4Q GDP

So the advanced estimate for 4Q GDP came out higher than people thought — at 5.7%. Remember that the 3Q number was originally 3.5% but revised down to 2.2%. As BEA notes in the beginning of the release, “The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency.” One of the biggest sources of a revision many be the trade data. The advanced estimate notes that part of the improved GDP was due to “a deceleration in imports.” That was true in October. But imports surged in November (see earlier posting). And we do not have December’s data.

So don’t break out the bubbly yet. It may not be as good as it sounds. And, as was noted in today’s New York Times story:

“It was an excellent report, but it’s not clear how sustainable this pace of growth is,” said John Ryding, chief economist at RDQ Economics. “We need numbers like this for the next two years, and I just don’t think we can achieve that.”

We still have a lot of work ahead creating a path to sustainable and shared economic prosperity.

Bad business ideas? Not!

Over the blog Jumpstart, Becca Braun has a listing of the 10 worst business ideas:

# Coffee shops? The world hardly needs more coffee shops. Plus, coffee shops don’t scale.
# A Maine-based line of natural products that are made with bees wax? Last time I checked, the “bee” supply chain wasn’t that scalable.
# Overpriced, finely made historically accurate dolls that will teach children about history? Seriously? I don’t even know where to go with that.
# An algorithm that will improve upon Yahoo’s web search technology? Fatal flaw: why couldn’t Yahoo just do that themselves?
# Packages overnight? The infrastructure required to make that happen is prohibitively expensive. Nice idea, but too much capital risk.
# Growing a technology business in Seattle? Cow town, and too far away at that: investors want to be able to drive no more than four hours from their home. Plus, there’s no entrepreneurial talent in Seattle.
# You want to trade collectibles and knick-knacks on the web? That’s maybe, like, a $1,000 market on a good day.
# Your children have an “orphan disease” for which you want to find a cure? OK, so what don’t you understand about the healthcare industry(?): orphan diseases are unfundable.
# Sell books on the Internet? People want the experience of touching books, opening the covers, being in a bookstore. Sorry, but the need just is not there.
# You don’t want to develop computers but you do want to (basically) assemble them? There’s nothing novel or even very protectable about that. If you had invented a new microprocessor or something, I might be interested. But just putting the boxes together isn’t going to generate sustainable gross margins.

Of course, these are all examples of highly successful companies:

1. Starbucks, founded in 1971 and a market cap of $17.2 billion today
2. Burts Bees, acquired by Clorox for $913 million in 2007
3. American Girl, founded in 1986 and acquired by Mattel Inc. for $700 million 1998
4. Google, founded in 1998 and a market cap of $184 billion today
5. FedEx, founded in 1971 and a market cap of $27 billion today
6. Microsoft, founded in 1975 and worth $274 billion today
7. eBay, founded in 1995 and a market cap of $29 billion today
8. Novazyme, acquired by Genzyme for $225 million in 2001; see Extraordinary Measures, which came out last week
9. Amazon, founded in 1994 and a market cap of $55 billion today
10. Dell Computers, founded in 1984 and a market cap of $28 billion today

What strikes me, however, is how many of this successful “bad” ideas are business innovations — not technological. Starbucks, FedEx, American Girl, Burts Bees are not what one would call “high-tech” companies. Even eBay and Amazon were built around a new business model using modifications of essentially existing technology. And while Dell makes a technology product, its innovation was the process — not the product.

So why is our national innovation strategy still fixated on “high-tech”?

Competitiveness in the State of the Union Address – and the next steps

Without ever using the phrase, last night President Obama devoted a large part of his State of the Union address to economic competitiveness. As he reminded us:

We can’t afford another so-called economic “expansion” like the one from the last decade — what some call the “lost decade” — where jobs grew more slowly than during any prior expansion; where the income of the average American household declined while the cost of health care and tuition reached record highs; where prosperity was built on a housing bubble and financial speculation.
. . .
Meanwhile, China is not waiting to revamp its economy. Germany is not waiting. India is not waiting. These nations — they’re not standing still. These nations aren’t playing for second place. They’re putting more emphasis on math and science. They’re rebuilding their infrastructure. They’re making serious investments in clean energy because they want those jobs. Well, I do not accept second place for the United States of America.

The President outlined four areas: Financial reform (access to credit for business); Innovation — meaning R&D and clean energy investments; Exports; and Education. While each of these was narrowly focused, his remarks hinted at what could be a broader agenda. The President talked about innovation in terms of what the Administration has done in expanding R&D funding and investments in clean energy, and called for the passage of an energy bill. As I have argued before, that focus needs to be expanded to a full innovation agenda. He spoke of the need to make more products in the US and export them. That should be expanded to a manufacturing strategy. He spoke of the need to invest in the skills but focused on formal education — K-12, community colleges, universities. That needs to be expanded to include all forms of worker training including on-the-job training.

