Archive for Europe
A book on World War II teaches a lesson for today on innovation. In Churchill and Orwell: The Fight for Freedom by Pulitzer-prize winning author Thomas E. Ricks (New York: Penguin, 2017), we learn about some of the reasons England struggled to defend itself effectively in dealing with Germany. A key problem discussed by Ricks was England’s poor state of preparation with inadequate machinery, feeble industrialization, weak supply chains, etc., that made it hard to fight a serious war and led to embarrassing disasters like the rapid loss of Singapore, their supposed fortress in southeast Asia. Close to home in Europe, Britain had a hard time just moving troops around — they often had to walk — and the Brits were amazed at how quickly their American cousins could mobilize when they came to the rescue. Why was England so poorly prepared?
England, as you will recall, was the birthplace of the Industrial Revolution, yet by the time of the War, they were awkwardly behind in many of the basic technologies they would need. How could this happen? Ricks comments are insightful:
Managed by family members more interested in reaping dividends than investing in new machinery and other gear, “British firms were unable to adopt modern, best-practice technology,” concluded business historian Alfred D. Chandler Jr. As a consequence, Britain’s brilliant university research generally did not make the transition into factories. Britain had led the first Industrial Revolution of coal and steam power, but generally sat out the “Second Industrial Revolution” of the late nineteenth and early twentieth centuries, built around oil, chemicals, metals, electricity, electronics, and light machinery, such as automobiles. By the end of the 1940s, it would have neither an empire nor an economy capable of competing with those of other major powers. As Correlli Barnett put it, the reality was that by the time World War II ended, the British “had already written the broad scenario for Britain’s postwar descent to the place of fifth in the free world as an industrial power, with manufacturing output only two fifths of West Germany’s.” Interestingly, Barnett was the keeper of the Churchill Archives at Cambridge University from 1977 to 1995. [Ricks, pp. 203-204]
Something similar happened in China, which once led the world in innovation and GDP, but from the Qing Dynasty until the late 20th Century, in part due to apathetic leaders unwilling to invest in or even open the doors to innovation and technology, China missed out on much of the Industrial Revolution. Only through massive reform and exerted effort in recent decades has China begun its return to a position of global leadership in innovation, IP creation, and economic growth.
In the paper industry, which I’ve been close to for many years, it’s clear that the American paper industry has largely fallen into the same trap that nearly cost Britain its freedom and did cost many lives unnecessarily. The American paper industry has largely failed to invest in new technology and relies heavily on antiquated paper machines and pulp mills that are decades behind what we have in Asia (China and Japan in particular). Their slower, less efficient machines and less efficient plantations put them at a distinct cost disadvantage. Instead of taking steps to compete better, the US industry too often tries to rely on protective legislation to raise tariffs on imported paper and make everyone in the nation pay much more for their paper than they should. The real problem is not Chinese competition, but American businessmen falling into the same pattern that nearly cost Britain the war: focusing on immediate profit and dividends while neglecting the future.
Each industry, whatever it is, needs to build for the future with investment in innovation and a willingness to boldly cope with the threats and opportunities of disruptive innovation. If your industry is dominated with leaders who feel like they can just milk their business as a cache cow with no need to invest in the future, that industry will fail.
The great challenge in innovation is not coming up with a discovery or great invention. The challenge is in making it stick, in nurturing it and growing it so that it spreads and changes the world. Numerous antibodies and barriers are ready to snuff out every great idea, even when it offers a solution that the world is clamoring for. The story of scurvy in the British Navy, as shared in Chapter 10 of Conquering Innovation Fatigue, illustrates this principle.
Scurvy cost the lives of thousands of sailors and soldiers around the world for centuries. For the British Navy, that disease was one of the greatest challenges it faced. On long voyages, 30% or more of the crew might die from scurvy. Through confusion and error among England’s educated elite regarding scurvy, misinformation about its cause and its cure would persist into the 20th century. However, there was credible medical information in the early 1600s pointing to citrus fruits as a key aid in preventing and curing the disease. [See Stephen R. Bown, SCURVY: How a Surgeon, a Mariner and a Gentleman Solved the Greatest Medical Mystery of the Age of Sail (New York: St. Martin’s Press, 2003).]
Physicians on land and at sea would later provide evidence in the mid-1700s that citrus or other fresh fruits and vegetables reduced the risk of scurvy, but this knowledge was not only ignored or resisted by those in the Navy, it was resisted by the mainstream European medical community who perpetrated a form of “strategy fatigue” by making a general understanding of the nature of disease their primary quest, being uninterested in “merely empirical” work aimed at curing a given disease. For example, the work in the 1730s of physician John Bachstrom in Holland pointing to fresh fruits and vegetables as the decisive cure for scurvy was dismissed by the medical community of his day, for he was “a mere empirick” in the eyes of his elite peers. [Kenneth J. Carpenter, The History of Scurvy and Vitamin C (Cambridge, UK: Cambridge University Press, 1988), pp. 44-45.]
The adoption of the innovation of citrus fruit in treating scurvy took more than compelling evidence. It took someone with powerful connections to champion the innovation. This man was the prominent Scottish physician, Sir Gilbert Blane, who was only 4 years old when a detailed study on the cure for scurvy was published by James Lind in 1753 – only to be ignored for decades. (To be accurate, the information from Lind and others was obscured by terrible confusion about physiology and disease, and continued to point to the dangers of various “airs” and climatic factors as key contributors to scurvy, obscuring the fact that it was a nutritional deficiency.) [See James Lind, A Treatise of the Scurvy. in Three Parts. Containing an Inquiry Into the Nature, Causes and Cure, of that Disease. Together with a Critical and Chronological View of What Has Been Published on the Subject, Edinburgh: Printed by Sands, Murray and Cochran for A Kincaid and A Donaldson. Portions of the original reproduced online by the James Lind Library. Also see Carpenter, op. cit., pp. 51-52.]
