Another problem with an intangible asset deal

So, enough about Skype already. Now there is this story about how the $4 billion intangibles play by Disney may face an unexpected glitch in securing those intangible assets (see Disney Faces Copyright Claims Over Marvel Superheroes):

Heirs to the comic book artist Jack Kirby, a creator of characters and stories behind Marvel mainstays like “X-Men” and “Fantastic Four,” last week sent 45 notices of copyright termination to Marvel and Disney, as well as Paramount Pictures, Sony Pictures, 20th Century Fox, Universal Pictures, and other companies that have been using the characters.
The notices expressed an intent to regain copyrights to some of Mr. Kirby’s creations as early as 2014, according to a statement disclosed on Sunday by Toberoff & Associates, a law firm in Los Angeles that helped win a court ruling last year returning a share of the copyright in Superman to heirs of one of the character’s creators, Jerome Siegel.

Did Disney do a complete enough job in its due diligence? According to the story:

Even before the Kirby family sent its notices, Disney was facing criticism from some Wall Street analysts who expressed concern that Marvel’s complex web of copyright agreements might prevent Disney from capitalizing on some Marvel assets.

Given that Disney has been one of the savviest copyright protectors, this comes as a bit of a surprise to me. However, the story notes that:

Disney said in a statement, “the notices involved are an attempt to terminate rights 7 to 10 years from now, and involve claims that were fully considered in the acquisition.”

We will have to see how this all turns out.

Helping commercialization

A couple of recent articles highlight the issue of increasing the commercialization of good ideas.

Steve Lohr at the New York Times writes on the growing use of patent auctions (Now, an Invention Inventors Will Like):

Wrangling over patents is beginning to move out of the courtroom and into the marketplace. A flurry of new companies and investment groups has sprung up to buy, sell, broker, license and auction patents. And venture capital and private equity is starting to pour into the field.
The arrival of these new business-minded players, according to patent experts and economists, could lead to a robust marketplace for patents, where value is determined not so much by court judgments but by buyers and sellers, perhaps, someday, like eBay.

Well, Steve, maybe not like the eBay/Skype deal — but you have the right idea.

Vivek Wadhwa and Robert E. Litan have an piece over at Business Week that focuses on the technology transfer problem (Turning Research into Inventions and Jobs):

Rather than wait decades for the new basic science to trickle out of the Ivory Tower and into products, a mechanism to quickly assess inventions and build associated companies with real potential would show real returns and major job growth within as little as one or two years.

Their solution is to turn scientists into entrepreneurs:

If we want to create jobs, we must first train scientists how to start companies. Tom Katsouleas, dean of Duke University’s engineering school, has a potential solution, called PhD+. For PhDs who wish to start companies and have marketable technologies, Katsouleas proposes that the federal government provide funding for training in entrepreneurship to teach the lab geeks how to get along better in the startup world.

Interesting, but I think a third-best solution. Yes we can do a better job at helping those scientists who also have the aptitude and willingness become entrepreneurs. But beware of simply invoking the Peter Principle of promoting people beyond their competence. A second best solution is to ramp up the patent auctions, as describe above.

The best solution comes at the end of the Wadhwa and Litan piece:

We also need to rethink the importance we ascribe to technology licensing. It should be subordinated to entrepreneurship as a scheme for pushing technology into the world. Instead of being rewarded for generating license revenue, technology transfer offices should be measured on the number of startups they help spawn, and by the employment and revenue created by these startups.

This solution attacks the problem at multiple levels. It puts the emphasis on the outcomes (spin-offs) rather than the intermediate product (more researchers as business people). It widens the focus to multiple activities — licensing and patent sales are part of the spin-off process. Finally, it is applicable to non-science based innovations as well as science-based ones.

In my view, anything that broadens the technology transfer mindset to innovation-creation is a good thing. That includes both increased patent sales (and other alternative financing mechanisms) to spur commercialization and encouraging more entrepreneurship. Neither is the silver bullet. Both are a step forward.

