Searching for corporate eyeballs

Much has been written about the business logic (perhaps out of desperation?) driving the proposed Microsoft-Yahoo merger, namely securing a bigger piece of the Internet search market now dominated by Google. A short article by Janice Fioravante, "Searching for Meaning," in the most recent issue of Institutional Investor, suggests that the Google model for reaping profits from search engines may itself ultimately give way in part, at least for the enterprise, corporate market.

The Google-type of search is described as not "particularly useful to corporate strategists seeking specific business intelligence or to securities researchers trying to stray on top of market-moving developments at companies they cover." The result is that both the search engine heavyweights, as well as smaller providers, are trying to find a better way to meet the needs of the enterprise market. Microsoft has agreed to pay $1.2 billion for a Norwegian company, Fast Search & Transfer. The perceived strength of the Fast Search technology is that it allows for "searching within large enterprises, behind the corporate firewall. Other companies vying in this space include Autonomy Corp., Endeca Technologies and Vivisimo.

The securities industry (to the extent that it has not been battered by recent events) is also trying to get into the game. The goal here is do "deep searching to mine the Web for nuggets of intelligence in domains that the Yahoos and Googles don't [currently at least) routinely reach, such as intranets, chats and blogs." The goal is a few, highly valuable pearls rather than a myriad of undifferentiated sand pebbles. Goldman, Sachs has apparently gotten into the act, investing in a company called Connotate as well as entering a market agreement with this company, so they maybe some substance in this approach.

One way to look at this is that this blooming of a thousand search-engine blossoms will take its toll on the Googles and Microsofts. But my heart of hearts tells me that the enterprise search market is not a disruptive technology, and that the big boys will find a way to dominate this emerging submarket as well.

Markets, bright-line tests and the IP owner

The March 2008 issue of Oxford University Press's quarterly Journal of Competition Law & Economics has just been published. Although much of its content is aimed at mathematically-minded economists rather than policy- and strategy-oriented intellectual property experts, its subject-matter inevitably converges with the interests of that group.

Of particular interest to readers of this weblog is "Economic analysis and "bright-line" tests" by Franklin M. Fisher (Jane Berkowitz Carlton and Dennis William Carlton Professor of Microeconomics, Emeritus, Massachusetts Institute of Technology). According to his abstract,

"Economists testifying in antitrust cases often encounter the demand by attorneys and judges for "bright-line" tests – simple rules supposedly based on economic analysis. This paper argues that, although such tests can have their uses, they are very likely to lead to error without a clear understanding of the purposes of the tests and the economics behind them. Issues discussed include: market definition, market share, the role of profits, and, especially, anti-competitive conduct (including the Areeda-Turner) test for predatory pricing. Examples are drawn from actual court cases (mostly in the U.S.), in many of which the author was an expert witness. The best known of these was the U.S. case against Microsoft, but there are many others".

I believe that bright-line tests are invaluable, however unscientific they may appear to a pure economist. This is because, essentially, the economist measures anticompetitive conduct retrospectively and on the basis of data that has been brought into existence on the basis of, for example, the successful exploitation of a patent monopoly. He has the luxury of epistemological meditation upon the different methods of establishing an ex-post-facto conclusion as to what a "relevant market" is and to whether that market has been subjected to abuse by an IP rights holder. Businesses themselves do not have this luxury, because -- at the time they enter a new market or seek to vary their conduct within an existing one -- the database of facts upon which their market activity will be approved or condemned has not yet come into existence. If they are forced therefore to conduct their business on the basis of generalised principles, rules of thumb and bright-line methodologies, it seems almost unfair that they should not also be judged by them.

You can peruse the contents of the current issue of this journal here.

TomTom, Nokia, face competition concerns

Via Matthew Newman and Stephanie Bodoni (Bloomberg) we learn that the European Commission has extended till 21 May the deadline for concluding its antitrust review of TomTom NV's 2.9 billion euro (US$4.6 billion) bid for digital-mapping company Tele Atlas NV. Tom-Tom, the world's largest maker of car navigation equipment, is buying Tele Atlas so that it can deliver real-time updates on routes to 15 million-plus navigation devices. Meanwhile, the commission is due to rule today on Nokia's US$8.1 billion bid for Tele Atlas's larger rival Navteq Corp.

The European Commission is anxious that the reduction in the number of competing businesses, and the control exercised by device makers over access to information that these devices deliver, will force up consumer prices. A business model that is more competition-friendly would be for TomTom and Nokia throw open their newly-acquired digital mapping resources for open licensing on FRAND terms, thus avoiding some of the sternest competition issues and incidentally generating more revenue from the copyright in the digi-maps.