In London, Blane became the private physician to Lord Rodney and sailed with him to the West Indies in 1779. Blane’s efforts to keep sailors healthy were increasingly successful, and through his connections to Rodney and others naval leaders, Blane was able to give lectures to senior leaders and gain support for improved practices across the entire navy. Drawing upon past work and a further demonstration of his own, he would introduce compelling evidence to naval leaders that lime juice prevented scurvy, leading the Navy to adopt lime juice in its global operations beginning in 1795. [David Nash Ford, “Biographies: Sir Gilbert Blane (1749-1834),” Royal Berkshire History (Finchampstead, UK: Nash Ford Publishing, 2005).] For nearly two centuries, the British Navy had been closed to a safe, inexpensive innovation from outsiders that solved what may have been its most vexing and costly problem. The citrus “sales pitch” fell on deaf ears until someone with the right connections to senior management could deliver it. It’s a tragic lesson of the dangers of closed innovation, of organizational rigidity, of devaluing the work of innovators, of listening to the wrong voices, of “not invented here,” and the importance of delivering the story of an innovation to the right people, through those who have the right contacts. It doesn’t need to be this way, but it often is. Thousands of needless deaths over centuries: welcome to the fruits of innovation fatigue.
Incidentally, innovation-related lessons from scurvy continued long after 1795. Though citrus juice was adopted in the British Navy, the nature of the disease and the reason for the cure were still unknowns. Without careful efforts to preserve knowledge and best practices, erosion can quickly occur. Thus when the Royal Navy undertook arctic expeditions in the 19th century, the leaders took with them a belief that good hygiene, good morale, and regular exercise prevented scurvy. Not surprisingly, scurvy was a recurring problem in these voyages. In the 20th century, when Robert Scott trekked into the Antarctic, tainted canned food was believed to be a cause of scurvy. The connection between vitamin C and scurvy was not discovered until 1932. Likewise, we have seen many organizations lose best practices, healthy processes, and even technical capabilities and knowledge when efforts weren’t taken to preserve and pass on what they had.
(The above is based on an section of Conquering Innovation Fatigue, Chapter 10.)
On October 15, 2015, Appleton, Wisconsin’s Paper Industry International Hall of Fame will be inducting six people into the Hall of Fame. One of them is an innovator and leader from ancient China who can be considered as China’s answer to Gutenberg. Gutenberg is frequently honored in the West as one of the most important inventors ever for giving us the world’s first book printed with movable type, a remarkable achievement from around 1455. As with many inventions long thought to have had European origins, there’s a touch of Eastern flavor in this one, for Gutenberg’s Bible came 142 years after the world’s first mass-produced printed book made with movable type, the large Book of Farming (Nong Shu) from China, printed in 1313 by Wang Zhen.
Wang Zhen was a Chinese official who recognized that vast amounts of agricultural technology scattered across China needed to be preserved to help all of China reduce famine and be more productive. He took a Chinese invention, movable type, and improved upon it to make a practical way to print an entire book. He used carved wooden blocks for each character, and developed a sophisticated way of arranging them on two rotating tables to allow typesetters to quickly find needed characters to place them in his press. The Nong Shu was printed and preserved many notable inventions in China, including an early form of a blast furnace driven with a reciprocating piston attached to water works, something long that to be a later European invention.
Recognizing Wang Zhen for his important role in the advance of printing is a fitting step for the Hall of Fame, and I look forward to many more Asian inventors, scientists, and business leaders being recognized in the Hall of Fame in future years. The historical contributions of China in numerous fields have received far too little attention, and I’m delighted to see folks in Appleton taking the lead in rectifying this problem. Kudos to the Paper Industry International Hall of Fame!
Abraham Lincoln said that the patent system “added the fuel of interest to the fires of genius.” Today the fires of genius and the fire of innovation itself is getting doused with something less helpful than fuel. These fires are being cooled and, in some cases, extinguished with harsh attacks on the IP rights that once enabled and motivated lone inventors and small businesses to take the fruits of their genius to the market.
The owners of small businesses, the people who generate most of the innovation and business growth in the United States have good reason to be worried. Their ability to attract funding through valuable intellectual property is being compromised. Their ability to protect their products and innovations from the power of corporate giants is being whittled away. This has come from many quarters, but there is a widespread anti-patent movement driven by politics and misinformation. It’s the bitter fruit of a bitter anti-property rights movement that exaggerates the threat of a few bad actors to justify widespread weakening of property rights in ways that will hurt the economy and our society for years to come.
We have seen a recent series of Supreme Court cases that have made it much harder to obtain patents and enforce them. We have seen massive changes in US patent law that make it easier to invalidate patents after they are granted and make it harder and more costly to stop infringers if your patent survives. Now the bogeyman of “patent trolls” is held up as a threat to America that requires more sweeping “patent reform” to make it even harder to enforce a patent, and it looks like both parties are united in a quest to do “something big” to shake up the IP rights that helped drive the American economy for so many decades. Corporate giants benefit from this reform as it clears away the annoyance of other people’s IP rights standing in the way of their marketing muscle. But the economy as a whole and the rights of many are hurt in this process this amplifies innovation fatigue .
