It looks like the size of recent patent portfolio valuations has caught the eye of more than investment bankers (see earlier posting).
Activist shareholders may now also be getting into the game. According the the NY Times DealBook blog, Carl Icahn is telling Motorola Mobility to sell off its patents — which he apparently estimates have a higher value than the $4.5 billion paid for the Nortel patents.
Anybody have a sense of whether these valuations are real — or are we talking possible bubble here?
Here is a little tidbit from a story today in the Wall Street Journal – Kodak Considers Options for Digital-Imaging Patents:
Kodak declined to comment on the process of its patent sale or the value of the portfolio. The company has retained Lazard as an adviser. Lazard also advised Nortel on its patent sale.
One estimate cited in the story is that the part of Kodak’s patent portfolio for sale is worth $2 billion. With numbers like that, no wonder the big boys of investment banking are getting involved.
In yesterday’s posting, I cited Rob Atkinson’s new report on tax reform. In that report, he argues that there is no evidence of the claim that tax incentives automatically lead to unproductive over investments in the favored sectors. For example, some investment tax credits may actually boost productivity because of an underlying under investment in certain productivity raising activities. I am prepared to admit that some tax incentives lead to economic distortions. For example, I’m not sure the mortgage tax deduction for second homes leading to greater vacation home production is the most productive use of capital. But I do agree that there is knee-jerk assumption about differential treatment in the tax code.
Atkinson points to a recent report by the President’s Economic Recovery Advisory Board (PERAB), Report on Tax Reform Options. That report asserts “Because certain assets and investments are tax favored, tax considerations drive overinvestment in those assets at the expense of more economically productive investments.”
I ran into an example of this thinking specifically with respect to intangibles in the previous Administration’s Treasury Department’s 2007 report on tax reform (see earlier posting). That paper claims that we may be overinvesting in intangibles, especially human capital, because of favorable tax treatment. This is because investments in intangibles are immediately expensed whereas investments in physical assets are depreciated over their useful lives. Frankly, I find that idea that somehow we are overinvesting in intangible assets to be laughable. If the tax code gives intangibles an advantage, then it is a unintended benefit that we should exploit not eliminate.
The PERAB seems to accept this claim, without actually making it. In their discussion of expensing of plant and equipment, they buy implicitly into the notion that investments in intangibles is favored by the tax code:
Providing expensing for physical capital would also eliminate the differential tax treatment between investments in physical capital, which are currently deducted over many years, and investments in certain intangible capital (like research
and development, or advertising), which businesses can currently deduct immediately.
PERAB does not, at least, make the mistake of then claiming that we are overinvesting in intangibles. While business investment in intangibles has increased over the past few decades, both absolute and relative to physical capital, it is not at all clear that we are overinvesting. In some areas, such as basic research and worker training, I believe it is clear that we are underinvesting.
For this reason, I would propose a principle for reform which turns the differential tax treatment on its head. We need to make sure that treats investments in intangible assets at least as well in tangible assets. The tax code should not distort investment decisions by skewing it toward physical assets.
Last year’s tax deal gives a perfect example of how this bias against intangibles works. In the stimulus bill (sec. 144(a)(12)(C)), there was a minor change to allow the use of industrial development bonds (IBDs) to finance facilities manufacturing intangible property. Before this change, only traditional factories were eligible for this program. The change would allow local government to support new facilities for software development or bio-tech research facilities, for example, as well. That expired at the end of 2010 — and was not included in the tax deal. This simply act of putting physical and intangible investments on the same footing was forgotten and ignored.
This example of ignoring intangibles is all too common in the tax code. Yes, intangibles are expensed. But I doubt that causes any CEO to say to themselves, “I’m going to increase my training budget and not buy that new machine because I get a bigger tax break from spending on training.”
We need to look at how investment decision really get made – and adjust our tax code accordingly. And one of the adjustments we need to make is ensuring that the tax code fosters, not discourages, investments in intangible assets. After all, intangibles are the fuel that runs this new knowledge economy.
Here is an interesting idea from my friend Rob Atkinson over at ITIF: a one-size-fits-all tax code is not one-size-fit-all. In a new report, (U.S. Corporate Tax Reform: Groupthink or Rational Debate?), he points out that the push for tax simplification will actually harm economic competitiveness.
The current thinking in Washington is that the tax code impedes economic competitiveness because of high tax rates. In order to lower rates, the tax code should be “simplified”, i.e. eliminate many tax deductions and credits. Increased revenues from tax simplification would offset revenues lost from lowering the corporate rate.
The other part of tax simplification is a call for fairness. Many see these tax deductions and credits (aka loopholes) as breaks for special interests. Others argue that they are expenditures in discipline, not subject to budgetary discipline.
Both of these arguments contain more than a grain of truth. I have long argued that, contrary to popular perception, the United States has long had a (dis?)functioning industrial policy: the tax code. It is a de-facto policy hidden from public (and most policymaker’s) sight.
The problem with the tax code is not that it introduces economic distortions, but that we have the wrong set of incentives built into the system. The idea of a sectors or industry neutral tax code is a chimera. By the mere nature of the different businesses, a unitary tax code will impact sectors differently. Instead of the current ad-hoc system of tax incentives, we need a guiding set of principles for evaluating each incentive. One overall principle should be to provide incentives for production and investment and not for consumption. [Having said that, I recognize the need for some consumption incentives to both stimulate the economy during economic downturns and provide a boost of purchasing of certain sectors to spur innovation, such as tax incentives for purchase of alternative energy production equipment.]
