Dirigisme wins, French entrepreneurs lose

By now, the whole tech world has heard the story first reported Tuesday afternoon in the Wall Street Journal about Yahoo’s failed effort to buy Dailymotion. As the story opened:

Dailymotion was on track to be the first big acquisition for Yahoo Inc. YHOO +2.76% Chief Executive Marissa Mayer, after her company signed a provisional deal to buy control of the online-video website from France Télécom FTE.FR -0.59% SA. Then Ms. Mayer's No. 2 executive met with French Industry Minister Arnaud Montebourg.

At an April 12 meeting in Mr. Montebourg's Paris office, the minister told Yahoo's chief operating officer, Henrique de Castro, and France Télécom's chief financial officer, Gervais Pellissier, that he didn't want 75% of a rare French Internet success story to be sold to an American Web giant, according to people briefed on the meeting.

"I won't let you sell one of France's best startups," Mr. Montebourg told Mr. Pelissier, his voice raised, according to people briefed on the meeting. "You don't know what you're doing."

Facing an uproar, the minister clarified:

“The minister has expressed his desire that a partnership between Yahoo and Orange should be built on an equal base, mutually beneficial to both companies,” his office said in a statement.

It was widely reported that the government was willing to let Yahoo get 49% — or maybe even 50% — but not beyond.

This has so many fascinating implications. First, Yahoo is back to the drawing board in trying to build up its video capabilities.

Second, are the policies of the socialist government — after five years of crypto-Gaullist Sarkozy — going to hurt trade and investment with France. From the New York Times:

The government’s intervention has alarmed entrepreneurs in France, who say it sends a bad message to foreign investors, especially at a time when the country is seeking their money to help jump-start its economy.

“I’m sure France will be downgraded in foreign investors’ eyes because they will think it is too complicated,” said Frédéric Montagnon, co-founder of OverBlog, a blogging platform.
…
The move to block a takeover by Yahoo comes even as France has been stepping up its efforts to attract foreign investment — much needed, analysts say, to pull the country out of a slump in which gross domestic product declined by 0.3 percent in the fourth quarter of last year.

Or, as the headline on the Financial Times proclaimed: “Dirigisme dies hard in France”.

The rebuff to Yahoo comes after Montebourg feuded with other foreign capitalists. From the London Telegraph:

But it is not the first time Mr Montebourg, on the Left flank of President Hollande’s Socialists, has been accused of damaging the country’s business image.

Last year he threatened to nationalise an ArcelorMittal steel plant in Floranges, north-eastern France. More recently he got into a spectacular public spat with American tyre tycoon Maurice Taylor, calling the Titan International CEO “extremist” after he pulled out of talks to buy a Goodyear factory over worker demands.

“The extremists are in your government, who have no idea how to build a business,” Mr Taylor fired back.

But what I think is most important is the message it sends to French entrepreneurs, who know that for the next four years (at least), they can’t build an economically significant firm and sell it to the highest bidder. From Business Week:

“It sends a very bad signal to the outside world, saying that because you aren’t French, we prohibit you from being involved,” says Christophe Chausson, managing partner of Chausson Finance, a Paris-based venture capital group. “To develop startups, you have to do the opposite of what the government has done. Dailymotion needs a lot of capital, hundreds of millions of euros, to develop and buy rights to content.”

The same article noted that the decision hit home for the company’s founders:

Perhaps the most poignant reactions to the collapse of the Yahoo deal came from Dailymotion’s co-founders, Benjamin Bejbaum and Olivier Poitrey, who started the company in Poitrey’s Paris apartment in 2005. “It shouldn’t have been THEIR decision,” Poitrey posted on his Twitter account on April 30. He recently moved to Silicon Valley to head a team that’s developing Dailymotion’s mobile offerings.

Added Bejbaum in a tweet today: “On Monday, there was hope. On Thursday we freaked out. The French economy is not a toy.”

Like Poitrey, some expatriate French are thriving in Silicon Valley. But I see a huge opportunity for French-speaking Switzerland (with access to capital and home of a first-rate technical university) or Belgium (already home of French tax refugees) to create entrepreneurial clusters and attract the best and the brightest minds trapped in President Hollande’s workers’ paradise.

Internet revisionism

At a campaign stop last week in Virginia, the president said

The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.

He also made some other controversial remarks on the role of government in a capitalist economy, but I just want to fact check these two sentences.

Yes, nothing "gets invented on its own." It takes people to do that, whether individuals or quasi-permanent groupings working in an organization who (under US law) are people too (and have been since Roman days). And it’s also true that a complex systems architecture — of which the Internet is the most complex — requires coordination of the distributed efforts of a large number of people.

But who did the inventing? To me, “government research” implies “government researchers” when it was actually university and corporate researchers. Yes, much of this research was government-funded research, including most of the research in the 1960s and 1970s.

