Dark matter – snippets

Just a couple of snippets from the “dark matter” debate.
From today’s Wall Street Journal — “Trading Shots”:

We are still getting emails about our Feb. 10 article on the theory, proposed by two Harvard economists, that there is “dark matter” in global trade that more than erases the enormous U.S. trade deficit. The economists suggested that, since the U.S. isn’t paying debt service to foreign nations and is in fact making more money on its foreign investments than foreigners are making by investing in and loaning money to the U.S., then the U.S. must not be a net debtor and instead must be earning investment income on some huge, invisible asset — dark matter.

One reader called PGL, a regular contributor to the AngryBear blog — which indicates PGL holds a PhD in finance — wrote: “Interesting article that covered a lot but not quite my favorite explanation . . . transfer pricing manipulation.” For those of us without PhDs, transfer pricing manipulation refers to the idea that U.S. companies are booking most of their profits in Ireland and other foreign countries where tax rates are super low. This was actually mentioned in the article, but not discussed at great length. “Though U.S. multinational companies seem to have an astonishingly persistent profitability advantage over their foreign counterparts,” we wrote, “that could be partly due to foreign companies understating their returns in the U.S. for political or tax purposes. Otherwise, you have to believe that foreign firms are simply terrible at doing business and should be put to pasture.”

And there is the new paper by Barry Eichengreen – “Global Imbalances: The New Economy, the Dark Matter, the Savvy Investor, and the Standard Analysis.” One of the arguments he pokes a hole in is the claim that the US can continue to run deficits because our economy is so much more productive, thereby drawing in foreign capital. If this were true, then it would run counter to a fact that the “dark matter” folks like to point out: the US has a higher rate of return on investments abroad than foreigner gain on their investments here. If we are drawing capital to our more productive economy, the differential should run the other way (high gains on investments in the US – not abroad).
He also points out (as does the WSJ story above) that the real issue may be transfer pricing:

In fact there is ample room for misstating income by using transfer pricing to shift profits between national subsidiaries — and considerable incentive for doing so to minimize tax liabilities

I won’t say its all transfer pricing — but that is a major issue, as I will discuss next week.

Real information technology innovation

Forget downloading the latest hot song or text messaging your friends 24/7 or even downloading the latest scores. Here is a new cell phone use that real people (i.e. anyone over about 25) can use – “Your Space Is Waiting: Reserving a Parking Spot”:

Taking a cue from Web-based reservation systems used by restaurants, airlines and movie theaters, more companies and cities are offering services that let people reserve parking spaces online or by cellphone.
The services come as traffic is growing worse around the country and are meant to help ease the traffic tie-ups caused by drivers cruising for a parking spot on the street, where charges tend to be lower than garage rates. In downtown areas, based on studies from cities around the world, about 30% of traffic results from drivers searching for curbside parking spots, says Donald Shoup, a professor of urban planning at the University of California, Los Angeles.

According to this Wall Street Journal story, cities from Boston to Lincoln, Neb. are setting up systems to call and park — or at least find out where spaces are available.
Now, that is innovation.

Patents and property rights – according to the Wall Street Journal

The editorial writers at the Wall Street Journal got it right yesterday in “The Problem With Patents”:

When the patent system works, it rewards entrepreneurs and inventors, encourages innovation and serves as a bulwark of property rights. The Founding Fathers considered patents important enough to provide for them in the Constitution. But the Founders left the implementation of patent rights up to Congress, which in turn vested patent authority in the U.S. Patent and Trademark Office and the courts. And there’s the free-market rub.
The Constitution grants Congress the power to protect the rights of patent and copyright holders, but only “for limited times” and to “promote the progress of science and useful arts.” It does not, by contrast, grant Congress the power to confer the right to real or personal property “to promote the cultivation of land” or “the accumulation of wealth.” This distinction is important because royal patents in Britain were often granted to provide the favorites of the crown with a legal monopoly, and the Founders did not want Congress in that business. Patent rights are good insofar as they are useful, and the analogy with real or personal property goes only so far.
A patent system, in turn, is only as good as the quality of patents that issue from it. If bad or dubious patents proliferate, they can have the opposite of their intended effect, which is to promote and reward innovation. Some of our free-market friends are so attached to patents as a vanguard of private property in theory that they ignore that the Patent Office is vulnerable to the usual failings and perverse incentives of any other government bureaucracy.

I have to note that the Journal’s argument stands in sharp contrast to what the conservative wing of the Court seems to think – (as reported by the Journal’s coverage of “High Court Hears eBay Patent Fight”:

“You’re talking about a property right here and a property right is the right to exclude,” Justice Antonin Scalia said at oral arguments in eBay v. MercExchange. Justice Scalia wondered why the Supreme Court should rewrite patent laws. “Why can’t we let the marketplace take care of the problem,” he said.