More on Skype – update 3

And the saga continues . . .
From the Wall Street Journal

Two companies owned by the founders of Skype have filed another lawsuit that could complicate eBay Inc.’s $2 billion deal to sell the Internet communications company to a group of investors.
The suit from Joltid Ltd. and Joost N.V.–both owned by Skype founders Niklas Zennstrom and Janus Friis–was filed Friday in a Delaware court. The suit claims that former Joost chief executive Mike Volpi breached his fiduciary duty by using confidential information to broker a deal announced recently by eBay, which owns Skype, to sell a 65% stake in company to private investors.

Quality control or innovation

I know that there is an ongoing debate whether quality methodologies like six sigma are antithetical to innovation (because they stress standardization and elimination of variation). But take a look at BusinessWeek’s recent article
Six Sigma Makes a Comeback – and more importantly its slideshow of examples Six Sigma Goes Shopping. If we define innovation as doing something differently and better, most of these examples could be considered process innovations.

Call it Six Sigma, call it process reengineering (remember that term?), call it process innovation, call it what you like — bottom line it is doing things differently and better. To me, that is what it is all about.

I especially liked the last paragraph in the story:

For a sense of the new approach to Six Sigma, consider Target. It hasn’t enforced its program with the rigor common in manufacturing. “Some companies require their employees to use Six Sigma,” says spokesperson Beth Hanson. “You don’t have to be a black belt or green belt or be certified at all to use Six Sigma [here]. We just offer employees the tools.”

Innovation today isn’t about people in white coats in labs making breakthrough research findings – although it still a part of the game. Innovation is more about front line workers coming up with a better way. We used to call that high-performance work organizations. It sounds like that is exactly what Target is trying to do.

The Economist discovers patents as financial assets

Last week’s Economist ran an interesting story on Patents as financial assets. However, there is a tone to the article (aided and abetted by a misleading title “Trolls demanding tolls”) that is unfortunate. While the article discusses a number of activities on patents, it leaves the impression that the main reason for investing in patents (and other intellectual property) is to become a troll. Yes, there be trolls here. But the vast majority of intangible asset investments is done for other reasons. Operating companies have long bought and sold patents for both operational and strategic reasons. As the article points out, companies can gain extra revenue by selling or licensing out unused technology. Patent brokers also play an important role in helping the small inventor, who may not have the resources or capability, to commercialize their idea.

Nor are pure investments in IP necessarily an infringement play (aka trolls). Investments in revenue-generating IP can be a bonus for the careful investor. For example, both Sir Paul McCartney and Michael Jackson invested heavily in the copyrights of other peoples’ songs. Patent investment companies, such as Royalty Pharma, have provided investors with an investment mechanism as well as providing financing to companies for future R&D.

(Side note: Athena is working on a report on case studies of investing in intangibles – look for this to be published in a month or so.)

Having said that, the fact that the Economist is even paying attention is a good sign. The article ends by saying “IP is moving out of the lab and into the financial mainstream.” I hope that is true.

More on Skype – update 2

In some earlier postings, I discussed the pending case against Skype filed in the UK concerning key VoIP technologies. The main point was that eBay did a less than perfect job of gaining control over key intangible assets when it bought Skype. Now the battle has heated up as the former owners – through their new company Joltid Limited, which controls the software code – have filed a new lawsuit here in the US for copyright violations.

This new lawsuit includes the investors who have agreed to buy a majority stake in Skype from eBay. As the Wall Street Journal notes:

Those investors include private-equity firm Silver Lake, venture-capital firms Index Ventures and Andreessen Horowitz, and the Canada Pension Plan Investment Board. The suit alleges that the investors were aware of Skype’s copyright violation when they were negotiating their deal.

EBay’s filing with the SEC notes that the deal is contingent “no settlement of the pending litigation with Joltid Limited having been effected without the consent of the Buyer (subject to certain limitations).” The New York Times notes that:

A person briefed on the buyers’ due diligence ahead of the deal, but not authorized to speak publicly on the matter, said that the venture capital firms hired a private investigations firm to examine the Skype founders’ business practices. The firm produced a lengthy report that explored the founders’ litigiousness, among other matters, this person said.