The definitive first-hand account of the creation of the Internet was published in 1997 in the leading US computing journal. It said

• An MIT professor, J. C. R. Licklider, conceived of a "galactic network” in 1962 [although other accounts say he was then a vice president of BBN, an MIT spinoff company]. He then went to ARPA, the DoD’s advanced research funding agency
• An MIT graduate student, Len Kleinrock, wrote a paper about packet switching in 1961
• An MIT [Lincoln Labs] researcher, Lawrence Roberts, set up the wide area network (over a dialup line) in 1965 and then in 1966 went to ARPA and proposed the ARPANET. [Wikipedia says in 1971 he went on to found Telnet in 1971, a packet switching common carrier].
• The switches that made the ARPANET possible were built by BBN, and Kleinrock (then at UCLA) got the first one in 1969.
• The Network Working Group [a small group of university and nonprofit software engineers] developed a spec for the first host-to-host communication standard in 1970
• In 1972, Ray Tomlinson of BBN wrote the first e-mail program.
• (D)ARPA funded a spec for TCP, which was implemented by Berkeley in Unix
• Connecting more than one machine at a given site was made possible by Ethernet, invented by Xerox PARC [and then sold as hardware by companies like 3Com.]
• The domain name system was created at USC.
• In 1985, the NSF created a second network, NSFNET, which would serve universities, not just the DoD and DoD contractors — and then defunded it in 1995, forcing it find its own way to self-finance.
• Leadership of the Internet passed to self-organizing [formal or informal] nonprofit entities, including the Internet Engineering Task Force, the Internet Society, the Internet Architecture Board, the Internet Engineering Steering Group and the World-Wide Web Consortium. [Starting in the 1990s, most of the resources for these entities were provided by corporations and universities using their own funds]

So yes, it took a village to create the Internet, and the ball would not have been started rolling without ARPA’s sustained funding over many years. But the actual work of designing and building the Internet was not done by the government, but for the government by smart people that it picked.

Then there is the question of what happened after the ARPA-designed data pipes were in place. An independent account by David Mowery and Tim Simcoe of Berkeley wrote in 2002:

Adoption of the Internet in the US was encouraged by antitrust and regulatory policies that weakened the market power of established telecommunications firms and aided the emergence of a domestic ISP (Internet Service Provider) industry. The large size of the US domestic market, as well as American firms’ large investments in desktop computing and computer networks, created the conditions for rapid diffusion of the Internet following the introduction of the WWW. “Network effects” created by the scale of the US market and the predominance of English language content also contributed to rapid US standardization and diffusion.

During the late 1990s, the Internet entered a third phase of growth characterized by the development of commercial content and business applications. This phase followed the completion of a long process of infrastructure privatization and a dramatic surge in Internet use associated with the introduction of the WWW. Commercial interest and activity were fueled by the availability of capital from the US venture capital (VC) industry, as well as the strong performance of the US economy.

Mowery would certainly be the first to argue for the importance of government-funded research, but in the end, the Internet would have been little more than a research curiosity (or an internal network for a few universities or DoD sites) without the private investment necessary to grow it into what we have today.

As campaign hyperbole goes, this probably rates only one or two Pinocchios — certainly not a whopper on par with Al Gore claiming he invented the Internet. But I’d hate to think that young people, listening to soundbites, took away from this campaign claim that an omniscient and omnipotent Federal government is how we got the Internet and how we will get similar innovations in the future.

Picking winners, getting losers

One of the key tenets of the interventionist view of governance (whether socialist, fascist or communist) is the idea that the government can manage the economy better than the free market. While extreme views (NB: Cuba, Venezuela, China) make an argument based on naked power — your government will provide for you — the more moderate interventionist arguments are based on the concept of “market failure.”

Of course, the idea that the government can correct for the errors of the market assumes that the government is more intelligent and foresighted than the market, and also is not susceptible to capture, cronyism or other bias. This week provides a classic counter-example.

In between baseball and a clean sweep by Bay Area liberals to the major statewide offices, one of the big Bay Area stories this week was the announcement that one of the biggest solar companies is struggling financially, raising questions about its ability to repay its federal loan.

The latest installment in the company‘s troubles broke Wednesday in the New York Times:

Solyndra, a Silicon Valley solar-panel maker that won half a billion dollars in federal aid to build a state-of-the-art robotic factory, plans to announce on Wednesday that it will shut down an older plant and lay off workers.

Just seven weeks ago, Solyndra opened Fab 2, a $733 million factory in Fremont, Calif., to make its high-tech solar panels. The new plant was supposed to be the first phase of a rapid expansion of the company.

Instead, Solyndra has decided to shutter the old plant and postpone plans to expand Fab 2, which was built with a $535 million federal loan guarantee.

A report by Michael Kanellos of GreenTech Media suggested that the news was held until after the election to avoid embarrassing the administration.