But Journal editoria goes on to argue for real patent reform — beyond what we hope the courts will do in the LabCorp v. Metabolite and the eBay v. MercExchange cases:

Neither case will fix what’s broken with the U.S. patent system, however. Bruce Lehman, Patent Office commissioner through much of the 1990s, once summed up the problem when he said, “We are the patent office, not the rejection office.”
The Patent Office itself gets paid when it grants a patent, creating pressure on the staff to keep the money coming in. Patent examiners’ bonuses are also based in part on the number of files they close in a year. But the only way to close a file for good is to grant the patent because an application that’s been denied can always be modified and resubmitted, and frequently is. So examiners have a direct financial stake in closing application files by green-lighting the patent.
Today the Patent Office grants so many patents that half of the fees it generates are given back to the Treasury to spend on other things. Next month, Congressman Lamar Smith (R., Texas) will hold hearings on a patent-reform bill that has many good qualities, such as allowing third parties to submit evidence of “prior art” to show that an alleged innovation is not in fact novel — before the patent is granted. It would also allow administrative review of questionable patents after they’ve been granted but before an infringement lawsuit is filed.
If this Congress wants to claim credit for doing something to help the economy ahead of November’s elections, addressing the patent system would be a good place to start.

Amen to that!

IP litigation

A sampling of today’s business news:

Patent Trolls Lurk in Supreme Court Case
Trial Over TiVo Patent Begins in Texas
The Beatles and Apple face off in court

And what was that I heard recently about IP litigation not being out of control?
I have been told that 3,000 patent lawsuits filed each year and 75,000 letters are sent each year asserting patent infringement.
Seems like a lot of litigation going on. That certainly boosts our annual spending on intangibles (maybe we could count it all as the “dark matter” in our trade statistics — at least that part that involves foreign companies). I’m not sure it adds much to our innovative capability or our standard of living, however.

Are newspapers dinosaurs?

As I noted yesterday, I believe that multiplicity of information channels is important in the I-Cubed economy. One of those channels is the newspaper. It has become conventional wisdom that newspapers are dead or dying. But, as James Surowiecki points out in his financial column in this week’s New Yorker – “Printing Money”, the newspaper business is actually profitable.

(s)ince 1980, the circulation of morning papers has actually risen by almost sixty per cent.
Meanwhile, newspapers have minimized the damage by getting better at making money off the readers they’ve kept. Some papers, such as the San Francisco Chronicle and the Des Moines Register, have deliberately reduced their circulation–usually by eliminating promotions and giveaways–in order to trim costs and improve their demographics.
. . .
Since lots of potential buyers read the classifieds, potential sellers are more likely to list there, which, in turn, makes potential buyers more likely to keep reading. That’s why seventeen billion dollars was spent on newspaper classifieds last year. And, while the Net has eroded newspapers’ advantage in disseminating news, it has expanded their reach and influence. The Washington Post, despite its drop in circulation, attracted more than eight million readers to its Web site in February, an increase of nearly three million over the same time last year. Papers may not have figured out how to maximize the monetary potential of this shift, but online advertising already earns them two billion dollars a year.

I agree that newspapers have yet to figure out how to deal with the internet — and not just on the advertising end. The news end is still trying to understand. One local example is the Washington Examiner. The Examiner boosts about its local DC coverage. The front page is often a local story. Yet, on the website, local Washington DC stories get mixed in with national/international Washington DC stories — apparently because the website can’t distinguish between all the national/political news generated in Washington from the local Washington stories. As a result, if you want to get the Examiner’s local coverage, you are almost forced to get a copy of the hard newsprint. And this is not a revenue generating strategy — the newsprint version is free!
Rather than outside forces causing the demise of the newspaper, Surowiecki believes the real danger is a self-fulfilling prophesy:

the popular conviction that papers are doomed may cause owners and shareholders to prefer the cash-cow approach, accepting eventual oblivion while continuing to harvest billions of dollars in profits, largely through cost-cutting. Settling for a tolerable short-term future, newspapers could end up writing themselves out of the long-term one.

As he points out:

Established media–radio, the movies, television–haven’t vanished when new forms have come along. They’ve adapted by playing to their distinctive strengths.

His solution:

For most newspapers, this will mean abandoning things that are ubiquitous on the Internet, like stock tables and wire stories, and investing in content they can own, like serious local coverage and in-depth reporting.

That is a good strategy – I think. Just as AM radio remade itself into the talk and sports outlet when FM took over music, newspapers will have to remake themselves into more in-depth sources of information.
But, what, does that mean for weeklies – such as Mr. Surowiecki’s The New Yorker?
Hum … This could get interesting.

