Zynga: Social Media Games In, Computer Games Out?

The headline in the October 26, 2010 edition of Bloomberg.com here speaks for itself: "Zynga's Value Tops Electronic Arts As Virtual-Goods Sales Surge." In a word, according to SharesPost.Inc. here, in an exchange for shares of privately held companies, the estimated worth of Zynga Games Networks Inc., the maker of such social network games as FarmVille and FrontierVille, is valued at $5.51 billion dollars. By comparison, Electronic Arts, the second largest publisher of video games, including such icons as "The Sims" and "Madden NFL", is valued at $5.22 billion on NASDAQ.

For those of you who might not be familiar, Zynga's earns its revenues primarily from selling virtual goods to players of social media games; these goods enable the players to progress in the game. Zynga uses Facebook to distribute its games and it has become the largest maker of games on Facebook. It is reported that Zynga owns six of the 10 most popular game apps on Facebook and that its games have 57.6 million users. Zynga shares with Facebook the income received from the sale of the viritual goods.

For sure, one needs to treat these kinds of valuations with a bit of caution. They are, after all, just informed guesses about a company's worth. (As one informed interviewee noted on a Bloomberg podcast several days ago, if you want to know about a company's position--"follow the cash"). Still, the ascendency of Zynga's social network games is noteworthy. Zynga is not a platform with zillions of users and lacks any proven monetizing model. Rather, Zynga runs a real business with what appears to be real revenues, estimated at about one-third of the $1.6 billion market for (expected to increase to $3.6 billion in three years). The company has raised $350 million in private capital, made six acquisitions since the spring and has increased its workforce in the last quarter (!) by one-third to 1,2000 employees.

Compare that with the recent fate of Electronic Arts, which has cut its staff and is looking to make acquisitions presumably to bolt-on to its current activities. True, contrasting rates of growth between well-entrenched and recently-established companies can sometimes be misleading, but the trends of these respective companies cannot be ignored.

Zynga seems to be engaged in asserting its competitive position across two different axes. Success on both axes will be critical for Zynga's continued flourishing.

First, there is competition with the makers of game products intended for use on computers and consoles (what the article calls the "shrink-wrapped program" business). Electronic Arts, reaching back to its 1982 establishment, has been a leader in the industry. Its speciality is in producing creative contents of a certain kind. But the industry seems to be plagued with high game development costs, a decline in the number of new blockbuster offerings, and a preference for the social media gaming experience (although Electronic Arts is trying to enter the social media space). Zynga provides an enjoyable user experience while leveraging its contents to sell virtual goods to users. The contents are the means for the monetizing, rather than the object of the monetizing itself.

Second, there is the multi-faceted relationship between Zynga, which provides the content apps, and Facebook, which provides the distribution platform for the apps. Zynga must no doubt be grateful for being able to take advantage of the distributional reach of Facebook, but it no doubt also frets about becoming over-dependent on that single disribution channel, hence the attempt to expand its channels. It is no surprise, therefore, that Zynga is seeking to create its own website and diversify its distribution platforms to include, e.g., sites run by Microsoft and Yahoo.

There is nothing wrong, if you are Facebook, from enjoying a revenue share with Zynga, but the greater portion of such revenues will presumably stay with the app owner rather than go to the platform owner. If you are Facebook, you can try to increase that share if you have a commanding distribution postion. But when other channels of distribution are available for the distribution of the app, the ability of Facebook to increase its share may well plateau, perhaps sooner than later.

"I Got A Distinct Look" - Or Do I?

The most popular Halloween costumes in the U.S. this year will be costumes based on three members of the MTV reality show Jersey Shore: Snooki, The Situation, and DJ Pauly D.

If you think those names sound more like cartoon characters than real people, you aren't far off the mark. Jersey Shore centers around a group of 20-something-year-olds who are or who portray (depending on your opinion of how "real" reality TV shows are) the stereotypical Italian American New Jersey resident. Jersey Shore has become one of MTV's most popular shows, and slang first uttered by the show's cast members have quickly entered the American lexicon (rather unfortunately, in my opinion).

The Wall Street Journal recently reported that MTV has partnered with Rubie's Costume Co. to create an official line of costumes based on the most memorable members of the Jersey Shore cast - apparently because of their "standout characteristics," which include a very short skirt and poofy wig for Snooki, flesh colored foam abdominal for The Situation, and a combed-up hair piece for DJ Pauly D. (No word on whether the Snooki costume packaging will include a warning that the wearer might experience "wardrobe malfunctions because of how short [Snooki] likes her dresses.")

However, The WSJ article notes that costume shops that are out of stock of the MTV-licensed costumes have been selling their own versions of Snooki costumes that include short skirts and unsold inventory of Amy Winehouse beehive-style wigs. Presumably, these stores aren't touting their offerings as official Snooki costumes. But the ease with which they have put together costumes that evoke the Jersey Shore character suggests that perhaps the costumes are rather generic at their core. Without the MTV and Jersey Shore logos on the packaging, what MTV-owned IP remains in the bag?

ARM and IP royalty rates

One of the most confusing terms in the semiconductor industry is the term "IP". IP lawyers and patent agents, like this blogger, will often think of intellectual property in terms of patent rights. IT administrators will think of an Internet Protocol. Semiconductor designers will normally think in terms of IP blocks which are designs for semiconductor circuits and which can be incorporated into much larger circuits. The rise of the "fabless" semiconductor model over the past few years has increased the importance of IP blocks.

The fabless model of semiconductors involves the separation of the design and sale of hardware devices and semiconductor chips from the manufacture of the chips. The production is done by specialised semiconductor foundries.

One of the most successful fabless companies is UK-based ARM Holdings, based in Cambridge, UK, with a number of development centers around the world. ARM's business model is based on producing the IP blocks and then licensing these out to companies such as Intel and the mobile telephone manufacturers. These manufacturers incorporate ARM's designs into their own chips. The revenue model is based on a royalty received for each chip sold which incorporates ARM's designs.