Several recent articles highlight just how serious the problem has become. Louis Carbonneau in “Toxic Asset: The Gradual Demise of the American Patent” (IPWatchdog.com, December 10, 2014), surveys the radical changes in the past two or three years:
On the judicial front, in 2014 we saw no fewer than 5 Supreme Court decisions going against patent holders on the various subjects of obviousness (a key test for patent validity), what constitutes “abstract ideas” (which now undergo a more stringent test for patentability), business method patentability, indefiniteness (how you construe claims), reasonable royalty (how you calculate damages), willful infringement (how you punish the “bad actors”) and fee shifting (making losers pay for winners legal fees). All of these decisions have collectively made it harder for patent owners to: i) maintain the validity of duly issued patents (previously presumed by law), ii) pursue infringement claims, ii) prove damages (let alone treble damages), iv) have open discussions with potential infringers prior to litigating, and have left the unsuccessful patent owner at risks of paying millions in legal fees to the other side if the judges so decides.
Parallel to judicial reform at the federal courts, recent US patent reform with the American Invent Act (AIA) introduced a new post grant review mechanism called Inter Partes Review (IPR) which allows a party to challenge the validity of any issued patent before the Patent Trial & Appeals Board (PTAB). Strangely, despite the PTAB being an emanation of the same USPTO that delivered all these patents in the first place, there is no longer a presumption of validity before the PTAB for the patents being challenged while other rules make it easier to invalidate patents based on prior art.
Finally, on the political front, in 2013 the US House of Reps. passed the Goodlatte bill, which would erode rights conveyed to all patent holders despite being primarily directed at NPEs. It is now expected that the new Republican led Senate will revive the bill -currently on hold- in early 2015 and, with a rare showing of bipartisanship from the White House, it is expected to be signed into law. At the same time, 27 US States have passed or are in the process of passing laws that make it harder for people to assert the patents they own.
Carbonneau goes on to explain that in recent Federal Circuit cases, patent owners are being crushed, and in Inter Partes Review (IPR) cases before the USPTO, nearly 80% of the owners of challenged patents are being told by the USPTO that their patents are not valid over the prior art that the USPTO itself supposedly considered before granting the patent in the first place. Carbonneau puts it rather wryly:
The most interesting statistics come from the PTAB [the USPTO’s Patent Trial and Appeal Board, which processes IPR cases] because it only focuses on validity issues based on prior art; the very same prior art patent examiners are supposed to have found and analyze prior to issuing a patent. Since patents going through IPRs are usually the same ones that being litigated, you would assume that owners did a lot of due diligence before investing in a costly patent lawsuit. Well, the PTAB is declaring 77.5% of reviewed patents invalid! And this is not limited to “abstract” software; patents related to biotech and pharmaceuticals, medical and mechanical devices, are being invalidated at an even higher rate! Remember, this is an offspring of the very same agency that inventors paid thousands of dollars in the first place to review applications and issue their patents. Now, after having to pay a quarter to a half million dollars in legal fees (average cost of an IPR procedure for a patent holder), the same agency is telling patentees nearly 80% of the time: “Very sorry we made a mistake; we would not have allowed your application had we looked more carefully for existing prior art. And no, there is no refund available.”
Personally, I cannot think of any industry that could survive more than a month with a nearly 80% defective rate, let alone by forcing you to spend a fortune for the “privilege” to confirm that indeed your title was invalid in the first place! Only a government can come up with such a broken system and get away with it.
The impact of these anti-patent efforts has been a surprisingly sudden break from the trend of increasing IP litigation, with litigation in 2014 down about 13% from the previous year according to a new 2015 PwC report on patent litigation. The problem of explosively increasing patent litigation, a common excuse to justify the slashing of patent rights, is not supported by the data.
Richard Lloyd, writing for the IAM Blog, draws this observation from the PwC report:
Of these three classes [of patent litigants considered], NPE [non-practicing entity] companies have been successful 31% of the time in patent cases brought since 1995; this compares with a success rate for universities and non-profits of 48% and a lowly 18% for individual inventors. Individual patent owners also do far worse with damages pay-outs, getting a median award of $3 million compared with $11.5 million for company NPEs and $16.2 million for universities/non-profits.
There could be many reasons for individual inventors doing relatively badly. Although the PWC study doesn’t provide any, it’s easy to speculate that small inventors may have lower average quality patents to begin with, while they probably don’t have the same kind of litigation savvy as other NPEs and are much less likely to have access to the same kind of litigation expertise that larger, better funded patent owners can turn to.
But what PWC’s numbers also strongly suggest is that the US patent litigation system is strongly stacked against small, patent owning entities. Bearing this in mind, it is worrying that the main packages of reform proposed in the House of Representatives (the Innovation Act) and the Senate (the PATENT Act) are only going to penalise them further.
Lloyd notes that potential irony now that many lone inventors, recognizing that they have little chance of winning and have almost no chance of affording the punitive legal bills they may face if they sue and lose, may be more likely to turn to NPEs (“patent trolls”) for help as the most practical way to realize any benefit from their work.
