Holiday Greetings – and see you next year

This is the time of year when Americans from a variety of faiths, beliefs and cultures pause for celebration. As this blog takes a break for the holidays, let us reflect on one of our most important intangibles assets.
Many people talk about the freedoms that we Americans enjoy. Among these is freedom of religion. We are free to live our lives according to our own personal beliefs. But freedom of religion also means freedom from others attempting to impose their religious beliefs and practices on us. We should have the freedom to practice those beliefs in an environment of tolerance and respect for our beliefs, just as we tolerate and respect the beliefs of others.
The motto of the United States is “e pluribus unum” – “from many, one.” One can also say it means, “from diversity, strength.” This time of celebration is a time to honor our diversity and take strength from it.
So, to a diverse America, let me wish you a Merry Christmas, Joyous Hanukkah, Happy Kwanza, Festive Solstice, and Happy Holidays for whatever you choose to celebrate.
(or according to the Dallas Morning News – Merry Chrismukkah)
And may you always have the right to choose what and how you wish to celebrate.
From Santa’s friend:
Santa 2005-2.JPG
See you in the New Year.
(and for those of you still looking for the true spirit of the holidays – let me direct your attention to this (spoof) from the advertising firm of Sedgwick Road)

Improving literacy

Last week, the Department of Education released the 2003 National Assessment of Adult Literacy:

Results showed that the average quantitative literacy scores of adults increased 8 points between 1992 and 2003, though average prose and document literacy did not differ significantly from 1992.

The survey uses the following definitions of literacy:
Prose Literacy – The knowledge and skills needed to perform prose tasks (i.e., to search, comprehend, and use information from continuous texts).
Document Literacy – The knowledge and skills needed to perform document tasks (i.e., to search, comprehend,
and use information from noncontinuous texts in various formats).
Quantitative Literacy – The knowledge and skills required to perform quantitative tasks (i.e., to identify and
perform computations, either alone or sequentially, using numbers embedded in printed materials).
Examples of the below basic level included:
– searching a short, simple text to find out what a patient is allowed to drink before a medical test (prose)
– signing a form (document)
– adding the amounts on a bank deposit slip (quantitative)
At the basic level, examples included:
– finding in a pamphlet for prospective jurors an explanation of how people were selected for
the jury pool
– using a television guide to find out what programs are on at a specific time
– comparing the ticket prices for two events
The intermediate level examples included:
– consulting reference materials to determine which foods contain a particular vitamin
– identifying a specific location on a map
– calculating the total cost of ordering specific office supplies from a catalog
The proficient level included:
– comparing viewpoints in two editorials
– interpreting a table about blood pressure, age, and physical activity
– computing and comparing the cost per ounce of food items
Much has been made in the press about the report’s finding of a decline in literacy of college graduates, and the reasons for that decline. For example, from the New York Times – “Literacy Falls for Graduates From College, Testing Finds”

When the test was last administered, in 1992, 40 percent of the nation’s college graduates scored at the proficient level, meaning that they were able to read lengthy, complex English texts and draw complicated inferences. But on the 2003 test, only 31 percent of the graduates demonstrated those high-level skills
. . .
Grover J. Whitehurst, director of an institute within the Department of Education that helped to oversee the test, said he believed that the literacy of college graduates had dropped because a rising number of young Americans in recent years had spent their free time watching television and surfing the Internet.
“We’re seeing substantial declines in reading for pleasure, and it’s showing up in our literacy levels,” he said.

I’ve not so sure about this analysis. I can see where a rise in TV watching might result in lower literacy levels. But I thought time spent watching TV was not rising. And I’m not sure the connection between surfing the Internet – especially since much of surfing is scanning materials and picking out the relevant portions (which sounds like “document literacy”).
In most cases, the decline in the “proficiency” category by college graduates was mirrored by an increase in the “intermediate” category. The Christian Science Monitor reported that there was:

modest literacy gains among African-Americans and Asian-Americans, but a drop among Hispanics in overall English literacy – the ability, essentially, to comprehend newspaper articles and fill out job applications. No significant changes were measured in whites among the 19,175 people surveyed. Moreover, literacy experts say, some 1.5 million adults a year show improvement in their reading skills, and there’s a 5 percent annual growth in the total number of students taking literacy classes.

