Intellectual Ventures goes global

The patent holding company, Intellectual Ventures is going global. According to the Wall Street Journal:

Intellectual Ventures LLC, a low-profile investment firm run by former Microsoft Corp. executive Nathan Myhrvold, is laying plans to go global: It hopes to raise as much as $1 billion to help develop and patent inventions, many of them from universities in Asia.
The move could help the firm, formed seven years ago to purchase patents and help inventors dream up new ones, expand its already-vast store of patents. But the new push also could exacerbate concerns that Intellectual Ventures will begin launching lawsuits to pressure companies to pay for use of its intellectual property.
Mr. Myhrvold said that his firm hasn’t sued anybody for patent infringement but that he can’t rule it out in the future.
Intellectual Ventures, which said it couldn’t comment on any current fund raising, employs about 200 people. It is also raising another, separate fund valued at more than $1 billion to buy up existing patents globally, people familiar with the matter say.
Until now, the firm has focused mainly on buying existing patents in the U.S. — though it has done some work overseas — and on dreaming up new inventions in-house with its own group of experts. It has bought thousands of patents but only 26 of its own inventions have been approved so far, according to a spokeswoman. The original patents cover areas such as digital imaging, medical devices and solid-state physics.
The firm had licensing revenue in the hundreds of millions of dollars last year, one person familiar with the matter said.

The Intellectual Ventures model has made some people nervous, especially the massing of a large patent portfolio that could be used in litigation (as the Journal article and a piece I posted last year relate). But Myhrvold says he is trying to help inventors and to create a more liquid market for intellectual property. If they do that, then they will be moving the innovation process along. If they end up simply suing everyone and blocking innovation, then they are a problem. Right now, the evidence seems to be on the former.
So, for now – more power to them.

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Record label as promoter

I’ve posted items in the past about how the model of the music business needs to change. One version is the record label as full scale promoter (as I discussed earlier this year). A story in yesterday’s New York Times —
The New Deal: Band as Brand explains about the “360 contract” and how it is helping one new band, “Paramore”.

Though its success is in large part due to smart pop songwriting and a fashion-forward frontwoman, music executives and talent managers also cite Paramore as a promising example of a rising new model for developing talent, one in which artists share not just revenue from their album sales but concert, merchandise and other earnings with their label in exchange for more comprehensive career support.
If the concept takes hold, it will alter not only the way music companies make money but the way new talent is groomed, and perhaps even the kind of acts that are offered contracts in the first place.
Commonly known as “multiple rights” or “360” deals, the new pacts emerged in an early iteration with the deal that Robbie Williams, the British pop singer signed with EMI in 2002. They are now used by all the major record labels and even a few independents. Madonna has been the most prominent artist to sign on (her recent $120 million deal with the concert promoter Live Nation allows it to share in her future earnings), but the majority of these new deals are made with unknown acts.
. . .
Like many innovations, these deals were born of desperation; after experiencing the financial havoc unleashed by years of slipping CD sales, music companies started viewing the ancillary income from artists as a potential new source of cash. After all, the thinking went, labels invest the most in the risky and expensive process of developing talent, so why shouldn’t they get a bigger share of the talent’s success?
In return for that bigger share, labels might give artists more money up front and in many cases touring subsidies that otherwise would not be offered. More important, perhaps, artists might be allowed more time to develop the chops needed to build a long career. And the label’s ability to crossmarket items like CDs, ring tones, V.I.P. concert packages and merchandise might make for a bigger overall pie.
Not everyone is sold on the concept. Many talent managers view 360s as a thinly veiled money grab and are skeptical that the labels, with their work forces shrinking amid industrywide cost cutting, will deliver on their promises of patience.
. . .
Even inexperienced performers may resist sharing their take from the box office, particularly at a time when plunging CD sales have pushed artists to rely even more on their concert earnings.
But record executives argue that such deals could free them from the tyranny of megahits because there would be less pressure to make back the label’s money immediately. In the 1990s the arrival of computerized data from SoundScan, which tracks retail sales, meant the industry had an instant scorecard that tempted companies to push for Hollywood blockbuster-style opening weeks. The demand for quick payoffs persisted, even though a review of the last 15 years of Billboard data shows the albums that immediately seized spots on the upper half of the Billboard Top 200 chart would go on to sell fewer copies, on average, than the releases that slowly worked their way up.

I’m not sure that this new business model is an answer to the “download challenge”. It does represent an understanding on the part of the record labels that the money isn’t just in the sale of recordings. That is a step forward.

