Innovative Ways to Grow During the Downturn
April 15th, 2009 | Posted by innovInnovation is taking a hit these days, with some people even blaming it for the financial market crash. But while most companies are trying to cut costs by eliminating staff and shutting down operations, some are finding new ways to innovate and grow by predicting—and quickly readying themselves for—emerging markets. They understand that while the overall economy may be shrinking, new markets can still be found.
Several recent trends are worth noting. Consumers are eating out less, but cooking at home more. They are buying fewer new cars, but taking better care of their current vehicles. They are spending less on entertainment outside their homes, but spending more on entertainment at home. In other words, each dark cloud may have a silver lining. Some companies are making smart, innovative moves to reorient their business models accordingly.
Wal-Mart Stores (WMT) is exploiting an opportunity that stems from today’s more cost-conscious grocery shopper. It is reinventing its private label brand, Great Value. The retailer reportedly has hired 75 people, improved the quality of 750 of its everyday food products, and overhauled the logo and packaging design.
Wal-Mart’s senior vice-president for private brands is Andrea Thomas, who joined in 2007 after leaving Hershey (HSY), where she had been vice-president for global innovation. “Consumer demand for private brands is growing,” she said at a recent food-industry conference. “Our customers are expecting more out of our private brands, and we are responding to their needs. This brand helps customers save money by offering national brand quality for less.”
The strategy has won approval on Wall Street. “The timing of what they’re doing in private label is almost impeccable,” Robert Drbul, a Barclays analyst in New York, told Bloomberg. “The consumer is going in and looking for private label.”
Procter & Gamble (PG) recently announced plans to roll out a national, franchised car-wash chain under its Mr. Clean brand name. Even though many chain operations have been struggling lately, P&G feels that the downturn offers a unique shot to move into the space.
For one thing, the recession means more people are looking for work, giving P&G a greater supply of would-be franchisees, notes Jim Amos, chairman of P&G’s franchising-subsidiary board. Second, depressed real estate prices will reduce the overall startup costs of opening facilities.
Hulu.com, a joint venture between General Electric’s NBC (GE) and News Corp. (NWS), is moving to take advantage of the shift to in-home entertainment. The online video streaming Web site delivers a compelling mix of prime time TV through an easy-to-navigate user interface supported by advertising. In only its second year of existence, it is already fourth among streaming video Web sites—YouTube (GOOG) is No. 1—and might generate $200 million in revenue this year.
What all three of these business concepts teach us is that even in a downturn, well-timed innovations can still create growth businesses. In order to succeed, however, companies will need to challenge some of their basic assumptions.
Here are three areas to start:
Take the blinders off your business model
Companies must be open to opportunities that lie outside their core. “We need to look for opportunities to allow us to grow,” Bruce Brown, Chief Technology Officer for P&G, told The Wall Street Journal. “That isn’t limited to things within our current business model.” But while P&G has a knack for exploring different consumer channels and business models, it shouldn’t be the exception rather than the rule.
Explore unexpected partnerships
Companies that find themselves too far out of their comfort zones might be better off finding partners to help them. This could be a joint venture, like Hulu, or it could mean working with small companies and entrepreneurs. P&G, for instance, acquired a small Atlanta chain, Carnett’s, to help it launch its Mr. Clean car washes.
Do more research and testing, not less
The knee-jerk response in a downturn is to cut back on customer-focused research to save money. Instead, companies should invest the time and money to unearth unmet consumer needs. Let’s face it, with economic and financial instability, distrust, and downright fear all around us, customers aren’t behaving in conventional ways. To know what they want and need today, companies should employ such tools such as ethnography, rapid prototyping, and co-development so they can build the right new products and services.
The bottom line is that there are still many opportunities to innovate in this economy—maybe even more than usual. Leaders who are able to think and act quickly and differently enough will take advantage of these times. Those who don’t will haplessly stand by and watch hard-won momentum deteriorate and their businesses contract. Innovation needs to be a strategic priority if corporations hope to do more than merely survive.
April 15th, 2009 | Posted by stockPosted by: Ben Steverman on April 15, 2009
By Kyle Shen
The slowdown in consumer spending cut many retail stocks in half in 2008, but retailers have seen a surprising rally recently. Many of the worst-performing stocks of 2008 — apparel chains, department stores and Internet retail firms — have done best in the last several weeks.
