John Deere gets into information services

One of the charateristics of the I-Cubed Economy is the fusion of manufacturing and services. Here is a good example from the Wall Street Journal story – “For Now, the Focus Is More on Innovation Than on Budget Cuts” – which highlighted that paragon of the industrial age, John Deere:

Last year, Deere formed two business groups: the intelligent mobile-equipment technology group and the Agri Services group, which is developing and marketing new services to help farmers grow more uniform crops. Last summer, the unit collected data from more than 300,000 acres of cotton fields so farmers knew precisely where to spray fertilizer.
Agri Services also aims to tell food companies and consumers more about what they’re buying. If a cereal company learns that certain crops make production easier or result in a better-tasting product, it may pay more for them. “We’ll be able to trace exactly what’s in the food we’re eating, where it was grown and what was done to it at every point in the food-production chain,” says Dan McCabe, senior vice president at Agri Services.

Many manufacturing companies have built businesses around servicing their own products. Deere has gone beyond that to build a business around their knowledge-base. In my mind, that is the mark of an I-Cubed Economy company!

Challeging innovation – and reforming copyright

Steven Pearlstein’s column in this morning’s Washington Post “A Sound Marketplace For Recorded Music” is a case study in how to attempt to stifle innovation:

Here in Washington, there is nothing more amusing than watching business interests work themselves up into a righteous frenzy over a threat to their monopoly profits from a new technology or some upstart with a different business model. Invariably, the monopolists (or their first cousins, the oligopolists) try to present themselves as champions of the consumer, or defenders of a level playing field, as if they hadn’t become ridiculously rich by sticking it to consumers and enjoying years in which the playing field was tilted to their advantage.
A recent example is the political and legal attack mounted by the music-recording industry against the upstarts of satellite radio.
You’d think an industry that has managed to turn out so much mediocre music for so many years, done so much to lower moral standards and lost so much business to illegal file-sharing would have something better to do than attack some of the few distributors that are actually expanding the market and charging for music. But the prospect that the industry might not extract every last penny out of the new satellite radio services and their customers is simply unacceptable to the Recording Industry Association of America.
. . .
The fundamental problem here is that there really isn’t a free and open “market” for recorded music.
It starts with copyrights, which are nothing more than little government-issued monopolies. As a result of the recording industry’s lavish political contributions, Congress has extended the copyright for music to absurd lengths of time (70 years after the death of the artist) and absurd situations (singalongs at Boy Scout campfires). This is well beyond what is reasonably required to meet the aim of encouraging artistic creation.
. . .
The copyright laws also effectively set up the record labels as a cartel that can bargain as a group with satellite and Internet radio operators over royalties and other terms. Not surprisingly, the same cartel-like behavior appears to extend to the industry’s negotiations with Apple’s iTunes and other download services, which seem to strike suspiciously similar deals at suspiciously similar times with all of the major recording studios. It’s perhaps no coincidence, then, that the industry has already settled an antitrust suit over price fixing of compact discs and is reported to be the subject of another antitrust probe regarding prices for music downloads.

After a succinct analysis of the problem, Pearlstein’s solution is straightforward:

if the goal here is to encourage innovation and competition in the market for recorded music, I can assure you that lawsuits and lobbying battles are a lousy way to go. The better strategy is to prune overgrown copyright protections, deregulate the industry and let the marketplace set prices and decide which companies and technologies and business models survive.

I agree to some extent – but wonder how far he is willing to push the competitive market. Is Pearlstein willing to go as far as the French in forcing Apple to open up the iPod? As far as I can tell, a significant part of the iPod success is due to the proprietary linkage between the gadget (iPod) and the download service (iTunes). Yes, the design is of the iPod is fantastic – but the business model is even better.
What the French propose to do is break that business model as anti-competitive. As one commentator in Wired put it, it may be the case of “How France Is Saving Civilization”:

Apple may not qualify as a literal monopoly — there are lots of ways to get music and buying online accounts for only a small fraction of total music sales. But the sliver it does control it controls almost completely, and it’s not out of the question to suggest that this sliver will ultimately become the only way people will buy music in the future.

