Yet another article on the 10-year anniversary of the iPhone

An extra-terrestrial alien visiting Earth in 2007 and returning, now, one decade later, might, at first glance, notice little difference in smartphones between times. For example, most-recent iPhone models superficially appear very similar to their predecessors including the first iPhone model in 2007. The external designs have remained fundamentally much the same including thin form factors, rounded corners and relatively large displays (with multi-touch operation) in comparison to featurephones.

                                                    Spot the difference

iPhone (2007)

iPhone 8 (as rumoured July 2017)

However, superficial appearances are very misleading: technological capabilities in mobile phones have improved massively with numerous valuable innovations from various contributors over the last decade, as did capabilities over the preceding couple of decades since the introduction of the first cellular “bricks” in the mid 1980s.

Another major milestone in cellular technology developments towards 5G

Recent new technology deployments with Gigabit LTE at Telstra in Australia, Sprint in the US and EE in the UK highlight how much cellular communications technologies have improved since the introduction of mobile data services with circuit-switched and then packet-switched offerings from around 20 years ago. Peak and average user data speeds on cellular networks have increased by a factor of 10,000 over 20 years. By way of comparison, microprocessor performance doubling every couple of years, as predicted by Moore’s Law, has increased only one thousand-fold over that period. Cellular performance improvements are therefore quite spectacular given the vagaries of connecting through the ether up to hundreds of metres, as well as processing those signals in the confines of around one square centimetre of baseband processor silicon!

2016 iPhone 7 is 1,000 times faster than the 2007 model

Whereas Apple has done an outstanding job in improving its iPhones in various ways and in motivating its customers to upgrade to later models, it is significantly dependent on other companies for many technical innovations that it includes in its devices.

While marketing departments and the press look for eye-catching new features on specific device models that might surge demand for the latter, it is relentless standards development work with innovations and performance improvements in cellular technologies to increase speeds, network capacity and reduce power consumption that provide the crucial underpinnings for these ––particularly for HD, 4K or even 8K video that sends or receives very large volumes of data over the mobile networks.

Inspiration and perspiration

Development work for this including 4G and 5G technologies is largely undertaken by a hard core of several major technology-developing firms. Research on attendance records of all the 3GPP working group meetings between 2005 and 2014 reveals that a few highly-active firms are largely responsible for the technical developments in that standards development organisation. Over this period, a total of 3,452,040 man hours were spent in 825 working group meetings, mostly in the development of 3G and 4G standards. Distribution of contributions to 3GPP is highly skewed, with a few firms submitting the vast majority. For example, the top two percent of firms (i.e. 9 of them) are responsible for submitting 60 percent of all contributions. Furthermore, approximately one-third of all participating firms (i.e. 161 of them) have not submitted a single contribution to 3GPP.

However, most of the activity in the public records of standards development organisation 3GPP is the mere tip of the iceberg in terms of the total amount of development work undertaken, with even more extensive other activities submerged from public view.

As I noted in a report on innovation and intellectual property protection, it is a popular misconception that innovation is random or serendipitous. In fact, it takes many ideas to find a few initiatives worth experimenting with, which may then enable some to be identified that are worth investing in significantly and might ultimately lead to a winner or two with sufficient development effort and investment. This work is largely undertaken outside of SDO meetings.

The numbers of patents and patent applications declared to the ETSI IPR database as possibly being essential to these cellular standards are also very skewed. A small number of mostly the same companies as above account for a large proportion of patent declarations. When I last checked, seven companies including Ericsson, Huawei, Nokia, Qualcomm and Samsung accounted for 70 percent of the many thousands of patents declared in the period 2008 to mid 2015.

Value for money in cellular patent licensing

Licensing fees paid in the smartphone industry are substantially for standard-essential patents and in some cases for non-SEPs. Total patent licensing costs for Apple and other smartphone OEMs at around only a few percent of revenues are good value given the development efforts and performance improvements delivered by technology developers.

Licensing fees pale in comparison to the profits generated by Apple. The original iPhone was introduced in June 2007 at a price of $599 in the US. This and subsequent iPhone models have generated very large profit margins, as illustrated by the difference between retail prices and manufacturing costs.

