According to a story in the Atlantic Wire, a major shareholder is going after AOL for not being more aggressive in monetizing its patent portfolio. Starboard Value LP has sent a letter to the AOL Board late December and then again in late February criticizing the Board’s actions. Starboard’s February letter highlight the patent monetization issue:
As one specific example, in addition to the valuable assets highlighted in our December Letter, AOL owns a robust portfolio of extremely valuable and foundational intellectual property that has gone unrecognized and underutilized. This portfolio of more than 800 patents broadly covers internet technologies with focus in areas such as secure data transit and e-commerce, travel navigation and turn-by-turn directions, search-related online advertising, real-time shopping, and shopping wish list, among many others.
Since our initial public involvement in AOL, we have been approached by multiple parties specializing in intellectual property valuation and monetization, some of whom believe that (i) a significant number of large internet-related technology companies may be infringing on these patents, and (ii) AOL’s patent portfolio could produce in excess of $1 billion of licensing income if appropriately harvested and monetized. Unfortunately, several of these parties have expressed severe frustration that AOL has been entirely unresponsive to their proposals regarding ways to take advantage of this underutilized asset. The Company’s inaction is alarming given our understanding that many of the key patents have looming expiration dates over the next several years which could render them worthless if not immediately utilized.
AOL’s response – we’re working on it:
We have a valuable patent portfolio and several months ago, prior to Starboard’s first letter, the AOL Board of Directors authorized the start of a process, and hired advisors, to realize the value of these non-‐strategic assets.
I don’t know if this will result in a possible AOL auction or other sale of their patent portfolio. But since Starboard Value has also nominated its own slate of Directors for the AOL Board, this could result in a major proxy fight. Regardless of the outcome of that fight, the mere fact of its occurrence would send a shot across a lot of corporate bows. How you handle your IP assets has become a Board of Directors issue. Will the broader question of managing intangible assets follow?
Here is a posting in the Wall Street Journal Real Time Economics blog – Vital Signs: Slowing Services Hiring. According to the posting, “U.S. services businesses slowed their pace of hiring in February from January. The Institute for Supply Management’s seasonally adjusted Services Employment Index was 55.7 in February, down 1.7 points from the previous month.”
What does that tell us? That the economy is slowing? Maybe, maybe not. The release from Institute for Supply Management said “Economic activity in the non-manufacturing sector grew in February for the 26th consecutive month.” And with respect to employment, “The industries reporting an increase in employment in February — listed in order — are: Mining; Other Services; Wholesale Trade; Educational Services; Professional, Scientific & Technical Services; Utilities; Transportation & Warehousing; Information; and Finance & Insurance. The industries reporting a reduction in employment in February — listed in order — are: Retail Trade; Public Administration; Health Care & Social Assistance; Accommodation & Food Services; Arts, Entertainment & Recreation; and Construction.”
Let’s parse this a little. First, this is a survey of non-manufacturing, NOT “services”. It includes mining, utilities and construction. Second, there are “services” and there are “services.” What is happening in “Retail Trade” sends a very different message about the economy compared to what is happening in “Professional, Scientific & Technical Services”, “Management of Companies & Support Services” and/or “Information.” The fact that hiring in “Accommodation & Food Services”, and “Arts, Entertainment & Recreation” is declining tells us something different from the fact that hiring in “Finance & Insurance” is increasing — and even different from the fact that “Public Administration” and “Health Care & Social Assistance” are also declining.
My point is simple: our continued framework of “services” as a aggregate measure is increasingly meaningless. Just as our dividing the economy into “manufacturing” & “services” is outmoded. We need better statistics. And to get to better statistics, we need better concepts of what constitutes our economic structure.
Now there is a research project!
Last month, the Hong Kong stock exchange issued new guidance to listed companies on disclosure of information on the companies’ intellectual property rights (IPR). The purpose of the guidance is to promote “more meaningful disclosure on such rights to the investors.” The exchange’s regulations already require listed companies to include information on IPR “which are material in relation to the group’s business and, where such factors are of fundamental importance to the group’s business or profitability, a statement regarding the extent to which the group is dependent on such factors.” The new guidance requires this disclosure to be part of the description of the business, not just a separate list of IP.
In the US, such disclosures are government mainly by the SEC regulations. Some years ago, the SEC expanded its guidance on what should be included in the Management’s Discussion and Analysis (MD&A) statement required as part of annual corporate filings. Specifically, SEC called for greater disclosure of non-financial information that are “material” to investors.
However, as the new Hong Kong guidance notes:
3.3 Disclosure of IP Rights by issuers in other jurisdictions is far less extensive than in Hong Kong listing documents:
(i) In the US, issuers are required to take into account both quantitative and qualitative factors such as the significance of the matter to the issuers, the pervasiveness of the matter and the impact of the matter in determining what information is material and should be disclosed. As a result, disclosure of IP Rights are far less extensive than in HK prospectuses (if any), and, if they appear, would form part of the narrative disclosure of all material information relating to the issuer’s business.
The question here seems to be whether U.S. companies consider their IPR to be material enough to warrant disclosure. Given this concern, it may be time for the SEC to once again review its MD&A guidance. I would suggest that they go even further than the Hong Kong exchange. IP is one important piece of information for investors. But, as we pointed out in our earlier study, Reporting Intangibles: A Hard Look at Improving Business Information in the US, more needs to be done to disclose intangibles in general.
Hong Kong may be leading the way on IPR disclosure. But the US can take the lead in providing more information on intangibles in general. Increased disclosure on intangibles would have a two-fold positive impact. It would give investors the information they need to make informed decisions. It would also force business executives to pay more attention to how manage their intangibles. Both markets and management benefit — as would the economy as whole.
Thanks to the folks over at the IAM Magazine blog for highlighting this.
As regular readers of this blog will know, I am excited about the possibilities of additive manufacturing (aka 3D printing). Thus, I was interested in a new article in Slate on “3-D printing hype: Will every living room have one?” The article by Will Oremus argues that the popular conception of home production is probably wrong. Additive manufacturing will not completely replace mass production – nor is it necessarily capable of making products out of a range of materials (rubber, wood, etc). But that doesn’t mean that the technique isn’t revolutionary and won’t have profound impacts.
Yesterday, the New America Foundation held an event that talked about some of the issues and opportunities around the “markers movement” or DIY (do it yourself): Tinkering With Tomorrow: Will the DIY Movement Craft the Future?. The comments by Banning Garrett were especially interesting. He pointed out that additive manufacturing changes things on the industrial scale. As I’ve noted before, the power of additive manufacturing is that it allows you to make things you simply couldn’t make before.
Remember, the mass production economy did not begin with the development of idea interchangeable parts. It began with the ability to produce those parts to a tolerance so that they were truly interchangeable. Additive manufacturing will allow us to make things in a whole new way — which will allow us to make whole new things.