Obviously, there were a number of other topics that the President needed to address. However, in a 70 minute speech, President Obama did a good job of outlining the political and economic challenges we face. The next step is to flesh out the broader agenda needed to address those challenges.

Manufacturing and services – update on Oracle

In some earlier postings, I used the example of Oracle’s acquisition of Sun to highlight how products and services are fused together. That acquisition has now been finalized and is back in the news as Oracle unveils its strategy. As the Wall Street Journal reports Oracle’s Ellison Sets New Course:

With the acquisition, Mr. Ellison, who built his fortune selling computer software and shunning hardware, says Oracle’s mission will change significantly. He said he plans to transform Oracle into a company that is as serious about server systems–the big back-office computers used for processing corporate data–as it is about business software.

Key is putting together all the pieces. According to the New York Times:

The company plans to offer customers databases, business software, servers, storage systems and networking equipment from one place. In addition, Oracle will do the hard engineering work to make sure all this technology works well together, Mr. Ellison said.

That is a good description of the value-added of fusing product and service.

Business innovation?

Here is a story on an interesting innovation from MSNBC – Cold sheets? Hire a human ‘bed-warmer’:

International hotel chain Holiday Inn is offering a trial human bed-warming service at three hotels in Britain this month.
If requested, a willing staff-member at two of the chain’s London hotels and one in the northern English city of Manchester will dress in an all-in-one fleece sleeper suit before slipping between the sheets.

However, not everyone seems sold on the idea. As our friends over at the Economist blog Free Exchange note:

Indeed, nothing is more comforting to me when I’m trying to sleep than the idea that only minutes earlier a complete stranger was lying in my bed.

Seems to me that this is a case where technological innovation may be better than organizational innovation.

Operational importance of IP as collateral

We generally think of using collateral for a loan as solely a financial matter–something to be sold off in the case of default on the loan. But it may also have a strong operational purpose. As part of its clean energy production loan application, the Department of Energy has provided suggestions on how to make application stronger. They include following:

Access to IP in a default scenario. Where proprietary technology is essential to the operation of a project, a willingness to assign those intellectual property rights to the DOE as collateral in the event of default also strengthens the application. The purpose of providing DOE access to the company’s IP is to allow DOE to continue operating the project in a default scenario.

In other words, DOE is not looking to recoup funds but to finish the project. Obviously, in that case control of the IP would be essential. It is a good sign that DOE has built this in to its process. I don’t know how standard this is for other lenders/funders. I would assume that potential operational control in the case of default is standard for VCs — another way of recouping their investment rather than liquidation.

By the way, the regulations also require a “listing and description of assets associated, or to be associated, with the project and any other asset that will serve as collateral for the Guaranteed Obligations, including appropriate data as to the value of the assets . . .” Given that DOE encourages the applicants to assign the IP as collateral to DOE for operational purposes, it would be interesting in see how the applicants value that IP collateral.

Does it pay to be a pioneer or a fast follower?

The answer to that question is, according to a story in today’s Wall Street Journal, is that “while platform creators may reap early financial gains (mostly by selling to followers), long-term advantage goes to the followers.” The three authors, Gezinus J. Hidding , Jeffrey R. Williams And John J. Sviokla, state:

Out of the 15 platform industries that we studied, 14 of the current leaders began as followers in a market created by a competitor’s platform. In only one market, for integrated business software, was the original platform creator still the leader–SAP AG. Five were fast followers, which we define as the second, third or fourth company to enter a market. The other nine were later followers.
. . .
online auction sites already existed when eBay Inc. founder Pierre Omidyar created his company. But those earlier sites were run by businesses selling to consumers. EBay changed the concept to one in which consumers would sell to consumers.
. . .
Research In Motion Ltd.’s BlackBerry predates the iPhone as a smart phone with PDA features, but Apple’s product offered key new features of a touch screen and applications that users can purchase or design themselves.
. . .
Early on, companies like WordPerfect, VisiCalc and Harvard Graphics dominated PC applications. But Microsoft responded by making its Word, Excel and PowerPoint programs (all follower products) compatible with one another, with existing products (like Lotus 1-2-3), and with the Windows operating environment.

Interesting – and an important point for policy. We have an S&T policy that promotes inventiveness. But where is our innovation policy that promotes “fast followers”?

A step forward on the digital promise

Here is some good news from a story in today’s New York Times – Congress Finances Program to Use Technology in Education:

National Center for Research in Advanced Information and Digital Technologies, finally has Congressional appropriation through the Education Department and will be introduced Monday. It could be handing out grants by fall.