The lawsuit also has one interesting new twist. According to the Journal:

Wednesday’s suit also names as a defendant Mike Volpi, a general partner at Index Ventures who previously served as chief executive of Joost, another company owned by Skype’s founders. Last week, Joost said it had removed Mr. Volpi from its board of directors and was conducting an investigation into his actions during his tenure there.

Given that, one has to ask the question as to what the potential new buyers thought about the merits of the original litigation – and the possibility of a technical work-around. One also has to ask whether they have done a much better job of looking into the issue of control of the intangibles than eBay did originally.

In any event, this will make a fascinating case study on intangible asset management once all the dust settles.

Disclosure and intangibles

You may have heard recently about a small law suit between Bank of America (BofA) and the SEC — the case where the Judge angrily through out the proposed settlement. This action has thrown the legal and financial communities into a tizzy — for example see the Wall Street Journal piece BofA Ruling Questions an SEC Weapon and Steven Pearlstein’s Washington Post column What Kind of Judge Stands Up For Truth and Justice?.

Given all this, you would think that BofA violated scores of securities laws and undertook huge nefarious transactions. The substance of the case is much simpler; it concerns disclosure.

As the Judge notes in his decision:

In the Complaint in this case, filed August 3, 2009, the Securities and Exchange Commission (“S.E.C.”) alleges, in stark terms, that defendant Bank of America Corporation materially lied to its shareholders in the proxy statement of November 3, 2008 that solicited the shareholders’ approval of the $50 billion acquisition of Merrill Lynch & Co. (“Merrill”). The essence of the lie, according to the Complaint, was that Bank of America “represented that Merrill had agreed not to pay year-end performance bonuses or other discretionary incentive compensation to its executives prior to the closing of the merger without Bank of America’s consent [when] [i]n fact, contrary to the representation …, Bank of America had agreed that Merrill could pay up to $5.8 billion — nearly 12% of the total consideration to be exchanged in the merger — in discretionary year-end and other bonuses to Merrill executives for 2008.”

The Judge found the proposed $33 million settlement to be unfair, unreasonable and inadequate. It would, he said, penalize the shareholders who have already been victimized by the false disclosure while not penalizing those responsible for the decision. He order the case go to trial.

It is interesting to see a disclosure issue rise to this height of attention. Of course, this was a crime of commission, not omission. The allegation is that BofA consciously said something that was untrue rather than simply failing to disclosure some important information.

The difference is important when it come to thinking about intangibles. False and misleading statements are one thing. Nondisclosure is another. As regular readers of this blog know, I have argued for increased disclosure of intangible assets. In an earlier working paper Reporting Intangibles: A Hard Look at Improving Business Information in the US, I supported more mandatory disclosure. But right now the standard is whether the information is considered “material” — as was the case in eBay’s disclosure of the Skype patent license problems (see earlier posting).

So when does the nondisclosure rise to the level of false and misleading statements? And what does the Judge’s decision mean for the SEC going after those who make such statements? Does it raise the bar – making cases less likely since they well need to go through an uncertain trial process rather than a settlement?

It seems to me that new guidelines will be needed. And as part of those guidelines, “bright line” guidance should be included as to what information on intangibles needs to be disclosed. In other words, is lying actual lying – or is it also just not telling the whole truth? In the case of intangibles, we know that financial statements don’t tell the whole truth. Let us hope that this incident on the importance of disclosure can help change that situation.

IP and the duty of Boards of Directors

Joff Wild over at IAM Magazine has an interesting new posting on his blog – To get boards of directors to take IP seriously learn the lessons that Philips teaches. He specifically cites the comments by Ruud Peters, CEO of Philips IP & Standards, at the recent CIP Forum on innovation at Gothenburg. The bottom line: your need to treat IP as part of the business. As Joff puts it:

By and large, the IP community is made up of lawyers and attorneys. They have a very specific way of seeing and explaining the world. One that is full of legal and technical jargon. But as Peters made clear in Gothenburg, senior executives do not want to hear that. If they are going to be interested in IP, it has to be made real in terms they can relate to – top line, bottom line, value creation, risk and reward.