Substantial mark ups and profits to Apple on iPhone

	2007	2011	2016
Model	iPhone	iPhone 4s	iPhone 7
Standard/technology	2G EDGE	3G HSPA	4G LTE- Advanced
Version (storage)	8GB	16GB	32GB
Full retail price*	$599.00	$649.00	$649.00
BoM cost*	$222.55	$178.82	$246.91
Markup ($)	$376.45	$470.18	$402.09
Markup (%)	169%	263%	163%

* Source: TechInsights/Portelligent

According to Strategy Analytics, Apple sold 231 million iPhones with an operating profit (i.e. after some other operational costs) averaging $239 per phone in 2015. That represents 36 percent of its $669 average selling price that year.

Following the introduction of a new model every year at gradually increasing prices, “the 10th anniversary iPhone, the next model, expected to be massively redesigned and packed with state-of-the-art technology, could sell for as much as $1,200 to $1,400, according to some estimates”.

Analysts also estimate patent licensing fees paid to Qualcomm average about $10 to $20 per iPhone. Apple has stated that Qualcomm charges it "at least five times more in payments than all the other cellular patent licensors we have agreements with combined."

On that basis, Apple is paying a total of between $12.50 and $25.00 per iPhone in fees for licensing from all cellular patent licensors. That is equal to between two percent and four percent of iPhone prices. Licensing fees as a percentage of consumers’ total cellular expenditures over a smartphone's approximate two-year service life, including operator service fees averaging around $40 per connection per month in the US, for example, are considerably lower.

Happy anniversaries

It is also ten years since I published my abovementioned report, noting as well that innovation can occur in many ways, with a variety of different business models and that fully vertically-integrated companies had become a rarity in technology industries. I stated that explicit recognition of value through licensing was increasing innovation, competition and customer choice with third-party supply of IP, in addition to that for components and manufacturing. That conclusion still holds.

Google's Competitors Take a Swipe at Google's "Academic Influence Campaign"

The Campaign for Accountability (CA) has released a report on Google's "influence" on academic papers.  Notably, The Chronicle for Higher Education states that "The Campaign for Accountability" is funded by Google's competitors.  The Wall Street Journal has followed up with an article titled, "Paying Professors: Inside Google's Academic Influence Campaign -- company paid $5,000 to $400,000 for research supporting business practices that face regulatory scrutiny; a 'wish list' of topics."  The CA report notes that "the influence" extends to direct funding of work by researchers, or researchers who were affiliated with institutions that were receiving funding.  The CA report then states that 66% of the papers funded did not disclose Google funding and that 25% of the directly funded papers did not disclose Google funding.  The information underlying the CA report was apparently partially obtained through state Freedom of Information Act Requests from professors at public universities.  Thus, there may not be a full picture of Google's activities--"influence" at private institutions. 

Here are a few preliminary thoughts.  First, Google is not the only company that strategically acts to influence academic research in fields that impact it.  As the Wall Street Journal points out, this happens in many industries.  My guess is that Google's competitors are acting similarly.  They just may not be as good at it, haven't had the light shined on them, or not have as many academics with similarly aligned values.  But, again, that is a guess.  Second, my impression is that Google's actions seem aimed at "rewarding" or "encouraging" research that it likes--not so much that it is paying people to make specific findings or skew research results.  Google encouraging research by people who have values aligned with Google doesn't seem too nefarious. This doesn't seem to be the same as paying for skewed or specific (incorrect) findings.  Third, my guess is that it is highly irregular to disclose every funding source that an institution has with whom you may be publishing or presenting an article.  I don't know the details, but that likely makes the numbers in the CA report higher. 

Fourth, it is plausible that the 25% number of directly funded papers that did not disclose Google funding could be an "oversight."  Importantly, it is unclear from the report when the funding was provided for all of the papers--either before, while, or after the papers were written.  I am assuming that the Wall Street Journal is using the most "damning" examples in its article.  Notably, some professors appear to have been in communication with Google about their papers in draft.  The point that some professors want feedback from the entity who they are writing about or in the industry is a pretty good one.  A conscientious professor would want to make sure they are accurately representing the way a particular technology or system or company operates.  Fifth, my understanding is that it is not entirely clear what should be disclosed and not disclosed in papers concerning source of funding.  I am sure my institution receives money from many sources, and I've never believed that I had to disclose those funding sources.  And, if Google or any other company sponsored a conference I presented at, I wouldn't mention that as a matter of practice in a paper.  Moreover, I find it hard to believe that if I received funding from Google once (or twice) that in the future I must disclose that every time I take a position that may support a position Google may have.  Sixth, public/private partnerships are not unusual and private funding of research happens somewhat regularly.  Professors frequently consult with private companies.  Seventh, this CA report (and the press it is receiving) may lead academics and companies to be more careful about disclosing funding sources.  That may be a good thing--within some reasonable bounds. [Hat tip to Professor Caron's Tax Prof Blog for a link to the Chronicle of Higher Education article and the CA report.]

