Wednesday 31 December 2014

While Aereo is liquidating, is the "Innovators' Dilemma" still alive and kicking?

After a high-profile IP case is decided by the courts, there tends to be little interest about what happens to the parties post-judgment. This is so, even when the losing party is a defendant that tried to disrupt an industry in a media-savvy way, but ultimately fell foul of an adverse judicial decision. An excellent case in point is the Aereo copyright litigation, which ended in June 2014. As readers will likely recall, Aereo was in the business of streaming over-the-air broadcast signals to customers via the internet, whereby each customer had its own tiny dedicated antenna from which the content was then transmitted to customers. No royalties were paid the broadcast providers for their content. All in all, Aereo’s business model was reasonably simple. The basic package was $8 per month to access the personalized antenna and 20 hours of DVR storage, with the option to pay an additional $4 of month for 60 hours of DVR storage. Compare these fees with the $80 a month charges for cable.

Broadcasters challenged this arrangement, alleging copyright infringement. The 2nd Circuit Court of Appeals ruled in Aereo’s favor, finding that no copyright infringement had taken place. The United States Supreme Court disagreed, ruling that Aereo’s scheme did infringe the U.S. copyright laws and ordered Aereo to stop making further use of their system. The decision put paid to the business model that had been employed prior to the Supreme Court decision. Aereo did not throw in the towel and tried to reconstitute itself as a cable company. However, in October a judge in New York approved a ban that prohibited the company from retransmitting live TV broadcasts.

Several weeks later, in November, the company filed for bankruptcy protection under Chapter 11 of the bankruptcy law, which is intended to enable a company to restructure its operations under court protection. However, on December 24, 2014 the U.S. Bankruptcy Court in Manhattan ruled that Aereo can go forward with the sale of its assets via an auction, which indicates that the company will be liquidated. Significantly, the court issued its ruling only after it reached agreement with certain major broadcasters, including CBS, Comcast, ABC and Fox, who will be allowed to attend the auction. As well, Aereo undertook to provide these broadcasters with a weekly update on the progress of the auction process.

The question immediately jumps to mind: why are the broadcasters so interested in monitoring the liquidation of Aereo’s assets? After all, the Supreme Court effectively shut the company down; what difference will it make to the broadcasters to whom and under what circumstances the company’s remaining hard assets are put up for sale ? The answer seems to lie in the fact that these broadcasters are concerned that the purchaser of these assets could use them as the springboard for another attempt to transmit content to end users without paying the content providers. This is so, even if the company itself has undertaken before the court that it will not recommence such activities in the future.

The concern expressed by the broadcasters is particularly interesting in light of the apparent disdain they have shown for the Aereo business model. Thus CBS chief executive Les Moonves is reported to have said in August 2014 that while Aereo attracted “a lot of attention for a service that virtually no one was using.” More generally, commentators wondered just how many people would ever sign up for the service, given that the broadcast signals are anyway free if one simply uses an appropriate antenna. But even if Aereo was a mere gnat in the firmament of television broadcasting, it was enjoying much more rapid growth than other content distribution channels. The Wall Street Journal estimates that Aereo had 108,000 subscribers in 14 cities when it closed down in June. This number pales in comparison with the reported 35 million subscribers at Netflix and Comcast’s base of 22.5 million. But Aereo’s rate of growth gave the industry pause for concern.

After all, Clayton Christensen’s iconic analysis on disruptive technology, The Innovator’s Dilemma, focused on new technologies being developed on a small scale and seemingly posing no threat to the entrenched industry. Even after the Supreme Court decision, perhaps the broadcasting industry has the “innovator’s dilemma” in mind as it seeks to bear careful watch on how Aereo’s assets will be disposed of.

Monday 22 December 2014

Will online distribution of movies provide a Hollywood ending for Nollywood's distribution woes?

