Cs207 9
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This document contains notes from a CS207 class on December 1st, 2012. It includes a signup sheet for the class, a syllabus covering various topics around intellectual property and software valuation, and notes on related concepts such as IP flows, transfers of rights, corporate growth patterns, and the role of advertising. The document provides information for students in the class through summaries, examples, and discussion topics for the final class.
![Economic Models
[Orrell: Economyths+]
• Used to predict effect of policies and tax changes
use assumptions based on easy data availability
miss realistic detail
Equilibrium ignores dynamics and lag: housing
Normal distribution based on additive model ∑n = ^2
many effects are multiplicative: power-law = ^3,4
Symmetric distribution value S-curve not centered:
small (infinitesimal change) calculus symmetric
big change: downside risk hurts more than upside gain
Rational behavior perfect foresight: X-mas shopping?
• Governments get poor advice
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![Example
Enterprise SW versus cloud
[Benioff:2009]
• SIEBEL sales force management $
1. Price $1,500 per seat, at 200 users = 300,000
2. $54,000 for support (18%) /year, x 5 = 270,000
3. $1,200,000 consulting for installation =1,200,000
4. $100,000 admin.personnel/year, x 6 = 600,000
5. $ 30,000 training / year, x 6 = 180,000
6 years’ usage Total = 2,550,000
Note that the customer’s total is >> than the price
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![Consistency in
plans
When comparing business alternatives
• Give each choice the same chance
1. Temporal consistency
Computing versus communication
Local versus Cloud in 2012
o Skate to where the puck is going [Gretsky]
2. Discount rate
3. Resource prices
Green alternatives
Benefits may depend on price of oil –
o if 3 x now, why not invest in oil instead
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![Growth
Based on 100 top public SW companies Q1 2009
Source: http://www.ipo-dashboards.com/wordpress/2009/08/how-long-does-it-take-to-build-a-technology-empire/
sybase [Database] Compuware [services]
SuperMicro
National [lab] Instruments (UK)
Mentor
Microsoft Blackbaud
[CAD] [non-profit acctng]
Adobe
EA Ciber
Quality Systems
. [consulting]
[med.offices]
Oracle
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![Fiat money
• Being on the gold standard has a problem
When more money is needed as in times of war, the
government can print more gold certificates
But with the same backing the value deflates
• The U.S. went off the gold standard (more than once)
5 April 1933 US citizen could no longer hold monetary gold/silver
15 Aug. 1971 when it no longer allowed foreign countries to exchange US debt
• Now backed by “The Full Faith and Credit” [Article IV, Section 1 of the USC]
• But now not based on a tangible asset,
but by the ability of government to levy taxes
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![• Anyone who has assets and is trusted
1. The Federal Reserve Bank $ ← taxes & trust
2. A bank can make loans ← assets held & trust for excess
3. A government reserve bank (UK BoE, ...) £, ¥, ← taxes
4. The European Central Bank € ← trust not taxes directly
5. Any financial institution with some assets & trust
Since ~1955 City-of-London banks & their offshore branches create
Eurodollars ← offshore income based on IP & trust
$2,600,000M in 1988 “the largest source of capital in the world” [Kynaston:02, p.696]
Investors don’t care about the color of the money.