There is a need to rebuild an innovation climate in the United States, starting with educating our leaders about the need for IP rights and the value of patents. If we don’t teach this lesson from within, it will eventually be taught rather loudly from without, for Europe and China are both moving to strengthen IP rights and strengthen IP enforcement. Europe’s Unitary Patent system could be a boon to IP there, though much remains to be seen, but the changes in China are strong and dramatic. That nation has gone from no patents and no IP system in the early 1980s to the world’s biggest source of IP generation and IP litigation, with many changes steadily strengthening the nation’s IP system. There is a long ways to go for China still and there have been some setbacks, but at current rates we can see China becoming a leading source of global innovation while the US loses its lead.
Will the flames of innovation be largely quenched in that nation? Much depends on what we do with IP rights now, the rights that will shape our culture and economy for decades to come. May the fires of genius be encouraged with something other than the cold water Congress and Courts have been sloshing.
A small start-up company fighting one of the great giants of all time: it’s a classic story of David vs. Goliath, or in this case, David vs. Googleliath (a.k.a. VSL vs. Google).
Many small companies have claimed that Google misappropriated trade secrets or other IP, but rarely has Google graciously (and accidentally) cooperated in providing smoking-gun evidence the way they apparently did for Vedanti Systems, Ltd. (VSL). In this case, they allegedly left sticky notes on VSL’s trade secret materials showing their questionable intentions to take Vedanti’s technology. If VSL prevails against this giant, it may be more a case of Googleliath falling on its own sword than David being great with a sling.
VSL and their partners are now suing Googleliath for infringement of patents and theft of trade secrets in two courts. The suits are against Google (here also known as “Googleliath”) and their subsidiairies, YouTube and On2 Technologies. London-based Vedanti Systems Limited and their U.S.-based parent, VSL Communications, Inc., have turned to Max Sound for help in enforcing IP rights. The patent suit was filed in U.S. District Court for the District of Delaware, while the trade secret suit was filed in Superior Court of California, County of Santa Clara.
The complaints claim that Google executives met with Vedanti Systems in 2010 to discuss the possibility of acquiring Vedanti’s patented digital video streaming techniques and other trade secrets. Vedanti’s compression technology for streaming audio and video files is far superior to what Google had, Google’s own standards for streaming video t the time led to “jittery, low-quality video and sound for large-sized video files,” according to the patent complaint.
As part of the talks with VSL, Google had access to trade secrets such as VSL’s proprietary codec for encoding and decoding a digital data stream. That codex has proprietary techniques for “key frame positioning, slicing and analyzing pixel selection of video content to significantly reduce the volume of digital video files, while minimizing any resulting loss of video quality.”
Shortly after the negotiations began, Google allegedly began implementing VSL technology into its WebM/VP8 video codec, applying what they had learned from VSL but not letting VSL know. The WebM/VP8 video codec is extremely important for Google. It is used in many of their services and websites including YouTube.com, Google TV, the Android operating system, and Chrome web browser. They had inferior technology, but by allegedly stealing Vedanti’s, they were able to quickly advance their business at virtually no cost.
There’s just two pesky little problems for Google:
1. Vedanti has patents for its technology and is not afraid to sue. Now you might see why Google seems to really hate software patents (rather, other people’s software patents). They have been a leading force in some of the patent reform measures and related steps that have made protecting IP rights harder than ever for little guys like Vedanti. This giant, with its easy access to the White House and many other influencers, has also been an important voice against software patents, and may have helped influence popular opinion and the courts into recent devastating attacks on software patents. But Vedanti’s patents are still alive for now, so Google has cause for concern.
2. Google seems to have assisted VSL’s case by returning VSL’s trade secret materials with tell-tale sticky notes all over them showing their intent. Huh? This is really an amazing part of this story.
When the VSL Google talks ended, VSL demanded the return of its files. The returned documents were covered with incriminating Post-it notes that had apparently been left behind by Google employees. Attorney Adam Levitt claims that the notes said, among other things, that Google might possibly be infringing VSL’s then-pending patent and that Google should “keep an eye” on VSL’s technology and sweep it into a Google patent. In addition, notes warned Google engineers not to be caught “digging deep” and to “close eyes to existing IP.”
The complaint alleges that Google began to amend its preexisting patent applications and file new applications using VSL’s technology. Then in early 2012, VSL noticed that there were significant improvements to the video quality of Google’s Android operating system as well as other Google software. In June, the staff at VSL analyzed Google’s publicly available code only to discover that the code contained VSL trade secrets. Levitt asserts that the “Defendants’ theft of VSL’s trade secrets pervades virtually every website and product offered by defendants.”
“The use of new technology by established companies should be based on original creation and innovation,” said Adam Levitt, head of Grant & Eisenhofer’s Consumer Protection practice, who is representing the plaintiffs. “Vedanti Systems created groundbreaking digital video technology — technology that has forever changed the way that video content is streamed and displayed over the Internet.”
The lawsuits allege that Google willfully infringed Vedanti Systems’ patent and did so deliberately and knowingly, while recognizing the serious shortcomings of their own video streaming capabilities prior to the infusion of stolen IP.
Whether the suit will succeed or not remains to be seen, but I find Google’s lapse in leaving sticky notes on the borrowed materials to be rather hilarious, if it is true. One thing is for sure: If Vedanti’s allegations are factual, their chances of seeing some degree of justice are vastly greater by virtue of having a patent than if they did not. Software patents are essential for protecting innovations in the hugely important arena of information technology. This is the Knowledge Economy, folks, not the Iron Age. Economic growth and progress is more likely to come from advanced software and IT innovations than from hammering out better cogs and gears, and we need an IP system that understands this. Most judges and politicians ranting against software patents or patents in general do not understand this. Recent ruling that make many software innovations not even eligible for patents show that we have judges and influencers very ignorant of the physical nature of information and computer systems. Innovations like those of Vedenati are not tantamount to mere abstraction and mental exercises. They should have just as much right to be considered for a patent (provided they are novel, nonobvious, and useful) as any tool wielded by or widget hammered out by an innovative blacksmith.