It's difficult to find out how much ARM is receiving as a royalty rate. However, intriguingly a report in EE TImes on an analyst's telephone conference in 2009 reported that Tim Score, ARM's CFO, stated that ARM had been able to raise its royalty rate on its newer Cortex processor cores from 1.1 to 1.2% and that this royalty rate was higher than that for older products. That raise may not sound much but of course does represent a revenue increase on the newer designs of 10%. Given that much of the work in designing the IP blocks has probably been incurred by the time that the royalties are received, this probably represents pure profit. The other message is that older products have a lower royalty rate (? <1%)

There are, of course, a number of other companies manufacturing IP blocks and so it must be a fine line at ARM trying to work out what is the correct royalty rate. To have raised the royalty rate in the recession-hit year of 2009 suggests that its newer processor cores must be in demand.

It's intriguing to actually look into ARM's IP rights (as opposed to IP blocks). The company has a large patent portfolio (the ThomsonInnovation database notes 1099 patent families, but that may be incomplete). However it's intriguing to bear in mind that many of the patents relate to product which ARM themselves do not make - they just sell the IP blocks as (copyright-protected) software to other companies to manufacture the products. It's actually ARM's customers who make the end products/circuits which are patent protected.

Technorati Tags:
Royalty, Semiconductor, Fabless Semiconductor, ARM

File downloading is cheap in Germany

This blogger knows one or two people who have MP3 players, some of which include songs which may or may not have been downloaded illegally (he would prefer not to know), but he's always interested to see how much an illegal (and in Germany criminal) download would cost. Fortunately he lives in Germany and is rather pleased that the Hamburg District Court  has decided that it's only EUR 15 per download (as report in the German language Beck website).

The 16 year old infringer happily used his father's Internet connection to place a couple of titles onto a file sharing site. The court concluded that these had been downloaded around 100 times and then applied the tarifs from the German collecting society GEMA. An arbitration case between GEMA and the German BITKOM information technology association adopted a similar level.

A mere 15 Euros seems a little low when one considers the penalties in the United States. However, German law on damages doesn't like the concept of punitive damages - and merely looks at replacing the economic damage suffered by the IP rights holder. The level tends to be set at the level that an arms-length negotiation between the rights holder and a potential licencee would establish - a so-called "fictitious licence agreement". It's probable that the court in this case was influenced by the young age of the infringer.

The IPKat has also blogged this here.

The Hamburger Court's press release is here (but the case is not yet reported in full).

Guide to McDonalds Restaurants in Hamburg here.

Licensing Rates in the Telecommunications Industry

Over the years we've reported on a number of licensing deals in the telecommunications industry. I've just been reading a highly interesting article by Eric Stasik of the Avvika company based in Stockholm. Erik has done a wonderful job in collecting together publicly available data on licensing rates for the proposed LTE standard. He's gathered a tremendous amount of information.

One of the fascinating points made by Eric is that compared to the earlier mobile telecommunications standards, the number of "essential patents" and also the number of individual patent holders has increased for the forthcoming LTE standard. Eric goes onto note that many of the smaller patent holders have more interest in obtaining royalty revenues than the larger "more established" players. He concludes that the putative licensing pools being organised by the likes of Sisvel, Via Licensing and MPEG-LA could well benefit by engaging with the smaller players to encourage them to join.

The article is published in the Licensing Executive Society International Les Nouvelles journal, September 2010, pages 114-119.

Technorati Tags:
Standards, Telecommunications, MPEG-LA, Via Licensing

Trading or employment?

In XX v HMRC (and related appeals) (TC00689): the First Tier Tax Tribunal has confirmed that licence fees paid to an inventor (XX) by a company of which he was a director were trading income, and not employment income - saving National Insurance Contributions for the company at the very least.

XX invented a defence product which he patented and trademarked, and licensed to a company (UKCo). He was the managing director and his wife was the sole shareholder of UKCo. UKCo sold the product only to the US Government Department of Defence, via a second company, USCo. UKCo paid licence fees to XX for the .

The First-Tier Tribunal confirmed that XX should be charged tax on the basis that these payments were trading income, as XX was the owner of the IP and the payments were made to him in that capacity; the payments were not employment income. Although there was only one invention, the work on that and the ongoing work on refining the invention were enough to create an identifiable trade.

Points to watch:

Note that matters were not assisted by the patent application which stated that UKCo had the right be granted a patent because the inventor was employed by UKCo, even though the licence agreement stated that the intellectual property was and remained the property of XX! Although the Tribunal accepted that the company held the rights as nominee for XX, the wording did set off unnecessary hares with HMRC.

Also note that HMRC had obtained documents directly from the US tax authorities - particularly the licence agreement, which the IRS had obtained in a tax audit of USCo. HMRC have wide powers to obtain documents from a variety of sources.

Finally, XX had operated under the not-uncommon misapprehension that, if they kept the money offshore (the payments from the US Government were left in USCo) they wouldn't be taxable in the UK. As the licence agreement stated that the licence fees were due to XX directly, so that USCo only acted as collecting agent, life isn't that easy. XX was UK tax resident and domiciled, and so was subject to UK tax on his worldwide income and gains, even if they were kept in a piggybank company elsewhere.

UK intellectual property insurance services: ten or more? Tell NIPCLaw

Insurance: what are the odds ...?

Barrister and blogger Jane Lambert is exasperated. But what is it that so troubles her? In "IP Insurance Five Years On", (NIPC inventors club, here), she explains:

"Exasperated by the absence of British companies among the top 10 companies that had been granted UK patents between 2004 and 2005 I wrote in September 2005 the article “Why are there no British Names in the Patent Office's Top Ten?” The reason then as now was that the cost of obtaining and enforcing a patent in the UK was beyond the means of most small and medium enterprises. In the article I discussed the ways in which intellectual property infringement litigation could be funded and came to the conclusion that before the event insurance was probably the best option. The very next day I wrote the article “IP Insurance: Does it Work?” and mentioned one instance where it seemed to do so. The next day in this blog I wrote an article especially on “IP Insurance”."

Jane then lists developments since 2005, together with the ten UK intellectual property insurance services that she has been able to identify. She asks:

"If anyone knows of any broker, underwriter or other intellectual property insurance service provider that I should add to this list, please let me know".