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Cs207 9
- 1. Signup sheet CS207 #9, 30 Nov 2012 Gio Wiederhold Hewlett 103 12/1/2012 CS207 1
- 2. Syllabus: 1. Why should software be valued? 2. Principles of valuation. Cost versus value. 3. Market value of software companies. 4. Intellectual capital and property (IP). 5. The role of patents, copyrights, and trade secrets. 6. Open source software. Scope. Theory and reality 7. Life and lag of software innovation. 8. Sales expectations and discounting, Licensing. . 9. Alternate business models. 10. Separation of use rights from the property itself. 11. Risks when outsourcing and offshoring development. 12. Effects of using taxhavens to house IP. IP transfer 13. IP flow, Abolish Corporate tax. Advertising, Money, 12/1/2012 CS207 2
- 3. Report notes • Always date your work. If it’s on-line it will stay around forever and you don’t want to be embarrassed 10 years later. • Few had abstracts; objective statement; (decompose); conclusion Good for your organization to state the objective. Have only one in a paper! Good to get on-line readers to go below the fold • If you cite web references, keep a copy on your files. Web pages may disappear or be changed. • I also mark writing, although that is not a CS207 objective (CS73N =WR2) •When you mail something out, include your name in addition to the course in the file name. Makes it easier for the recipient who gets a bunch of `CS207report’ files • Report option: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2176728 12/1/2012 CS207 3
- 4. Transfers of rights tangible ≈ intangible Creator Rights to tangible Owner Lease Use $ Price € rents Creator Use Rights Rights to intangible $ IP value ?? Owner € fees Use But setting the right value is harder, and easily misused 12/1/2012 CS207 4
- 5. IP flow in the Hard-& Soft-ware industry Design & validation Technical IP in US Development, testing Investment in the US and at CFCs manufacturing, CD creation distribution Internet Product Sales within Product Sales external the US to the US Income is taxable Part of income is due to US contribution & taxable 12/1/2012 CS207 5
- 6. Flow of IP in the financial industry say: INYB investment bank Financial IP Investment by INB INYB system Design & Programming Technical IP experts in feedback and testing Investment by INB the US INYB finance Operations of Operations of Finance experts at experts within INYB within INYB external INYB site external the US the US to the US to the US Service Sales within Service Sales . the US Income due to external to the US technical US All US Income is taxable contribution is taxable 12/1/2012 CS207 6
- 7. IP rights create earnings IP rights stay . Non-routine Earnings ongoing from sales Repatriated Retained Offshore costs financial capital Financial Capital Foreign Countries Home Country Taxhavens (& US ?) 12/1/2012 CS207 7
- 8. Blocked earnings IP rights Blocker statement: stay . Non-routine Earnings indefinitely ongoing reinvest from sales Repatriated Retained Financial Offshore costs financial capital Capital Foreign Countries Home Country Taxhavens (& US ?) 12/1/2012 CS207 8
- 9. Government Taxing country Shareholders IP IP at MNC . IP rights held r . Primary taxhaven Use ↓ $ at CONCH . of IP $ . $ for Initial IP & $ buy-in ↓ . for tax divi- Right to . to gro ? on dends use Buy w the -in the IP IP new Use IP of $ funds $ for Buy-in $ all untaxed new ? $ New projects in More semi-taxhavens & CFCs low cost countries New profits only at CONCH 12/1/2012 CS207 9 time
- 10. Corporate income $B $B 1500 W D $620B US corporate earnings 1400 US total worldwide available for sources → destinations corporate earnings corporate 1300 $1,550B /year dividends 1200 (less during 2008-2009) & 1100 investment in the U.S. 400 1000 1,250B from US tax paid on US R 300 900 domestic sources Corporate earnings US corporate 200 800 W-F tax revenue $335B 100 $340B 700 0 U US-sourced 600 T earnings moved (100) 500 abroad = $300B $690B (200 400 ) (300) F available in 300 Earnings on $1,800B taxhavens 200 income from foreign for corporate sources = $400B investment 100 12/1/2012 CS207 10
- 11. Trend 12/1/2012 CS207 11