Katie Fehrenbacher of GigaOM was even more skeptical:

Back in May, I raised the question of whether or not Solyndra’s $535 million loan guarantee from the Department of Energy — the DOE’s first and flagship loan guarantee — was a mistake. Despite the fact that Solyndra had raised around a billion dollars of its own private equity, I pointed out the company has one of the highest manufacturing costs of its thin-film solar peers. The economics just didn’t seem to work.

Since I wrote that article, Solyndra ended up ditching its IPO plans, and its founding CEO stepped down. Now this morning, the company announced it will close its first factory and will lay off dozens of workers. Wow. Things could not have turned much worse for the company the DOE held up as an example of a stimulus package that could create green jobs and a good candidate for its long-delayed loan guarantee program.

Fehrenbacher reminds us of the great symbolism of the factory’s 2009 groundbreaking, which attracted the governor, US energy secretary and a video keynote by the vice president. She leaves out that the president himself showed up to tour the factory last May.

Like Fehrenbacher, a GTM analyst quoted by the Oakland Trib thinks the investment was questionable to begin with:

"Solyndra is facing the heat," said Shyam Mehta, an analyst with GTM Research, which tracks alternative-energy markets. "Many higher-cost solar manufacturers are doing well. It's alarming for Solyndra to be cutting back when others are expanding."
…
"The company's problems raise questions about the federal government's wisdom in giving $535 million to a company with an unproven technology," Mehta said.

As with any tech company, the loan was risky — the difference is the magnitude of the risk. It’s rare that a single private investor puts up more than $50 million at once, and only someone who can print money will put up a half billion on a risky investment.

The chances are not looking good for the government — let alone private investors — to be made whole on their investment. As Kanellos concluded:

What happens next? We know what the solar industry thinks. Solyndra will collapse is the general opinion. But it still has a single factory. In some long-shot scenario, something good could, maybe, one day, come out of this.

If the deal fails, the US government owns an unprofitable solar factory and some industrial land in a high-tax state.

It’s clear that the government did inadequate due diligence on a loan guarantee that had a minimal upside and a huge downside. Apparently the assumption was that $1 billion in private money couldn’t be wrong. Has anyone heard of “escalation of commitment”? (Perhaps if they had more MBAs or psych majors they would have.)

What’s the answer? Writing in July, a professor of environmental entrepreneurship argued the answer is avoiding favoring specific individual companies:

The best investments will not come from backing individual companies but come from reshaping the competitive landscape—creating the opportunities for new business models and markets that enable the unique strengths of green technologies to emerge and develop. Consistent regulatory policies and open technology platforms will benefit all ventures and foster collective action to shape emerging market opportunities.

Meanwhile, the Heritage Foundation concludes that all the alternative energy industries are failing despite generous subsidies — and the answer is less, not more subsidies.

NOW they tell us!

Earlier this month, GE CEO Jeff Immelt expressed disappointment that the Chinese government is not all that interested in buying Western imports. As Gomer Pyle would say, “surprise, surprise, surprise!”

One man who’s not surprised is former LA Times China correspondent Jim Mann. Since leaving journalism, Mann seems to have made a career of writing books telling Americans that what they see in China is just their imagination.

Writing in The New Republic, Mann shreds the naïveté represented by Immelt and all the others business moguls that hoped that China would some day import in proportion to their exports:

Over the past two decades, the business community has been more upbeat about China than any other constituency in American society. Business leaders led the charge in loosening trade restrictions with China. …

However, over the past year or two, and to their evident surprise, their earlier assurances were revealed to have gotten things exactly backward. Immelt was merely the latest representative of corporate America to ring the alarm about restrictions on business operations in China, taking his cue from the leaders of Google and other major companies. …

American and European companies have vied for centuries, through all of China's upheavals, to dominate what used to be called "the China market." Now, increasingly, China wants to keep that market for itself.

The entire blog entry is worth reading in its entirety.

While I agree with Mann, I’m not clear why business leaders are surprised. China’s industrial policy is utterly predictable who studied US/Japan or US/Korea trade relations over the past 50 years — let alone anyone who understands the brief interruption in China’s role as the dominant Middle Kingdom.

I began my academic career studying the Japanese technology industries. After researching Japanese non-tariff trade barriers — particularly Mark Mason’s account of Texas Instruments and Marie Anchordoguy’s report of what happened to IBM — more than a decade ago I was completely puzzled as to why American and Western executives thought they would ever establish a large and durable market position in China. My two colleagues, Ken Kramer and Jason Dedrick of UCI, also wrote about this sentiment 9 years ago.

Mann himself also captured this in his book Beijing Jeep, chronicling how Jeep transferred technology to Chinese manufacturers to allow them to improve their export capabilities while providing Jeep (at best) temporary access to the Chinese market.

At the risk of mixing my metaphors even more: “When will they ever learn? When will they ever learn?"