It would be good to know who exactly there is out there. If you can add to Jane's list, please do!

VAT and R&D services: Kronospan

Kronospan Mielec sp zoo v Dyrektor Izby Skarbowej w Rzeszowie (Case C-222/09): the ECJ has confirmed that where R&D services carried out by engineers are supplied ‘on a contract basis for the benefit of a recipient established in another Member State’, they were ‘services of engineers’ and so the place of supply is the country in which their work is carried out, not the country in which the supplier is based. Given that VAT varies between 15% and 25% across the EU, describing the service correctly can make quite a difference in cross-border services.

In this case, Kronospan, a Polish company provided R&D services to a Cypriot company. The services were described as ‘research and development work relating to the environment and technology, carried out by engineers’.

Poland claimed that some of the services were ‘scientific activities’ - this would mean that the place of supply for VAT purposes was Poland and so Polish VAT (22%) should have been charged by Kronospan. The company disputed this and argued that the services were services of engineers, so that the place of supply was in Cyprus where the work was carried out, so that Cypriot VAT was due - at 15%.

The general rule on the place of supply of services for VAT purposes changed from 1 January 2010, so that the general rule is that services are supplied where the customer is based – but this remains subject to overriding provisions in certain areas, including cultural and scientific activities, and use and enjoyment provisions. It’s important to review exactly what is being done and to make sure that the contract is accurately depicting the services.

Coming (Maybe): A Tide Dry Cleaner Near You?

Few commercial arrangements are more complicated from an IP perspective than a franchise operation. In the interplay between product and service delivery, the franchise operation will typically involve trade secrets, proprietary technology, perhaps a patent or two, copyright (starting with the oh-so-critical Operations Manual), not to mention the trade marks and brand name of the franchise. Entering into a franchise is not for the faint of heart, be it either the franchisor or the franchsee, and disagreements are frequent.

Againt this backdrop, an item in the September 8 issue of Bloomberg Business Week ("P&G Puts Big Brands to Work in Franchises") is particularly interesting. According to the report, Procter & Gamble, the consumer product multi-national giant, is about to launch a franchise dry cleaner operation under the name of Tide Dry Cleaners. Tide, of course, is the well-known brand of laundry detergent products whose multi-coloured mark is familiar to hundreds of millions of consumers. The idea is to leverage the goodwill and reputation in the Tide mark so as to attract customers to entrust the cleaning of their most valuable items of clothing with independent franchisees.

The motivation for this move by P&G appears simple enough. As stated in the article, "P&G wants to put its brands to work selling services to boost U.S. revenue." That said, the P&G move is curious for at last three reasons.

First, I do not recall many instances where brand extension goes from a product line to a franchise operation, in part since the skills and competencies required to maintain a franchise business are exceedingly different to those needed for extending a brand by coming up with new products. It is no surprise, therefore, that P&G has apparently created a new company to manage the franchise and has appointed a veteran of Pepsico to run its operations. How the franchise side of the business will integrate with the company's long and illustrious record of success in coming up with iconic consumer products was left unaddressed in the article.

Second, there is the choice of the dry cleaning business as a potentially attractive franchise business for the company. It appears that the selection of a branded dry cleaning service came from a P&G unit assigned to develop new business ideas for the company. And what was the principal rationale for choosing the dry clearning business? According to the article, the unit "looks for a fragmented market where consumer expectations aren't high."

Third, add to this the comment by Michael Stone, the head of the brand-consulting company, the Beanstalk Group,who suggested that services such as dry cleaning "are virtually unbranded." The upshot of attaching the Tide brand to a franchised dry cleaning business is a "Field of Dreams"-like scenario, namely, set up the locations, brand the dry cleaning operations with the Tide mark, "and "they, the consumers [inasmuch as they have low expectations), will presumably come."

This move by P&G, while bold, raises a number of questions.

First, there is the P&G track record for setting up a franchise operation. The article reports that the company established a Mr. Clean Car Wash franchise operation in 2007. To date, it has only nine(!) franchisees in operation. True, the initial cost for a Mr. Clean Car Wash is $5,000,000, compared with up to $950,000 for the proposed dry cleaning franchise. Still, the rationale for the car wash business also rested on a belief of low consumer expectations together with the strength of the Mr. Clean brand. Based on this, the report that one prospective franchisee plans to open 150 Tide Dry Cleaner sites over the next three years might be a tad over-optimistic.

Second, there is the potential risk to the Tide brand if the franchise operation fails or even if highly publicized disputes erupt between P&G and its franchisees. The brand equity in the Tide brand is among the highest in the world, which makes it potentially even more exposed to downside risk if the Tide Dry Cleaners franchise does not succeed. True, as noted by the company's CTO, "if we did anything to damage that [brand equity], we'd stop." Even so, stopping the damage is only second best, if that. It may be that the damage has already been done. [It is also curious that this declaration comes from the CTO and not someone more directly identified with branding part of the business.]

There is certainly nothing wrong with P&G seeking to seek additional revenues for brands that it has carefully and successfully nurtured over tens of years. There is also the financial plus that a franchise operation allows the company to offload a significant portion of the financial burden of maintaining the franchise sites, which is borne by the franchisee. Whether the risks to the brand are ultimately worth these benefits, however, must still be viewed as an open question.

More on P&G here.
More on tides here.
More on Field of Dreams here

Summary judgment, but no quick fix on costs

At least in England and Wales, where a large-scale IP owner finds itself constantly having to commence proceedings against small defendants, where (i) the value of each infringement is very small in financial terms but (ii) the perception that infringers can "get away with it" damages the confidence of lawful traders, the IP owner often commences proceedings which the defendant cannot and/or will not defend, being willing to accept an undertaking not to infringe in future and delivery up of infringing stock if applicable. The threat held over the head of the small defendant is that, if the case goes to trial, the IP owner will seek an order for costs.

