Visions of the future of “media”

One of the fastest changing industries is the one lumped together under that terrible label of “the media.” Newspapers, radio, TV, movies etc etc etc are rapidly undergoing transformation as the means of delivery shifts to digital. No one knows where the industry will end up. But as Sunday’s International Herald Tribune pointed out in a story “Road maps for the digital revolution”, there are some interesting ideas.
One alternative is increased interactivity – taking the lead from gaming (as I have talked about before):

To Gerhard Florin, the mass media empire of the future combines a phone company the size of Verizon with a search engine as popular as Google and a video game company with interactive content like the one he works for, Electronic Arts.
. . .
“Media companies should learn from games because we totally absorb our players,” he said. “Unlike music, for example, people playing our games are not also reading a newspaper.”
. . .
“You may be able to do everything online, but we find people are still very attached to the idea of getting something physical,” Florin said. “Downloading simply does not give people the same satisfaction.”<br.
Advertising would only be a minor source of revenue, mainly in the form of credible product placements.
“Our players react very strongly against obvious advertising,” Florin said. “But, interestingly, our players are quite positive about branded items placed in credible situations.”

Another alternative is localization:

The Internet may reduce the cost of distributing content on a global basis, but Michelle Guthrie, chief executive of the Asian broadcaster STAR Group, is convinced that the next-generation media empire will be built using highly localized content.
“I know this sounds strange in the era of global communication, but you can already see this localization trend among our viewers,” Guthrie said. “The top 10 television programs in every one of our markets are locally produced about local stories.”

And there is the rise of content-as-king:

Shelby Bonnie, chief executive of CNET Networks, a technology-focused online news organization claiming more than 110 million unique visitors a month, said future media empires would center more on a broad brand name than on a means of distribution.
. . .
“The successful media empire of the future will regularly send their audience to the best stories by their competitors,” Bonnie said. “The three-legged stool of content will be original, user-generated and aggregated.”

Interesting ideas. And all very important for those in the “media” industry.
But we will see if any of them matters, at least to the end user. Remember TV was supposed to transform our lives. It did transform popular culture – but created what was labeled a “vast wasteland“. Likewise cable was to give us expanded choices. But, as Bruce Springsteen said “57 Channels (And Nothin’ On).
As much as I like the “new media”, sometimes the old visions are best. Over 30 years ago, Isaac Asimov wrote an essay entitled “The Ancient and the Ultimate” where he described the ultimate self-contained, portable, high-tech reading device of the future. You guessed it, it is the book.
So put me down as enjoying the old fashioned pleasure of a roaring fire, a stiff drink and a good book.

Music industry’s new model – update

Monika Ermert has posted a great summary of the state of play on P2P music downloads on Intellectual Property Watch: “After Grokster, Industry Seeks Legal P2P As Mobile Music Takes Over”.
The title says it all: legal P2P systems and mobile music:

Now industry is looking for the next model, one that will meet demand within the confines of the legal and policy environment which itself is changing.
There is a whole array of P2P services in the making, as British music consultancy MusicAlly found out in a study presented at Midem. “Most of these services have been around for several years already preparing for a start,” says Paul Brindley, managing director of MusicAlly. “If they do not start this year, it is over.”
. . .
The music industry, on the other hand, seems to place its hope on a different technology. The Midemnet in Cannes devoted a whole day of discussion to mobile music. “Mobile music may solve the piracy problem,” said Brazilian lawyer Marcelo Goyanes. “Mobile might be the saviour of the music industry in China,” added Richard Robinson, co-founder of Shanghai ISP and mobile content provider Linktone.
While the CD and Internet music market was 90 percent pirated, this was yet no problem with mobile phones. The combination of fast-growing numbers of handsets in countries like China (400 million), India (over 80 million) and Brazil (86 million) and a nearly piracy-free technology makes mobile very attractive.

The ongoing conductivity part sounds similar to the interaction model of gaming that has cutting down on video-game piracy (see my earlier posting). I’m not sure that the technology can be made piracy-proof, but if the nature of the commercial interaction is “right-now, just-for-me” it seem hard to see how pirates have an advantage. Unless of course the music industry follows to old movie industry practice of limiting initial distribution — there is a reason why all those pirated videos are in hot demand and it has to do with availability well before the “official” video release, not just price. Interestingly we are now seeing movies with simultaneous release in multiple formats. Someone is learning that in the digital age, more (distribution channels) is better.

