The WIPO Information Meeting on IP Financing: some notes

The IP Finance weblog would like to offer its sincere gratitude to Baskut Tuncak for preparing the following notes. Baskut is a fellow with the Center for International Environmental Law (CIEL) in Geneva; he works in the IP, Trade and Sustainability department, looking at Tech Transfer of Environmentally Sustainable Technologies. Baskut writes:

"WIPO held an information meeting on IP Financing on 10 March, 2009 in Geneva, Switzerland. Director-General Francis Gurry began the conference by identifying what he believed to be the principle reasons for considerable difficulty in developing IP Financing: (1) the lack of a clear connection between the security and the underlying asset, and (2) the complexity and lack of transparency in the IP system results in distrust for the intangible economy.  

Mr Lorin Brennan (of Grey Matter LLC) further elaborated that, in the context of UNCITRAL’s efforts to harmonize international secured transaction laws, considerable difficulty is presented by legal systems utilizing a pledge-possession based property system. Specifically, Mr Brennan noted that, without IP filing mechanisms in place, IP financing is impossible in nations with pledge-possession based property system. 

Mr Brennan identified several areas requiring further development to develop a robust, global IP Financing system: (1) Draft a generic law of financing that is applicable for all types of IP under all current international IP related conventions; (2) Coordinate priority systems in IP financing with priority systems in debtor financing; (3) Refine IP valuation methods from the Basel 2 method currently used; (4) Increase the strength of IP laws and the reliability of registries; (5) Integrate underwriters and title insurers to help increase confidence in IP securities. 

Responding to Mr Dalindyebo Shabalala’s request for clarification, Mr Brennan explained that he was not advocating for, or against, harmonization of global IP laws.
Professor Neil Cohen, author of the IP Annex to the forthcoming UNCITRAL Legislative Guide on Secured Transactions, explained that the Guide takes a functional approach and will have a broad scope, applying to both tangible and intangible property. For both types of property, the Guide will cover the relevant conflicts of law issues. However, according to Prof. Cohen, it is presently unclear to the drafters as to whether the law of State in which the asset is located (as is the case with tangible property), or the law of the State in which the grantor is located (the case with intangible property) ought to apply to IP, due to the geographic limitations of IP laws.

Sprios Bazinas, Secretary of UNCITRAL Working Group VI, spoke of the need to have robust valuation methods in place. He also explained the need to harmonize insolvency laws along the way to developing a viable IP Finance market. Accordingly, the Guide’s IP annex will have a section devoted to insolvency issues. However, harmonization of insolvency laws requires coordination of two different UNCITRAL working groups.  

Regrettably, very little attention was placed to two key issues. First, an in-depth discussion of how the current financial crisis is impacting both current and future efforts to securitize IP assets was sorely missed. Second, and perhaps on a related note, while numerous commentators acknowledged the difficulty in valuing derivatives, no discussion was devoted to current IP valuation methods, auctions or otherwise".

The presentations of the various speakers may be accessed here.

G20 IP debates

Reports emerging from Downing Street over the weekend underlined that Britain would like to get tougher on tax havens by making them "increasingly unacceptable and costly to operate". The reports focus on virtually the entire list of abuses identified in the Guardian's recent Tax Gap investigation which revealed how companies are now alleged to be shifting valuable intellectual property such as patents and consumer brands into tax havens. A key reform the government is reported to be pressing for is to tighten up the rules on transactions with tax-haven companies. Obama, before he became president, famously said that an office block in the British-controlled Cayman Islands acted as headquarters for 12,000 companies. (The Guardian).

One wonders how increasing measures to tax IP rights (be making tax havens less attractive) stimulates innovation and hence helps nurture the growth needed to kickstart global and UK economies. On the other hand, Mr Brown's government has embraced a knowledge based economy for many years now and perhaps it is legitimate that they may see IP rights transfers to tax efficient economies as theft?

Right: An IP Lawyer's empty beach chair on a haven beach

And, according to reputable IP Watch, leaders of the world’s largest economies struck a closed-door deal late Tuesday to create an international court for intellectual property litigation in a move sources said they deemed a contribution to the global economy. IP Finance contemplates how costs and damages would be awarded in such a court?

The cost of biodiversity -- a fascinating business model

Watching paper-based periodical publications struggle with shrinking markets and declining enthusiasm for paper delivery (high production cost, slow delivery, uncertainty of arrival etc), I was wondering how their electronic cousins fare. Earlier this week I came across something that gave me an acute insight into their prospective profitability. This was a notice on the Agrobiodiversity Grapevine that read as follows:

"We would like to bring to your attention the launch of a new international peer-reviewed journal called International Journal of Biodiversity and Conservation.
...

You will see that to submit a paper to this journal there is a handling fee of $550.00. It is a very small amount compared to other STM publishers that request a fee of $3000 - $5000 to make a research paper “open access”".

 The publisher's instructions to authors are quite specific:

"Copyright: Submission of a manuscript implies; that the work described has not been published before (except in the form of an abstract or as part of a published lecture, or thesis) that it is not under consideration for publication elsewhere; that if and when the manuscript is accepted for publication, the authors agree to automatic transfer of the copyright to the publisher [this appears to be unlimited in time, geographical extent or means of exploitation -- and the point at which 'automatic transfer' takes place, assuming that such assignment is valid,will be known to the publisher before it is known to the author. There appears to be no indication of the law governing disputes between author and journal, or any designation of forum].

Fees and Charges: Authors are required to pay a $550 handling fee. Publication of an article in the International Journal of Biodiversity and Conservation is not contingent upon the author's ability to pay the charges. Neither is acceptance to pay the handling fee a guarantee that the paper will be accepted for publication. Authors may still request (in advance) that the editorial office waive some of the handling fee under special circumstances.

The journal will be launched in May 2009 and the publisher is Academic Journals; a publisher whose mission is to provides free access to research information to the international community without financial, legal or technical barriers. This publisher works with the open access model, and strongly supports the Open Access initiative. Abstracts and full texts (usually in PDF format) of all articles published by Academic Journals are freely accessible to everyone immediately after publication".

Compared with these terms, the oft-criticised deals struck by recording companies with rock groups, or by music publishers with composers, no longer look quite so outrageous.

The fall of DRM and the rise of digital rights manipulation

This article has been written for IP Finance by Rebecca Chong (Morgan Cole).

In the ongoing battle against piracy, balance sheets in the entertainment industry are still being bruised by a growing force of consumers using digital tools to enjoy and share creative content. The industry's defence against illegal use of digital media; of filtering access to content by recruiting the assistance of Internet Service Providers (ISPs) to stop users from accessing peer-to-peer networks, armouring content such as DVDs and games with copyright protection, has largely proved unsuccessful; the culture of sharing continues to thrive. A 2009 report by the International Federation of the Phonographic Industry (IFPI) states that 95% of music downloaded is obtained illegally. Now, businesses are being slowly led by the wallets of their consumers towards a new age of cooperation, in which access to digital media may no longer come with as heavy a financial, or legal, price.