Atkinson adds a new element to the discussion by showing that tax simplification would effectively raising taxes on sectors that are subject to international competition (such as steel, pharmaceuticals and electronics), while lowering taxes on non-tradable sectors (grocery stores, electric utilities and car dealers). That would have the opposite effect on competitiveness:
While the former [grocery stores, electric utilities and car dealers] provide needed services, if their taxes increase they are not going to build fewer grocery stores, electric wires, or car dealerships since those investments are largely based on levels of consumer demand. But if the taxes on steel companies, drug companies and electronics companies are raised, they will act as any rational company would by moving some production to nations that tax them less.
He argues that the tax code should be designed so that it achieves three goals:
1. Provides direct incentives for U.S.-based enterprises to invest in the building blocks of innovation, productivity and competitiveness: research and development and innovation commercialization, workforce training, and machinery and equipment (including computers and software);
2. Taxes firms in internationally traded industries at a lower rate than firms in non-traded industries; and
3. Lowers the average effective corporate tax rate from its current levels.
One of Atkinson’s recommendation is a version of something he and I have been advocating for years – a knowledge tax credit:
Congress should enact an American Innovation and Competitiveness Tax credit that provides a credit of 30 percent on expenditures on R&D and workforce training and a credit of 15 percent on machinery and equipment (including software) in excess of 50 percent of base period expenditures. For business to get the full benefits from new equipment, they need higher-skilled workers. Allowing employee training expenditures to be counted as qualified expenditures for the credit would help correct the problem that workforce training in the United States has fallen by approximately half as a share of GDP over the last decade.
As I noted in my recent comment in the journal Economists’ Voice (“Invest in Intangibles”)(see also earlier posting), we should be focusing on incentives for investments in intangible assets as well as equipment.
I don’t know if in the current budgetary climate of austerity such a tax credit is politically feasible. But it makes sense from an economic and competitiveness point of view. The issue of corporate tax reform will clearly be on the political agenda for some time. Let us hope this idea manages to get into the mix.
I have mentioned a number of time that the Bureau of Economic Analysis has been working on including intangible assets in the System on National Accounts (i.e. the GDP numbers) (see “Toward Better Measurement of Innovation and Intangibles”). One of those efforts is to look at the value of artistic originals. Rachel Soloveichik has been doing ground breaking work on this –see her paper “Artistic Originals As Capital Assets”. Her findings:
The $51.6 billion in current-dollar investment in artistic originals in 2007 breaks down by category as follows: $14.0 billion in theatrical movies, $7.5 billion in original songs and recordings, $5.5 billion in original books, $21.9 billion in long-lived television programs, and $2.6 billion in miscellaneous artwork.
Now, Peter Goodridge and Jonathan Haskel have put up a first draft of their analysis “Film, Television & Radio, Books, Music and Art: UK Investment in Artistic Originals”. There conclusion is that investment was £3.5 billion in 2009.
All of this reinforces the point made in at our conference on New Building Block for Jobs and Economic Growth: we are making good progress in macro economic measure of intangibles. Now we have to build on that progress to infuse an understanding and utilization of intangibles into both company strategy and public policy.
For more on the conference, see our New Building Blocks Forum.
(Thanks to IP Finance for a heads up on the new UK study).
Is consumer research really research? That seems like a silly question — the answer of most techies would be no, its marketing. But I beg to differ. And here is an example. This story is about Motorola Solutions. Motorola Solutions is the communications equipment half of the recent Motorola split; the other half is Motorola Mobility, the cellphone company. The story (from the New York Times – Motorola Has New Tricks to Teach) relates the following:
For a single product set — the communications gear inside a police cruiser — [Motorola] Solutions conducted in-depth interviews and ride-alongs with more than 250 officers. The technology that resulted can scan license plates in a parking lot at speeds up to 20 miles an hour, remotely control gun locks that keep officers safe and help the police talk to headquarters while chasing bad guys.
To me, that research is as important to the innovation process as the folks in the lab doing the work on optics that end up in that license plate scanner. So here is my question: did Motorola Solutions count the expenditure for those interviews and ride-alongs as part of their $1 R&D budget? Did they get the R&D tax credit for it (probably not)? And if not, why not? Or is meeting customer needs not considered “innovation” in our current mindset?
The May trade data is out and it looks like the economy is reverting to some past (bad) behavior. The deficit increased by $6.6 billion to $50.2 billion. Exports were down by $1.0 billion while imports were up by $5.6 billion. The deficit had shrunk somewhat in April (see previous posting). Analysts had expected a deficit of $44.5 billion, only slight up from April’s $43.6 billion (revised). The really bad news is that deficit grew in both petroleum and non-petroleum goods — so the trade deficit is a function of both our energy and manufacturing problems.
Our intangible trade surplus increased slightly in May — up by $107 million. As in April, imports and exports of both business services and royalties increased, with exports rising slightly faster than imports in all cases.
Our Advanced Technology Products deficit also grew in May to $7.9 billion. Export grew slightly while imports rose by almost $1.2 billion. It was a mixed bag with some sectors, such as aerospace, seeing increased exports and decreased imports while others, such as information and communications technology, seeing declining exports and rising imports. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:
Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.
Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.