high-risk finance at Citicorp and Sanwa Business Credit.

Andrew Sherman, Jones Day - - co-Chair
Andrew Sherman has served as a legal and strategic advisor to dozens of Fortune 500 companies and hundreds of emerging growth companies. The author of 17 books on the legal and strategic aspects of business growth, franchising, capital formation, and the leveraging of intellectual property, his latest book is Harvesting Intangible Assets.

Joe Dyer, iRobot
Vice Admiral Joseph W. Dyer (U.S. Navy, Ret.) oversees operations at iRobot as Chief Operating Officer. He came to iRobot in 2003 from a career in the U.S. Navy where he last served as the commander of the Naval Air Systems Command, where he was responsible for research, development, test and evaluation, engineering and logistics for naval aircraft.

Gabe Fried, Hilco Streambank
Gabe Fried is the CEO of Hilco Streambank, the intangible asset valuation and disposition arm of Hilco Trading LLC. Mr. Fried has authored numerous articles for the Turnaround Management Association and American Bankruptcy Institute and is frequently a panelist for both organizations.

Allen Howell, Corporate Flight Management
Allen Howell has been in the aviation industry for 30 years, and for the last 13 years, he has been at the helm of Tennessee-based, Corporate Flight Management as its CEO. In 2011, he launched Social Flights, which markets private aviation flights through Web 2.0 social technology.

John Hudson , Deloitte
John Hudson is a Senior Manager in Deloitte Financial Advisory Services LLP with more than fifteen years of experience valuing businesses and intangible assets.

Don Kuratko, Johnson Center for Entrepreneurship & Innovation, Indiana University
Dr. Donald F. Kuratko ("Dr. K") is The Jack M. Gill Distinguished Chair of Entrepreneurship; & Executive Director of the Johnson Center for Entrepreneurship & Innovation at Indiana University. Professor Kuratko has authored 28 books over 180 articles on aspects of entrepreneurship and corporate innovation.

Bob Laux, Microsoft
Bob Laux is the Senior Director of Financial Accounting and Reporting at Microsoft Corporation where he interacts with and responds to accounting standard setters on numerous issues. He was an Industry Fellow at the Financial Accounting Standards Board working on emerging issues. Before that, Mr. Laux spent eight years at General Motors managing their external financial reporting.

Jim Malackowski, OceanTomo
James E. Malackowski is the Chairman and Chief Executive Officer of Ocean Tomo, LLC, an integrated Intellectual Capital Merchant Banc™ firm. Mr. Malackowski is a member of the IP Hall of Fame Academy and is currently the President of The Licensing Executives Society International, Inc. He began his career spending fifteen years as a management consultant and forensic accountant focused on intangible assets.

As readers of this blog know, I have long advocated for a broad view of innovation to replace the science-driven, technology push vision of the linear model. So I am very excited to pass along this announcement from NBER:

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The Changing Frontier: Rethinking Science and Innovation Policy

With the 1945 publication of Science: The Endless Frontier, Vannevar Bush established an intellectual architecture that helped define a set of public science institutions that were dramatically different from what came before yet largely remain in place today. Now, at the start of the 21st century, many aspects of the science and innovation system ­ from its organization and scale to the role of geography, networks, and legal institutions ­ have witnessed important changes, with potentially substantial implications for the design of science policy and institutions both today and in the decades ahead.

With funding from the National Bureau of Economic Research and the Erwin Marion Kauffman Foundation, the conference and subsequent volume will explore two overarching questions: (1) what are the critical dimensions of change in science and innovation systems, and (2) what are the implications of these changes for policies and institutions in the 21st Century?
Topics of interest include, but are not limited to:

* The influence of increasing market scale and globalization on the demand for and supply of innovations;
* Innovation in financing, such as venture capital, and the role of entrepreneurship in driving innovation;
* Changes in the knowledge production function, including the human and physical capital intensity of R&D, changes in the salient features of the scientific workforce, and the implications of new research tools;
* Shifts in the geography of R&D, including regional and international dimensions, the implications of shifting geography for where the returns to R&D are captured, and analysis of the evolving forces that shape agglomeration and collaboration tendencies;
* Changes in intellectual property regimes and their use, with particular reference to its impact on licensing and alliances;
* Changes in public views of science;
* How information technology and digitization are impacting the production and diffusion of knowledge;
* The evolving roles of different research institutions (including government agencies, universities, and the private sector) in regional, national or global innovation systems, including changes in the relative scale of these types of institutions, the organizational forms these institutions take, the incentive mechanisms these institutions provide, and the ways these institutions interact;
* Unique features of "new" innovative sectors (e.g., biotech, clean energy, nanotech, and mobile broadband) and any implications for innovation policy; and
* Interactions among the above.

This list of topics is intentionally broad and open-ended, and is meant to simply highlight some of the many possible areas witnessing substantive changes in the science and innovation process that may also raise important questions for policy and institutional design.

Interested authors are encouraged to submit a 2-page research proposal that includes an abstract of the intended paper, an outline of the methodologies to be used, and a brief statement about the current state of the research project. The research proposals are to be submitted by April 15, 2012 to http://www.nber.org/confsubmit/backend/cfp?id=RSIPf12. Accepted papers will ultimately be published together in an edited volume.

Authors will be notified of acceptance by May 6, 2012. A pre-conference is scheduled to be held in Cambridge, MA on October 26 and 27, 2012, and the formal conference will be scheduled for summer 2013. Authors of accepted papers will be reimbursed for regular transportation expenses for both the pre-conference and conference, and receive an honorarium of $7500 for timely submission of the draft and final manuscripts.

Conference Organizers

Adam Jaffe, Brandeis University and NBER & Ben Jones, Northwestern University and NBER

I think Matt Yglesias has lost it. His reaction to last night's State of the Union is an over-the-top screed against manufacturing (President Obama's muddled plan to boost employment by hindering trade). The President's sin was the suggestion that some other countries, such as China, aren't playing by the rules when it come to trade and that we should enforce the trade laws. And then the President had the audacity to say that manufacturing was important. That sent Yglesias off into the never-never land of "manufacturing doesn't matter" and "services will save us."