The increasing availability of compression technology, high-bandwidth, and high-levels of storage space at affordable prices has enabled the sharing of digital media both off and online on a mass and global scale. A study commissioned by Fujitsu Siemens Computers in 2008 revealed that an estimated 1 million UK homes possess one terabyte of digital storage. One terabyte of data according to Fujitsu, is equivalent to shelves of books stretching for 6.5 miles.

To the new generation of consumer, the sharing of content, whether legal or not, has become far more convenient and cost-effective than searching for a CD or DVD on the shelves. Some file-sharers have also attempted to justify their activities as being necessary and helpful to the entertainment industry. In 2007, outraged fans of Japanese cartoons (anime) reported to have received letters threatening legal action from Odex (a Singaporean anime distributor), explained that they chose to download episodes of anime that had been copied and subtitled by fans because the subtitles provided by fans were superior to those of Odex and were available long before Odex offered their videos for purchase; by implication, any sales loss incurred by Odex was self-inflicted. Fan sites which provide subtitles for anime shows, it is argued, help generate fans for series in foreign-speaking markets that may otherwise never have been reached. Nikolai Nolan, who assists with leading Anime-Faith, a group that translates and subtitles Japanese cartoons for downloading, stated in a February 2005 report by CNET that some Japanese companies " really appreciate fan subbing", citing the example of a director of a series called Battle Programmer Shirase who apparently thanked fans including "those outside the broadcast area who took special measures to watch the show on their PC monitors, and to everyone who watched it subtitled overseas without permission" in a final episode of the show.

Until recently the entertainment industry's response had been to scare the average consumer away from illegal file sharing by holding specific individuals to account. That tactic resulted in mixed success. The Recording Industry Association of America (RIAA) filed a succession of lawsuits against alleged users of networks including KaZaA, and Grokster, which led to payments being made in some cases, but also to public relations disasters that included the law suits against 13 year old Brittany Chan, and deceased grandmother Gertrude Walton. As if in a show of defiance to the entertainment industry's heavy handed approach, illegal downloads of music have continued to soar. According to the IFPI, more than 40 billion music files were illegally shared in 2008, compared to 1.4 billion legal single track downloads. The RIAA's new focus this year is to work with ISPs to identify individuals engaged in illegal activity and not target individuals itself (essentially 'passing the buck'), but the value in this strategy is questionable; even as ISP's increase monitoring, it is inevitable that this will not discourage hardened individuals who may simply improve their encryption methods and migrate between ISPs to evade capture.

The industry's attempt to prevent their products from being illegally copied and adapted, by using digital rights management (DRM) and embedding copy protections in music, film and games, has also proved to be relatively ineffectual on the increasingly technologically sophisticated consumer. Fans of the computer game Spore swiftly circumvented the SecuROM program that installed itself with copies of the PC game, and produced cracked versions to be made available on the internet; only last year Antigua-based company SlySoft announced that it had produced new software for cracking the Macrovision copy protection technology in Blu-ray and DVD-High Definition discs. Not long ago, the distribution of the so named 'Messiah' mod chips attracted the attention of Sony which eventually brought a successful action in the UK to prevent the importation of the chips. The chip enables an owner of a Playstation 2 console to play region locked official games produced in other countries like Japan and the US. However, it also enables an owner to by-pass copy protection in all games, and make and play pirated copies of games. Although the Messiah chip can be used for legal purposes, the fact that it can also be used to enable the make and play of pirated copies of games, was held to be enough to make selling, advertising, possessing for commercial purposes, and using the chips, illegal. The decision unusually contrasts with that made in the House of Lords 1980s Amstrad case, which involved twin cassette deck machines that enabled the speedy copying of cassette tapes. In that case, more consideration was given to the fact that the twin deck cassette players could be used for perfectly legal purposes as well as used for illegal copying of cassette tapes. It was decided here that merely supplying the machines was not enough to make a supplier an infringer of copyright. The harsher line taken in the Messiah case may well have been due to the fact that as it is now much easier than it was at the time of Amstrad for the average person at home to copy and distribute pirated goods swiftly and on a larger scale.

So far the 'Big Brother' steps taken by the entertainment industry to manage their intellectual property have been to little avail and seem instead to have bred discontent. Monitoring through ISPs may not only be ineffective because there are ways to evade detection, but also because as digital storage increases in size and speed it has become much easier to take trading offline to trading media by hand. Imposing restrictions in products have also led to expensive battles against a fluid community of underground hackers that appears to relish new obstacles thrown at it. Controlling without meeting needs provides little incentive for consumer loyalty, or for people who copy to mend their ways. There is also a danger both that the ordinary consumer looking for a fair deal will be driven away and that copyright infringers will be pushed out of reach; some recalcitrant infringers even see the measures initiated by the entertainment industry for protecting their intellectual property, as merely proof of big businesses flexing their muscles at the consumers' expense, which galvanises any motivation to infringe.

Having reached an apparent impasse, the entertainment industry has begun to take some interesting steps forward. Just this year, Apple announced the removal of digital rights management from its music library, enabling users to transfer downloaded music freely (previously, a song under music labels other than EMI, downloaded from their music library iTunes, could only be played on an Apple device). It is suspected that in order to secure this deal, Apple had to concede to major record labels to allow for variable pricing of songs. The move comes as no surprise, however, since competitor Amazon's MP3 store has been successfully selling digital rights management-free tracks since 2007, and this was likely taking a bite out of Apple profits.

More significantly, in a drive to find a compromise between managing rights and meeting consumer want for choice, it was revealed last year that a consortium of digital-entertainment companies which includes manufacturers, retailers, and film studios called the Digital Entertainment Content Ecosystem (DECE), will be attempting to standardise digital rights management practices. The intention is to create a DECE standard that will be used for managing digital rights, also letting consumers use digital content that they purchase on a range of devices that comply with the industry standard. Granted, the consumer will only be able to use digital content within boundaries, but the consumer will no longer be restricted by DRM to using just one device. The consortium is an impressive collaboration between big industry names including Alcatel-Lucent, Best Buy, Cisco, Comcast, Fox Entertainment Group, HP, Intel, Microsoft, NBC Universal, Panasonic, Paramount Pictures, Phillips, Samsung, Sony, Toshiba, VeriSign and Warner Brothers Entertainment. Apple is notably absent from the consortium however, and the question has been raised whether it will eventually join ranks with the large consortium, live side-by-side with it, or die trying. Assuming that the competing interests within DECE are able to work together to provide an attractive package for the consumer, it may be difficult for Apple to continue playing lone ranger.