(See “Stocks: Have Retailers Hit Bottom Yet?” And check out BW’s Michael Mandel’s take on yesterday’s report that March retail sales fell 1.1%.)
For stockpickers, retail poses a dilemma: Based on recent data, there’s no simple way to tell where consumer spending is headed. So, with the current outlook so uncertain, one possible strategy for retail investors is to begin thinking very long term.
A recent report by PricewaterhouseCoopers and TNS Retail Forward examines major changes that could hit the retail industry between now and 2015.
The aging of the Baby Boom generation and coming of age of Generation Y will cause a change in consumer demand and spending habits, the report says. Retail stores that are able to adapt to the new consumer demographics will thrive while those unable to adjust will fail.
To survive in the next decade, retailers must adapt to a number of changing factors:
1. The new generation of consumers contains a more tech-savvy and more diverse group that holds different values than its parents.
2. The one-size-fits-all approach of the mass chain store format will not be viable. Stores able to respond to individual tastes will become dominant.
3. “The belief that bigger is better will break down—aggregation of small will be the new big,” says the report. The new consumer will be more intent on quality than quantity. Mass production models will not succeed.
4. Ability to keep close contact with customers through mobile devices will be important to maintain quality of service and product as well as receive customer feedback.
5. The still large group of Baby Boomers will remain active in the economy. However, their demands will shift from goods to service and healthcare.
6. Retailers may also expand in developing economies such as India and China. These growing markets have much more room to expand along traditional modes than developed nations. However, American companies will be “late to the game,” says the report, and will need to compete with both European and local retailers.
Fast and quality service and the ability to attune to individual tastes will be vital. Retailers must completely alter their business models. The report says:
Retailing will become an industry that realizes, more and more, that it must tailor its offerings to select customers, as opposed to the mass appeal approach of the 1980s, in order to win over customers and foster greater customer loyalty.
That means reacting more quickly to consumer trends. Realizing a trend as it happens will be too late, the report argues.
Kyle Shen is an intern in BusinessWeek’s Chicago bureau.
Preparing Now to Drive Future Growth
April 14th, 2009 | Posted by innovWhen the global economy finally starts to rebound, will you be ready to drive growth in your organization? That’s a question I discussed recently with a group of senior executives during a business trip to Singapore. Many of these leaders represented leading multinationals in finance, manufacturing, and technology. All of them were consumed with the challenge of leading through this historic recession, and many of them have had to cut their work forces significantly. But they are also trying hard to keep their sights on the horizon—and we all need to follow their lead.
This recession will end. We don’t know when, but it will. When the recession ends, organizations that can take advantage of emerging opportunities will have the best chance to grow. To position themselves for success, the executives I met in Singapore agreed they will need leaders who are highly skilled in at least three core aspects of leadership: collaboration, mental agility, and judgment.
When it comes to collaboration, here’s the good news: Most leaders know it’s important. But this is the disturbing part: Their organizations usually aren’t very good at it. In fact, 97% of executives and managers surveyed by CCL acknowledged that collaboration is a key to business success. And yet just 47% of these same executives said their colleagues are skilled collaborators. That’s a big gap, and it will carry bottom-line consequences. Though it is fashionable these days to say otherwise, command-and-control styles of leadership are still much in vogue. As a leader, it’s tempting to walk into a meeting, listen to your colleagues talk for a few minutes about a problem and then say: “O.K., here’s our plan for solving this. Go do it now.”
Group Decisions
But you are likely to get better results when you involve more men and women in your decisions. John Chambers, CEO of Internet networking and communications equipment giant Cisco Systems (CSCO), has gained widespread publicity for using collaborative leadership to transform his company. Cisco used to rely on about 10 top executives to make key decisions; it now involves 500 of them. Reaching collective business goals, rather than individual benchmarks, take precedence in deciding pay and advancement. At Cisco, boards and councils that are representative of the whole business, rather than individual champions, drive key projects and new products.