For more than a decade, the film industry continues to wrestle with the challenge of online distribution of its content, which
poses a tripartite threat to the existing business models. At once, online distribution is viewed as leading to a decline in cinema attendance as well as to a decrease in the sale of DVD copies for home viewing. If that were not enough, the ease by which unauthorized online copies can be made only serves to exacerbate the double whammy to both less cinema viewing and fewer DVD purchases. It may come as a surprise, therefore, that not everyone in the film business has the same wariness of the online environment. Indeed, at least one prominent national film industry may be seeking its commercial salvation in the online distribution of its contents. No, we are not talking about either Hollywood or Bollywood, but about a rival national film industry that is the second largest world-wide measured by the number of films produced on an annual basis, and the third largest as measured by revenues, namely the film industry of Nigeria, popularly known as Nollywood.

First some statistics: Nollywood produces 50 new film titles every week and the industry is said to constitute 1.2% of the gross domestic product of Nigeria. In a vast country with a pressing need to diversify its economy beyond the oil patch to provide jobs for its young and dynamic work force, Nollywood employs over one million employees. The problem, as described in a recent article that appeared in The Economist, “Selling BlackBerry Babies: Nigeria’s film industry”, is that its current business model, especially the means of distribution of DVD copies (which constitute 90% of revenues), is not up to the task. Consider the anecdotal description set out in the article: hawkers weave between vehicles on crowded Lagos streets, seeking to sell their DVD Nollywood wares for the equivalent of two or three dollars. How many copies does the vendor sell in a day: on a good day, up to five, but things are slow, maybe as few as one or two. Add to that the fact that the sale of pirated copies is rife.

Even at the typical low production cost of $40,000 and a mere ten-day production schedule, it is extremely difficult to make much money from any given single movie. Improving movie quality, which necessarily means increasing the production budget, does not provide a direct solution to the problem, because reliance on DVD sales and the limitations on physical distribution, as described above, do not lend themselves to increasing both pricing power and sales volumes. A better Nollywood movie product in and of itself is not answer. In the words of Obi Emelonye, a film director: “Distribution is hands down the biggest problem…. Solve that, and Nollywood will explode.” But what will be the catalyst to find a solution to this problem of distribution? Nollywood seems poised to rely more and more on on-line distribution via the internet.

Particular note is made of iROKOTV, which has a repertoire of about 5,000 film titles available for streamed viewing. iROKOTV is reported to pay between $8,000 and $25,000 for a film for a limited period of time. These sums, in the words of Mr Emelonye, have “absolutely” improved the profitability of his film business. Not only that, but streaming enables film producers to reach viewers seeking Nollywood contents outside of Nigeria. Indeed, it is reported that iROKOTV has more viewers in London than in Nigeria.

One might retort that the current state of electric power distribution and low levels of computer ownership in Nigeria serve as a powerful glass ceiling on expanding online distribution of contents in the country. Not necessarily so—as with banking services, particularly in East Africa, the smartphone provides a potential distribution device for online movies that will simply by-pass these current limitations. In the words of the piece, use of smartphones in this manner “is a mouth-watering prospect.” Time will tell to what extent these aspirations for leveraging on-line distribution will succeed in putting Nollywood on a more viable commercial footing. Even at this early stage, however, reliance on the oft-perceived enemy of the film industry—the internet and online distribution—is itself a fascinating reversal of accepted common commercial wisdom.

More on Nollywood here

Friday 19 December 2014

STR-IP takes off

According to a media release recently received by this blogger concerning STR-IP -- that stands for "Startup-IP Program -- a new product from Foresight Valuation Group (an intellectual property strategy and startup advisory business). This is
" ... a new initiative aimed at helping technology startups build an IP portfolio that is aligned with their business goals and that would enhance their valuation. STR-IP is particularly important for startups in IP-rich industries ranging from the Internet of Things (IoT) segments such as wearables, automotive and home automation, to material sciences such as Nanotechnology. Foresight’s capabilities at the nexus of technology, IP and valuation, as well as its location in Silicon Valley, uniquely position it to help startups build an IP portfolio that would assist with their overall market success.