Good advice – and good posting, Joff.

Process innovation for health care

The Booz & Company magazine Strategy+Business has an interesting new article on A Better Model for Health Care which asserts that:

Unlike other industries, in which products and processes tend to be about 80 percent standardized, and a purchaser has a reasonable sense of what to expect, the U.S. health-care industry is full of fragmentation, friction, unnecessary customization, and excessive costs. Reducing those costs would require holistic change in the practices and structures of the industry.
. . .
The health-care industry–in the U.S. and around the world–is the only industry whose products and services are virtually always custom-built, that is, independently engineered for each customer. If reform efforts simply expand coverage and make the system work faster by installing electronic medical records, costs will only climb further.

So while other industries are moving to more customization, their solution is to move to more standardization.

I understand the point (which has been made by others), but I’m not sure this is quite right. Part of the health care delivery problem may be that it needs to be custom build but the current system is closer to a one-size fits all. If you have a common condition, the system processes are fine–in fact, medical centers thrive on high volume standardized procedures (as much of the discussion of the medical tourism sites indicates)–even if these procedures are individually dramatic, such as a heart transplant. But anyone who has had a non-common problem can testify to the frustration of being routinely shunted into the standard protocols. We all either have or know of the all too common complaint of “assembly line” treatment.

I do strongly agree with the article’s authors that the solution is organizational–as they put it “structures, relationships, and incentives”. The trick here will be to invest the new organizational process based on the emerging collaborative models. Turning back to the Taylorist/Fordist assembly line standardization of the industrial age is likely to fail. A more productive route would be creating better tools kits and components that can be mixed and matched to provide the building block for a customized solution.

Health care has the possibility of being the template for the 21st Century organization. It will be a mix of standardization, customization and collaboration. But just exactly what is the formula for mixing those ingredients is still unclear. Years of evolution and experimentation lie ahead. So look at the current turmoil over health care reform as one step in a very long process.

Ranking competitiveness

I know some folks have made a big deal out of the fact that the latest World Economic Forum’s Global Competitiveness Report shows the US now number two behind Switzerland. They shouldn’t. I’ve always be skeptical of these composite rankings (although I understand why they are necessary). In this case the difference between Switzerland and the US is the difference between 5.60 and 5.59 on their competitiveness scale. Close behind are Singapore, Sweden, Denmark, Finland, Germany, the Netherlands, Japan, and Canada.
I’m also skeptical of some of the indicators used. For example, as far as I can tell, the number of patents grant is a good indicator of . . . the number of patents granted. It tells us nothing about the quality of those patents (for example if they are junk or overly broad), the technical significance of the ideas embodies in the patent, or the commercial relevance.
Far more interesting are some of the subjective measures gauged through a survey of business executives. Take for example the follow question on innovation, “In your country, how do companies obtain technology? (1 = exclusively from licensing or imitating foreign companies; 7 = by conducting formal research and pioneering their own new products and processes)”. Japan and Germany top the list at a score of 5.9 with the US sixth with a score of 5.5. Ireland is 30th with a score of 3.8 and India is 35th with a score of 3.6. Another interesting question was “How numerous are local suppliers in your country? (1 = largely nonexistent; 7 = very numerous)”. Japan and Germany had the highest scores, followed by India and Qatar. The US was 7th. Then there is this question: “How well do companies in your country treat customers? (1 = generally treat their customers badly; 7 = are highly responsive to customers and customer retention).” not surprisingly Japan came in on top with a score of 6.3; the US was 9th with a score of 5.7.
The country profiles give an interesting snapshot of where a nation is relative to others. For the US there are some surprising results. For example, the US is 39th with respect to the strength of auditing and reporting standards, 22nd on ethical behavior of firms and 26th on judicial independence. (There are also some answers I would expect from a survey of businessmen.)
I could go on and on with the specific of the measures, but I think you get the point. I’m not sure I completely believe the numbers, but it is interesting to see how countries rate themselves on such measures.
So, all in all an interesting report. But don’t take the rankings all that seriously. Best to look carefully under the hood, where things are much more interesting.