The bottom line: Profits are up, and operating expenses down. The Center for Creative Leadership worked with Textron, (TXT) a Fortune 500 company whose brands include Bell Helicopter and Cessna Aircraft, to help Textron reshape itself from a classic holding company into a streamlined, networked enterprise. By increasing collaboration across business groups, Textron reduced its number of medical plans in the U.S. from 154 to 2, from 40 payroll systems to 3, and created a shared technology infrastructure. Most important, it began finding a far greater number of its top executives from within the company.
In a previous column, I discussed the importance of learning agility in leadership success. There’s a related skill that Ram Charan and others have termed “mental agility”—and it’s critically important for knowing how to reposition your company during and after tough economic times. With mental agility, you can monitor changes in the market place, figure out what customers want, and adjust your strategy to deliver it. Repositioning your business isn’t easy. It calls for digging through a vast array of options and zeroing in on the one or two that most resonate with clients.
Doing this hard work effectively requires an agile mind. During my visit to Singapore, several executives referred to a recent cover story in The Economist on “Asia’s Shock.”
Many countries in Asia-Pacific have positioned themselves quite successfully as leading exporters. Now, however, external demand for their goods is drying up, forcing them to find new avenues to growth. Many business enterprises around the world, from the largest corporations to the newest startups, are experiencing a steep drop in revenues. Just like the nations of Asia, they need to adjust as quickly as possible. Success starts with a nimble and open mind.
Strategic Bets
Finally, there’s judgment. This skill, in my estimation, is perhaps the most critical of the three discussed in this column. To a great extent, it determines your organization’s capacity for collaboration and its overall level of mental agility, because judgment involves making some important wagers about the future of your business. Right now, for instance, you need to be making some bets on your people. You’ll want to have the right ones on board to execute your strategy when the recovery begins to take hold.
Executives I’ve talked to say the recession has prompted them to take a close look at restructuring their organizations. They’re asking themselves some difficult, and often times painful, questions. Which men and women should they keep? Should some of them be moved into different roles that better unleash their talents? Are there others they should let go? What new talent and skills will their enterprises need when the economy gets rolling again? This adversity is a good time to build in discipline around talent that might have been missing previously.
At the same time, it’s important to make some bets on business strategy. This is a great time to look for partnerships that could extend your reach into a new geography or a new market niche. Take my own organization, for example. Though we’re global, we have fewer than 500 employees. So it’s not possible, or even desirable, for us to have our own people everywhere. Instead, we work with a pool of more than 500 adjunct faculty and coaches that speak many languages and have been trained by our experts. We can also greatly extend our reach by partnering with other institutions. In fact, we must.
Just like so many other industries, executive education is getting hurt by this downturn. Resources are tight. But we’re still making some strategic bets on our future. Earlier this year, with the help of some corporate and educational partners, we opened an office in Moscow. We’re well on the way to setting up an office in India. Are these initiatives tapping resources that could be used to address more immediate issues elsewhere in my organization? Of course. But we’re also not second-guessing our decision to move into these markets—and that’s because now is simply no time to stop searching for tomorrow’s engines of growth.
Movie boom keeps booming, lifting cinema stocks
April 14th, 2009 | Posted by stockPosted by: Aaron Pressman on April 14, 2009
I must admit that when my kids turn the dial to the popular Disney Channel show “Hannah Montana,” I make my excuses and hurriedly leave the room. But the show and related merchandise, CDs and DVDs have been a big winner for Disney (Symbol: DIS). Over the weekend, the latest Hannah Montana movie grabbed $34 million and the overall take for the weekend for Hollywood was an estimated $130 million. That’s up 61% from the same weekend last year and the best box office ever for Easter weekend, according to Steve Birenberg, money manager and founder of Northlake Capital Management. The previous weekend was even better at $148 million. In recessionary times, it seems, a night out at the movies is a solid downscaling entertainment bargain.
That’s good news for some of Hollywood’s biggest players like Disney and Dreamworks Animation (DWA) but they are also suffering from cratering DVD sales and lagging theater attendence outside of the United States, Birenberg notes. He prefers cinema operators like Regal Entertainment (RGC), Cinemark Holdings (CNK) and Carmike Cinemas (CKEC). Merriman Curhan Ford analyst Eric Wold also likes IMAX Corp. (IMAX)
, which runs giant-screen theaters around the country.
The group has rallied in recent weeks, thanks to impressive first quarter results, but with the attendence boom still growing, there’s likely more upside there.
