The sharecropper society grows

From the BEA News Release this morning:

The U.S. net international investment position at year end 2004 was -$2,484.2 billion (preliminary) with direct investment valued at current cost, as the value of foreign investments in the United States exceeded the value of U.S. investments abroad (table 1). At year end 2003, the U.S. net international investment position was -$2,156.7 billion (revised). The -$327.5 billion change in the net investment position from yearend 2003 to year end 2004 was largely due to substantial net foreign purchases of U.S. Treasury securities and U.S. corporate bonds. The impact of these net purchases was partly offset by appreciation of most foreign currencies against the U.S. dollar, which raised the dollar value of U.S.-owned assets abroad, especially of U.S.-owned foreign stocks. In addition, increases in stock market prices raised the value of U.S. holdings of foreign stocks somewhat more than they raised the value of foreign holdings of U.S. stocks.

That debt substantial reflects investments in financial assets (US stocks, bonds etc). In direct investment, the US position is positive (we own more physical assets in other countries than foreigner own in the US). According to my calculations, that direct investment jumped from $476.65 billion in 2003 to $658.51 billion in 2004.
This could be good or bad, depending on how you look at it. The good part is that direct investment helps to offset some of the debt we own the rest of the world. The bad is that it shows that we continue to invest a large portion of our resources in hard (productive?) assets abroad. Unclear, however, whether this jump is due to currency changes (see above), investment in non-productive assets (second homes) or in foreign plant and equipment.
Earlier this year, BEA released direct investment statistics showing that US direct investment abroad increased from $119,41 billion in 2003 to $229.29 billion in 2004. Foreign direct investment into the US jumped from $56.83 billion in 2003 to $95.86 billion in 2004.

The limited power of brands

In his new book, Three Billion New Capitalists, Clyde Prestowitz tells the following amusing story about the limited power of brands:

At a Harvard Business School symposium in 1983, I heard then RCA chairman Thornton Bradshaw explain that the RCA brand was so powerful that RCA could sell VCRs made by Hitachi more profitably than Hitachi. Three years later RCA ceased to exist as an independent company. The RCA brand, however, is still being kept alive by its latest owner, Thomson SA of France.

That reminds me of the story told about the economic rivalry between Great Britain and Germany at the turn of the last century. British manufacturers were concerned about the flood of cheap German goods into their market. They pressured Parliament to pass a country-of-origin labeling law so that all of these cheap goods would be marked “Made in Germany.” The idea was that British consumers would see from the markings that these were cheap (read “shoddy”) foreign goods and reject them. Unfortunately, the German goods may have been cheap, but they were not shoddy. Soon, British consumers were deliberately looking for the “Made in Germany” label as a sign of value.
In our own day, we have seen the same transformation of the “Made in Japan” label from cheap to quality.
Like most intangible assets, brands are of changeable value. Without the underlying reason for the customer’s support behind them, their value and power can crumble and dissipate like a sandcastle on the beach.
(P.S. – more on the excellent Prestowitz book later.)

The wired city – Lawrence Kansas

There has been a lot of talk about the wired city – where everyone is connected to local news and events. That vision has arrived, in Lawrence, Kansas (according to a fascinating story in the New York Times, “The Newspaper of the Future”:

The steward of this online smorgasbord is Dolph C. Simons Jr., a politically conservative, 75-year-old who corresponds via a vintage Royal typewriter and red grease pencil while eschewing e-mail and personal computers. “I don’t think of us as being in the newspaper business,” said Mr. Simons, the editor and publisher of The Journal-World and the chairman of the World Company, the newspaper’s parent. “Information is our business and we’re trying to provide information, in one form or another, however the consumer wants it and wherever the consumer wants it, in the most complete and useful way possible.”
. . .
The Simons family, through the World Company, enjoys an unfettered and often-criticized media monopoly in Lawrence. But the family has used that advantage to cross-pollinate its properties, ranging from cable to telephone service to newspaper and online publishing, and to take technological and financial risks that other owners might have avoided.
. . .
On a sweltering midsummer morning in 2001, Mr. Simons convened most of his media staff in the basement of a handsomely restored former post office at the corner of New Hampshire and Seventh Streets. The building was World’s new “converged news center,” where the company’s television, newspaper and online staffs would all be housed.
Mr. Simons told his editors and reporters that they were going to do more than merely work shoulder to shoulder; they were going to share reporting assignments, tasks and scoops – whether they liked it or not.
Many did not like it at all, and some World reporters say they sometimes still feel taken advantage of – when they are asked to squeeze multiple print, television and online duties into the course of a single day. Print reporters and their editors have, at times, been reluctant to share scoops or ideas with their television counterparts, and vice versa. But many reporters also said that, over time, they have adapted.