Here is a perfect example of how he misunderstands. Yglesias states, "Indeed, even in the fabled industrial juggernaut of Germany, 68 percent of the population works in services." Of course. It is that "industrial juggernaut" that supports those services jobs. And many of those "services" jobs are actually part of the manufacturing process. And that the Germans are light-years ahead of us in figuring out the fusion between manufacturing and services.

With muddled thinking like this that passes for "expert analysis", no wonder we can't make any headway in the public debate.

OK, so the President didn't use my suggestions on what to say about innovation (see yesterday's posting). But I did like the President's speech. It was a positive speech, a forward looking speech, and, at times, an in-your-face speech. One of the re-occurring themes was "I won't back down." I was especially pleased to hear this in reference to the Administration's policies on worker retraining and on funding for the development of clean energy technologies. These programs have been under attack lately - so it was good to hear the President defend them. While I believe these programs are not enough, the idea that we should cut them back is wrong. The easy course for the President would have been to side step them. Instead he choose to push forward.

In an interesting twist, the White House has prepared a slideshow to accompany the speech and a background paper on the economic policies -- Blueprint for an America Built to Last. Unfortunately, both the speech and the Blueprint did not break any new ground when it come to innovation. The President reiterated his support for small business and entrepreneurship, for basic R&D and for clean energy technologies. In this time of tight budgets, such a limited set of proposals may be all we can realistically expect. And even there, we may not get all that is needed (for example in the R&D budget).

So the fight continues.

According to all indications, the President will use tonight's State of the Union to hit on economic themes. Look for exhortations to Congress to pass the payroll tax cut extension and other Obama Administration proposals. With the head of the IMF now talking about a "1930's moment" in Europe, there are clearly some short term economic issues to be addressed. But on the long term issues, what I expect to hear tonight is an expanded variation of the following:

We need to increase our investments in basic research, education and infrastructure - and bring back manufacturing.

As I've noted before, that is all well and good. But here is what I would like to hear next (using my wording from a number of reports and posting on this blog I've written over the past few years):

This is not the first time we have faced economic challenges. In the 1980's, the U.S. confronted a series of challenges to our economic competitiveness. By working together, we overcame those challenges. We can do the same today.

But we need to recognize that today's challenges are different. The nature of our economy has changed. We are still an economic powerhouse. We need to understand the new environment in which we find ourselves.

Back in the 1980's, we faced global competition in goods and loss of domestic manufacturing firms; now it faces the fusion of manufacturing and services and the opening to international competition of services sectors once thought immune to such challenges. Then, the operating issues were quality and productivity; now they are customization, speed, and responsiveness to customer needs. Then, a key concern was creating a flexible and educated workforce; now, in addition, we must foster an educational enterprise that can provide the constantly changing skills required in a knowledge- and information-intensive economy. Then, the main financial challenge was reducing the cost of capital; today's equivalent challenge is unlocking the value of underutilized knowledge assets and ensuring the efficiency and stability of the global financial system. Then, the policy problem was raising awareness of the importance of international trade; now it is crafting policy appropriate to an increasingly globalized and interconnected economy.

In the 1980s our focus was on individual firms and industries; now we must find ways of sustaining networks of firms and of adopting new business models. Finally, these problems and challenges, as well as myriad new ideas and technologies, are rapidly sweeping across the domestic and international economy. Their speed requires that U.S. industry, both manufacturing and services--as well as the suppliers of financial, scientific, and human capital--have the capabilities and resources necessary to prosper and grow in this new environment.

Basic research helped sustain America's economy growth in the 20th Century. But basic research is not enough. It is one part of a the larger mix that fuels the economy. We moving to a post-scientific economy where, to quote Dr. Christopher Hill, former Vice Provost for Research at George Mason University, "the creation of wealth and jobs based on innovation and new ideas will tend to draw less on the natural sciences and engineering and more on the organizational and social sciences, on the arts, on new business processes, and on meeting consumer needs based on niche production of specialized products and services in which interesting design and appeal to individual tastes matter more than low cost or radical new technologies."

Education needs to move from the classroom to the living room. Life-long learning should not be a slogan but an ingrained part of everyday life. And as important as STEM is, our economic future is not solely in the hands of our scientists and engineers. Our future prosperity rest on raising the skills and knowledge level of everyone. Productivity no longer comes just from new machines, but from new ways of organizing work. And as Professor Jamie Galbraith once said "American competitiveness depends at least as much on style, design, creativity and art - and especially on the liaison between technology and art."

And let us be clear. The manufacturing jobs of our father and grandfather are not coming back. But we can create the manufacturing jobs for our children and grandchildren. We cannot -- we will not -- compete on the basis of a race to the bottom where wages and living standards are lowered to keep jobs from moving elsewhere. We can - and will -- compete based on raising the knowledge content of our products -- both goods and services.

We need to create new policies to confront our new challenges. Government can play a major role in innovation and the development and diffusion of new products. But, innovation policy needs to catch up to the innovation process.

In crafting a new policy, we must recognize three points:
 • the innovation model has changed,
 • it's all about people and organizations, and
 • technology plays multiple roles.

First, we all need to recognize that the innovation model has changed. It is not the linear process of flowing from basic research to final product that sticks in everyone mind. It is a network process. There are many points on the network where innovation can come from. We have used a number of terms to try to describe parts of the new model: "open innovation," "user-driven innovation," and even "design thinking."

It is also not solely about technology. Technology remains an important component. But, as noted earlier, social innovations, marketing, finance, design and business models are also key sources of innovation as well.

Suffice it to say that innovation policy needs embraced this broader concept.

Second, innovation is about people and organizations. Skills, not just education, are critical. Likewise, both tacit and experiential knowledge, not just codified and science-based knowledge, are also important. In order to put those skills and knowledge to proper use, organizational structure comes into play. The old hierarchical systems of the industrial age are no longer adequate or appropriate. New adaptive organizations which encourage innovation are needed. What we use to be called "High Performance Work Organizations" are needed to effectively utilize worker skills and knowledge.

Finally, any innovation policy needs to understand that there are multiple roles for technology. Technology can be a driver of innovation, a tool of innovation, and even sometimes not all that that relevant to innovation. As a driver, the creation of new technology is a major source of innovation - the kind we normally think of when we use the word "innovation."