It will probably be a long time before DECE-compliant devices hit the market, and it is not known if the industry's recent concessions will please the consumer in the long run. Jim Killock, Executive Director of The Open Rights Group remains cynical about DECE, commenting for a January 2009 report of the BBC that "Consumers don't like DRM"; implying perhaps that control to any degree will be resented. True that the consumer is unlikely to welcome being dictated to on how they may use their legitimately purchased entertainment, particularly in an age where culture is aplenty for free through platforms like Youtube where global talent is beginning to be born (Justin Timberlake signed popular Youtube singer Esmee Denters to his new record label, and the infamous videoblogger 'Lonelygirl15' succeeded in being cast in a movie). However, taking a different approach to managing their rights in recognition of consumer dissatisfaction has at least for the moment not gone entirely unnoticed; and although the entertainment industry's plans for the future involve clinging to copy protection, consumers may be appeased by an apparent long term strategy of compromise.

Online Video: Has Hulu Found the Business Model?

Lest we forget, modern copyright is ultimately about monetization. Nowhere is this first principle more apparent than in the world of user-generated content, especially of the visual sort. YouTube may have zillions of viewers and a seemingly endless number of users willing to share visual content, but YouTube, and its owner Google, still struggle with how to turn YouTube from a social phenomenon into a viable business model. It is not surprising, therefore, that the search for how to monetize visual contents on the Internet goes on.

One notable attempt--Hulu--was reported last month in The Economist ("Hulu Who?", February 7th). The article can serve as an elegant primer for anyone interested in the complex matrix of considerations of how to turn content into profits in the online video world. According to the article, YouTube as a business suffers from three overarching problems: (i) Advertisers and brand holders are wary of being connected with user-generated content; (ii) the content is too variable and may turn off viewers in unpredictable way; and (iii) a sizable amount of the contents was illegal and has attracted law suits from media giants.

Based on these uncertainties new entrants, according to analyst Shadid Kahn, had to confront the following questions in fashioning their alternative to YouTube: (i) How much to rely on user-generated content as opposed to commercial content?; (ii) be an aggregator for numerous media providers, or focus on delivering the content for one provider?; (iii) distribute the contents via the user's computer to a user-held device, such as the IPod, or stream the contents; (iv) if streamed, is is better to do via a dedicated application on the user's computer, or to enable viewing inside the web browsers; and (v) charge viewers or rely on advertising?

User-generated contents: but will they still watch it tomorrow?

Enter Hulu in 2007 --a joint venture of NBC Universal and and News Corporation. Hulu, and particular, its CEO Jason Kilar, formerly of Apple. Already in December 2008, 216 million videos were viewed, advertising is fully subscribed, and the impression (unverified) is that Hulu is generating revenues in a way that point to a viable business model.

So what is the Hulu business model? There are at least four basic elements: (i) Eschew user-generated contents and use only professional content: (ii) aggregate content from many sources, despite the fact that the two partners is each a content provider on its own (Universal and Fox); (iii) streaming through the browser rather than downloading to the user's computer by means of special applications software; and (iv) rely on advertising rather than charging users for downloads.

I said Hulu, not Hula

So will Hulu win out? Prophesy is beyond the ken of this blog, but we would note the following. there are substantial competitors to Hulu, such as Apple and TV.com, a streaming service owned by CBS, and there is no doubt that others will surface. It is possible that there is room for more than entrant, each of which provides a somewhat different mix reaching its own distinctive audience. Hulu may itself modify its model to reach out further (already there is talk of enabling downloads which will be funded by user fees rather than advertising revenues). Moreover, in the short term, at least, the appetite for advertising may soften in the face of deteriorating economic circumstances. From the business point of view, it will be fascinating to see how all of this plays out.

One final comment is in order. The Economist report mused that the decision to stream via the user's browser was perhaps the most crucial decision in accounting for Hulu's early success (particularly in that allegedly left rival Joost, who charged for user downloads, far back in the pack). But being an IP person, I believe that the decision to rely on professional content is no less important. Copyright may be, as we never fail to tell our students, the most democratic and omnipresent of IP rights, but mass itself is neither necessary nor sufficient for commercial success.

Like it or not, even the most repulsive example of reality show contents is the handicraft of content professionals, while capturing one's cat on video, engaged in some momentarily eye-catching antic, is not. Not every professional content will presage commercial success, but it seems more likely to be a prerequisite (necessary, but not sufficient, if you like). I do not think that the online video world will prove to be any different.

Even cats like Reality TV

Small deal, big deal for Ruby Tuesday

It only takes a small deal to strike a large hike in share values, it seems. According to The Street, shares in Ruby Tuesday restaurants (Maryville, Tennessee) soared 22.5% apiece to $2.40 on news that a new franchise agreement had been concluded with Global Brands Qatar for the opening and management of just three franchised outlets in Qatar over the coming five years. The franchise had nearly 700 outlets by 2007 (current figure not known). How much of the sudden leap in share price can be attributed to extra revenue, and how much to the higher brand profile once RT is trading in Doha?

Is Choruss out of tune?

In July 2008 IP Finance posted this item ("Music recordings: the Lincoff model"). Last week the same author returns to the theme in a well-reasoned piece that was published on the well-regarded IP Watch weblog, "Choruss’s Covenant: The Promised Land (Maybe) For Record Labels; A Lesser Destination For Everyone Else".   I don't feel sufficiently confident to comment on an issue which has "Made in America" stamped right through it, though I do feel that the Choruss model, if successful in the States, will be closely examined as a model for European campuses too.  Readers' comments, please!

Choruss' Music Tax Plan: Bait and Switch here
The Licensing Plate carries Jim Griffin's explanation of Choruss here

Two Final Thoughts on Big Pharma Acquisitions

A coda in two parts to my recent postings on the mega-transactions by Pfizer, Merck and Roche of Wyeth, Schering-Plough, and Genentech, respectively.

Coda No. 1

I had surmised that one of the possible outcomes of the current spending spree by Big Pharma would be that promising small companies in the pharma area, and in particular, biotech companies, would be gobbled up principally for their promising technology. However, if the observations by Ben Levinsohn are correct ("Biotech Bonanza", Business Week, Feb. 16th), I may have to modify by predictions.

According to Levinsohn, writing in the "Money Report" section, the driving dynamic of Big Pharma is that it needs quickly to replace (read cash) to make up for the fact that many blockbuster drugs will be coming off patent in the next several years. If so, and relying on the views of an industry analyst (Leerink Swann), what Big Pharma needs is "manufacturing knowhow of big biotechs to bring new biopharmaceuticals to market." If that be correct, then the biotech companies most likely to be in play are those with manufacturing capabilities and not merely promising technology. Stated otherwise, small biotech companies without a manufacturing capability will be less likely to be acquired than their larger and more integrated corporate brethren.