Rambus Shares Jump 39% on news of Patent Win

It's always interesting to see how the stock market reacts to patent news. Pharmaceutical shares commonly yo-yo on the news of patent grants, wins against generic companies and expiry of major patents. However, until yesterday, I had not see any major share price movement in the semiconductor field.

Rambus has been fighting a patent battle with a number of companies concerning technology used in memory chips. Rambus had previously been accussed of misleading standards bodies (the Joint Electron Device Engineering Council) about their patented technology. A jury in the US has now decided that this was not the case as the New York Times reports. There was no misleading of the other participants.

Rambus share price jumped $7.25, or 39 percent, to close at $25.86 on the news.

The major loser is bound to be Hynix Semiconductor which was found to infringe Rambus patents in 2006 and had damages of $133.6M awarded against it. Another one of the companies involved, Micron Technology announced that it would be appealing the decision as announced in a press release.

How this affects the EU's case against Rambus anti-competitive behaviour (reported here) is not yet recorded.

Has AOL overpaid for Bebo?

Earlier this month internet giant AOL agreed to pay a reputed US$850 for social network Bebo. With over 40 million members, Bebo has obvious advertising and marketing potential -- but its only assets are intangible: its name, the goodwill that continues to attract social networkers and the software that drives it. The deal was brokered on AOL's side by Bank of America Securities and Deutsche Bank Securities. Bebo engaged investment bank Allen & Co. when it opted to put itself up for sale.

By way of comment it would appear that, while social network sites are highly popular, as a genre they are still in their infancy and it cannot be confidentially predicted that models such as Bebo or Facebook,, which have captured the mood of the moment, have any degree of staying power. They may indeed be quite generation-specific (witness the embarrassment of many young users when discovering that their non-fashionable parents have a presence, or are proposing to establish one, in the same network facility). It should also be borne in mind that the social network site is something that has only low barriers to market entry for competitors and new products. On this basis, it is tempting to speculate that AOL's investment at US$850 only really makes sense if it is seen as conferring a principally short-term benefit upon the acquiring party.

Franchising into Canada

"Considerations for Franchising in Canada" is the title of an article on International Law Office by Bruno Floriani and Marvin Liebman (Lapointe Rosenstein). This article, an earlier version of which was published on Getting the Deal Through, explains the different vehicles available to foreign franchisors who wish to carry on business in Canada, in terms of their fiscal and corporate consequences. The authors say that the preferred choice of vehicle for the expansion of a foreign franchise system into Canada is the incorporation of a Canadian subsidiary, but recognise that foreign franchisors may prefer to enter the Canadian market by franchising directly from their country without setting up a permanent establishment in Canada, thus avoiding being considered by Canadian tax authorities as carrying on business in Canada. They write:

" ... a franchisor may choose to contract with its Canadian franchisees directly without having a permanent establishment in Canada. As the franchisor will be only minimally involved in the operations conducted by an arm’s-length entity, income earned in Canada by the franchisor through royalty payments and rent will be qualified as passive income and subject, in Canada, to a withholding tax only.

Second, a franchisor may opt to carry on business in Canada using a Canadian branch or division. If the franchisor actively participates in the operation of the Canadian franchise, any income derived therefrom will qualify as business income which is taxable in Canada on a net income basis. Furthermore, the income of a non-resident franchisor carrying on business through a Canadian branch will typically be subject to a branch tax which is payable at the time the earnings of the subsidiary are accrued (and not at the time the income is paid to the foreign franchisor). In light of the foregoing, few franchisors choose to establish a branch office or division for the purpose of expanding into the Canadian market.

Third, a franchisor may choose to carry on business in Canada through a federally or provincially incorporated subsidiary. This is the most frequently used vehicle by non-resident franchisors wishing to export a franchise system into Canada.The incorporation of a subsidiary presents certain advantages, including the avoidance of Canadian withholding tax on passive income. Nonetheless, the subsidiary’s income will be taxable in Canada on a net income basis and dividends paid to its parent will be subject to a withholding tax. The franchisor may also charge a reasonable fee for providing assistance to its Canadian subsidiary in the operation of its business activities, with the expectation that a reasonable portion of such fee may then be deducted from the subsidiary’s income for tax purposes".

They then warn:

"Significant business and tax consequences arise from each of the above-mentioned structures and a careful review of all relevant legislation pertaining to each is highly advised. In addition, fiscal treaties ratified by Canada may substantially derogate from the tax considerations set out above and should therefore be consulted where applicable".