But technology is also a tool in the innovation process. Technology as innovation tool works in two ways. One is innovation as the absorption and utilization of technology. For example, the iPod contained no new technology. It utilized the technology in a new way. The other is technology as an enabler. This is especially true in the information technology (IT) area, where IT allows for a myriad of new applications and innovations.

Take the analogy of the railroad. The marrying of the steam engine to a carriage on iron rails brought about far reaching changes in many difference areas. The railroads spurred on development of a number of other industries, most notably the steel industry. They changed opened up vast new markets and changed the retail and wholesale industries. They even gave rise to new management practices and the shift from ownership capitalism to managerial capitalism.

And sometimes technology plays a very minor role in innovation, if at all. Which was more important in creating the American suburbs: the automobile, Levittown or the 30 year mortgage? One was technological; one was design; one was financial. All were important. As a nation we need to recognize and promote multiple forms of innovation.

So here are some policies I plan to put forward. The new demand driven model innovation shows that government procurement and regulations can drive innovation. Government as a demanding customer can create the "thin opening wedge" -- new products and services that have a specialized use. Once that specialized use is established, the product or service can be refined and adopted to a broader customer base. The demanding customer in fact becomes a co-creator. Smart regulations can serve the same function by creating demanding customers.

Here is another example of how we can expand our thinking on innovation. We have a program to create and fund Engineering Research Centers (ERCs) in a number of areas. We should create one for design thinking. We should expanding the ERC model to funding research on and demonstration of new business methods and organizational mechanisms as part of our "Catalyze Breakthroughs for National Priorities" element of the innovation strategy. And we should fund more organizationally-focused challenges, such as the famous DARPA "Red Balloon" challenge.

These are but few of the types of new policies we will pursue -- beyond the status quo and conventional thinking that government should confine itself to basic research, education and infrastructure. That might be uncomfortable for some to hear. But it is where we need to go if we are to restore long term economic prosperity in this highly competitive global economy.

That is would I would like to hear (or a variation there of). If the President hits any of the major points, however, I will be happy.

Earlier this month, I posted a piece on the possible loss of commercial filming rights on the west side of the U.S. Capitol. The concern was that the area was begin transferred from the National Park Service, who allows filming for a fee, to the Architect of the Capitol (AOC) and the Capitol Police, who do not allow commercial filming. While the dollar amounts might be small, the concern was that Congress was tone-deaf to the idea of managing these government assets as assets.

Over the weekend, it appears that that the specific issue of this area (know as Grant Memorial or Union Square) has been resolved. According to an email to Washington City Paper from the Senate Sergeant at Arms, the existing policy based on the Park Service policy will continue for 90 days while the powers-that-be look into the situation. The expectation is that the current policy of allowing filming will continue. I say "powers-that-be" since the leadership and institutions of both the House and Senate are involved (AOC, Capitol Police, Senate Sergeant at Arms, House Sergeant at Arms and their respective House and Senate oversight committees).

I hope, per my earlier suggestion, that the powers-that-be will use this review to the entire policy toward the management of the U.S. Capitol as a filming site. I would note that the Agence du patrimoine immatériel de l'État (APIE) -- the Agency for Public Intangibles of France last April published a guide for agencies and local authorities for managing filming in public spaces. We should do the same -- including filming at the U.S. Capitol.

One of the hallmarks of a major innovation is that it doesn't just let you do the same-old things better, it helps you do things differently. Cable television was first developed to help rural areas get a better broadcast signal by using a community antenna located in a better stop that on the top of one's own house. It blossomed into a new media revolution. Hydraulic diggers took a long time replacing steam shovels, but really took off when they were used to create smaller specialized earth moving tools such as backhoes and trench diggers (for use in areas that large steam shovels couldn't get to). When electric motors replaced centralized steam or water powered belt systems to run machinery, factories could be redesigned along the lines of the production flow not the power source -- thereby greatly increasing productivity.

Now we are beginning to see the same phenomena with 3D printing. In numerous earlier postings, I've talked about how 3D printing (or "additive manufacturing") is becoming a replacement for customized fabrication. For example, one of the growing uses appears to be in the creation of customized medical devices, like hip replacements. Now users are finding that additive manufacturing allows for the fabrication of items that could not be made before. A story last month in The Economist ("The shape of things to come") describes some of 3D printing products that would be difficult or impossible to make using existing techniques. One example concerns artificial hips that not only better follow the curves of the patient's bones but also reproduce the lattice-like internal structure of natural bone making the implant lighter and stronger. Another is a heat exchanger in an optimum shape that resembles a fish gill. Yet another are objects that are stiff on one end and flexible or soft on the other. Each of these are not simply substitutes for existing manufacturing processes, but processes that allow for a new type of product.

As the cost of 3D printers come down and more users become familiar with their capabilities, expect to see a lot more of these never-before-seen creations. Just as precision machining made possible manufacturing revolution of mass production using interchangeable parts, additive manufacturing may spark a new manufacturing revolution with opportunities and consequences that we can barely conceive of today.

In the wake of the shut down of the big filing sharing website Megaupload, I thought it would be a good idea to highlight someone who seems (so far) to have gotten it right. A recent story in the New Yorker (Will Robert Kyncl and YouTube Revolutionize Television?) reminds us how YouTube solved its copyright issue "through a content-management program, called Content ID, that alerted copyright holders automatically whenever any part of their content went up on YouTube. Owners can choose to remove the content, sell ads against it and share the money with YouTube, or use it as a promotional tool." In other words, content owners are in control and have a choice of strategies. That seems to be the right way to do it.

The answer to the question of whether Kodak is planning on selling or licensing their smartphone related patents is "yes". According to court documents:

The Company anticipates substantial future revenue from licensing its intellectual property for use in smartphones and tablets that employ digital cameras, as well as in next-generation products that utilize Kodak technology, or from the disposition of related patents to third parties.

On the other hand, according to a story in the Wall Street Journal:

A syndicate led by Citigroup Inc. has offered to finance operations during the Chapter 11 proceeding, but set a June 30 deadline for Kodak to get rules for bidding on the company's digital imaging patent portfolio on file with the court.

The auction seem to be limited to the approximately 1100 patents involving digital photography. Kodak's total IP portfolio, according to the documents, is "13,100 foreign patents and trademark registrations or pending registration in approximately 160 countries." And "8,900 patent and trademark registrations and applications in the United States." The court documents make it clear that Kodak is betting its future on the printing and related digital document processing business. Presumably that is where a significant portion of the "core" IP (which is not for sale) is located. I wonder whether the creditors will go after those patents if the smartphone related patents don't bring in the anticipated $2 to $3 billion?