Everyone wants to be Silicon Valley

For decades, politicians and business leaders from the rest of the world have come to Silicon Valley, wanting to create the next Silicon Valley.

From research of people like Martin Kenney, Anna-Lee Saxenian, Tim Sturgeon and others know the relevant list of preconditions for SV"s success.

Technology from universities, good industry-university relations (as in the Terman era), entrepreneurial culture, entrepreneurial infrastructure and last (but not least) venture capital. Oft-copied, these explanations for SV’s success might be necessary, but they do not appear to be sufficient to create a high-tech cluster.

And of course the other requirement for a cluster is to, well, be clustered. Spillovers happen in a cluster due to VCs visiting companies, universities talking to companies, and workers changing jobs — limiting the size of a cluster to (roughly) a radius of a one hour commute.

Meanwhile, since the end of the dot-bomb era, Silicon Valley has struggling with its raison d’étre, with many assuming that its salvation will be “clean” technologies such as renewable energy, energy efficiency and better life cycle consideration of material use and waste.
At the InterSolar trade show Wednesday, I picked up a renewable energy industry trade magazine enerG, which devoted its closing column to adapting a speech by Obam’s commerce secretary, former Washington Governor Gary Locke:

U.S. Needs to Become the Silicon Valley of Renewable Energy
…
For the Record is an edited excerpt of a speech … in Washington D.C. in February.

Two observations about the dubious economic logic of this article:

• First, an entire country cannot be a regional cluster. Even in biotech — perhaps the most fragmented of America’s high tech clusters — leadership is concentrated in the Boston and San Francisco regions, with San Diego a distant third.
• Secondly, if some place is going to be the Silicon Valley of renewable energy, why not Silicon Valley? That’s certainly what local entrepreneurs have had in mind for the past three (or even five) years.

However, to be fair to Secretary Locke, the original speech only warned against a future in which “Shanghai became the Silicon Valley of clean energy.” So the confused clusterology of the headline is due to the magazine editors, not a politician and lawyer.

FCC should fold its losing hand

The proponents of “net neutrality” have done a great job of convincing the world that future of mankind — or at least USA’s national competitiveness — depends on the ability of the Federal government to tell broadband carriers what they can or cannot do to manage their networks.

Thus, the media has been predicting catastrophe for net neutrality after the unanimous decision Tuesday by the D.C. Court of of Appeals on Comcast v. FCC, in which the reversed the FCC order that Comcast not block BitTorrent. (Unlike most, CNET managed to find two sides to the story.)

The problem for the FCC is that there was no legal basis for its action. The 3-0 Appeals ruling concluded:

Yet notwithstanding the “difficult regulatory problem of rapid technological change” posed by the communications industry, “the allowance of wide latitude in the exercise of delegated powers is not the equivalent of untrammeled freedom to regulate activities over which the statute fails to confer . . . Commission authority.” NARUC II, 533 F.2d at 618 (internal quotation marks and footnote omitted). Because the Commission has failed to tie its assertion of ancillary authority over Comcast’s Internet service to any “statutorily mandated responsibility,” Am. Library, 406 F.3d at 692, we grant the petition for review and vacate the Order.

Translation: the FCC gave a laundry list of reasons why it had authority to regulate Internet carriers, but in no cases did Congress ever give them statutory authority.

This was, in fact, predicted by the dissent in the sharply divided 3-2 FCC vote in August to go after Comcast. As CNET reported at the time:

In an unusually pointed dissent, Commissioner Robert McDowell, a Republican, said the FCC's ruling was unlawful and the lack of legal authority "is sure to doom this order on appeal." …

The is the FCC's "journey into the realm of the unknowable," McDowell said, saying that the outcome "may result in slower online speeds" for most Americans.

The problem is, despite all the lawyers involved, the FCC majority and its allies are pursuing an end-justifies-the-means strategy: it is right that the government regulate carriage of data over broadband carriers, no matter what the law says.

The FCC is now considering two options around the ruling. One is to appeal to the Supreme Court, while another is to reclassify broadband as a different type of service and try again. Both could end up with the same result.

To an outsider, the answer is obvious: if the law says the FCC doesn’t have authority over Internet services, then the FCC should stop trying to weasel out of the law and instead go through the Constitutional process to change the law.

After C-SPAN and the other media cover the Congressional hearings, our elected representatives will come up with something that considers all the competing perspectives. That’s what a democracy is about, not having an unelected regulatory agency interpret, stretch or ignore the law as it sees fit. (The solution won’t be perfect, but then neither will any FCC order).

In the meantime, the market will do what it usually does: solve problems on its own, with both competitors and the real threat of regulation prevent excesses. As the Merc quoted one trade group leader:

"The idea that this ruling will invite bad behavior is nonsense," said Bruce Mehlman, a former assistant secretary of commerce for technology policy during the Bush administration and now co-chair of the Internet Innovation Alliance. "Companies need to manage their networks to handle high volumes of traffic and bona fide threats out there, but we're simply not going to see blocking or degrading of disfavored sites. It would be bad business and it would beg for regulatory overkill."

