Jim Moore’s blog: Innovation, Strategy, Public Policy

 In the “you have got to be kidding” box:  a rich idiot is going to try to pressure Obama to take Hillary on the ticket, by getting the Congressional Black Caucus to go along.  Right.

And this after her attempt last night to rain on the parade of Obama’s victory, a victory that is undoubtedly a milestone for race relations in this nation, and in the world.

This effort will be about as successful as the (failed) attempt by big Clinton donors to pressure  Nancy Pelosi by threatening to withhold contributions.

Obama Clinches Nomination; First Black Candidate to Lead a Major Party Ticket – NYTimes.com
Robert L. Johnson, a prominent Clinton-backer and the founder of Black Entertainment Television, said Wednesday on CNN’s “American Morning” that he planned to enlist members of the Congressional Black Caucus to push Mr. Obama to accept Mrs. Clinton as his vice presidential nominee, adding that Mrs. Clinton had not directed his efforts but was aware of them.

New Hints Seen That Red Wine May Slow Aging – NYTimes.com
Red wine may be much more potent than was thought in extending human lifespan, researchers say in a new report that is likely to give impetus to the rapidly growing search for longevity drugs.

The study is based on dosing mice with resveratrol, an ingredient of some red wines. Some scientists are already taking resveratrol in capsule form, but others believe it is far too early to take the drug, especially using wine as its source, until there is better data on its safety and effectiveness.

Image via WikipediaObama Clinches Nomination; First Black Candidate to Lead a Major Party Ticket – NYTimes.com
“Tonight, we mark the end of one historic journey with the beginning of another — a journey that will bring a new and better day to America,” Mr. Obama told supporters at a rally in St. Paul. “Because of you, tonight I can stand here and say that I will be the Democratic nominee for president of the United States of America.”

Image by Getty Images via DaylifeTop Democrats call for unity behind victorious Obama
“Democrats must now turn our attention to the general election,” said the statement, signed by the partys leaders in Congress, the head of the Democratic state governors association and chair of the Democratic National Committee. The party, the statement said, needs to “stand united and being our march towards reversing eight years of failed Bush/McCain policies that have weakened our country.”

The news is coming together, and it points to Barack.

Bill Richardson will make history today. His endorsement of Barack Obama will start a cascade of endorsements that will bring the swift end of the Clinton campaign.

Why? Because the professional observers have long believed that there is close to a zero chance that Hillary can win the nomination. She has been battling to undo party rules in Michigan and Florida. This was her last hail Mary attempt to block Barack, and neither is going to happen, as of yesterday. Without them she has essentially no chance of winning the nomination, no matter how well she does in her one remaining stronghold, Pennsylvania.

Meanwhile, Barack launched a national dialogue on race–much needed and much desired by leaders of all faiths, colors, and communities. Barack created a leadership moment for our society, turning a crisis of misunderstanding into a national opportunity for honest discussion. By the way, lets give some of the credit to bloggers who engaged in the dialogue early. Once again, bloggers helped open up a topic that otherwise might have festered below the surface.

So now party leaders see that the time has come to unify the Democrats, and none too soon. Bill Richardson is moving for unity today. This is his own very important leadership intervention, perfectly timed. It will be catalytic. Expect others to follow quickly. Expect Hillary to suspend her campaign within days, in the interest of unity.

From a systems point of view, I am almost always interested in situations where executives or government officials lose control by seeking it. The classic now is the Iraq war, where Bush/Cheney thought they could spread democracy across the middle east by focusing on one small autocratic nation, Iraq. The plan was to “seed democracy.” On the other hand, they did not trust the local people. So they worked with the local leaders–some but not all–to create a hybrid of autocracy and democracy. The most autocratic thing of all was the insertion, by war and force, of the United States military into the country.

Of course they could not control the local situation. They think they “underestimated the opposition.” Actually, they deluded themselves about being able to control the situation–or any similar situation.

More important, the mix of autocracy and democracy (invasion and occupation and elections) was so transparently wrong that it turned off both democratic and autocratic leaderes in the nation. And it frightened both democratic and autocratic governments around the region.

Internally, this upset the delicate balance of forces that was keeping the country from melting down. In the region, it wrecked the balance that kept the middle east, if not peaceful and democratic, at least relatively stable.

Finally, by persisting with this plan, the US lost all legitimacy everywhere, and with it the ability to influence anything.

In my own experience this pattern is surprisingly common. Consider situations you are facing.