A more striking finding was the decline in English literacy in the Hispanic population. As the New York Times story relates:

The same period saw big declines in Hispanics’ English reading skills. In 1992, 35 percent of Hispanics demonstrated “below basic” English literacy, but by 2003 that segment had swelled to 44 percent. And at the higher-performing end of the literacy scale, the proportion of Hispanics demonstrating intermediate or proficient English skills dropped to 27 percent from 33 percent in 1992.
“These are big shifts,” said Mark Schneider, commissioner of the National Center for Education Statistics, the arm of the Department of Education that gave the test.
“The Hispanic population in 2003 is radically different than in 1992, and many of the factors that have changed for Spanish-language immigrants make learning English more difficult,” Mr. Schneider said. “They are arriving later, staying in the U.S. for a shorter period, and fewer are speaking English at home.”

According to the Monitor, the story is our response to the

some 40 million American adults can’t read much beyond “See Spot run,” many of them concentrated in economically depressed areas from Oklahoma to South Carolina. That fact puts pressure on a national strategy that is focused on schoolchildren and that was at risk this year of losing a chunk of federal funding for adult literacy programs.
“The idea is if we put money into elementary schools and prevent the problem, that’ll solve it, but it’s not enough,” says Rochelle Cassella of ProLiteracy Worldwide in Syracuse, N.Y. “It doesn’t address a sizable population that exists already.”

Hurdles impeding adult literacy include intergenerational illiteracy – when parents don’t read, their children often don’t – as well as economic and cultural barriers.

Dealing with this intergenerational illiteracy might be the hardest task of all. When kids don’t pick up on the importance of literacy from their parents, it is doubtful that they never will. And while low literacy abilities might have been a hindrance to the parents, it will become an insurmountable barrier to their kids as the economy shifts more and more to an information base.
Overall, the assessment shows a little progress in the past 10 years. The total percentage of those at basic or above has increased slightly in all three areas. The problem is that it has not increased enough. With 22 percept of the total population at the below-basic level in quantitative literacy, 14 percent at the below-basic level in prose literacy and 12 percent at the below-basic level in document literacy, we still have a long way to do to make sure everyone can prosper in the new I-Cubed Economy.

Surviving on personized service

One of the things that the Internet was predicted to do was eliminate the “middle-man.” “Friction-less” commerce was how Bill Gates described it. Well, that has and has-not turned out to be the case. Web-based transactions have not replaced the middle-man because the middle-man plays an important role as information-broker. Take the case of travel agents – who were supposed to disappear in the face of the onslaught by Expedia, Travelocity, Orbitz and airline/hotel/car rental direct web-based booking sites. This has not been the case, as the Christian Science Monitor points out in “Travel agents find routes to survival”:

So are the nation’s 100,000 or so travel agents headed for the same fate as blacksmiths and buggy-whip makers – near extinction? The US Bureau of Labor Statistics expects positions as travel agents to decline through 2012 and warns those considering the profession to expect “keen competition for jobs.”
But balancing that are a couple of factors: (1) The travel market in general is expected to continue to grow, and (2) despite growing comfort with the Internet, some people are expected to still want personal service and expertise from another human being. Recognizing this, online travel agencies such as have expanded to offer bookings by contacting a real, live travel agent via its toll-free phone line – no computer needed.
“Service is what makes the industry,” says Christopher DeSessa, an associate professor at Johnson & Wales University in Providence, R.I., who teaches courses on travel and tourism. “It’s when [customers] start getting to the high-ticket items that they need the expertise of a travel agent.”

Expedia adding real live people? What is the Web coming to!
Looks like the travel business is learning the same lesson that the banking industry learned when it thought it could do away with tellers just because of ATMs.
It is the intangible asset of tacit knowledge that is brought to bear in many service transactions – not simply the transaction. As routine information becomes codified and available easily in digital form, the skills and tacit knowledge to navigate and interpret that information become more important.
In the information age, there will always be a need for information brokers. That is what much of the “service” sector is all about.

