The Long Tail, fashion design and collectables

I don't make a point of cross-referring my own posts, but there's very little overlap between the readerships of IP Finance and Fashionista-at-law, and my piece there this morning ("Does my Long Tail look big in this outfit?", here) is arguably as relevant, if not more so, to readers of this blog than that one. The piece draws attention to the imbalance between the windows of opportunity for deriving revenue as between fashion designers on the one hand, whose markets are often ephemeral creatures of a single season, and sellers of collectable dolls on the other. Enjoy!

An Anlysis of IP Licensing: The Empirical Challenge

Research on IP licensing tends to be of two types--either anecdotal or empirical. The strength of each is also its weakness. Anecdotal research, while it drills down into the specifics of a given licensing situation, lacks the ability to support broader generalisation; empirical research, while it provides a broader overview of licensing, usually lacks any guidepost for the practical implications of the results.

With that in mind, I finally had an opportunity to review a study published last year as a Working Paper of the OECD Directorate for Science, Technology and Innovation (DSTI/DOC(2009)5)). Entitled "Who Licenses Out Patents and Why? Lessons from a Business Survey," the study was carried out by Maria Pluvia Zuniga and Dominque Guellec. As described in the Abstract, "[t]he goal was to investigate the intensity of licensing to affiliated and non-affiliated companies, its evolution, the characteristics, motivations and obstacles met by companies doing or willing to license." To this end, responses were studied from 600 European, and 1700 Japanese, corporate patent holders.

The first point is the unique nature of technology transactions. The authors mention a number of factors that make IP licensing a challenging activity: (i) markets for technologies are seen as less efficient economically than product markets; (ii) the incorporeal nature of IP rights, whether registered and disclosed, as with patents, or tacit, as with trade secrets, makes both valuation and deal structure uncertain; (iii) a license arrangement requires the licensor to find a satisfactory way to share the fruits of its innovation with a third party, with both commercial and psychological implications; (iv) the mixed nature of an IP license, having both proprietary and contractual aspects, makes the structure and drafting a license agreement a non-trival and often times costly activity; (v) the licensor runs the risk that the licensee may become a competitor, lawfully or otherwise; and (vi) the characteristics of a license are industry-specific with significant differences across industries.

Let's go now straight to the statistical findings:

1. About 20% of companies in Europe and about 27% of their Japanese counterparts license-out at least one patent to an unrelated party.

2. The probability of a company licensing-out patents is U-shaped, namely, small and large companies are more likely to license-out than mid-size companies.

3. In Europe, UK companies, followed by Nordic companies, are most likely to license-out.

4. Revenue is the major driver of licensing-out, followed by the sharing of technology (i.e., cross-licenses) and "constrained licensing" (an alleged infringer is compelled to accept a license).

5. About 24% of European companies holding patents, and about 53% of their Japanese counterparts, expressed the unrequited desire to license-out, due to the failure to locate a partner.

6. The use of patents in connection with fund-raising is most notable for young firms, i.e., venture capital (31%) and private equity (40%).

The authors then state as follows:

"The survey shows that licensing markets are less developed than they could be, in view of the willingness of patent holding companies to license more of their portfolio. Helping suppliers to find partners would substantially increase transactions in patent markets. Both market and government solutions exist which could alleviate obstacles and reduce transaction costs. Market-based mechanisms have recently emerged (technology brokers, internet platforms, patent funds, auction houses, IP consulting companies, etc.)."

I have a number of comments about this.

1. It has always seemed to me that the greatest threshold obstacle to getting our empirical arms around IP licensing is the quality of the data. Most IP licenses are private arrangements and the kind of (self-) sampling described in this study seems dicey as a statistical matter. Until we solve this problem, whatever the results are, they must viewed with a healthy degree of skepticism.

2. It would have been helpful if the authors had suggested the reason for the U-shaped probability curve for who licenses-out. Is this a robust result or an artifact of inadequate data? If the former, it strikes me as having significant implications for policy and practice, but only after a plausible explanation is offered for it.