It is official: Kodak has filed for bankruptcy. According to the company's statement, Kodak will continue to operate while it restructures. That restructuring will include "monetizing non-core IP assets." One presumes that this refers to the digital imaging patents that Kodak has already tried to sell and are at the center of Kodak's infringement cases against Apple and others (which also extend to other infringement cases filed this month against Fujifilm and Samsung). No new information on whether "monitization"means more licensing or an auction of the patent portfolio in whole or in part. As I noted earlier, it is reported that Kodak is seeking a stalking-horse bidder for the patent portfolio.

In my mind, the announcement raises the question of what Kodak sees as its core business: digital imaging or something else. As the Kodak CEO Antonio M. Perez states in the announcement:

"Chapter 11 gives us the best opportunities to maximize the value in two critical parts of our technology portfolio: our digital capture patents, which are essential for a wide range of mobile and other consumer electronic devices that capture digital images and have generated over $3 billion of licensing revenues since 2003; and our breakthrough printing and deposition technologies, which give Kodak a competitive advantage in our growing digital businesses."

Perez's statement is sure to raise some eyebrows. Some believe that a major source of Kodak's current problem stems from their inability to pivot away from imaging into new businesses. A recent story in The Economist compares Kodak's problems with Fujifilm's success:

But whereas Kodak has so far failed to adapt adequately, Fujifilm has transformed itself into a solidly profitable business, with a market capitalisation, even after a rough year, of some $12.6 billion to Kodak's $220m.

Fujifilm diversified more successfully. Film is a bit like skin: both contain collagen. Just as photos fade because of oxidation, cosmetics firms would like you to think that skin is preserved with anti-oxidants. In Fujifilm's library of 200,000 chemical compounds, some 4,000 are related to anti-oxidants. So the company launched a line of cosmetics, called Astalift, which is sold in Asia and is being launched in Europe this year.

Fujifilm also sought new outlets for its expertise in film: for example, making optical films for LCD flat-panel screens. It has invested $4 billion in the business since 2000. And this has paid off. In one sort of film, to expand the LCD viewing angle, Fujifilm enjoys a 100% market share.

In part, Kodak may have been a victim of their own past success. The Economist asked Fujifilm's CEO Shigetaka Komori about the difference:

Mr Komori says he feels "regret and emotion" about the plight of his "respected competitor". Yet he hints that Kodak was complacent, even when its troubles were obvious. The firm was so confident about its marketing and brand that it tried to take the easy way out, says Mr Komori.

In the 2000s it tried to buy ready-made businesses, instead of taking the time and expense to develop technologies in-house. And it failed to diversify enough, says Mr Komori: "Kodak aimed to be a digital company, but that is a small business and not enough to support a big company."

So, Kodak goes into Chapter 11 with a potentially valuable digital imaging portfolio it will seek to monetize outside the company while pursuing a strategy of building a core business around printing and digital imaging technology. Should be an interesting case study to watch.


UPDATE: In fairness to Kodak, I should point out that the company has tried to diversity over the years. But as The Economist Schumpeter columist notes:

When film sales collapsed in the 2000s, Kodak tried to diversity into new business areas, from drugs to chemicals--with mixed success. In some cases pricey acquisitions were abandoned.

UPDATE 2: In its bankruptcy filing, Kodak is blaming part of its financial troubles on "litigation tactics employed by a small number of infringing technology companies with strong balance sheets and an awareness of Kodak's liquidity challenges", according to a story in the Wall Street Journal.

According to a New York Times/Reuters story, no buyers stepped up to bid on taking over Solyndra as a turnkey, stand alone operation. So the next step looks like liquidation of the remaining assets. As I noted earlier, those include the core IP. Since everything will now be sold off piecemeal, we might actually see what someone is willing to pay for those patents.

The National Science Board (part of the National Science Foundation) has released its Science and Engineering Indicators 2011. As the press release states:

The United States remains the global leader in supporting science and technology (S&T) research and development, but only by a slim margin that could soon be overtaken by rapidly increasing Asian investments in knowledge-intensive economies.

As more effective communication and management tools have been developed, multinational corporations (MNCs) seeking to access these new markets have evolved global corporate structures that draw on far-flung, specialized, global supplier networks. In turn, host governments have often attached conditions to market access that, along with technology spillovers, have aided in the development of indigenous S&T capabilities.

This is a trend that may of us have noted for some time (see earlier postings). Countering and/or adapting to this trend will not be straightforward. It is not a simply matter of just increasing government R&D funding, increasing STEM education or expanding infrastructure investments. All of that will help, but it is not enough. As the report notes, there are strong reasons why companies would like to have research operations in many parts of the world. The U.S. does not have a monopoly on smart people. Being able to tap into the brain power of those smart people is helpful both to the companies as well as to the United States. A stronger world-wide research network benefits everyone in the network. The trick for America is to develop a positive economic role within that network. That will take the creation of a broad economic competitiveness plan (see yesterday's posting) -- a plan that understands the new network and can adapt to it.

One side note. The Indicators study seems to have adopted and included my measure of trade in intangibles. Page O-19 of the Overview notes that:

U.S. trade in commercial knowledge-intensive services and intangible assets--business, financial, and communications services, and payments of royalties and fees--has produced a consistent and growing surplus (figure O-38). It reached a record $108 billion in 2008, sufficient to counterbalance the high-technology goods deficit, and has been flat since then, reflecting the recession's effect. The EU's surplus was sharply off, and that of the Asia-8 fell as well--reflections of the continuing effects of the global recession.

In my previous posting on the Administration's government reorganization posting, I mentioned that the re-organization proposal seems to be based on a Center for American Progress (CAP) report A Focus on Competitiveness. I hope the Administration will look very carefully at other the parts of the CAP report which I highlighted earlier:
  • A Quadrennial Competitiveness Assessment by an independent panel of the National Academies whose objectives are to collect input and information from many sources and perform a horizon scan that identifies long-term competitiveness challenges and opportunities
  • A Biannual Presidential Competitiveness Strategy that lays out the president's competitiveness agenda and policy priorities, and captures the attention and buy-in of cabinet principals
  • An Interagency Competitiveness Task Force led by a new deputy at the National Economic Council that develops the biannual strategy, oversees White House coordination of competitiveness initiatives, and monitors their implementation by agencies
  • A Presidential Competitiveness Advisory Panel of business and labor leaders, academics, and other experts who assist the administration in developing policy details.

