This document outlines the syllabus for a course on software economics. It covers topics such as valuing software, intellectual property, different business models, licensing, and taxation. The course is divided into three parts, with each part covering several topics related to software economics. It emphasizes that software is different from other assets because it requires ongoing maintenance to retain value over its lifetime. Proper valuation of software should account for expected future income from sales and maintenance fees, discounted to reflect present value and risk.
French Research Tax Credit (CIR) & Innovation Tax Credit - overall presentationAdrien Brazier
This presentation explains the key points to bear in mind regarding two french incentive tools dedicated to R&D&I : the research tax credit (aka CIR) and the innovation tax credit (aka CII).
A personal view of the SME Instrument from an Evaluator's Role, based on the experience of 2 years, since 2014, as expert evaluator working for the European Commission (EC).
Horizon 2020 - SME Support 2014-2020 - Jean-David Malo - Israel, May 16th 2012ISERD Israel
מצגת בנושא:
SME Measures in Horizon 2020
הועברה ע"י:
Mr. Jean David Malo, Head of Unit Financial Engineering, DG Research and Innovation, European Commission
ביום מידע "מנגנוני הורייזן 2020" לקראת תוכנית המסגרת הבאה למו"פ של האיחוד האירופי שהתקיים במשרדי ISERD 16.5.2012
Eurostars is a joint programme supporting R&D performing small and medium sized enterprises (SMEs). It is co-funded from the national budgets of 34 Eurostars countries and by the European Union through Horizon 2020.
Eurostars has been carefully developed to meet the specific needs of SMEs. With its bottom-up approach, it stimulates international collaborative research and innovation projects that will be rapidly commercialised.
Eurostars is an ideal first step in international cooperation, enabling small businesses to realise the many benefits of working beyond national frontiers. Participation in a Eurostars project can become a passport to growth, further innovation, an opening to new global markets and even greater business success.
Propose your project idea: https://www.eurostars-eureka.eu/
French Research Tax Credit (CIR) & Innovation Tax Credit - overall presentationAdrien Brazier
This presentation explains the key points to bear in mind regarding two french incentive tools dedicated to R&D&I : the research tax credit (aka CIR) and the innovation tax credit (aka CII).
A personal view of the SME Instrument from an Evaluator's Role, based on the experience of 2 years, since 2014, as expert evaluator working for the European Commission (EC).
Horizon 2020 - SME Support 2014-2020 - Jean-David Malo - Israel, May 16th 2012ISERD Israel
מצגת בנושא:
SME Measures in Horizon 2020
הועברה ע"י:
Mr. Jean David Malo, Head of Unit Financial Engineering, DG Research and Innovation, European Commission
ביום מידע "מנגנוני הורייזן 2020" לקראת תוכנית המסגרת הבאה למו"פ של האיחוד האירופי שהתקיים במשרדי ISERD 16.5.2012
Eurostars is a joint programme supporting R&D performing small and medium sized enterprises (SMEs). It is co-funded from the national budgets of 34 Eurostars countries and by the European Union through Horizon 2020.
Eurostars has been carefully developed to meet the specific needs of SMEs. With its bottom-up approach, it stimulates international collaborative research and innovation projects that will be rapidly commercialised.
Eurostars is an ideal first step in international cooperation, enabling small businesses to realise the many benefits of working beyond national frontiers. Participation in a Eurostars project can become a passport to growth, further innovation, an opening to new global markets and even greater business success.
Propose your project idea: https://www.eurostars-eureka.eu/
Bouquet: SIERA Workshop on The Pillars of Horizon2020Mustafa Jarrar
Prof Paolo Bouquet
University of Trento Italy.
Workshop on Proposal Writing and International Fundraising
Sina Institute at Birzeit University
April 2, 2014.
Innovation Funding for Growth-Oriented Companies - Oct 24, 2014Boast Capital
The Canadian Government provides over $7B in innovation funding each year and is considered one of the most generous countries for funding research, innovation, and experimentation.
Learn more about a few of Canada's innovation funding programs:
-Scientific Research & Experimental Development Tax Credit (SR&ED), slides presented by James Suk, Boast Capital
-Small Business Grants, slides presented by Stephanie Sang, Granted Consulting
-Sustainable Development Technology Canada (SDTC) slides presented by Paul Austin, Regional Director of Partnerships
SMEs Support & Financial Instruments in HORIZON 2020 - J.D Malo - Presentatio...ISERD Israel
Horizon 2020 Launch Event in Israel - Presentation of Jean-David Mשךםת Head of Unit SMEs, Financial- instruments and State Aid, DG Research and Innovation, European Commission
Slides presented during #ISVwebinar n°1, 12 September 2016.
Content: The SME Instrument initiative of the EU Commission. Key elements of the programme and instructions on how to apply.
#ISVwebinars n° 1: Smart&Start Italia - Daniela Patuzziitaliastartupvisa
Slides presented during #ISVwebinar n°1, 12 September 2016.
Content: Smart&Start Italia, the financing initiative for innovative startups managed by Invitalia. Rules of the programme and key data on applicants
Horizon 2020 European Grants: Should Your Portfolio Companies Apply?Zaz Ventures
In 2014-2015, the European Commission awarded 500M Euros of non-dilutive, non-reimbursable funding to innovative SMEs via its dedicated SME instrument, aiming to fill gaps in funding for innovative companies that are 1-2 years away from commercialising a new product/service or an improved version of an existing product/service.
In 2016-2017, the European Commission will award 740M Euros of grants to innovative SMEs with up to 2.5M Euros for a single applicant. Can your portfolio companies benefit? Do they have what it takes to succeed in this programme?
There are 3 phases and 13 topics under the SME instrument, making it difficult for an organization to navigate this "jungle". This presentation will allow you to:
Learn more about the SME instrument requirements and benefits
Select the right phase and topic to maximize your odds of success
Get the latest statistics including success rates and cut-off scores per topic
Understand key success factors from 40+ funding applications and 15 successful proposals
Learn how to select in your investment portfolio the companies best suited for this programme.
Network Rail & Innovate UK Railways SBRI Competition Briefing: Innovation in ...KTN
Network Rail, through Innovate UK, are to invest £2.88 million in two SBRI competitions to improve the safety and efficiency of our railways. The competitions launch on Monday 2nd December and this briefing event is aimed at providing you with more information on the competitions and how to apply. It is also an opportunity to meet others, network and form collaborative partnerships.
Up to £1.08m (+VAT) is available to support the key challenges faced by Network Rail: trespass at platform ends and edges (e.g. fare evasion, shortcuts) and incursion over platform ends and edges to commit crime (e.g. cable theft, vandalism). Network Rail is seeking to demonstrate the capability of physical and/or technological solutions to combat these challenges. The solution must be scalable to suit a variety of station environments and will be tested through trials at multiple live station environments.
