Google buys up Modu's Patents

Modu was a small Israeli telecommunications company which attempted an IPO on the Tel Aviv stock exchange (see report here) but collapsed a few days later when the IPO failed, apparently USD 130 million (according to the report here). The 2008 investment round placed a valuation of USD 150 million on the company.

Modu made tiny little handsets which were no bigger than a credit card. Not much use either without a keyboard, but they were designed to be fitted out with jackets to add the functionality. Well it appears that the lack of a keyboard was their downfall since the company went out of business.

And their biggest asset left? Well apparently the patent portfolio, as Google came in at the last minute to pick up around 100 patents for a price of USD 4.9 Million. Quite a price for a bunch of patents - but probably only the cost of one saved litigation if the patents ended up in the wrong hands. I've no idea how many litigations Google have pending related to their Android-based telephones. It's probably into the tens and it would not surprise me if the fees were beginning to have an impact on the bottom line of the company. Google has never been a particularly aggressive company in asserting its patent rights and so these IP rights will probably end up in a dusty box somewhere in a lawyer's office (or since it's Google out in the big wide cloud) until the opportunity comes to defend itself.

 

 

 

 

Technorati Tags: Telecommunications, Google, Modu, Patent Sale

The Physics of Finance

In the spring of 2009, in the wake of the recent financial crisis, economists gathered at a conference in Dahlem, Germany for five days of discussion on the economic modeling of financial markets. After the meeting, the group issued a joint statement on the economic profession's failure to either see the financial crisis coming or to judge its ultimate severity. The lack of understanding, they suggested in the conference report, is due

“... to a mis-allocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public.”

The full report makes good reading. Most importantly, it singles out the lack of realistic market dynamics as the primary failing of the standard models used by economists. These models assume that markets tend to a state of balance or equilibrium, and pay no attention to potential positive feed backs -- among asset prices, investors views, new regulations and so on -- which might drive markets far away from a state of balance. Realistic models would seek to capture such processes from the outset.

This aim of this blog is to cover and comment upon a wide range of new research -- much of it in physics, but some elsewhere - which is beginning to fill this gap. The idea is to accept that markets like most other natural systems have rich and complex internal dynamics. As with the weather, terrific storms can brew up out of blue skies through quite ordinary natural processes. If the equilibrium fixation of traditional economics has pushed the study of crises to one side - as the study of those exceptional events that occur when markets fail - the new perspective aims to understand how crises of many kinds emerge quite naturally from market processes. As any glance at history shows, they surely do, and quite routinely.

This work has been developing and growing more sophisticated since early evolutionary models of financial markets first developed in the mid 1990s at the Santa Fe Institute in New Mexico. It has come a long way since then, particularly in the past five years, and a growing number of economists and policy makers are beginning to take it very seriously. As just one example, Nature recently published a paper reviewing research on the stability of banking "ecosystems" - looking at problems that can arise in networks of banks -- which was co-authored by a mathematical ecologist, Robert May, along with an employee of the Bank of England, Andrew Haldane.

Old crude ideas about efficient markets and market equilibrium are rapidly being buried, good riddance, to be replaced by more realistic and useful ideas emerging from the physics of finance.

Emerging IP Monetisation Solutions: Institutionalization of an IP Exchange

Coming up next week -- indeed, on Wednesday 25 May 2011 at 1730 -- is a seminar on "Emerging IP Monetization Solutions: The Institutionalization of an IP Exchange", the speaker being Gerard Pannekoek (right), Founding President and Chief Executive Officer of IPXI Holdings.

"This paper examines whether moving licensing from the traditional bilateral contract model to an exchange model will lead to more efficient price discovery and, ultimately, more liquidity in the market for IP rights transfer. Using the recently created Chicago based Intellectual Property Exchange International (“IPXI”) as a model, we address the rationale for such an exchange and the mechanisms by which it can operate. We contend that IPXI’s business model, which is built around Unit License Right (ULR) contracts - which may be seen as a paid-up non-exclusive license to the purchaser- addresses some of the current inefficiencies in IP management. However, the market efficiency that is needed to turn IP rights into a liquid asset inevitably takes time to evolve. Without community support for and participation in the exchange, from both buyers and sellers, the market cannot be established".

The venue is Room 19 in the Law Faculty, University of Oxford, and there's an accompanying paper from Roya Ghafele (University of Oxford), James Malackowski (Ocean Tomo) and Benjamin Gibert (University of Oxford) here.

Further details may be obtained here.