Japan goes upmarket – in fruit

Japan has found a way to improve its trade with China — selling the Chinese $17 apples. No, this is not a con job. Japanese apples that routinely sell for $15 in Tokyo are now selling for $17 in Beijing. As the Washington Post explains:

To be sure, through luxury fruits the Japanese are exporting their own culinary aesthetic. Apples in Japan, for example, are prized as much for beauty as for taste. On Japanese farms — almost all of which are small-scale operations — even slightly blemished apples are discarded for juice and jams while production is limited to grow fewer but better quality fruit.

And there are enough newly rich Chinese, and others, willing to pay the price for aesthetics:

As big as softballs and as shiny as gems, the precious produce typically goes from the farm to the glitzy retailers of Japan’s big cities — where the high prices charged for such fruit have earned this nation its reputation as the land of the $15 apple.
But this year, the most costly crates of Katayama’s “Japan’s Best” apples are bypassing Tokyo’s chic Ginza district and heading to China instead. There, Japanese apples are being scooped up by the Lamborghini-driving, Gucci-toting nouveau riche in Beijing and Dalian at $17 a piece, or roughly 100 times the price of a Chinese apple. Some of the finest specimens, with dragon designs and Chinese characters in their peels, retail for more than $100 each.
. . .
The crates of “Japan’s Best” apples being shipped overseas are only part of a niche-market export boom from high-end Japanese farms. It includes $240 musk melons flying off to Thailand, $3 strawberries heading to Hong Kong and $170 square-shaped watermelons carted to Kuwait.

Cultivating this upscale market is a one more extension of Japan’s export-led economic strategy:

“Japan may well be beaten by developing nations with cheaper farm and fishery products,” Prime Minister Junichiro Koizumi said at an agricultural conference in Tokyo this year. “But I think Japan can still compete on the international market — by exporting more expensive and delicious goods.”

It may be a little thing – but it goes a long way to explaining why Japan continues to run a trade surplus. (See the chart below from the Statistical Handbook of Japan).
I know many of my economist friends will maintain that the trade balance is all a matter of macroeconomics — savings rates, etc. But I still believe that micro matters — and that business competitive strategy plays a part. At least it does with $17 apples.
Japan trade.gif

October trade in intangibles

The BEA trade data released this morning shows the surplus in our balance of trade in intangibles continued to increase ever so slightly. The surplus rose by just $51 million to $6.88 billion in October. Note that the revisions for the past few months show that the intangibles surplus grew by less than originally reported: $44 million in July, $94 million in August and $94 million in September. Before July, the balance of trade in intangibles had decreased for many months. Essentially, the balance of trade in intangibles is treading water at a surplus of just below $7 billion per month.
This comes at a time when the overall monthly deficit grew to a record $68.9 billion.
The deficit in Advanced Technology Products was somewhat improved in October, only $4.9 billion, compared to $5.6 in September. 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.

Intangibles trade-Oct05.gif

Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.

Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Taking patents-are-property to its logical conclusion

There is a group of people who believe that intellectual property rights (such as patents) are an absolute property right. Now the EU is proposing a course of action that must be based on that position: criminalizing all intellectual property infringements, including patent violations. The obviousness of this position is clear — we lock people up for theft of and trespass on real property, why not for intellectual property.
Well, the answer is not so clear. First, is “intellectual property” really property — or is it a state-granted monopoly right? If it is a state-granted monopoly right, then civil not criminal penalties are more appropriate.
Second, assessing the validity of a patent right is not so clear cut (for more see the Athena Alliance/CELI session on patent reform). Patents are not the same quality as real property titles — and even real property titles can get messy (which is why we all have title insurance on our houses). Criminalizing patent infringement would put a strong chilling effect on innovation, since an innovation that is later found to infringe (willfully or not) would subject the innovator to the risk of prison.
Here is what some of the most innovative companies have to same, according to the International Herald Tribune/New York Times:

Tim Frain, director of intellectual property at Nokia, called the inclusion of patents within the scope of a European law “ludicrous.” Frain, who is based near London, advises managers at Nokia on the risks of infringing existing patents when they develop new functions for mobile phones.
Frain indicated that patent holders wanted protection but not penalties of imprisonment as they tested the boundaries of other patents. “It’s never black and white,” he said. “Sometimes third-party patents are so weak that I advise managers to go ahead and innovate because, after making a risk analysis, we feel we can safely challenge the existing patent.”
He added, “But with this law, even if I’m certain the existing patent is no good, the manager involved would be criminally liable.”
. . .
“The law could trigger abusive criminal litigation, which would have a chilling effect on innovation,” said Francisco Mingorance, European affairs manager at the Business Software Alliance, a trade body that represents Microsoft and Apple Computer, among others, in Brussels.
Some of the biggest patent owners have themselves been accused of patent infringement. Microsoft owns around 5,000 patents and is currently fighting 32 infringement claims, the company’s spokesman in Brussels, Tom Brookes, said.

