Defending an intangible

You probably know that the credit rating agencies are under attack for their role in the current credit problem (see for example How Rating Firms’ Calls Fueled Subprime Mess – WSJ.com). Now the agencies are fighting back. As this oped in the Wall Street Journal by Vickie Tillman, executive vice president of Credit Market Services for Standard & Poor’s, (Don’t Blame the Rating Agencies) recognizes, the agencies live or die by an intangible:

Most important: Reputation and integrity are our most valuable long-term assets, which would make it imprudent for S&P to provide anything other than fair, objective and independent ratings opinions.

Recognizing the importance of an intangible asset is one thing; managing it is another. As the sage unfolds, we will witness a prime case study in reputation management. Should be interesting.

Bernanke and the history of housing

The press attention on this morning’s speech by Fed Chairman Ben Bernanke is focused, rightly so, on reading the tea leaves as to the direction of monetary policy and interest rates (see Wall Street Journal, Reuters via washingtonpost.com, Associated Press via washingtonpost.com, the New York Times — which split somewhat in their assessment of the possibility of a future rate cut).
However, the bulk of the speech is a history lesson, as befits a former professor. In this case, the lesson is on the development of the housing and home mortgage industries. Bernanke describes the role of the government and other institutional factors in the development of these markets and of public policy, especially monetary, in this area. For those interested in the long term direction of the Fed (rather than just the next interest rate cut), I would suggest paying close attention to his conclusion:

I hope this exploration of the history of housing finance has persuaded you that institutional factors can matter quite a bit in determining the influence of monetary policy on housing and the role of housing in the business cycle. Certainly, recent developments have added yet further evidence in support of that proposition. The interaction of housing, housing finance, and economic activity has for years been of central importance for understanding the behavior of the economy, and it will continue to be central to our thinking as we try to anticipate economic and financial developments.

Looking at the evolution of these institutional factors will be critical as we bring our policies in line with what is already happening in financing the I-Cubed Economy.

Mike Huckabee gets it

From Candidate: Former Arkansas Governor Mike Huckabee Proposal: Focus on Arts and Music Education – washingtonpost.com:

To hear Huckabee tell it, expanding arts and music instruction is not only a cure-all for much that ails America’s schools, but also key to keeping the country competitive. The economy of the future, he says, will place a premium on creativity, and even scientists and engineers will need to be able to be inventive, in addition to knowing the periodic table of elements.
“I call it a weapon of mass instruction. It’s a critical part of education,” Huckabee said during a visit to Northern Virginia last weekend. “A lot of education today has become left-brain only. All we’re doing is . . . nothing more than data download: taking data from the teacher and downloading it to kids. And we wonder why 6,000 kids drop out of school every day and why so many millions more kids sleep through the day with their heads down on the desk, taking the most expensive nap in America. The reason they’re doing it is not that they’re dumb but that they’re bored.”
He added: “If you don’t stimulate both sides of a human’s brain, you’re simply generating half the capacity. This whole idea that music and art are great programs if you can afford them and have room for them — that’s utter nonsense. It’s the stupidest thing we’ve done to education in the last two generations.”
. . .
As governor, he pushed through a 2005 law requiring elementary schools to offer 40 minutes per week of music and art and requiring high school students to take at least a half-year of art, music or dance to graduate.

Now the tough questions: would President Huckabee do the same as Governor Huckabee and change the No Child Left Behind law to require more art and music? Would he increase funding for arts and music education? Apparently not, as Huckabee is a strong believer in leaving education most up to state and local governments.
However, he would not be the first President to change his tune on the role of the Federal government once inside the White House (the most famous being “small-government” advocate Thomas Jefferson’s extraordinary use of Presidential powers to buy the Louisiana Territory).
At least Mike Huckabee understands the importance of stimulating all forms of creativity in the I-Cubed Economy.