And they keep pushing into the technological future:

In 2003, World installed about 30 wireless hot spots around Lawrence. That same year, it began sending daily content to cellphones. For example, subscribers can have real-time scores and statistics from the University of Kansas’s football and basketball games delivered on demand.
The company has begun offering daily “podcasts” of news and other information to Apple iPod owners or anyone else carrying an MP3 player. It plans to offer a service that automatically loads information onto a docked MP3 player in the early-morning hours before students head to school.

Lawrence is not the only town where local papers are using new technology to gain an edge. But they are certainly a leader. Whether they remain a leader – or others can follow – is still unclear:

As effervescent as the new media are in Lawrence, analysts balk at making grand extrapolations from World’s efforts.
“It’s a market dominated by one company so you have to be very careful when holding them up as a paragon,” said Howard Finberg, director of interactive learning at the Poynter Institute, which operates a Web site devoted to journalism. “Are they creative? Without a doubt, but I’m cautious about it being seen as a single solution or a model.”
Others are more laudatory but equally cautious about Lawrence’s online innovations. “Nobody else is close to doing what they’ve done,” said David Card, a new-media analyst at Jupiter Research. “But you also wouldn’t necessarily be able to duplicate what they’re doing in towns like San Francisco or New York.”

In the meantime, what a fascinating experiment.

For the future of the music and movie industry look to video games

With the Supreme Court ruling on Grokster, expect of flood of ink (or, more up to date, a flood of digits) on the meaning of the decision for the future of the music and movie industries. As I’ve opined before (most recently last week in “Music industry adjusts to file sharing”), the Grokster case is an attempt to put the genie back in the bottle.
So where does this leave the music and movie industries? Some will use the decision to try to defend the existing business model. The smart ones will move on. And where will they go? An intriguing notion surfaced at a recent talk on the OECD’s work on digital content. The presentation was an overview of the OECD’s Working Party on the Information Economy (WPIE) studies on scientific publishing, music, video-gaming and mobile digital content.
The speaker, Graham Vickery, is a long-time scholar of innovation and new technology. He pointed out the parallels between the music industry and the video gaming industry. In all of our discussions, we tend to overlook the video gaming industry. Yet, it is 2/3 the size of the recording music industry. It is growing rapidly and is subject to the same problems of online piracy.
The direction video gaming is heading, however, may overcome the piracy problem. Games used to be relatively static. Once the game was released, it became a good, just like a movie or song. As such, it was easy to copy – until the latest version came out. The industry is now moving more toward online games (multiplayer that change and develop over time). In essence, the business model has changed from providing a good to providing a service (an experience). And an online service is much easier to protect from piracy.
Could the music industry move in this direction? It has been argued that the future of music in back with the live-performance (see my earlier posting “The new music industry“). That is one way of turning a good back into a service. Maybe there are other innovative ways to create an online, interactive music “service.” Isn’t that what radio stations (including XM radio) do? They provide not only the music but the service of the information broker. And they pay royalties to the artist and the companies.
For the movie industry, the situation is not the same. There already exists an interactive version of movie — it is called theatre. If is doubtful that movie companies will survive as promotes for the stage. Interactive movies have been tried before (at the Expo 67 – Montreal Worlds Fair) with less than sterling success. However, the direct tie in between movies and video-games is growing. Maybe that will be a way for the movie industry to change its model — say an online connection to some special feature of the movie that isn’t available on the DVD. Remember that there were prophecies of doom when the VCR came out. And now videos make up a large proportion of the industry revenues.
Granted all of this is unclear — major shifts tend to be that way. What is clear is that the old models are unsustainable – even now after the Supreme Court rules against Grokster.

