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CS207 #9, 2 Dec 2011, Fin
Gio Wiederhold
Gates B12
12/2/2011 CS207 1
Syllabus:
1. Why should software be valued?
2. Principles of valuation. Cost versus value.
3. Market value of software com...
Money
• Income, represented by Money, is the objective
• What is money
• It is an owned asset that can be exchanged for
ot...
Backing
Originally most countries were on the gold standard
– mixed with silver in the US (bimetallic coinage)
a ten-doll...
Paper money
• “Real money” is hard to handle ↓
• “Real money” is hard to manipulate ↑ & ↓
A government can keep gold and s...
Fiat money
• Being on the gold standard has a problem
When more money is needed as in times of war, the
government can pr...
• Anyone who has assets and is trusted
1. The Federal Reserve Bank $ ← taxes & trust
2. A bank can make loans ← assets hel...
Discussion points
1. Role of software and IT in commerce
2. Naivite about the role of IP by economists &
politicians
3. Le...
Topic 1.1: role
12/2/2011 CS207 9
Consumer
Pull
Research
&
Inno -
vation
Tool
building
Product
building &
marketingGeneral...
T.1.2: IP flow in the
Hard-& Software industry
Design &
validation
in US
Product Sales within
the US
Product Sales externa...
Service Sales .
external to the US
Finance experts
at site external to
the US
Income is taxable
Service Sales within
the U...
Topic 2
Naiveté of all politicians and most economists
• Believe in financial-only capital
 Fed. RB trying to lower rates...
Intellectual Resources
Public
&
Private
Intellectual Capital
Rights owned by the business
Intellectual Assets
Available fo...
Use
Creator
Owner
Rights to intangible Use Rights
€ fees$ IP value ??
Use
Owner
Rights to tangible
€ rents
Lease
Creator
$...
$B
400
200
100
300
800
600
500
700
1100
900
1000
1300
1200
1400
1500
200
100
300
(100)
0
400
US tax paid on US
Corporate e...
Retained Financial
Capital
Non-routine Earnings
Repatriated
financial
capital
IP rights
stay .
Home Country Taxhavens
Fore...
New projects in
semi-taxhavens &
low cost countries
IP rights held .
at CONCH .
.
.
Right
to
use
the
IP
IP at MNC .
r
$
to...
T6.1 Standards
• Shared standards create a credible market
• Contain proprietary IP
• Reduce first-to-market advantage
12/...
T6.2 Share IP?
Yes, with care
 Adobe: Reader
 XEROX PARC: Smalltalk OO language nearly dead
 We got C++ instead
 Indus...
Topic 7.1: growth
1. Internal: Organic growth
 improve product line - sequential
 increase penetration, market share
 b...
T7.2 organic
Complementary
• Advertising 25% of business spending
 Google Adwords /Adsense to trigger where ads go
 Show...
T7.2 Growth
• Organic
a. Product R&D investments
 New versions
b. Product Marketing
 New, broader applications
c. Fundam...
T7.3 Generalize
success
A. Broaden
 Adobe : After WYSIWIG printing
1. Pagemaker for Page composition
2. Dreamweaver for W...
T7.4 Advertising became
main web income source
1. Audience
Focused
 Salesforce
In front of competitors
annual sale meetin...
Customer
Segmentation
• Getting a broad market presence is very hard
 Superbowl advertising: 30 seconds costs $3M
o Apple...
`Buzz’
Customer and potential customer interaction
• In the relevant community
 The most powerful sales tool
 Novelty an...
Use your income to
grow IP: R&D and
• Advertising 25% of business spending
 Google Adwords /Adsense to trigger where ads ...
Acquisitions
• A common path for
a. Exit from a startup venture  seller
b. Growth of a larger company  buyer
• 2 parties...
Example:
Adobe events
12/2/2011 CS207 29
Dec..
1982
1984/1985
1976 Xerox Parc uses Press language
to drive its new Dover l...
Consistency in
plans
When comparing business alternatives
• Give each choice the same chance
1. Temporal consistency
 Com...