In the Patents County Court, in Nike International Ltd & Ors v Bateman [2010] EWPCC 010 (11 October 2010), a small-scale infringer imported a single pair of Nike trainers which he purchased over the internet. Since he put in a defence that he did not know the trainers were counterfeit, Nike could not obtain judgment in default and had to seek summary judgment. Said Judge Birss QC:

"It may be questioned whether the sledge hammer of these proceedings is necessary in order to crack this nut of this magnitude but ... I accept, that brand owners in this situation have no realistic alternative to enforcing their rights this way. Accordingly although this appears to be the smallest of cases, nevertheless the Claimant is entitled to bring proceedings".

But what of the question of costs? Nike's solicitor warned the defendant of the problem the defendant faced with his defence (i.e. that it was not a defence to the action) and offer to settle on terms, warning him that, if he did not settle, his client would seek its costs. The defendant wrote back:

"Could this action please be transferred to my local county court?
Unfortunately I cannot deliver any goods as I have not received anything as these goods were seized on entry to the country.
I ordered these goods in good faith over the internet believing them to be authentic; I will not be ordering anything else.
This was a simple mistake. and the only information I can you give about the supplier is the msn contact I used this is Trademount.com
I undertake not to infringe the Claimants rights in the future and consent to the destruction of the goods".

On this offer Judge Birss QC had this to say:

"In substance the Defendant offered the Claimant all the relief it sought in the letter and it seems to me that the better course would have been for the Claimant to engage with the defendant to produce a consent order in appropriate terms. I understand ... that the Claimant proceeded with this application for judgment because [the defendant] had sought to transfer the case to another county court. While I can understand the Claimant's desire in a case like this not to devote undue resources to the matter that does not seem to me to be a cogent reason for avoiding doing so. Even if, which is unclear but may be the case, the letter was only sent after the application for summary judgment had been served, it still seems to me that some sort of engagement with the Defendant would have been preferable in the circumstances. 

Accordingly I will make no order as to costs".

The moral is clear: both pressing for judgment and sorting out a consent order will cost an IP owner money -- but if he doesn't opt for the latter in cases such as this, he won't get costs when he goes for the former. Multiply this a few hundred times over and you have an enforcement spend issue that requires budgeting aforethought.

A Coda to "Patent Data and Innovation: Once Again, So Much and Yet So Little"

It is rare that I add a Coda to an IPFinance blog post -- but this is one those exceptions. Last week I commented in a blog post ("Patent Data and Innovation: Once Again, So Much and Yet So Little" here) about the effort by The Economist magazine to reach conclusions about the nature of innovation in Asia in particular, and in China, in particular, on the basis of selected data filing and registration data. Interesting comments were made by several readers and on other blogs, including by our colleague Ken Jarboe at Athena Alliance.

The last word, however, belongs ironically to The Economist itself. Appearing at the bottom of the Business section of the October 9th issue of the magazine is the following:

"Correction: "In "Trading Places" (October 2nd) we incorrectly said that in 2008-2009 the Japanese filed 12% fewer international patents and the Chinese 18% more than the previous year. In fact, the Japanese filed 4% more international patents and the Chinese filed 29% more. Also, America has 1.4 million patents in force, not 14m. Sorry."

1. No problem with the typo that misreported 1.4 million as 14 million, although one wonders how, through how stages of proofreading, the error passed without editorial comment. If it passed several layers of editorial review, and no question was raised why the figure for the U.S. was 10 times greater than Japan, then one wonders about degree of understanding about the content of the entire article.

2. More interesting are the revised figures about Japanese and Chinese patent filings, inasmuch as the original (and apparently incorrect) data were attributed in the October 2nd issue "to a recent report by the World Intellectual Property Organization (WIPO) ...." The Correction does not indicate the source of the error--The Economist, WIPO, or otherwise? Similarly, it does not indicate the source for the correct information.

3. Perhaps even more interesting is the absence of any further comment about the Correction. I know that The Economist seldom offers any comment to a correction of fact. Here, however, since patent filing and registration data were the foundation of the article, is the reader not entitled to know whether the corrections had any material affect on the substance of the article? Unless, of course, there anyway was less to these data than met the magazine's editorial eye.

R&D tax relief - relaxation of rules finally making it into law soon

The Government has finally enacted (in Finance (No.2) Bill 2010, which will become Finance (No.3) Act 2010, a relaxation for small and medium-sized companies' (SMEs) R&D tax relief by removing the requirement that they own any intellectual property that results from the R&D.

The change was announced almost a year ago, and will apply to accounting periods ending on/after 9 December 2009 as a result - with the changes in government, it's taken a little while to come into law.

The change is a real advantage for SMEs that carry out sub-contract work for larger companies - until these changes take effect, neither the SME nor the large company could claim any relief because:
- an SME had to own the intellectual property resulting from R&D; and
- large companies can only claim a very limited amount of sub-contractor costs

The R&D still has to be qualifying R&D for the SME, so this doesn't mean all sub-contracted R&D will qualify for relief (for example, simple testing that is sub-contracted out may not be qualifying if it doesn't relate to the trade of the SME)

Remember that the R&D tax reliefs may change further as a result of the consultation due to start later this autumn on the UK's approach to taxing intellectual property - including R&D. Watch this space ...

Perfecting security interests: Masters student needs urgent help!

IP Finance has received an urgent request for assistance from Emmanuel Kedi Beh, a Masters student who is studying the Bank Management course at the University of Yaoundé II, Cameroon.  Emmanuel is preparing a Masters dissertation on "The perfection of security interests relating to intellectual property rights".

Perhaps unsurprisingly, Emmanuel is having much the same trouble as many of the rest of us in locating and obtaining suitable reading materials. He writes: "I have serious difficulties in finding books on security interests relating to intellectual property and the perfection of such security interests. Please could somebody help me or direct me?"

If any readers of this weblog can send him links to recent publications and helpful websites, this assistance would be grateful.  Also, if anyone who is familiar with UNCITRAL's output on the subject could make his task easier by pointing to those items on the organisation's website that will be most useful to a Masters candidate in Bank Management, that would be appreciated too.

Please email Emmanuel here, and/or post your recommendations as comments below this request for assistance.

Good luck, Emmanuel!