- 12. Proposal: Abolish Corporate Taxation now Multinationals use taxhavens, Domestic businesses cannot Unfair taxation ! Easy to buy startups, still hard to integrate them Loss of tax revenue from C-corporations ~75% of business tax -$143B No `double taxation’ 15% > full 35% (35%) tax on all Dividends $ 30B without Bush tax cuts Also full 35% taxes on capital gains (20%), on 70% of revenue $ 69B Risk is a red herring. Inflation is real but also experienced by businesses and their gains. Flexibility of holding term (now 1 year) encourages short term investments Higher corporate dividend payouts to compensate. Also taxed $ 10B More corporte spending: direct effect $ 20B Don’t count on indirect effect (Laffer curve) $ 0B Total effect (0.5% of tax revenues) loss - $14B 12/1/2012 CS207 12
- 13. Estimate Taxed item Action Change Motivation and result Corporate income tax (CIT) for Abolish ($143.3B) 75% Cannot be administered fairly C-corporations -- not S-corps. LLCs Dividends to individuals $30.4B Tax as Treat all sources of individual Capital gains by individuals income $69.0B income identically Effect of taxation of greater Tax on compensation of share- Cor- $9.6B dividend payouts holders for their increased taxes. porate $20.4B Purchases (based on DoD spending) Direct effect of investment Research credit , similar corporate tax No $ change. No If incentives are still desired, they deductions (loopholes), corporate AMT tax, no tax credit must be replaced by explicit grants Indirect effect of increased investment No effect of “Laffer curve” No trustworthy data and repatriation of offshore holdings (7.2%) of business tax revenues Total estimated effect ($13.8B) (0.5%) of US tax rev. 12/1/2012 CS207 13
- 14. Economic Models [Orrell: Economyths+] • Used to predict effect of policies and tax changes use assumptions based on easy data availability miss realistic detail Equilibrium ignores dynamics and lag: housing Normal distribution based on additive model ∑n = ^2 many effects are multiplicative: power-law = ^3,4 Symmetric distribution value S-curve not centered: small (infinitesimal change) calculus symmetric big change: downside risk hurts more than upside gain Rational behavior perfect foresight: X-mas shopping? • Governments get poor advice 12/1/2012 CS207 14
- 15. Discussion topics for next, last class • General IP 3 slides • Advertising on the web 9 slides • Corporate growth patterns 9 slides • Money 5 slides 12/1/2012 CS207 15
- 16. IP to customers Research & Tool Inno - building Consumer vation Product building & Pull General marketing Technology Push Information Business Technology needs Government responsibilities 12/1/2012 CS207 16
- 17. Opportunities • There are big waves where much changes 1. Introduction of automation into manufacturing 2. Introduction of data processing in business 3. Introduction of the Internet into communication 4. Business and Social networks • Within a big wave there are many small waves 1. Management of feedback Product improvement, advertising 2. Locality of computing a. Timesharing - many users use a large computer b. Personal computing – local computing is cheap c. Cloud computing – remote computing is flexible All waves create opportunities 12/1/2012 CS207 17
- 18. Share IP? Yes, with care Adobe: Reader free; pay for Composer XEROX PARC: Smalltalk OO language nearly dead We got C++ instead Industry Group: Standards specifications Publication in scientific venues ok, limited impact Publication in trade journals ok, some impact Apple vs Microsoft, Xerox vs all: Look and feel Apple had licensed earlier version, without overlapping windows. Could protect the trashcan CS207 12/1/2012 18
- 19. Adverting Income • Advertising 25% of business spending Google Adwords /Adsense to trigger where ads go Show your ad on top or on the side of a search Show your ad on relevant web pages o Charge by show (eyeballs) or click-through o Do that until money runs out o Allocate among competitors according to money made available Google tools for measuring Google’s ads impact measurements in other media are ad-hoc could be disregarded, but still contribute to the perception. Perceptions is also IP, embodied in trademarks etc. 12/1/2012 CS207 19
- 20. Ads: a surprise in 1994 Shortly after the Internet was established to serve a broader community of researchers than the ArpaNet, commercial uses started. Advertising, a consumer of a large fraction of revenue from sales, and requiring little tangible presence, was on reflection, an obvious candidate 12/1/2012 CS207 20