Opportunities
• There are big waves where much changes
1. Introduction of automation into manufacturing
2. Introduction of...
The End
I hope that you have learned in this course a bit about a
topic which is currently ignored in the CS and
Engineeri...
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Final lecture on Software Economics for Fall 2011

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Cs207 9

  1. 1. CS207 #9, 2 Dec 2011, Fin Gio Wiederhold Gates B12 12/2/2011 CS207 1
  2. 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. 13. Money, a distraction – but it closes a loop 12/2/2011 CS207 2
  3. 3. 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 12/2/2011 CS207 3
  4. 4. 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) 12/2/2011 CS207 4
  5. 5. 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. 12/2/2011 CS207 5
  6. 6. 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 12/2/2011 CS207 6
  7. 7. • 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. 12/2/2011 CS207 7
  8. 8. Discussion points 1. Role of software and IT in commerce 2. Naivite about the role of IP by economists & politicians 3. Levels of intellectual capital 4. Tax avoidance and tax evasion 5. Repatriation of $$$ and IP 6. Role of standards 7. Corporate Growth – organic vs. acquisitions 12/2/2011 CS207 8
  9. 9. Topic 1.1: role 12/2/2011 CS207 9 Consumer Pull Research & Inno - vation Tool building Product building & marketingGeneral Technology Push Business needs Government responsibilities Information Technology
  10. 10. T.1.2: IP flow in the Hard-& Software industry Design & validation in US Product Sales within the US Product Sales external to the US manufacturing, distribution CD creation Internet Development, testing in the US and at CFCs Technical IP Investment Income is taxable Part of income is due to US contribution & taxable 4 June 2010 10Gio Wiederhold IP havens
  11. 11. Service Sales . external to the US Finance experts at site external to the US Income is taxable Service Sales within the US Technical IP Investment by INB T.1.3 Flow of IP in the financial industry say: INB investment bankT.1. Design & feedback Operations external to the US INB system experts in the US Programming and testing Operations of INB within the US INB finance experts within the US Financial IP Investment by INB Income due to Technical US contribution is taxable 4 June 2010 11Gio Wiederhold IP havens
  12. 12. Topic 2 Naiveté of all politicians and most economists • Believe in financial-only capital  Fed. RB trying to lower rates on capital when there is plenty of money already, while imposing coverage limits on small banks • Ignoring offshore intellectual property  Repatriation of earnings leaves the generating asset offshore • Dealing with the U.S. in isolation  Change U.S. Laws & regulations and ignoring the world • Ignoring the interaction of semi-& real taxhavens Trying to apply constraints on one aspect and then help the others indirectly 12/2/2011 CS207 12
  13. 13. Intellectual Resources Public & Private Intellectual Capital Rights owned by the business Intellectual Assets Available for transfer Intellectual Property Legally protectable Patents Copyrights Trade secrets Trade marks Contracts covering intellectual capital Intellectual Property Legally protectable Patents Copyrights Trade secrets Trade marks Contracts covering intellectual capital Topic 3: IP
  14. 14. Use Creator Owner Rights to intangible Use Rights € fees$ IP value ?? Use Owner Rights to tangible € rents Lease Creator $ Price Topic 4.1: Tax avoidance/evasion
  15. 15. $B 400 200 100 300 800 600 500 700 1100 900 1000 1300 1200 1400 1500 200 100 300 (100) 0 400 US tax paid on US Corporate earnings $335B (200 ) US total worldwide corporate earnings $1,550B /year (less during 2008-2009) 1,250B from domestic sources W - F US-sourced earnings moved abroad = $300B Earnings on $1,800B income from foreign sources = $400B $620B available for corporate dividends $690B available in taxhavens for corporate investment US corporate tax revenue $340B (300) US corporate earnings sources → destinations W U F D T R $B & investment in the U.S. T.4.2: effect
  16. 16. Retained Financial Capital Non-routine Earnings Repatriated financial capital IP rights stay . Home Country Taxhavens Foreign Countries periodic ongoing Topic 5: Repatriation
