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.

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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.