3. I remain wholly puzzled by the geographical focus of licensing-out on the UK and the Nordic countries. Once again, is this simply the result of inadequate data, or does it represent a significant difference in the way that IP is commercialized in these countries, as contrasted with such jurisdictions as Germany, France and Benelux? I think that there the empirical jury is still out on this point.

4. As for the search for better licensee identification and reduced transaction costs through market mechanisms, there is a "quest for the Holy Grail" aspect here. More ink seems to have been spilled at positing the possibility of promoting such markets, as contrasted with identifying such markets on the ground. I really want to be proved wrong here. If so, research should begin with evaluating the effectiveness of the market alternatives suggested by the authors.

More generally, I wonder just how useful empirical studies of IP licenses can really be. This unease about the entire enterprise has not been allayed by this study, despite some tantalizing findings and suggestions.

It May be Easier to Find Transaction Costs After All

What price Gourmet?

Writing for BrandChannel, Vivian Manning-Schaffel ("Condé Nast Considers Licensing To Mitigate Losses", here) explains that, in its quest for fresh revenue streams, publishing house Condé Nast may opt for brand licensing in an attempt to leverage income from titles such as Vogue, or even to resurrect dead titles like Gourmet -- which died last year along with Cookie, Modern Bride, Elegant Bride and Domino.

Manning-Schaffel is sceptical as to whether this strategy will yield fruit:

"Those same luxury publications (well, maybe not Gourmet) met their demise last year because their target audiences could no longer afford their contents.

So now consumers are expected to shell out money for products that are literally, in Vogue? To wit, one source ... said, "DO WE REALLY need Vogue handbags? Gourmet kitchen mitts?"".

The question, it is submitted, is not what consumers can afford, nor what they need. There are two elements to a brand: its allure and its goodwill. The allure is a magnet that attracts first-timers who want to look like Kate Moss, smell like Britney Spears drive like Jensen Button or exude the couldn't-care-less cool of Diesel. This applies in respect of both new and established brands.

Goodwill, in contrast, attaches to an existing product, being the attractive force which brings customers back for more; this is however lacking in any case of brand extension by the original owner or the licensing of the brand to another. You can't simply say, as Cadburys did many years ago, that if consumers like their chocolate bars they will purchase their instant mashed potatoes. Anyone paying licence royalties for non-core uses of Vogue, Gourmet or Domino is taking a big risk, since a brand that doesn't have sufficient gravity to retain custom in the sphere in which its goodwill was initially developed can't be expected to perform strongly in other markets.

Monetizing Online Contents: Is It a Qualitative or a Quantitative Matter?

I admit--I am a podcast freak. Every night I dutifully download from iTunes to my iPod the most current podcast broadcasts from a pre-selected list of sites. I then spend the better part of an hour in the morning (in conjunction with my morning walk), and a similar amount of time on the bus ride home, listening to these broadcasts. At the top of my list are the economic and business-focused podcasts offered by Bloomberg Radio, orchestrated by the dynamic force of its primary interviewer. While most of these podcasts are shortened from the full-length version of the original radio broadcast, sufficient content and elegant editing made the offerings a perfect fit for my morning and evening listening habits.

However, those days may be coming to an end. Starting at the beginning of this week, Bloomberg seems to be offering one of two choices. Either subscribe to a so-called "premium" service, which entitles the listener to access to the original, full-length broadcasts in exchange for a yearly fee, or be satisfied with only a series of short snippets, a mere fraction of not only the length of the original broadcast but the typical length of the edited item prior to the introduction of the premium service as well. (The "premium" service also promises a number of additional contents, presumably available only to podcast subscribers.)

In so doing, Bloomberg appears to betting that it has found a winning formula for that most elusive of challenges--how to monetize contents available online. Bloomberg is seeking to so by changing the behaviour of its listeners, whereby it is attempting to induce people to pay for contents that were previously available free of charge. While I can sympathize with Bloomberg's desire to find new sources of income, particularly in the online space, nevertheless, permit me to voice my reservations about this scheme.

