Thursday, 29 August 2019

Welcoming Dr. Roya Ghafele to the IP Finance Blog!

IP Finance is delighted to announced that Dr. Roya Ghafele, the Director of OxFirst, will join our permanent team of bloggers.  I’ve pasted a short bio of Dr. Ghafele below.  Dr. Ghafele is planning to author a series of posts on IP valuation and management.  Please find her first post on IP valuation below.  We are very excited to have her join us!  

Here is her bio:

Dr Ghafele has been the Director of OxFirst, an award winning IP law and economics consultancy, since 2011. In addition, she has held academic positions in International Political Economy and Business with Oxford University since 2008 and was also a tenured Lecturer (Assistant Professor) in IP Law with Edinburgh University. Prior to that she had post-doctoral assignments at Harvard and U.C. Berkeley. From 2002-2007 she worked as an Economist with the U.N.’s World Intellectual Property Organization (WIPO) and the OECD. She started her career with McKinsey in corporate finance.

Her Ph.D. was awarded the Theodor Koerner Research Prize by the President of the Republic of Austria. Dr. Ghafele was trained at Johns Hopkins University, School of Advanced International Studies, the Sorbonne and Vienna University. During the course of her studies she was fully funded by the Austrian Government because her academic merits were continuously of outstanding quality. She is native in German and fluent in English, French and Italian.

Specialties: IP valuation, FRAND Royalty Rate Determination, IP and Competition Economics

Here is her first post: 

IP valuation – Why it Matters

The major challenge does not seem to be that patents or other forms of intellectual property cannot be valued or that IP disposes of any intrinsic features that would prevent its valuation. The challenge is that many IP managers are still rather ignorant when it comes to the valuation of intellectual property.  This can have a series of adverse effects. On the one hand, intellectual property may be inadequately managed. On the other hand, others in the company may in all honesty wonder what the bottom-line contribution of IP is to business. Without an adequate understanding of the value of intellectual property, much IP risks gathering dust and not being put to work in the most effective manner.

This raises the question how intellectual property can be valued. While there are many different methods that allow to value intellectual property, there currently exist three overarching principles that allow to value IP assets. These principles are in no way different from the valuation of any other assets, be they tangible or intangible in nature. These are the income, market and cost approach. Each of these methods offers different insights. Hence, depending on the situation, they can complement each other. The income method, measures value in terms of future revenues that can be generated from the asset. It looks at upcoming revenue streams and seeks to determine the current value of these assets. As the method is hinged on an outlook of what the future may hold, it is crucial to determine the discount rate, which reflects risks and probabilities associated with such potential future income. This method can be quite helpful if one is keen on enhancing the management of a patent portfolio. It gives the manager an insight as to how much the IP could potentially generate. This can help formulate a forward-looking IP strategy. The market method again looks at comparable rates that kind of similar IP could fetch in somewhat similar market transactions. As such the insight gained is what a typical rate could be for the IP. Such a method can give a helpful first insight when one is for example seeking to sell or license IP. It can allow to understand if one’s asking price is somewhat in the range of what others have wanted. That being said, it can be challenging to find such information and the method says nothing about the specific worth the patent has in a specific business context. The cost method again can help determine costs associated with IP creation. This can be useful when seeking to minimize costs in an IP Department.  

Each of these paradigmatic approaches have their strengths and weaknesses. They also vary in terms of the effort needed to find relevant information. But overall, they can help optimize expected results from intellectual property. Important to know is that any IP valuation is an off-book valuation and this makes it harder to systematically make use of data which has undergone the scrutiny of controlling. To the keen IP manager this is however nothing but a small stumbling block that should not prevent her to systematically manage IP for value generation.

Monday, 19 August 2019

Tax Credit System for Video Games not Working Well in the United Kingdom?