I think I need some help here. A mantra being expressed a lot these days is that it is a buyer's markets for those flush with cash seeking to buy promising technology on the cheap.Perhaps this is only true for pharmaceutical products that are not biotech per se, where "cash is king" still enables nimble, dynamic small companies to attract a willing purchaser for its technology. If Swann is correct, however, that mantra is less appropriate for biotech products, where the desire by Big Pharma for quick revenues means that manufacturing prowess may be no less important than promising biotech technology.

Biotech: it may be about manufacture after all

So what happens to the smaller biotech companies, especially if they need to obtain additional financing during the coming years? Does this mean that there will be less aggregate development for biotech because of this concern for shorter term revenues? If not, exactly what is the mechanism for ensuring that technological developments remain apace in the biotech area? I would be delighted for some insight here.


Coda No. 2

Perhaps I got a bit carried away when I assumed that Big Pharma was funding these acquisitions by their cash reserves. It seems that all of these purchasers-Wyeth, Merck, and Roche--are in fact reaching out to the bond market as well to borrow money from the public to fund at least apart of the acquisitions.

As reported by Bloomberg.com on March 17th ("Pfizer May Get Lower Rates Than Roche in Planned Bond Offering", by John Detrixhe and Gabriella Coppola), drug makers have already offered $27 billion dollars in bonds in 2009, as compared to $13 billion dollars in all of 2008. While these may not be bind-boggling sums in an era of AIG excess, they still point to a willingness by the public to buy the debt of Big Pharma to fund these purchases and the willingness of the public to invest in this corporate paper.

Maybe I should have bought those big pharma bonds all along

I need some help here as well. Given the sums being borrowed by corporate Big Pharma for the acquisitions via bond offerings, I would like to understand better how Big Pharma is funding its R&D efforts to replace its product lines. Is it being funded internally by company cash, by bank loans (that hardly seems likely in today's lending/borrowing climate), or otherwise? And whatever the answer to this question, is this funding adequate to support the kind of R&D that will be needed to replenish the drug pipeline? In the flurry of the business press to cover these mega-acquisitions, the issue of product R&D has been largely ignored of late. I, for one, would be grateful if it would return to center stage.

UK insolvency practitioners

Last Wednesday, following a virtually fruitless appeal on this weblog, the IPKat asked, "are there any IP-savvy insolvency practitioners out there?". He has since received a bagful of correspondence, some of it printable and all of it interesting. He has passed it back to IP Finance for the perusal of its readers.

The following individuals and/or firms have either been recommended by others or have written to express their own involvement:

Richard Fleming (KPMG)
James Sleight and Stephen Goderski (Geoffrey Martin)
Stephen Katz (Fisher Partners)
Brett Israel and Trystan Tether (Bird & Bird)
John Pennie (Dickinson Dees)
Martin Austin, Steve Parker, Trevor Binyon (Tenon)
Beverley Marsh (Vantis)
Andrew Tait (Abbott Fielding)
David Stephenson (David Rubin & Partners)
Robin Staunton (TLT LLP)
Lee Manning, Fiona Watson, Brian Simpson (Deloitte)
Philip Long (PKF)
Shirley Jackson MBE (BN Jackson Norton)
Radford Goodman (insolvency) and Jonathan Ball (IPR) (Norton Rose)
Alexander Stewart (Hogarth)
ReSolve Partners LLP
Grant Thornton

There were also some interesting comments. For example, Richard Yoxon (Intangible Business) wrote:

"As a result of recent negative press regarding pre-pack administrations, some insolvency practitioners are waking up to the fact that they need to get to grips IPR but they’re starting at the bottom of a steep learning curve. Intangible Business is supporting those insolvency practitioners who are alive to IPR issues. There may be plenty of scope for more innovative solutions in the longer term but for now the IPs need to learn to walk before they can run. It is also important to note that the attitudes and approaches to IPR of individual insolvency practitioners within a firm may differ".

Bernie O'Brien (Green Planet Enterprise) comments:

"I read with interest your posting regarding the paucity of insolvency practitioners with experience in IP rights...I have spent much of the past 15 years in the IP development business globally, and I am yet to find such a practitioner.

I spend a great deal of time having to educate accountants and insolvency experts on the realities of dealing wtih IP rights, and have been able to change professional thinking on restructuring on a number of occasions. I have had an increasing number requests over the past year to advise on company rescues where there are substantial IP assets involved.

With a legal background and a wealth of constructive experience at the sharp end of the IP industry (and having recently advised a client in the UK on pre-insolvency matters), I have no doubt that my input would be of benefit to your reader. There is also a new IP finance product coming to market which could be of interest".

Keith Hodkinson (Chairman, Marks & Clerk International) adds:

"... I went round the country last year on a roadshow organised by R3, the association of business recovery practitioners, speaking about the valuation, sale and purchase of IP rights in insolvencies and liquidations, along with a number of insolvency and valuation experts who claimed to deal in IP related transactions (mostly trade marks in fact, dealing with luxury brands like Asprey but also talking about issues such as the MG and ROVER (ROEWE) brand. As I recall we did events in London, Manchester, Newcastle, Birmingham and Belfast and there was a good deal of interest but a very large and evident gap in knowledge among practitioners about methods of valuation and risks attached to IP rights. it was clear that a lot was going to waste and that these rights were thought of as "difficult" things to sell and accompanied always by the most extreme caveats and a great reluctance to execute any useful documents for overseas rights recordal.

Over the years I've done quite a few of these and they combine the worst of time pressure with lack of cash for due diligence and scrappy documentation with great difficulty in proving title.

In passing I have also done quite a few acquisitions of IPR as bona vacantia from the Treasury Solicitor (another IPKat item) and that is relatively straightforward".

Thanks, everyone, for your responses.  IP Finance is considering having a meeting on this issue and will let readers know if/when this comes to pass.

IP securitisation in Italy

This note has been kindly provided for IP Finance by Chiara Ortolani, an Erasmus Scholar from the University of Bologna who is at present in residence at the London office of Olswang:

"When considering the intangible nature of intellectual property, perhaps it is not surprising that securitisations in this field have not become everyday, well-publicised transactions. Each type of intellectual property comes with its own peculiar set of complexities and unknown risks that are not common to commercial ventures involving tangible property" K. W. Medansky and A. D. Dalinka

As of March 2009, no public information has been made available about IP securitisation in the Italian market. However, given that the transparency of financial markets is only one species of capitalist utopia and that IP securitisations are less publicised than other kinds of transaction, we can assume that IP securitisation is a process which is extremely rare (if it has ever happened) in the Italian market.

Why hasn't a traditionally illiquid and bank-oriented market like that of Italy discovered IP securitisation? There are at least two answers: first, the Italian rules on securitisation date from 1999: even though some securitisations had been arranged since 1990 using foreign vehicles, uncertainty about the protection of the investors and the conflict between laws slowed the development of this financial process, which in the same period was already used in the US and UK markets.