The answer, as far as I can tell, is that the US must admit its powerlessness to control, and must look beyond itself for answers. It must make allies–and more important take data, analysis and advice, from people and nations outside of the region, outside of its ideological spectrum, and outside of the United States.

1. What scares big companies is disruptive innovaton carried out by individuals and small firms. There are no scale effects in innovation. Bach, Mozart were individuals. Larry Ellison of Oracle famously says that software technology innovation can no longer be accomplished in large companies. This is why Oracle acquires companies right and left. Microsoft spends billions of dollars a year, and only comes up with incremental improvements.

The same is broadly true in other fields. Most biotech innovation happens in universities or small labs. Even Apple, the famous innovator, is highly dependent on small outside design firms, and a few individuals carefully nurtured in the firm, for both look-and-feel and technology innovation.

The US as a whole needs innovation.

The US needs to nurture innovative individuals.

2. The following analysis shows that strong patents are pro-innovation. I have excerpted a small bit, but please click to the full article. From Science magazine.

The author points out that patents of building blocks promoted innovation across history and across industries.

3. This puts to lie the arguments supporting a bill that weakens patent law, currently being pushed by Patrick Leahey of Vermont.

Efforts to weaken patent law come almost entirely from two groups. First, the lobbyists for very large, traditional firms. In information technology, it is the established “gorillas” like IBM, Microsoft, Google, and Cisco. Second, from policy wonks who are funded by the big companies.

These big gorilla techs named above are today’s version of the big auto companies, big plastics companies and big pharma companie, each of which tried to quash patents as they tightened control over their industries.

Big companies dominate their industries by economies of scale, by monopolies and oligopolies on distribution, and on stopping new entrants by “killing the snake while it is small” (or buying the snake when it is mid-sized).

In autos, they succeeded. In plastics and pharma they did not. In materials and in biotech there are vibrant communities of independent think tanks and innovation laboratories that make their living licensing patented inventions to larger firms or directly to the public.

The information technology industry looks more like the early auto company days than it does the early biotech days. This is because small companies in information technology have not figured out the value of their intellectual property, and how to protect it.

Big companies in information technology depend on squashing small companies, buying intellectual property on the cheap from small companies, and buying pioneering companies on the cheap. They can easily do this when the small companies either don’t protect their intellectual property (a problem in many small software companies) or open source their technology in unwise ways. Big companies are now trying to weaken the patent system before the small companies wake up to its value.

Who is taking the money from these big companies to do their bidding? Senator Patrick Leahey of Vermont–for whom John Chambers, CEO of Cisco, held a big fundraiser in Vermont. Why did Chambers, who lives in Silicon Valley, come to Vermont to do a fundraiser. You connect the dots.

Leahey is now aggressively pushing changes to the patent system that make it harder for small companies to succeed, and easier for big companies to triumph.

Leahey has, to put it bluntly, sold out.

He probably figured no one would notice. This is typically how Senators agree to sell out. They pick an issue that is important to a group of wealthy companies, and try to slip changes in unnoticed.

Shame on your Senator Leahey.

BIOTECHNOLOGY: The Patenting of DNA — Doll 280 (5364): 689 — Science
..in the USPTO’s view, new areas of technology do not create the need for a whole new specialized patent law. In many ways, the arguments currently being used for DNA sequence technology resemble those voiced 30 to 40 years ago when polymer chemistry was an emerging technology. At that time, people argued that if broad generic claims were granted on the building blocks of basic polymers, it would devastate the industry. In fact, no such disaster occurred. For example, the issuing in 1965 of a basic patent broadly claiming a vulcanizable copolymer of aliphatic mono-olefins and unsaturated bridged-ring hydrocarbons (3) did not preclude the later issuing of patents to different inventors for several copolymers of this type (4). These patents represent early examples of ethylene-propylene-diene monomer (EPDM) rubbers, which are highly weather- and ozone-resistant, stable to thermal aging, and have good electrical insulating properties. These EPDM rubbers have been commercially important as components in tires, weather stripping, radiator hoses, wire insulation, impact modifiers, and roofing.

EPDM copolymers were assembled from three basic building blocks that could be combined in many different ways and, as such, generic and specific claims to these copolymers are analogous to claims that may be issued to DNA inventions. Just as the issuing of broad product claims at the early stages of this technology did not deter development of other new vulcanizable copolymers, the issuing of relatively broad claims in genomic technology should not deter inventions in genomics. Two relevant examples of this in the field of biotechnology are the polymerase chain reaction (PCR) and the human immunodeficiency virus (HIV) protease, which were patented and then widely licensed to permit the biotech industry to continue to grow and benefit from these inventions.