The United Kingdom’s Tax Watch has an interesting report on the alleged abuse of the tax credit system in the United Kingdom by video game maker, Rockstar North, Take-Two Interactive and related companies.  Rockstar North and Take-Two Interactive are two of the related companies responsible for the hugely popular video game Grand Theft Auto.  Despite making 6 billion US dollars, Rockstar North has apparently not paid any corporate tax in the United Kingdom and has claimed 42 million UK pounds in tax credits.  The Report states: 

Video Games Tax Relief was introduced by the UK government in 2014 to provide targeted support for games that were “culturally British”, with a particular focus on support for small and medium sized businesses.

Our analysis shows that the amount claimed by Rockstar North is the equivalent of 19% of the total relief paid to the entire video games industry in the UK since the programme came into effect. This raises serious questions as to whether the relief is being properly targeted, at a time when the industry is lobbying for the relief to be expanded and made more generous.

This report also raises questions as to whether an appropriate amount of profit has been allocated to the UK companies involved in the game’s development. Seven active companies based in the UK, using the Take-Two and Rockstar names, declared a total profit before tax of £47.3m in the UK between 2013 and 2018. However, over the same period we estimated the operating profit of games published by Rockstar to be in the region of $5bn.

Despite the minimal allocation of profits to the UK, Take Two interactive placed a substantial amount of value on the work of Rockstar employees, including those based in the UK. These key employees were given the rights to substantial amounts of the profit generated by the company in relation to games released under the Rockstar label.

It is our opinion that a more appropriate allocation of profit between the US and UK would have resulted in substantially more profit being allocated to the UK. This would have meant that Rockstar North would not be eligible for a payable tax credit. Instead, Take-Two and the Rockstar companies should have had a substantial tax liability in the UK.

It would be interesting to see data on the supposed overall economic benefit of having the development of Grand Theft Auto in the United Kingdom; although I take that type of data with a “grain of salt.”  Part of the conclusion of the Report states: 

Take-Two appears to believe that it is reasonable that close to 100% of the profit should flow to their US based parent companies and senior management, whilst almost no profit flows back to the UK companies involved in either making or selling the game. We do not believe that this division of profits can be justified under the so-called “arm’s length” standard found in international tax law.

There is no evidence that HMRC have challenged this set-up or that Take-Two or any of the individuals named in this report has acted illegally. However, it is open for HMRC to challenge the allocation of profit under the transfer pricing system and we urge them to investigate this case urgently.

My understanding is that some prominent video game makers suffered a stock price drop soon after President Trump's criticism of violent video games.  The full Report is available, here.  (Hat tip to George Turner)

Saturday, 17 August 2019

The World of Concentration and the Absence of Competition Harming Workers/Consumers and Innovation

Jonathan Tepper and Denise Hearn recently published in 2019, “The Myth of Capitalism,” which is around 290 pages with endnotes.  Jonathan Tepper is a former hedge fund analyst and trader, and founded Variant Perception, a consultancy.  Denise Hearn is Head of Business Development for Variant Perception.  In “The Myth of Capitalism,” the authors provide a very ambitious analysis and diagnosis of U.S. economic problems—they start with the question: “Who killed your paycheck?,” and provide many policy proposals.  They critique the Chicago/Harvard School approach to antitrust and point to how investors such as Warren Buffet specifically seek out investing in firms in markets with significant concentration.  They point to the significant increase in merger approvals.  The authors point to the technology companies as problematic, but also point to many other industries which are relatively highly concentrated.  They discuss the problem of “tacit cooperation” between firms in markets with relatively high concentration—smart people do not need to have a meeting to get something done like price fixing.  They further discuss how concentration has led to a monopsony in labor markets—there is only one buyer of labor (or just a few).  This is part of the basis of their argument for why we have for the most part been stuck with relatively stagnant wages.  One of their policy prescriptions is renewed, vigorous antitrust enforcement.  They also discuss intellectual property in various sections of the book and raise some of the well-known critiques of the system.  The authors generally seem to believe that because intellectual property resembles a monopoly (although not always is) then it is problematic.  There is not too much of the book discussing the benefits of intellectual property to start-ups—new entrants to the market and how this may ultimately lead to fewer highly concentrated markets.  However, they do discuss the literature concerning a lower number of startups.  Similarly to Professor Timothy Wu's new book, they also raise issues with respect to political freedom and market concentration. This book is available here for around $18.  