September trade in intangibles

This morning’s BEA trade data shows a slight decline in the overall trade deficit in September — down $300 million to $56.5 billion from $56.8 billion in August. That decline is being attributed to the falling dollar. And, as the New York Times reports “that was the narrowest trade imbalance since May 2005 and took economists by surprise. They had been forecasting the deficit would rise.” According to the Wall Street Journal, “The U.S. trade gap unexpectedly narrowed in September, despite record prices for imported crude, as heavy foreign demand for American-made food products and industrial supplies helped export growth outpace imports.”
The intangible trade balance however worsened slightly, reversing last month’s improvement. Our surplus in intangibles dropped by $44 million compared to a $40 million improvement in August. The September surplus was $10.14 billion. Both royalty payments (imports) and receipts (exports) grew by a small amount, as did both imports of business services. But exports of business services dropped by $30 million.
So, basically a wash over the last two months. For the year (October 2006 to September 2007 compared with October 2005 to September 2006), our surplus has grown by $17 billion. Slow but measurable progress.
The deficit in Advanced Technology Products also worsened slightly. The September deficit grew to $5.2 billion compared to $4.7 billion in August. The balances in life sciences and electronics improved while he balances in aerospace, biotechnology and information and communications technology (ICT) worsened. Our biggest deficit remains in ICT (a deficit of almost $9.3 billion) while the biggest surpluses are in aerospace (a surplus of $4.4 billion) and electronics ($2 billion). The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.

Intangibles trade-Sept07.gif


Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:


Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.


Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Securitization market moves forward

Even in this time of meltdown, at least one new product is reaching the securitization market — Reverse Mortgages To Back Bond Issue – WSJ.com:

Federal housing-finance agency Ginnie Mae plans to roll out as soon as today what it calls the first “standardized” bond issue backed by reverse mortgages, a move aimed at boosting liquidity for one of the fastest-growing markets targeting baby boomers.
The offering, expected to total about $120 million, consists of more than 1,000 government-insured reverse mortgages, which allow homeowners 62 years old or older to turn home equity into income they don’t have to repay until they sell their homes.
Such loans have grown rapidly in popularity in recent years, thanks to the nation’s aging population, a lack of retirement savings and the rapid house-price gains in the first half of this decade. At the same time, a lack of a liquid secondary market for reverse mortgages — where lenders can sell, as opposed to hold, the loans they make, just as what they do with traditional mortgages — has constrained this growth.
Ted Foster, senior vice president for mortgage-backed securities at Ginnie Mae, said bundling reverse mortgages into securities could increase liquidity by providing capital-market funding sources to lenders and ultimately help drive down costs for consumers. “Our objective is to get the best price for consumers by supporting the underlying product,” he said. “Two years from now, the market [for reverse-mortgage-backed securities] will be there.”
For years, Fannie Mae, the government-sponsored provider of funding for home mortgages, has been the dominant buyer of reverse mortgages. Recently, lured by the product’s growth potential as baby boomers retire, more financial-services firms, including Lehman Brothers Holdings Inc. and Bank of America Corp., have been buying these high-yielding loans from lenders with the idea of repackaging them into securities for sale to investors.
But Mr. Foster said until now, reverse mortgages have been packaged and sold by investment banks only to a limited number of investors through private placements — via a complex tax-free structure called a Remic. The Ginnie Mae deal, he said, represents the first standardized reverse-mortgage security on the market and should help “open up the universe” to more investors, especially those with long-term investing horizons such as pension funds and insurance companies.

This is good news for the securitization of intangibles. It proves that with a well structure and standardized product, it is still possible to bring a new product to the capital markets in these turbulent times. Of course, the Ginnie Mae government guarantee certainly helps.
Now, all intangibles securitization needs is a standardized product (and a government guarantee?).

Hollywood wars – part 2

As a follow up to my posting yesterday, I would like to point out Henry Chesbrough’s interesting take on the writers strike in his Business Week piece Behind the Hollywood Strike Talks:

What makes the often fractious negotiations particularly interesting this time are the underlying business-model challenges confronting both sides. Business models enable companies (and organizations such as the 12,000-member Writers Guild of America or the Alliance of Motion Picture & Television Producers) to create and capture value. Once established, successful models often take on a life of their own. This can lead to inertia, and a prevailing model can drift out of alignment with the future needs of an industry.
That’s what has happened here. The traditional business models of both sides worked well when there were a handful of movie studios and three major TV networks. But now everyone can be a writer or a producer, and every computer is potentially a studio, able to create and publish content. More than 1 billion people on the planet are connected to the Internet, a healthy portion of them via high-speed broadband.
. . .
Both sides need to change some strongly held business models to seize new opportunities—a process that has many risks, but potentially lucrative rewards. However, if Hollywood cannot rise to the challenge, the independent, online creative communities stand ready to pounce. The one thing that seems sure is that neither side has a choice.

Good point!