Find out more: https://ktn-uk.co.uk/news/live-now-webcast-network-rail-innovate-uk-railways-sbri-competition-briefing
Iurii Blavt, CIVITTA. 100500 ways startup can raise capital at early stage wi...IT Arena
Iurii-Volodymyr Blavt is Associate Partner and Head of Startups and Innovation Division at CIVITTA. Currently Iurii-Volodymyr is leading the Startups and Innovation stream within the company. Iurii is an expert in funding attraction for startups and innovative companies With more than 5 years experience in the field, Iurii has successfully helped numerous Ukrainan and foreign startups to attract funding from European Commission, USAID, Horizon 2020, EBRD, COSME, EXPO 2020 Impact Innovation Grant program and other national and international grant programs. Iurii-Volodymyr is a mentor in a few acceleration programs and is also responsible for design and delivery of startup support programs in Ukraine and abroad. Together with his team, Iurii-Volodymyr is passionate about helping innovative startups and companies to develop scalable business models, identify most promising markers, develop financial models, sales and pricing strategy, increase their investment attraction readiness and bring companies to the next level. Iurii has been involved in strategy development for UNIT.city, the first Innovation Park in Ukraine and is a representative of Altfinator Hub, which aims to facilitate access to alternative financing among Ukrainian innovative SMEs.
Supplements that provide funding to SBIR phase II awards for hiring students, veterans, and college instructors, and partnering with community colleges.
R&D tax credits - who's claiming and by the way what are they?Linda Eziquiel
Research and Development (R&D) tax credits in the UK provide innovative businesses with extra cash to invest in their development activiites - find out more about what the are and which businesses are benefiting.
Bouquet: SIERA Workshop on The Pillars of Horizon2020Mustafa Jarrar
Prof Paolo Bouquet
University of Trento Italy.
Workshop on Proposal Writing and International Fundraising
Sina Institute at Birzeit University
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Innovation Funding for Growth-Oriented Companies - Oct 24, 2014Boast Capital
The Canadian Government provides over $7B in innovation funding each year and is considered one of the most generous countries for funding research, innovation, and experimentation.
Learn more about a few of Canada's innovation funding programs:
-Scientific Research & Experimental Development Tax Credit (SR&ED), slides presented by James Suk, Boast Capital
-Small Business Grants, slides presented by Stephanie Sang, Granted Consulting
-Sustainable Development Technology Canada (SDTC) slides presented by Paul Austin, Regional Director of Partnerships
SMEs Support & Financial Instruments in HORIZON 2020 - J.D Malo - Presentatio...ISERD Israel
Horizon 2020 Launch Event in Israel - Presentation of Jean-David Mשךםת Head of Unit SMEs, Financial- instruments and State Aid, DG Research and Innovation, European Commission
Slides presented during #ISVwebinar n°1, 12 September 2016.
Content: The SME Instrument initiative of the EU Commission. Key elements of the programme and instructions on how to apply.
#ISVwebinars n° 1: Smart&Start Italia - Daniela Patuzziitaliastartupvisa
Slides presented during #ISVwebinar n°1, 12 September 2016.
Content: Smart&Start Italia, the financing initiative for innovative startups managed by Invitalia. Rules of the programme and key data on applicants
Horizon 2020 European Grants: Should Your Portfolio Companies Apply?Zaz Ventures
In 2014-2015, the European Commission awarded 500M Euros of non-dilutive, non-reimbursable funding to innovative SMEs via its dedicated SME instrument, aiming to fill gaps in funding for innovative companies that are 1-2 years away from commercialising a new product/service or an improved version of an existing product/service.
In 2016-2017, the European Commission will award 740M Euros of grants to innovative SMEs with up to 2.5M Euros for a single applicant. Can your portfolio companies benefit? Do they have what it takes to succeed in this programme?
There are 3 phases and 13 topics under the SME instrument, making it difficult for an organization to navigate this "jungle". This presentation will allow you to:
Learn more about the SME instrument requirements and benefits
Select the right phase and topic to maximize your odds of success
Get the latest statistics including success rates and cut-off scores per topic
Understand key success factors from 40+ funding applications and 15 successful proposals
Learn how to select in your investment portfolio the companies best suited for this programme.
Network Rail & Innovate UK Railways SBRI Competition Briefing: Innovation in ...KTN
Network Rail, through Innovate UK, are to invest £2.88 million in two SBRI competitions to improve the safety and efficiency of our railways. The competitions launch on Monday 2nd December and this briefing event is aimed at providing you with more information on the competitions and how to apply. It is also an opportunity to meet others, network and form collaborative partnerships.
Up to £1.08m (+VAT) is available to support the key challenges faced by Network Rail: trespass at platform ends and edges (e.g. fare evasion, shortcuts) and incursion over platform ends and edges to commit crime (e.g. cable theft, vandalism). Network Rail is seeking to demonstrate the capability of physical and/or technological solutions to combat these challenges. The solution must be scalable to suit a variety of station environments and will be tested through trials at multiple live station environments.
Find out more: https://ktn-uk.co.uk/news/live-now-webcast-network-rail-innovate-uk-railways-sbri-competition-briefing
Iurii Blavt, CIVITTA. 100500 ways startup can raise capital at early stage wi...IT Arena
Iurii-Volodymyr Blavt is Associate Partner and Head of Startups and Innovation Division at CIVITTA. Currently Iurii-Volodymyr is leading the Startups and Innovation stream within the company. Iurii is an expert in funding attraction for startups and innovative companies With more than 5 years experience in the field, Iurii has successfully helped numerous Ukrainan and foreign startups to attract funding from European Commission, USAID, Horizon 2020, EBRD, COSME, EXPO 2020 Impact Innovation Grant program and other national and international grant programs. Iurii-Volodymyr is a mentor in a few acceleration programs and is also responsible for design and delivery of startup support programs in Ukraine and abroad. Together with his team, Iurii-Volodymyr is passionate about helping innovative startups and companies to develop scalable business models, identify most promising markers, develop financial models, sales and pricing strategy, increase their investment attraction readiness and bring companies to the next level. Iurii has been involved in strategy development for UNIT.city, the first Innovation Park in Ukraine and is a representative of Altfinator Hub, which aims to facilitate access to alternative financing among Ukrainian innovative SMEs.
Supplements that provide funding to SBIR phase II awards for hiring students, veterans, and college instructors, and partnering with community colleges.
R&D tax credits - who's claiming and by the way what are they?Linda Eziquiel
Research and Development (R&D) tax credits in the UK provide innovative businesses with extra cash to invest in their development activiites - find out more about what the are and which businesses are benefiting.
NTT DATA Open Innovation Contest 10.0 for startups and scaleupsTom Winstanley
NTT DATA runs a global open innovation contest annually as part of programmes to identify partners to develop new value adding services with and to scale services and go-to-market more rapidly. This 10.0 edition of the event is taking place in 16 cities globally, including in London and Edinburgh in December 2019. Find out more at http://uk.nttdata.com/openinnovationcontest
Digital Business Models I Best Practices I NuggetHubRichardNowack
What new business models are made possible by digitization? Digital business models are based on connected service and digital platforms. In this business best practice slide deck you learn how to develop, prototype and implement digital business models based on platforms and connected services.
We provide you with the following best practices:
- Introduction
- Digital Platforms, Strategies and Services
- Operating Models
- MVPs and Prototyping
- Platform Design
BeWise lecture: Siim Lepisk '7 Key Topics for Getting Funding' @ EBS 13 Oct 2014JCI Tallinn BeWise
The CEO of Prototron Siim Lepisk talks about different sides and factors of starting a business, introducing the topic trough examples from real life.