My reservations do not derive so much from the prospect of being asked to now pay for online contents (I would prefer not to pay, but I am prepared to do so if I believe that I will receive a commensurate benefit.) Rather my puzzlement centres on the why Bloomberg believes it can attract me to sign up for contents which, in the aggregate, are less attractive for my personal use than were the contents prior to the change.

Think about it: the attraction of the contents in the old regime were not simply that they were available for free, but that they were edited in such a way that made them a perfect fit to my morning and evening schedules. In other words, I was drawn to the podcasts precisely because they were a shortened form of the original radio broadcasts. Recalling the old saying, "I did not have enough time to write you a short letter so I wrote you a long one", it was the editing function that turned these contents into a desirable user experience. Without wishing to sound trite, the fact that "less was more" was crucial.

Where Did That User Experience Go?

The new premium podcast service has turned the user experience of these broadcasts on its head. In so doing, has taken the position that monetizing contents online, by moving from a free to a subscription model, is a quantitative, rather than a qualitative, matter. Speaking for myself, I don't get the commercial logic.

After all, if I want to listen to the full-length broadcast (which, crucially, I do not), I can do so for free by listening to the original radio broadcasts. No special effort is required by Bloomberg to enable me to do store and listen to these broadcasts on my MP3 player. As I noted, the value-added experience under the previous arrangement lay in the editing of the contents. I would have thought, therefore, that Bloomberg's challenge would be to convince me to begin to pay for this user experience.It may come as a surprise, but I so much valued this user experience that I would have been willing to pay for it, even if had been previously offered for free. But I was never given this opportunity.

Instead, Bloomberg is trying to convince me to sign up simply because they offer me more contents that were previously available. If before, "less was more", as a qualitative matter, the current offer is that "more is less", as a quantitative matter. I assume that Bloomberg has done its marketing homework and that it is convinced that it will commercially succeed in this move. If so, it will may mark a major turning point in the monetizing of online contents. Perhaps--but not for me, I suspect.

Fallen angels?

Via Technology Transfer Tactics comes Marty Zwilling's "Eight Angel Investors to Avoid", a provocative little article from his Startup Professions Musings blog which might make some investors feel a little less comfortable about themselves -- though I doubt that many of them will be reading it. "Most angels are pure", he writes, "but there are some exceptions that may cost you more than an investment". Investors to watch out for are:

"Shark angels. This is the ultimate bad guy whose sole intention of getting involved in early-stage investing is to take advantage of what they believe is the entrepreneur’s lack of financial and deal-making experience. If the term sheet process turns to pure torture, it may be time to respectfully bow out [It might be too late at this point. It's worth asking for, and taking up references -- if any can be found -- from previous early-stage investments].

Litigious angels. The litigious investor will look for almost any excuse to take you to court. This type of investor never really focuses on the returns your company can deliver, but instead tries to make money by intimidation, threats and lawsuits. They know you won't have the resources to fight them, so they count on you "caving.” Keep your attorney close by your side [I never thought these existed till I had personal experience of one. They're sometimes difficult to detect, particularly at the early stages of their careers].

Superior angels. A number of successful business people, some of whom become angels, develop the belief that they are destined for greatness because of their clear superiority over everyone else. These are usually overbearing, negative people who are hypercritical of every decision you make. Don’t be intimidated into bad decisions [If you can't avoid them, try flattery or distraction ...].

Control freak angels. This angel starts out looking like your new best friend. Once you are funded, he waits until you hit your first pothole and then points out “gotcha” clauses in your agreement that give him more control. This escalates into a requirement that he must step in to run your company himself. Only your Board can save you here [Easy to avoid if you just keep missing those pot-holes].

Tutorial angels. The tutorial investor is not after control, but wants to hold your hand on every issue. The mentoring offer always sounds good up front. But after they write the check, it soon becomes apparent that their desire to be helpful 24 hours a day is a nuisance at best. Initially, your gratitude for their investment may prompt tolerance, but eventually the burden wears you down. Keeping your distance is the best solution [or ask for more advice, particularly if it involves market research and competitors' product development prospects, since that can wear them down].