So, does the EU propose hauling Bill Gates off to the gaol if Microsoft loses one of those 32 infringement cases? That would certainly foster a spirit of innovation and solve Europe’s competitiveness problem.

Outsourcing gaming – and more

No – it’s not about the growth of the video-gaming industry in China. It is about the growth of the paying-others-to-play industry, and how the Chinese are cashing in on it.
Ogre to Slay? Outsource It to Chinese – New York Times:

One of China’s newest factories operates here in the basement of an old warehouse. Posters of World of Warcraft and Magic Land hang above a corps of young people glued to their computer screens, pounding away at their keyboards in the latest hustle for money.
The people working at this clandestine locale are “gold farmers.” Every day, in 12-hour shifts, they “play” computer games by killing onscreen monsters and winning battles, harvesting artificial gold coins and other virtual goods as rewards that, as it turns out, can be transformed into real cash.
That is because, from Seoul to San Francisco, affluent online gamers who lack the time and patience to work their way up to the higher levels of gamedom are willing to pay the young Chinese here to play the early rounds for them.

This phenomenon is part of a growing trend where “professionals” play on-line games to collect a virtual currency (similar to the bonus points of early games).

The games allow players to trade currency to other players, who can then use it to buy better armor, amulets, magic spells and other accoutrements to climb to higher levels or create more powerful characters.
The Internet is now filled with classified advertisements from small companies – many of them here in China – auctioning for real money their powerful figures, called avatars. These ventures join individual gamers who started marketing such virtual weapons and wares a few years ago to help support their hobby.
. . .
This virtual economy is blurring the line between fantasy and reality. A few years ago, online subscribers started competing with other players from around the world. And before long, many casual gamers started asking other people to baby-sit for their accounts, or play while they were away.
That has spawned the creation of hundreds – perhaps thousands – of online gaming factories here in China. By some estimates, there are well over 100,000 young people working in China as full-time gamers, toiling away in dark Internet cafes, abandoned warehouses, small offices and private homes.

And where are the US professional gamers who are making money? Not there, apparently.

“They’re exploiting the wage difference between the U.S. and China for unskilled labor,” says Edward Castronova, a professor of telecommunications at Indiana University and the author of “Synthetic Worlds,” a study of the economy of online games. “The cost of someone’s time is much bigger in America than in China.”

There are some attempts to crack down on this so-called “gold farming.” At the same time, companies have set up their own trading exchanges.
Even if these gold farming factories are shut down, the operators have learned a valuable lesson:

“My ultimate goal is to do Internet-based foreign trade,” [Mr. Yu, the Fuzhou factory operator] says, sitting in a bare office with a solid steel safe under his desk. “Online games are just my first step into the business.”

Just wait until these guys hit the financial exchanges!

Future of Tulane … and New Orleans

From the Wall Street Journal – “Tulane Announces Downsizing In Wake of Hurricane Katrina”:

Battered by Hurricane Katrina, Tulane University announced a major downsizing that will eliminate the jobs of a third of its medical-school faculty, do away with 22 programs of study and suspend eight sports.

While this is understandable given the financial situation, this could be worrisome for the future of New Orleans. As I said earlier, how Tulane copes will be a leading indicator of the future.
But, there is a bright point in this story:

Because of changing health-care needs and the reduced population of New Orleans, university officials said they plan to downsize the medical school’s clinical operations and put added emphasis on research and educational programs.

Keeping the research programs is key.
As the Wasington Post – “After Katrina, A Leaner Tulane” puts it:

Administrators say the long-term plan — which will ultimately reduce the annual budget by $55 million — is to create a stronger and leaner undergraduate school by focusing on strong programs in such areas as architecture, business, arts and sciences while jettisoning some engineering programs that were not as highly rated.

