Last week, Lee Rainie, Director of the Pew Internet & American Life Project, gave a talk to senior government managers on “Governing as a social network. Below is his powerpoint presentation. What I found especially interesting was the graphic on how the information ecology has changed. It certainly is a different era.
Two bits on the demise of the magazine Portfolio.
Bruce Nussbaum’s take:
The closing of Conde Nast’s 2-year old monthly business magazine, Portfolio, proves his point. Portfolio was a lush, expensive paen to an era of big advertising budgets from big corporations spent on mass audiences. This era has been ending since the the technological innovation of web, Google and targeted advertising fused with a quick-quick, multiple tasking, attention-challenged culture of Gen Y. Maybe a decade ago?
Ed Yardeni’s take (from his list of 12 Reasons To Be (Economically) Optimistic):
Condé Nast has decided to shutter Portfolio after two years of struggle. The introduction of the glitzy magazine about Wall Street launched in the spring of 2007 marked the end of the bull market. Now its demise may mark the end of the bear market.
An interesting metric of both economics and publishing.
The BEA report this morning that the GDP fell by 6.1% in the 1st quarter of 2009 is not as bad as it seems. Yes, the drop was greater than the 4.6% decline predicted by the Dow Jones Newswires survey of economist. But there are some interesting bits of good news in the data. The main one is that personal consumption actual rose (by an annualized rate of
1.5% 2.2% – contributing a positive 1.5% to the change in GDP) after two quarters of decline. The real killer was a large decrease in private domestic investment, especially fixed non-residential (i.e. business spending). Inventories also declined sharply. Revived consumer demand and low inventories adds up to a potential rebound in business spending.
Also note that this is the “advance” version of the data — which will be revised as more data (such as the March trade figures) become available. The advance GDP usually gives a good indication of the direction and relative size of the changes to GDP, but the actual number will change.
This morning BEA released its sector by sector breakdown of the 2008 GDP. The analysis confirms some of what we knew about the slowdown, but also reveals some other interesting facts. We knew that the slowdown hit the construction, manufacturing, retail and finance sectors. The BEA data on real value added in 2008 in each of these sectors confirms that. Real value added in construction dropped by 5.6% in 2008. Manufacturing real value added declined by 2.7%, with manufacturing of non-durable goods down by 4.6%. Retail related sectors were down, with transportation and warehousing dropping by 3.7%. Finance and insurance was down by 3.0%.
But here is the interested part. Construction actually started declining much earlier: down 0.5% in 2005, 4.1% in 2006 and a whopping 11.2% in 2007. So 2008 was actually an improvement. And while finance was down, real value added in the real estate sector (including renting and leasing) was actually up 1.8% in 2008 – although that was a slowdown from the 3.3% increase in 2007.
The “information economy” was still growing in 2008. The real value added in the information/communications sector increased by 5.2% in 2007 – again slower growth than the 8.1% increase in 2007. Growth in real value added in professional, scientific and technical services actually increased in 2008 over 2007 – an 8.7% increase in 2008 compared to a 7.1% increase in 2007.
The BEA data also shows that the goods producing part of the private sector slid into recession back in 2007 – when its annual growth in real GDP decline by 0.7%. The decline was, of course, even greater in 2008 – down 3.0%.
What this new data tells me is that the economic slowdown was caused by a variety of factors. It was not simply a lock up of the financial or house markets. There were significant weaknesses, and strengths, baked into the economy. Any sustained recovery will need to be based on correcting those weaknesses and building on the strengths. Including the strengths of the I-Cubed portion of the economy.
Yesterday, President Obama gave a major address to the Annual Meeting of the National Academy of Sciences on his science and technology policy. In the speech he mentioned a number of initiatives his Administration will undertake — see the Fact Sheet for details. These moves are, in my view, long overdue. Some are new initiatives, such as the “Race to the Top” program to support math and science teachers and the emphasis on clean energy technology. Some, such as increased funding for basic research, will simply bring us back to where we should have been years ago.
While he didn’t speak directly about entrepreneurship and broader innovation, his remarks did contain this line:
For we must always remember that somewhere in America there’s an entrepreneur seeking a loan to start a business that could transform an industry — but she hasn’t secured it yet.
That quote should be our take off point for the next step. Science is an important part of our social and economic activities. But it is only part. It is one ingredient that goes into the mix of what we call innovation. Many other ingredients are needed — including the entrepreneurs and the financing issues that the President’s quote highlights.