Secondly, the Italian market has a very peculiar composition: a large proportion of economic operators are represented by small or medium family-owned businesses which are unable to bear the costs involved by securitisation. Furthermore, since the banks have never shown a real interest in IP securitisation, this can be considered a relevant factor, if not a proper reason, in our analysis.

Focusing on the Italian rules about securitisation, provided by Act 130/1999, they statute a wide definition of the assets which the originator can pool and sell to a special purpose vehicle (SPV), simply specifying that the assets have to be pecuniary credits, already existing or existing in the future (Art. 1). This means that every kind of asset, including IP assets, can be pooled and sold to the SPV to start off a securitisation. The Italian rules are at the same time careful to protect investors, stipulating that the rules for public offerings of financial instruments are to be applied to some phases of the process of securitization (Art. 2), that the SPV has to meet strict requirements to do this activity (Art. 3) and prescribing that some of the rules of banking and financial transactions are to be applied to securitisations (Articles 4 and 5).

There are still many live issues concerning this Act: in particular, the function of Italian SPVs is completely different from the role of US and UK SPVs, because the Italian ones are businesses which can manage assets from different originators (they have been defined "multi-seller" for that reason), with a high risk of conflict of interests. Furthermore, the Act doesn't provide any definition of the financial instruments which the SPV will use to obtain funds from the investors and doesn’t specify if they are shares, bonds, credit derivatives or hybrid securities. This omission leads to huge problems in applying the protection to investors. However, some authors say the Act on securitisation can only provide a legislative framework but does not cover all the issues which securitisation raises.

The Italian rules neither forbid nor limit IP securitisation, but the key issue is whether the characteristics of the Italian market can stop the development of this financial process, which is actually one the most affected by the financial crisis. Predictions as to the survival of IP securitisation in the financial markets are pessimistic because of the decreasing answer of securities, the pressure put on banks by the recession and the prohibitive costs of assets on the secondary market. No predictions can be offered where unpredictability is the rule, but one may focus on the "set of complexities and unknown risks" of IP securitization to understand if there are opportunities for the diffusion of this instrument in the Italian market.

In general the two main problems involved in the diffusion of IP securitisation are the lack of common and widely accepted valuation methodologies for IP assets and the volatility of the IP market. The effective degree of success of a film or of a song, as well as the degree of use of a trade mark or of a design, is unpredictable in the absence of a specific framework for evaluation and the value of these intangible assets; further, the rating of financial products used to obtain funds definitely relies on the prediction of successful diffusion of the IP assets (copyrights, trade marks, designs, patents). For that reason the valuation of IP assets made by banks and financial institutions needs a generally accepted methodology, able to ensure to businesses a global assessment of their securitisation plans, not solely based on the reputation of the originator or of his brand.

There are some trans-national challenges to overcome in the process of development and diffusion of IP securitisation. This process can't succeed without a generally accepted framework for valuation of IP assets, new international rules which allow IP owners to gain access to affordable credit through specific procedures and a strong awareness of the potentiality of this finance process between the economic and legal operators. Some domestic challenges face the Italian market and its players: IP securitisation is a not completely explored field and, for that reason, new solutions can be found to enable the Italian market to take advantage of IP securitisation. There is no evidence that this kind of securitisation can't work in a bank-oriented financial system -- the challenge is understanding how.

Refreshing

Africa's biggest mobile operator by subscribers said on Monday it signed a $9.7 million deal with Fundamo, a South Africa-based mobile banking and payment solutions group, to provide mobile banking facilities. You can read all the hype about the race to provide mobile banking services in Africa here, here and here.

This development finds itself on IP Finance because it is refreshing - refreshing amidst all the news about liquidations and recession, and refreshing because it largely involves African IP development and investment by Africans within Africa.

As one posting describes: "Africa leading the world in mobile banking", and another:

"The telcos in Nigeria are taking the battle to the next frontier in coming months: Mobile Money. Not to be left out of this race are Banks and Independent providers which had seen the clearly untapped potentials in an economy of only 20 million Bank accounts and 60 million mobile subscribers under an addressable market of 140 million people. No one wants to be left behind in the evolving ecosystems."

....and Standard Bank, Africa's largest bank, just purchased a 33% stake in Russia's investment bank Troika Dialog (CNN Money).

How much value in a Rights Agency?

Digital Britain: is there method in the UK Government's madness?

At last a little more light has been shed on the concept of the potential Digital Rights Agency which was mentioned in the Digital Britain Interim Report (published in February). Last Friday Stephen Carter and David Lammy published a paper intended to kick-start discussion as to how such a rights agency might work in practice.

The proposals are published in the form of a 'straw man on digital rights', a joint initiative between the Department for Business, the Department for Innovation, Universities and Skills and the Department for Culture, Media and Sport. The straw man seeks to take forward the three actions set out in the Interim Report regarding the distribution of digital content and ways to help to deter copyright infringement online. While the report makes it clear that it does not propose that the Government should set up and run such a rights agency, it sets out that,

"...put at its most ambitious, our vision for a rights agency is to facilitate a major change of approach across the whole value chain as to how content is provided, packaged and sold to consumers. Business models need to develop that are not only sustainable but that provide real opportunities to build the successful businesses of tomorrow".  

All options are left open by this paper: the agency might be 'a very light touch organisation' or a substantial self-regulatory body. Since the agency's tasks are not clear, its structure and nature aren't clear either. All that the straw man says is that

"it is impossible to suggest how an agency might look until it is decided what role it should play".

Industry is invited to

"come together to create a body that could tackle those parts of this agenda that are for industry to deal with".

Among the key issues the agency could look into are consumer education, explaining to the public the consequences of unlawful use of copyright material, the facilitation of negotiation and rights clearance, how to resolve disputes and provide a forum for dialogue, development of codes of practice around enforcement measures, and how to deal with persistent infringers. The straw man re-runs the 'light-touch' legislation already proposed in the interim report, requiring ISPs to notify account holders of the existence of evidence of copyright infringement and, in relation to serious infringers, to maintain data relating to the notifications sent to customers, as well as to comply with a code of practice. An annex describes the sorts of things a rights agency might do, raising more questions on the paper's key issues, and discussing what the agency might look like and how it is going to be funded.

Comments are invited but must be received by 30 March -- a surprisingly short deadline given the amount of questions the paper raises/leaves open. How constructive will the discussion forum later this spring will be? One can only guess.  It seems likely that the Final Digital Britain Report will be published in early summer and we will soon discover whether the straw man has generated anything of genuine substance.

Some IPKat thoughts on the DigiBrit straw man can be found here.

