1. The document provides instructions for a directed reading course, including defining a topic of study, signing up under the instructor's course section, and draft/feedback deadlines of November 19th and 25th respectively, with a final report due December 2nd.
2. The syllabus outlines topics for the software valuation course, including why software should be valued, open source software, principles of valuation, market value of software companies, intellectual property, and risks of outsourcing.
3. The review discusses how understanding software value allows for rational design and business decisions, and could improve software education by considering quality over quantity in assignments.
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www.FITT-for-Innovation.eu
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Tutorial on how software can be valued in a global business setting. IThe last section covers multinational tax avoidance. enabled by moving rights to profit from software assets into tax havens.
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A Strategic Approach: GenAI in EducationPeter Windle
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The US House of Representatives is deeply concerned by ongoing and pervasive acts of antisemitic
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• The Committee on Education and the Workforce has been investigating your institution since December 7, 2023. The Committee has broad jurisdiction over postsecondary education, including its compliance with Title VI of the Civil Rights Act, campus safety concerns over disruptions to the learning environment, and the awarding of federal student aid under the Higher Education Act.
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1. CS207 #2, 7 Oct 2011
Gio Wiederhold
http://infolab.stanford.edu/people/gio.html
Complementary Directed Reading Projects:
1. define the topic you‘d like to study and email me a brief memo.
I can either provide readings then or we can discuss it further by appointment
2. Sign up for a directed reading course at your level (UG or Grad) in EE or CS.
Use my Directed course Section Id, either 17(CS) and 65(EE).
The number of units should be about the (number of hours/week you plan on) / 4.
3. Draft due 19 Nov. Feedback from me 25 Nov. Final report due 2 Dec.2010
4. Topics later today. <lost message>
07-Oct-11 CS207 Fall 2011 1
2. Syllabus:
1. Why should software be valued?
2. Open source software. Scope. Theory and reality
3. Principles of valuation. Cost versus value.
4. Market value of software companies.
5. Intellectual capital and property (IP).
6. The role of patents, copyrights, and trade secrets.
7. Life and lag of software innovation.
8. Sales expectations and discounting.
9. Alternate business models.
10. Risks when outsourcing and offshoring development.
11. Licensing.
12. Separation of use rights from the property itself.
13. Effects of using taxhavens to house IP.
07-Oct-11 CS207 Fall 2011 2
3. Review: Knowing
what software is worth
• Allows rational design decisions, as
Allocating development efforts
Programming investment for long-lived SW
Understand limit to Software Life
• Allows rational business decisions, as
Choice of business model
Where and when to invest
How to assign programming talent
• Improve focus of education in software
Consider quality, not just quantity in assignments
Effectiveness of curriculum
07-Oct-11 CS207 Fall 2011 3
4. Economic
Loop again
07-Oct-11 CS207 Fall 2009
fall 2011 4
5. Value
Profit margins are the excess left after
CoGS [Cost of Goods Sold] and business costs
(SG&A, capital cost, tax) are are deducted
Conclusion from last week
If goods are sold based on their manufacturing cost, there
is no accounting for the value added due to their
uniqueness.
If anyone can compete profit margins will be modest.
• Uniqueness has value because it raises profit margins
• Uniqueness in software in not a tangible
07-Oct-11 CS207 Fall 2011 5
6. Examples → Gad- Soft-
Income allocation get ware
525M 525M
Sales revenue = units sold x unit price 140% 162%
after
Product revenue 375M 325M
after
Distri- 100% 100%
butor
Distri- 284M 300M
Gross income
markup after
butor 76% 92%
markup Prod- 250M 225M
after Operating income
uction over- 67% 49%
cost head 164M 160M
after Net income 44% 42%
Mark
eting, Research after 154M 154M
Admin.
Earnings 41% 47%
Capital
CoGS cost after 100M 100M
SG&A R&D Taxes
Profit 27% 31%
$$
7. Quick definitions:
Intangibles
In a business there are 3 parts that have value
(Contribute to potential income)
1. Tangible goods: buildings, computers, working capital
2. The know-how of management & employees
3. Intellectual property: Software, designs, methods, etc.
• 2. + 3. make up the Intangible Capital of a company.
• Software is an intangible good
If it is owned then it is Intangible Property
07-Oct-11 CS207 Fall 2011 7
8. Intangibles
• Product of knowledge by
Cost of original >> cost of copies
1. Books authors
2. Software programmers
3. Inventions engineers
4. Trademarks advertisers
5. Knowhow managers
6. Customer Loyalty
Interacts with long-term quality
07-Oct-11 CS207 Fall 2011 8
10. Approaches
to assess IP
• Technical alternatives
1. Income Prediction $
Based on expected sales, life, lag
2. R&D roll-over
Based on life and effectiveness of R&D
∫ ×1.?