Siim Lepisk has graduated MBA and Executive MBA programs in EBS and has spent half of his life on information systems and e-marketing projects. As the CEO of Prototron he is looking for new success stories in Estonia to assist them in the preparation phase of the first prototype to concur the world. Prototron provides startup-s funding, mentors, coaching and comprehensive growth support.
The lecture deals with start-up business steps as:
• Scaling thinking
• Creating a team
• The idea
• Business model & more.
Digital strategy design & proptech resources Jonas Canton
"Down the rabbit hole of Proptech" was presented at the event ProptechRiga. It provides real estate companies with the necessary resources and framing to design their digital strategy. The second part of the presentation focuses various references of content to train employees about Proptech.
Innhotep - Contribution of ICTs in Sustainable Development (2008) Innhotep
Les TIC sont une source notable d'émissions de GES et à la fois une composante majeure des solutions innovantes pour le développement durable, permettant des réductions de coûts et d'empreinte carbone. Qu'en est-il précisément ?
Pour plus de publications d'Innhotep, veuillez vous rendre à cette adresse : http://www.innhotep.com/fr/publications
Catalyzing Growth through Industry-Academia CollaborationNorAzmi Alias
General presentation on CREST and its role in catalysing growth in industry through facilitation of collaboration between industry, academia and government in addressing specific challenges in the particular industry or sector. Presented at recently held ESTCON2018 at KLCC Convention Center, Malaysia.
Thermocol Cups, Glass and Plates - Market Survey cum Detailed Techno Economic...Ajjay Kumar Gupta
Thermocol is formed by the synthesizing of spherical particles consisting of air (at a rate of 98%) contained within an infinite number of hollow cells. These cells, forming a structure of pellets fused together, give consistency and rigidity to the final product. The advantages are many: the product’s manufacturer requires very little energy, thereby allowing full weight to be given to ecological consideration. Of fundamental importance is the treatment with the vapor, which, as well as having a technical function during the manufacturing process, renders the product hygienic through sterilization. Thermocol is a good resister of cold and heat but since it is a petroleum product it dissolves in any solvent of petroleum.
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Entrepreneur India, an Industrial monthly magazine on industrial development, technologies & project opportunities aims at simplifying the process of choosing the suitable project for investment. It makes business decisions easier and trouble-free for business leaders, young entrepreneurs, women entrepreneurs, investors, NRI (non resident Indians), startups, and professionals looking to start their own venture by providing information about right projects for investment. ‘Entrepreneur India’ -the right tool for identifying sound investment projects is published by Niir Project Consultancy Services (NPCS) - a multidisciplinary project consultancy organization. NPCS provides reliable consultancy services worldwide and has been excelling its expertise in a wide range of services. the services includes: investment opportunities, technology transfers, pre-feasibility study, business plan, new project identification, project feasibility, identification of profitable industrial project opportunities, thorough analysis of the project, plan all resources & details on capital and operational costs, economic feasibility study of the project, profile analysis, preparation of project profiles / pre-investment studies, market surveys / studies, preparation of techno-economic feasibility reports, funding analysis, market potential study, identification and section of plant /process / equipment, general guidance, technical and commercial counseling for setting up new business.
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The new data-driven industrial revolution highlights the need for big data technologies to unlock the potential in various application domains. The insurance and finance services industry is rapidly transformed by data-intensive operations and applications. FinTech and InsuranceTech combine very large datasets from legacy banking systems with other data sources such as financial markets data, regulatory datasets, real-time retail transactions, and more, improving financial services and activities for customers.
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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.
This is oldish set on an engineering-based approach to sharing diverse and heterogeneous data. It complements a paper about to be published in a Springer collection by Tansel et al. as well as recent Health care record systems discussions.
Abhay Bhutada Leads Poonawalla Fincorp To Record Low NPA And Unprecedented Gr...Vighnesh Shashtri
Under the leadership of Abhay Bhutada, Poonawalla Fincorp has achieved record-low Non-Performing Assets (NPA) and witnessed unprecedented growth. Bhutada's strategic vision and effective management have significantly enhanced the company's financial health, showcasing a robust performance in the financial sector. This achievement underscores the company's resilience and ability to thrive in a competitive market, setting a new benchmark for operational excellence in the industry.
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the what'sapp contact of my personal pi merchant to trade with
+12349014282
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
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The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
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A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the what's app number of my personal pi vendor to trade with.
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1. Software Economics:
How Do the Results of Intellectual Efforts
Enter the Global Market Place
SSTiC 2013, Tarragona, 22-26 July 2013.
Gio Wiederhold
Stanford University, Stanford CA
http://infolab.stanford.edu/people/gio.html
1/18/2014
SSTiC 2013
CS207 fall2013
SSTiC 2009
1
2. Syllabus, part 1
22 July 2013 , 13:00-15:00
1.
2.
3.
4.
5.
6.
7.
8.
9.
Background & Definitions
Why should software be valued?
Principles of valuation. Cost versus value.
Market value of software companies.
Intellectual capital and intellectual property (IP).
Methods based on comparisons.
Methods based on assessing life of software
Sales expectations and discounting.
Putting it all together in a simple business model.
1/18/2014
SSTiC 2013
2
3. Syllabus, part 2
22 July 2013 , 19:00-21:00
1.
2.
3.
4.
5.
6.
7.
8.
Alternate business models.
Service models
Open source software
Freemium
Allocation among IP contributions
Estimating development efforts
The role of patents, copyrights, and trade secrets.
Advertising.
1/18/2014
SSTiC 2013
3
4. Syllabus, part 3
25 July 2013 , 13:00-15:00
1.
2.
3.
4.
5.
6.
Licensing and Royalties
Separation of IP rights from the property itself.
Outsourcing and offshoring development. IP flow.
Effects of using taxhavens to house IP rights.
Changing taxation.
Summary
1/18/2014
SSTiC 2013
4
6. 1
2
Background
Two aspects to Software Economics
1.Minimizing the cost of building effective SW
Much literature exists, taught as part of SW engineering
Factors
1. Well educated scientists you
2. Good languages expressive and constraining
3. Good methods Waterfall, Spiral, Rapid prototyping,
Scrum, Extreme programming, Agile processes.
And when the work is done
2.Predicting & maximizing the benefits of the SW
the topic of this course
1/18/2014
SSTiC 2013
6
7. Current State
1. Software producers traditionally care about
Cost of writing software
Time to complete products
Capabilities
2. When the value is a concern
Business people
Economists
Lawyers
Promoters
1/18/2014
life
inconsistent
SSTiC 2013
7
8. What is
the problem?
Say you create some great software and then ship it on a
CD to a company that sells software.
• Let’s assume they get the exclusive right to the SW.
1.
2.
3.
4.
•
What should the selling company pay you?
The cost of the CD and mailing it? about €10.-?
The amount it cost you to write the SW:
5 months at €10,000/month = €50,000.- ?