Newspapers Fight Back Against Facebook and Google for Stronger IP Protection

In most intellectual property law courses and many property courses in the U.S., the INS v. AP case is taught.  In that case, the U.S. Supreme Court created the INS misappropriation claim which essentially protects the gathering of “hot” or “fresh” news from free riding competitors.  The decision was a close one and has been criticized over the years.  Occasionally, it rears its head in cases dealing with financial information and in one case seemed to cover paparazzi photos.  My impression has always been that the U.S. Supreme Court was attempting to protect the news gathering business because of the importance of having an informed citizenry in a democracy. 

Interestingly, at the confluence of fake news and President Trump’s attack on the media, the Washington Post added a slogan to its website: “Democracy Dies in Darkness.”  Prior to the fake news issue and presidential attack on the media, the newspaper business had not done well—arguably because of digital media and the internet.  Newspaper businesses through the News Media Alliance are now attempting to obtain an exemption to antitrust law which will allow them to negotiate collectively against entities such as Facebook and Google.  The Los Angeles Times states:

By banding together news outlets would have more leverage against two companies that command more than 70% of the $73-billion dollar digital advertising in the U.S.  By comparison, newspaper ad revenue in 2016 amounted to $18 billion, down from $50 billion a decade ago, according to the Pew Research Center. 

According to the article, "pushing for" stronger intellectual property protection is part of the goal.  It will be interesting to see whether the Trump Administration grants the exemption. 

UNCITRAL Considering Model Law of IP Licensing

The United Nations Commission on International Trade Law (UNCITRAL) is considering creating a model law concerning intellectual property licensing/transactions.  The Note by the Secretariat outlines the potential need and benefits from such a model law:

[T]he panel noted a gap in the law with respect to contractual matters. While some intellectual property laws contain a few provisions addressing contract terms, there is no general commercial law directed specifically to intellectual property licensing. Instead, contracting parties must rely on a general intellectual law merchant based on ad hoc rules and practices that often require specialized knowledge and experience. This causes increased transaction costs and barriers to international trade, and puts small and medium-size enterprises at a disadvantage.

. . . The panel referred to studies that show the benefits that States derive from increased intellectual property commerce. These benefits include: (a) superior access to finance and venture capital; (b) higher quality utilization of national human capital; (c) increased local inventive activity; (d) better access for local firms to technology: and (e) streamlined and enhanced access for the public to creative content. Realizing these benefits also requires legal support for commercial transactions in intellectual property, e.g. “licensing.” The lack of a general commercial law text specially crafted to the unique needs of intellectual property licensing constitute a barrier to realization of these benefits.

The Note by the Secretariat also lays out issues related to the feasibility of developing an international model law on intellectual property transactions similar to the CISG: 

"59. To establish the feasibility of the preparation of a uniform law text on intellectual property licensing, the panel then discussed a range of commercial issues that arise in typical intellectual property licensing contracts and ways in which they could be usefully addressed. These issues include the following: 

  (a) Scope of work: the proposed text should address intellectual property licensing issues that could be addressed with non-mandatory law rules that the parties could vary or derogate from, with the understanding that the text is not intended to alter provisions of intellectual property law;

  (b) Definitions and rules of interpretation: terms, such as “assignment”, “licence”, “exclusive”, “scope”, “use”, and other terms that would appear in the text, would need to be defined; also reference would need to be made to the general obligation of good faith and reasonable conduct;

(c) Contract formation: the question would need to be addressed whether there should be any special rules for the formation of an intellectual property licensing contract apart from a State’s general contract law rules on matters, such as written form and contract formation by electronic means; in this regard, it may be useful to review the Unidroit Principles of International Commercial Contracts;

  (d) Contract interpretation: a number of questions would need to be addressed, including whether: (i) the parties may agree to limit interpretation solely to the terms of a written instrument; (ii) if the written instrument is ambiguous, it is then proper to look to the conduct of the parties; (iii) a contract should be interpreted by neutral rules or whether there should be a rule in favour of one party (e.g. an author); and (iv) it is necessary to address interpretation of terms that call for successive performances, or that require performance to the satisfaction of the other party; 

