Stock market

Once again the stock market has reminded us of the fragility of intangibles – and the power of that market intangible which Keynes called “animal spirits.” By that Keynes meant business confidence. But it equally applies to the loss of confidence. Roughly $600 billion of value (according to analyst Howard Silverblatt as quoted in the New York Times) evaporated yesterday on the US exchanges alone. As Steven Pearlstein, it was a situation when “unvarnished greed gives way to unadulterated fear.”
It is hard to tell how much of those lost billions were simply speculative value (bubble) versus real intangible assets. I’m sure a great deal were bubble assets. When the market comes back and settles down at a new level, we will be able to judge the amount of froth. But not all the loss will be froth. Some may well be due to a post-drop reevaluation of risk and therefore a reassessment of the value of company intangibles. Unfortunately, it will be very difficult to sort out the two.

The power of the brand

Federated Department Stores is changing its name to Macy’s Group. The company owns Bloomingdale’s, May’s, Marshall Field’s and Filene’s. According to the WSJ.com:

As for the plans to change its name, the company is “focused on Macy’s and Bloomingdale’s, not a federation of department stores,” Mr. Lundgren said. “That said, Bloomingdale’s is — and will remain — a very important part of the company.”

Such is the power of brands.

Environmental reputation as an intangible asset

The big news on Wall Street this morning is the private equity buyout of energy giant TXU. But the real shocker is that the new owners wanted to improve the company’s environmental image as part of the deal. According to A Buyout Deal That Has Many Shades of Green – New York Times:

Because private equity firms are unregulated and historically have valued their privacy, neither Kohlberg Kravis nor Texas Pacific were eager to become an “enemy combatant” of the environmental groups, people involved in the talks said.

I wonder if we could quantify what the end of the warfare between the company and the environmentalist might be worth in dollars and cents. The purchase price is already at a $15 premium over the current stock price. But the buyers are betting the deal will make future energy investments by the company a lot easier. This is one to keep an eye on.

EU innovation scorecard

While the US discusses how to measure innovation (and decides it is all about productivity), the EU has released its latest European Innovation Scorecard 2006. And based on their Summary Innovation Index (SII), the US is now an innovation follower:

• Sweden, Switzerland, Finland, Denmark, Japan and Germany are the innovation leaders, with SII scores well above that of the EU25 and the other countries. The lead of the innovation leaders has been declining compared to the average of the EU25, with the exception of Denmark.
• The US, UK, Iceland, France, Netherlands, Belgium, Austria and Ireland are the innovation followers, with SII scores below those of the innovation leaders but above that of the EU25 and the other countries. The above EU25 average innovation performance of the innovation followers has been declining. Also, the gap of the innovation followers with the innovation leaders has on average slightly increased.
• Slovenia, Czech Republic, Lithuania, Portugal, Poland, Latvia, Greece and Bulgaria make up the group of catching-up countries, with SII scores well below that of the EU25 and the innovation leaders, but with faster than average innovation performance improvement.
• Estonia, Spain, Italy, Malta, Hungary, Croatia and Slovakia seem to be trailing, with SII scores well below that of the EU25 and the innovation leaders, and innovation performance growth which is either below or only just above that of the EU25.

I have to quibble with the definition of “innovation follower” – since it means above average but not in the top 10%. This is especially confusing when they admit, “The US and Japan are still ahead of the EU25 in terms of innovation performance, but the innovation gap between the EU25 and Japan, and in particular with the US is decreasing.”
I also have to question these comparison, as compete data is not available for all countries. For example, under the Innovation & Entrepreneurship category, there is no complete EU data or US data on 4 of the 6 elements: SMEs innovating in-house; Innovative SMEs co-operating with others; Innovation expenditures; and SMEs using organizational innovation. Nor was there complete EU or US data 2 of the 5 elements of the Applications category: Sales share of new-to-market products and Sales share of new-to-firm products. (As the accompanying report on individual countries admits, “Only four indicators are available for year 2005. The figure below shows the latest available data for United States, yet ten indicators are still missing.”)
Still, it is a useful look at international innovation. There is also an extensive section on innovation in regions: Stockholm is the most innovative, London is 35th (out of 203 – and behind other areas of the UK) and Sicily is 177th.
The report also outlines a number of possible new innovation measures. As is well known, our innovation metrics leave a lot to be desired. The authors of this report — the Maastricht Economic Research Institute on Innovation and Technology (MERIT) and the Joint Research Centre (Institute for the Protection and Security of the Citizen) — are to be commended for their work.
Let us hope that the Secretary of Commerce’s Advisory Committee on Measuring Innovation in the 21st Century Economy (see Friday’s posting) can come up with something as useful.