New patent infringement case

From Information Week — Amazon, Google, Yahoo, And Others Sued For Automating Their E-mail:

Six major Internet companies have been sued for using computers to process their e-mail.
AOL, Amazon, Borders, Google, IAC, and Yahoo stand accused of violating a patent on automatic message routing held by Texas-based Polaris IP.
Attorneys representing Polaris IP filed a claim of patent infringement on Monday in U.S. District Court of the Eastern District of Texas in Marshall, Texas.
The lawsuit charges the companies with implementing systems that “comprise interpreting electronic messages with rule base and case base knowledge engines” as described in the patent held by the plaintiff, “Automatic message interpretation and routing system.”
The lawsuit seeks an injunction against continued infringement. If granted — a remote prospect at best — the injunction would have a significant impact on the defending companies.
A more likely scenario appears to be a payday for the plaintiff. “It looks like Polaris IP is in the business of licensing patent rights and has no desire to enforce its requested injunction,” said Dennis Crouch, associate professor of law at University of Missouri School of Law and the author of the law blog Patently-O, in an e-mail. “I expect that Polaris IP will be willing to settle these cases for what it believes is a reasonable six- or seven-digit figure.”
Crouch pointed out that the message routing patent at issue has been involved in litigation many times. “There are no published opinions associated with these cases and they have all been settled,” he said.
Polaris IP, Crouch observed, “appears to be part of a web of IP-related companies associated with attorney David Pridham.” These companies include Orion IP, Constellation IP, IP Navigation Group, Cushion Technologies, CT IP Holdings, Triton, Circinus IP, and Firepond.
Pridham did not respond to a request for comment.
The method and system detailed in the patent describes a way “for automatically interpreting an electronic message including the steps of (a) receiving an electronic message from a source; (b) interpreting the electronic message using a rule base and case base knowledge engine; and (c) retrieving one or more predetermined responses corresponding to the interpretation of the electronic message from a repository for automatic delivery to the source.”
The Eastern District of Texas has become a favored venue for filing patent lawsuits. Polaris IP has launched three other patent cases there in the past two years against numerous technology companies, including Art Technology Group, Oracle, and Sirius Satellite Radio. All three of these cases have involved the same patent, which has a long legal history.
“The Eastern District of Texas has seen a flood of patent litigation in recent years based on its reputation as a patent-friendly court,” said Crouch. “Interestingly, that reputation is rapidly changing as the court invalidates more patents.”

Legitimate licensing or patent troll? Without knowing the validity of the patent (whether it is overly broad, etc.) it is impossible to say. The patent has a “long legal history” but that could mean almost anything. And since the cases have all been settled, no court has ever ruled on the validity. One can presume that since the defendants settled, they thought the patent valid. But there is a history of cases being settled because the settlement is cheaper than the cost of winning the lawsuit, not even figuring in the possibility of losing.
To me, the case points out one big flaw in the current system — the necessity of a lawsuit. Yes, I know there are lots of lawsuits on numerous frivolous ground (remember I live in DC, home of the infamous drycleaner pants suit). But it seems to me that there are an extraordinary number of patent suits, where the cases should be straight forward: either a patent is valid or it isn’t. After all, there doesn’t seem to be a number of lawsuits over the standard land claim. Unless there are unusual circumstances, it is pretty clear whether I own my home or not.
There is a lot of strum und drang over the pending patent legislation. I can’t comment on each and every specific provision of the bill. I do know that the patent system needs to restore some sense of certainty to the process. Right now, it is coming to resemble “Lets Make a Deal.”

Update:
The patent complaint is available on the New York Times website. Here is what the Time’s technology blog has to say on the case:

Maybe they haven’t sued the whole Internet, just a good chunk of it. Polaris IP, a patent firm, has filed a patent infringement suit against Google, Yahoo, Amazon.com, A9.com, Borders, AOL and IAC/InterActiveCorp, which owns Ask.com.
Polaris is the owner of United States Patent No. 6,411,947, for an “Automatic Message Interpretation and Routing System.” It is not entirely clear what the patent covers or how Google, Yahoo, et. al. infringed on it. We’ve contacted the lawyers for Polaris for details.
The patent appears to cover a customer service system that can analyze incoming customer e-mail messages and decide whether they can be handled automatically or need review by a human. According to the complaint, Polaris claims that Google’s advertising systems, including AdWords and AdSense, which analyze electronic messages to determine which ads to place next to them, infringes on its patent. Yahoo and others similarly infringe on the patent, according to the complaint.
Patent claims, of course, are a dime a dozen. And this case was filed in the United States District Court for the Eastern District of Texas, Marshall Division, the nation’s preferred venue for patent plaintiffs.
But last year Polaris filed a suit against Kana Software alleging that it had infringed the same patent. Kana settled the case in March and agreed to license the technology from Polaris, though terms of the settlement were not disclosed.