- 21. Advertising sample 1. Audience 3. Logo & name Focused Essential for branding Salesforce In front of competitor’s Metaphor 4. Timing annual sale meetings 3x 1. Fake demonstrators in SF. Have Product ready 2. Give coffee, mugs, rides, • Few bugs literature to attendees in NY • Clear operation 3. Hire all taxis in Nice, give free Negative? • Useful rides to meeting in Cannes. Vs. Superbowl? 2. Address overlapping segments • Much buzz a. Buyers in corporations c. Both • Huge audience b. Users and employees • Your audience? • Understand motivations for change 12/1/2012 CS207 21
- 22. Customer Segmentation • Getting a broad market presence is very hard Superbowl advertising: 30 seconds costs $3M o Apple 1984: Macintosh o Hulu 2009: Internet video player Find narrow markets that are now not well served Professional groups o Use professional magazines o Establish credibility through publishing Social networks o Participate Health concerns by symptoms or diagnoses Educational specialties 12/1/2012 CS207 22
- 23. Customer segments • I tried Spotify to listen to classical music but the ads they interpose seems use the same music they use for all listeners, and are quite jarring when one has just listened to Bach or Mozart. Their selection is also quite trite Either serve a community well or not at all 12/1/2012 CS207 23
- 24. Example Enterprise SW versus cloud [Benioff:2009] • SIEBEL sales force management $ 1. Price $1,500 per seat, at 200 users = 300,000 2. $54,000 for support (18%) /year, x 5 = 270,000 3. $1,200,000 consulting for installation =1,200,000 4. $100,000 admin.personnel/year, x 6 = 600,000 5. $ 30,000 training / year, x 6 = 180,000 6 years’ usage Total = 2,550,000 Note that the customer’s total is >> than the price 12/1/2012 CS207 24
- 25. Consistency in plans When comparing business alternatives • Give each choice the same chance 1. Temporal consistency Computing versus communication Local versus Cloud in 2012 o Skate to where the puck is going [Gretsky] 2. Discount rate 3. Resource prices Green alternatives Benefits may depend on price of oil – o if 3 x now, why not invest in oil instead 12/1/2012 CS207 25
- 26. Cloud delivery by • Saleforce.com: salesforce.com $150.-month & user only -- monthly billing Make interface look like Amazon – no training needed Low risk for individual adopters Still a high risk for a changeover in large businesses, where changes are controlled by a risk-adverse IT manager or CIO. Start focusing on small businesses Hard to reach a broad market with little cash Must make a lot of noise Later sales force had to change its initial model Deal with large companies Deal with the Dot-com bust, when many companies failed Business must remain flexible 12/1/2012 CS207 26
- 27. `Buzz’ Customer and potential customer interaction • In the relevant community The most powerful sales tool Novelty and quality drive buzz Advertising effect is complementary • Simple stories for the press Writers look for good guys vs bad guys stories Don’t have time to dig deep Match public events o Be ready - security SW when there is a big break-in; … • Direct mail ? Sometimes for a specific off-the-net audience 12/1/2012 CS207 27
- 28. Use your income to grow IP: R&D and • Advertising 25% of business spending Google Adwords /Adsense to trigger where ads go Show your ad on top or on the side of a search Show your ad on relevant web pages o Charge by show (eyeballs) or click-through o Do that until money runs out o Allocate among competitors according to money made available Google tools for measuring Google’s ads impact measurements in other media are ad-hoc could be disregarded, but still contribute to the perception. Perceptions is also IP, embodied in trademarks etc. 12/1/2012 CS207 28
- 29. Growth • Organic • Through acquisitions a. Product R&D investments a. Additional products New versions novel – first b. Product Marketing complementary New, broader applications anti-competetive c. Fundamental R&D b. Product improvements d. Trademark promotion c. IP: Patents … as with a. → as with a e. Curiosity-driven R&D ? d. Knowhow of staff • Paid for by a. Profits on existing products (after dividends are paid out) b. New investors: venture funders before / stockholders after going public c. Loans Interest on loans up to x can be deducted from taxes 12/1/2012 CS207 29