  (e) Implied terms: the text would need to address the question whether an intellectual property licensing contract should be deemed to include implied terms, such as an implied representation about ownership or control of the intellectual property by the licensor, or a duty of cooperation, or mutual obligations to act in good faith;

  (f) Obligations and their performance: it may be necessary to address the general obligations of the parties (e.g. the licensor to enable use and the licensee to use according to the terms of the licence and pay royalties) and their performance; 

  (g) Transfer of rights and acceptance of duties: it may be necessary to address transfers of intellectual property rights by a licence agreement and transfers of contractual rights, for example, by an assignment of a right to payment, and to distinguish acceptance of duties from a transfer of rights; 

  (h) Breach of contract and remedies: it may be necessary to address situations that would constitute breach of an intellectual property licensing contract and the relevant remedies (e.g. whether exact or substantial performance is required, whether a distinction would need to be made between a breach that allows ending the contract and one that only allows damages, the measure and type of damages); and

  (i) Conflict-of-laws issues: the law applicable to an intellectual property licensing contract may also need to be discussed and in particular whether the parties may choose it and, if so, what matters may be covered by the law chosen by the parties. "

The Increasing Value of Trade Secrets: Baker & McKenzie and Euromoney Release Trade Secret Report

The law firm of Baker and McKenzie (and Euromoney Institutional Investor Thought Leadership) has released a 22 page report titled, “Protect and Preserve: The Rising Importance of Trade Secrets.”  The authors surveyed 404 senior executives in industries which included Industrials; Financial Services; Consumer Goods/Retails; Information, Communication and Technology; and Chemical, Healthcare, Biotechnology, and Pharmaceuticals.  Over half of those surveyed reported that trade secrets were more valuable than other types of intellectual property for them.  Additionally, 69% of those surveyed believe that trade secrets will be even more important in the future because of the rapid change of technology.  Apparently, short product/service cycles coupled with the time required to obtain some IP rights (patents?) may make them less important.  The key findings of the report, include:

[1] In our survey, 82% of respondents said their trade secrets are an important, if not essential, part of their businesses. Among industries, 46% of financial services executives said they consider their trade secrets to be essential to their corporate strategy, followed by industrials and ICT executives (both 41%), healthcare (35%) and consumer goods and retail (27%).

[2] Among our respondents, 61% said that protecting their company trade secrets and IP is a board-level issue, reflecting the rising value of trade secrets in our digital age. Nearly one-third ranked it a top-five concern.

[3] Among the companies in our survey, 20% said they’ve had trade secrets stolen. Another 11% said they don’t know whether they’ve been the victim of misappropriation, indicating that the incidents of theft are likely higher. The healthcare industry is by far the most targeted, with 33% of those executives in our survey reporting that they’ve suffered trade secret theft, followed by industrials (18%) and ICT (17%).   

[4] When asked to identify the greatest threat to their trade secrets, 32% of our respondents said they most feared having trade secrets stolen by former employees, followed by suppliers, consultants and other third parties (28%), and current employees (20%). Another 15% said they most fear rogue or state-sponsored cybercriminals or hackers.

[5] Despite the heightened awareness of the importance of trade secrets, only 31% of our respondents said they have procedures in place to respond to the threat of or actual theft of trade secrets. Given that trade secrets are no longer protected once they become public, the question is how much more they should be doing to manage this risk.

The report identifies the apparent cause of the disconnect between the importance of trade secrets and the fact that companies have insufficient protection with the belief that many companies do not know which of their trade secrets are the most valuable until they are actually stolen.  One reason for this appears to be a failure to audit and perhaps a lack of clarity in valuing trade secrets.  Executives also seem to want stronger trade secret protection, particularly those based in Asia.  [Hat tip to Corporate Counsel for a lead to the report.]