Critics of reinventing high school

Earlier this week, I posted a story on how DC is changing its high school system to allow for both 3 and 5 year graduations. Now comes the backlash to that idea from the Washington Post editorial board – Reinventing High School:

Mr. Janey’s departure from tradition may be necessary, but the reasons for it are no cause for cheering.

The thrust of the of Post’s view is that the changes are due to a low graduation rate and an inability of the DC school system to keep track of how many students actual graduate.

While acknowledging that their statistics are less than reliable, D.C. school officials say they are grappling with a high dropout rate among students in grades nine through 12. One school system report, according to Post staff writer V. Dion Haynes, showed that of the 4,207 students who enrolled as ninth-graders in 2000, only 2,740 graduated four years later. Of course, some of the students may have transferred out of the D.C. school system, but at this point, D.C. officials have no way of knowing. They do know that the system has a large number of students at risk of not finishing high school. Thus Mr. Janey’s flexibility on high school completion, or as critics might charge, his loosening of attendance standards.

The Post is apparently worried that this change will result in more kids dropping out:

At this stage, the school system cannot speak with confidence about its statistics on student transfers or dropout rates. Absent a tracking system that produces reliable data, an extended school year could augur more of the same, only with a longer time frame for discovery of the disaster.

I am very disappointed in the Post’s reaction. Their negative take on the process is disheartening. The potential problem they point is a problem now – and has only little relation to the new system (DC schools need to improve their student tracking systems whether they stick to the traditional system or not).
I am especially concerned that, at it heart, the Post’s critic is about a lack of understanding of the need to change the educational model (as I’ve discussed in earlier postings). This concern is raised in the very first sentence of the Post’s editorial:

The path to a D.C. high school diploma was once a straightforward proposition: Enroll in the ninth grade, receive passing grades, complete all school requirements and, four years later, attend graduation exercises.

The Post’s editorial board celebrates the old industrial model of high school education (and probably education in general — just change “ninth grade” to “kindergarten” and “four years” to 13 years”). The whole point of the editorial is that DC is failing properly execute this model. Yet, this lock step assembly-line process model — enter the education factory here; come out processed with a degree here — is exactly what needs to be changed.
Yes, it will require a change in the school system’s tracking statistics (among many, many, many other changes that the Post does talk about or seem worried about). But Superintendent Janey is laying the groundwork for the fundamental change needed in the system. The editorial board demonstrates that they (and many others) haven’t quite understood the direction we need to go if we are to meet the challenges of the information-innovation-intangibles economy.

Design awards – and competitive advantage

Business Week Online is running a special section on the 2005 Industrial Design Excellence Awards. To me, the awards highlight both the importance of design as a competitive advantage and the importance of customer-driven innovation.
On the first point, the lead story starts out with this statement:

When people talked about innovation in the ’90s, they invariably meant technology. When people speak about innovation today, it is more than likely they mean design.

Now, if we could only get that into the policy debate, which is fixated on the techological solutions!
On the second point, as the teaser for the report states:

Many of the winning entries from this year’s competition for Industrial Design Excellence Awards spring from a close observation of the customer.

Customer-driven innovation – always a winning strategy.
If we could only get that point as well into our debate over innovation!

The “stuff” economy

We may be moving to an intangible economy, but we are still a “stuff” economy – as David Wessel points out in his “Capital” column in today’s Wall Street Journal, “In Modern Era, Self-Storage Has Right Stuff”

How much? So much that there is enough space in rentable self-storage lockers in the U.S. for each man, woman and child to stand on a spot 2 1/2 feet by 2 1/2 feet, with room left over.
The U.S. has 1.875 billion square feet of self-storage space, according to the Self Storage Association. That is three times the area of the island of Manhattan or the square footage of 426 copies of the 110-story Sears Tower in Chicago.
. . .
“Forget about two- or three-car garages and finished basements — today that’s just not enough space for U.S. households overflowing with excess furniture, camping gear, sporting equipment,” Joseph Quinlan, chief stock-market strategist for Bank of America Corp., said in a note to clients the other day. He even suggested that the ability to put all that stuff in storage units is a “critical prop to global growth” because consumers will keep spending only as long as they have a place to put their purchases. “If U.S. consumers run out of storage space,” he quipped, “the global economy is doomed.”