• Broader alternative approaches
3. Market capitalization (Market Cap)
Covers everything the shareholders value
4. Comparisons with another existing businesses
With other companies based on industry, operational similarity
and then check their performance based on ratios
royalties gathered, costs/earnings (price/earnings needs market cap)
07-Oct-11 CS207 Fall 2011 10
11. Fraction of
intangibles
• Principle
The sum of all future income
discounted to today (NPV)
Implicitly estimated by shareholders through the market cap
• Example: Market Cap value of a company (SAP, 2005)
Largely intangible – like many modern enterprises
1. Market cap = share price × no. of shares €31.5B 100%
2. Bookvalue = sum of all tangible assets € 6.3B 20%
Equipment, buildings, cash
3. Intangible value per stock market €25.2B 80%
Intangible/tangible = 4 x .
How much of it is software at SAP ?
07-Oct-11 CS207 Fall 2011 11
12. Basis for SW
value as of today
• Sum of future income
Independent of cost
Sales = price x copy count
Maintenance fees if service subscription
• Minus sum of future costs
Cost of goods sold
Cost of marketing
Cost of doing business
Cost of maintenance
• Discounted to today
To account for value of money and risk
07-Oct-11 CS207 Fall 2011 12
13. Discounting
• Standard economic accounting principle
Getting $1 next year is less valuable than getting $1 today.
1. If no risk of getting it later, discount by available interest rate
Say 4%, 1-year off is $0.96, 5-year is $0.855, 15 year only $0.542
Formally, use Federal bonds rates for that period
2. If there is a risk - likely in business – use risk experience
Say 15%+4%: 1-year is $0.81, 5-year is $0.349, 15 year only $0.042
Tables per industry are available (at a price), based on past experience
Discounting has a large effect on income estimates
Makes looking into the future less risky
07-Oct-11 CS207 Fall 2011 13
14. Market cap :
Issues only a hint
• Stockholders don’t know what is really going on
Wisdom of the masses?
Are fed limited information
Indirect indicators are delayed: sales by principals
• Market cap is unreliable due to high variability
Market bubbles mislead
Option values are hard to judge
• In a multi-product company
Allocate income to each product line
Over time, many factors should even out
07-Oct-11 CS207 Fall 2011 14
15. For that hint: Adjust market cap
$M of some company
Reduced Market Cap
Deal with the argument:
“Market cap is due to bubble !”
07-Oct-11 CS207 Fall 2011 15
16. A better, direct
approach
• Value the software specifically by income
over its lifetime
• But software is not stable over time: Slithery
Getting long-term income requires maintenance
Maintenance enables long-term income
• Much more so than other intangibles
Books, music,
• Similar to some intangibles that contribute to life
Costumer loyalty, trademarks
07-Oct-11 CS207 Fall 2011 16
17. Maintenance
is beneficial
depreciation / year = 1 / lifetime
years
13
Lifetime maintenance cost
12
11
10 100%
9 90
8 80
7 70
6 60
5 50
4 40
3 30
2 20
1 10
0
PCs cars software intangibles
Typical Life 3years 5 years 12 years 18 years
Maintenance 2%/year 5%/year 15%/year 13.75%/year
Maintenance cost 6% 21% 80% most over asset life
Depreciation 33/y. linear 20%/ y. linear 8%/y. linear 12% geometric
07-Oct-11 CS207 Fall 2011 17
18. Software is
slithery !
Continuously updated Life time
1. Corrective maintenance 100%
bugfixing reduces for good SW 80%
2. Adaptive maintenance 60%
externally mandated
40%
3. Perfective maintenance
satisfy customers' growing 20%
expectations
[IEEE definitions] Ratios differ in various settings
07-Oct-11 CS207 Fall 2011 18
19. Topics for paper
• Something your are interested in / wondering
• Value in Apple about
• Value in Microsoft
• Value in Google
• Value in Facebook
• Value in a company you plan to start
• Value of education when starting a company
• Company failures -- real or potential (HP)
• Accounting for intangibles
• 9% income + 9% corp.+ 9% sales tax [Cain]
07-Oct-11 CS207 Fall 2011 19
20. Next Class
• Cost of maintenance
resources needed
• Combine it with income
Estimate sales
• Subtract costs
Sales etc
• Discount it all
life if well-maintained
• Estimate current value
07-Oct-11 CS207 Fall 2011 20