Half of their sales that year (~ 50% is their cost of selling) :
50% of 10,000 copies at €49.99 = €250,000.- ?
50% of their €2M lifetime sales = €1,000,000.- ?
How does what you get affect your obligations?
1/18/2014
SSTiC 2013
8
9. Why is value a
Concern
• Making decisions about creative tradeoffs
Elegance versus functionality
Rapid generation versus maintainability
Careful specification versus flexibility
• Dealing with customers
Dijkstra model: for self-satisfaction
Engineering model: formal process driven
Startup model: see if it sticks to the wall
• Gain respect: know what you are doing
1/18/2014
SSTiC 2013
9
10. Computer Science
vs. other professions
• Architects of buildings
Know if they are designing public housing or a castle
That helps specify the type of furnishing and fixtures: zinc / nickel
• Car Designers
Produce
~1M/year
or
~1K/year
Know if they are designing a people’s car or a Siddeley
That helps specify the level of sound insulation and parts’ life time
• Software scientists and engineers
Don’t consider if the software will be widely used,
Bugs, when encountered by many customers, are costly
May spend much time refining software that will be used rarely
Not taught, no textbook
1/18/2014
SSTiC 2013
10
11. Value depends on use
When the value is a concern
Business people
Income from sales or businesses improvements
Price or license determination
Economists
Effects on national productivity
To an economist, reality is a special case, and usually the least interesting [Kenneth Arrow]
Lawyers
Settlement of disputes and infringements
Promoters
Motivating investments
1/18/2014
SSTiC 2013
Where is the scientist ?
11
12. What’s left to
value?
• Common software that is sold or licensed
• Software that enables Internet Services
• Software that is written inside companies to
improve their business
• Software purchased from vendors by
companies to improve their business
• Software purchased from vendors by
government to improve its operations
Military, Social Security, IRS, Healthcare, . . .
1/18/2014
SSTiC 2013
12
14. Accounting
simplified
Sales = units sold x unit price
1/18/2014
Operating
Research
COGS
Gross
Admin.overhead
Distributor
markup
Production cost
SW company revenue
SSTiC 2013
Net
Capi Earnings
tal Tax
cost -es Profit
14
15. Assets
MNC
Plant
Factories in the US
and Malaysia
Property
Land in
Malaysia. Unsold
inventory
Equipment Manufacturing
tools & Office
equipment
$
Liabilities
40M
30M
100M
subtotal
tangible assets
220M
Goodwill
Left from the
$300M initial
acquisitions
after write offs
total
1/18/2014
book assets
Mortgages
Factories and land
in the US & offshore
35M
Rents on
leases due
US land, offices all
over the world
15M
Retirement, health
care & employment
contracts
Debts and
interest due
Loans for
acquisitions & to
start subsdidiaries
Reserve for
taxes due
Accumulated each
quarter before paid
50M
Bank, notes,
receivables due
Mainly from
acquisitions
$
Obligations to
employees
Cash &
equivalent
Capitaliz’d
R&D
MNC
subtotal
90M
Shareholders’
equity
140M
450M
=
SSTiC 2013
total
tangible liabilities
$100M in excess
tangible assets plus
$230M in
intangibles.
book liabilities
11M
50M
9M
120M
330M
450M
15
16. Income example
model |
high tech
actual
ForestLabs:
MNC
Distributor
markup
Production
cost
after
Business
overhead
after
Research
after
SG&A
R&D
$$
$56/unit
74%
250M
$45/unit
59%
164M
$40/unit
53%
Earnings 154M
Capital
cost after
CoGS
100%
44%
Net income
$76/unit
67%
Operating income
130%
284M
Gross income
140%
76%
after
$99/unit
100%
Corporate revenue
525M
375M
Sales revenue = units sold x unit price
after
gadgets ForestLabs
MNC pharma
Taxes
41%
$35/unit
47%
Profit 100M $33/unit
44%
27%
17. Value
Profit margins are the excess left after
CoGS
[Cost of Goods Sold]
and business costs
(SG&A, capital cost, tax) are deducted
Cost +
If goods are sold based on their creation 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 (etc.) is not a tangible
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17
18. 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,
trademarks, 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
or Intellectual Property
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similar – distinction is metric
18
19. Intangibles
• Product of knowledge
Cost of original >> cost of copies
1.
2.
3.
4.
5.
6.
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by
Books
authors
Software
programmers
Inventions
engineers
Trademarks
advertisers
Knowhow
managers
Customer loyalty
Interacts with long-term quality
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19
22. • Corrective maintenance
ongoing
IP sources
Feedback through error reporting mechanisms
Taking care of bugs and missed cases, conditions
Complete inadequate tables and dimensions
• Adaptive maintenance
Staff to monitor externally imposed changes
Compliance with new standards
Technological advances
Keeping with viruses, spam etc.
Effort depends on number & volatility of external
interfaces
• Perfective maintenance
Feedback through sales & marketing staff
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Minor features thatSSTiC 2013 be charged for
cannot
22
23. • Technical alternatives
Approaches
to assess IP
€
1. Income Prediction
Based on expected sales, life, lag
2. R&D roll-over
∫
×1.?
Based on life and effectiveness of R&D
• Broader alternative approaches
3. Market capitalization (Market Cap)
Covers everything the shareholders value
4. Comparisons with another existing businesses
Find other companies based on industry, operational
similarity and then check their performance based on ratios
royalties gathered, costs/earnings (price/earnings needs market cap)
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23
24. •
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
2. Bookvalue = sum of all tangible assets
€31.5B 100%
€ 6.3B
20%
Equipment, buildings, cash
€25.2B
3. Intangible value per stock market
80%
Intangible/tangible = 4 x .b
How much of it is software at SAP ?
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24
25. Market cap :
only a hint
Issues
•
Stockholders don’t know what is really going on
•
Wisdom of the crowd ?
Are fed limited information
Indirect indicators are delayed: sales by principals
Market cap is unreliable due to high variability
•
Market bubbles mislead . . . . . Facebook lemmings
Option values are hard to judge . startups 30% of stock
In a multi-product company
Allocate income to each product line
Over time, many factors should even out
Never ignore the market capitalization if available
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25
26. To hide a bubble
Adjust market cap
of some company
$M
Reduced Market Cap
Deal with the argument:
“Market cap is due to bubble !”
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26
27. Expense Rollover
A valuation based on cost
1.
2.
3.
4.
5.
Collect the expenses ei over the total lag period p
Adjust the expenses by a discount rate d, ai= (1+d)p-i
For year i = 1 → p estimate the R&D retained ri =1- 1/p
Aggregate retained to the end date, R = Σ ri x ei x ai
From experience, publications obtain an expected expense
to income margin m; m can range from 1 to 20 ...
6. Expected value of IP V = m x R
m≈2 in the first model we used
But the estimation of m is verrrrrrrrrrry iffy
Technological advances are rarely stable
But used for a) advertising -- much untrustworthy data
b) stable maintenance component only
c) venture capitalist’s result assessments
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27
28. • Sum of future income
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
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Independent of cost
Basis for Software
value as of today
28
29. A better, direct
approach
• Value the software specifically by expected
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 brand intangibles
Costumer loyalty, trademarks
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30. Software is
slithery !