The machine versus the virus

One of the things that has concerned me about our conduct of the “war on terror” has been the asymmetry. Al-Qaeda and others operate as networks; our response was to re-arrange the bureaucracy (Department of Homeland Security). We are using a machine and industrial age mentality (as seen in the rhetorical references to the ultimate industrial age war – WWII) to fight a virus and an information age war. If, in fact, we are now in the first war of the information age, then we need to fight it differently than the wars of the industrial age.
That point was struck home reading two book reviews in the latest issue of the Economist. One was a review of a new biography of one of the leading polemist — Architect of Global Jihad: The Life of Al Qaeda Strategist Abu Mus’ab al-Suri by Brynajar Lia (see The brains behind the bombs). As the review points out:

His life’s work is a 1,600-page opus, “The Global Islamic Resistance Call”, which started to take form in the early 1990s. In it, Mr al-Suri argues that jihadis should avoid creating hierarchical structures, which are vulnerable to attack by local or American security forces, and move instead to a decentralised system of individuals or small local cells linked only by ideology.

Clearly a virus model based on a networked approach.
The second was a review of Winning the Right War: The Path to Security for America and the World by Philip H. Gordon (see Blowing cool, blowing hot):

In his five long chapters Mr Gordon makes a case for reinvigorating the toolbox employed in the cold war for the fight against terrorism. Containment, dedicated diplomacy designed to win friends and allies, investment in promoting Western moral authority and a smart defence strategy worked then, and can work again, he argues. If this approach is followed, he suggests, Islamist extremism, like communism before it, will collapse not because it was defeated militarily but because it will fail to inspire large numbers of people.

This last sound more like a strategy based on the power of intangibles.
So, maybe this isn’t the first war of the information-intangible age after all. Maybe we have been fighting information age wars for a long time – we just haven’t recognized them (the Cold War being a prime example). Just as information and intangibles have played a role all along in our economy (and we are focusing on it much more right now), intangibles and information have always played a role in warfare. One of the most famous, yet overlooked, quote from Sun Tzu on the Art of War is:

to fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy’s resistance without fighting.

To do so requires matching our organization, strategy and tactics to our adversaries. And converting adversaries into allies (“attacking their alliances” as Sun Tzu said).
Sound advice from 2500 years ago.

The Hollywood wars

Things are escalating in the Hollywood wars, raising tension between studios and their writers. As the Los Angeles Times reports, the studios appear to be using the writers strike to clean house:

A day after Hollywood’s writers went out on strike, the major studios are hitting back with plans to suspend scores of long-term deals with television production companies, jeopardizing the jobs of hundreds of rank-and-file employees whose names never appear in the credits.
. . .
These suspensions stop payments to production companies that are largely bankrolled by studios, which count on them to come up with the next “Grey’s Anatomy” or “House.” Under multi-year deals, studios such as Warner Bros., Walt Disney Co., and 20th Century Fox pay for the salaries, the office space, the project development costs, even the utilities whether these entities generate hits or not. Producers and writers typically serve as creative heads of these companies, which vary in size from a handful of employees to hundreds, most of whom do not belong to the WGA.
The major studios that have issued or are planning suspensions include Fox, CBS Paramount, Disney, Warner Bros. and NBC Universal. Sony has yet to act, two people familiar with the issue said. Not all production companies financed by the studios will be cut off. The most prolific ones, run by such high-profile figures as David E. Kelley (“Boston Legal,” “The Practice”) and John Wells (“ER”), are unlikely to be touched, according to studio executives.
If the strike continues for long, some studios are expected to follow suit with their less fruitful movie production deals, using the same escape clause.
The employment contracts that studios have with talent contain a provision known as force majeure that allows them in a crisis situation such as a strike to suspend and terminate deals. Before a deal can be ended, a studio must first suspend it for a period of time, typically for four to eight weeks.
Some studios are using this clause to purge expensive and unproductive arrangements, according to industry executives.
“It’s so sick,” said one television writer worried about getting a suspension letter who asked not to be named for fear of losing his job. “The studios are using the strike to clean their books, getting rid of the writers they don’t want and keeping the ones they do.”
Dana Gould, a former writer on “The Simpsons,” described the studios’ tactic as a “controlled burn” strategy that would save these giant companies millions of dollars. He said the timing couldn’t be better, amid television’s recent poor ratings.
“It’s a reboot. They want to hit Control-Alt-Delete on the fall season,” Gould said.

This is a risky tactic — profitable in the short run but dangerous in the long run. As one leader of the Writers Guild is quoted in the in LA Times story, “This is an industry based on talent, and to break relations with the most talented people in town is not a very good business plan.” Hollywood is one of the most intangible intensive industries in the world. Those intangibles are not just the talent, but the set of relationships. To the extent that those intangible assets flow elsewhere or are irreparably damaged, the industry is vulnerable.
We will see how this develops. It may be a case of the bean counters looking for a short term gain by dumping unprofitable arrangements. It might also be a highly strategic move to rearrange the organizational power structure in the industry. In either case, the studios and the writers have tossed the dice.