Select tweets 6/4/12 – 6/10/12

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April trade in intangibles – and revisions

The U.S. trade deficit shrank by $2.5 billion in April to $50.1 billion, according to BEA data released this morning. Exports fell by $1.5 billion while imports were down by $4.1 billion. Imports of petroleum and non-petroleum goods were down, as were exports of non-petroleum goods. Curiously, exports of petroleum goods were up slightly. The decline was in line with economists’ expectation of a $49.4 billion dropped (according the Wall Street Journal). But the data suggest continued weakness in the global economy.
Our trade surplus in intangibles declined slightly in April, dropping by $157 million (from March’s revised level) to just over $13 billion. [Note that is about $1 billion less than reported last month – the change is due to the annual data revisions – see below]. The surplus in royalty payments increased slightly, with both exports (payments received) and imports (payments paid out) up. But business services saw a more than offsetting decline, with exports down and imports up.
Consistent with the overall trend, the deficit in Advanced Technology Products also dropped somewhat in April to $6.7 billion. The improvement was mostly due $2.4 billion drop in information and communications technology (ICT) imports — which offset a decline in aerospace exports. 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.
Also released today were the annual revisions going back to 2009. In general, the revision increase the size of the surplus in the mid-2009 to mid-2011 time period and reduce the surplus in the latter part of 2011. That description holds true for both imports and exports and for royalty payments and business services. Revised chart of the annual data are presented below.
Intangibles trade-Apr12.gif
Intangibles and goods-Apr12.gif
Oil good intangibles-Apr12.gif
Intangibles trade-2011 - April 2012 revision.gif
Annual - intangibles v goods 2011  after April 2012 revision.gif

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.

Intangible capital and creative destruction

I want to repeat and follow up on a point I made in yesterday’s posting. In that post I including the following quote from a Bloomberg story (“Zipcar Now Sees Enterprise in Rear Window”):

Enterprise is betting that its network of neighborhood branches will be a differentiator. With 5,500 locations, the company says 90 percent of the U.S. population is within 15 miles of one. Zipcar says about 10 million people live within a 10-minute walk of its cars.

I went on to note that Enterprise’s network of neighborhood branches might not be a competitive advantage, since one of the innovations in the car sharing model is by-passing the office and having close and easy access to the car. I also noted that fast-followers can run into difficulty adopting an innovation if it means changing their organizational model.
In other words, a company may have to abandon existing intangible assets in order to move forward. For example, the skills you have now may not be the skills you need tomorrow. The organizational set up you have now may not work tomorrow. The relational capital you have now may not be what you need to move into tomorrow’s markets.
In the case of Enterprise, their car sharing business probably will need a different distribution model. That is not to say that the neighborhood branches might not continue servicing the traditional market (which of course assumes that the car sharing market does not subsume the current rental car market). Or that the neighborhood branches somehow become useful in supporting the car sharing market. But the intangible asset created by the network of neighborhood branches may not be useful in the new model.
There are two take-away’s from this point:
1) the value of an intangible is contextual. In the case of the Enterprise branch network, it has value in the traditional rental car model. It may not have any value (or reduced value) in the car sharing model. Knowledge may be a “non-rival good,” meaning that it can be utilized by more than person simultaneously. But the value of the knowledge to each of those individuals might be vastly different.
2) the utility of an intangible asset needs to be constantly assessed and the asset upgraded or abandoned as necessary. Intangible assets are not fixed in time and space. They are subject to the forces of creative destruction and need to be reassessed and refreshed on a regular basis.
Intangibles need to be treated as a flexible resource rather than an immutable treasure. Knowledge and other intangibles may be precious, but they are existing in a changeable environment as well.

Latest knowledge economy accounting model

Here is an interesting new accounting model from a prospectus for a new company called Ponzify, Inc. This new non-GAAP metric is called Adjusted Consolidated Assumed Income (ACAI).
Sorry, couldn’t wait for April 1st — but this measure and the prospectus make more sense that some I’ve seen, including the often used “mark-to-model” loan accounting systems (see earlier posting).

Innovators versus fast-followers: the car sharing case

One of the standard pieces of conventional wisdom about innovation has to do with the role of the incumbent firm. Existing, incumbent companies don’t innovative, so the story goes. Start-up and new entries are the innovators — who then go on to displace the incumbent firms. Mammals and dinosaurs are the usual analogy. But just like evolutionary biology (which now posits that modern birds are the descendants of the dinosaurs), innovation looks a lot more interesting when you start getting into the details. One of those details is the role of incumbent companies as fast-followers rather than first-movers.
A story today on Bloomberg (“Zipcar Now Sees Enterprise in Rear Window”) illustrates the point. Zipcar was the pioneer in creating the “shared car” concept: short term car rentals from nearby sites. There were a number of innovations that came together in this case. The concept of hourly rental was only the beginning. There was also a different distribution model made up of two parts: no office to go to and no paperwork to fill out. Paperwork was essentially done before hand as part of membership and cars were located in neighborhoods, often singly at reserved spaces on the street or in someone’s driveway. Then there was the innovative marketing model. It was marketed as a shared-ownership model, not a rental model. The target was not travelers or people would needed a car while theirs was being repaired. The target was people who didn’t own a car and didn’t want to own a car. It was a substitute for car ownership, not a temporary replacement of one’s own car.
Now it looks like at least two of the incumbent companies, Hertz and Enterprise, are trying to play the role of fast-followers. In Europe, car makers Daimler and BMW have gotten into the game. So we will have a classic natural experiment in the market place of business evolution. The question is, can the incumbent’s successfully pull off the strategy?
Both Enterprise and Hertz will have to adopt a new approach, which is usually the reason why incumbents fail in their attempts at fast-following. Innovation means doing it differently and often means abandoning existing organizational and other intangible assets. The Bloomberg story hints at how this might be a problem for Enterprise:

Enterprise is betting that its network of neighborhood branches will be a differentiator. With 5,500 locations, the company says 90 percent of the U.S. population is within 15 miles of one. Zipcar says about 10 million people live within a 10-minute walk of its cars.

As I noted earlier, one of the innovations in the car sharing model is by-passing the office. The other is the closeness and ease of access to the car. There is a universe of difference between 15 miles away and a 10 minute walk away. The Enterprise “we’ll pick you up” is vastly different from Zipcar’s “wheels when you want them.”
For the car makers, the task is different. They don’t have the organizational legacy to overcome. But that just means that they aren’t joining the party with any specific advantage. And, if they tie themselves to just their own products, they are a niche player catering to BMW and Mercedes want-to-be owners.
So, this is a case of innovation worth watching. Will the first-movers (Zipcar) hold on? Can the incumbents (Hertz and Enterprise) become fast-followers or will they be tied down by their past? And can some other large new entrants (the car companies) leverage their intangible assets (especially brand) into this market? Stay tuned!