The same patentability analysis is conducted for every patent application, regardless of whether the application is for a computer chip, a mechanical apparatus, a pharmaceutical, or a piece of DNA. In every field of technology–whether emerging, complex, or competitive–all the conditions for patentability (such as statutory subject matter utility, enablement, written description, novelty, and non-obviousness) must be met before a claim is allowed (5).

BIOTECHNOLOGY: The Patenting of DNA — Doll 280 (5364): 689 — Science

…Without the incentive of patents, there would be less investment in DNA research, and scientists might not disclose their new DNA products to the public. Issuance of patents to such products not only results in the dissemination of technological information to the scientific community for use as a basis for further research but also stimulates investment in the research, development, and commercialization of new biologics. It is only with the patenting of DNA technology that some companies, particularly small ones, can raise sufficient venture capital to bring beneficial products to the marketplace or fund further research. A strong U.S. patent system is critical for the continued development and dissemination to the public of information on DNA sequence elements.

To the editor,

I am writing regarding this New York Times article, on patents.

This article conveys the surprising “finding” that for public companies in the United States, patent litigation costs are apparently much higher than previous researchers have documented.  Boston University researchers Bresson and Mauer claim that “Domestic litigation costs alone, meanwhile, soared to $16 billion in 1999 from $8 billion in 1997.”

Is this true? Really? Unfortunately the writer, Michael Fitzgerald, neglects to point out the key assumption that underlies the Bresson and Mauer studies.

Though the arguments are complex, at core the authors assume that the “cost of litigation” is best estimated by the reaction of investors upon reading about the filing of a patent suit in the Wall Street Journal.

Stated more generally, the authors’ argue that if investors discount a stock in response to the announcement of patent litigation, the decline in market cap of the company can be assumed to be a sound estimate of the projected “litigation cost” of the suit. This argument assumes market rationality and the wisdom of crowds to an extreme seldom contemplated by serious analyists of markets.

I kid you not. Here is the astounding argument in the authors’ words:

SSRN-The Private Costs of Patent Litigation by James Bessen, Michael Meurer

Here is the relevant passage:

A key assumption of this literature is that the change in firm value that occurs around a

lawsuit filing reflects investors’ estimates of the direct and indirect effects of the lawsuit on the

profits of the firm and not any unrelated information. We argue below that this is a plausible

assumption for defendants in infringement suits and that, therefore, we may associate the loss in

wealth with the effective total cost of litigation for defendants.

We find that firms lose about half a percentage point of their stock market value upon

being sued for patent infringement. This corresponds to a mean cost of $28.7 million in 1992

dollars (median of $2.9 million), much larger than mean legal fees of about half a million. In

aggregate, infringement risk rose sharply during the late 1990s, reaching 19% of R&D spending.

The authors calculate the cost of patent litigation based principally ON THE AVERAGE DROP IN MARKET CAP OF PUBLIC COMPANIES WHEN A LAWSUIT IS FILED AGAINST THEM. THIS DROP AVERAGES ABOUT 1%. Stock market value for most companies are highly sensitive to perceived negative announcements, and a negative movement of 1% is hardly ever significant or lasting. For investors, trend is usually more meaningful than the sensitivity to perceived events.

Of course, a 1% drop, if assumed to be “real” and more or less irreversable, yields very large dollar amounts for the “cost of patent litigation.”

Most of us, on reading about the cost of patent litigation, would assume this refers to legal fees. However, the authors’ note that in their model the “direct costs of legal fees” are much less than what they argue is the total cost of being accused of patent infringement.

These estimates are clearly much larger than the estimates of direct legal costs. Most of

the cost of litigation to firms appears to arise from business costs such as loss of market share,

management distraction, and increased financial costs from greater risk.

Of course, this is broadly true. But is it right then to estimate this broader cost based on small fluctuations in market value? I think not.

So what is the bottom line? James Bessen and Michael Meurer are taking on the patent system, and promoting their upcoming book.

Would I bet on their academic careers? Sure. In the current climate in academics, and in tech journalism, one can ride “patent reform” pretty far.

Would I ask them to help me invest? No. Would I take their strategic advice on patent strategy? No. Would I rely on them to set policy for innovation in the United States? No.