- 30. Growth Based on 100 top public SW companies Q1 2009 Source: http://www.ipo-dashboards.com/wordpress/2009/08/how-long-does-it-take-to-build-a-technology-empire/ sybase [Database] Compuware [services] SuperMicro National [lab] Instruments (UK) Mentor Microsoft Blackbaud [CAD] [non-profit acctng] Adobe EA Ciber Quality Systems . [consulting] [med.offices] Oracle 12/1/2012 CS207 30
- 31. Categories * * Graph includes some hardware companies • Rocket Ship: 28% Autodesk, Electronic Arts, Interwoven→ Autonomy, Sybase, Novell Adobe (Xerox Parc), McAfee (Lockheed), Salesforce (Oracle) had substantial IP headstarts • Hot Company Microsoft, Oracle • Slow Burner SPSS, Ciber inc Consultants, Quality Systems • Missing Lotus (1982-1983 to $53M, but acquired 1995 by IBM) Macromedia, acquired by and now incorporated in Adobe, ….. Google (does not sell Software) 12/1/2012 CS207 31
- 32. Rocketship list 3-6 years to $50M Rev. 2nd largest largest Net income is convoluted due to acquisitions, write-offs, etc. 12/1/2012 CS207 32
- 33. Hot Company list 7-12 years to $50M Rev. larger 12/1/2012 CS207 33
- 34. Slow Burner list 13-30 years to $50M Rev All smaller 12/1/2012 CS207 34
- 35. Acquisitions • A common path for a. Exit from a startup venture seller b. Growth of a larger company buyer • 2 parties at `Arms-length 1. Willing seller 2. Willing buyer Assumption here: no funny business o Buyer has funded seller, formal/ informal restrictions o Selling a non-exclusive license o Seller is object of a legal proceedings, as patent suit o Seller is bankrupt Both parties must agree on the value Both parties should understand intellectual property 12/1/2012 CS207 35
- 36. Example: Adobe events Unix Peter Deutsch Alladin OpenSource PostScript reader Free PC? HTML reader PPT Jonathan Gay → Flash, Dreamweaver Unix Mac Nick Corfield founds Frame Tech. for WYSIWG Mac PC Paul Brainard (Stanford) develops PageMaker, founds Acquisitions: Mac&PC Aldus, Frame Macromedia 1976 Xerox Parc uses Press language PhotoStyler → Photoshop to drive its new Dover laserprinter PhotoMerge → Photoshop Elements TypeAlign 1978 John Warnock joins Parc OCRsystems Dec.. 1982 Unix NexT 1993 1984/1985 Mac PC Internal Acrobat products: Mac PC IRS adopts free Reader 12/1/2012 Illustrator CS207 InDesign 36 ImageReady
- 37. Generalize success A. Broaden Adobe : After WYSIWIG printing IP shared: 1. Customers 1. Pagemaker for Page composition 2. Marketing 2. Dreamweaver for Web composition 3. Distribution 3. Photoshop for Image editing B. Deepen Salesforce.com IP shared: Customer Relationship service on-line 1. Concept 2. Technology Force.com 3. HW Support 4. Analytic SW Operating system for on-line business applications 12/1/2012 CS207 37
- 38. Misvaluation poor due diligence Hewlett-Packard Co. said on Tuesday that it's the victim of a multi-billion dollar fraud at the hands of a British company it bought last year that lied about its finances. HP said Autonomy Corporation PLC, a British company it bought for $10 billion last year, lied about its finances, resulting in a massive write- down of the value of the business. HP's net loss for the fiscal fourth quarter, which ended Oct. 31, amounted to $6.85 billion, or $3.49 per share HP CEO Meg Whitman said executives at Autonomy Corporation PLC "willfully" boosted the company's figures through various accounting tricks, which convinced HP to pay $9.7 billion for the company in October 2011. Autonomy's former CEO said HP's allegations are false. HP is now taking an $8.8 billion charge to align Autonomy's purchase price with what HP now says is its real value. More than $5 billion of that charge is due to false accounting, HP said. The revelation is another blow for HP, which is struggling to reinvent itself as PC and printer sales shrink. The company's stock hit a 10-year low in morning trading. Among other things, Autonomy makes search engines that help companies find vital information stored across computer networks. Acquiring it was part of an attempt by HP to strengthen its portfolio of high-value products and services for corporations and government agencies. The deal was