Fruits of Labour not Windfall Gains in Standardization

In pursuance of its policy of strengthening its content relating to intellectual property as a value-generating asset with standards-setting bodies, IP Finance is pleased to host this piece by Keith Mallinson (WiseHarbor):

Fruits of Labour not Windfall Gains in Standardization Basic economic principles that underpin the IP system—such as being able to make a return on the capital, labour and time invested in what are typically risky developments of patented technologies—are as applicable with standards-based technologies as they are elsewhere. Many companies invest a significant percentage of their revenue, amounting to millions or even billions of dollars per year, in R&D of technologies that are then contributed for possible inclusion in industry standards.

While many companies primarily reap their rewards by selling products that implement the standards—with much of the standards-essential IP contributed by others— other companies rely on licensing to generate their investment returns. Large numbers of patents are often included within the definition of technical standards, raising a concern amongst some that the standard may not be generally available to companies for implementation on (Fair), Reasonable and Non-Discriminatory (FRAND or RAND) terms.

Those who implement standards in their equipment are typically more interested in minimizing licensing out-payments than in maximizing cash licensing fees received and so may prefer relatively low rates all round. Accordingly, some of the implementing companies and their
advocates have been vocal in calling for regulatory involvement in licensing terms for standards-essential patents, including proposals to “define” the exact meaning of (F)RAND, impose limits on the aggregate licence fees for all essential patents, or to limit such fees to levels achieved before standardization (“ex ante” terms). However, if regulatory authorities were to impose such limits, the impact would likely be to impede incentives to contribute those technologies to standards or even to invest in such innovations. Imposing constraints, such as limiting licensing fees to “ex ante” levels or other arbitrary limits, will not only short-change those who relied on licensing fees to fund their developments, but discourage high-risk technology investments in follow-on standards upgrades.

Regulatory price-setting in the arena of innovative technologies neither reflects the market reality of commercial negotiation nor is it related to the costs, efforts and technical or commercial risks involved in developing those technologies. Defining (F)RAND according to an imposed pricing structure would severely limit the ability of licensors and licensees to negotiate bilateral commercial terms that reflect their respective positions and needs. There are many uncertainties involved in investing in R&D of innovative technologies.

Many technologies developed are never adopted. Even those technologies that are contributed to a standard and selected for inclusion, on the basis of merit, might never generate return on investment because of the standard failing or being overtaken by a competing standard. Further, minimizing the cost of licensed technologies may not result in a minimum cost solution. In addition to providing higher performance and improved features, incorporating patented IP into a standard may actually reduce the cost of implementing the standard. For example, patented IP might reduce the total cost of ownership to the end consumer of a product such as a mobile phone – including phone acquisition costs (with costs of design, development, bill of materials and assembly) and network service charges (reflecting costs of bandwidth acquisition, network equipment, operations, and maintenance).

The impact of such cost reductions may far exceed any additional costs in licensing fees. Market forces are best at determining the value to be attributed to any input component in such a system, including technology licences. Regulators should be careful to avoid favouring particular business models or making decisions on which part of the value chain deserves to make the greater profit, especially where dynamic innovation is concerned.

Commercial negotiations between companies are the most effective way to balance the interests of the parties and to establish an agreement that takes into account their particular incentives and business relationships. Arbitrary pricing limits or ex-ante terms cannot take such factors into account and fail to recognize the inherent difficulty in determining a “value” for a certain technology early in a standards process or in the case where no competing technology exists. If regulated pricing principles were enforced, it could make patent owners leery of licensing technologies until incorporated in a major standard or of participating in the standards process at all, resulting in inferior and ultimately more costly standards.

The principle of (F)RAND licensing has been broadly adopted to ensure that patent owners who contribute technology to standards agree to make licences available to their standards-essential IP to all comers on terms that are reasonable and free from unfair discrimination, while maintaining the ability to achieve adequate reward for their innovations. There will at times be significant contention between the patent owner and implementer about what constitutes reasonable licensing terms, but this is to be expected as with commercial negotiation on any input cost component and has, for the most part, been readily resolved through bilateral negotiations. In the rare instances where such negotiations have not been successful, contract
law is applicable to the (F)RAND commitment and the courts are able to deal with such disputes (although some cite examples of apparently outrageously high court award of damages to patent holders, such examples are extremely rare as have been demonstrated by independent academic researchers. See eg "Are Patent Infringement Awards Excessive?: The Data Behind the Patent Reform Debate" by Michael J. Mazzeo, Kellogg School of Management, Northwestern University, Jonathan Hillel, Skadden, Arps, Slate, Meagher & Flom LLP and Samantha Zyontz, George Mason University School of Law, available on SSRN here).