The comments on the Times blog are very interesting.

Financial innovation

When we think of innovation, the first thing that usually comes to mind are the “high-tech” industries — IT, biotech, nanotech,etc. But one of the most innovative industries in the United States is financial services. Some of those innovations are turning out to be not so good, such as collateralized debt obligations (CDOs) backed by subprime mortgages. But, in the spirit of every cloud having a silver lining, other innovations are popping up because of the credit meltdown. Take, for example, this item from a Washington Post story Home Buyers Forced to Change Tactics about a woman whose nonconforming jumbo loan fell through:

Her loan officer advised her to apply for a piggyback mortgage, meaning two loans. She made a $350,000 down payment, as planned. Then she split the remaining $600,000 between a first loan for $417,000 and a second at a higher interest rate for the balance.
The combined rate of the two, 6.875 percent, was about half a percentage point lower than the jumbo loan would have been, the mortgage company said.

Not everyone qualifies for such a loan package, as the story points out. The woman needed to put up a large down payment and had a good credit rating which allowed her to get the second mortgage at an acceptable rate.
But the story does make the point. Financial services continues to be very innovative — even when it is part of cleaning up their own mess.

Chinese patents

In one of yesterday’s postings, I made reference to possible use of patent laws by Chinese companies against US companies. Today’s entrepreneurship column in the Wall Street Journal – “Small Talk” by Kelly Spors – tells the following story about Chinese patents:

The big risk: If another company patents your idea first, it can turn around and sue you for infringement. It isn’t as much about “getting a patent in China as preventing other people from getting one,” says Siva Yam, president of the U.S.-China Chamber of Commerce, a Chicago-based organization that helps businesses navigate China. Mr. Yam says the Chinese government is trying to better enforce patents, so having a Chinese patent may be worth more in the future.
Mr. Yam recalls a few years back when a Pennsylvania company decided not to seek a patent in China since it was already selling the technology there. But a Chinese company later sought and received a patent on a similar technology and then sued the U.S. company, along with writing letters to its customers threatening to sue if they continued doing business with the firm. The Chinese company eventually backed down, but not before the U.S. company had spent ample time and money fending off the claims.

Oh, you say, but that is all about patents in China – not US patents law. True, but it illustrates my point that the Chinese clearly understand how to use patents as a defensive weapon.
And there is this Financial Times story, which ran last October – China asserts patent rights in US courts:

Chinese companies have begun to defend their patent rights increasingly aggressively in US courts, legal experts say.
“Within the past year or two, the Chinese have begun standing up for themselves and testing the limits of intellectual property rights that are asserted against them,” says Mark Hogge, a patent attorney at the law firm Greenberg Traurig. “They are learning the rules of engagement in the US marketplace and that includes intellectual property litigation.”
Some Chinese companies are even going on the offensive in the US for the first time, and filing their own patent lawsuits against US competitors.
This year, Netac, a manufacturer of computer flash memory products based in Shenzhen, China, brought a patent suit against a New Jersey rival in a federal court in Texas, in what is believed to be the first time that a mainland Chinese company has sued an American one for patent infringement.
“This could be a harbinger of things to come,” says Tony Chen, a US-trained patent attorney in the Shanghai office of the US law firm, Jones Day. “Chinese companies are treating intellectual property lawsuits as an effective competition tool in the marketplace.”

As a March 2007 story in EuroBiz Magazine – “Home and Way” put it:

As for the Netac case, it is uncertain how and when it will be resolved, but it does represent an important shift in the IP debate. With Chinese firms making more an effort to stand for their brainwork, multinationals will need to keep their guard up.

So, tell me once again how defending the current patent system (which is set up to encourage defensive patenting and litigation as a business strategy) is going to help US competitiveness?
Don’t say you haven’t been warned.

Patent reform snag?