Patent Data and Innovation: Once Again, So Much and Yet So Little

Can there be a body of IP data that is more analyzed than patent filings and registations? The avalability of this data, and the large number of information fields that can be examined, seem to have made patents an irresistible source of attraction for quantitative analysis. More challenging, however, is the drawing of meaningful conclusions from this wealth of information.

A good example of this gap between the qualitative abundancy and qualitative
scarcity in analyzing patent data was underscored in the article that appeared in the October 2 issue of The Economist entitled "Trading Places: Innovation in Asia." Permit me to summarize points made in the article (more or less in the order of the article itself). The starting point is the statement that "[p]atents are a crude but useful measure of innovation". Based on the opaque disclaimer, of sorts, the article notes as follows:

1. Japan's dominance of Asian technology has been eroded by its neighbours. Consider, for example, the provenance of most of the major components of the Apple IPad (South Korea and Taiwan), but nearly none from Japan.

2. Between 2006-2009, patent filings in Japan have notably declined while those in China have soared. Based on the filing trends of these past years, filings in China may surpass those in Japan in 2010, "putting China in striking distance of America."

3. In 2008-2009, the Japanese filed 11% fewer PCT applications, while the Chinese filed 18% more. That said, the Japanese have a much better success rate in granted patents and enjoy a higher patent citation rate.

4. While Japanese companies are cutting back on R&D, Chinese companies are accelerating their R&D activities. Indeed, China may soon surpass Japan in domestic-spending R&D, "on purchasing-power terms."

5. China is not alone on this. Moving to South Korea, Samsung plans to double its research spending this year. Not by accident, perhaps, Samsung enjoyed profits last year that were greater than the largest nine Japanese electronic firms combined.

6. This push by China in the patent arena is attributed in large part to governmental policy. For example, China wants to wean itself off reliance on foreign patents (Chinese companies pay more than $10 billion to foreign in companies in licensing fees annually). Increasing Chinese patents will (i) avoid some of the need to pay royalties to foreigners: (ii) force foreign companies to take a license of Chinese technology and (iii) improve the position of Chinese companies in negotiating licences.

7. Japan is woefully behind other countries in patents that list a foreign co-inventor (4% for Japanese applications, compared with 40% for American filings).

8. Japan still has the most patents in force (1.9 million, compared to 1.4 million for America and 134,000 for China).

So what are we to make of the article?


First, the article does not really address the connection between patents and innovation. Is it really the case that increased patent filings in China and by Chinese points to increased innovation? Maybe yes, maybe no--the article does not really explain. In this regard, it is curious for The Economist to focus so much on the point given that the cover story of the same issue, entitled, "How India's Growth Will Outpace China's," seems to suggest that, over the long run, India will be a better bet than China with respect to innovation. The place of India in connection with Asian innovation, however, is not addressed in the article.

Second, why the scant attention to South Korea in the article? Given the so-called "lost decade" in Japan, data about patent doom and gloom is not very surprising. The more interesting comparison would be between China and South Korea. Alas, on this, there is nary a word.

Third, the observation that licensing fees are seemingly a major reason for the Chinese government push into patents is quite amazing, if true. Patents are filed for a variety of reasons, of which patent royalties (and the ability to extract cross-licences) is only one of them. If patent licensing has been identified as a major driver of patent activity in China, this seems to me to be a big deal. Sadly, the point is not pursued.

What stands out in the article is yet another effort to gather diverse bits and pieces of patent filing and registration information without either bringing them together into a coherent narrative or analyzing the points in any depth. That is too bad.

IP Valuation seminar: a chance to visit Budapest

IP Finance has learned from Hungarian Patent Office (HPO) economist Peter Kaldos that there's a highly useful seminar coming up shortly.  "IP Valuation for Technology Transfer".  Organised by the World Intellectual Property Organization together with the HPO, the event takes place on Thursday 28 October. According to the conference blurb,

"The efficient transfer of technology to industry partners is increasingly a key objective for many research institutes and universities. Valuing technology created as a result of R&D activity can assist with creating successful partnerships and with the technology transfer process [it can also assist in destroying successful partnerships, if it's not properly handled].

The purpose of the seminar is to discuss how IP valuation tools and methods can be used by research institutes and technology transfer offices (TTOs). The aim is to bring together experts in technology transfer and IP valuation, to initiate discussion, and to call for increased cooperation in this field.

Issues addressed will include: When and why is IP valuation relevant for research institutes and TTOs? Is IP value a good indicator of whether research funding is efficiently allocated to R&D projects? [This question could occupy the whole day, given a chance] The optimisation of the technology transfer process by using IP valuation tools. How can the results of an IP valuation assist with decision-making related to R&D and patenting? communicating the significance of research results? out-licensing technology? forming spin-off companies and joint ventures? bringing in investors and increasing capital? efficiently allocating funding to R&D projects by calculating IP value?".

Speakers are Dr Robert Pitkethly, of the Said Business School and Oxford Intellectual Property Research Centre, Oxford, Theo Grünewald (Steinbeis-Transfer-Institute, Berlin, Germany), Dr István Molnár (Szeged-BIOPOLISZ Innovation Services Ltd., Szeged, Hungary) and Peter Kaldos himself.

For further information and for registration, click the seminar website here.

VAT and EMI's CD samples for pluggers: final ruling good news for recording companies

On 30 September the Court of Justice of the European Union gave its ruling in Case C‑581/08 EMI Group Ltd v The Commissioners for Her Majesty’s Revenue & Customs, on a reference to the Court of Justice of the European Union for a preliminary ruling from the London VAT and Duties Tribunal on Article 5(6) of the Sixth VAT Directive. This provides:

"The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration. However, applications for the giving of samples or the making of gifts of small value for the purposes of the taxable person’s business shall not be so treated".

EMI, a company engaged in music publishing and in the production and sale of recorded music, distributed free copies of music recordings on vinyl records, cassette tape and compact discs to various persons in order to promote newly released music. EMI maintained that such distribution was necessary for its business, since it enabled the company to assess the commercial quality of a recording as well as its viability in the marketplace. Part of its promotion strategy was to distribute CDs to individuals who were in a position to influence consumer behaviour (such as individuals working in the press, radio stations, television programmes, advertising agencies, retail outlets and cinemas), and to 'pluggers' -- music promoters who distribute CDs to their own contacts. EMI hired both internal pluggers and external pluggers on the basis of their expertise or success in promoting recordings.