Financing is especially critical right now as we hear stories of venture capital pulling back. One area we need to look more closely at is use of intangibles as lending collateral (see earlier posting). Another is expanded use of government loan programs for commercialization – such as the Energy Department’s new loan program. Other mechanisms, such as government procurement to create markets, are also needed. But such activities go well beyond a science and technology policy. They require – and create – organizational and process innovations. And they require a broader policy view.
The President has articulated his science policy. In other speeches and documents, he has outlined a technology policy. Next up should be a broad innovation policy.
Speaking of banks and intangible assets (see earlier posting), here is an interesting summary of the debate over how to count bank assets – from the NY Times blog Dealbook – Questioning Wall Street’s Favorite Bank Benchmark. The article describes the difference between using “tangible common equity” (TCE) to measure the level of bank capital or the current regulatory definition of “Tier I” capital. A big difference: Tier I includes some intangibles.
On the one side are people like former House Banking Committee Chairman Jim Leach, who is quoted saying “The fact that we even have anything other than T.C.E. is a reflection on judgment, which was deeply lacking.” On the other side is Warren Buffett (among others), who is quoted as explaining the flaws of TCE by saying “”Coca-Cola has no tangible common equity, but they’ve got huge earning power.”
For right now, the banking analysts and the markets are focused solely on TCE. In this age of uncertainly, I guess they don’t care about intangibles.
For many banks, now comes the time of separating the wheat from the chaff — in this case valuable intangibles from the froth of “goodwill” created by overpaying for assets. According to today’s New York Times:
Companies are taking billions of dollars in losses as they write down the value of assets known as good will — the amount they overpaid for a business compared with the sum of its parts. As the economy sinks lower and businesses struggle, that good will is going bad.
. . .
Banks wrote down more than $25 billion in good will in 2008, up sharply from $790 million a year earlier, according to data compiled by Frank Schiraldi of Sandler O’Neill & Partners. By the end of the year, banks still had $291 billion worth of good will on their books. An incomplete tally of write-downs from the first quarter showed that banks had taken a $3.5 billion hit to good-will values.
A bit of explanation first. In accounting terms, “goodwill” was an amorphous category where you threw all sorts of assets you couldn’t figure out. When a company buys another firm, everything in the purchase price above and beyond the “fair value” is categorized as “goodwill”. In 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) 141 and 142. These required companies to separate out a long list of intangibles assets from “goodwill” and treat them differently. Goodwill therefore includes all of the speculative overpricing of the purchase as well as unidentifiable intangibles.
The definition of “goodwill” is important when reading the Times story. The story states that the goodwill includes “brand name, its customer base and reputation.” Not necessarily — since those were supposed to be pulled out from goodwill under 141/142. The story thus combines two issues: the write down on intangible assets and the write down on the goodwill.
For example, it its 10K filing with the SEC, SunTrust (mentioned in the article) had $7 billion in goodwill and slightly over $1 billion in other intangible assets. Those other intangible assets included “customer relationship.” In its 1st Quarter statement, SunTrust took a $715 million write down of its goodwill — but not of its intangible assets.
In 2008, Macy’s took a $5.4 billion goodwill write down (according to its 10 K filing). But it only wrote down about $112 million in intangibles.
So, it is clear that the massive write downs are not due to intangibles loosing value. The write down are companies finally recognizing that they overpaid for previous acquisitions. As an August, 2008 paper by Feng Gu and Baruch Lev (Overpriced Shares, Ill-Advised Acquisitions, and Goodwill Impairment) hypothesize:
the root cause of many goodwill write-offs – managers’ public admission of ill-advised corporate acquisitions – is the overpriced shares of buyers at acquisition. Overpriced shares provide managers with strong incentives to invest, and particularly to acquire businesses, even at excessive prices and doubtful strategic fit, in order to buy themselves out of the overpriced share predicament and postpone the inevitable price correction by portraying continued growth.
That inevitable prices correction has come about, and the effects of overpriced purchases is becoming clear.
So don’t blame intangibles. The problem is bad management — which, on second thought is an important negative intangible. But one that never shows up on the books.
Business Weeks has released its ranking of the 50 best performing companies. According to the cover story, the companies that doing the best are those who are taking advantage of the economic turmoil, “This year’s BusinessWeek 50 is chock-full of companies that changed the rules of engagement in their industries.”