What happened to growth

This morning’s GDP numbers for the 4th quarter of 2005 were quite a shock: growth slowed to 1.1% (a rate we used to call a “growth recession” — still positive but not enought absorb the growing population). According to the BEA News Release: Gross Domestic Product:

The deceleration in real GDP growth in the fourth quarter primarily reflected a deceleration in PCE [personal consumption expenditures], an acceleration in imports, a downturn in federal government spending, and decelerations in equipment and software and in residential fixed investment that were partly offset by an upturn in private inventory investment.

Much of this was a large decline in purchases of durable goods (-17.5%) – especially autos. Spending on non-durable goods and services both increased (5.1% and 3.2% respectively). However, the biggest increase in services was in health care — not necessarily a good sign from long term growth.
And while the trade figures for only two of the three months of the quarter are out, BEA estimates there will be a decline in services exports for the quarter.
One worrisome part is the slow down in investment by businesses in equipment and software — down to only 3.5% compared to 10.6%. Most of that slow down was due to an absolute decline in purchasing of transportation equipment, but investments in IT equipment and software and in industrial equipment slowed slightly as well.
The stock market shrugged off the news but economists reactions were mixed. Some forecast high, rebound-type growth in the first quarter of 2006. Others predicted a continuing slow trend. Some even questioned the number, since this is the advanced estimate, and expect large revisions once more data is available.
I try not to read too much into a single data point. However, the projected decline in services exports will bear watching. This may be due to a decrease in tourism and travel – or due to a decline in our intangibles trade balance. Monthly trade figures for Dec 2005 (and consequently for the entire year) come out on Feb 10. I will be looking carefully at that data to see how our intangibles trade is holding up.

Competitiveness plans

Yesterday, a bipartisan group of Senators unveiled major competitiveness legislation. Entitled PACE – Protecting America’s Competitive Edge, the legislation was crafted by Senators Bingaman, Alexander, Domenici and Mikulski. This set of three bills implements the recommendations of the recent NAS report “Rising Above the Gathering Storm” (which Bingaman and Alexander were instrumental in bringing about). The legislation includes provisions to increase funding for science and math education (including better training for teachers) and for energy research and development (including creation of a new agency in the Department of Energy similar to the Defense Advanced Research Project Agency – the famed DARPA). The legislative package also expands the R&D tax credit and, more importantly in my mind, creates a tax-credit for providing continuing education to current workers (rather than waiting for them to lose their jobs before they can get job training help).
This is the second major competitiveness bill. Late last year, Senators Ensign and Lieberman introduced the National Innovation Act of 2005 (S.2109) – which tracked the recommendations of the Council on Competitiveness’s National Innovation Initiative.
Adding to the mix, earlier in the week, the Democratic Governors Association unveiled its “America Competes” plan
While I think these proposals are incomplete, they are steps in the right direction. One provision in the PACE package that may sow the seeds for greater progress in the future is an OMB and Treasury Department study on innovation incentives. Such a study could lay the groundwork for a much more comprehensive approach to innovation policy
I don’t know whether to be optimistic or pessimistic about these initiatives. The growing drum beat over competitiveness is heartening. And the PACE legislation has the best chance of serving as a engine to get something through the Congress – since at its core is a set of energy policy proposals that are co-sponsored by both the Chairman and the Ranking Member of the Senate Energy Committee. Getting these big packages passed requires some sort of legislative vehicle. The last time Congress did a big competitiveness package, the engine was the need to give the President trade negotiating authority (which culminated in the creation of the WTO). This time energy policy, rather than trade policy, might be the spur.
However, a lot will depend on how the President reacts. Next weeks State of the Union address will be critical. There are some indications that the President will address these competitiveness issues – or so says a recent story in the Baltimore Sun “Bush weighs costs to U.S. of keeping up”. In a recent interview with the Wall Street Journal, the President talked about competitiveness:

WSJ: Is competitiveness going to become more of a theme for you in this year?
Mr. Bush: Competitiveness has always been a theme for me, and I’m going to continue to make it one. Remember, in the campaign, I used to say, “How do you deal with jobs going overseas? Make America the best place in the world to do business.” That is a competitiveness theme that basically says I recognize that we’ve got to compete. And we have a global economy. Some wish there wasn’t a global economy, but there is a global economy. And we’ve got to have our young trained for the jobs of the 21st century or else [the jobs are] going to go somewhere else. That’s what happens in a global economy. And there’s been some interesting — there is an interesting debate in America about, well, how do you react to a global economy? There are some who say, let’s protect ourselves. And as you know, I believe in opening markets and enforcing trade law, which is the opposite of “let’s protect ourselves.” It’s “let’s compete, and by the way, let’s make sure we have an environment within America that enables us to be competitive.”

On the other hand, Bush’s energy message could veer off into a messy fight over a plan to reprocess used nuclear fuel, as reported in today’s Washington Post and Wall Street Journal. That fight could obscure other energy technology issues in a battle over nuclear waste and proliferation.
Presidential policy could also bog things down. Yesterday, Senator Clinton introduced her own energy technology bill – S. 2196 – to create an Assistant Secretary for Advanced Energy Research, Technology Development, and Deployment.
Like everyone else in Washington, I will be looking at the State of the Union address carefully – reading the tea leaves see the direction of our policy. More on my findings later

Power of ringtones to change the music market

This little story in today’s Wall Street Journal underscores the dynamics of the music market today:
WSJ.com – How Cellphones Saved the Radio Star

The mobile-phone ring tone was more important in propelling Madonna’s hit single “Hung Up” to the top of the charts than radio airplay, said a senior executive at Madonna’s recording company, Warner Music Group Corp.
. . .
“I think it’s not inaccurate to say that the mobile campaign, and the ring tone in particular, was more effective in launching the single than radio airplay,” said Michael Nash, a senior vice president at Warner Music.
. . .
The growing importance of ring tones, along with other digital music products, is prompting changes in the way music companies identify new artists and bands and market music to consumers. Mr. Nash said the ring tone is now becoming a central part of the marketing strategy for an album or single.
He said Warner Music has charged its staff responsible for signing and managing artists with creating content in the studio that works as part of a whole digital package.
The International Federation of the Phonographic Industry said mobile phones accounted for nearly 40% of digital-music sales in the first major year that full songs were available over the mobile phone. Ring tones account for by far the largest portion of mobile-phone music revenue, according to research released by Informa PLC.

As I’ve pointed out before, the rise of digital technology is forcing the music industry to find new business models. It appears that innovation and creating new markets (rather than criminalizing users) might just be the future salvation of industry.

Invention of the automobile – and competitive advantage

This Sunday is a special day in the history of the world (no, the Super Bowl is the next week). As Business Week explains:

The automobile celebrates its 120th birthday on January 29, 2006, the anniversary of the date in 1886 on which Karl Benz applied for a patent for his motorized vehicle. With the German Reich Patent No. 37435a, granted in November of the same year, his Patent Motor Car, as this three-wheeled vehicle has since been known, received official recognition as the world’s first automobile. It was the individualized technology that secured the Benz Patent Motor Car this status. Unlike other inventors, Benz did not merely install an internal combustion engine into an existing coach chassis, thereby making it capable of autonomous motion (Greek/latin: auto/mobil). His design extended to the entire vehicle: It was quite clear to him that a vehicle powered by an internal combustion engine was subject to engineering principles quite different from those applying to a horse-drawn carriage.

And I suppose you are one of those who, like me, were taught that Henry Ford invented the automobile.
Ford didn’t invent it. What Ford did was much more important. He commercialized the auto through a series of innovations – technical, organization and financial. Before Ford, the automobile was a rich-man’s toy; after Ford it was an everyday item. Mass produced to be cheap enough to be affordable by all. Simple yet strong enough to replace the horse for rural travel. Economically dynamic with linkages throughout the economy to help create the massive middle class.
As this history lessen shows, invention or great technical ideas are not enough. There is more to innovation than a smart engineer.
Now, if we can just get our policymakers to understand that lesson they might be able to craft a complete innovation policy.