Has-been angels. These tend to appear with every perturbation in the economy. They are usually high-flyers with a liquidity problem. They are still at the country club every day, but are now running up a tab. They will meet with you, and ask a thousand questions, but never get around to closing the deal. Learn to ask the closing questions [Closely related to Wannabe angels, whose habits are sometimes strikingly similar].

Dumb angels. Wealth is not synonymous with business savvy. You can spot dumb angels by the questions they ask (or don’t ask). If they ask superficial questions or don’t understand business, a successful long-term relationship is not likely. But don’t forget that people with wealth usually may have some savvy friends to meet [Careful, you might be in danger of taking them for a ride].

Brokers posing as angels. These people are all over the place, often posing as lawyers and accountants. They have little intent to invest in your company, and will eventually solicit you to sign a fee agreement to pay them to introduce you to actual investors. Brokers are often worth the fee, but don’t be misled about who is the angel [this category may overlap with Control Freak angels]".

Does Manufacture Have a Place for Small Country Hi-Tech?

Can small countries with a dynamic tech sector successfully translate technological prowess into commercial success? The question bedevils all of us who live in such locales and who are engaged in the local high tech business. Should our mindset be to invent, develop and sell the resulting technology, usually for the benefit of a small number of persons with an equity or like interest in the company? Or should we view the development of the technology as the only the first step in the building of a long-term commercial venture?

Stated otherwise, are the likes of Nokia (in Finland) and Teva (in Israel), the high tech rule or the exception for small countries located at the periphery? These thoughts ran through my mind when I read about the fate of deCODE Genetics, an Iceland- based pioneer in genetic research, which filed in mid-November 2009 for chapter 11 bankruptcy in the U.S.

According to a November 1th report of scienceblog.com, deCODE was established in 1996,

"basing its business plan on its unique access to biological samples and genealogical and medical records from the small [NJW--approximately 320,000 citizens], homogeneous Icelandic population. Since its launch it has proved wildly successful as a research institute, generating an astonishing number of high-profile publications on the genetics of common traits and diseases. Unfortunately, it has also been a complete disaster as a commercial venture, hemorrhaging away over $700 million while failing to generate a single quarterly profit."

In its bankruptcy filing, deCODE listed total assets of $69.9 milli0n and total debt of $313.9 million.

The bankruptcy filing by deCODE follows the failure in April 2009 to sell Iceland's Actavis company, which was a prominent generic drug manufacturer. On top of the country's well-documented banking woes, the question that is raised is whether companies such as deCODE and Actavis, seeking to operate from Iceland, are well-nigh doomed from the outset if their business model is built on manufacturing rather than "develop and sell" (although in the case of Actavis, being a generic drug company, manufacture was at the apparent heart of the company's activities).

Focusing on deCODE, the CEO, Mr. Kari Stefansson, in explaining the need to file for bankruptcy protection, stated in a Reuters report that

"[t]he company was probably founded about five years too early. ....At the time we started out there was very substantial support for long-term investment by biotech companies. But when we were halfway through development of our first compound, the market lost patience with long-term investment like that."

As well, the company had the misfortune to choose Lehman Brothers to invest its funds; the defunct financial company invested in U.S. auction-rate securities, the market for which completely collapsed during the summer and fall of 2009. So was deCODE a victim of bad timing, or something more fundamental?

Perhaps one way to better gauge this answer is to follow the fate of the company after reorganization. It is reported that its major asset--its huge DNA biobank and database--will be sold to a group of investors as a central part of the disposition of the company's assets under the chapter 11 proceeding. If the reorganized company succeeds commercially, then the debate will center on whether deCODE should have planned to sell these assets all along, whereby the company's scientific capabilities could then have been merged in a more orderly and lucrative way with the abilities of a third party better placed to commercialize these research efforts. As part of the answer to the question, consideration would have to be given to the fact that deCODE is an Icelandic company, even to the extent that the answer might differ if the company had been located elsewhere.

There is a further social policy aspect here. Manufacturing generates more employment than most R&D, and that will most certainly be the case in a situation such as deCODE. Even for an advanced society like Iceland, there may be a conflict between the most efficient use of technological resources, namely, the development and sale of R&D, and the broader social goal of achieving maximum employment for the population. Large countries are reasonably placed to satisfy both goals; query whether the Icelands (or Finlands or Israels) of the world have the same luxury.