Are You a Walt Disney or a Roy Disney?
April 14th, 2009 | Posted by innovPerhaps no other country celebrates innovation the way America does.
This passion for inventions started early in our history. Did you know that George Washington signed the First U.S. Patent Grant on July 31, 1790, and the patent examiner was none other than Thomas Jefferson? (Thank you, Google (GOOG)!) In America, we’re reminded of the life-changing power of inventiveness every day. Some of the greatest inventors of yesterday spawned the greatest brands of today. What do the names Chrysler, Coleman, Goodyear (GT), Campbell (CPB), Colt, and Edison mean to you? Cars, tents, tires, soup, guns, and the electric lightbulb, of course.
When you dig a little deeper, you start to notice an incredibly important aspect of inventiveness: For every yin, there must be a yang.
For example, the next time you are marveling at the wonders of Disney (DIS), make sure you remember Roy. While Walt was dreaming about his Magic Kingdom and making a mouse talk, his brother Roy was actually making sure that Walt’s dreams would come true. Roy was the operational genius; a yin for Walt’s yang.
Turns out, the best companies are a lot like Roy and Walt Disney. They are naturally good at creating new ideas and executing them brilliantly. All too often, we here at Maddock Douglas (and maybe at your firm, too) stop at the first part, and pat ourselves on the back for being innovative, even though we are aren’t exactly sure what to do with a great idea.
At our firm, ideas come easy. In fact, we believe big, beautiful, million-dollar ideas are a dime a dozen. Want to see? Picture yourself sitting on a plane. Hmmm. Let’s see. Airline ideas. Why don’t airlines create a loyalty card? You’d pay for travel at the beginning of the year in exchange for some sort of special treatment or perks—say, no fees for checking luggage; free food and drinks (including alcohol), and access to their “president’s club” lounges so you would have some place—other than the gate—to wait for your plane. Sure, you can pay à la carte for all these things, but it would be more convenient for you if the airline bundled it all together, and better for the airlines since they would get the money up front. Starbucks (SBUX) has created plenty of cash flow with this idea. Why not the airlines?
Here’s another idea: Airlines should sell luggage engineered to fit perfectly into their planes. The airlines get new revenue and quicker boarding because bags are all fitting nicely into place. You get the picture.
For all of us who say ideas are easy, there are others who say executing is easy. These are the operational experts—the Roy Disneys if you will—who know how to drive the best ideas forward. The corporate equivalent of them would be the director of R&D and the COO. You don’t think of them as product innovators, but once they have an idea they execute it—hopefully to perfection.
We find that companies, like people, are usually good at either creating ideas or executing ideas. The trick is to know which describes your company. If you or your company are about operational excellence, but desperate for big ideas, consider importing this kind of thinking via a business partner.
Want proof that we are on the right track? Venture capital companies are full of Roy Disneys, and they know it, so they don’t waste time trying to think up new ideas. They know what they are good at and go do it. And here’s a bold statement: We also believe that right now venture capitalists have a golden opportunity to revive the spirit of innovation in America. But we’ll save that for the next article.
For now, ask yourself this. Is your company a Walt or a Roy? Figure it out and go find a yin for your yang.
Quick Tips: Six Under-the-Radar Tax Perks
April 10th, 2009 | Posted by taxTHINK YOU’VE CUT all of the corners and exhausted every small business savings vehicle possible? You may have another shot at saving with a handful of often-overlooked federal, state and local tax credits and exemptions.
Many of these tax perks are hard to figure out because they’re so complicated or just plain obscure. Rules can change from state to state, locality to locality and even industry to industry. But once you figure out which ones your business qualifies for, the savings can really add up. And you can even carry back certain credits four to five years depending on the rules in your state, says Jack Rothstein, a tax partner at Pricewaterhouse Coopers in New York.
To make sure your business is getting all of the savings it can, seek out a trusted advisor with local and state tax expertise. They can often suggest a number of tax-saving strategies that are specific to your business needs. Also contact your local economic development council and chamber of commerce.
In the meantime, here are six often-neglected tax perks that can help your business save some cash.
In 2009, companies that produce more than 50% of their products (including software and films) domestically are entitled to a federal tax deduction equaling 6% of either the income they receive from those products or an individual business owner’s adjusted gross income, whichever is less. In 2010, that deduction will rise to 9%.