Even more on patents

Yesterday, a jury ruled that Microsoft was liable for $1.52 billion in damages for infringing on Alcatel-Lucent’s MP3 patent. Turns out that Microsoft licensed the technology from the wrong company. As the Washington Post explains:

Alcatel-Lucent argued that it held the rights to the technology because it was developed at Bell Laboratories, which later became part of Lucent. Alcatel bought Lucent last year. The company successfully argued that Microsoft infringed on the patents by including the digital music technology in its Windows operating system starting in 1998. The same technology later was used in Microsoft’s Windows Media Player and is included in the Windows Vista operating system, which was released to the public last month.
Microsoft countered that it had properly licensed the technology from Germany’s Fraunhofer Institute, which was involved with Bell Labs in developing aspects of the MP3 format. Only after Microsoft and other companies made licensing agreements with Fraunhofer did Alcatel-Lucent raise its claim, Microsoft argued.

The jury said “wrong” and awarded the damages to Alcatel-Lucent.
That decision may have huge implications for the digital music industry. The Post story goes on:

About 400 companies have similar licensing agreements with Fraunhofer, according to Thomson Technology, a San Diego company that identifies itself as the “licensing representative of MP3 patents and software of the Fraunhofer Institute.” Those companies include Apple, Creative Technology, Real Networks, Palm and Samsung.

To me, this raises a fundamental question about the patent system. If the electronics industry can’t figure out who owns a basic patent (and whom they should be licensing it from), then how can there be any innovation? I don’t know all the details of this patent or the licensing history. But how can Microsoft and 400 other companies simply guess wrong about who owned the patent?
Something is seriously wrong here.

Meeting of advisory committee on measuring innovation

Yesterday was the first meeting of the Commerce Department’s new Advisory Committee on Measuring Innovation in the 21st Century Economy (see also my earlier posting). The meeting was generally a good start to the process, with a few disappointments. The good news is that the participants have a firm grasp of the complexity and diversity of innovation. Unlike most times when innovation gets talked about in Washington, the discussion was about new processes and new organizational models – not just new gadgets. Most of the CEO’s present told great stories about new ways of doing things, which is the broad definition of innovation. Even my favorite topic of the importance of intangibles was mentioned.
The not so good news was when they came down from the 30,000 foot level of generalities to the specifics of measure. Too much of the discussion got stuck on utilizing macroeconomic measure of total factor productivity (TFP) as the ultimate measure of innovation on the one hand, and firm specific measures such as customer satisfaction and market share on the other hand. Little if any way said about measurement of the innovation process itself. While the old line about “what gets measured gets managed” was repeated often, there was almost no discussion of metrics for better managing innovation. Measuring ultimate outcomes (such as TFP) is great, but you need to understand the factors that influence how TFP rises or falls. That is where those innovation process measures come in — the one’s we don’t yet have.
(See also the ACM summary of the meeting)
I was also surprised by the apparent lack of awareness of previous activities. When the question on cross-national comparisons was raised, EU projects on better measuring productivity were mentioned. But no one seemed to know about the 50 years of OECD work on comparative innovation statistics. I hope that will change as the staff gets to work on the process. The Commission’s Executive Director has worked with OECD projects and should be able to bring that work to bear on the issue.
So a good beginning, but we will have to see where it goes. My biggest fear is that this group will either head off into macroeconomic never-never land (without ever looking at whether we are collecting the right data) or try to re-invent the wheel. If the final recommendation of the Commission was simply that the US should institute a periodic innovation survey based on the OECD Oslo Manual — like every other advanced economy does — I would be happy. As I’ve said before, that would be a major step forward.

More patent news

And more on the patent front this morning . . .
The PTO revoked Genentech’s so-called “Cabilly II” patent on techniques for making monoclonal antibodies (see New York Times. This is the patent that was the subject of the MedImmune v. Genentech case recently decided by the Supreme Court. In that ruling, the Court allowed MedImmune to challenge the validity of the patent even though it was paying royalties to license the patent. The request for a PTO reconsideration can from a lawyer representing an anonymous client.

The Verizon – Vonage patent suit went to court. As the WSJ.com explains:

Verizon is accusing Vonage of infringing five patents, some related to features such as call forwarding, fraud detection and other technologies. Vonage denies the accusations and argues that the actual goal of the Verizon suit is to eliminate the Internet company, a growing competitor to Verizon’s landline phone business.

The case could help determine the future direction of VoIP phone service.

Reinventing Job Corps

Here is another example of a government program that is coming to grip with the I-Cubed Economy – Job Corps Plans Makeover for a Changed Economy – New York Times:

Over the last four decades, even as failed experiments and partisan disputes took the luster off the war on poverty, the Job Corps, the government’s main effort to give poorly educated youths a second chance at a diploma and a trade, was widely seen as one of the few success stories.
But now, as the economy has turned against those with low skills and researchers have questioned the long-term impact of the Job Corps on the lives of its graduates, this remnant of the Great Society is facing an urgent need to reinvent itself.

According to the story, the new head of the Job Corps, Dr. Esther R. Johnson, wants to move the program toward higher value-added careers through “improving their reading, math and vocational skills. She also wants trade courses to connect more closely with college programs and emerging industries, and she thinks the corps must double the number of graduates, now just 10 percent, who go on to higher education.”
The result will be individuals who qualified for those higher level jobs:

With better training, high school diplomas or, better, degrees from community colleges, many graduates of such programs, it is hoped, will become chefs instead of hamburger flippers; plumbers, electricians or carpenters instead of pickup laborers; nurses instead of health aides.