Whether you agree or disagree with the French action, it highlights the problem of competition (anti-trust) policy in the equation. When is a business model innovation and when is it simply a new monopoly?
Implied, but not stated in Pearlstein’s solution is a careful analysis of the linkage between intellectual property and competition (anti-trust) policy. A few years ago, the Federal Trade Commission (FTC) did such an analysis in 2003 – To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy – which we featured in an Athena Alliance congressional luncheon briefing last year. Unfortunately, that report has had little impact, as patent reform legislation is stalled and no one is even considering copyright reform.
As Pearlstein says, it is time to “prune overgrown copyright protections.” In fact, it may be past time. Let us see if the fight he describes between satellite radio and the music-recording industry will provoke action.

UK gets it – D-School; does the US?

Thanks to Bruce Nussbaum for his blog posting on the new Dyson School of Design Innovation in the UK. As Nussbaum points out, while the US gets it, the US does not:

There is a huge amount of public policy work going on in Europe in the space of innovation, design and creativity. I fear that in the U.S., we are stuck in a rut of the federal government defining innovation just in terms of technology and pouring more money into engineering, science and math (yes, it’s a good thing but only necessary, not nearly sufficient). Washington sponsors the annual National Design Awards contest through the Cooper Hewitt and that is a good thing too (lunch with Laura Bush was today, Monday. This year Nike won, as did MOMA’s Paola Antonelli and 2×4, Maria Cornejo, Bill Stumpf and others. But the National Design Awards program could use more focus (do they go for lifetime achievement or to current great projects or to what?). I think the awards are a wonderful thing but what, as a nation, do we want to reward in design?
Washington doesn’t get it on several fronts:
Invention does not automatically equate to innovation and technology and science do not automatically equate to creativity. Europe–meaning Britain, Scandanavia, the Netherlands and Italy in particular, do get design. They get it in terms of education, in terms of effecting social policy, in terms of generating economic growth, jobs and wealth. We really need to work on this in the U.S. It’s not just about more money for design. It’s about thinking about design thinking.

Needless to say, agree wholeheartedly — see my piece U.K. Leads; U.S. Lags. But I am hopeful that the trio of Roger Martin, Dean of the Rotman School of Business at the University of Toronto; David Kelly, the Design Engineering Professor at Stanford and founder of the D-School; and Patrick Whitney, the Director of the Institute of Design at the Illinois Institute of Technology can change our perspective.
In that regard, Athena Alliance held a congressional briefing on Innovation and Design last month. The summary and the speaker’s presentations (Roger Martin and John W. Leikhim, Director, Corporate Innovation Capability at Procter & Gamble) are now available at our website.
– – –
PS – for more on the Dyson School, see the latest issue of Business Week – The Dyson School: Feel Free to Fail.

The Dyson School of Design Innovation, in contrast, will focus on function-led, problem-solving design. With a breathtaking six-story building planned for the banks of the river in downtown Bath, the school will include a café, design center, and a library complete with a collection of prototypes. Dyson’s hope is that the school will be a prototype for many more to come.

Design and brands – more than you think

One of the characteristics of the I-Cubed Economy is that concepts we think we understand take on a richer meaning under closer examination. Take for example the concepts of “design” and “brands”. We all know what those words mean. Design is cool looks and brands are titles to products. But both of those concepts are much more complex than that.
Design is much more than looks or aesthetics (Virginia Postrel’s great insights in to aesthetics aside – see The Substance of Style and her blog The Dynamist). Design is as much about functionality as looks (see my earlier posting). It is a process of problem solving as Professor Roger Martin points out.
The same is true of brands. The power of brand comes from the image it brings to mind – the experience. As a recent Washington Post story on Taking a Tip From Madison Avenue, Towns Buy Into Branding stated:

“You’re creating an experience for the customer, to live and be and feel the brand,” said Dana Page, program manager of the Zyman Institute of Brand Science at Emory University.