There was similar sturm und drang over mobile carriers blocking VoIP services such as Skype. But in the face of overwhelming consumer demand, the carriers have given up their futile fight against VoIP.

One radio account said that a possible outcome of the Comcast decision is variable-rate pricing, in which home broadband users pay more for faster or greater data transfer. What’s wrong with that? That’s the only thing that’s going to save 3G data services from negative externalities, and home broadband — or at least the shared bus cable TV internet — will similarly collapse in download of multi-gigabyte HD movies.

New York adopts an industrial policy

I didn’t get why the NY attorney general is suing Intel, other than it’s the same publicity-seeking path his predecessor to get elected governor. Antitrust enforcement is a Federal issue, whether for the US DoJ/FTC/FCC or the Eurocrats in Brussels.

However, blogger Geoffrey Manne suggests that NY has an interest in hurting Intel and helping AMD, given that AMD is talking about building a $3 billion plan in upstate New York. For some reason, I thought the idea of Federalism and the Constitution was to prevent inter-state trade wars, but I guess both have gone out the window along with original intent.

Like most lawyer-politicians, the AG’s understanding of business and economics is dubious at best. FT’s Lex aptly summarized the likely effect:

Share prices for Intel and competitor Advanced Micro Devices barely reacted. The problem for AMD, which is set to face Intel in a Delaware courtroom in March, is that legal victories offer only consolation, and perhaps the chance of a pay-out to help pay down debt. The period when the company had a clear technological advantage and opportunity to make a dent in Intel’s market share of about 70 per cent has passed.
…
[E]ven if, as alleged, Intel is shown to have forced customers to guarantee market share levels in return for cash rebates, the structure of the industry will probably remain unchanged.

Net neutrality to preserve the status quo

Holman Jenkins is right. The big industry money fighting to get the FCC to impose net neutrality comes from powerful incumbents who want to preserve the status quo:

Google has been one of the most influential net-neut proponents. It recently secreted its top lobbyist, Andrew McLaughlin, into a White House job as deputy head of telecom policy. But Google also understands, as its chief Eric Schmidt recently put it, "It's very, very important that the telecom operators have enough capital to continue the build-outs."

Google's trick will be to lobby for the optimum of Internet socialism—"tiered" pricing may be OK, in which some consumers pay extra for a bigger pipe. But usage-based pricing that would give consumers a reason to think twice before clicking on a Google-sponsored ad? It would be the end of Google's business model.

And Google has allies. The greatest fear of Microsoft, Amazon, eBay and Yahoo is having to plumb their deep pockets and offer competing payments to broadband carriers to speed their bits to consumers. They much prefer spending their money to sprinkle server farms around the globe, assuring fast, reliable access for their customers in a way that no newcomer can easily replicate.

What if some startup Google sought to achieve the same goal by outsourcing its data management to the telecos, say, by mounting servers in their premises to help deliver Web applications more quickly? This would be a win-win for both parties. Data that travels within a carrier's system is cheaper to deliver than data that must be handed off between two or more carriers.

I often disagree with Jenkins, but today I think he’s right on the money. The successful dot-com incumbents are quite happy with the current Internet distribution and cost structure, and want to avoid any change that might threaten their power of incumbency.

Another point he alludes to only in passing: the dot-com winners don’t want to change an allocation of spoils between their high margin, highly scalable (network effects) business to give more to the capital-intensive operators that supply the essential last mile infrastructure they must have.

Both GOOG and T have gross margins of 60%. However, Google’s operating profit (EBIT) is 26.7%; AT&T (due to high SG&A plus depreciation) has an operating profit ratio of 18.6% and Verizon a mere 11.9%.

Latest in a series of outsourced economic policy criticism as a cost-cutting move during difficult times.

iPhone in Korea

The iPhone has been approved for sale in Korea by the local operators. KT is known to be interested, while SK and LG are not clear.

The WSJ account makes it sound like a temporary suspension of protectionist barriers to protect Samsung and LG:

[In allowing the sale of the iPhone,] The Korea Communications Commission made an exception to a rule that requires cellphones sold in the country to use domestic technology for location-based services such as GPS. The commission's action comes after months of consumer pressure. South Korea has long stood out as one of the few technically advanced countries that doesn't allow the iPhone.
…
The iPhone is likely to shake up price competition for cellphones in South Korea. The market is dominated by domestic producers Samsung Electronics Co. and LG Electronics Co. Both companies typically report that average prices for phones sold in South Korea are about double the average prices they get outside the country.
…
South Korea's telecom regulators have long used technical rules to protect its domestic industry, which now has some of the world's most advanced manufacturers and service providers.

In general, Korea continues to use the protectionist measures that Japan was forced to abandon decades ago when it achieved per capita GDP parity with the West.

