Swiss book price-fixing: can it work?

Where old business models prove inadequate on account of new technologies and old IP laws, the usual answer these days is to call for new business models (whatever, and however effective they may or may not be).  There is however another solution, though admittedly one which may be of limited and diminishing applicability, depending on the technology -- state control of the market.

In March of this year the Swiss Parliament adopted new legislation to fix book prices. This law, which also applies to online book sales, requires the publisher or importer to set the final retail price of books that it publishes in, or imports into, Switzerland, compelling retailers to resell the books at the fixed price.

Following the passage of this law the Swiss Competition Commission decided to suspend its investigation of whether distributors and marketers of French-language books in Switzerland held a dominant position and, if so, whether they had set their prices at an excessively high level (Secretariat of the Competition Commission opened a preliminary investigation in 2007 into the French-language book market in Switzerland to see whether the retail price differences observed between books sold in Switzerland and those sold in France (between 25% and 35% at that time) were caused by anticompetitive activity).

On March 13 2008 the commission decided to open an investigation into distributors of French-language books operating in Switzerland. Distributors obtain exclusive rights to publishers' books and therefore any given book can be purchased only from its respective distributor or marketer in Switzerland. In view of this exclusivity, the commission considered that there were indications that the distributors of French-language books might hold, on an individual basis, a dominant position on the Swiss market, and that the level of prices charged for distribution services might be regarded as abusive pursuant to Article 7(2) of the cartel act. Subsequently, the commission widened its investigation to include Swiss recommended public prices set by distributors, in order to examine whether such practices (as well as the juxtaposition of vertical agreements between distributors and booksellers) could be regarded as illegal within the meaning of Article 5 of the cartel act.

The purpose of the new law is to promote the variety and quality of books, which are considered as cultural assets. Accordingly the publisher or importer has the right to determine the final retail price of the books that it publishes or imports. While booksellers are compelled to sell books at the final retail price they can still offer a general discount of up to 5% on the final retail price, as well as dropping prices for sales to public libraries, bulk sales and sales by book clubs. The law applies to the sale of books on the Internet (but not to digital books).

It will be curious to see how the controlled market for books fares in the era of e-books, downward-spiralling copyright protection and the accelerated closure of traditional book shops. If it works and keeps prices up, I suspect that this will make it more profitable for people to seek to circumvent it.  If it doesn't work and prices fall anyway, it may as well not have been implemented in the first place. Another interesting issue is the impact of this law on current and future contracts struck by authors with their Swiss publishers. But let's wait and see ...

Source: "New legislation introduced to allow publishers to fix book prices" by Silvio Venturi or Pascal Favre (Tavernier Tschanz), International Law Office, 5 May 2011

RPX flotation: brilliant investment or bubble waiting to burst?

I had the pleasure of a long discussion with Intellectual Asset Management (IAM) editor Joff Wild over lunch yesterday, in the course of which we discussed the initial public offering of RPX.   I agreed with him that the offer was likely to be well-subscribed, but expressed my doubts as to whether there is a commercial future for a business plan based on defensive patent aggregation -- particularly given the relatively short duration of patent rights and their high degree of vulnerability.  Anyway, as Joff predicted, the IPO was extremely successful.  In his blog today he writes:

"Defensive patent aggregator RPX Corp has stated that its IPO, which took place today, raised approximately $159.6 million, with shares trading at $19 a pop. This is higher than the original $16 to $18 forecast, and must mean the firm is valued close to, or even over, $1 billion. That is an extraordinary valuation for a company that has yet to have its third birthday and which has generated "just" $100 million since its inception. How much leverage does this give the firm's subscribers I wonder? Could RPX afford to allow any of them to walk away by refusing a request for a discount on subscription fees? 

You can follow RPX share price performance here. As of 5.45 pm UK time (12.45 EST), shares were trading at $23.65, up over 20% on the day. As I say, extraordinary. I cannot do the maths, but I wonder whether RPX is now notionally more valuable than Acacia, the NASDAQ-quoted NPE. Its market cap is currently $1.45 billion. That's up from $90 million two and a half years ago. Is it just me, or is anyone else seeing bubbles when they close their eyes?"

I agree wholeheartedly with Joff's comment and wonder what other readers feel. Do let us know.

Can Western Multi-Brand Retail Giants Prosper in India?