For those purposes, EMI supplies recorded music in different forms: ‘watermarked’ compact disc recordables (‘CDRs’) bearing the name of the recipient and allowing any copies made to be traced back to the recipient; un‑watermarked CDRs supplied in a white cardboard sleeve; ‘sampler’ CDs supplied in a cardboard sleeve bearing the same artwork as on the finished album; or ‘finished stock’ CDs in their definitive form ready for sale to the public. The latter bore a sticker stating ‘Promotional Copy Not For Resale’; the others stated that ownership and title remained vested in Virgin Records Limited, a subsidiary recording label of EMI. The ‘finished stock’ was given to artists, their management and publishers, agents and any other media contacts whom EMI felt it necessary to have the finished product. Around 90% of promotional CDs were sent to named individuals, with some recordings also being sent individually to more than one person working for a single organisation. For any given single release, around 2,500 free copies were distributed (3,000 to 3,750 for albums). A single plugger might receive up to 600 free recordings for onward distribution. These figures are trivial, given that a top-selling CD album may sell millions of copies.

From April 1987 until early 2003 EMI accounted for VAT on these recordings. Thereafter, taking the view that the national legislation was incompatible with Article 5(6) of the Sixth Directive and that, as a consequence, no VAT was payable, EMI requested the Commissioners for Her Majesty’s Revenue and Customs to pay it all back. The Commissioners said "no", so EMI sued them. The Commissioners then asked EMI to pay the VAT it refused to pay from 2003. The London VAT and Duties Tribunal then referred to the Court of Justice the following questions for a preliminary ruling:

"(a) How is the last sentence of Article 5(6) of the Sixth Directive to be interpreted in the context of the circumstances of the present case?

(b) In particular, what are the essential characteristics of a “sample” within the meaning of the last sentence of Article 5(6) of the Sixth Directive?

(c) Is a Member State permitted to limit the interpretation of “sample” in the last sentence of Article 5.6 of the Sixth Directive to

(i) an industrial sample in a form not ordinarily available for sale to the public given to an actual or potential customer of the business (until 1993),

(ii) only one, or only the first of a number of samples given by the same person to the same recipient where those samples are identical or do not differ in any material respect from each other (from 1993)?

(d) Is a Member State permitted to limit the interpretation of “gifts of small value” in the last sentence of Article 5.6 of the Sixth Directive in such a way as to exclude

(i) a gift of goods forming part of a series or succession of gifts made to the same person from time to time (to October 2003),

(ii) any business gifts made to the same person in any [twelve] month period where the total cost exceeds £50 (October 2003 onwards)?

(e) If the answer to question (c)(ii) above or any part of question (d) above is “yes”, where a taxable person gives a similar or identical gift of recorded music to two or more different individuals because of their personal qualities in being able to influence the level of exposure the artist in question receives, is the Member State permitted to treat those items as given to the same person solely because those individuals are employed by the same person?

(f) Would the answers to questions (a) to (e) above be affected by the recipient being, or being employed by, a fully taxable person, who would be (or would have been) able to deduct any input tax payable on the provision of the goods consisting of the sample?"

The Court, following the sympathetic tack taken by the Advocate General, has ruled that samples may be outside the scope of VAT even if they take a form that can be finally consumed, even though Member States may require distributors to take certain precautions against final consumption. The VAT exemption is not limited to the first sample given to each recipient either: even substantial numbers of samples given to a single recipient (which may include an intermediary) may be outside the scope of VAT if this is necessary to meet promotional aims.  As for small gifts, the UK's cap of £50 per person per annum was not inconsistent with EU law -- but the presumption that all gifts made to different individuals are in fact made to their common employer is contrary to EU law since each case must be determined on its facts.  To quote the ruling in full:

"1. A ‘sample’, within the meaning of the second sentence of Article 5(6) ... is a specimen of a product which is intended to promote the sales of that product and which allows the characteristics and qualities of that product to be assessed without resulting in final consumption, other than where final consumption is inherent in such promotional transactions. That term cannot be limited, in a general way, by national legislation to specimens presented in a form which is not available for sale or to the first of a series of identical specimens given by a taxable person to the same recipient, unless that legislation allows account to be taken of the nature of the product represented and of the specific business context of each transaction in which those specimens are distributed.

2. The concept of ‘gifts of small value’, within the meaning of the second sentence of Article 5(6) ... must be interpreted as not precluding national legislation which fixes a monetary ceiling of the order of that established by the legislation at issue in the main proceedings, namely GBP 50, for gifts made to the same person in the course of a 12‑month period or forming part of a series or succession of gifts.

3. The second sentence of Article 5(6) ... precludes national legislation which establishes a presumption that goods constituting ‘gifts of small value’ within the meaning that provision, distributed by a taxable person to different individuals having the same employer, are to be treated as having been made to the same person.

4. The tax status of the recipient of samples has no bearing on the answers given to the other questions."

I'm not too sure what part is played by the giving of samples in a recording industry which is increasingly dominated by downloads -- but this ruling at least gives some historically profitable businesses a chance to recoup some of the VAT they've paid.

IP law and business .. or is it economics?

Intellectual Property And Business, edited by Stephen E. Margolis, Professor of Economics and Craig M. Newmark, Associate Professor of Economics, North Carolina State University, is another attractive and star-studded two-volume compendium of "greatest hits" covering that ever-appealing topic of IP law/business.  As the publisher's blurb states:

"The law and economics of intellectual property is attracting increased attention as technological innovation continues to have a major impact on economic growth [and vice versa?].

This authoritative two-volume set brings together the most significant [American -- is there any other?] scholarship on intellectual property. It provides comprehensive coverage, with a mix of theory, empirics and institutional details. The emphasis is on more recent writings, although it also includes some early work that continues to provide the platform for contemporary scholarship [there are a couple of Demsetz classics -- dating back to the days when Tony Sheridan was still playing with The Beatles -- and which, this reviewer, suspects, he probably has several copies of, to be found in other sets of "greatest hits"].