As an added bonus: Some states, including Pennsylvania, Vermont and Virginia, offer the same deduction amounts for state taxes as the federal government, says Tarra Curran, managing director at accounting firm CBIZ Tofias in Boston.
Most small business owners take advantage of federal tax perks that let them write off the cost of new, depreciable assets like manufacturing equipment or light trucks: the Section 179 deduction and the 50% first-year bonus depreciation provision. But many don’t know that they may also be eligible for a state manufacturing credit. In New York, California and Illinois, for instance, companies that purchase qualified machinery or other equipment used in manufacturing may receive a credit against the cost of that new equipment. “It usually amounts to some percentage of the purchased equipment,” says Rothstein. Also, in New York, business owners whose companies didn’t earn profits can use this credit to offset the business’ net worth or capital taxes, he says.
Many businesses take advantage of the research and development tax credit, which refunds 20% of expenses associated with research projects. (President Obama is proposing that this credit, which needs to be renewed periodically, be made permanent). But what many don’t know is that they can qualify for a research and development credit on the state level as well.
States including Ohio, New Jersey, Pennsylvania and California all offer their own brand of research and development credits. In California, for example, if you paid or incurred qualified research expenses while in the state, you’ll receive a credit that’s worth 15% of those expenses.
Another R&D benefit? Biotech companies in New Jersey and Pennsylvania are allowed to sell their research and development credits, says Myron Vansickel, global director of the state and local tax center at Jefferson Wells, an accounting firm in Milwaukee.
Like many residential home values these days, commercial property values have also plummeted. To avoid overpaying real estate taxes, get an appraisal of your property to verify that it is now worth less. You can also check out how much similar properties in the area are fetching, too, says Curran. Then file an appeal with your local assessor’s office.
Before you buy anything for your business, check for sales tax exemptions in your state. In Virginia, for example, information technology firms can purchase computer hardware sales-tax free, says Vansickel. In Illinois, manufacturers can avoid owing sales tax on manufacturing equipment. And in Massachusetts, there’s a sales tax exemption for equipment used in research and development, says Curran. To see what kinds of exemptions you qualify for, head to your state’s department of taxation web site or business development center.
Want to reduce your company’s unemployment tax? Then do your best to retain workers. According to Vansickel, a small company can save between $25,000 and $300,000 a year by managing its unemployment claims. State revenue departments track how many unemployment claims workers log against your company from year to year. So if you had 100 employees at the beginning of the year and only have 50 by the end of it, then you hire 50 more workers the next year, you’ll be paying twice as much in unemployment tax for the following two to three years, he says.
Corrected April 10, 2009. In our initial version of this story we incorrectly stated that business owners in New York could use a manufacturing credit to offset their personal net worth if their company is unprofitable. In fact, they can use it to offset the net worth of the business.
U.S. Marketers Say Hola! to Hispanic Consumers
April 9th, 2009 | Posted by innovWhat do Procter & Gamble (PG), Johnson & Johnson (JNJ), Verizon (VZ), and General Mills (GIS) have in common? All are pouring more advertising dollars into marketing aimed at Hispanics. Last year, General Mills tripled its spending on commercials on Spanish-language TV to more than $35 million, according to ad tracker TNS Media Intelligence. “We’ve gone aggressively into Hispanic marketing,” explains the food company’s Chief Marketing Officer Mark Addicks, “because we’re getting double-digit sales gains.”
That may seem counterintuitive. After all, America’s 45.5 million Hispanics have been particularly hard hit since the U.S. economy went off the rails. Unemployment among Hispanics shot up in March to 11.4%, the Bureau of Labor Statistics reports, compared with 8.5% for the U.S. population as a whole. But Hispanic consumers are less likely to be hobbled by mortgage or credit-card debt, and tend to have two or more income earners in a household, according to market researcher Experian Simmons. What’s more, Hispanic consumers typically like to buy products and services from brands advertised on TV, according to a consumer survey that Experian conducted last year for the Hispanic television and radio company Univision Communications.
As one might expect, Hispanic consumers spend heavily on the basics, including packaged goods and wireless phone services. “Their disposable income might be lower,” says Kelly McDonald, a Dallas-based marketing consultant, “but Hispanic consumers spend a far greater percentage of what they have” than the rest of the U.S. population.