It has been 20 years since India reversed its statist focus in favour of an open-market approach. The move from post-independence socialism to a unique form of market economy is surely one of the great economic success stories of the last two decades. From the IP perspective, the relationship between brands and modes of distribution is one aspect of this ongoing economic story. In that connection, an article that appeared in the April 16th issue of The Economist ("Send for the Supermarketers") attracted my attention.

It is well known that retailing in India is still woefully underdeveloped. Anyone who has been there can testify to the seemingly endless number of small shops (so-called kirana shops) that dot the Indian landscape. In part, such shops are tolerated because they are seen as providing a vital source of economic opportunity for a large number of potential small businesses, and the Indian regulatory apparatus has traditionally brought its full weight to bear in support of these arrangements. Allow in western-style retailing, it is feared, and yesterday's shopkeeper may find that he is no longer competitive.

All of this concern for social safety-netting comes at a cost for the consumer, who is deprived of the benefits of mass retailing. The result is what the article describes as "the most supermarket-hostile environment among big economies in the world." The difficulties include administrative regulation, poor road and train transportation, cold-water storage facilities, complex taxation and the high-cost real estate in many locations.

One manifestation of this policy in support of kirana shops are a series of regulations that hamper certain categories of foreign retail brands from functioning freely in India. Of course, regulatory restrictions are not new in India and are not limited to the retail structure. There was a time when virtually all foreign direct investment (FDI) was limited to a 49% stake by the foreign owner. The best-known example is the Indian car brand Maruti-Suzuki, which reflected the fact that the Japanese manufacturer could only enter the Indian market in the 1980s with a majority local partner.

Today, however, the focus is on the retail sector, where limitations regarding FDI in multi-supermarket chains are still in place. In particular:

1. There is a ban on FDI by multi-brand supermarket chains. This means that the likes of Walmart and Carrefour are still not permitted to enter at the retail level.

2. Such multi-brand chains can up wholesale warehouses, provided that they do not sell directly to the end customer. As a result, for example, Walmart has entered into a joint venture for the provision of wholesale and logistic services and appears to be seeking further such alliances.

3. In contrast, a single-brand retailer, such as Nike, can own a 51% stake in an Indian retail outlet.

These restrictions raise the issue of just how genuinely international any multi-brand retailing brand can expect to be. Granted, even the most successful product brands may be subject to local variation -- but the difficulty in adjusting to local tastes pales in comparison with adjusting to the demands of operating a successful multi-brand retail operation across different and diverse countries.

Carrefour is an excellent example, as its recent exit from the Russian market shows (for a discussion posted on IP Finance on November 12, 2009, regarding Carrefour's tribulations in Russia, see here.) Success, even retail dominance in one major market, provides absolutely no guarantee of success in any other foreign market. On the other hand, the fact that Carrefour has experienced difficulties in establishing a presence in the Russian market does not seem to have directly affected the overall value of the brand.

Circling back to India, the article describes the growth of a local multi-brand retail company called Pantaloon Retail here. As reported in the article, this company has stores in 73 cities in India and it employs 30,000 employees. It expects to reach revenues of $4 billion next year, which is still a small fraction of the total revenues of a Walmart or Carrefour.

My intuition tells me that Pantaloon Retail has no aspirations outside of India. If so, can Walmart or the like successfully compete with this brand at the local Indian level? More generally, are there limits for even the most successful multi-brand retail company at the trans-national level? Considering the strategic task of developing the house brand for such a retail company, must my focus ultimately be breadth or depth? Or can I reasonably achieve both?

Questions, Questions, questions!

Before-the-event IP litigation insurance

The IP Finance blog has received information concerning what has been described as "an innovative solution to the intellectual property protection requirements of small and medium sized enterprises", following cooperation between McDaniel & Co Solicitors and FirstAssist Legal Protection.  According to the information received,

"The Patents County Court reforms [in England and Wales] are likely to create a forum for the resolution of IP disputes which will improve access to justice by limiting and controlling the costs of litigation. The reforms will undermine litigation which currently uses a conditional fee agreement and an after-the-event legal expenses insurance policy in line with wider challenges regarding recovery of the success fee and insurance premium.

The difficulty with IP litigation at present is the absence of clear rules or guidance on whether an action will proceed in the Patents County Court, where costs are tightly controlled, or the High Court where additional liabilities are potentially recoverable in full from the opponent.

Before-the-event legal expenses insurance is available which will indemnify an IP owner’s legal costs when it is necessary to pursue an infringer. This type of insurance demonstrates that the custodians of a company have made an assessment of litigation risk and obviates the need to hold large cash reserves or seek finance to pay legal fees.