These actions don't need to wait for Congressional action. The Administration should move ahead with them on its own.

There is some indication that the Administration is going beyond the Commerce Department reorganization proposal. At the same time as the President announced the re-organization proposal, the person behind that effort -- Jeff Zients, OBM Deputy Director and Federal Chief Performance Officer -- issued a Memorandum on an Inventory of Government Programs: Trade, Export and Competitiveness Pilot. The memo informs agency heads that OMB will be working with a select group of agencies (the pilot part of the activity) to "development a comprehensive list of government programs" and then "map them to established programmatic and organizational structures, as well as agency's strategic planning and performance goals." The agencies involve go beyond those involved in the re-organization (Commerce, USTR, SBA, TDA, Exim and OPIC) to include BLS (already mentioned part of the re-organization's plan for statistic agencies), parts of NSF, the Community Financial Development Institutions Fund at Treasury, Community Economic Development at Health and Human Services, and the Rural Business and Cooperative Service at Agriculture.

That sound a lot like the first step toward some of the planning activities recommended above. It is only a preliminary step however. Still needed is the overarching competitiveness policy that would be developed in the Quadrennial assessment and Biannual strategy. Looking at how programs math with agency strategic plans is fine. But there needs to be the top level activity that makes sure the individual agency strategic plans add up to an overall competitiveness strategy.

I realize that this is an election year. During an election year, an incumbent Administration wants to talk about how its current strategy is working and what has already been accomplished. But setting up a comprehensive review system on competitiveness as outlined in the CAP report is a good way to show that the Administration has a serious plan for addressing the economic issue on an ongoing basis. That would be both good policy and good politics.

One of the points that needs to be continually reinforced about economic growth, is that it's not about how long (or "hard") you work, but how smart you work (generally measure in terms of productivity). As a story in today's New York Times ("Gap in Competitiveness Weighs on Europe, Analysts Say") notes:

Greeks with full-time employment worked an average of 42 hours a week last year, according to Eurostat, the European Union's statistics agency, while the average in Portugal was 38 hours. In Germany, it was just over 35 hours.
But the effect on competitiveness was starkly different. A Eurostat index of labor productivity gave Germany a mark of 105 in 2010, the latest year for which figures were available. But productivity was only 94.8 in Greece and 76.4 in Portugal.

But increasing productivity means making investments in tangible and intangible assets. And under many austerity programs, those types of investments get cut. Thus a vicious cycle begins: cuts reduce the ability of the country to grow, leading to further declines in revenues, leading to calls for further cuts.

To avoid this trap, our economic investment policy -- as well as our workforce -- needs to be smart.

As I noted in an earlier posting, last year's State of the Union contained a sleeper issue: the consolidation of trade and economic agencies. This morning, the President released his proposal. Actually, he asked for Congress to reinstate re-organization authority that lapsed in 1984. That authority would allow to present a re-organization plan to Congress for an up or down vote. Thus, he couched this as a good government issue -- one of shrinking the bureaucracy and reforming government.

His first general proposal is specifically targeted at making government more business friendly. The proposal would consolidate the Small Business Administration (SBA), the Office of the United States Trade Representative (USTR), the Export-Import Bank (Exim), the Overseas Private Investment Corporation (OPIC), and the Trade and Development Agency (TDA) with core trade and economic functions of the Commerce Department. These seems to come straight out of a report from the Center for American Progress on competitiveness from December 2010 (see earlier postings). In addition, he took immediate action to elevate SBA to a Cabinet-level.

I am a scarred veteran of the last attempt to reorganize the Commerce Department to create a Department of Trade and Industry in the late 1980s. I learned a number of lessons from that experience. One is the power of the resistance to change. Each of the existing agencies has its own set of constituencies and allies on Capitol Hill.

Besides the resistance to change, the other problem is that there are many possible permutation to the new structure -- although some are better than others. There is no way to completely pull all the competitiveness related programs into one Department. For example, what about worker training and education programs in the Labor and Education Departments? In addition, what does the new structure do about the Census Bureau and NOAA (National Oceanic and Atmospheric Administration) now currently in Commerce? Also it is unclear how the elevation of the SBA to a Cabinet position interacts with the consolidation proposal. Since the idea of the elevation of SBA is to "put small business at the table." The consolidation would probably then take that seat away by folding SBA into a larger (Commerce?) Department. The President's proposal doesn't address these issues. [UPDATE: The Washington Post reports that NOAA (including the Weather Service) would be moved to the Interior Department while the Census Bureau and the Bureau of Economic Analysis (BEA) would remain in the new Department and be joined by the Bureau of Labor Statistics. According to a Wall Street Journal story, SBA would lose its new Cabinet-level status when the consolidation happens.]

This being an election year, it is unclear that the President's request for "consolidation authority" is going anywhere. This Congress does not seem inclined to give the President any additional powers. Even if there wasn't a partisan divide, there is still the institutional divide based on a strong desire on Capitol Hill to preserve Congressional powers.

But there might be another sleeper in the announcement. At the very end, it states:

We will also be unveiling a new website: BusinessUSA. This site will be a virtual one-stop shop with information for small businesses and businesses of all size that want to begin or increase exporting.

Frankly these type of steps toward coordination and better information flow strike me as a better way to go. Let me go back to an issue I raised with respect to the creation of the Department of Homeland Security and the Bush Administration's proposal for financial regulatory consolidation (see earlier posting). In an age of increased emphasis on collaboration, flattened organizations and multi-organization cooperation, is creating a new bureaucratic structure the right answer? As the importance of interconnections and multiple points of view grows, does it make sense to create a Department of Everything Department? Shouldn't we be creating networks to tie the agencies together instead? The government is full of coordinating groups. Maybe it is time to look seriously in to making those work better rather than rearranging the organizational boxes.