Since General Mills began buying more ads in Spanish-language media, it says sales of its Progresso, Honey Nut Cheerios, and other brands have soared. Besides putting Hispanic TV stars in its commercials, General Mills has been sending a quarterly magazine to 350,000 Latino homes, featuring recipes made with its products.
Companies are funneling much of their Hispanic marketing budgets into Spanish-language TV. It’s not hard to see why. So far this year, ratings at the three largest Hispanic networks—Univision, Telemundo, and Telefutura—are up by 22% for the 18- to 49-year-old demographic, while overall ratings at the Big Four broadcast networks are flat. “Hispanic consumers appreciate when you speak to them in their own language,” says Edward Gold, advertising director at State Farm Insurance.
State Farm agents regularly get new clients in the days following Univision’s highly rated Saturday night variety show Sábado Gigante. The program features several State Farm-sponsored segments and even a company song sung by the audience. (The refrain goes: “They will give you a discount. This is true. Like a good neighbor, State Farm is for you.”)
Hispanic media companies are working overtime to make it easier for marketers to find a home on their airwaves and in their pages. Univision recently produced a commercial for Carl’s Jr., a Western hamburger chain, that looks like a steamy soap opera, with a scantily clad woman seducing her lover—and then eating a burger in bed with the lover and her husband.
In December, Telemundo and Vidal Partnership, an ad agency whose clients include Kraft Foods (KFT), Home Depot (HD), and Wendy’s (WEN), joined forces for a promotion in which advertisers will sponsor an online contest allowing viewers to pick the ending of one of the network’s telenovelas. “When we do product integration,” says Univision CEO Joe Uva, “we do more than just put a Coke cup in front of Paula Abdul.”
Grover is Los Angeles bureau chief for BusinessWeek.
Stimulus act provides contractors tax-saving opportunities
April 8th, 2009 | Posted by taxBy Newman, Marc
Publication: Real Estate Weekly
Several of the tax saving opportunities included in the massive $800 billion American Recovery and Reinvestment Act of 2009 (ARRA) recently signed into law by President Obama should be of particular interest to those in the architecture, engineering and construction industries.
Tax breaks of particular
interest to company owners address use of the net operating loss (NOL) carryback, the Section 179 depreciation election, estimated tax payments, and green credits.
Net operating loss carryback
Generally, a net operating loss (NOL) may be carried back two years to generate a current tax refund, providing a cash infusion in times of loss. For 2008 (not 2009), ARRA gives qualifying taxpayers the choice of carryback up to five years for small businesses with gross receipts of $15 million or less, making the potential cash infusion even more powerful.
Any loss not absorbed in the carryback period can be carried forward up to 20 years. Businesses also have the option to waive the carryback period and carry the entire loss forward. This may be beneficial if your marginal tax rate in the carryback years is unusually low or if the alternative minimum tax (AMT) in prior years makes the carryback less beneficial.
Depreciation breaks extended
To spur additional investment, ARRA extends the increase in the Section 179 limit for initial year expensing to $250,000 (from $125,000 indexed for inflation). The Sec. 179 expensing election allows a current deduction for newly acquired assets that otherwise would have to be depreciated over a number of years. A business can claim the expensing election only to offset its net income, not to reduce net income below zero.
Because this tax break is designed to benefit primarily smaller businesses, the expensing election begins to phase out dollar for dollar when total asset acquisitions for the tax year exceed $800,000 (up from $500,000 indexed for inflation). The new higher limit applies for calendar year 2009 or a business’s fiscal year that begins in 2009.
Another depreciation-related provision extends the special allowance for certain property, generally if acquired in 2009. This is in addition to any such property that qualifies for Sec. 179 expensing. For eligible property, the special depreciation amount is equal to 50% of its adjusted basis. Types of property that qualify for this special depreciation include tangible property with a recovery period of 20 years or less, computer software purchased by the business, water utility property, and qualified leasehold improvement property.
Are Patent Problems Stifling U.S. Innovation?
April 8th, 2009 | Posted by innovChief executives from 28 large corporations, including Google (GOOG), Cisco (CSCO), Research in Motion (RIMM), and Intel (INTC), sent President Barack Obama a letter on Mar. 25, urging him to support the Patent Reform Act of 2009. The problem, they say: Litigation costs and patent infringement damages are stifling innovation.