I have long been a support of this program (see earlier posting). The program holds out the possibility of transforming education — not simply by introducing more computers but using the power of the digital technology to tailor learning to individual needs.

Interestingly, it took someone with the title of “assistant deputy secretary for innovation and improvement” to finally push the program through.

Setting the next innovation adenda

Earlier this week, the House Science and Technology Committee began hearings for kick off the reauthorization of the America COMPETES ACT. The first hearing had representatives from the Business Roundtable, the US Chamber of Commerce, the National Association of Manufacturers and the Council on Competitiveness. All of them supported reauthorization. So did the ranking Republican on the Committee. Thus, it looks like this may move forward in a bipartisan fashion–as the original bill did. One part of the testimony of the head from the Council on Competitiveness, Debra Wince-Smith, especially resonated:

The Council on Competitiveness strongly urged the creation of a President’s Council on Innovation and the legislation included such a provision, yet the reality has not matched the intent. What became clear as we sought the input and advice from leaders within government and the private sector was that the government’s innovation policy was fragmented, poorly coordinated and often running at cross purposes between agencies and departments. We would urge a fresh look at this provision.

The utilization of this Council is something that I have been advocating for some time (see Crafting an Obama Innovation Policy).

The President’s Council on Innovation and Competitiveness (PCIC) was created by Section 1006 of the America COMPETES Act of 2007 as a mechanism to “develop a comprehensive agenda for strengthening the innovation and competitiveness capabilities of the Federal Government, State governments, academia, and the private sector in the United States.” The statutory Chair of the Council is the Secretary of Commerce and is made up of the heads of 16 departments and agencies (a nonexclusive list).

As the House S&T Committee summary of America COMPETES Act puts it, the legislation “establishes a President’s Council on Innovation and Competitiveness (akin to the President’s Council on Science and Technology).” It is important to note use of the phrase “akin to.” The intent was clear that this Council would be a high-level activity.

However, subsection (e) of the bill allows the President to delegate the responsibilities of the Council to an existing entity. In early April 2008, President Bush delegated this responsibility to the Committee on Technology (CoT) of the National Science and Technology Committee (NSTC) in OSTP – which established it as a Subcommittee. While the NSTC is a Cabinet-level organization, neither the CoT nor its subcommittees are “principles” committees. In other words, the issue of innovation and competitiveness was relegated to a subcommittee of a committee of a committee.

Unfortunately, the Obama Administration has not activated this Council or changed the Executive Order. It might be a good idea for the House S&T Committee take up Ms. Wince-Smith’s advice and “take a fresh look at this provision.” One change should be to designate the President as Chairman, similar to the NSTC, and make the Vice President a member.

But we don’t have to wait for legislation to do this. The President could make these changes and get PCIC up and running with the stroke of a pen (through a new Executive Order).

We need to be crafting the next generation innovation policy. That was the explicit charge to the PCIC. In an earlier posting, I outlined the tasks PCIC needs to take on to craft such a policy. But first of all, the Administration needs to activate the Council–now!

Collaboration and transaction costs

Neil Wilkof has posting a thoughtful discussion on collaboration and IP rights over at the blog IP Finance . He notes that fashioning a collaborative agreement can be a tricky and time consuming activity. He then notes the case of the takeover of Genentech by Roche, which reportedly cut through the legal thicket to make collaborative research possible, to ask a fundamental question:

Can it be that the transaction costs in bargaining the disposition of IP rights in a collaborative arrangement between two separate parties are so daunting that the only feasible solution is for the two parties to merge, thereby eliminating the friction in the contractual bargaining?

To me, this begs the question: why are transaction cost so high? Collaborative research is not a new phenomenon. What is it about IP rights that have caused Wilkof to state that “often times devilishly difficult to find a workable arrangement for the allocation of IP rights . . .”? We seem to lack standardization of contracts — a complaint I hear about technology licensing agreements as well.

It is not as if we don’t have standardized forms. Take for example the federal government’s Cooperative Research and Development Agreements (CRADAs). CRADAs are agreements between federal agencies and private companies on specific joint research projects. Agencies, such as the National Institute of Health, have model agreements. Could it be that in this case, the bureaucracy actually reduces transaction costs? I can image that federal agencies have far less bargaining room in their negotiations than private companies. A CRADA may be much more of a take-it-or-leave-it proposition. Thus the transaction cost may be in part a function of bargaining power and size.

Wilkof ends his comments with the suggestion that this issue would make a good topic for an MBA case study. Let me expand that we need more than a case study on the Roche and Genentech example. That would be a good starting point, but I sense there are a couple of Ph.D. dissertations needed here as well.