New patent laws in the US under the “First to File” regime, recent Supreme Court decisions, as well as the increased risk of patent litigation, make it absolutely critical for a startup to start building its IP portfolio as early as possible. Foresight’s STR-IPTM program provides startups with a structured approach to aligning their IP strategy with their business model and financial projections.
This is a brainchild of Efrat Kasznik (Foresight’s president and founder, Lecturer on IP strategy at the Stanford Graduate School of Business and a one-time guest contributor to IP Finance); we shall be keeping an ear out for news of STR-IP's progress,

Thursday 4 December 2014

The Secret to Start-up Success: Secure IP from a Local University?

Angel investor and founder of inBounce Entrepreneurship Bijan Khosravi makes several important points in a recent article in Forbes titled, “Why You Want IP for Your Startup.”  First, Mr. Khosravi points out that IP, particularly patents, provide a competitive advantage.  Sure, you have a great idea, but competitors are essentially free to copy that idea without IP protection.  The first mover advantage may not be good enough, especially if you need time to expand to other geographic markets.  This seems to be particularly true in the age of Rocket Internet.  Second, Mr. Khosravi points to local universities as great sources of intellectual property for startups.  He points to the Association of University Technology Manager’s search engine for finding university technology [here,].  He provides his own successful example of securing patents from University of California, Davis[Hat tip to Glen Gardner at Vortechs Group.]

IP Issues in Mergers and Acquisitions: Any Recent Examples of Due Diligence Failures Involving IP?

Corporate Counsel has published a pair of informative articles concerning due diligence and intellectual property.  The first article is titled, “Identifying IP Risks in M&A and Tech Joint Ventures: Beyond the Data Room”, by Anne Cappella, Charan Sandhu and Brian Chang of Weil, Gotshal and Magnes.  The second article is titled, “The Financial Impact of IP Issues in M&A,” by Steve Ball and Jon Winter of St. Onge Steward Johnston & Reens.  Both articles provide useful advice designed to help counsel avoid missing intellectual property issues during due diligence.  The overarching message is that corporate counsel should include intellectual property specialists in any due diligence of a potential target.  Both articles raise specific points that should be considered such as: proactively examining a target’s competitors to ascertain whether patent trolls have litigated against the target’s competitors to determine if your target is next; considering potential trade secret misappropriation actions by competitors of the target based on new hires by the target; ensuring that third parties who have worked with the target have not improperly claimed intellectual property possibly owned by the target; having clear title to intellectual property; and properly recording title.  The second article provides a couple of examples where intellectual property counsel were not consulted or there were intellectual property issues missed in the due diligence.  One problem involved Rolls Royce and BMW:

[I]n 1998 the Volkswagen AG Corporation purchased the automobile assets of the bankrupt Rolls-Royce Motor Cars Limited for $790 million, with the value of the physical assets estimated at $250 million. Volkswagen was unaware that Rolls-Royce’s trademark rights were subject to a nontransferrable license from Rolls-Royce Aircraft. Volkswagen purchased the plant, the machinery and the automobile designs from Rolls-Royce, but only learned after the deal that the purchased assets did not include the Rolls-Royce® trademark. So while Volkswagen was able to build the car, it could not brand it with the famous trademark. BMW then acquired the trademark rights for $65 million from the bankrupt Rolls-Royce Aircraft and forced Volkswagen to concede the brand, resulting in a huge windfall for BMW.

The most recent example included Apple’s acquisition of Beats Electronics:

Apple Inc. agreed to acquire Beats Electronics for $3 billion. In doing so, Apple purchased an infringement suit by Bose Corporation, which owns a number of patents directed to noise-cancelling headphones. After the deal was announced, Bose filed infringement suits in district court as well as at the International Trade Commission seeking to ban imports of the Beats headphones into the U.S.
I have to imagine that Apple’s counsel knew they were likely to be sued by Bose Corporation.  Are there any more recent public examples of IP failures in the due diligence before merger or acquisition with a target company?