The proponents say the measure would help patent holders by giving them a stronger defense against lawsuits from others who claim to have made the same invention, fights that can cost upwards of $10 million. The biggest change: Patents would go to the first to file an application, rather than the first to invent, which is often hard to determine. The bill would also curb forum shopping, in which plaintiffs look around the U.S. for judges they believe are sympathetic to their side.
But litigation isn’t the only problem. The U.S. Patent & Trademark Office is drowning in applications. If new filings were to stop today, it would take the agency’s 9,500 employees two years to clear the backlog. Moreover, the Patent Office may soon run short of money. The office is entirely funded by patent application fees—it expects to take in $2 billion in 2009—and those applications are projected to drop 2% to 10% this year as companies deal with the slumping economy.
Mark A. Lemley, a professor at Stanford Law School and specialist in intellectual property, has been sounding the alarm on these issues for years. He’s co-author, with Dan L. Burk, of an upcoming book, The Patent Crisis and How the Courts Can Solve It. Lemley spoke to BusinessWeek‘s Damian Joseph. An edited version of their conversation follows:
What’s wrong with the U.S. patent system?
I think there are a couple of problems. The Patent Office gets 450,000 applications a year, and there’s a backlog of 1 million applications—700,000 of them are just sitting in a stack. The examiners don’t have time to review them. It’s sort of turned patenting to a mass-production business, and I think there are concerns that quality has declined. A lot of patents shouldn’t have been issued.
Also it is impossible to finally ever reject a patent. Someone can go back unlimited times and get a do-over. If the patent office denies your application, you can keep coming back and back until they approve. Examiners turn over pretty quickly so if a new examiner reviews the resubmitted application, or he’s not paying attention, it can slip through.
Why should businesses care if there are issues with the patent system?
They spend a lot of money just paying lawyers and dealing with copyright infringement claims. To take a patent case to trial can cost $5 million to $10 million. Even worse is the time and distraction. Some number of employees are dealing with lawsuits, depositions, and collecting materials. Then at the end of the day, there’s the risk that even a weak case could still go to jury and you never know what the jury will do. The jury could award huge damages. Companies end up settling cases and paying out money to avoid that.
Is there an effect on the overall economy?
I think it has an affect on the overall economy, but concentrated in different industries. The problems are most severe in information technology. Money being diverted from research and design is most problematic.
What can be done to solve the problem?
I think there are a couple of basic approaches—by fixing forum-shopping and fixing the way we calculate infringement damages. We are, though, beginning to see an approach in courts and Congress to deal with litigation abuse problems. We recently fixed the problem of getting injunctions, where cases involving small components of an item can shut down the production of the larger product. (For yet another solution, check out this BusinessWeek article on peer-to-patent crowdsourcing.)
AP and News Corp.: Wrong About Google
April 8th, 2009 | Posted by innovI’d like to open this column with an apology to the Internet on behalf of reasonable members of the traditional media.
Internet: It is not your fault that our business models are slowly dying, that we resisted the Web for so long, and that we then did a mediocre job of adapting our products to it. Your large portals and search engines like Google (GOOG) and Yahoo! (YHOO), aggregation services like Techmeme and Digg, and your countless blogs have been very kind in sending us so much traffic at no charge over the years. We know well that traffic is currency online. That’s why we spend so much time squeezing any remotely relevant ticker into a story, appending “Digg this” buttons to pages, and doing whatever we can to optimize our stories to get the most search traffic possible.
You’ve done your part to help save us, Internet, and we appreciate it. You’ve given us an immediacy and two-way connection with readers we wouldn’t have had otherwise. We can now measure which stories resonate with readers the most—no expensive surveys and focus groups necessary! You’ve even made all those ridiculously high costs of paper and printing obsolete. It’s not your fault we haven’t yet found a way to monetize it or the gumption to cut our costly print operations sufficiently to make new business models viable.
Of course, if you’ve read the headlines this month, you understand why I’m writing this note. A once proud, robust industry that should be concerning itself with speaking truth to power is spending much of its time whining. Old Media has largely failed to join the ranks of companies profiting from the Web. Instead, it’s trying to browbeat those companies into subsidizing its own money-losing operations.