What constitutes a "franchise" may be defined differently according to the law of individual provinces and, while pan-Canadian trade mark protection is available, remedies for the protection of assets such as licensed know-how may vary across the provinces too.

Obviously, while tax-efficiency and the protection of IP will be a matter of concern to any ambitious franchisor seeking to extend an existing franchise formula into uncharted territory, they are not normally matters that make or break a decision as to whether to franchise. For this reason they are sometimes starved of adequate attention until relatively late in the creation and implementation of the business plan. This in turn may force belated business plans changes, with all the uncertainty and inconvenience that such belated changes inflict. Prudent planning will factor both these issues in at the earliest convenience, since they are the twin pillars upon which every solid franchising infrastructure rests.

Football fans worth £2.50 a year each in ITV sell-off

Earlier this month UK-based broadcaster ITV sold its 50% share in the Liverpool football club website liverpoolfc.tv to the club itself for £15.8m. This transaction was portrayed as part of ITV's programme of disposing of non-core assets. According to How-Do, the website is claimed to be the world’s most popular football club site, with over a million visitors a month. Last year http://www.liverpoolfc.tv/ was the only football club website represented in the UK's top ten sports sites, coming in at number nine with a market share of 1.39%. This year it has climbed to fifth spot and its market share has risen to 1.55%.

This transaction lets us hypothesise a simple equation for valuing commercial/sporting websites at current rates. If 12 million visitors a month enable a price of c. £30 million to be placed on the site, the site value works out at around £2.50 (that's around US$5) per visitor per year. This probably represents a mark-up for the fact that football fans exhibit more loyalty than the average casual site visitor and also display irrational market behaviour. It also probably incorporates a mark-up to take account of the goods and services that are purchased by preference on account of their availability through the site (for example, Liverpool supporters who wish to travel to foreign fixtures with fellow supporters are more likely to be able to do so by ordering fllights and accommodation through liverpooltf.tv than through leaving it to chance or lastminute.com. The football club can also rely upon a raft of trade mark registrations and extensive goodwill in fending off web pages with confusingly similar names.

Is the buzz light years away?

Writing on BrandChannel today, Beanstalk Group CEO and President Michael Stone raises an interesting issue: should brand licensing be conducted with a short-term view to securing accessible income streams, or should it be done with an eye to a strategic policy of enhancing brand value? In "Licensing Is the Purest Form of Buzz Marketing" he says:

"... Let’s start with the worst kind of example, licensing as a non-strategic, opportunistic tactic whose primary purpose is (perhaps) protecting against trademark infringement while generating royalties. While many would hope that such an approach was outdated, a quick wander down these aisles will prove that in too many cases it is still alive and well. Completely transactional in focus, this approach to licensing is the purview of lawyers and agents (as well as the intellectual property owners themselves) of the “Let’s Make A Deal… Any Deal” variety. Furthermore, this approach is scattershot and does little for a brand, except for slapping its most valuable asset—its trademarks—on products that will be short-lived (if they live at all), with little connection to the brand’s equity and which do not resonate with the consumer as anything more than decoration.

Such thoughtless executions are among the reasons that trademark licensing is below the radar of many (but not all) chief marketing officers and brand managers. Of course, this is not surprising given the lack of inspiration that characterizes these kinds of licensing programs. After all, today’s chief marketing officers have a lot on their plates. ... they have to successfully reach consumers who are increasingly adept at declining brands’ offers to participate in their lives.

... if you are lucky, you will run and take refuge in one of the aisles that showcases products with more exemplary approaches to brand licensing today. That’s where you’ll find sophisticated and savvy marketers who have already learned that in today’s fragmented media marketplace, strategic brand extension licensing is among the most authentic and credible forms of buzz marketing and, therefore, an integral part of the marketing mix for today’s most innovative brands.

Licensing as buzz? Yes, when the licensing program matches or extends a brand to products so authentically that the brand enters consumers’ lives in ways that are unpredictable, but completely natural. If done properly, a consumer will have such a meaningful experience with the brand that they can’t resist sharing it with others. It’s the retail form of human media or user-generated content—authentic, relevant, and person-to-person. But unlike the more common notions of buzz, which are often fleeting, risky and not targeted, licensing-generated buzz can be long-term, controlled and highly-targeted.

In addition to driving increased buzz or word of mouth, a smart brand extension strategy also increases awareness among a brand’s core audience and attracts new audiences, inspires loyalty and even generates revenue for the brand. In fact, according to The Licensing Letter, licensed products account for more than $12 million in retail sales per hour.