Some bad economic news in the November trade figures released today by BEA. The monthly trade deficit grew by $4.5 billion to $47.8 billion in November. Exports declined by $1.5 billion and imports were up by $2.9 billion. The deficit in both petroleum goods and non-petroleum goods increased -- with the petroleum deficit growing by a more significant amount of almost $3.5 billion.

The deficit in advanced technology goods also increased somewhat by about $300 million in November. Both imports and exports were down. 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 good news is that the intangibles surplus increased with both exports and imports of intangibles growing. The trade surplus in both business services and royalties increased.

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.

According to a Bloomberg story, "Advisers to Kodak are lining up a bidder that will be the frontrunner or so-called stalking horse bidder for the patent portfolio should the company file, one person said." Sounds like another big patent auction is definitely in the works (see earlier posting).

Yesterday, President Obama held a jobs forum with business leaders and talked about "in-sourcing" jobs. In his remarks, the President said that "in the next few weeks, we're also going to put forward new tax proposals that reward companies that choose to bring jobs home and invest in America." According to a story in the Wall Street Journal, that package of tax incentives could include "lower tax rates for income derived from innovation produced in the U.S. or expanded breaks for domestic research or manufacturing." Presumably, the latter reference to research means the Research and Experimentation Tax Credit (generally known as the R&D tax credit). The former reference by the Journal to income from probably refers to what is known as the "patent box."

While the Administration has not said anything about supporting the concept of a patent box, the idea has been gaining support in Washington. As I noted in an earlier posting, I support the idea of a patent box. It would provide an incentive to keep intellectual property (IP) in the United States. However, it needs to be tied to the other side of the equation: the international taxation and transfer pricing system that helps companies move IP to low tax countries.

Just to recapitulate. The public policy goal here is to promote more innovation and the utilization of that innovation (via production using that innovation) in the United States. This creates jobs and economic growth. A secondary goal is to capture the revenues from the income generated by that innovation and production activity. Tax policy can be crafted to provide an incentive to undertake innovation and production in the United States while creating a disincentive to move that activity elsewhere. There are two interconnected issues: the rate at which income from intellectual property (such as patents) is taxed and the transfer of intellectual property from one (high-tax) location to another (low-tax) location.

In the United States, the income from patents and other intellectual property is generally taxed at the normal corporate or individual rate. In some countries, income from intellectual property are taxed a lower rate -- commonly referred to as a "patent box". The rate and what constitutes "qualifying income" vary from country to country. For example, some countries allow a lower rare for income from copyrights as well as patents.

In addition, the U.S. has a worldwide system of taxation, meaning that income is taxable by the Federal government regardless of where it is generate, as specified in Subpart F of the Internal Revenue Code. However, companies are allowed to defer U.S. taxes on "active" income until the revenue is brought back to the United States. This includes income from intellectual property.

The tax rate differential and the ability to not pay U.S. taxes on income until repatriated has resulted in some corporations transferring ownership of their patents (and thus the income) to subsidiaries in low patent tax countries. The price that the company sells or licenses the patent to the subsidiary is known as the transfer price. The transfer price is supposed to reflect the true market ("arms-length transaction") value of the patent. However, market prices of patents are difficult to obtain. Thus, companies use appraised values. Critics, including the IRS, raise the issue that the transfer pricing process can become a loophole that companies exploit to avoid U.S. tax. (See stories in the New York Times and the Washington Post on the transfer issue.)

In our Intangible Asset Monetization report, I suggested that we should explore lowering the tax rate on intangible asset royalties, in conjunction with stricter regulations on international transfer-pricing mechanisms and cost-sharing arrangements and on passive investment companies:

Providing a more direct tax incentive to the licensing of intangibles by lowering the rate on intangible asset royalties, such as to the capital gains rate, is a more controversial proposal. This lower rate could be crafted to apply only to royalties for new licenses for a limited time, such as a sliding scale for three years. In crafting such an incentive, safeguards would need to be established to prevent the incentive from being used for simply transferring existing licenses to SPEs [special purpose entities] and to ensure that the incentive went to new licensing activities only.

In conjunction with such a tax incentive, the problem of tax havens should be addressed. Transfer pricing mechanisms and cost sharing arrangements need to prevent those transfers that, as the IRS describes, are "for inadequate consideration." The issue (some would say the abuse) of "passive investment companies" should also be handled.

The notion of tax havens and loopholes is often a matter of perspective. One person's loophole is another person's incentive. However, there is a growing concern that the tax code has become overly complex and that rates could be lowered in conjunction with the elimination of certain specific provisions. Any such tax reform, including the possibility of closing loopholes currently applied to intangibles and lowering the tax rate on royalties, should be looked at very carefully in the context of the impact on the creation and utilization of intangible assets.

On the patent box side of the equation, probably the best version to look at is the Dutch "innovation box." The Dutch innovation box is an expanded version of their earlier patent box to include credit for the outcome of research activities that have not yet resulted in a patent (referred to as a "technology intangible asset"). The tricky part is determining the amount of what income qualifies as income from a technology intangible asset. The Dutch use transfer pricing mechanisms negotiated with the tax authority. In their more limited patent box, Luxembourg uses a royalty approach assuming the income that the taxpayer would have earned if it had licensed the right to use the patent to a third party. The UK is using a "qualifying residual profit" formula for its new patent box. By the way, the UK took a year of consultations to come up with its method. And the methodology is so complicated that the UK is making their system optional - i.e. a company can elect to apply for the lower rate but are not required to go through the calculation if they don't feel it is worth the effort.

On the transfer pricing issue, the Obama Administration has already twice put forward two proposals as part of their budget proposals (see earlier posting). One proposal would tax "certain excess income" from intangibles at the U.S. rate if the income comes from a low-rate country. The second proposal contains three related changes in the transfer pricing rules addressing several definitional and methodological issues that have arisen over the years: clarify the definition of intangible property to include workforce in place, goodwill and going concern value; clarify the IRS's authority to value the intangible properties on an aggregate basis where multiple intangible properties are transferred; and clarify IRS's authority to value intangible property using the realistic alternative principle.

Congressman Lloyd Doggett (TX-25) and Senator Jay Rockefeller (WV) have a more drastic proposal in H.R. 62 and S. 1373, The International Tax Competitiveness Act of 2011. Section 3 of that legislation would remove intangibles from the tax deferral completely. In other words, all royalty income from IP would be subject to U.S. taxation. It has been estimated by the group Business and Investors Against Tax Haven Abuse that this proposal would generate $10 billion a year in revenues. That estimate, of course, is based on current tax rates, not a new patent box rate.