I doubt that the global economy is doomed if the US runs out of storage space. There are lots of people in the world who don’t have all that stuff (of course, they may also not have the multi-bedroom, three-car garages and basements to store it all in either – hence they may need extra storage space as well). I wonder, however, how well the stock value of the self-storage companies will do as we more to a more weightless society.
On a more serious note, Quinlan’s quip does highlight an interesting point. Yesterday, at the New America Foundation’s National Policy Forum on America’s Economic Future, the issue of the need to reduce US consumption kept coming up. With it came the concomitant concern that this would result in a lower standard of living for Americans. Well, if all we are doing is storing that stuff, I’ve not sure that a cut back in consumption (both in the purchase and in the storage fees) will have much of an impact on our standard of living (unless, of course, you count the entertainment value of buying – not just shopping – as part of standard of living).

The perils of instant information

This was the view from the Wall Street Journal’s “Marketplace” page on the wsj.com website at 10 am today:
Left side of the screen, story saying “Stocks are likely to gain early Thursday, as traders consider a bigger-than-expected decline in jobless claims, a restructuring at GE and merger deals.”
Right side of the screen: stock chart showing the opening lower than yesterday’s close and heading even lower.
I’m not picking on the Journal — I’m just pointing out the problems of reporting in the age of instant information. It would be difficult for the news page of the Journal’s website to keep up with very tick of the Dow. If I wanted real-time analysis, I would probably tune into one of the financial cable channels. Even with the boost that the Internet has given to the written word (via websites, blogs, etc.), there is still nothing like live reporting for fast moving stories.

Music industry adjusts to file sharing

In advance of the expected Supreme Court ruling on Grokster, the news media has been cranking out stories about how the music industry is trying to cope with the new technology. For example, “File-Swapping May Be Here to Stay” from the AP

Recording companies have begun taking steps to legitimize the peer-to-peer technology that lets computer users share songs, video and other files with one another online.
. . .
In the last few months, major record labels have signed licensing deals with companies working to field file-swapping services that would block unauthorized files from being traded online.

Yet, even these optimistic stories question whether such a strategy will work.

Even so, it remains to be seen whether those industry-endorsed alternatives can attract people who now tap open file-swapping networks using such programs as eDonkey, BitTorrent and Kazaa.
“When it comes down to it, why is somebody going to pay for something they can get for free?” said Mac Padilla, 21, a student who lives in Los Angeles.

So, as I’ve said earlier (see Closing the barn door — the Grokster case) regardless of the Supreme Court decision, the music industry will ultimately find a new model. And there are some tantalizing suggestions out there. More on this later.

Destroying your local advantage

In this economic era of global competition, localities are desperately seeking unique local assets (what Professor MaryAnn Feldman calls “jurisdictional advantage” – see her paper on the Athena Alliance website) upon which to build a competitive advantage.
Yet, here we have a case of a locality in the process of destroying a unique local asset. WSJ.com – In Tasmanian Forests, A Battle Breaks Out Over Bees and Trees:

Leatherwood grows only on this heart-shaped island the size of Ireland, a hundred miles south of the Australian mainland and 800 miles west of New Zealand. The trees’ small, star-shaped flowers blossom into the autumn, generating 70% of the 1,200 tons of honey produced in Tasmania each year.
But today, a battle of trees versus bees is unfolding here. For more than 30 years, timber companies have been energetically converting the forests of this Australian state, which have the tallest and oldest flowering trees in the world, into sawdust and woodchips, which are shipped primarily to Japan. The loggers want the huge eucalyptus, but like dolphins caught in a tuna net, the leatherwood, Huon and King Billy pines that grow alongside them are harvested as well. The loggers then firebomb the forests to clear out the debris, a process that can lead to runaway “regeneration burns” and inadvertently destroy nearby leatherwood, and threaten the hives.
If the logging of leatherwood isn’t limited, the beekeepers warn, not only will their livelihood disappear, but so will the world’s only source of leatherwood honey, which has a sharp, musky flavor similar to honey from chestnuts or thyme.

Reminds me of the story Jared Diamond tells about Easter Island — “and so what was that inhabitant of Easter Island thinking of when he cut down the last tree” and thereby destroyed a key pillar of the local economy.