According to this morning’s Wall Street Journal:

A bipartisan effort in Congress to overhaul the patent system — a priority for some of the nation’s biggest technology companies — is hitting resistance because of concerns the U.S. might be exposed to greater foreign competition.
Patent overhaul appeared to be on a fast track earlier this summer. But plans for a quick vote got derailed last month after the AFL-CIO entered the debate, warning that innovation — and union-backed manufacturing jobs — might be at risk if the changes were adopted. The union has considerable clout in the Democratic Congress and expressed concerns with provisions that would expose patents to expanded challenges and might limit damages for infringement.
“At a time when the Chinese government is constantly being challenged to live up to its intellectual-property obligations, we do not want to take actions that may weaken ours,” the AFL-CIO’s legislative director, William Samuel, said in the pointed missive that was circulated on Capitol Hill.

I normally tend to agree with the AFL-CIO on a lot of issues. But on this one they are wrong, wrong, wrong. It seems they have fallen under the spell of the “more-is-better” “lock-it-up-tight” crowd of patents. And they have confused cracking down on counterfeiting with encouraging innovation. As far as I can tell, there is nothing in the patent reform legislation that will hinder attempts to crack down on illegal activities in China.
We made this mistake back in the 1980’s with respect to Japan. In order to fight their tactic of patent thickets (the process of defensively patenting everything under the sun to surround a product with a wall of patents), we proceeded to create our own patent thickets. As a result, the culture of defensive patents grew to a point where it is now putting the culture of innovation at risk.
Going down the same path with the Chinese will only make matters worse.
And what does the AFL propose when the Chinese start filing a bunch of questionable infringement cases here in the US? We know that the Chinese strategy is to move up market in the innovation process. What will happen when they start using our own patent system against us? The answer is simple — companies will move their innovative processes to China (or worse yet, be forced to license their technology) in order to get out from under the threat.
Is that really what we want to have happen?

Value of early education

On this first day of school (at least here in DC), let me offer up these comments in today’s Washington Post from Jeffrey Lacker, President of the Federal Reserve Bank of Richmond on “Children’s Education Is a Smart Investment”:

Early childhood development may seem like an odd topic for a Federal Reserve Bank president. But as a regional Reserve Bank in a federated central banking system like the Fed, we spend a good deal of time trying to understand the economies that make up our district, which includes Maryland, D.C., Virginia, West Virginia and the Carolinas.
Data on the growth of income per person across the United States and across cities and metropolitan areas reveal that at least one important measure of skills is consistently correlated with future growth. That measure is education, and a typical finding is that the share of the population of a U.S. city or state that had a college degree in 1990 was positively associated with growth in family income between 1990 and 2000. In other words, the more educated the population, the greater the subsequent growth in economic well-being. Furthermore, population growth is correlated with education levels, suggesting that places with highly skilled populations create opportunities that attract newcomers.
. . .
What does this have to do with early childhood? I mentioned that acquiring skills improves one’s ability to acquire further skills. Could this logic extend back to the earliest investments in human capital — those that occur between birth and age 5? I believe the evidence indicates that the answer is yes.
Economists like to think about investment in terms of rate of return, and there is reason to think that the rate of return on early childhood investment could be particularly high. Like any investment in human capital, some of the return accrues directly to the individual in increased lifetime earning ability. But a substantial share of the return — perhaps as much as three-quarters of the total — is a broader, social benefit coming from such sources as reduced costs of remediation and other special services in primary and secondary school, as well as from the reduced incidence of the array of social problems often associated with low educational achievement.
There are many explanations for the apparent high economic returns to early childhood education, but a key difference between early childhood investments and investments at primary and secondary education levels is the potential for compounding. That is, enhancing early childhood development appears to improve a child’s ability to learn at later stages. This means the return on early education comes not just from the direct effects, say on the development of cognitive ability, but also from the fact that these early investments increase the productivity of later educational investments. Nobel Prize-winning economist James J. Heckman has emphasized this point in his writing on early childhood education.
This compounding effect means disparities in early childhood development have potential to exacerbate inequality within our society. People with limited means are more likely to have difficulty providing their children with high-quality early childhood environment, leaving those children less able to benefit from later investments in human capital. This possibility creates a legitimate public interest in helping people of modest means find and afford quality early childhood education. It holds the promise of expanding the development of human capital more broadly across our society and in so doing, widening our potential for skill-based economic growth.