Continuously updated
1. Corrective maintenance
bugfixing reduces for good SW
2. Adaptive maintenance
Life time
100%
80%
60%
externally mandated
3. Perfective maintenance
satisfy customers' growing
expectations
[IEEE definitions]
1/18/2014
40%
20%
Ratios differ in various settings
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30
32. 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 1/1.04 = €0.962, 5-year is €0.822, 15 year
only €0.555
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 €0.84, 5-year is €0.42, 15 year only €0.074
Tables per industry are available (at a price), based on past
experience
Discounting has a large effect on income estimates
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Makes looking into the future less risky
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32
33. Current value
Prior investment has created what you have now
“a bunch of software”
That’s what’s to be valued
Based on reasonable expectations
• future maintenance will be needed to earn income
• future maintenance represents future investments
More “software code”
not promises of new innovations ← new IP
Later we look at other valuation/business models
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34. Technical
Parameters needed
IP is to be valued as of some specific date
1. Life of the IP in the product from that time on
design,
code,
....
The interval from completion until little of the original stuff is left
2. Diminution of the IP over the Life
A bit like a depreciation schedule, but based on content replacement,
until little IP is left. 10% is a reasonable limit.
3. Lag period*, interval from transfer to start of IP diminution
•
also called “Gestation Period
Effective Lag = the average time before an investment earns revenue
4. Relative allocation, if there are multiple contributors to income.
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34
35. Crucial assumption
for a quantitative valuation
• IP content is proportional to SW size
Not the value, that depends on the income
=======================================
Pro: Programmers’ efforts create code
An efficient organization will spend money wisely
Counter: not all code contributes equally
early code defines the product, is most valuable
new versions are purchased because of new features
• Arguments balance out
it is the best metric we can obtain
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36. Maintenance
→ SW Growth
Rules: Sn+1 = 2 to 1.5 × Sn per year [HennesseyP:90]
Vn+1 ≤ 1.30% × Vn [Bernstein:03]
Vn+1 = Vn + V1 [Roux:97] ([BeladyL72], [Tamai:92,02] [Blum:98] indications)
Deletion of prior code = 5% per year [W:04]
at 1.5 year / version
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36
37. •
•
Linear growth has been observed, is reasonable
Software cannot grow exponentially
Because
1.
Cost of maintaining software grows exponentially with size
2.
3.
The number of interactions among code segments grow faster [Brooks:95]
Can't afford to hire staff at exponential *2
Cannot have large fraction of changes in a version
4.
5.
no Moore's
Law
And get it to be reliable
Cannot impose version changes on users < 1 / year
Deleting code is risky and of little benefit
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except in game / embedded code
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37
38. Price
remember IP = f(income)
•
But --- Price stays ≈ fixed over time
like hardware Moore's Law
Because
1.
2.
3.
4.
•
Customers expect to pay same for same functionality
Keep new competitors out
Enterprise contracts are set at 15% of base price
Shrink-wrapped versions can be skipped
Effect
The income per unit of code reduces by 1 /
size →
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38
40. Total income
Total income = price × volume (year of life)
• Hence must estimate volume, lifetime
Best predictors are Previous comparables
Erlang curve fitting (m=6 to 20, 12 is typical)
and apply common sense limit = Penetration
estimate total possible sales F × #customers
above F= 50% monopolistic aberration
P
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40
41. Lag measures
Prior effort
“Gestation period”
E
Staff Growth: Linear
Effort total = ½ E x T
A simple metric: lag vs completion=
Centroid of prior expenditure
here @ 33% (without discounting)
100
1/18/2014
87.5
75.0
62.5
Overall
@0.33→
50.0
SSTiC 2013
37.5
25.0
12.5
T left
0.0
41
42. Timing of expense
and income
Manufacturing &
distribution delay
←→
Costs →
Release to Production
development lag
Centroid of total
development cost ..
Distribution
to Sales
←─→
Centroid of
revenue
Testing
~60%→
←
Research,
Design, Implementation
Sales lag .
−−−−−−−−−−−−−
→
Development done → ←→ marketing lag
Marketing
← Costs
Centroid of presales marketing costs
part of investment: IGE
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Sales
Revenues →
capitalization of cost
allowed under GAAP
SSTiC 2013
time →
Post-sales marketing,
part of sales cost: CoGS
42
43. Lag differs less than
development period
Testing
R&I
done
done
start
Testing
R&I
done
start
Testing
Effective lag =
Development period × Centroid fraction
start
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R&I
done
done
43
44. Sales models
1. Normal curve: simple, no defined start point
2. Erlang: realistic, more complex
both have same parameters: mean and variance
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44
45. 18M
^ 50M when
| Erlang m ~ infinite
sales
16M
Erlang m = 6
14M
12M
10M
8M
6M
4M
Erlang m = 12
|
| end of time horizon
| 9 years
|
2M
0
years →
47. Erlang sales
curves
m=mean/variance
18,000
^ 50,000 w hen
| Erlang m ~ infinite
16,000
Erlang m = 6
14,000
For 50 000 units over 9 years
12,000
Flash-in-the pan
10,000
8,000
One-time promotion
6,000
4,000
Long-lived single product
Erlang m = 12
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15
14
13
12
11
10
8
7
6
5
4
3
2
1
0
0
9
|
| end of time horizon
| 9 years
|
2,000
47
48. Ongoing
Version
Sales sales
Predicted product sales for 5 versions, stable rate of product
3 year inter-version interval, first-to-last product 12 years, life ~15 years
Product Line sales
1.00
0.90
0.80
sales
0.70
0.60
Replacement
Product
0.50
0.40
0.30
0.20
0.10
approximation
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
years
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48
49. Fraction of
income for SW
Income in a software company is used for
• Cost of capital
Dividends and interest
typical
≈ 5%
• Routine operations -- not requiring IP
Distribution, administration, management ≈ 45%
• IP Generating Expenses (IGE)
Research and development, i.e., SW
Advertising and marketing
≈ 25%
≈ 25%
Joint distributor & creator
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These numbers areSSTiC 2013
available in annual reports or 10Ks
49
50. Recall:
Discounting to NPV
Standard business procedure
• Net present Value (NPV) of
getting funds 1 year later = F×(1 – discount %)
Standard values are available for many businesses
based on risk (β) of business, typical 15%
Discounting strongly reduces effect of the far future
NPV of €1.- in 9 years at 15% is €0.28
Also means that bad long-term assumptions have less effect
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50
51. Example
Software product
Sells for €500/copy
Market size 200 000
Market penetration 25%
Expected sales 50 000 units
Expected income €500 x 50 000 = €25M
What is the result?
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51
53. Software product
Result of
Example
Sells for €500/copy
Market size 200 000
Market penetration 25%
Expected sales 50 000 units
Expected income €500 x 50 000 = €25M
Earnings (Profit before taxes) is just € 1M
after your salary etc ...