However, in the vast majority of cases, the (F)RAND regime and bilateral licensing agreements have enabled the successful deployment and rapid growth of standards-based products and systems. Some notable examples of such successful deployments include the GSM (with four billion users) and WCDMA (with approximately one billion subscribers expected by yearend) wireless telecommunication networks. The flourishing market for mobile phones, which have transformed our business and daily lives, is evidence of the success of the economic incentives created by the IP system and the market-driven FRAND framework for licensing standards-essential IPR.

In summary, there has been no evidence of “windfall gains” to patent owners impeding the adoption of any technology-based standard. On the contrary, the rapid and extensive adoption of WCDMA and earlier GSM telecommunication standards have demonstrated the success of the FRAND discipline employed by standards setting bodies such as European Telecommunications Standards Institute (ETSI) in promoting widespread deployment of networks and products utilizing the adopted standards".

Swiss book price-fixing: can it work?

Where old business models prove inadequate on account of new technologies and old IP laws, the usual answer these days is to call for new business models (whatever, and however effective they may or may not be).  There is however another solution, though admittedly one which may be of limited and diminishing applicability, depending on the technology -- state control of the market.

In March of this year the Swiss Parliament adopted new legislation to fix book prices. This law, which also applies to online book sales, requires the publisher or importer to set the final retail price of books that it publishes in, or imports into, Switzerland, compelling retailers to resell the books at the fixed price.

Following the passage of this law the Swiss Competition Commission decided to suspend its investigation of whether distributors and marketers of French-language books in Switzerland held a dominant position and, if so, whether they had set their prices at an excessively high level (Secretariat of the Competition Commission opened a preliminary investigation in 2007 into the French-language book market in Switzerland to see whether the retail price differences observed between books sold in Switzerland and those sold in France (between 25% and 35% at that time) were caused by anticompetitive activity).

On March 13 2008 the commission decided to open an investigation into distributors of French-language books operating in Switzerland. Distributors obtain exclusive rights to publishers' books and therefore any given book can be purchased only from its respective distributor or marketer in Switzerland. In view of this exclusivity, the commission considered that there were indications that the distributors of French-language books might hold, on an individual basis, a dominant position on the Swiss market, and that the level of prices charged for distribution services might be regarded as abusive pursuant to Article 7(2) of the cartel act. Subsequently, the commission widened its investigation to include Swiss recommended public prices set by distributors, in order to examine whether such practices (as well as the juxtaposition of vertical agreements between distributors and booksellers) could be regarded as illegal within the meaning of Article 5 of the cartel act.

The purpose of the new law is to promote the variety and quality of books, which are considered as cultural assets. Accordingly the publisher or importer has the right to determine the final retail price of the books that it publishes or imports. While booksellers are compelled to sell books at the final retail price they can still offer a general discount of up to 5% on the final retail price, as well as dropping prices for sales to public libraries, bulk sales and sales by book clubs. The law applies to the sale of books on the Internet (but not to digital books).

It will be curious to see how the controlled market for books fares in the era of e-books, downward-spiralling copyright protection and the accelerated closure of traditional book shops. If it works and keeps prices up, I suspect that this will make it more profitable for people to seek to circumvent it.  If it doesn't work and prices fall anyway, it may as well not have been implemented in the first place. Another interesting issue is the impact of this law on current and future contracts struck by authors with their Swiss publishers. But let's wait and see ...

Source: "New legislation introduced to allow publishers to fix book prices" by Silvio Venturi or Pascal Favre (Tavernier Tschanz), International Law Office, 5 May 2011

RPX flotation: brilliant investment or bubble waiting to burst?

I had the pleasure of a long discussion with Intellectual Asset Management (IAM) editor Joff Wild over lunch yesterday, in the course of which we discussed the initial public offering of RPX.   I agreed with him that the offer was likely to be well-subscribed, but expressed my doubts as to whether there is a commercial future for a business plan based on defensive patent aggregation -- particularly given the relatively short duration of patent rights and their high degree of vulnerability.  Anyway, as Joff predicted, the IPO was extremely successful.  In his blog today he writes:

"Defensive patent aggregator RPX Corp has stated that its IPO, which took place today, raised approximately $159.6 million, with shares trading at $19 a pop. This is higher than the original $16 to $18 forecast, and must mean the firm is valued close to, or even over, $1 billion. That is an extraordinary valuation for a company that has yet to have its third birthday and which has generated "just" $100 million since its inception. How much leverage does this give the firm's subscribers I wonder? Could RPX afford to allow any of them to walk away by refusing a request for a discount on subscription fees? 