Better data

This from the Dow Jones Newswires:
“BEA May Share Some Data On Trade, Flows With BLS”:

The Commerce Department’s Bureau of Economic Analysis is proposing to provide the Labor Department’s Bureau of Labor Statistics with data collected from several surveys that it conducts on U.S. direct investment abroad, foreign direct investment in the U.S., and U.S. international trade in services.
In a notice published Monday in the Federal Register, the Bureau of Economic Analysis, or BEA, requested public comment on the proposed data-sharing by May 26. It said the data sharing would be “for statistical purposes exclusively.”
BEA said it “will provide data collected in its surveys to link with data from BLS (Bureau of Labor Statistics) surveys, including the Quarterly Census of Employment and Wages, the Occupational Employment Statistics survey, and the Mass Layoff Statistics survey.”
“The linked data will be used for several purposes by both agencies, such as to develop detailed industry-wide estimates of the employment, payroll, and occupational structure of foreign-owned U.S. companies or of U.S. companies that own foreign affiliates, and to assess the adequacy of current government data for understanding the international outsourcing activities of U.S. companies,” the notice continued.
BEA said the confidentiality of the data will be protected, saying “access to the shared data will be restricted to specifically authorized personnel and will be provided for statistical purposes only.”

(See Federal Register for the entire announcement)
This is a step forward in understanding the offshoring issue. No reason why the financial and employment data shouldn’t be linked.
Now, if I can only get them to collect data on the transfer prices and volume of intangible assets.

Future of TV – and ICT

The IBM Institute for Business Value has released a new study on The end of TV as we know it: A future industry perspective. While technology is pushing the industry toward convergence (i.e. telephony, cable TV and Internet), this study see consumer behavior as the major differentiator:

The industry instead will be stamped by consumer bimodality, a coexistence of two types of users with disparate channel requirements. While one consumer segment remains passive in the living room, the other will force radical change in business models in a search for anytime, anywhere content through multiple channels.

The study labels this as:

the “Generational Chasm” between the passive mass audience (“Massive Passives”) and leading-edge users (divided into two sub-groups: “Gadgetiers” and “Kool Kids”).

As a result, the industry will have to invest in different strategies to reach the different consumer groups. That should make for an interesting scramble.
On the technology side, the World Economic Forum has also just released its Global Information Technology Report. The report ranks countries on their “Network Readiness” – with the US as regaining the top spot. [I wonder how that will play out in all the competitiveness discussion on the US lack of broadband.]
More importantly, the rest of the WEF report discusses how information and communications technology (ICT) is absolutely key for economic developments. For example, in one chapter “Information Technology and Productivity, or ‘It Ain’t What You Do, It’s the Way that You Do I.T.'”:

The authors show that the higher productivity of US multinationals located in Europe–as compared to other multinationals–appears to be linked to their better use of IT. They argue that this is likely to be due to the superior internal organization of the US firms, such as stronger worker incentives, smarter targets, leaner manufacturing, etc. This effect is particularly strong in the ICT-using sectors, where the United States experienced a productivity burst, whereas Europe did not. This difference in the use of IT may explain the absence of US-style productivity acceleration in Europe over the last decade.

Looking at the TV industry as part of the broader ICT sector gives us a different look at the IBM “Generational Chasm.” Does this chasm describe not only consumers of information/content, but also producers. Are those in the massive passive category also workers who are not using ICT and not very engaged in the I-Cubed Economy? Or are they (as I can speak from my household experience) people who need an evening break from the interactive world (i.e. have TV news on while cooking dinner – or relaxing in the evening)?
The line between consumption and production of information is blurring with the rise of interactivity. But it is not completely gone. We need to take a closer look at how people respond at work and play. We also have to realize that people may shift categories during different parts of their day (and different times of life).
The IBM authors are absolutely right in their statement that the one-size-fits-all version of TV is gone forever. But, I’m not sure that it ever really existed. I remember the old fights over whose TV programs we are watching tonight — which only lessened with the move to multiple sets in the household and still exists in the ongoing “war of the sexes” over who controls the remote.
My guess is that in the I-Cubed Economy, the concept of broadcast versus narrowcast will be lost. Both of those speak to the distribution technology — not how the consumer wants the content. Getting “Desperate Housewives” on a PDA or mobile phone screen does not remove the desire by others to see it on Sunday night curled up in front of the TV. But that does not necessarily mean that everyone curled up on Sunday stays that way for the entire week. They maybe downloading TV talk shows to their iPod or using the Web almost exclusively for their news.
For me, multiplicity and fluidity of categories are real the concepts. All of which should make for a very interesting ride for all the ICT industries over the next few years.