Now that they’re #2 and #3 in the world, however, it doesn’t seem as though the Korean mobile phone vendors need any more protection. Or will the trade barriers remain in place until one of them (presumably Samsung) passes Nokia? Think of the lesson that would teach the Chinese about telecommunications trade barriers.

Bill Joy for CTO-in-Chief

Al Gore’s boss, Kleiner Perkins VC John Doerr, is recommending Bill Joy as Barack Obama’s first CTO. I think it’s a brilliant choice: California gave Obama so many votes and so much money, but as a novice senator from the Midwest, he knows almost nothing about the place.

Joy has the maturity, the contacts and credibility to serve in the role, and no obvious axe to grind. He also has tremendous name recognition, and since he’s not currently in a startup, the opportunity cost is low. (Perhaps neo-renaissance man Elon Musk can run in 10 years when he has all his business and personal commitments straightened out.) He also actually has done the tough to work to make something of value, unlike friend-of-Barack Marc Andreessen.

(Valleywag reports that: Obama has appointed a fellow Harvard Law grad to be the lead technologist on his transition team. Not a good sign for the new administration giving policy jobs to those people in life who have actually created value, rather than merely redistributing it.)

Doerr has a number of technology policy recommendations, some fairly obvious. It’s a given that Obama will invest a lot in renewable energy. Doerr is also hoping that the government will promote more engineering graduates

I would create a specific program to double the number of engineers we graduate in the U.S. from 30,000 a year to 60,000.

Some of the engineering shortage is a supply issue, kids who give up on math too early. But it’s also a demand issue — young people are becoming lawyers because it pays better. (Something no Democrat administration in our lifetime is going to change).

So if Doerr wants more engineers, why doesn’t he pay them more? He‘s done pretty well by the free market, so perhaps he could send some market signals to encourage more supply.

Perhaps Doerr could get fellow loyalist Eric Schmidt to also put in a good word for Joy, cofounder of the (now-flagging) company that really launched his career. The visibility of an engineer-in-chief could make the profession cool again, without Doerr (or Schmidt) having to part with their hard-won billions.

Bye bye Frontline

Yesterday I noticed an interesting tidbit regarding the US 700 MHz spectrum auctions that begins on Jan. 24. This is the largest auction of land mobile spectrum in more than a decade, and the one where Google has pressed (with some success) to get open access provisions instituted.

Deposits (of $130-280 million) were due last week. Frontline Wireless, which last month said it was going to bid, did not place a deposit. In fact, IDG reports, it’s gone out of business:

Frontline spokeswoman Mary Greczyn said Wednesday the company would have no further comment beyond saying Frontline is "closed for business at this time."

Frontline was always a political animal, with Reed Hunt (Clinton’s activist FCC chairman) as frontman and backing from James Barksdale (FedEx, McCaw, Netscape) and John Doerr (Kleiner Perkins partner), the former head of NTIA and ex-director Louis Freeh.

So was it because they couldn’t raise money — a sure sign (if you have KPCB partner on your board) that the business model made no sense. Or was this always just a stalking horse pushing open access — a credible threat — to force the big telcos to worry about open access?

Frontline’s plan was always to bid on the spectrum which had a mandate to help build public safety communications — a sure way to reduce the price of the spectrum, both because of the costs associated with meeting that commitment, and also by eliminating bidders who wanted unrestricted spectrum. Of course, this would be a cross-subsidy from the Feds (getting less money for spectrum) to misc state and local public safety agencies (who get a big investment in their communications by the bidder).

Now that Frontline is gone, there’s a worry that no one will bid on the spectrum. Or a firm could buy the spectrum cheap, and then walk away if it doesn’t like the terms.

To me, this is yet another example of why the US fails when it attempts to emulate the statist industrial policy of other countries. Our policies should encourage (and protect) competition, to reward efficiency and allocate resources based on market demand. If the government wants to do something, it should pay for it as a line item rather than mandating that private firms do it for them.

Jobs solves one EU problem

As I’ve noted, French EU industrial policy is about picking on winners and cutting them down to size, so Apple’s iTunes Store was naturally in their sights.

Last year, Apple’s most visible EU regulatory problem was the switching costs created by its end-to-end control of the FairPlay DRM, and regulators’ attempts to force it to waive the competitive advantage to help latecomers. But the shift by Apple (and others) to DRM-free seems to be solving that problem.

Today Apple settled an older problem, about different prices within the EU between the Eurozone and not. Specifically, the gap is £0.79 UK and €0.99 in most of Europe, which at current exchange rates (€100 = £74.9) penalizes Britons by about £0.05. The AP claims it’s £0.09 but reporters are rarely good at math — this is probably an obsolete exchange rate.