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53
54. Combining it all
and adjusted for endof-life
factor
Version
today
y1
1.0
y2
2.0
y3
y4
3.0
4.0
unit price
500
500
1.00
1.67
2.33
3.00
3.67
New grth
0.00
0.67
1.33
2.00
replaced
0.00
0.05
0.08
old left
1.00
0.95
Fraction
Income
€500
Rel.size
I
P
y5
100%
57%
500
500
y6
y7
5.0
500
y8
y9
6.0
7.0+
500
500
500
500
4.33
5.00
5.67
6.33
7.00
2.67
3.33
4.00
4.67
5.33
6.00
0.12
0.15
0.18
0.22
0.25
0.28
0.32
0.92
0.88
0.85
0.82
0.78
0.75
0.72
0.68
39%
28%
22%
17%
14%
11%
9%
8%
Units sold
0
1911
7569
11306
11395
8644
2646
1370
1241
596
Rev, €K
0
956
3785
5652
5698
4322
2646
1370
620
299
SW IP 25%
0
239
946
1413
1424
1081
661
343
155
75
Due old
0
136
371
416
320
204
104
45
18
6
Disct 15%
1.00
Contribute
0
Total SW
990
1/18/2014
0.87
118
0.76
276
≈ € 1 million
0.66
0.57
263
178
0.50
94
0.43
40
0.38
0.33
15
6
0.28, 0.25
2
out of €14 771 discounted sales
SSTiC 2013
54
55. Example
revisited
Software product
7 versions
Sells for €500/copy
Market size 200 000
Market penetration 25%
Expected sales 50 000
50 785 V1-V7
Expected income €25M
Discounted gross income €14.7M
Available for SW maintenance €3.7M
Ok but see when it is needed
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55
56. Result of
Example
• Selling 50 000 SW units at €500 ≈ € 1M
not € 25M
Once its in a spreadsheet, the effect of the
many assumptions made can be checked.
When assumptions later prove unwarranted
then management can make corrections.
To be wise, don't spend more than ≈ €500 000
to develop the software product.
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58. Net income,
after sales cost
End of profit
on sales
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End of profit
on all income
58
59. Life of
Software
We learned now why software has a finite life
Although SW can be indefinitely maintained
Eventually the maintenance costs exceed income
• A very well-selling product can have a long life
1. Unique
2. High quality
3. Well maintained
Conflict?
• An easy to maintain product can have a long life
1. Well designed
2. Insulated from change by established standards
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60. Dealing with
Income Factors
1. Business overhead takes 50% of net revenue
An average, when sales are low, fraction is higher
Be lean, especially when sales fall
Focus on on-line sales
2. Marketing uses 25% of net revenue
Assess customer base, but don’t skimp here
3. Available for maintenance is still 25% of net
Enough once sales become substantial
Requires initially additional capital
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61. Transients due
to versions
Customer behavior w.r.t. new versions, superimposed on basic sales curve
2-year version life
Vn+1
Vn+2
Overall steady state sales
New version
release
New version
announced
Q4
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Q1
Q2
Q3
Q4
Q1
Q2
Q3
SSTiC 2013
New version
announced
Q4
Q1 Q2
Q3
Q4
Q1
61
62. Ongoing
development
New considerations
1. Have staff already
a. Early versions rapid growth, but observe ~20% limit
b. Later, best grow slower
2. Can overlap version development
a.
b.
c.
d.
Don’t let valuable staff be idle
Missing features should already be understood
Rapid analysis of problems to allow next version fixes
Any research should be done before major staff effort
3. Adequate testing to keep reputation
more next session
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63. Marketing
• Business model must allocate spending optimally
Technology, as needed, long life and lag
&
Marketing, necessary, less lag, slower growth
Life of advertising 50% of technology, mix product & brand
in your
brain
forever
• Interdependence
viral
Consistent
SW value
Relevant
Linked by a common name and label
Honest name for file software misled: FLASH for flexible, but it wasn’t fast
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65. End of Part 1
References at
i.stanford.edu/VIC
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66. Syllabus, part 2
July 22, 19:00
1.
2.
3.
4.
5.
6.
7.
8.
Alternate business models.
Service-based models
Open source software
Freemium
Allocation among IP contributions
Estimating development efforts
The role of patents, copyrights, and trade secrets.
Advertising
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67. Summary of part 1
Valuation is important for business decisions.
Always based on expected future income: uncertain
Using multiple methods reduces uncertainty:
1. Fundamental: Income prediction (sales – costs)
based on SW growth, maintenance, IP diminution
2.
3.
4.
5.
Market estimates
Wisdom of the crowd
Leverage of R&D: investment expectation
Comparison with parameters of similar businesses
Comparison with other corporate investments
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69. Guidance
obtained earlier
Income determines value
Income is due to sales
• We applied an overall Erlang sales curve
new versions keep market going but customers do
not replace earlier versions
• The assumption are sufficiently simple that
alternatives can be intelligently discussed
1.
2.
3.
4.
5.
6.
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keep development costs low
design so that SW maintenance is low
charge a higher price
minimize sales cost, without reducing market size
broaden the market
or →
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69
70. Example
revisited
Software product
7 versions
Sells for €500/copy
Market size 200 000
Market penetration 25%
Expected sales 50 000
50 785 V1-V7
Expected income €25M
Discounted gross income €14.7M
Available for SW maintenance €3.7M
Ok but see when it is needed
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71. Business models
0. New versions do not replace earlier versions
Alternative business models
1. New versions encourage replacement
2. Provide related services
3. Charge for maintenance
Lower initial cost, slower income stream
4. Make product Open source to broaden market
Charge only for services
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72. Alternate
business model
Consider maintenance and its income
"Service model"
More assumptions – now include cost @50% of value
1. Original cost €500 000 (used to estimate 2.)
a.
b.
c.
Maintenance cost 15%/year of aggregate original cost
Maintenance fee 15%/year of original price, 1 year delay.
85% annual retention of customers.
2. Maintenance Lag = Δ (t cost , t income) = 1 year
3. Stop maintenance when cost > income
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73. Additional Effect
of service model
factor
today
Version
1.0
Org.cost €K
y1
y2
500
Maint.cost
y3
2.0
y4
3.0
y5
4.0
y6
y7
5.0
y8
6.0
y9
7.0
Assume designed for maintenance
0
75
99
114
75
86
99
114
131
SW@Cust.
0
812
4475
9456
Maint.Fees
0
0
122
671
1419
2060
2060
2400
2437
2277
Total income
0
956
3906
6324
7116
6382
5045
3806
2897
2380
Contribute @25
0
239
977
1581
1779
1569
1261
952
724
570
Unspent SW
-75
153
877
1467
1648
1445
1088
752
495
306
Unspent Disc.
-75
133
663
965
942
718
470
162
87
40
Spending
86
4 348 ≈ € 4.3 million
Total
131
151
151
174
174
200
200
230
230
Σ1523
13735 15997 16243 15176 13520 11744
>> sales only
but €1 523M for maintenance
Cost of maintenance = 1523/(500+1523) = 75% of total
typical
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74. Service model
factors
• Same proportion was used for SW contribution: 25%
Maintenance income has lower sales cost, perhaps more should
be made available for software improvements
• Discount total only after maintenance cost
Income comes at time of spending
• Maintenance fees still generate substantial income
Organize business sector to collect those in out years
Use excess SW income for replacement or new products
• Continue longer, but stop in time!