  17. 17. New projects in semi-taxhavens & low cost countries IP rights held . at CONCH . . . Right to use the IP IP at MNC . r $ to gro w the IP $ all untaxed time $ for Buy-in Primary taxhaven Taxing country IP Initial IP & $ buy-in ↓ . ↓ $ for divi- dends Government Shareholders new IP $ for tax on Buy -in $ New profits only at CONCH Use of IP ? Use of funds ? More CFCs new $
  18. 18. T6.1 Standards • Shared standards create a credible market • Contain proprietary IP • Reduce first-to-market advantage 12/2/2011 CS207 18
  19. 19. T6.2 Share IP? Yes, with care  Adobe: Reader  XEROX PARC: Smalltalk OO language nearly dead  We got C++ instead  Industry Group: Standards specifications  Publication in scientific venues ok, not enough  Publication in trade journals ok, little impact Apple vs Microsoft, Xerox vs all: Look and feel Apple had licensed earlier version, without overlapping windows.  Could protect the trashcan 12/2/2011 CS207 19
  20. 20. Topic 7.1: growth 1. Internal: Organic growth  improve product line - sequential  increase penetration, market share  broaden market - parallel 2. External: acquistions a. Startups - mainly people - integrate a. Improve quality b. Broaden b. Mature companies a. Complementary products b. IP exchange low-level technology / management / market c. Just as investment -- added management cost 12/2/2011 CS207 20
  21. 21. T7.2 organic Complementary • 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. 12/2/2011 CS207 21
  22. 22. T7.2 Growth • Organic a. Product R&D investments  New versions b. Product Marketing  New, broader applications c. Fundamental R&D d. Trademark promotion e. Curiosity-driven R&D ? • Through acquisitions a. Additional products  novel – first  complementary  anti-competetive b. Product improvements c. IP: Patents … → as with a d. Knowhow of staff 12/2/2011 CS207 22 • 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 as with a.
  23. 23. T7.3 Generalize success A. Broaden  Adobe : After WYSIWIG printing 1. Pagemaker for Page composition 2. Dreamweaver for Web composition 3. Photoshop for Image editing B. Deepen Salesforce.com  Customer Relationship service on-line Force.com  Operating system for on-line business applications 12/2/2011 CS207 23 IP shared: 1. Customers 2. Marketing 3. Distribution IP shared: 1. Concept 2. Technology 3. HW Support 4. Analytic SW
  24. 24. T7.4 Advertising became main web income source 1. Audience Focused  Salesforce In front of competitors annual sale meetings 3x 1. Fake demonstrators in SF. 2. Give coffee, mugs, rides, literature to attendees in NY 3. Hire all taxis in Nice, give free rides to site in Cannes. 3. Logo & name Essential for branding Metaphor Negative? 12/2/2011 CS207 24 Vs. Superbowl? • Much buzz • Huge audience • Your audience? 4. Timing Have Product ready • Few bugs • Clear operation • Useful 2. Address a. Buyers in corporations b. Users and employees • Understand motivations for change c. Both
  25. 25. 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 12/2/2011 CS207 25
  26. 26. `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 12/2/2011 CS207 26
  27. 27. 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. 12/2/2011 CS207 27
  28. 28. 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 12/2/2011 CS207 28
  29. 29. Example: Adobe events 12/2/2011 CS207 29 Dec.. 1982 1984/1985 1976 Xerox Parc uses Press language to drive its new Dover laserprinter 1978 John Warnock joins Parc Unix NexT Illustrator Mac PC Acrobat Mac PC Internal products: Peter Deutsch Alladin OpenSource PostScript reader Unix Acquisitions: OCRsystems TypeAlign IRS adopts free Reader 1993 Jonathan Gay → Flash, Dreamweaver PC? Aldus, Frame Paul Brainard (Stanford) develops PageMaker, founds Mac PC Nick Corfield founds Frame Tech. for WYSIWG Unix Mac HTML ImageReady Free reader PhotoMerge → Photoshop Elements PPT Macromedia InDesign PhotoStyler → Photoshop Mac&PC
  30. 30. 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 12/2/2011 CS207 30
  31. 31. 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 • 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 12/2/2011 CS207 31
  32. 32. 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. 12/2/2011 CS207 32

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