Roche and Genentech: The Knot Is Nearly Tied

Following my report on Thursday evening regarding the acquisition by Merck of Schering-Plough, let us consider briefly the announcement made on Thursday that Roche has succeeded in convincing the board of Genentech to purchase the remaining 44% of the iconic U.S. biotech company that Roche did not previously own. The amount of the offer is $46.8 billion dollars. The tender offer will be in effect until March 25th and is based on $95 per share (in case any of our readers happens to own Genentech shares). The offer is 9.8% above the lowest offer that Roche made for Genentech in a process that began last summer. Roche has held a stake in Genetech for nearly 20 years.

First, some facts: Roche, located in Switzerland, is the world's largest manufacturer of cancer drugs, while Genentech is ... Genentech, a pioneer in the biotech world, and located a continent and culture away, in South San Francisco. The key to the consummation of the offer by Roche and acceptance by Genentech seems to be the Avastin cancer drug. As reported by Bloomberg.com,

"Avastin is approved to treat colon, lung and breast tumors and is being tested in more than 400 clinical trials involving 40,000 patients worldwide. The treatment may become the best-selling medicine in the world within six years, London-based consultant EvaluatePharma said in August."

As an indication of its potential, consider that Avastin garnered $4.52 billion in sales for Roche in 2008. By consummating the deal, Roche will reportedly be able to pare costs (what merger does not claim this?), enhance its income from cancer-related drugs at a time when income for the broader drug business slows, and guarantee that Roche will have access to Genetech's labs after 2015, when a current accord between the two companies comes to an end.

It is this last point that troubles me a bit--let's hope for Roche's sake that the Gententech labs in 2015 will be blessed with same developmental elan that has seems to have marked it throughout its tenure as an independent company. Without having any direct contact with either a Roche or Genetech facility, I can still say from experience with other companies in these respective locations that it the corporate cultures of a Swiss Big Pharma titan and a legendary biotech Silicon company are likely to be quite different from each other.

It will be a challenging test for the two companies to mesh their cultures in a way by which the arrangement is a win-win situation down the line, after Avastin passes from the scene and/or it (other Gententech cancer products )encounters stiffer competition from other cancer drugs. The real test is not today, or even five years from now, but 2o years hence (the time during which Roche has had in interest in Genentech), to measure the ultimate success of the venture.

Genentech - ever upward and onward?

And that is the ultimate rub. The short-term motivation for this spate of 2009 acquisitions in Big Pharma seems to be a confluence of lots of cash ($100 billion according to Bloomberg), and the need to replace $84 billion in sales from products whose patent protection is set to expire (also according to Bloomberg). The ultimate test will be new products, which means continued successful R&D. Whether these acquisitions is the best way to accomplish that goal (which is in truth a never-ending moving target) awaits the long-term verdict of the markets.

Roche and Genentech: one view of the long road?

Merck Buys Schering-Plough: Some Ruminations

This certainly has been a blockbuster week for Big Pharma. On Monday, Merck announced that is has agreed to acquire smaller drug company Schering-Plough for $41.1 billion. Today, the Swiss pharma company Roche announced its intention to purchase the U.S. biotech icon Genentech for $46.8 billion. 

These two acquisitions come after the January purchase of Wyeth by Pfizer for $68 billion. Because of the different IP/product/technology dynamics of each of these most recent transactions, we will divide our comments into two separate blogs. Today will focus on the Merck-Schering-Plough deal; we will report on the Roche-Genentech acquisition separately.


The structure of the deal is a form of reverse-merger arrangement, in order to a avoid the claim by Johnson & Johnson that the acquisition constitutes a change of control. Should the change of control clause be effective, J&J, via its subsidiary Centocor, would gain rights in the marketing of the anti-inflammatory drug Remicade outside of the U.S. (worth $2.1 billion to Schering-Plough last year) to complement J&J's marketing rights in the product within the U.S. As for the arrangement

While it is Merck that is putting of the money to buy Schering-Plough, the ownership of Schering-Plough technically remains unchanged, and Merck becomes a subsidiary of Schering-Plough, thereby presumably avoiding a claim that there has been a change of control. Of course, J&J can challenge the arrangement in arbitration and claim that the change of control clause should be applied. For those of you who want to follow the corporate law gymnastics of this transaction, look at the New York Time Dealbook Blog of today's date, March 11th.

A reverse merger

As for the substance of the transaction itself, one podcast by New York Times reporter Natashia Singer observed that Merck was facing the prospect of a less than stellar pipeline of developments together the prospect that its leading patent-protected products were close to the end of their patent protection (shades of the Pfizer-Wyeth transaction). By acquiring Schering-Plough, according to Singer in her March 10 written report of the deal, Merck gets access to the allergy spray Nasonex, Schering-Plough's investments in biotech drugs (some of which I think were themselves the result of corporate acquisitions), and certain patented products with expiry dates further down the next decade. As stated succinctly by Singer, this is [a] drug deal that is mainly about drugs."

A somewhat different cast on the transaction was spun by analyst Les Funtleyder on CNNMoney.com on March 9th, "the two companies have overlapping portfolios for cardiovascular, respiratory,and anti-viral drugs and experimental drugs. ...Schering-Plough will add animal health products and a consumer division toMerck's profile, while bolstering its women's health area, led by Merck's cervical cancer vaccine Gardasil." In that regard, the two companies already have had an agreement with a cholesterol treatment called Zocor, although the advantage of of this combined effort over low cost alternatives remains uncertain.

Permit me to ruminate. Proprietary drug companies are very much about their patent portfolios and their pipeline of future patents. The claim has been made in the business press from time to to time that big pharma has largely exhausted its ability for the blockbuster drug dealing with general health problems, and that the next generation of products will focus on more specific medical problems. If both of these assertions are true, I guess it makes sense to seek mergers in order to spread the effort and resources of R&D over a broader base.

Another view of mergers and synergy

That said, it still remains (at least for me), a bit of black box why bigger will necessarily translate into better product development and innovation by the combined companies. Here as well, though, I suppose that the combined clout of the two companies will also make it easier to cherry-pick the most promising R&D developments of smaller and more nimble pharma companies, allowing such results to be taken to the next level by virtue of the combined company's marketing, distribution and manufacture muscle. If so, the merged company may, at least down the line, following Teece's classic analysis, be rewarded more for its complementary asset position, such as marketing, distribution and manufacture, rather than the strength of its IP per se.

Leveraging The Sharper Image Mark after Bankruptcy

In my previous post, I discussed the acquisition of certain names and brands from Mervyns following the bankruptcy of the West Coast company. In particular, I mused about whether brands and names could survive a bankruptcy by being successfully picked up and renewed.