Here’s what Apple said:

LONDON—January 9, 2008—Apple® today announced that within six months it will lower the prices it charges for music on its UK iTunes® Store to match the already standardized pricing on iTunes across Europe in Austria, Belgium, Denmark, Germany, Finland, France, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Sweden, Switzerland and Spain. Apple currently must pay some record labels more to distribute their music in the UK than it pays them to distribute the same music elsewhere in Europe. Apple will reconsider its continuing relationship in the UK with any record label that does not lower its wholesale prices in the UK to the pan-European level within six months.

“This is an important step towards a pan-European marketplace for music,” said Steve Jobs, Apple’s CEO. “We hope every major record label will take a pan-European view of pricing.”

The complaints of course came from British consumers who felt cheated. If the pound fell and Britons got better prices, would they complain too? Information goods lend themselves more to cross-border arbitrage of exchange rates than do cars or houses.

In addition to reducing intra-European transaction costs, a major goal of the Euro was to encourage crossborder price competition. I don’t quite get why Britons (who chose to keep another currency) are entitled to price parity with the Eurozone.

However, the fragmented nature of IP rights across Europe — with different copyrights, licensors, terms, etc. aligned to national boundaries — still remains. My news archives show concerns about this being the subject of a WSJ story back on Nov. 10, 2003. And the EC today acknowledged there are problems that remain beyond its ability to pressure Apple:

The Commission’s antitrust proceedings further allowed the Commission to clarify that there is no agreement between Apple and the major record companies regarding how the iTunes store is organised in Europe. Rather, the structure of the iTunes store is chosen by Apple to take into account the country-specific aspects of copyright laws.

The Commission is very much in favour of solutions which would allow consumers to buy off the iTunes' online store without restrictions, but it is aware that some record companies, publishers and collecting societies still apply licensing practices which can make it difficult for iTunes to operate stores accessible for a European consumer anywhere in the EU.

Frankly, (nominally) cheating British consumers 4p a song is small potatoes in both the context of the industry and EU industrial policy. The bigger unanswered issue is what will the recording industry’s business model be a decade from now? Particularly since the legal download business is anemic in Europe compared to the US.

Incentives for innovation

This week my friend Kevin Short (former guest lecturer on drug discovery in my technology strategy class) introduced me to several healthcare blogs. The most interesting was “In the Pipeline” (referring to drugs under development) by Derek Lowe, a Ph.D. chemist who has worked for various pharma companies. Its average posts are as substantial (if not more so) than my longer posts, and it has the sort of dry humor that I enjoy.

There was a lot to enjoy. As an academic social scientist, I liked “Run! Anthropologists!” about the (decade-old) practice of hiring anthropologists to study corporate culture. As a former journalist, I relished how he skewers bad gonzo journalism in a visit by a wanna-be Hunter Thompson to the Genentech plant in Vacaville (about 80 miles north of Silicon Valley). Gonzo journalism is about 30 years out of date: at least imitating Hemingway (rather than Thompson) has some lasting value.

But the article most relevant to this audience bears on a core theme of this blog, the incentives for innovation. As someone whose business card says “innovation and entrepreneurship,” I think there is no more fundamental issue than who and why does someone develop important new innovations?

In the posting, Dr. Lowe talks about European Union efforts to stimulate more drug innovation. He quotes from a speech by Günter Verheugen, a commission official looking at pharmaceutical industry policy, acknowledging (very obliquely) the conflicting goals of containing prices and providing incentives for innovation.

After he praises EC for considering providing more financial incentive for European drug discovery, Lowe wonders whether that’s the major effect, instead pointing to cultural differences:

Perhaps I think this way because I used to work for a European company, and now work in Cambridge (home of a zillion startups). But I've long thought that there's a different attitude to research and development in this country, a greater willingness to try odd ideas and to put money behind them. I'm not saying that you don't find innovation in Europe, because you certainly can. But I think that innovators have, on the average, an easier time getting funded and being taken seriously over here. It’s not a huge difference, but it's a steady one, and it's been compounding over time.

In classical political and economic theory, the two issues are inherently related — encouraging risk-taking either reflects (or is reflected in) economic policies. The problem with such neat theorizing are the counterfactuals.

In the past decade, California has become one of the most redistributionist states in the country, and yet remains probably the most risk-taking. Cambridge (Mass.) is located in an even more redistributionist state, one that more than 20 years ago was dubbed “Taxachusetts” and yet still has the best concentration of biomedical research universities in the country. So will entrepreneurs continue despite regulation and taxation? Is there a lag effect? Or are the universities so important that California will always beat out Nevada, Arizona (or Utah) in entrepreneurial formation?

So as with any policy question, advocates on each side can only guess what would happen with a policy change. Would more generous payment for European drugs encourage innovation, or would it require a sea change in work attitudes and risk taking to make something happen? And will it ever matter if the Wild East (of Chinese coastal regions) boasts both low wages and high rates of industry growth and entrepreneurial opportunity, or if India becomes the preferred Anglo-American outsourcing venue for more than just I.T.?