Take, for example, the Jaguar pen brand extension. Designed by Jaguar’s own auto designers, but manufactured and sold under a license, the pens are sleek, high-end writing instruments that are reminiscent—in design at least—of the Jaguar automobile. Available at luxury retailers in Europe, the pens allow consumers to experience the Jaguar brand in an entirely new but credible way—shifting from the highway or the showroom to the high street and the boardroom. Every time a consumer uses it in front of friends or colleagues, he or she generates a “human media impression” and more importantly offers an implicit endorsement of the Jaguar brand. Is there anything more authentic? The program has been so successful that Jaguar is moving into luxuriously designed home furnishings, another logical, authentic, and on-brand extension.

Are there risks associated with licensing-generated buzz? Yes, but the risks are completely different than those normally associated with buzz programs. The risk inherent in any licensing or brand extension is in not doing it right. At the end of the day any brand’s most important asset is the brand itself, and executing a shoddy or unsuccessful program can have negative repercussions that go beyond simply having an unsuccessful licensed product pulled from retailers’ shelves. But those risks can be navigated and mitigated if licensing is approached correctly.

Before executing any licensing program it is important to not only identify your brand’s leverageable equities (tangible and intangible), but to conduct the proper due diligence you would perform before entering into any new marketplace or launching any new product. This includes evaluating the competitive landscape for each potential licensed product category, understanding the market dynamics and retail needs in the targeted categories, and gauging the ease of entry and the financial attractiveness of the potential licensed product categories.

As many people lament the alleged end of brand marketing as we currently know it, I prefer to think we are at the beginning of a new chapter, a golden age if you will, where licensing-generated buzz will prove to be the most creative and effective form of marketing in a marketing-saturated society".

Buzz marketing (a.k.a. viral or word-of-mouth marketing) is a valuable tool, to be sure. But it's not clear whether it's a means of establishing leverageable goodwill or a product of having done so. A problem also exists in that, while the equity in a brand -- hence its utility for securitisation or its subsequent value if sold -- is something that accrues to the brand owner, the brand manager's ability to keep his job depends upon his being able to point to a direct flow of here-and-now licensing income. It is clear that a balance between these competing interests is desirable in theory -- but how can it be struck in practice? Suggestions, anyone?

Footnote: the Jaguar pens mentioned here are not presumably connected to the Jaguar pens here

Domain tasting: why are IP owners silent?

ICANN's Generic Names Supporting Organization (GNSO) is soliciting comments on its draft resolution to curb the much-criticised practice of domain tasting -- which leverages the value of many brand-based domain names for the benefit of third parties seeking to cash in on them. According to the GNSO:

"The GNSO Council is considering the issue of "domain tasting", a term used to describe the case when someone registers a domain name and then tests to see if the name has sufficient traffic to provide more income than the annual registration fee (usually through pay-per-click advertising). If the name is deemed sufficiently profitable, it is kept.

If not, the current "add grace period" (AGP) - where domains can be returned within five days without cost - is used to return the domain at no net cost to the registrant. Recently there has been a significant increase in the number of domains registered and returned within the AGP. ICANN staff prepared an Issues Report in June 2007 and subsequently a GNSO working group published an Outcomes Report in October 2007. The GNSO Council decided on 31 October 2007 to launch a policy development process (PDP) on domain tasting. An Initial Report was produced for public comment, outlining the policy development process, possible actions that might be taken, and the arguments put forward for and against such actions. Public comments were incorporated into a draft Final Report (posted 8 February) for GNSO Council review and action.

Members of the Council subsequently drafted this motion to curb domain tasting. It would prohibit any gTLD operator that has implemented an add grace period from offering a refund for any domain name deleted during the AGP that exceeds 10% of its net new registrations in that month, or fifty domain names, whichever is greater. An exemption may be sought for a particular month, upon the documented showing of extraordinary circumstances, as detailed in the motion.

The GNSO Council will consider public comments and constituency impact statements regarding the draft motion and incorporate them into a further draft for Council consideration at its scheduled 17 April meeting.

Please submit comments to: domain-tasting-motion@icann.org. Comments may be viewed at: http://forum.icann.org/lists/domain-tasting-motion/".

At the time of posting this blog, only three comments (see here for current tally) have been submitted to the GNSO - and nothing has been heard from IP owners, organisations representing their interests or professional advisers whose clients' interests are adversely threatened by this practice. Readers of this blog are urged either to submit something themselves or to forward it to someone else who might be persuaded to do so, otherwise the GNSO will believe that this is not an IP issue at all. The closing date for submitting comments is 28 March 2008 -- that's just a week away.