The legal protection available to clients of McDaniel & Co is a before-the-event legal expenses policy in respect of which a premium is payable annually. If a matter proceeds in the Patents County Court, the policy will, subject to terms and conditions, indemnify the costs incurred by McDaniel & Co for bringing the action and any costs awarded to the opponent. In the event the matter needs to proceed in the High Court the policy will indemnify a proportion of McDaniel & Co’s costs and the IP owner’s disbursements such as counsel’s and experts’ fees and can be used to support other funding arrangements.

The McDaniel & Co/FirstAssist Legal Protection solution allows IP owners to factor into their risk management equation the reduction to the overall costs of IP litigation brought in by the introduction of the Patents County Court costs regime. ... Clients of McDaniel & Co can also opt for FirstAssist’s standard before-the-event intellectual property legal expenses policy which can provide cover in jurisdictions throughout the world. ..."

The IP Finance weblog is always keen to receive readers' comments -- particularly from SMEs, since the viability and profitability of insurance schemes such as this one depends on making them sufficiently attractive and well-priced to persuade them to buy into them.

The Patent Cliff: A Coda

As a coda to today's post, attention is drawn to the attached article here that appeared on Bloomberg with a by-line date of April 15th ("Drugmakers Posed to Report Biggest Decline Since 2006"). The losses are attribute the fact that "the companies cope with record patent losses in 2011."

And so the challenge to Pharma becomes increasingly immediate and increasingly substantial.

What To Do in the Face of a Patent Cliff: A View from Medium Pharma

Once again, a potential substantial takeover in the pharma business has hit the headlines. And once again, the motivations for the proposed acquisition raise questions about how Big (and Medium) Pharma see the future of their industry. This time the parties are Canada's Valeant Pharmaceuticals International, Inc. and the target of their hostile offer, Cephalon, Inc. a U.S. rival. As reported at the end of March, Valeant made an all-cash offer for all of Valeant's shares, based on a valuation of $5.7 billion. This amounts to nearly a 25% premium over the closing price of Cephalon at the eve of the offering. Funding will be provided by Goldman Sachs. Valeant has also indicated that it intends to replace replace Cephalon's board if the acqusition takes place.

The motivation for the the transaction, as described in a March 30, 2011 report in wsj.com, is as follows (here):

"The offer suggests just how much the anticipated loss of revenue from patent expirations on key products is re-shaping the pharmaceutical industry. As drugs lose patent protection in coming years, drug makers stand to lose hundreds of millions of dollars of revenue and are searching for growth through acquisitions that plug those expected holes and allow companies to cut costs."

My interest is less in the dynamics of the hostile offer itself (I leave that to my M&A colleagues down the hall) and more on the commercial thinking that was reported to lie behind Valeant's offer. The following points are noted: 1. Cephalon faces a patent cliff in 2012, especially for its Provigil-branded narcolepsy product, with the expected concomitant loss in revenue that will follow such loss of patent protection. 2. The two companies share branded generic businesses in Europe and the acquisition will enable Cephalon to achieve cost-cutting in this area. This will help the company make up at least a part of these projected revenue losses.

Lying behind these two considerations are two quite different views of how Pharma should address the challenge of declining revenues in the face of a patent cliff. Cephalon's position seems to be that the company has acquired several promising compounds and it is confident that its development activities with these compounds will bear fruit in the coming years.

By contrast, the CEO of Valeant, J. Michael Pearson (a former McKinsey consultant),is said to view the matter more from the vantage of "financial engineering". In particular, Mr Pearson emphasized that he would focus on acheiving cost-cutting efficiencies, especially in the marketing of Provogil and other drugs when they come off patent protection. Moreover, he would spend less on R&D in favour of entering into partnerships to develop commpounds. In the spirit of financial engineering, Mr. Pearson also noted in a letter that since Cephalon has itself recently made two offers for acquiring companies, this will "... reduce your cash on hand by over $400 million dollars, which makes Cephalon a less attractive acquisition from our standpoint."

These two views reflect the quite different histories of the two companies. Cephalon was established in 1987 and it focuses on drugs in the area of central nervous system disorders, pain and cancer treatment. Its founder, Frank Baldino Jr., passed away in December 2010 after being in charge of the company for more than 20 years. While the company faces an imminent patent cliff next year, it remains fixed, it seems, on a strategy based of continued R&D to develop new products.