Against that backdrop, I am grateful to have had my attention drawn to a brief item that was reported in the March 5 on-line issue of Global License! regarding a licensing deal involving The Smarter Image mark with respect to blenders, coffee-makers, cookers and other kitchen appliances. According to the report, the mark has been licensed to Emson USA, which is described as a "small kitchen manufacturer and infomercial marketer".

The Sharper Image company was a one-time successful retailer of high end electronic products and gifts that went into bankruptcy in 2008 and liquidated its brick and mortar operations, reportedly leaving it with a direct-to-retail business. As reported on March 3 by another online service (PRNewswire), The Sharper Image was purchased in 2008 as a three-way joint venture, with the intent of distributing its branded products through three-party retailers such as Macy's, J.C. Penney and OfficeMax.

The strategy in the license with Emson was expressed by its CEO (Ed Mishan), as follows:

" The Sharper Image is a coveted brand with high consumer recognition. The brand can now be extended to kitchenware products that blend technology with great designs. Our direct response TV advertising will foster increased brand awareness, as well as educate the consumer on our products' features and benefits."

If I understand this correctly, under the license, the licensee will create a new line of kitchen products under The Sharper Image mark and market them by a combination of direct response television advertising by Emson and by placing the products in selected stores. The underlying assumption appears to be that The Sharper Image brand has sufficient residual goodwill that can be redirected to distribution by third party channels (Emson and bricks and mortar retailers), instead of the same-store focus of the defunct company.

Brand leverage, piece by piece

This is certainly a challenging strategy, especially given the decline of retail generally in the U.S. market. I seem to recall that The Sharper Image ads were regular fare on the SkyMall airplane magazine and I assume that the pre-bankruptcy brand sought to reach out to its perceived upscale purchasers in other ways as well. I imagine that the brand acquired goodwill with this group (though not enough to maintain its bricks and mortar operation when the economy turned south in 2008).

Still, I wonder how the new licensing strategy will be able to successfully leverage the presumed residual goodwill in the brand and name with viewers of direct response television and customers of stores such as Macy's and J.C. Penney, especially given the focus of the license on kitchen appliances. I am led to believe that The Smarter Image has entered, or will enter, other licenses for the sale of its products via third parties. If so, it is encouraging that such efforts to revive brands out of bankruptcy continue, despite the dismal economic news. One small step for Keynes' "animal spirits", even in this most trying of times.

OPEL IP Confusion

BBC News runs a story that Opel, the German car maker, should consider entering into insolvency rather than rely on a state handout to help its survival. This type of story is all too common these days but what struck this writer is that, according to the BBC, there is now apparent "confusion about whether Opel owns the intellectual property information about its vehicles":

Picture: Opel's lightening brand without the IP

"Deputy economic minister Dagmar Woehrl told parliament on Wednesday that GM had pledged the IP of Opel as security against capital injections it had received from the US government. Trade union leader Armin Schild, who is on the board of Opel, said that both firms could use the IP without having to pay royalties. But it has raised concerns that it could be sold on by GM. GM Europe proposed last week that Opel should be partly separated from its parent company's US operations. " (BBC news)

"The stricken US car maker General Motors has ceded patents obtained by its German unit Opel to the US Treasury in exchange for public aid, the daily Bild-Zeitung reported on Friday." (Yahoo News)

The two reports appear to conflict each other - has the IP been pledged (BBC) or has it been ceded (Yahoo News) in exchange for the finance. Either way,the perception that Opel may not own all of its IP nor for that matter have control over it (eg in the sense of being able to enforce it as it likes) is one which the car manufacturer will have to try to ensure does not affect their ability to attract investment on all levels. The US Treasury too will also have an interest in ensuring that the perception (and confusion) does not harm their own investment. Those in the know please feel free to "enlighten" us.

IP-friendly UK insolvency practitioners -- who are you?

A UK-based reader who is a legal practitioner writes:

"Do you know of any UK insolvency practitioners who are familiar with the issues relating to intellectual property in the event of insolvency?

... We have put together some advice on what might happen to the IP and the potential risks in the event of the various forms of insolvency procedures etc. We have also given thought to ways of structuring the transaction, and drafting terms which may make the client less vulnerable.

We are now considering factoring in the views and experience of an insolvency practitioner, particularly in relation to the finer details of the insolvency law. Given how topical this is, it is surprisingly difficult to identify someone with the right skills set. Do you have any suggestions?"

Embarrassingly enough, I have to say "no", so I'm turning to readers of this blog to help.  If you are, or know of, any UK insolvency practitioners who have genuine experience of dealing with IP rights -- and I'd like to limit that to "genuine and positively constructive experience of IP rights" -- can you please email me here and I'll publish the list for all to see. Please head the email IP Insolvency so I can easily spot it.

IPscore, a new patent valuation toy

Here's an interesting toy for those who want to do their own patent valuations, drawn to my attention by David Nelms of Potter Clarkson. Last week the European Patent Office announced IPscore, its new free-to-use patent portfolio management tool, which can be downloaded from the EPO website here (together with 30-minute video and training manual). 

Right: a good score on IPscore -- will it be music to the patent owner's ears?

You're supposed to register for it here, though, enabling the EPO do do its data capture exercise. According to the EPO:

"You can use IPscore to:

examine your company's patent portfolio
analyse the value of individual patents
align your company's patent strategy with your overall business strategy
make the best use of patents as a business tool
identify opportunities and risks.

The tool uses 40 factors to assess each patent and visualises the input in spider and portfolio diagrams. The results of the evaluation are stored in a database.

IPscore was originally developed by the Danish Patent and Trademark Office, but was later bought by the EPO.

Training
Accompanying the release of IPscore, we have also posted a short introductory video called "Patent portfolio management with IPscore".

Other training opportunities include an online "virtual classroom" session and a two-day training course at the EPO, which provides a thorough introduction to patent valuation and how to use IPscore. The course includes hands-on exercises to help you get to know how to use the many features".

E-learning site here. There's also a users' forum here

If you have any interesting experiences arising from the use of IPscore, please let IP Finance know.

Patent damages as an incentive to transact

I spent a couple of hours this afternoon talking to Professor Paul Heald in Oxford. Paul is an enthusiast/expert in the field of damages for patent infringement. In brief, on the assumption that all systems of remedies are designed to influence behaviour, Paul thinks that patent remedies should be designed to induce the optimal amount of transacting between inventive firms and those who need inventions. He rejects the commonly-made assertion that damages can be calibrated to induce the optimal amount of investing in R&D. Looking at the patent world through the transactional lens lets him to solve (or claim to solve) serious practical questions such as when an injuntion should issue, how and to what extent an infringer's intent or knowledge should effect damages, and when an accounting is appropriate.