Technorati Tags: biotech, EU, IP policy, industrial policy

Embedded OS technonationalism

When I was beginning my doctoral studies in the mid-1990s,
the U.S. was still worrying about global competition between technological rivals like Japan and Europe. Among a certain crowd, everything was about economic competition within the “Triad,” Ken’ichi Omae’s term for the US, Japan and Europe. (Obviously before the rise of Korea’s per capita GDP and China’s trade surpluses).

A few American scholars even talked about “technonationalism,” normally in the context of Japanese industrial policy that was aimed at the US (and that we should emulate). (I was briefly part of this crowd, and published my first few papers in 1994-96 quoting some of this work, but never made any significant contributions.) This was both fueled by and fueled the Clinton Administration’s foreign policy doctrine that war was obsolete and economic competition was the wave of the future.

One of the biggest pre-Clinton proponents of such arguments was Laura Tyson, whose treatise Who’s Bashing Whom? earned her a ticket from Berkeley to chair President Clinton’s Council of Economics Advisors. After the White House gig, Tyson went back to Berkeley’s Haas School as dean and then moved on to become dean at London Business School before returning to Berkeley. (There’s no record of her covering any Sting songs or even Blondie songs after either the CEA or dean gigs). Meanwhile, the economist passed over for the White House job has become a bitter New York Times columnnist who no longer does serious research.

All of this being a long forward to an odd article from the SJ Mercury that I read Tuesday morning on the plane (out to Philadelphia) about Japanese industrial policy for automotive embedded operating systems. The Japanese government kicked in $8.4 million [check yen] to help fund a consortium of 10 Japanese firms to develop said OS. It includes the big three auto makers (Toyota, Nissan, Honda) and major electronics suppliers like Denso (which as Nippondenso began life as was a Toyota division) and Toshiba. The story of the Japan Automotive Software Platform (JasPar) was also written up Sunday in Yomiuri (one of the big Japanese dailies) and PC World.

The money is coming from the Ministry of Economy, Trade and Industry, née Ministry of International Trade and Industry, the famed tsûsanshô of Japan’s postwar economic miracle. Spending $8m on embedded car software seems like a far cry from MITI’s glory days.

In fact, Chalmers Johnson’s book on MITI and the Japanese Miracle was required reading for budding technonationalists (or for anyone else in comparitive political economy) in the early 1990s. Listening to Chal’s night school class in 1993-1994 (and the associated office hours) had more influence on my becoming an academic than anyone else.

The MITI of the 1950s and 1960s used trade restrictions to build up Japan’s infant industries. Mark Mason studied how MITi delayed the TI integrated circuit patent in Japan long enough for Japanese firms to develop their own semiconductor capabitilies without having to pay royalties. Marie Anchordoguy (the inspirtiaton for my earliest Japan research) did her Ph.D. thesis at Berkeley (before it became Haas) on how MITI built up Fujitsu and other Japanese mainframe makers, using liberal financing in the domestic market to enable Japanese firms to undercut the prices of the the superior IBM computers.

It’s not just the Japanese, since nowadays the French view of industrial policy (dirigisme) has become the norm at the EU: after one success in a perfect storm of market timing and technology opportunity (GSM), the EC has spent almost two decades in a futile attempt to recreate that storm. (Tuesday’s report implied the Europeans also have their own automobile software consortium but I couldn’t find it, only their trade association.) Presumably the Koreans and Chinese will follow with their own national consortia, and then the US Big 2½ automakers will scream to Washington that they need their own subsidies.

But I can’t figure out what the deal is with embedded operating systems — it seems such small potatoes. The Mercury newspaper article parroted the Japanese press release “A standardized OS across the industry could have some big economic benefits, making it easier to bring new automotive technology into multiple models and bring down costs.”

Standardization has such benefits, but that doesn’t mean the Japanese carmakers have to go build their own. They could standardize tomorrow on an off-the-shelf solution from Wind River or MontaVista and get the same benefits — unless of course “bring down costs” is a code phrase for “stop paying foreign royalties.”

Don’t want royalties? Embedded Linux (or BSD if you dislike compusory sharing) is already available off the shelf for any firm. Why is the government involved? Is it that METI has to put up seed money to get Japanese firms to share and work together?

As industrial policy goes, it’s much less interesting than something major like TD-SCDMA. I suppose government industrial policy for an embedded OS is like the old line about the talking dog — what’s interesting is that he talks, not what he says.

Instead of responding with more technonationalism, perhaps MontaVista (or even Wind River) could put together an international open source coalition based on open source technologies. Given the popularity of open source in Scandanavia, they might able to peel off Saab and Volvo, which (this week at least) remain American-owned. If they did, the Chinese firms could choose to leverage the GPL technology while free-riding off the toothless enforcement of compulsory sharing in China.

Technorati Tags: compulsory sharing, consortia, embedded Linux, EU, industrial policy, Japan