Tulane could come out of this as a stronger school – and one that can lead the nation in educational reform. That would be a positive for the future of the Big Easy.

Opening designs the old fashioned way

While secrecy is a good way to protect designs from pirates (see earlier posting), openness can be a way to make others work for you. The open-source movement is the classic example. The “anime” industry (Japanese-style animation) uses “pirates” (aka hard core fans) as both a screening mechanism and as a workforce. Here is how it works (according to Fortune):

The most dramatic example of [the industry’s open] attitude is their tolerance for folks who have the potential to put them out of business: pirates trading anime online. And not just trading, but competing to see who can create the best subtitled version of a particular show.
This is open-source TV programming. “Fansubbers,” as they’re called, can spend more than a dozen hours collectively just to get a half-hour show ready for English speakers. The process is as orderly as an ant farm, with each fansubber having a specialized task. TV watchers in Japan start the process by recording an anime show and uploading it to the Net, typically a few hours after it airs. Bilingual fans around the world download the show and start writing out translations in text documents, which they post online or e-mail around. The first drafts have all kinds of mistakes – words are translated too literally or just wrong – and other translators make refinements. At this stage, self-appointed editors ask questions and make changes, then fan typesetters plug in the subtitles as well as the translations for words that pop up on signs or characters’ T-shirts. Finally someone somewhere encodes the completed version – and here there’s competition to see who can encode it with the fewest glitches and the best filters – and runs it through BitTorrent, a piece of software that allows large files to be downloaded quickly. Typically the fansubbers organize themselves in teams to make the process move more smoothly. All this is done for free.

Now comes the really interesting part — US companies then license the best of these translations for distribution in the US. And the system works.

Part of the reason is that the fansubbers police themselves with a zero-tolerance policy that would impress Eliot Spitzer. The first rule of fansub club: Don’t trade fansubs once a U.S. company licenses a show. . . .
The fansubbers themselves also scour the Net to make sure that despite all their hours spent translating, no copies of their work remain. “If you really like the show, you should go out to buy the DVD,” says the fansubber who goes by the online handle Quarkboy. In real life, Quarkboy is Sam Pinansky, a 25-year-old physics Ph.D. student at University California at Santa Barbara who’s researching string theory. Pinansky doesn’t mind the ephemeral nature of what he does. All he cares about is making sure there’s plenty of anime out there for him. “If you do buy the DVD, more shows like it will be licensed in the future. Our whole goal from the beginning was to get more people to like anime.”

This works for marketing as well:

Fansubbers also act as free focus groups for the U.S. anime distributors. The more people rally to translate a show on the Internet, the more likely it is to do well as a commercial product.

Innovation through anti-secrecy.
Many paths to the same destination.

Protecting designs the old fashioned way

While it is fashionable to assert copyright and patent protection for almost everything, there are other, more old fashioned ways of protecting ideas and designs: keep them secret. Pre-releases of products may be important to marketing purposes, but it also gives pirates a head start. It is widely suspected in Hollywood, for example, that pre-release versions of movies sent out to influence the Oscar process are the source of pirated copies seen on the street even before the premier.
One area where this secrecy is especially important is in designer fashion. Nothing undercuts the value of a design to see knock-offs floating around. A niche of that market — the wedding dress industry — seems obsessed with that problem. After all, no blushing bride wants to pay mega-bucks for that special gown just to see it show up at everyone else wedding. (Being male, I can only accept this statement as fact, rather than try to completely understand it. After all, as some one said, what’s the problem – it is guaranteed that the bride will be the only one in the room wearing that particular dress). So, wedding dress designers have taken an extra precaution to insure their clients will have at least one fleeting moment of uniqueness. No pictures — absolutely none — are allowed during the fitting process.
This came as a surprise (and disappointment) to a young friend of mine who is going through that pre-marriage ritual. She was eager to share the dress design with her bridesmaids. But the thought of having something special overrode any disappointment when the connection between pictures and knock-offs was pointed out.
So, secrecy still matters if you are trying to prevent piracy.
On the other hand if you are looking for collaboration in design, then secrecy can be a problem.
More on that next.