Software patents matter, and they are vitally important for the best innovators of our day if they are to stand against the anti-patent giants that want anything but a level playing field. VSL vs. Google, or David vs. Googleliath, is a compelling reminder of that.
VSL’s patents in Europe are already causing pain for Google. Here is an excerpt from “Court Seizes Google’s Infringing Android Devices in Germany at IFA,” Stockhouse.com, Sept. 11, 2014:
SANTA MONICA, CA–(Marketwired – September 11, 2014) – VSL Communications, creators of Optimized Data Transmission technology and Max Sound Corporation (OTCQB: MAXD) (MAXD) creators of MAX-D HD Audio solutions, have been granted multiple preliminary injunctions from the District Court Berlin against OEM’s (Original Equipment Manufacturers) to stop the sale of certain Google Android devices in the Federal Republic of Germany at the Premier show IFA in Berlin (Internationale Funkausstellung, http://www.ifa-berlin.de/en), the world’s leading fair for Consumer Electronics and Home Appliances).
Max Sound, under agreement with VSL Communications, is enforcing intellectual property rights on VSL’s behalf and has obtained preliminary injunctions against Shenzhen KTC Technology Co. Ltd and Pact Informatique S.A., France. German Customs authorities further inspected several other exhibitors of smartphones and tablet PC’s with Android operating system. Shenzhen KTC Technology Co. Ltd. is one of the largest Chinese electronics groups operating worldwide, and Pact Informatique is a French electronics company operating in many European countries under the brand Storex. Max Sound’s actions were based on infringement of VSL’s European Patent EP 2 026 277 concerning an Optimized Data Transmission System Method. The Infringement was found on the basis that Google’s Android OS implements the H.264-Standard for video encoding, which is protected by VSL’s patent. A bailiff seized all smartphones and tablets of KTC and Pact at the trade fair IFA in Berlin on September 10, 2014. The injunctions have no automatic time limit, and opponents can file an opposition.
So what will Google do? For starters, I’m predicting we’ll see VSL and their allies soon being called some kind of “troll.” I also think we can rely on Google’s friends at the USPTO and beyond to find all sorts of reasons why Vedanti’s patents aren’t even drawn to patent eligible subject matter, regardless of how novel they may be. But the trade secret case is where I think tiny Vedanti might have a fighting chance, thanks to Googleliath’s cooperation with the sticky notes. Who said IP law wasn’t entertaining? Weird Al could have a lot of fun with this story. Suggestions for what tune to use in his spoof?
Note: The US cases referred to are captioned as: Vedanti Systems Ltd. and Max Sound Corp. v. Google, Inc., YouTube, LLC, and On2 Technologies, Inc., No. 1:14-cv-01029 (D. Del., filed Aug. 9, 2014) and Max Sound Corp., VSL Communications Ltd., et al. v. Google, Inc., et al., No. 114-cv-269231 (Cal. Sup Ct.).
- Max Sound Corp. Files Two Lawsuits Against Google, Accusing Search Giant of Misappropriating Proprietary Digital Video Streaming Technology (PRNewswire.com)
- Story at Yahoo! News
- Android Devices Seized in Europe (Stockhouse.com)
- Originally posted at JeffLindsay.com
Dave Galland’s recent column at Casey Research discusses the malaise that has swept Portugal, resulting in utter discouragement across the rising generation. In spite of the beauty and natural richness of Portugal, the entrepreneurs and innovators of the future tend to be looking to leave as quickly as possible. What has gone so wrong? Casey suggests that the innovation fatigue factor of stifling Eurozone bureaucracy and oppressive regulations have gutted Portugal’s spirit.
‘ll give you a hint by relating that as a condition for inclusion in the Eurozone, functionaries in the European Commission based in Brussels required the Portuguese to retire and destroy a large percentage of their fishing fleet. As I understand it, the commissioners felt that the size of the Portuguese fleet coupled with the sea-faring nation’s long history in commercial fishing gave it an unfair advantage over other nations in the Eurozone. They also helped rationalize the demand to burn the boats by saying that the Portuguese fishermen were putting the ecosystem of the Atlantic Ocean at risk.
The result of forcing the Portuguese to burn these tools for capital creation is that since joining the Eurozone in 1986, Portugal’s fish harvest has effectively been cut in half. I was told that the country is reduced to buying many of the sardines that find favor in the local cuisine from the Spanish fleet.
The Euro-meddling doesn’t stop with fish. The Portuguese are mandated to trash a large amount of their annual orange production lest they exceed the quotas set in Brussels. Apparently the Spanish, ever attuned to capitalize on Portugal’s mandated misfortunes, buy the unsellable excess oranges and use them to make marmalade… which they then sell back to the Portuguese.
Of course, actions have consequences. One of them has been that Portugal has run a trade deficit for about twenty years now – in other words, starting soon after joining the EU in 1986.
And even though the country (and the continent) is tight in the grips of the most dire crisis in living memory, the EU commissars are still at it. In fact, as I write, Portugal is being forced by the European Commission to kill a large percentage of its chicken population, with the slaughter to be completed over the next month. This by virtue of the ironically named EU Welfare of Laying Hens Directive, forbidding the continued use of conventional egg-laying cages.