Valeant deals in both branded and generic drugs and it has a particularly interesting past. A former CEO, Milan Panic (and also a former prime minister of Yugoslavia) disposed of $1.24 million in stock, only thereafter disclosing that a major drug lacked regulatory approval. The present company itself is the product of the merger of several pharmaecutical companies. If Mr Pearson's announced intention to deemphasize R&D on the part of Cephalon is an indication of the company's general view on the issue, R&D would seem to be taking a back seat to more downstream development and commercialization.

All of this raises the larger question: whence will come the drivers for the next generation of patented drugs? The belief is sometimes expressed that nimble start-ups (like Cephalon) are a prime source for future dynamic R&D. The trend of Big Pharma to seek to acquire companies, rather than to invest these amounts in internal R&D, supports this view, at least in part. On the other hand, Valeant is hardly Big Pharma, and its announced strategy lying behind the proposed acquisition is hardly a vote of confidence for the ability of a one-time start-up such as Cephalon to continue to be a source of fruitful R&D, at least not on its own.

And so the question remains: whence will come the drivers for the next generation of patented drugs?

Vodafone in Africa - a red footprint

Vodacom, RSA’s market leader in the cellular network space with a market share of 58% and 23 million customers (Wikipedia), is undergoing a major re-brand from its traditional blue/green to red. If you live in RSA, you cannot miss it - it is just as well that you do not have to stop your car on the way to work, every time a billboard goes red. However, it is worth pausing, even if the colour is red and not orange.


The rebrand is not just a marketing tinker. It is the much-talked about and delayed alignment of Vodacom’s branding with its parent company in the UK, Vodafone. It’s really a partial re-brand for the time being; Vodafone’s red and "apostrophe" are now evident but the name Vodacom remains, revealing a measure of caution and for good reason too.

Red is a primary, powerful colour but the colour also has other connotations. A fight breaks out during a school rugby derby between an English school that plays in red and an Afrikaans school playing in brown. The headlines the next day refer to the Anglo-Boer war and the annual fixture is subsequently cancelled. It’s a knee jerk reaction but powerful if the colour connotation sticks. Vodafone are looking to spread their influence over Africa where anti-colonial feelings can be very strong. Using red has obvious risks for the UK giant.

Locally, Vodacom sponsors the Blue Bulls rugby team based in Pretoria, where the company has a significant subscriber base. The Lions rugby team who play in a red/white strip are based in nearby Johannesburg. Does Vodacom reconsider the sponsorship and risk marginalising the Blue Bull faithful or retain it, with all the mixed messages the dual branding could provoke? Vodacom’s sensitivity to this is illustrated in some of its re-branding adverts where the only blue that is retained on screen, depicts the Blue Bulls.

If anyone doubted the ability of a single colour to act as a badge of quality and origin ie function as a trade mark, this re-brand and Vodacom’s obvious advertising spend on educating customers to their new look should convert you. There are even rumours that Vodacom paid off competitor Cell C (whose branding had included red) not to enforce any residual rights they could prove in the colour, against them.

It is difficult to imagine the rumour being true although the RSA telecoms space is no stranger to brand wars over colours. Afro-IP has reported on a number of them, mainly over the colour orange (stop here! for more information on Neotel, Iburst and Orange Telecoms’ fight over the colour, and the difficulties protecting single colours). Now look around at local competitor Cell C and their new advertising campaign. It’s directed straight at Vodacom’s new branding and provoked Vodacom into lodging a complaint before the Advertising Standards Authority that the campaign is disparaging to their brand. Is it…or is it [also] just more exposure for both Cell C and Vodacom? [Please visit the site for links to Cell C's adverts]

Taiwan to defend its tech companies by setting up an IP bank

Taiwan is planning to set up an intellectual property bank in light of the constant suing of Taiwan-based companies by foreign firms for patent infringement, according to that country's Ministry of Economic Affairs (MOEA), according to this report in Focus Taiwan; accusing competitors of stealing patents has become a normal way for international companies to compete with each other these days and large-scale Taiwan-based firms have been the constant targets of foreign competitors, the MOEA says.