Ford and our bankrupt economic policy

Two side notes to Ford’s announcement of drastic cut backs illustrate how our economic thinking and economic policy is bankrupt.
The first is the failure of the American Job – NOT – Creation Act – some thing I’ve discussed before. As Allan Sloan points out – Ford Takes a Tax Holiday for ‘Jobs Creation’:

Right there, on page 2 of one of its news releases yesterday, Ford said that “repatriation of foreign earnings pursuant to the American Jobs Creation Act of 2004 resulted in a permanent tax savings of about $250 million.”
Hello? How can you simultaneously cut jobs and benefit from the American Jobs Creation Act? Welcome to the wonderful world of Washington nomenclature.
Ford, understandably, declined to expand on its news release. But my calculations indicate that Ford last year brought into the United States about $850 million of profit that it had earned overseas but did not have to share with the Internal Revenue Service.
Let me hasten to say that I’ve got no problem with Ford bringing this money home. Ford is battling for survival, and every $850 million helps. It would have been remiss not to have taken advantage of the idiotic legislation that Congress adopted and that President Bush signed despite objections from his Treasury Department and Council of Economic Advisers.
My problem is with the legislation, and especially with its misleading name. Companies don’t add jobs based on one-time chances to repatriate money from overseas.

Yet – that is exactly what our political leaders seem to think.
Nor do state tax breaks help. The Hazelwood plant is one of the plants scheduled to be shut, according to yesterday’s announcement. Hazelwood had been targeted in earlier cutbacks. But, workers tried to turn the situation around. State and local governments also put up $17 million in incentives, according to a story in today’s Washington Post – “Workers Lament a Plant’s Falling Star”. It worked for awhile, but …

just last month, with workers still motivated to save their jobs, the factory was named the highest-quality Ford plant in North America and the one with the best cost controls, according to union and management officials.
. . .
After winning the two Ford performance awards, employees joked darkly that the company forgot to send the third award, the one for best plant closing.

One wonders why Ford was giving out these awards. Quality is no longer a competitive advantage. It is a minimal standard to stay in the game. And efficient mass production is no longer the name of the game. It too is a basic criterion.
Ford – and the rest of the country – needs to re-think its economic strategy. Quickly.

More on literacy

There is a new study of literacy of college graduate, this one by the American Institutes for Research funded by The Pew Charitable Trusts. The report finds:

there is no difference between the quantitative literacy of today’s graduates compared with previous generations, and that current graduates generally are superior to previous graduates when it comes to other forms of literacy needed to comprehend documents and prose.

It also finds that college graduates are have higher literacy skills that the general population.
That is the good (or at least ok) news. The bad news:

Twenty percent of U.S. college students completing 4-year degrees — and 30 percent of students earning 2-year degrees — have only basic quantitative literacy skills, meaning they are unable to estimate if their car has enough gasoline to get to the next gas station or calculate the total cost of ordering office supplies.

Maybe OK for the Industrial Economy; a real problem for competing in the I-Cubed Economy.

Getting the metrics right – innovation and R&D

I was reading an article in Business 2.0 about how 3M has reconfigured its R&D process when one particular sentence touting their success hit me:

Product development cycles have shrunk from an average of four years down to two and a half, operating profits are up 23 percent, and R&D spending as a percentage of sales — a key bang-for-your-buck barometer — last year hit an all-time low of 5.7 percent.

Ok – shorter product development cycles; that’s good. Higher operating profits; that is really good. Lower R&D spending as percentage of sales; wait a second – lower? Yes, lower – this is a measure of efficiency (“bang for the buck”).
From a business point of view, this makes some sense. As the old saying goes, I know that half of my advertising [or R&D] budget is wasted, I just don’t know what half. So a company needs to worry about its R&D efficiency.
But from a national competitiveness point of view, this is exactly opposite of what we should be doing. All of the various reports decry our declining R&D budget as a percentage of GDP. In fact, the OECD Science, Technology and Industry (STI) Scoreboard 2005 leads with data on the investments in knowledge as a percent of GDP. So, lower spending is bad – either absolute or relative.
Returning to the business point of view, it is not clear that measuring R&D as a percentage of sale is a good metric for a company as well. It takes the view that R&D is a cost/expense rather than an investment and it is too easy to game the number by lowering R&D expenditures. Investopedia has the following advice on “Buying Into R&D”:

Measuring R&D
Financial expert/writer, Kenneth Fisher, touts the price-to-research ratio (PRR), which is the market value of the company divided by its research-and-development expenditure over the last twelve months. Fisher suggests buying companies with PRRs between five and 10 and avoiding companies with PRRs greater than 15. By looking for low PRRs, investors should be able to spot companies that are redirecting current profits into R&D, thereby better ensuring long-term future returns.
Technology investment guru Michael Murphy offers the price/growth flow model. Price/growth flow attempts to identify companies that are producing solid current earnings while simultaneously investing a lot of money into R&D. To calculate the growth flow, simply take the R&D of the last 12 months and divide it by the shares outstanding to get R&D per share. Add this to the company’s EPS and divide by the share price.
Measuring R&D Effectiveness Is Key
Unfortunately, while the Fisher and Murphy models both do a great job of helping investors identify companies that are committed to R&D, neither indicates whether R&D spending has the desired effect – the successful creation of profitable products. When evaluating R&D, investors should determine not only how much is invested but how well the R&D investment is working for the company.
Companies often cite patent output as a tangible R&D success measure. The argument goes that the more patents filed, the more productive the R&D department. But, in reality, the ratio of patents per R&D dollar tends to represent the activity of a company’s lawyers and administrators more than its engineers and product developers. Besides, there is no guarantee that a patent will ever turn into a marketable product.
One way, however, to perceive the proficiency of R&D is to calculate the percentage of sales that come from products introduced over a period of time, say the preceding three years. For the calculation, investors need annual sales information for specific new products. If lucky enough to get that kind of data from company reports, investors can do the calculation this way:
New product sales (previous three years) / Total sales (previous three years)
The resulting percentage gives investors a sense of R&D success as well as R&D output and offers a useful metric for comparing R&D performance with peer companies.
Investors should also pay attention to R&D expenditure/sales. According to Michael Murphy, good growth-flow companies spend at least 7% of their sales revenue on R&D. On the other hand, what is deemed a healthy R&D/sales ratio depends on the industry and the company’s stage of development.
Pharmaceuticals, software, and hardware companies, for instance, tend to spend a lot on R&D while consumer product companies typically spend proportionately less. In 2003, Johnson & Johnson, for example, reported spending about 10 cents per sales dollar on R&D, but drug company Pfizer spent 15% of expected sales on R&D; software giant Microsoft spent 16%; and network-equipment maker Cisco Systems spent 18%. For smaller, early-stage software and biotech companies the number can easily stretch as high as 80%.

Yet, the story gets even more complicated in that recent research shows that R&D spending does not deliver profits:

Companies which invest heavily in research and development may be wasting their money. According to a new study, there is no direct relationship between R&D investment and significant measures of corporate performance such as growth, profitability, and shareholder return.
But despite the absence of a clear return on investment, the pace of corporate R&D spending is accelerating, suggesting that many executives continue to believe that enhanced innovation is required to fuel their future growth.
According to consultants Booz Allen Hamilton, who analyzed the world’s top 1,000 corporate research and development spenders, innovation spending is still a growth business. This 2004 Global Innovation 1,000 spent $384 billion on R&D in 2004, representing 6.5 per cent annual growth since 1999.
And the pace is accelerating. Measured from 2002, the annual growth rate jumps to 11.0 per cent.
While the top 1,000 corporate R&D spenders invested $384 billion in 2004, the second 1,000 spent only $26 billion – only an additional 6.8 per cent beyond the top 1,000 spenders.
Yet as the study also points out, being large is an advantage when it comes to R&D. Larger organisations are able to spend a smaller proportion of revenue on R&D than smaller one with no discernable impact on performance.
But while spending more doesn’t necessarily help, spending too little will hurt. Companies in the bottom 10 per cent of R&D spending as a percentage of sales under-perform competitors on gross margins, gross profit, operating profit, and total shareholder returns.
However, companies in the top 10 per cent showed no consistent performance differences compared to companies that spend less on R&D.

And, as Ben McClure writes in the Motley Fool – Ruminations on R&D

Great companies invest in innovation. Those that roll the dice on research and development (R&D) programs tend to generate bigger profits than those that don’t. But take note, Fools: The world of R&D is full of questionable spending, unqualified results, and payoffs that can be hard to measure. Factoring R&D into stock evaluations and analysis is not a simple affair.