Some have called this The Experience Economy. But in many cases, the experience need not be all encompassing. Rather it is a simple search for quality and consistency (hotel chains like Quality Inn, fast food like McDonalds, retail chains like Target). But it is still the substance behind the style that powers the brand.
However you label these changes, it is clear that we need more carefully examine our concepts as part of the ongoing economic transformation. Companies (and locations) who think of brands as just titles, without the back up substance will find their brands quickly degenerate into empty slogans. And those who look at design as just “cool” with out functionality will end up with failed products.
Such is the harsh reality of the I-Cubed Economy.

The power of information — amplified buying power

Earlier this week, I posted a comment on how advanced communications and information processing could boost economic arbitrage – The power of information — faster use of friction.
The power of information extends to other parts of the buyer-seller relationship, as well, as illustrated by a recent Economist story “Chinese consumers are ganging up on their retailers”:

On an otherwise quiet Friday afternoon in Guangzhou, a city in southern China, 500 shoppers gather outside a Gome electrical superstore in the downtown district. They arrive en masse at the designated time—June 16th at 4pm—that they had previously agreed online. Several hours later, they emerge clutching boxes, having secured 10-30% discounts on cameras, DVD players and flat-screen televisions. “It was great,” says Fairy Zhang. “We just bought an apartment and this way we can afford nice things for it.” The previous weekend, over 100 locals visited Meizhu Central, a well known furniture outlet, to haggle over the prices of kitchen cabinets and dining-room furniture.
Tuangou, or team buying, aims to drive unprecedented bargains by combining the reach of the internet with the power of the mob. It is spreading through China like wildfire. The practice originated in online chat-rooms but has quickly inspired several specialist websites, such as 51tuangou.com and http://www.teambuy.com.cn. Zhang Wei, who helped to set up teambuy less than six months ago, says the site has 10,000 registered members. The company plans to expand into Beijing and Shanghai.

Sounds to me like asymmetrical buying power – not “frictionless commerce.” If you are part of the mob, based on your access to information (and ability to be at the right place and the right time), you get the discount. Otherwise, even if you know about it, well, tough luck.
Just another example of how the I-Cubed Economy is evolving in unexpected, but traditional ways. As the Economist points out, “team buying turns haggling, a tradition in China, into an art-form.”
The more things change . . .

Tax breaks as economic policy

David Wessel’s “Capital” column in today’s Wall Street Journal is all about that myriad of tax breaks individuals can claim — “Tons of Tiny Tax Breaks Prove To Be Addictive and… Taxing”.

But the real driver of all this is that Congress has turned the tax code into a theme park, with a tax break for every good cause. Each one makes sense: Congress decides it’s in the public interest to encourage people to use mass transit. Allowing employers to take money out of workers’ checks, shield the money from taxes, and then give workers fare cards instead of pay is a reasonable, cheap approach. Workers are happy: They’ve saved money. Some probably think employers are giving them an extra benefit. Employers surely don’t mind that.
So what’s the problem? Add this tax break to the dozens of others that decorate the tax code, and we get higher tax rates than otherwise needed to bring in the same sum. We get a lot of hassle and complexity that chews up time and money. And, I suspect, the government creates tax breaks that are claimed far more often by sophisticated, upper-income taxpayers than by others.
And do these tax breaks actually accomplish their goals, or just make politicians feel good? Does up to $105 a month in tax-free mass-transit fare cards actually increase use of mass transit? Maybe. The tax break seems to have produced a somewhat bizarre parallel tax break for parking — up to $205 a month for some reason — so constituents who don’t live near or use transit systems don’t feel jilted. Hard to see how that fosters “energy independence.”
Joel Slemrod, a University of Michigan tax economist, has a theory about what’s behind this: marketing.
Politicians figure you won’t bellyache so much about taxes if they quote a high price and then give you discounts — in the form of deductions, credits and other tax breaks. And they figure 10 little tax breaks make people feel better than one big one. “I probably ignore more of them than I should because I find them to be tremendously intrusive and such a hassle,” he says. He probably never used those 50-cents-off coupons at the supermarket either.
The proliferation of tiny tax breaks, each with its own complexity and paperwork, doesn’t rank up there on the worry list with persistent poverty, stagnating wages, mounting debt or deadly disease. On the other hand, it ought to be easier to fix.