In any event, a patent box would be expensive. With limited ability to come up with a budget offset, expanding and making the R&D tax credit permanent would still be my first on my priority list. But the transfer of IP to low-tax rate countries is an issue that needs to be addressed in and of itself. It could be part of a larger tax reform package (see my earlier posting on House Ways and Means Chair David Camp's proposal.) Or it could be part of a more targeted package, such as it sounds like the President is going to propose. Either way, it should be dealt with.

Kodak appears to be ratcheting up its patent fight with Apple and HTC by filing a infringement suit in U.S. Courts and with the International Trade Commission (ITC). But, as the Wall Street Journal points out:

The latest lawsuits aren't likely to help ease the immediate financial pressure on Kodak. Patent disputes in the district courts can take years to resolve. The ITC can move faster, but a complaint Kodak filed two years ago against Apple and BlackBerry maker Research In Motion Ltd. is still pending, and a ruling has been pushed back until September.

UPDATE (1/19/12): For a list of the specific patents, see Kodak's press release. Also see additional cases filed this month against Fujifilm and Samsung.

Over on his blog The Low-Down, Jon Low takes on a tricky subject -- Are Most Facebook Fans and Likes for Brands Worthless?. His answer: unclear.

An objective assessment suggests that fans and likes are an indication of familiarity and favorability, which is useful. But converting those inclinations into sales requires considerably more effort - and resources - than the brands and platforms would have anyone else believe. There are data that suggest fans and likers spend more money on brands than do those who are not, but those data are primarily from a couple of consumer-oriented businesses and may not be useful as an extrapolation of broader behavior patterns.

The best advice appears to be to ignore general claims of efficacy. Test, re-test and track trend data over time for your brand or business. Eventually the trend data will provide useful knowledge. Emphasis on the word 'eventually.'

Sounds like the old joke about advertising still remains true: "we know that half of our advertising spending is worthless; we just don't know which half."

At midnight last night, the actual voting for President began (as opposed to caucuses) when nine voters in Dixville Notch, New Hampshire cast their ballots. The result: two for Romney; two for Huntsman; one for Gingrich; one for Paul; and three for Obama. Since 1960, Dixville has always the first to vote in the New Hampshire primary and again in the general election. The neighboring town of Hart's Location, which now votes right after Dixville Notch, had a tradition of voting first at midnight beginning in 1948. But they discontinued it in 1964, because, according to some, of the press attention. They reestablished the early voting tradition in the 1996.

According to a story in the Boston Globe in 2008, Dixville started their early voting to get publicity for the city and the hotel where the voting is held. In fact, the story goes that a press photographer moved the clock hands forward so that the first vote actually took place at 11:57 before the midnight vote at Hart's Location. The photographer at Dixville Notch got his picture of the "first" vote before all the other photographers over at Hart's Location -- and thereby got the story out first. The rest, as they say, is history.

If the early voting was meant to drum up publicity, it certainly worked. Last night, according to the Washington Post, "A crowd of about 200 media representatives chronicled the entire 2-minute affair." Not a bad turnout for a town of 12 people. That is the power of being first.

Joe Stiglitz has a provocative new article out in Vanity Fair (obviously written for the layperson) -- "The Book of Jobs". In it he takes a new look at the Great Depression and its parallel to the economic transformation we are going through today:

At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century--better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.

What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn't pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.

The cities weren't spared--far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.

The value of assets (such as homes) often declines when incomes do. Farmers got trapped in their declining sector and in their depressed locales. Diminished income and wealth made migration to the cities more difficult; high urban unemployment made migration less attractive. Throughout the 1930s, in spite of the massive drop in farm income, there was little overall out-migration. Meanwhile, the farmers continued to produce, sometimes working even harder to make up for lower prices. Individually, that made sense; collectively, it didn't, as any increased output kept forcing prices down.

He compares this to today's situation of a transformation from manufacturing to services. While the diagnosis of a structural transformation of the US economy is correct, the description of today that he uses is unfortunately incorrect. We are not shifting to services just like we did not shift production out of agriculture. Agriculture became so productive that it needed fewer inputs and production in other areas grew so that the percentage of the total production contributed by food production declines while total food production grew. At a superficial level, it appears that we shifted out of agriculture. A deeper look reveals that we industrialized food production. It was transformed - not simply reduced.

Likewise, we are in the process of transforming the production of goods (including food) by infusing knowledge. Manufacturing is being transformed, not necessarily reduced. And during that transformation, we are seeing the types (but not the scale) of economic displacements and income shifts that Stiglitz describes.

Stiglitz's argument that the Great Depression was caused by structural changes should hold important lessons for today. Unfortunately, most of the policy prescription that we hear tend to be more of the same. Simply trying to re-inflate previously existing sectors is a non-solution. So, while a robust housing sector is important for a sustainable economy, attempting to return to the go-go years of the past decade is folly. The same can be said of the financial sector. Or the manufacturing sector (thinking back more to the 1960s).

Rather, as Stiglitz notes, "The only way it [recovery] will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one." I would note, however, that his solutions don't give that much guidance. For example, at one point he calls for moving workers out of manufacturing and into services; then he calls for more workers (including technicians) in clear energy industries. His call for more investment in education, basic R&D and infrastructure is fine as far as it goes. As I noted in an earlier posting, government investments in R&D, education and infrastructure should be a no-brainer. They were keys to the post-WWII industrial-era economic growth in the United States.

As currently carried out, these generic investments won't, I'm afraid, help that much in making the transformation. Done right, these investment can fuel information age growth. But not if they follow the same old path and are not augmented by other policy changes. What we need now is bolder thinking on how the transformation is affecting the economy and what can be done to foster the positive trends and mitigate the negative. However, we seem to be stuck fighting the last battle over and over again.

This morning, the Obama Administration released a new report on competitiveness -- The Competitiveness and Innovative Capacity of the United States. Prepared by the Commerce Department and the National Economic Council, the document was required under the America COMPETES Reauthorization Act of 2010 to look at a long laundry list of topics.