Autodesk exemplifies many of the companies in this year’s BusinessWeek 50, our 13th annual ranking of the best-performing companies in the Standard & Poor’s 500-stock index. While each list invariably includes companies that rode the wave of powerful industry cycles–such as this year’s four energy companies–many more, like Autodesk, earned their spot in the BW 50 as innovators. They created products or services dramatically better and cheaper than anything offered by rivals. “These companies are what I call the ‘disrupters’ of the economy,” says Harvard Business School professor Clayton H. Christensen, an innovation expert. Autodesk and its cutting-edge design software, for example, have helped the makers of everything from appliances to cars to prosthetic limbs take on entrenched rivals with greater resources.
What I especially like about this list is that the companies are innovative across a range of activities: technological, organizational, marketing, etc.:
At Nucor (NUE) (No. 20), experimental technologies and cutting-edge compensation revolutionized steel manufacturing–and may help explain why the company is holding up despite tough times. IntercontinentalExchange (ICE) (No. 17) and its electronic futures market brought greater price transparency to energy trading, and the company is now blazing a new trail by launching one of the first clearinghouses for complex credit default swaps. Occidental Petroleum (OXY) (No. 43) has relied on advanced technology to wring more production out of its oil fields in Texas and is now doing the same in Libya. Laparoscopic tools from Intuitive Surgical (ISRG) (No. 41) have shortened the recovery period for many surgery patients and could in time dramatically reduce the number of beds the nation’s surgical hospitals need.
. . .
In the case of Coca-Cola, that meant finally embracing the change in consumer tastes–and marketing niche brands, such as vitaminwater and its Dasani water, with the same commitment as it does its flagship cola.
. . .
Consider Fastenal, a distributor of nuts, bolts, and 49,000 other tools and parts used by industrial customers. Given the commodity nature of its products, Fastenal works hard to guarantee its costs are the industry’s lowest. To encourage employees to act like owners and shave every penny possible out of its cost structure, Fastenal pours 10% of all profits above a preset level each year into bonuses and 401(k) contributions.
As the Business Week 50 list demonstrates, innovation pays off in economic performance. So, where is the public policy to support this range of innovative activity?
One would think that by now we would have a handle on measuring economic activity in the tangible economy. But, it appears that a simple thing like a house can cause an uproar. Take the case of an article in today’s Wall Street Journal about a fight between two well known housing experts — Robert Shiller and Thomas Lawler — over whose data is correct. As the story points out:
No one has found a precise way to measure changes in house prices. Because no two homes are exactly alike, changes in the price of one won’t necessarily be matched even by apparently similar homes nearby, much less those hundreds of miles away. Though some indexes track price changes in the same set of houses over time, those can be distorted by major improvements in some of the houses and deterioration in others. The publicly recorded transaction prices, used to create indexes, often are distorted by incentives given to buyers that aren’t tallied in the price.
Yet, as I pointed out yesterday, the housing market seems to work (even in these bad times).
A lesson to be learned about valuation of intangibles. Valuation is a complex issue, even for things that we think we understand.
The latest issue of Intellectual Asset Management (IAM) magazine has an article on the Ten common myths about intangibles value and valuation (subscription required). IAM editor Joff Wild has posted a summary on his blog Ten intangible/IP valuation myths revealed. I will let you read the 10 myths for yourself. I agree with most – but want to focus on Myth #4:
Each intangible should have only one official value. A single intangible may have several very different values at the same time; all of them valid, depending on who owns it and for what purpose it will be exploited.
This characteristic of an intangible (and these folks use the word to really mean IP) makes the valuation highly context specific. I like to use the analogy to the housing market. There are those who want to use a house as shelter; those who want to rent it out; those who want to use it a speculative investment. In that case of a patent, there are those who want to use the patent to create a product and those who want to own the patent to collect royalties. There are also those who want to sell the patent at a later date — as part of a pool of patents that would be more valuable than a single patent, or after doing further development work on the technology to increase its value, or use the patent for infringement litigation. On top of these categories, we also have defensive ownership. In the housing market, this is buying the lot next to you so no one builds there to block your view.
Yet, for all these different reasons for buying a house, housing prices are generally accepted as valid — even in periods of extreme volatility such as today.
So let me add Myth #11: Intangibles can’t be valued in the market place.
The solution to the valuation problem, it seems to me, is in building up a robust market. And, ironically, building up a robust market requires more attention to disclosure – rather than valuation methodology. If you get the items out to the market – if you let people know they are available for transactions – the market will set a price. It won’t be perfect – in fact it is guaranteed to be subject to all sort of irrational and arational behaviors. But if it is transparent and the process is seen as fair, then the price will be legitimate.
And that is the best valuation methodology of all.