approved by Whitman's predecessor, Leo Apotheker, but closed three weeks into Whitman's tenure as chief executive. Whitman was a member of HP's board of directors when Apotheker initiated the Autonomy purchase. Among the tricks used at Autonomy, Whitman said: The company had been booking the sale of computers as software revenue and claiming the cost of making the machines as a marketing expense. Revenue from long-term contracts was booked up front, instead of over time. The allegations are serious, according to accounting experts. "According to GAAP (generally accepted accounting principles), the overstatement of revenue under any tax code is illegal," said Mark Williams, a finance professor at Boston University and a former bank examiner for the Federal Reserve. As a result of its alleged accounting practices, Autonomy appeared to be more profitable than it was and seemed to be growing its core software business faster than was actually the case. The moves were apparently designed to groom the company for an acquisition, Whitman said. Once HP bought the company, Autonomy's reported revenue growth and profit margin quickly declined. Autonomy CEO Mike Lynch continued to run the company as part of HP, but Whitman forced him out on May 23 because it was not living up to expectations. 12/1/2012 CS207 38
- 39. Money • Income, represented by Money, is the objective • What is money • It is an owned asset that can be exchanged for other, real goods and the happiness they bring • What gives money its value • the money we use is debt-instrument backed by a trustworthy asset • In the US the faith we have in the US government 12/1/2012 CS207 39
- 40. Backing Originally most countries were on the gold standard – mixed with silver in the US (bimetallic coinage) a ten-dollar coin was tiny, but real gold • Spanish doubloons common were silver dollars • Joachimsthaler – a silver mine in Bohemia Other assets are feasible – they should not be easy to falsify and in limited supply • Shells • pork bellies • Corn • aluminum lire • Oil • milk chits (italy, 1950) 12/1/2012 CS207 40
- 41. Paper money • “Real money” is hard to handle ↓ • “Real money” is hard to manipulate ↑ & ↓ A government can keep gold and silver (specie) in its treasury and issue gold or silver certificates • “dollar bills” One on display with the IBM cards on 2nd floor You could take them to federal bank and get gold Gold miners would take their gold to the SF mint and could get gold certificates. 12/1/2012 CS207 41
- 42. Fiat money • Being on the gold standard has a problem When more money is needed as in times of war, the government can print more gold certificates But with the same backing the value deflates • The U.S. went off the gold standard (more than once) 5 April 1933 US citizen could no longer hold monetary gold/silver 15 Aug. 1971 when it no longer allowed foreign countries to exchange US debt • Now backed by “The Full Faith and Credit” [Article IV, Section 1 of the USC] • But now not based on a tangible asset, but by the ability of government to levy taxes 12/1/2012 CS207 42
- 43. • Anyone who has assets and is trusted 1. The Federal Reserve Bank $ ← taxes & trust 2. A bank can make loans ← assets held & trust for excess 3. A government reserve bank (UK BoE, ...) £, ¥, ← taxes 4. The European Central Bank € ← trust not taxes directly 5. Any financial institution with some assets & trust Since ~1955 City-of-London banks & their offshore branches create Eurodollars ← offshore income based on IP & trust $2,600,000M in 1988 “the largest source of capital in the world” [Kynaston:02, p.696] Investors don’t care about the color of the money. 12/1/2012 CS207 43
- 44. The End I hope that you have learned in this course a bit about a topic which is currently ignored in the CS and Engineering curricula. Much success in your futures Gio Wiederhold Business models and finance topics can be discovered when experienced entrepreneurs present their history. A good resource is of the Stanford Entrepreneurship Corner, with viseos at <A HREF=“http://ecorner.stanford.edu”>. I recommend searching for authors as Hawkins, Ries, Kaplan, Siebel, Estrin. Some of their views differ greatly, illustrating the complexity of translating IP to success. You can also search by topics. 12/1/2012 CS207 44