When maintenance costs more than income
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75. More years of
service model ?
factor
Version
Curr.cost €K
Maint.cost
Cont.
y10
7.0
y11
8.0
y12
y13
9.0
y14
10.0
y15
y17
11.0
y17
12.0
y18
13.0
1530
229
264
303
349
401
461
530
610
702
Spending
264
303
349
401
461
530
610
702
540
SW@Cust.€M
11.7
10.1
8.6
7.3
6.2
5.3
4.5
3.8
3.2
1.9
Maint.Fees
2038
1761
1511
1289
1098
933
794
674
573
487
Total income
2280
1855
1543
1300
1101
934
794
674
573
487
Contribute @25
570
464
386
325
275
234
198
169
143
122
306
160
40
-76
-186
-297
-411
-533
-397
-145
Unspent Total 2015
1551
1194
898
639
404
184
-27
32.6
221
Unspent Disc.
133
663
965
942
718
470
162
87
40
Unspent SW
Total SW
-75
4 158 Less, out year losses because €5 687M spent on maintenance
Good time to quit
1/18/2014
540
But still have income to v12
SSTiC 2013
Quit: reduce expense &
income 1/3 each75
year
77. Open Source
software?
Should software should be a free good?
Implicit in that view is that government, universities, and foundations should
pay for software development, rather than the users.
1. Programmers are creative artists, creating beauty
and benefits for all of Mankind !
vs.
2.Software is an industry.
SW revenue is $121B per year in the U.S. alone, well over 1% of the US GDP.
Non-software companies spend yet more for business-specific software.
Over 4.8 million people are employed in IT, earning nearly $333B annually.
• It is unlikely that universal free software is an achievable and
even a desirable goal.
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77
78. Open Source
Practice
• Appropriately, open source initiatives actually
focus on software that deserves wide public
use and should be freely available to students
and innovators, as editors, compilers, and
operating systems.
• Much open source software is incorporated
into Commercial software, that is not made
freely available,
even if it should be made available.
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78
79. Sue us if
you can !
Open Source SW,
from a 10-K report
• Certain of our software (as well as that of our customers) may be [is]
derived from “open source” software that is generally made available to the
public by its authors and/or other third parties.
• Such open source software is often made available to us under licenses,
such as the GNU General Public License (GPL), which impose certain
obligations on us in the event we were to [for] distribute[ing] derivative
works of the open source software.
• These obligations may require us to make source code for the derivative
works available to the public, or license such derivative works under a
particular type of license, rather than the forms of licenses [it] customarily
used to protect our intellectual property.
• In the event [If] the copyright holder[s] of any open source software were to
successfully establish[their rights] in court that we had not complied with the
terms of a license for a particular work, we could be [must] required to
release the source code of that[our] work to the public and/or stop
distribution of that work.
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79
80. Freemium
Software is free
1. Charge for fancy version
2. Charge for upgrades (maintenance)
3. Charge for multi-user version
4. Charge for Internet sharing
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80
81. Planning:
Consistency in plans
When comparing business alternatives
• Give each choice the same chance
1. Temporal consistency
Computing versus communication
Local versus Cloud in 2012
Skate to where the puck is going [Gretsky]
2. Discount rate
3. Resource prices
Green alternatives
Benefits may depend on future price of oil –
1/18/2014
if you assume future price = 3 x now, why not invest in oil
instead
SSTiC 2013
81
82. Example
Enterprise SW versus cloud
[Benioff:2009]
• SIEBEL enterprise sales force management $
1.
2.
3.
4.
5.
Price $1,500 per seat, at 200 users
$54,000 for support (18%) /year, x 5
$1,200,000 consulting for installation
$100,000 admin.personnel/year, x 6
$ 30,000 training / year, x 6
6 years’ usage
Total
Note that the customer’s total is
1/18/2014
SSTiC 2013
>>
= 300,000
= 270,000
=1,200,000
= 600,000
= 180,000
= 2,550,000
than the price
82
83. Software
users & IP
Companies that
1. develop & sell software
•
→
*
Basis of IP: income from sales
2. purchase & license software for internal use
•
Do not generate IP with software
3. develop software internally for their own use
•
Basis of IP: relative SW expense × all income
4. combinations
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83
84. Review:
Intangibles
• Software is an intangible good
If it is owned it is considered Intangible Property
In a business there are 3 parts that have value.
(Contributes to potential income)
1. Tangible goods: buildings, computers, money
2. The know-how of management & employees
3. Intellectual property: Software, patents,
etc.
2. + 3. make up the Intellectual Capital of a
company.
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84
85. IP Protection
Intellectual Capital
all intangibles that contribute to non-routine returns
People: “Operational capital”
hard to protect
encourage loyalty
stock options
Intellectual Property
Should be protected against misappropriation
a) Patents
tranches
b) Copyright
c) Trade Secret
All can be
Sold
gone to someone else
Licensed
1/18/2014
• if you cannot use them profitably
specified rights to the IP box are rented
• Sales of a product in Europe, Japan
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85
86. Overview IP
protection
1. Patents
Federal Law
Use only if the invention is visible in the product
Or use to hinder others …. “blocking patents”
2. Copyright
Federal Law
Protects source code and chip masks
Not the underlying ideas
3. Trade Secret
State law
If it can be kept secret, best choice
Must be defended: NDAs, action when violated
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86
87. 1. Patents
1. Device patents
• Good for visible ideas
[DiggL:12] C.Digg and S.Lohr: The patent used as a Sword; NYT,
7 Oct.2012, http:// www.nytimes.com/2012/10/08/technology/
patent-wars-among-tech-giants-can-stifle-competition.html
• Headlights built into fender
(Pierce Arrow ~1918)
2. Materials patents
Does the law support inventors or investors; NYT, 10
Oct.2012, http:// www.nytimes.com/roomfordebate/
2012/10/10/does-the-law-support-inventors-or-investors.html
Analyzable stuff
Glue, drugs,
3. Business patents
Garret A. FitzGerald: Can Intellectual Property Save Drug
Development?; Science, 26 Oct.2012, Vol.338, 26 Oct. 2012
http://www.sciencemag.org/content/338/6106/483.full
hard to assure that they represent new findings
Amazon (1999, 2006↑US , 2011↓Europe): One-click ordering
Grand Fishery of Great Britain (1720): ocean fishing ─ rejected
Wireless Electronic Mail (NTP versus RIM [Blackberry], Nokia, suing Palm)
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87
88. Limits to patents
• Genes
Recent ruling overturns patentability
• Stemcell : EU Court of Justice, said the use of human embryos ‘for
therapeutic or diagnostic purposes which are applied to the human embryo and
are useful to it is patentable. But their use for purposes of scientific research is
not patentable.’
case: http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&typeord=ALLTYP&numaff=&ddatefs=12&mdatefs=10
&ydatefs=2011&ddatefe=19&mdatefe=10&ydatefe=2011&nomusuel=&domaine=&mots=&resmax=100&Submit=Rec
hercher
pro: http://www.nationalrighttolifenews.org/news/2011/10/stem-cell-patent-ruling-is-a-triumph-of-ethics-overcommercial-expedience-and-will-open-fruitful-new-areas-of-research/
con: http://www.sciencebusiness.net/news/75509/European-Court-of-Justice-rules-against-embryonic-stem-cellpatents
case was Re: Greenpeace versus Oliver Brüstle, Director of the Institute of Reconstructive
Neurobiology at Bonn University, whose research in turning embryonic stem cells into neural cells for
treating Parkinson’s disease.