In the light of this, Kingsley Egbuonu (Queen Mary, University of London) has put together this list of key facts and recent developments:

* TSMC (a Taiwan-based company) is the world's largest semiconductor foundry; 

* "We know it's coming": HTC joins defensive patent pool in December 2009; 

* Apple sues HTC for patent infringement in March 2010; 

* HTC sues Apple in May 2010; 

* "Let's not sue one another" Microsoft agrees with HTC, April 2010; 

* HTC inks patent pact with Myhrvold's Intellectual Ventures - Licensing, Nov 2010; 

* Taiwan lets mainland invest in technology; 

* Taiwan Patent Court a Concern for U.S. Tech Firms (U.S companies losing patent infringement cases in Taiwan’s new IP court, February 2011;

Kingsley has a few questions and comments based on this:

1. With the recent news of Google attempting to sweep up millions of dollars’ worth of patent portfolio and the ever growing concern about the so-called patent trolls, will this state-led interventionist approach help Taiwanese companies fend off competitors? 

2. Why can't companies be left alone to fight it out with one another without government help?

3. Can the "IP bank" fail like our normal retail or investment banks and what would be the ramifications? 

4. Is it not ideal for the State to focus on developing innovative competition policies to police the monopoly it grants, rather than get involved in litigation between undertakings? 

5. Is this the new game or arms race in our 21st century patent world?

Premium Brands and Private Label Products: The Inflation Challenge

Certainly one of the ongoing point/counterpoint narratives in the world of brands is the competition between premium brands and their private label product rivals. For premium brands to flourish, they prefer a robust economy that will more easily support their pricing differential. Conversely, private labels presumably benefit on a relative basis in an economic downturn with low or no inflation, where diminished consumer purchasing power puts pricing pressure on premium brands.

Assume that the foregoing is correct and describes what occurred during the darkest days of the world-wide (or nearly so) Great Recession. What happens to the relative position of premium brands and private level competitors when the Great Recession gives way to a sub-par economy recovery, under unusual credit and interest rate circumstances, and low inflation suddenly gives way to inflationary pressures in commodities?

One possible answer can be found in an article that appeared in the March 21st issue of Bloomberg Businessweek. Entitled "Nestlé's Recipe for Juggling Volatile Commodity Costs,", the article describes the response of the Swiss food giant to spiking commodity prices in an economic climate of tepid growth, especially in the developed world. There is likely no company in the food industry more exposed to commodity price changes than Nestlé. As the article points out, the company spends over $30 billion yearly on raw materials, which includes purchasing nerly 10% of the coffee crop worldwide, 12 million metric tons of milk and more than 300,000 tons of cocoa. The interesting question is how the company's dependence on commodity prices affects its strategy in promotimg its premium brands.

According to the article, the company has made a strategic assumption that commodity pries will not decline anytime soon. Instead, Nestlé is banking on squeezing cost efficiencies from operations, seeking to raise prices as well, to launch what are described as "more upscale, higher margin products in which raw material costs account for a smaller portion of the retail price." For instance,the company has made a great push into upscale coffee through the sale of single-serve capsules for the Nespresso coffee machines (aided by commercials featuring George Clooney). Whatever the increased cost of the coffee might be, the pricing for these capsules enjoys a price that is 10 times (!) the price that rivals command per cup for unground beans. Additional examples include Mövenpick, a gourmet ice cream with exotic tastes, which is sold in smallish portions that are equivalent to about $15 per quart.

Also noteworthy is the company's high-margin bottled water product--PURE LIFE-- described as the world's largest bottled water brand. The upshot is, according to Nestlé, that being able to command premium prices for its brands makes it easier for the company to swallow increased world commodity prices. In the words of the Nestlé CEO Paul Bulche, "[p]rivate label is raw material cost with a mark up. As the raw material cost incrasesm they are much harder hit than branded products."

The examples brought in the article neither support or refute Bulche's claim. The single-serve capsules for the Nespresso coffee machines, and the measured, pricy portions of Mövenpick gourmet ice cream seem to me to be only niche products. There is nothing in the article that explains why a mainstream product like Taster's Choice coffee enjoys the same pricing power in the face of increasing raw coffee prices. As for PURE LIFE bottled water, it is a non-commodity-based product. The article only hints that this brand has continued to enjoy oversized profits and to successfully compete against private label competitors.

The upshot is that the article provides only some tantalizing morsels of information about how Nestlé plans to compete against private label competitors in the current unsettled economic climate. In truth, given the size of the company, Nestlé's response may depend on what product is involved, making any one-size-fits-all product solution to the challenge of private label competitors inappropiate. To the extent that information on this will be publicly available, it will be interesting to follow this topic, which will have major implications for a broad array of consumer product categories.