Once the chickens are destroyed, and provided the Portuguese egg farmers can ever find the capital needed to rebuild, they will have to build to the specifications of the EC Directive that requires that all laying hens must be kept in “enriched cages” providing each hen with at least 0.8 square feet of cage area, a nest-box, litter, perches and claw-shortening devices, allowing the hens to satisfy their biological and behavioral needs.
Tragically, as Europe stumbles in a massive economic crisis, the bureaucrats aren’t backing off, but increasing the burdens on the backs of the people and making it harder than ever for business to grow and innovation to thrive. This is sadly typical of minds disconnected from reality and deaf to the voice of innovators, a voice that will become largely silent if the burdens on their backs aren’t eased.
One of the hottest areas for innovation globally is in improved foods and beverages that benefit human health. Unfortunately, bureaucrats are among the biggest barriers that innovators face in this field. In the United States, something as uncontroversial as the well-known relationship between citrus fruit and scurvy (that is, citrus fruit can prevent or help cure scurvy) becomes a dangerous proposition in the hands of a bureaucrat. One VP with a major global food company explained to me that selling an orange with the claim that it “may help prevent scurvy” could get you thrown in jail in the U.S. under the strict rules of the FDA, rules which make it exceedingly difficult to pursue innovation in food, no matter how strong the science is. But the innovation barriers from regulations in the U.S. may be dwarfed by those that are metastasizing in Europe, especially under the heavy hand of the EFSA (European Food Standards Authority). The fantasy land of bureaucrat anti-imagination in Europe is so other-worldly that you can become a criminal for claiming that “water may help prevent dehydration.” Incredible? Impossible? Here’s what Victoria Ward and Nick Collins report in The Telegraph, Nov. 18, 2011 (excerpt):
EU bans claim that water can prevent dehydration
Brussels bureaucrats were ridiculed yesterday after banning drink manufacturers from claiming that water can prevent dehydration.
EU officials concluded that, following a three-year investigation, there was no evidence to prove the previously undisputed fact.
Producers of bottled water are now forbidden by law from making the claim and will face a two-year jail sentence if they defy the edict, which comes into force in the UK next month.
Last night, critics claimed the EU was at odds with both science and common sense. Conservative MEP Roger Helmer said: “This is stupidity writ large.
“The euro is burning, the EU is falling apart and yet here they are: highly-paid, highly-pensioned officials worrying about the obvious qualities of water and trying to deny us the right to say what is patently true.
“If ever there were an episode which demonstrates the folly of the great European project then this is it.”
NHS health guidelines state clearly that drinking water helps avoid dehydration, and that Britons should drink at least 1.2 litres per day….
German professors Dr Andreas Hahn and Dr Moritz Hagenmeyer, who advise food manufacturers on how to advertise their products, asked the European Commission if the claim could be made on labels.
They compiled what they assumed was an uncontroversial statement in order to test new laws which allow products to claim they can reduce the risk of disease, subject to EU approval.
They applied for the right to state that “regular consumption of significant amounts of water can reduce the risk of development of dehydration” as well as preventing a decrease in performance.
However, last February, the European Food Standards Authority (EFSA) refused to approve the statement.
A meeting of 21 scientists in Parma, Italy, concluded that reduced water content in the body was a symptom of dehydration and not something that drinking water could subsequently control.
Now the EFSA verdict has been turned into an EU directive which was issued on Wednesday.
Ukip MEP Paul Nuttall said the ruling made the “bendy banana law” look “positively sane”.
He said: “I had to read this four or five times before I believed it. It is a perfect example of what Brussels does best. Spend three years, with 20 separate pieces of correspondence before summoning 21 professors to Parma where they decide with great solemnity that drinking water cannot be sold as a way to combat dehydration.
“Then they make this judgment law and make it clear that if anybody dares sell water claiming that it is effective against dehydration they could get into serious legal bother.
EU regulations, which aim to uphold food standards across member states, are frequently criticised.
Rules banning bent bananas and curved cucumbers were scrapped in 2008 after causing international ridicule.
The ruling is more than merely laughable. For those on the cutting edge of advanced foods and beverages, it is an ominous sign of the innovation fatigue from government that is increasingly strangling Europe and much of the Western world. The inability to make reasonable, scientifically-supported claims about the benefits of healthy foods and beverages is one that will stifle innovation and entrepreneurship in Europe. I’d rather have to do my own homework to understand the validity of health claims than to have bureaucrats completely stifle innovation in health-promoting goods. Give me the Wild West of unrestrained innovation, with all the risks and bad claims that might follow, rather than a sterile 1984 society in Oceania which hordes of bureaucrats protect me from myself and everything new. But between those two extremes are many healthy, democratic alternatives in which sound legislation reduces the most egregious crimes while allowing innovators for the most part to move forward.
Here in China, where some of the best beverages in the world are to be found, I’m happy to say that soft-drink entrepreneurs appear to still have the freedom to declare that aqueous beverages reduce thirst and help prevent dehydration. Watch for the world’s epicenter of food and beverage innovation to increasingly shift toward China, if it’s not already firmly rooted here.