I suspect the same dynamic is behind all those corporate/business tax breaks as well. For example, as a speaker at a recent Athena Alliance/CELI event [summary coming soon] mentions, there is no evidence that the R&D tax credit actually spurs increased R&D. And increased R&D many not be the sole driver of economic growth. Innovation broadly defined is the driver of economic prosperity — and our investment tax rate maybe more important in that regard than a targeted R&D tax credit.
But targeted business tax breaks are easier to legislate (some would say, sneak in) than addressing the broader issue of tax reform — as illustrated by the recent experience of the President’s Advisory Panel on Federal Tax Reform.
If you want to understand American industrial policy, you have to look to the tax code. That myriad of tax breaks — big and little — that dominate the tax code define how we view our economic structure. Yet no one has done the systematic study of what that vision looks like. I have to assume that it is like through a glass darkly — fragmented, contradictory and inefficient if not ineffective.
I also suspect that it is geared toward the past, not the future. Just one of the many policy areas that have not caught up with the I-Cubed Economy.

May trade in intangibles

Once again, this morning’s BEA trade data showed a widening trade deficit. But our surplus in intangibles trade improved slightly, rising by $90 million to $8 as receipts (exports) for royalties and exports of business services increased faster than imports of business services and payments (imports) for royalties.
The overall trade deficit increased in May by $0.5 billion to $63.8 billion as imports increased faster than exports. This was unlike last month, however, when exports actually declined. As the Wall Street Journal reported:

The May trade deficit was smaller than Wall Street predicted. A Dow Jones Newswires and CNBC survey of 18 economists had forecast a deficit of $65.30 billion. While the increase was smaller than the 2.9% rise that economists had been expecting, it still represented the sixth largest deficit in history.
. . .
The nation’s bill for all energy-related petroleum products rose to $27.91 billion from April’s $23.40 billion. Imports of capital goods like medicinal equipment increased by $171 million. Purchases of cars and parts made abroad fell by $522 million. Consumer goods imports — including clothing — tumbled by $40 million. Imports of foods and beverages decreased by $146 million.
U.S. exports rose by 2.4% to $118.66 billion in May from $115.93 billion in April. Sales increased by $803 million for capital goods, including civilian aircraft. Exports rose by $524 million for consumer goods, like diamonds. Sales of industrial materials such as precious metals were up $766 million. Exports of food and beverages increased by $387 million. Sales of autos and parts fell $120 million.

The deficit in Advanced Technology Products also increased in May by $1.2 billion to $2.9 billion — again as imports rose faster than exports. The increase was due mainly to increased deficits in information & communications, life sciences and bio-technology. Aerospace showed an increased surplus due to higher exports.
The increase in our intangibles surplus is good news – but not good enough to offset our huge deficit in tangible goods.

Intangiblestrade-May06.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.

Superhero as super smart

Bollywood’s answer to super strong Superman: a super smart superhero, Krrish.
From the Christian Science Monitor – “India’s Superman saves the universe and aces an IQ test”:

While Superman is a space alien who flies around wearing spandex tights and a cape, and rescues people as if it’s his night job, Krrish is a mere human in a mask and black leather coat à la “The Matrix,” who has extraordinary speed and strength, and rescues people out of sheer decency.
There are other differences. India’s “Superman” breaks out into song – several times. And befitting a country that now defines itself as a rising information economy, Krrish’s superhero gifts are first noticed in school, including in a grueling IQ test in which the first-grader Krishna explains to a panel of adults the principles of accounting.

Hum … super smart?
Or maybe I’ve reading too much into this?