I am also in the process of reading Harvard Business School Professor Emerita Shoshana Zuboff's book, "The Age of Surveillance Capitalism: The Fight for A Human Future At the New Frontier of Power," almost 700 pages with endnotes.  So far, she does not seem to think that rigorous antitrust review will make a difference at all--the problem is more centered around the new markets of selling our personal information and habits by technology companies, and then framing and controlling our behavior through software we interact with.  The number of technology companies does not matter.  She believes there is a need to redefine what is happening in this new surveillance age without trying to refer to preexisting structures--we're dealing with something very new with great danger.  This is a very ambitious book.  This book is available here for around $23.  It is interesting to read the two books close in time.  

Monday, 12 August 2019

Professor Shamnad Basheer

As IPKat and IP Finance blogger Neil Wilkof recently reported Professor Shamnad Basheer passed away.  Neil wrote a very beautiful tribute on the IPKat blog, here.  I encourage you to read it and particularly note his work with children and youth (also here).  About ten years ago, Shamnad and I were both in Munich teaching.  I became very sick, and Shamnad stepped in and kindly gave a presentation at a conference for me.  That was Shamnad to me.  He was always willing to help and such a very kind soul.  We were able to spend some time together getting to know each other in Munich and over the years exchanged emails.  He was always the same—kind, thoughtful and willing to help.  I know there are so many other stories of Shamnad’s kindness.  Thank you for being you, Shamnad.  You are missed.

Saturday, 10 August 2019

New Study Finds Tremendous Economic Impact of US Department of Defense Licensing Program

TechLink--University of Montana, Bozeman; and Business Research Division, Leeds School of Business, University of Colorado have released an impressive report, National Economic Impacts of DoD Licensing Agreements with U.S. Industry (Report), concerning U.S. Department of Defense (DoD) licensing.  TechLink serves as a tech transfer partnership arm of the DoD.  The Report is particularly impressive because of the response rate of surveyed DoD licensees—apparently 95% out of 915 companies with over a 1,000 agreements, and covers the years 2000 to 2017.  Some of the important findings from the Report, include: 

•             $27 billion in total sales of new products and services resulting from the DoD license agreements

•             $4.5 billion in sales of new products to the U.S. military

•             $58 billion in total economic impact nationwide

•             $6 billion in new tax revenues (federal, state, and local)

•             214,791 jobs (11,933 per year) with average compensation of $74,762

Interestingly, about 43% of the over 1,000 agreements resulted in sales in new products and services.  Fifty-three percent had no sales.  The difference in statistics is because some where designated “unknown” and 1% generated sales only outside the United States.  One license agreement resulted in $16.1 billion in sales (Wow).  That agreement concerned an antibody: 

The antibody is used in a top-selling drug, Synagis, to prevent serious lower respiratory tract disease in infants and young children. Without this top-selling drug, commercial sales were just under $4.5 billion and total sales were just under $10.9 billion.

The remaining sales were distributed relatively widely amongst agreements: 

Twenty agreements generated more than $100 million in sales; however, 101 agreements had sales of at least $10 million. Notably, 233 license agreements, approximately 20 percent, generated sales of at least $1 million.

Sales to the U.S. Military were about 42% of the total sales when Synagis sales are excluded.  

Another fascinating statistic is that 82% of the licenses generating sales were to entities that would be characterized as small businesses by the Small Business Administration (basically less than 500 employees).  And, 47% of the 82% are companies with nine or fewer employees.  

Additional economic impact also included: 

[Companies] reported approximately $776 million in total outside investment funding (including venture capital and angel funding) directly related to the licensed DoD technologies. In addition, 25 companies were acquired primarily because of their DoD license agreements. Companies reported that they had sublicensed 64 technologies to other companies. Finally, they reported that they had created a total of 144 new companies to commercialize the licensed inventions, including 23 spin-outs of existing companies and 121 start-up companies.