This book will be an essential source of reference for both academics, students and practitioners concerned with this exciting new [!] field of research".

It is conceded without argument that (i) business and economics have plenty to do with one and other and that (ii) these collections are popular both with those who teach law and economics and with those who enrol for their classes -- but it would be good to see a few changes.  Separate compendiums for IP law and economics and IP law and business would be fun, and some materials dealing with non-US scholarship and non-US markets would be good for a comparison with these rock-solid pillars of standard scholarship.

Bibliographic data: published 2010. Two vols, 1,072 pages. Hardback. ISBN 978 1 84720 911 5. Price  £295 (with the publisher's online discount this comes down to £265.50).  Web page here.

Best Practices in Valuing IP: an eye-witness account

IP Finance is pleased to welcome as a guest contributor Jackie Maguire (CEO, Coller IP Management), who writes:

"I attended the recent Summit on Best Practices in Valuing Intellectual Property. Challenged with making IP Valuation Standards sound interesting to a US audience, my good friend Thayne Forbes and I had accepted the kind invitation from Business Valuation Resources to present an international perspective at Morningstar’s Headquarters in Chicago.

Mike Pellegrino (President, Pellegrino & Associates, LLC) provided excellent opening remarks and gave a very reasoned argument for why Google paid far too much for YouTube’s brand, domain name and software platform, and failed the reasonableness test.

Anxious as to how the US audience would take to the new ISO 10668:2010 Brand Valuation Standards, Thayne explained the differences and similarities between the different IP Valuation standards that are being developed or are in preparation.

It has to be said that that the approach to valuing intangible assets in the Accounting Standards such as IFRS and US GAAP are essentially the same, but currently there is only a requirement from these standards to place a value on intangible assets in the company accounts if those assets are the result of an acquisition.

Accountants and the like, therefore, have a different perspective on Valuing IP compared to those of us with technology or brand investment and development in mind.

The new developments from the International Valuation Standards Council are however starting to move the debate forward beyond the accounting profession. It was a shame that the IVSC declined to talk about their proposed Standards at the Summit, especially as they published an exposure draft and collated feedback on 3 September. For those interested though, a rustling of the pages to No 79 will reveal a whole standard for valuing intangible assets, separating IP from goodwill. These apply to any business and are proposed to come into force in 2011. The standards define the principal classes of intangible assets in an interesting way for the IP non-expert: market-related (such as trade marks, domain names and non-compete agreements), customer- or supplier-related, technology-related and artistic-related. The standards then recognize the three principal approaches of Direct Market Comparison, Income and Cost for valuing intangibles. Essentially, as long as the valuation is carried out by a suitably qualified person who takes a reasoned position, making his/her assumptions clear, our view is that while the Standards are not very specific, covering them off will provide a framework for a robust valuation.

While my job was to report on the development of Valuation Standards at the Summit , I couldn’t leave without a comment on the really good presentation of Navigating US legal minefields in IP valuation from Lisa Brownlee and Jimmy Nguyen. The In re Bilski decision of the Supreme Court has secured value in many business method patents, but futher decisions are also having a strong influence on other IP valuations. Microsoft v i4i, Costco v Omega and HydramediaCorp. v. Hydra Media Group Inc. (here) all impact on the valuation of patents and trade marks, but the cases that took my fancy were those on false markings. Stimulated by Pequignot v. Solo Cup Co, where 300 complaints from the US public were made about the 21 billion cup lids that had been stamped with an expired patent number and the public claimed damages of $500 per event of mismarking, the number of cases for false markings are running amock! A list of False Marking cases of quite considerable length is found here.

On Tuesday a petition for writ of mandamus was filed by a false marking defendant who asks the Federal Circuit to consider the following issue:

"Did the district court clearly err when it denied [defendant's] motion to dismiss Relator's false patent marking case for failure to plead supporting factual allegation sufficient to infer an intent to deceive under this Court's precedent in Pequignot v. Solo Cup Co., 608 F.3d 1356 and Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312?"

The Federal Circuit has now ordered the plaintiff to respond to the mandamus petition within 14 days. A pdf copy of the petition can be found here. A copy of the Federal Circuit's order can be found here.

Make money from IP? Not this way!

Tonight marked the close of the IP Finance "IP begging letter competition", for which the prize was complimentary admission to CLT's IP and Finance Conference on 20 October.  To everyone's disappointment the organisers have had to postpone this event -- which this blog hopes will be held at an appropriate future occasion.

The competition was a simple one. We all receive scam emails. Some are from people purporting to be in possession of funds which can only be released once the recipient has himself paid some cash over to the scammer, or which require the recipient to part with his confidential online login and password details. The task, in entering this competition, was to compose a plausible scam email which seeks to entice recipients to invest money in an imaginary IP-protected business venture of their choosing.

Readers are invited to vote on their favourite.  Those who receive their IP Finance posts by email should note: the poll can be found at the top of the side bar on the weblog's front page.

Entry 1: "The Capodistrian Caper"

Learned Sir,

I write to you in the hope that you can assist me with a matter of some difficulty, which may be of benefit to your good self and the cause of IP.

I reside in Koper (Capodistria, the Italians called it). I am the executor of the late Simon Gregorcic, who from 1948 until his decease was the local agent of the U.S. Office of the Alien Property Custodian (and of comparable authorities of other victor nations).

You will no doubt remember that in 1942, President Roosevelt issued an Executive Order (No. 9095) creating the OAPC. This body acquired the property of enemy aliens. Of course, this included their valuable copyrights.

Now, as you will well recall, Trieste was the resort of many authors. Joyce, Freud and, of course, Scipio Slataper are a few of the important writers who sojourned there. Many valuable works were first published in the region both before and after 17 June 1930, when the Kingdom of Jugoslavia acceded to the Berne Convention. These books were all published by the leading publisher of the region, Igor Smircic.