The beginning of the document is focused on the competitiveness problems and the importance of innovation. I was pleased to see that the report adopts broad definition of innovation from the 2008 Commerce Department report Innovation Measurement: Tracking the State of Innovation in the American Economy (see earlier posting) as:

The design, invention, development and/or implementation of new or altered products, services, processes, systems, organizational structures, or business models for the purpose of creating new value for customers and financial returns for the firm.

As far as offering up any new policy proposals, the document is much more limited. It is really a discussion and description of previous and ongoing Administration policies and programs. At today's PCAST meeting, Commerce Secretary John Bryson referred to the report as a "call to arms." One of the main purpose seem to be to reinforce the importance of federal government investments in R&D, education and infrastructure.

The report is a generally good set up to a discussion of the competitiveness and innovation issue. It is sad, however, that the report has to fall back on a primary objective of defending what should be a no-brainer: that federal investments in R&D, education and infrastructure matter to the growth of the economy. As long as we are still forced to defend these basic principles it will be hard to go one to a discussion of all the other things needed to make our economy more competitive and innovative. That is the study we desperately need.

Another month of good news on employment. According to the BLS, nonfarm payroll employment grew by 200,000 and the employment rate dropped to 8.5% in December. Economists had expected a growth of about 155,000 jobs. And, as was the case in November, 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 continued to decline. They remain, however, still well about pre-recession levels.

Rumors are flying that Kodak is getting ready to file for bankruptcy. And, according to the Wall Street Journal, the focus of the bankruptcy proceedings will be a court-supervised auction of Kodak's patent portfolio. Kodak has been trying to sell enough of its patent portfolio to stay out of bankruptcy. But, according the Journal story, "Efforts to sell the portfolio have been slowed by bidders' concerns that Kodak might seek bankruptcy protection." With the new rumors, bankruptcy might just have become a self-fulfilling prophesy: the company needs the sell the patents to stay out of bankruptcy but buyers are not buying because they are afraid the company will go into bankruptcy.

There may be another dynamic at work as well. As the Journal story also points out, "Advisers told Kodak a filing would make its patent sale easier and likely allow the company to command a higher price, people familiar with the matter have said." As I noted in an earlier posting, Kodak is under pressure from creditors to make sure they maximize the value of the patent sale. With visions of the Nortel court-supervised $4.5 billion auction, these creditors may think that a bankruptcy auction is the way to go. But, as experts have noted (see IAM Blog, M-CAM report and WSJ article), the Kodak portfolio is nowhere near as valuable as the Nortel patents. Should the bankruptcy move ahead and the court-supervised auction not live up to expectations, there may be some nasty second-guessing.

Welcome to a New Year -- and the same old mindset but a new opportunity.

Let's start with the same old mindset. Is the Congress in the process of destroying a federal government intangible asset? Not deliberately, I'm sure. But a recent action illustrates how some policymakers -- including Congress -- still don't seem to understand intangible assets. The asset in question is filming rights in front of the U.S. Capitol.

Taking a step backwards, everyone knows that movies and TV are big business. Everyone wants production companies to come to their location to shoot a film or a show. Government's generally understand that their location's "view" is an important asset. Last February, the Obama Administration proposed a unified fee schedule for filming on lands controlled by the National Park Service (NPS), Fish and Wildlife Service (FWS), Bureau of Land Management (BLM), Bureau of Reclamation (BOR) and Bureau of Indian Affairs (BIA) (see earlier posting). The purpose was to "provide the commercial filming industry with a predictable fee for using federal lands, while earning the government a fair return for the use of that land." As I've noted before, the French government has the Agence du patrimoine immatériel de l'État (APIE) -- the Agency for Public Intangibles of France, which, among other things, helps coordinate the filming on public land. State and local government have offices to recruit and assist (and thereby generate revenues from) location filming.

So, now to today's issue. At the base of the U.S. Capitol is a reflecting pool and a statute of Ulysses S. Grant, officially known as Union Square. This area defines the eastern most portion of the National Mall and was controlled by the National Park Service. Section 1202 of Consolidated Appropriations Act 2012 (that big budget bill passed at the end of the year and signed by the President to keep the government open) transfers control of the land from Park Service to the Architect of the Capitol (AOC). The problem? National Park Service allows filming (as noted above). However, the Architect of the Capitol and the Capitol Police restrict commercial filming on Capitol grounds (some news filming is allowed).

As the Washington City Paper ("An Architect of the Capitol Land Grab Robs Filmmakers of the Best Shot in D.C.") notes, Union Square is a key area for filming in D.C., especially given that the Capitol grounds are off limits:

"Virtually every single project, whether it's a TV project or a movie, shoots at Grant statue," says Jonathan Zurer, a local producer who made an annual trip to the site when working on The West Wing in the early 2000s. "If you come to D.C. from L.A., you're coming to D.C. because you want to say 'hey we shot in D.C., and here's the proof."

[By the way, it may also eliminate one of the highlights of the school trip to Washington: the professionally taken, wide angle lens group picture in front of the Capitol.]

A minor point, you might say. Yes -- minor in the overall size of the budget but major in terms of illustrating the mindset. The switch of jurisdiction to the AOC was done without thinking through the consequences. At a time when we need to be utilizing all of our intangible assets, the concept just seems to get lost.

There may be still time to rectify this -- and even make lemonade out of lemons. There is nothing in the transfer legislation that prohibits commercial filming at Union Square. Nor, as far as I can tell, is there any legislation ban on commercial filming on Capitol grounds. That appears to be either an AOC or Capitol Police policy.

Congress should use this opportunity to take a close look at the Congressional commercial filming policy. What is really needed for security reasons? Perhaps spots such as Union Square can be opened up. I would note that there are designated spots for news cameras already (on the Senate side, it used to be in a area we called "the swamp" because that is what it turned into after a rain). Maybe those spaces could be opened up for commercial filming. As importantly, Congress could set a fee for the commercial use of these designated areas consistent with the Park Service fees.

Two policy objectives could be accomplished with such a review. First, Congress would establish a coherent policy to open up an intangible asset under its control. Second, and as important, such as review would highlight the importance of and the need for a larger review of government intangible assets.

I hope Congress will seize on this opportunity and help make 2012 a breakthrough year in our understanding and utilization of our valuable intangible assets.