Policing the Web
Consider the latest chapter of the Associated Press’ bizarre anti-Internet saga. The news organization now says it will police the Web for what it calls “misappropriation” of news content, in hopes of forcing sites that link to news stories to share revenue with creators of that content. Details are still unclear. In an interview with BusinessWeek, Tom Curley, the chief executive officer of AP, elaborated on the AP’s plan to build its own news aggregation pages, creating something of an alternative to Google. Good luck with that.
The AP’s rant followed News Corp. (NWS) CEO Rupert Murdoch telling Forbes that Google should have to start paying for linking to News Corp. content. What’s next? Charging Twitter for the privilege of all those editors and reporters who try to drum up interest in their articles via Tweets? Forbes called Murdoch’s anger “understandable.” Really? Then please explain it to me. From where I stand, traditional media has only itself to be angry with.
That’ll Show ‘Em
Old Media’s indignation is akin to a parent who tries to punish a kid by taking away the Glenn Miller records. Let’s be honest: The traditional media is threatening to cut off access to an asset that’s declining in value, and in many cases, no longer brings in profits. Think about that. What exactly is the “or else” here? Or else, we won’t take your free traffic, and we’ll just watch our subscriber rolls dwindle and ad revenue shrink all alone?
The fact is, wire services like the AP simply don’t add as much value on the Web as they do in print. And we’re headed to a largely nonprint world. How many 20-year-olds do you know who complain of inky fingers after reading the news?
The Web doesn’t have column inches to fill daily. And there are plenty of other news sources online. Heard of Reuters (TRI) and Bloomberg? If you’re interested in tech the way I am, there’s no end of business pubs and blogs. And even if no one covers a story, it’s not hard to find direct source material, be it a speech, SEC filing, or press release.
To be sure, there are fabulous reporters at the Associated Press who dig out original stories through dogged reporting. But ultimately members pay for the service mainly to fill a news void left by increasingly smaller editorial staffs. And don’t forget that many of the sites that help drive traffic to the AP—from Google to Huffington Post—are actually paying members.
April Fool?
So why doesn’t the AP get this? Where has AP Chairman Dean Singleton been for the past decade as scores of newspapers went under, print subscriptions plummeted, and traffic to blogs and other online media soared? He told PaidContent: “I think print’s going to be important for a long time…, Print is still the meat. Online’s the salt and pepper.” I had to check the dateline to make sure this wasn’t one of those April Fool’s gags the blogs love so much. I’m from the traditional press, and I don’t read anything in paper form anymore.
But if news outlets really want to cut Google off—if Google really is getting all this value it’s not paying for—then they ought to take the approach proffered by blogger Danny Sullivan. Embed in stories a line of code that would prevent Google from aggregating content. Done. You’ve got your valuable content back all to yourself, and you don’t have to burden your servers with all those extra readers.
It’s not just that Old Media is wrong, it’s that they’ve played this sad hand so badly. They spent years nakedly trying to get more and more traffic from search, portals, and aggregators, and now they suddenly strike a victim pose once they realized their business models are broken beyond repair.
Worse, traditional media waited until blogs became recognized as credible sources of news that matters. I’m not saying there aren’t distinctions between mainstream press and blogs. There’s a reason I still do a column for BusinessWeek. Editors add value, and traditional media hew to established practices around reporting and sourcing that give their material a layer of credibility many blogs lack.
Embarrassed for Journalism
Still, readers are increasingly ignoring those distinctions, and when your audience doesn’t put a value on them, that erodes the ability to charge a premium. As Google CEO Eric Schmidt told a group of newspaper publishers on Apr. 7, “I would encourage everybody, think in terms of what your reader wants. These are ultimately consumer businesses, and if you piss off enough of them, you will not have any more.”
There’s always been a lot of pride associated with the Old Media world. There had to be—we didn’t make much money, we worked long hours, we had to ask uncomfortable questions and report things people didn’t want reported. And then there’s that endless stream of deadlines. But this week is the first time I can think of that I’m embarrassed for my profession. Once you’re reduced to legal threats and whining, you’re one step away from admitting total defeat. Just ask the music industry. What’s next, suing our own readers for clicking on Google links?
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