A painful message from the CEO of Nokia, shared below, reminds us that the pain of disruptive innovation often catches major incumbents unaware. As they listen to their existing customers and improve existing products and services, often incrementally, they may not sense the tsunami of change that is coming from afar. The innovations that will disrupt them often seem not good enough to threaten their core business. By ignoring the threats and opportunities around them, they continue to focus on core competencies and core markets and feel little pain until the new competition, ignore too long, has developed the skills and competencies to strike at the core itself. When the pain is felt, it is often too late. When the heat of a raging fire is finally felt and awakens you from your dreams, it is often too late. You may escape if you are lucky, but the building is likely to be lost. How will Nokia cope? Read the speech below, then we’ll discuss their newly announced plans.
Nokia’s CEO, Stephen Elop, gave this speech to employees last week and the transcript has been posted on several sites such as Casey’s Daily Dispatch, the Wall Street Journal’s TechEurope Blog, Ongo.com, MSDN.com. It is brutal and painful. A few years ago tech stock experts recommended Nokia as one of the leaders in the business and best investment opportunities. But by focusing on their existing markets and competencies, they missed the changes that would envelope the market and misallocated their innovation resources. They are now on a “burning platform.”
There is a pertinent story about a man who was working on an oil platform in the North Sea. He woke up one night from a loud explosion, which suddenly set his entire oil platform on fire. In mere moments, he was surrounded by flames. Through the smoke and heat, he barely made his way out of the chaos to the platform’s edge. When he looked down over the edge, all he could see were the dark, cold, foreboding Atlantic waters.
As the fire approached him, the man had mere seconds to react. He could stand on the platform and inevitably be consumed by the burning flames. Or he could plunge 30 meters into the freezing waters. The man was standing upon a “burning platform,” and he needed to make a choice.
He decided to jump. It was unexpected. In ordinary circumstances, the man would never consider plunging into icy waters. But these were not ordinary times – his platform was on fire. The man survived the fall and the waters. After he was rescued, he noted that a “burning platform” caused a radical change in his behaviour.
We too, are standing on a “burning platform,” and we must decide how we are going to change our behaviour.
Over the past few months, I’ve shared with you what I’ve heard from our shareholders, operators, developers, suppliers and from you. Today, I’m going to share what I’ve learned and what I have come to believe.
I have learned that we are standing on a burning platform.
And we have more than one explosion – we have multiple points of scorching heat that are fuelling a blazing fire around us.
For example, there is intense heat coming from our competitors, more rapidly than we ever expected. Apple disrupted the market by redefining the smartphone and attracting developers to a closed but very powerful ecosystem.
In 2008, Apple’s market share in the $300+ price range was 25 percent; by 2010 it escalated to 61 percent. They are enjoying a tremendous growth trajectory with a 78 percent earnings growth year over year in Q4 2010. Apple demonstrated that if designed well, consumers would buy a high-priced phone with a great experience and developers would build applications. They changed the game, and today, Apple owns the high-end range.
And then there is Android. In about two years, Android created a platform that attracts application developers, service providers and hardware manufacturers. Android came in at the high end, they are now winning the midrange, and quickly they are going downstream to phones under €100. Google has become a gravitational force, drawing much of the industry’s innovation to its core.
Let’s not forget about the low-end price range. In 2008, MediaTek supplied complete reference designs for phone chipsets, which enabled manufacturers in the Shenzhen region of China to produce phones at an unbelievable pace. By some accounts, this ecosystem now produces more than one-third of the phones sold globally – taking share from us in emerging markets.
While competitors poured flames on our market share, what happened at Nokia? We fell behind, we missed big trends, and we lost time. At that time, we thought we were making the right decisions; but, with the benefit of hindsight, we now find ourselves years behind.
The first iPhone shipped in 2007, and we still don’t have a product that is close to their experience. Android came on the scene just over 2 years ago, and this week they took our leadership position in smartphone volumes. Unbelievable.
We have some brilliant sources of innovation inside Nokia, but we are not bringing it to market fast enough. We thought MeeGo would be a platform for winning high-end smartphones. However, at this rate, by the end of 2011, we might have only one MeeGo product in the market.
At the midrange, we have Symbian. It has proven to be non-competitive in leading markets like North America. Additionally, Symbian is proving to be an increasingly difficult environment in which to develop to meet the continuously expanding consumer requirements, leading to slowness in product development and also creating a disadvantage when we seek to take advantage of new hardware platforms. As a result, if we continue like before, we will get further and further behind, while our competitors advance further and further ahead.
At the lower-end price range, Chinese OEMs are cranking out a device much faster than, as one Nokia employee said only partially in jest, “the time that it takes us to polish a PowerPoint presentation.” They are fast, they are cheap, and they are challenging us.
And the truly perplexing aspect is that we’re not even fighting with the right weapons. We are still too often trying to approach each price range on a device-to-device basis.
The battle of devices has now become a war of ecosystems, where ecosystems include not only the hardware and software of the device, but developers, applications, ecommerce, advertising, search, social applications, location-based services, unified communications and many other things. Our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem. This means we’re going to have to decide how we either build, catalyse or join an ecosystem.
This is one of the decisions we need to make. In the meantime, we’ve lost market share, we’ve lost mind share and we’ve lost time.
On Tuesday, Standard & Poor’s informed that they will put our A long term and A-1 short term ratings on negative credit watch. This is a similar rating action to the one that Moody’s took last week. Basically it means that during the next few weeks they will make an analysis of Nokia, and decide on a possible credit rating downgrade. Why are these credit agencies contemplating these changes? Because they are concerned about our competitiveness.