Overview of the JOBS Act about Equity Crowdfunding and Success Stories

The University of Memphis Cecil C. Humphrey’s School of Law law magazine (Spring 2017) has an excellent and concise five page overview article concerning the JOBs Act and crowdfunding.  The article describes three types of equity crowdfunding under the Act and discusses the related regulations.  The article notes that, “As of this writing, there were over 20 debt and equity crowdfunding platforms, with 186 companies having launched a campaign through them, and with 79 of those companies hitting their minimum funding target.”  Apparently, $19 million was raised for the 186 companies.  Interestingly, the real estate sector is a strong participant in crowdfunding. One success story described in the article concerns Zenefits, a human resources services company for smaller entities which notably raised $300,000 “on Wefunder.com at a $9 million valuation in March 2013; [r]aised $15 million at a $70 million valuation in January 2014; [r]aised $66 million at a $500 million valuation in June 2014.”  The second interesting story concerns Elio Motors, which raised $16 million on “StartEngine from 6,600 investors in early 2016.”  According to the article, Elio Motors has an over $1 billion valuation. 

The article points to Indiegogo (“movies, games and tech gadgets”) as an equity crowdfunding platform that “is expected to bring millennials” into the game.  Indiegogo’s website notes that over $1 billion has been raised over 650,000 projects in 222 different countries since 2008.  Indiegogo’s equity crowdfunding platform is called, First Democracy VC, a partnership with MicroVentures.  The First Democracy VC website apparently went live in December of 2016 and a couple of companies have raised a half million dollars (US) or more. 

Okay amigos, tell me how much George Clooney's favorite tequila brand is worth

Let’s start with a confession: try as he may, this blogger still finds the valuation of trademarks and brands a bit of a black box. For sure, there are some fine books that attempt to explain how this kind of valuation is done (see, here, for example, the excellent book by Gordon Smith and Susan Richey,Trademark Valuation: A Tool for Brand Management). But the sense of unease remains.

Against this backdrop, the following headline that appeared on reuters.com on Thursday grabbed his attention: “Diageo to buy George Clooney’s tequila for up to $1 billion.” Diageo, despite being saddled with one of the worst rebranded company names in recent memory, has managed to become the world’s largest spirits maker. Recently, it has taken an increasing interest in the high-growth market for tequila.

Enter “Casamigos” (meaning “house of friends” in Spanish), which was established only in 2013 by actor George Clooney, entrepreneur Rande Gerber, the spouse of supermodel Cindy Crawford, and real estate developer Mike Meldman. According to the deal, the owners of the company will be paid $700 million, with an additional $300 million to kick-in over 10 years if certain performance goals are met. While one billion dollars is not an especially large sum for an acquisition into today’s business world, it is hardly an insubstantial amount for a four-year old brand selling into a market with established competitors.

Crucially, the founders, or at least some of them (surely George Clooney?), will continue to promote the brand. Within the Diageo stable of tequila offerings, it is said that Casamigos will be promoted as a “celebrity lifestyle brand”, while the existing Don Julio product will be promoted as a “heritage craft spirit’.

For someone who is trying to make sense of this transaction and the acquisition price, consider the following, as reported in the reuters.com report:

1. Morgan Stanley estimates “the deal’s enterprise value was about 20 times annual turnover”. Compare this with what is described as an industry standard of enterprise value in the range of 4-6 times sales.

2. Morgan Stanley added that “If the brand sustains its growth, it could potentially be the next Patron [described as the major competitor in the tequila market]," …."But if not, it might be value destructive."

3. As for the fact that Diageo will be flogging two tequila products, however the respective brands will be positioned, analysts at Bernstein were skeptical:

"In our experience, it is difficult for sales, distributors and customers to focus on two brands in the same category at similar price points at the same time.”

4. How central to the deal is George Clooney’s promotion efforts? According to Morgan Stanley, Clooney’s continued focused involvement with the product is crucial. As suggested above, the brand positioning of the product rests on its celebrity status.

5. Whether it is reasonable to expect Clooney to promote the product for the next 10 years is anyone’s guess. If not, can one reasonably expect “Casamigos” to meet its goals and successfully position itself as a celebrity brand?

But all of this uncertainty is not simply the purview of analysts and other third-party observers. Consider the words of the president of Diageo North America, Deirdre Mahlan. A high-growth company like Casamigos (54% growth over the last two years) is "notoriously challenging to value under traditional methods".

Query whether this is simply another way of saying that the traditional methods cannot support the valuation given for the deal, which will soar or crater as a function of the ability to continue with the star-associated aura of the product. Disentangling the value of the brand from the contribution by George Clooney in continuing to promote the product strikes this blogger as a particularly challenging exercise in the valuation of intangibles.

Picture on lower left by ESA/Hubble