Paul has authored a very impressive paper, "Optimal Remedies for Patent Infringement: A Transactional Model". The abstract reads as follows:

"In a world of zero transaction costs, one should observe optimal invention and innovation. As long as a system of enforceable contracts were in place, firms with inventive capacity and firms requiring inventions would negotiate for the optimal production of new creations. With adequate information, an observer could accurately predict which transactions would occur between firms and which transactions would not, thereby permitting description of the conditions for optimal inventiveness. Patent remedies in a world with transactions costs can be calibrated so that real firms behave as ideal firms, providing incentives for real world transactions to mimic those in a world without transactions costs. The goal of remedies for patent infringement should therefore be to provide incentives for efficient transactions to occur, while minimizing the cost of transacting. This approach sets the framework for a comprehensive revision of current patent remedies and resolves current debates over the relevance of an infringer's knowledge, independent invention, and the proper scope of injunctive relief."

You can read this paper in full here.

Can a House Mark or In-House Brands Be Saved Despite Bankruptcy?

Nearly two months ago, I looked at the demise of the Mervyn's retail chain in the US as an example of what happens when a brand loses its cache, first because it was acquired by a retail conglomerate more interested in its cash flow than brand longevity, and then by private equity owners more concerned with the value of the real estate than the brand. The fate of Mervyn's got me to thinking about whether a service-oriented brand that goes into liquidation has any residual value, particularly when the brand had anyway been on a downward trajectory for a number of years.

My initial sense was that, in such a case, the brand itself would likely be irreparably impaired with the result that it would have little or no value, but that there may be bits and pieces of the operation, either product lines or discrete sub-services, that might be attractive to a potential buyer. Little did I know that my hypothesis would be put to an early intitial test. And the result seems to be that I may be only partly correct. As reported by the Wall Street Journal on February 15th ("Family Aims for A Return of Mervyn's", written by Kelly Nolan), the Mervyn's house brand, and most of the house-brand porfolio of the chain's apparel lines, were each separately sold.

As for the Mervyn name, three of the founder's sons agreed to purchase the retailer's house mark, plus a number of otherwise unspecified "Internet-related intellectual properties". Contrary to what appears to be an irreparable decline in the value of the Mervyn name, son John Morris opined that "[w]e strongly believe we have a very strong, loyal base of families in the Western states that would support Mervyn's." So on first blush, I was wrong. The Mervyn children appear to be willing to put cold cash to reacquire the house mark.

But for how long will these customers stay loyal?

That said, it still seems to me difficult to fathom that a declining brand can be so righted, especially given the state of the current world economy. Even assuming that there is a critical mass of a "strong, loyal base of families" (something I about which I am skeptical), then every week that passes without the reopening of the Mervyn chain will diminish such loyalty, no matter how fervent it once may have been. Time will tell, but my instincts tell me that either the sons purchased the name out of paternal respect to preserve the family name, or that there is some material value in the "Internet-related intellectual properties."

The sale of the apparel lines, most notably --High Sierra (for casual sportswear), Hilliard & Hanson (for woman's fashion), and ellemenno (for young women's apparel--to four other entitities--is perhaps more understandable. After all, the way that lines can be shuffled from owner to owner, it may be more likely that one or more of these lines can be revived. It also suggests that the purchasers viewed these retails lines as having value separate from the chain itself.

High Sierra, Bogart-style

Interestingly, the rights to these apparel lines were purchased at a bankruptcy auction. I have always been surprised that anyone would purchase apparel brands at auction without acquiring substantial underlying assets. Goodwill is a basic component of a mark, and there does not seem to have been any acquisition of any underlying goodwill in the case of these Mervyn house brands. (Indeed, given that U.S. trademark law requires that the acquisition of a mark be accompanied by goodwill, lest the assignment be viewed as a naked assignment, one wonders whether the acquired marks are at legal risk.)

The bottom line is that the acquisition of both the Mervyn house mark and the various house brands raise a raft of questions about the economic viability of such moves. Given that retail consultants direly predict the demise of additional retail entities during the current economic downturn, we will likely encounter additional instances in which brands and marks are purchased in the insolvency context. It will be interesting to see how such acquisitions play out.

So You Want to be a Developer of a Smartphone Application?

Few current topics offer as many interesting angles as the cell phone business. Historically (to the extent one can talk about the "history" of this nascent industry), the business focused on the system operator, handset manufacturer and purveyor of the computer operating system. More recently, the rise of the Smartphone, the increasing importance of application programs, and the challenge of the Android operating system have all pushed IP to a more central role in the industry.

Following on my previous post of February 28th on the possible patent aspect of the iPhone and its competitors, my attention was drawn to an article that appeared in The Marker, the business daily published together with the Israel newspaper Haaretz. The article, entitled (in English translation) "How to Make Money from iPhone Applications", contains a large number of interesting nuggets about the emerging industry of iPhone application programs, where copyright reigns supreme. Let me mention several of the points made in the article.

While Smartphone applications are developed by companies with dedicated staff, successful applications have been developed by an individual or two, often working in his/their spare time for several months. One such example is iFog, which was developed by two individuals over a two-month period. Reportedly ranked no. 20 on the list of most downloaded applications on AppStore and iPhone, the iFog has been downloaded over 150,000 times, at a price of $1 per download.

Find the Fog in iFog

Seen from another angle, each of the top ten downloads can earn $3,000 a day for its developer, while the number 1 download is reported to earn $15,000 a day. Of course, there can be only a single no. 1, and over 15,000 applications are reportedly competing for downloads by the iPhone users. Neverthless, perhaps (perhaps not) with a tinge of exaggeration, one of the iFog developers observed that one can earn sums similar to producers or artists in the music business. That said, even the most successful developer will admit that the half-life of application is not overly long, and the odds of coming up with a second (or third) hit would not seem to be overly high.

There appear to be several business models for the developer of the application to monetize his product. Marketing the application through the operator or integrator is reported to split revenues 70-30 in favor of the operator/integrator. On the contrary, distribution via iTunes or the AppStore splits revenues 70-30 in favor the developer. There also appear to be applications that are distributed for free, with monetization realized either by the provision of add-on services or from advertising.

The application must further take into consideration the characteristics of the typical user of the particular system. Thus, the Blackberry user is overwhelmingly a business type, while the iPhone has not (at least yet) been embraced by the business community. Further, the developer is advised to make his product compatible for different platforms, for use with both proprietary and open source operating systems. Moreover, the AppStore will likely encounter additional competitors. The article noted that Samsung, Nokia, RIM, PocketGear and Palm are all contemplating application stores, which provides further channels for sale and distribution for potential developers.

So what do I tell my son when he comes into my study tomorrow, asking advice on how to get into the Smartphone applications business? Young man, it is a tough, competitive business, but it is also an attractive way to channel your creative digital juices in a way that is both financially and aesthetically attractive. And who knows--maybe you will find that pot of gold at the end of the copyright rainbow that has eluded so many an author in the oh-so-yesterday publishing business.

I found my copyright pot of gold