Consumer preference for Nokia declined worldwide. In the UK, our brand preference has slipped to 20 percent, which is 8 percent lower than last year. That means only 1 out of 5 people in the UK prefer Nokia to other brands. It’s also down in the other markets, which are traditionally our strongholds: Russia, Germany, Indonesia, UAE, and on and on and on.
How did we get to this point? Why did we fall behind when the world around us evolved?
This is what I have been trying to understand. I believe at least some of it has been due to our attitude inside Nokia. We poured gasoline on our own burning platform. I believe we have lacked accountability and leadership to align and direct the company through these disruptive times. We had a series of misses. We haven’t been delivering innovation fast enough. We’re not collaborating internally.
Nokia, our platform is burning.
We are working on a path forward — a path to rebuild our market leadership. When we share the new strategy on February 11, it will be a huge effort to transform our company. But I believe that together, we can face the challenges ahead of us. Together, we can choose to define our future.
The burning platform, upon which the man found himself, caused the man to shift his behaviour and take a bold and brave step into an uncertain future. He was able to tell his story. Now we have a great opportunity to do the same.
Alex Daley’s commentary at Casey’s Daily Dispatch on this memo is among the best. A few excerpt from Alex follow:
But one of the mobile world’s most celebrated early stars is fading, and fast – Nokia. The Finnish mega-company traces its roots all the way back to the rubber industry in 1865. But it evolved over nearly a century and a half into the largest mobile phone supplier in the world. At its peak, the company accounted for the majority of all phones in the world. However, lately things have begun to unwind. Market share for the company has slipped from 39% in 2008 to 35% in 2009, and again to 30% in 2010.
Not only is their global market share decreasing, they’re being assaulted from every side and find themselves with shrinking influence, shrinking margins and shrinking options. Apple, RIM, and the contingent of Android phone manufacturers around the world have gulped up the overwhelming majority of the high-end smartphone market, where profit margins are high. On the other end of the spectrum, Chinese technology outfits have begun to lock up the massive lower end of the market, turning out designs and equipment at a breakneck pace.
Desperate to find relevance in a market moving on without the company, last year they appointed former Microsoft executive Stephen Elop to the position of CEO. He has been pretty quiet since he joined the company, taking his time to learn the business and get to the root of the issues that cause the market to value this technology giant at less than the $43 billion in revenue it generated last year. Quiet until now….
And [Elop’s] use of the term “platform,” while symbolic, seems like a calculated choice for a company that staked its future on a failing developer platform known as Symbian, and a long delayed smartphone platform called MeeGo yet to even launch nearly four years after the iPhone was originally released….
The question of the hour is not just whether or not that will happen, but whose platform it will be. Apple doesn’t license. HP has locked up WebOS with its Palm buy. That really only leaves Google, whom Elop cites as a competitor, and Microsoft, his Alma Mater, which goes completely unmentioned in the damning note….
Elop’s failure to mention Microsoft was certainly deliberate, for a few days later he announced a major partnership with Microsoft aimed at saving the company. See “Microsoft, Nokia Agreement Signals New Smartphone Game,” a Feb. 14, 2011 story from EWeek.com.
Microsoft and Nokia announced a wide-ranging partnership Feb. 11, which will include running Windows Phone 7 on Nokia smartphones, in a combined bid to blunt the competitive momentum of Google Android and the Apple iPhone.
“We have a formidable plan to ensure our collective leadership in the smartphone market and in the ecosystem that surrounds it,” Nokia CEO Stephen Elop told a London press conference. “Our long-term strategic alliance will build a global ecosystem that creates opportunities beyond anything that currently exists.”
Now comes the hard part: actually building that ecosystem.
A formidable plan? I’m sorry, but part of me cringes when anyone declares that the plan they created is “formidable.” Too close to “fool-proof.” And we went from desperation on the brink of ruin on a burning platform one day to a formidable plan the next? Eweek mentions some reasons to restrain enthusiasm:
“Microsoft wins big in this arrangement, having gained a partner for an OS that is struggling in the market and losing share even among its current device suppliers (e.g., HTC),” Jack Gold, principal analyst of J. Gold Associates, wrote in a Feb. 14 research note. “Nokia brings huge scale and can dramatically increase WP7 market share beyond its traditional reliance on vendors with much lower market share. And this precludes Microsoft from having to enter the device market directly (as it did with its Kin disaster).”
However, some analysts see the deal as a decidedly negative one for Nokia, particularly in the longer term.
“We think Nokia has created a new set of issues—a lack of ecosystem control, margin decline and a raft of new royalty payouts—in return for a ‘unique relationship,'” Lee Simpson and Andrej Krneta, analysts with Jeffries & Co., wrote in a Feb. 14 research note. “With WP7 as Nokia’s new primary smartphone OS, why would any operator take an end-of-life product (Symbian)? This can only cap the top line for Nokia going through 2011 and much of 2012.”
The analysts believe that Nokia’s first Windows Phone 7 devices will be “hollowed out ‘N8s’ or the like,” referring to one of the manufacturer’s higher-end smartphones. “Despite longer-term assertions of speedy time to market designs, the overhauling of road maps (and cancellations near-term) will likely dent near-term progress and leaving Nokia dangerously exposed to further market-share erosion.”
I wish Nokia success, but feel that it will take more than Microsoft to bring them success. Innovation fatigue needs to be addressed at multiple levels in the company and the culture radically strengthened to reach their destination. Otherwise, further fatigue may stand in the way.