Well said, although I have to take issue with one point. In his remarks, Mr. Lacker downplays the importance of on-the-job and experiential learning:

It is worth noting that the skills that have become most valuable over time seem to be general skills that come with higher levels of education — as opposed to the very specific skills gained through experience in a particular job or occupation. This is an important distinction. It means that more than ever, the path to economic success lies in education rather than in on-the-job experience.

He does this, it appears, to emphasis the importance of formal education in the process of learning to learn. I agree that general skills are important. But much of formal education is about specific skills (especially at the higher levels when knowledge becomes much more specialized). And experiential learning, especially in childhood, is very much a part of the learning to learn process. In fact, some might even complain that formal education gets in the way of learning to learn.
That last criticism notwithstanding, early childhood education is one of the best ways to raise the knowledge level of our nation. DC has initiated a pre-K pilot programs to expand early childhood education beyond the traditional Head Start program (an initiative started by my good friend Councilmember Tommy Wells when he was on the School Board). Such pre-K programs are an example of cities and states across the nation understanding that an investment in the intangible asset of knowledge and kids is one that have a huge pay off in the future.
(FYI — the Post is an excerpt from his remarks at the July 2007 Governor’s Summit on Early Childhood Development in Virginia, see the full text of the speech.)

Determining value of an intangible

Do intangibles have value? Of course they do. What a silly question, you might ask. But let me give you an example of how not so silly it is. Earlier this year, the VoIP company SunRocket closed down and began the legal process of liquidation (under the control of SunRocket LLC). Yesterday, SunRocket LLC sued another VoIP company, Vonage, for illegal use of its customer lists. (Vonage has its own problems with intangibles – specifically patents – but that is another story). According to today’s Washington Post story :

SunRocket said that its customer list is “one of its single most valuable remaining assets,” and that Vonage’s use of the list has caused “immediate and irreparable harm and injury” to the company.

Here is the irony and the difficulty. While SunRocket was a going concern, the value of its customer list was official zero. That is right – worth nothing according to accounting rules. Only intangible assets acquired from outside the company can be put on the accounting books. But now, in liquidation proceedings a court will decide how much that asset is worth. In this case, we have to rely on the damages remedy under contract law to determine value. (Technically, that appears to be what SunRocket is doing – suing not for taken the assets but breaking a confidentiality agreement). The International Accounting Standards Board and the US Financial Accounting Standards Board are talking about a joint research project to extend accounting rules to internally generated intangible assets. A decision on the project timing and scope is due by the end of the year.
The sooner, the better.

Cashing in on an intangible

There is a fun story in the Christian Science Monitor about a town cashing in on its one major intangible — A rock ‘n’ roll revival in Winslow, Arizona. For those of you who don’t immediately recognize the name of the town, Winslow has a walk on cameo appearance in the classic rock song “Take it Easy” by the Eagles: “Well, I’m standin’ on the corner in Winslow, Arizona, and such a fine sight to see. It’s a girl, my Lord, in a flatbed Ford, slowin’ down to take a look at me.”
Today Winslow has become a tourist draw with the “Standin’ on the Corner Park”:

In the center of town, the first thing you notice is a large trompe l’oeil mural covering the western wall of an aging brick building that shows what appears to be the reflection in a window of the girl in the flatbed Ford slowing down to take a look at a bronze statue of a young man – wearing jeans, shirt, boots, and vest – on the corner with his guitar.

Doesn’t sound like much, but the good folks in Winslow have worked it for all its worth:

When travelers get about 20 miles from Winslow in either direction, they see highway signs suggesting that they tune their radios to a local station for town information. When they do, they hear about the site, get directions to the park, and are invited to have their photos taken with the girl in the Ford truck.

The result is people bypassing I-70 so they can ride into Winslow the old fashioned way — on Route 66.

Shops sell everything from reproductions of Route 66 highway signs and newly mastered DVDs of the old television series to Eagles CDs, hats, key chains, shoulder bags, and refrigerator magnets, as well as prints of the mural. Every store in town sells “Standin’ on the Corner” post cards. Business is once again booming in Winslow.
And never more so than each September, when, for the past eight years, the annual Standin’ on the Corner Festival has brought thousands of tourists to town. This year’s festival will take place Sept. 28 and 29 and features the tribute band “Hotel California, a Salute to the Eagles.”

That is what I call making the most of your intangibles! Bravo Winslow.