That is clearly the right direction. As more and more of the low skill jobs are either automated or shifted offshore, the skill level of the bottom portion needs to be significantly raised. The rising tide may lift all boats; but you have the skills to float – otherwise you drowned.
Revamping Job Corps is a good start at making sure those individuals at the bottom are ready when the tide comes in.

Cisco and Apple – part 2

As a follow up to an earlier posting, Apple and Cisco have reached a settlement. According to WSJ.com:

Under their agreement, Cisco, of San Jose, Calif., and Apple, of Cupertino, Calif., are free to use the iPhone trademark on their respective products throughout the world. Cisco will drop a lawsuit it filed against Apple in federal court in San Francisco, accusing Apple of infringing on a Cisco trademark with a forthcoming cellphone called the iPhone, due out in June.
In a joint statement, Apple and Cisco said they will explore opportunities for making their products work better together “in the areas of security, and consumer and enterprise communications.” The companies said other terms of the settlement are confidential, declining to comment further.

The agreement may be a win-win. As the AP reports (Cisco, Apple settle ‘iPhone’ dispute – Yahoo! News):

Analysts said the settlement announced late Wednesday in Cisco’s trademark-infringement lawsuit could help both companies strengthen their positions in the increasingly fierce battle to deliver video and other applications directly to consumers’ homes.
Zeus Kerravala, a network infrastructure analyst with Yankee Group, said there are ample opportunities for the companies to dream up collaborative projects to win over consumers.
One possibility, he said, could be a device from Cisco’s Linksys division that users call into to record podcasts that are then automatically uploaded to iTunes. Such a product would make it easier to create and disseminate such programs.

Negotiations win out once again.

Supreme Court hears ATT-Microsoft patent case

Today the Supreme Court hears oral arguments in Microsoft v. AT&T. At issue is generally framed as the extraterritorial application of U.S. patent law. As the FT explains:

AT&T won a claim that Microsoft infringed its ­patent by including its technology in the Windows operating systems installed in computers built in the US. This case tests whether Microsoft must also pay when it sends Windows versions including the AT&T technology overseas for installation in ­foreign-made computers.
The dispute centres on a law aimed at preventing companies from circumventing US patent law by shipping “components” overseas for assembly. The case tests whether software is such a “component” and whether creating copies of software overseas from a master disk shipped from the US is covered by that law.

I am less interested in the extraterritoriality of the case as with the definitions. One of Microsoft’s claims (in their brief) is that they do not supply the infringing component:

The only things Microsoft furnishes from the United States are the golden master disks and encrypted transmissions containing master versions of the Windows object code. But those masters are never installed on a computer that is sold; rather, only the foreign-made copies of Windows are installed on foreign built computers.

Thus, the infringement takes place when the foreign copies are made from the master and installed on the computer. This is beyond the scope of US law (I won’t get into all the details – for a good discussion of the case see the Patently-O: Patent Law Blog: Microsoft v. ATT: Unlicensed Export of Patented Software).
To argue this, Microsoft has to claim that the copying the software from a master disk (but not directly onto a computer) is foreign “manufacturing.”
I worry about that assertion. Copying of the software from a master to individual disks does not involve a transformation, which what is required to define “manufacturing.” The point of transformation is the process of installation on the computer (which transforms the computer and the software into a usable product). In the Microsoft case, the component is never transformed between the time it leaves the US and the time it is installed on the computer abroad. The software can in no way be considered foreign-manufactured by simple copying (no transformation).
I also find the case interesting in what it says about the US patent law. In their brief, Microsoft and the software industry essentially argue that US infringement penalties are so draconian that they would move software “manufacturing” (i.e. code writing and development) offshore rather than expose it to US infringement penalties on foreign sales. I don’t know if that is just hyperbola rhetoric. But is it is a damning statement about the current state of patent law.
It may also come back to bite the software industry when they argue for tougher enforcement in other countries. On the one hand, Microsoft (and the software industry) admit infringement in the US but argue that US law should not be enforced abroad. They also seem to say that piracy is allowed. Microsoft and the software industry are defending the right of foreigners to pirate IP (and reverse engineer) in foreign countries (see p. 19 of the petition for writ of certiorari):

In foreign markets, a patentee’s competitor remains free to duplicate or reverse-engineer inventions patented in the United States, or to assemble such inventions from foreign-manufactured component parts.

Then, on the other hand, the software industry routinely calls for sanctions on countries that don’t enforce as tough as US laws.
It may be good legal argument to stress the limit the extraterritoriality of US law. But it runs counter to all public policy in this area, which is based on the assertion that foreign infringement on foreign sales (aka piracy) is bad. Thus Microsoft seems to be arguing that the sale of a computer with a pirated Windows operating system sold in China should be subject to US trade retaliation (trade law under special 301) but its infringement of AT&T’s patent in operating systems sold in Europe should not be subject to US law. Legal technicalities aside, it make no sense.
Interesting. We will see what the Court decides.