The Kingdom of Italy had been party to the Berne Convention since 1887, so the books published in Trieste were protected by copyright in many countries, including (through simultaneous publication in Canada) the United States. After 1930, they were also protected in Jugoslavia. The works acquired by Igor Smircic included many works popular in Jugoslavia and the Warsaw pact countries.

At the risk of repeating matters that are very familiar to you, from 1947 to 1954 a state called the Free Territory of Trieste existed. During this time, my late client acted on behalf of the OAPC, accumulating royalties payable locally in respect of the US and other Allied copyrights of Italian (enemy) nationals . It was only with the Treaty of Osimo in 1975 that the disposition of the Istrian Littoral was settled, with the area around Trieste (called “Zone A”) going to Italy and the rest (“Zone B”) becoming part of Jugoslavia.

Smircic’s office was in Koper in Zone B, a few kilometres from the border with Zone A. With the abolition of the OAPC in 1966 and the accession of Zone B to Jugoslavia in 1975, it became impossible to repatriate these royalties to the US. Accordingly, the sum of 45,321,892 Jugoslavian Dinar has accumulated in the bank account of my late client at the Maritime Bank of Koper which constitutes bona vacantia. (Please be assured that by a confidential annex to the Treaty of Osimo, my client’s title to these moneys was confirmed.)

With the passing of my client, who died without heirs, it is essential to liberate these funds for the excellent pro-IP purposes that only you, learned Sir, are able to devise. If you would be so very good, therefore, as to provide me with your bank details and the small sum of $2,436 to cover the formalities, I shall be happy to transfer these moneys to you.

Respectfully,

Dr. T Dilczin

Entry 2: "The Trusty Troll"

My good friend,

I am writing this revelation to you under strictest confidence and secrecy as I am sure you are one of the few people understanding the value of Intellectual Prosperty (IP) and also patents, according to my father who instructed me to trust you with this informations.

I am Kees Jokkebrok, 20 years of age, the only child of my parents, Mr and Mrs J. Jokkebrok. My parents were natives of Belgium before they migrated to the Nederlands when I was just 4 year old. We lived at No 1010 JulianaBeatrixlaan in Wassenaar, the Netherlands, and I attended the famous KoningWillem-XI School in Leiden, but when my mother fell sick and died Friday, 13 June 2008, my father became weak, I believe it was the shock of my mum's sudden death that deteriorated his health. He retired from the European Patent Office (where he had access to a lot of secret IP) in November 2008, from there he moved to Zürich Switzerland because of his medication, I stayed in Leiden to study Mechanical Rocket Engineering. Then in December 13, 2008 my father called me and told that he was ready to set up his own IP-Troll company, and he also told me that he want me to learn about his secrets and the fortune we could make with trolling. On 14 December 2008 I flew to Zürich. Unfortunately on 22 December 2008 my father collapsed and later died. Then my uncle Boef Jokkebrok seized all my fathers bank documents and properties. But he doesn't know that I have hide the most valuable documents of IP in a safe place outside the house where he can not find them based on my late father's advice on his sick bed before his death. This secret IP has been in my mind for more than 18 months now and I don't even know who to tell because I need someone to help me to develop these secrets into a real company and to enable me leave Zürich rich and peacefully. This is the reason I make contact with you to help me develop this IP. That mean you will provide an account with some starting money in Switzerland with which we start the a company "Troll-IP inc" in which I put the IP. As an engineer in mechanical rocket engineering I can understand the abracadabra IP very easy and soon I will be able to make out of the IP within a few weeks some strong WIPO-Patents to extort money from other rich foreign companies. Thus the value of the company "Troll-IP inc" will multiply thousand times within a year, making you and me rich.

I have thought about it long and I came to the conclusion that, this is the only way I can get the IP work for me without my uncle knowing about it.

If you believe that you can help me please respond to this mail and include with it your telephone number to enable me give you a call please.

Of course as someone who knows about IP, you know that we need a small fortune to file the patents I will make from the IP and even more later on for all the translations, but I guarantee that the resulting patents will scare even the biggest foreign companies, who will gladly settle quickly, giving us a huge leverage.

I want you to know that I passed by so many patent experts before I came in contact with your contact info and when I did, my heart and the spirit of God dwelling inside me asked me to confide and trust you.

Please get back to me ASAP.  God bless you as I look forward in meeting you soon!!!

Kees Jokkebrok, Immersauerstrasse 6, Zürich, Switzerland.

Entry 3: "Verily Val Verde"

Dear Mr Dr Jjip,

Forgive my no good English - I hope that this letter finds you with full heart.

My father Mr Ausgustus del Fonto del Monte del Boy recently died. Before his death he was the head of a small company based in Cuba which he began by his own hands when we fled the evil regime in Val Verde. I do not need to tell you the sad story of Val Verde, but he was fatally injured in helping us to escape.

My father explained to me before his death that his entire business was now in the hands of the US government, who I understand are now controlled by Arnold Schwarzennegger after he took over from Bill Pullman when he died saving the USA from alien invasion in Independence Day. Excuse my contacting you but I believe that as one who converses with cats you are able to help me to solve this sad affair by getting the trade marks transferred to you and then to me.

If you are able to provide me with help in the form of an amicus brief then I am willing to share with you the IP portfolio of my fathers business which I have concrete proof has the value for you of 81.2 (EIGHTYONEPOINTTWO) million US dollars. I will need you to provide me with a few details to allow for the transfer of half of this value now. I will need your full name, passport number, sort code.. let these things not be a gap between our safe meeting in London on Tuesday next week.

I have been able to safely escape to London, but to be able to safely live in the UK I have had to change my name to David Victor Ambwile. Please excuse my new name. You will also find that I have taken an accent to hide from the hideous officers of Val Verde that still hope to secure my return, and I have had to disguise myself. I must secure your privacy and speed in this matter, and to avoid detection and to guarantee your safety once you have given me your details I must ask that you do not check your bank account for 24 hours.

Yours with full heart

Simone del Fonto del Monte del Boy (David)

Please cast your votes, which will be decisive as to the winner.  Meanwhile, the IP Finance weblog will try and sort out a fresh prize for the winner that is of a value commensurate with that of the now-postponed confernce.