But Where Are the Manufacturing Jobs?

When Moribund Brand Meets Turning a Disadvantage into an Advantage

Two of the more daunting challenges in consumer marketing certainly must be: (i) successfully obtaining a moribund trademark with the intention of reviving it; and (ii) developing a campaign whereby one turns an apparent disadvantage into a marketing virtue.

Regarding the first, we are reminded of the revival of the "Packard Bell" mark. It was first used in 1926 in connection with radio products and later expanded into defense contracting work as well as other consumer electronic products, most notably television sets. In the 1980's, the mark was purchased by a group of investors for use in a newly formed personal computer manufacturing company. The latter company plus mark was sold to Acer in 2008. Presumably, at the time of acquisition in the 1980's, the investors were convinced that there was sufficient goodwill in the mark, and that this goodwill could be extended into a new product category, that made its acquisition an attractive alternative to building a new brand from scratch.

Regarding the second, the iconic corporate slogan of Avis Rental Cars--"We Try Harder", springs immediately to mind. The slogan was first adopted by the company in 1962 and conveyed the dual message that while the company was certainly a respectable number two to the industry leader, The Hertz Corporation, it would not rest on its laurels and was committed to out- hustling its principal competitor. (This promise may be put to a severe test. According to Wikipedia, "the company primarily leases General Motors (GM) vehicles, such as Chevrolet, Pontiac and Saturn within the United States, though some locations feature other popular non-GM brands, such as Huyndai or Kai.")

It is difficult enough to succeed either in reviving a moribund brand or turning a marketing disadvantage into an advantage. An attempt to do both simultaneously must certainly pose even a greater challenge. An instance where it did succeed was recounted in the November 14th issue of The Economist. The article, entitled "Salesman of the Irrational", described the fascinating success of Jean-Claude Biver in successfully reviving three Swiss watch brands ("Blancpain"; "Omega"; and "Hublot") over nearly a 30-year period. The strategy that he employed regarding each of these brands was different, and we wish to focus on his success in connection with the "Blancpain" brand.

In 1981, Mr. Biver and a friend bought the rights to the "Blancpain" mark for what seems to be the sum of SF22,000. The mark had been used by a Swiss watch company which, among other things, had once supplied watches to the US navy. The company, however, had effectively gone out of business in the 1970's. What attracted Mr. Biver to the brand? According to the article, there were two things: First, the defunct company had claimed to be Switzerland's oldest watch manufacturer; second, the company had completely missed out on the technological revolution from mechanical watches to quartz timepieces operated by a battery.

Mr. Biver parlayed these two factors into the slogan--"Since 1735 there has never been a quartz Blancpain watch. And there never will be." To appreciate the audacity of the message, consider that at the time, digital watches being manufactured in Asia were selling for $20, a fraction of the price being charged for a Swiss watch. I remember to this day the spate of publication of articles eulogizing the end of the Swiss watch industry.

Mr. Biver bet that the message of tradition, which could be seen as the antithesis to technological progress and cutting-edge prowess, would ultimately carry the day. He was right. As the article mentions, "[i]t turned out to be an industry-changing move. Last year mechanical watches accounted for 70% of the value of Swiss watch exports." The "Blancpain" mark, which had been left for dead, succeeded in reestablishing itself as a respectable and viable brand.

As we enter the third year of the world economic slowdown, we have witnessed companies, some with venerable brands, go out of business. One by-product has been an increased interest in purchasing such brands out of bankruptcy. See here for an earlier blog post on this topic in connection with "The Sharper Image" mark. Mr. Biver's success has paralleled the 20-year boom from the 1980's until the recent past, and this confluence of favorable circumstances should not be forgotten. Nevertheless, the saga of the revival of the "Blancpain" mark shows how the likelihood of succeeding in the acquisition of a brand out of bankruptcy can succeed on the back of a high-risk marketing strategy. In appropriate circumstances, it remains an instructive example.

We wish all the readers of the IP Finance blog the best for the year 2010.