The dilemma for those of us looking for good metrics of the I-Cubed Economy is clear. Right now we have a black-box approach: money goes in and patents come out. We need better measures of the process, including a measure of efficiency – not all R&D spending is productive. Yet that productivity is hard to grasp and we don’t want to reward the view that cutting R&D is a good thing.
One of the measures propose in the Investopedia article — the ratio of new products sales to total — is an excellent measure. It is also a variation that is used in OECD surveys of innovation (as codified in the Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd Edition).
Unfortunately, the US does not conduct such an innovation study. We should (as I’ve said before). We need real metrics of innovation — not the ones left over from the industrial era.
PS – the Business 2.0 article has other interesting insight about how 3M moved its research away from “mini-alignments with old markets” and tied it basic nanotech research to marketable products. Interestingly, nothing in the article about the “lead user” theory that Eric von Hippel developed through his study of 3M. I wonder how that fits with the problem of aligning R&D with old markets?

Misleading indicators

The EU’s European Innovation Scoreboard was released last December, but there was small flurry of excitement last week when the European Commission sent out a press release “Innovation scoreboard: Mixed results that mentioned the “innovation” gap between the US and Europe. For example, the Financial Times and MSNBC ran this story: Europe’s record on innovation ’50 years behind US’:

The European Union’s record on innovation is so poor that it would take more than 50 years to catch up with the US, according to a survey presented by the European Commission on Thursday.
The Innovation Scoreboard compares the performance of the 25 EU countries with the US, Japan and several other nations, and ranks them according to factors such as the number of science and engineering graduates, patents, research and development spending and exports of high-tech products. The survey finds that only four EU countries — Sweden, Finland, Denmark and Germany — can compete with the US and Japan in terms of their innovative abilities.

However, this supposed comparison with the US is based on only partial data. As I have lamented before, the US does not have an innovation policy or a set of innovation indicators. We have a set of science and technology indicators. But that is not the same thing. Our S&T indicators measure R&D funding and the number of scientists and engineers as inputs and the number of patents as output. The US does not measure actual innovation, in the form of new products – nor do we measure non-technological innovation. European nations do, following the OECD Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data.
The Scorecard measures five areas. The first three are input measures:
* Innovation drivers measure the structural conditions required for innovation potential,
* Knowledge creation measures the investments in R&D activities,
* Innovation & entrepreneurship measures the efforts towards innovation at the firm level,
The last two are output measures:
* Application measures the performance expressed in terms of labor and business activities and their value added in innovative sectors, and
* Intellectual property measures the achieved results in terms of successful know-how.
These areas are broken down into a total of 25 specific statistics, such as number of science and engineering graduates, amount of public R&D expenditures, amount of private R&D expenditures, high tech exports, etc. In a number of specific statistics, there is no data for the US. This includes the key statistics of sales of new-to-market products and sales of new-to-firm not new-to-market products — both of which are major indicators of innovation. Also missing from the US data are statistics on SMEs using non-technological change and employment in high-tech services — again, some key measures. In all the US is missing 10 out 26 data points.
How can anyone compare the EU and the US when over a third of the data points — and some of the most important data points are missing! To say that the EU is 50 years behind the US on innovation based on this study is absurd.
Yes based on R&D spending and the number of patents, Europe may very well be behind. But given that a large percentage of government R&D spending in the US is defense-oriented and given the problems with the US patent system turning out patents for anything and everything, I’m not even sure that statement holds up.
Apparently, politicians on both sides of the Atlantic (and even in Canada) are eager to raise the specter of falling behind the competition to press for more funds for S&T. I am all for increased funding. But let us not be blind to the fact that S&T is not innovation. And that increasing funding for S&T will solve our innovation problem. There are many other areas of innovation and many other innovative activities that need to be fostered and encouraged — such as design and creativity — if our nation is to succeed in the I-Cubed Economy.
But first, we need to get the damn statistics right. As they saying goes, that which is measured is managed. So, getting the measures wrong invariably means getting the policy wrong.
And so we stumble on in the darkness — looking for answers in the wrong places like the drunk looking for his keys under the lamp post.