You can follow RPX share price performance here. As of 5.45 pm UK time (12.45 EST), shares were trading at $23.65, up over 20% on the day. As I say, extraordinary. I cannot do the maths, but I wonder whether RPX is now notionally more valuable than Acacia, the NASDAQ-quoted NPE. Its market cap is currently $1.45 billion. That's up from $90 million two and a half years ago. Is it just me, or is anyone else seeing bubbles when they close their eyes?"

I agree wholeheartedly with Joff's comment and wonder what other readers feel. Do let us know.

Can Western Multi-Brand Retail Giants Prosper in India?

It has been 20 years since India reversed its statist focus in favour of an open-market approach. The move from post-independence socialism to a unique form of market economy is surely one of the great economic success stories of the last two decades. From the IP perspective, the relationship between brands and modes of distribution is one aspect of this ongoing economic story. In that connection, an article that appeared in the April 16th issue of The Economist ("Send for the Supermarketers") attracted my attention.

It is well known that retailing in India is still woefully underdeveloped. Anyone who has been there can testify to the seemingly endless number of small shops (so-called kirana shops) that dot the Indian landscape. In part, such shops are tolerated because they are seen as providing a vital source of economic opportunity for a large number of potential small businesses, and the Indian regulatory apparatus has traditionally brought its full weight to bear in support of these arrangements. Allow in western-style retailing, it is feared, and yesterday's shopkeeper may find that he is no longer competitive.

All of this concern for social safety-netting comes at a cost for the consumer, who is deprived of the benefits of mass retailing. The result is what the article describes as "the most supermarket-hostile environment among big economies in the world." The difficulties include administrative regulation, poor road and train transportation, cold-water storage facilities, complex taxation and the high-cost real estate in many locations.

One manifestation of this policy in support of kirana shops are a series of regulations that hamper certain categories of foreign retail brands from functioning freely in India. Of course, regulatory restrictions are not new in India and are not limited to the retail structure. There was a time when virtually all foreign direct investment (FDI) was limited to a 49% stake by the foreign owner. The best-known example is the Indian car brand Maruti-Suzuki, which reflected the fact that the Japanese manufacturer could only enter the Indian market in the 1980s with a majority local partner.

Today, however, the focus is on the retail sector, where limitations regarding FDI in multi-supermarket chains are still in place. In particular:

1. There is a ban on FDI by multi-brand supermarket chains. This means that the likes of Walmart and Carrefour are still not permitted to enter at the retail level.

2. Such multi-brand chains can up wholesale warehouses, provided that they do not sell directly to the end customer. As a result, for example, Walmart has entered into a joint venture for the provision of wholesale and logistic services and appears to be seeking further such alliances.

3. In contrast, a single-brand retailer, such as Nike, can own a 51% stake in an Indian retail outlet.

These restrictions raise the issue of just how genuinely international any multi-brand retailing brand can expect to be. Granted, even the most successful product brands may be subject to local variation -- but the difficulty in adjusting to local tastes pales in comparison with adjusting to the demands of operating a successful multi-brand retail operation across different and diverse countries.

Carrefour is an excellent example, as its recent exit from the Russian market shows (for a discussion posted on IP Finance on November 12, 2009, regarding Carrefour's tribulations in Russia, see here.) Success, even retail dominance in one major market, provides absolutely no guarantee of success in any other foreign market. On the other hand, the fact that Carrefour has experienced difficulties in establishing a presence in the Russian market does not seem to have directly affected the overall value of the brand.

Circling back to India, the article describes the growth of a local multi-brand retail company called Pantaloon Retail here. As reported in the article, this company has stores in 73 cities in India and it employs 30,000 employees. It expects to reach revenues of $4 billion next year, which is still a small fraction of the total revenues of a Walmart or Carrefour.

My intuition tells me that Pantaloon Retail has no aspirations outside of India. If so, can Walmart or the like successfully compete with this brand at the local Indian level? More generally, are there limits for even the most successful multi-brand retail company at the trans-national level? Considering the strategic task of developing the house brand for such a retail company, must my focus ultimately be breadth or depth? Or can I reasonably achieve both?

Questions, Questions, questions!