• Business Methods
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88
89. Patent troll
instance?
Sharing Sound, which holds an actual, government-approved patent.
Improbably issued in 2001, Sharing Sound’s absurdly broad patent covers “distribution of musical
products by a web site vendor over the internet.”
Actually: specifically includes the generation of a user-specific key that is inserted into the music file at the
time of purchase and used in conjunction with keys on the user’s computer to verify authorization.
The inventor was Bernhard Fritsch, whose short-lived MCY.com music service launched in early 1999 does
appear to have been the first to employ this type of system. Sold the patent to Sharing Sound,
Instead of creating a product or service with the patent, Sharing Sound lied in wait and finally in
May 2010 filed patent infringement lawsuits in the U.S. District Court for the Eastern District of
Texas against Apple, Sony, Microsoft, Rhapsody, Brilliant Digital Entertainment (BDE) and Napster,
and separately also sued Amazon, Netflix, Barnes and Noble, Wal-Mart, and GameStop. The
patent (here is a good summary of it) essentially describes how these companies sell music
online. Other than BDE, all of the companies have reportedly settled, the latest being Apple and
Rhapsody. But online selling of digital goods was well underway before the Patent Office issued
the Sharing Sound patent.
The terms of the settlements remain private, Sharing Sound no doubt kept its monetary demand
below the defendants’ anticipated cost of litigation.
[Glenn Lammi: The Legal Pulse; Washington Legal Foundation, 2010 & comments]
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89
90. Patent
bundles
• Many – 100’s – patents are needed for many modern products.
• Negotiating with all the patent owners is much work and leads to costly
total royalties ► 20% of cost of GSM phone
• Alternative – standard-specific patent organization ► UMTS for 3G
1.
2.
3.
Bundles all patents needed for a standard, SEP patents
Collects a global royalty from all manufacturers
Reimburses all patent owners – keeps say 6%
Historical model: U.S. aircraft industry at the start of WW II
without a patent pool no manufacturer could build good planes
• Bundles also used to negotiate among companies
• Still threatened by patent trolls
East Texas district court
Costs for a legal defense are huge, often companies just give up
○ Devise a work-around
Pay-up for a license .
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90
91. 2. Copyright
Differs by country, although ongoing harmonization
even when laws are the same, expectations differ
Often changed, last major US changes 1978, 1990
• grants very long period: 120 years or
70 years after the death of the author
was 28 years in the U.S. but renewable another
67 years
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91
92. Copyright
• To defend your work you must show the violation
Substantial code must match precisely
Automatically derived code is protected as well
Binary versions are protected, even if they differ
Changes of variable names don’t invalidate copyright
Damage awards depend on loss sustained
• Recoding the embodied concepts is not protected
Feasible for well defined tasks
Worked for IBM PC BIOS (COMPAC, now HP)
Difficult for large, diverse code
Fujitsu IBM case for OS370 (base OS 360 was not protected)
o Used a clean room, but did not succeed, had take a license out.
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92
93. Trade secret
• Origin in Roman law: Actio servi corrupti
Bribery, kidnap of servants/slaves to divulge secrets
Guilds in the middle ages protected their secrets
o watchmaking, black-cloth dying,
• Also applies to marketing schemes
• Supported by Agreements
+for company / + $ for employee?
Non-disclosure agreements
Employees, Consultants, Contractors, Customers, Tax officials
Invention assignment agreements to cover
Invent for hire, invent using resources, invent independently
No-compete agreements
(limits differ by state: CA↓ MA↑)
Even covering one’s own inventions, but not routine knowledge
Are limited in time (3 months to 3 years), but deceit is a violation
• Must be defended when a violation is known
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93
94. Trade Secret
federal
There is at least one type of trade secret that is
recognized by US federal law:
• Exclusive access for 4 or 12 years to
•
Small molecules ● biological material
the `sponsor’ of IP material collected for
Clinical trial data
Software to design drugs
Drug-making processes
Software to control drug-making processes
Even though the information must be made available
to the FDA for drug approval.
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94
95. Trade secret
and SW
• Reverse engineering of public SW is legitimate!
Unless copyright is violated – masks, code
Threats in the fine print that is ignored by most
• Getting a patent invalidates the trade secret
Patents invite trolls
• Determining loss of trade secret is hard
Code and Documents in hand of thief
Often voluminous
Having labeled documentation helps greatly
`company confidential’
Tracking of documents and document copying
Meetings in room without personal, but corporate recording
• Prosecution is hard
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95
96. Protecting
trade secrets
Covers majority of IP value in modern companies
• Period of usefulness is limited in practice
. . . but adequate given its simplicity versus
patent, copyright
• Reasonable practice is important
• Do not hire employees based on loyalty vs. smarts
Pay for loyalty commitments as well as for smarts
Employee should receive a comparable benefit for
signing a restrictive covenant.
New hires should arrange a parachute (payment for
not divulging secrets) at hiring
don’t wait for the termination.
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96
97. Employee
motivation
Convey benefits of keeping secrets to your staff
and contractors
Contracts should not infringe employee mobility / betterment
Doctrine of `inevitable disclosure’
even without a non-compete contract
State laws differ:
California supports mobility, leakage; Midwest less so
• Dishonesty or aggressiveness on either side
makes a difference in court. Use facts.
•
•
•
Legalistic NDA forms make enforcement awkward
Brief summary and discussion with signer should be routine
Exceptions should be possible: student intern vis-à-vis professor
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97
98. Allocation
• When there are multiple products
• When there are other contributors to income
Substantial hardware
Financial consultants in financial firms
Experts in call centers
Brand name
Not all of the income can be allocated to the software
• Pareto Optimum
Assume the company invests its income optimally
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98
99. Pareto Optimality
(not Pareto Efficiency : 80/20 rule)
The point were any change lowers the total benefit/cost
• Spending more on software will have less
than spending on other stuff
People
Hardware
1870 startup: Rome Railway Co.
Advertising
benefit
For large 10 IT companies the average value allocated
to their brand name is 22% (BW survey).
Conclusion:
• If a company is managed optimally, we can allocate IP contribution by
multi-year spending patterns
Σi costi ,
1.
simple total
2.
Exponential diminishing
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for i = n .. 0
Σi 80%i x costi ,
SSTiC 2013
for i = n .. 0, 20% annual loss
99
100. Review Allocation
When is allocation needed?
1.
Technology, Pharmaceutical company:
2.
income due to R&D versus advertising
Financial Company:
income due to software versus investment experts
3. Internal ▬ product mix
Expenses for a. products
b. tangibles
c. personnel needed to realize income from the products
d. marketing, advertising
For a Pareto-optimality allocation of income we use cost.
But recall: Do NOT use cost as a surrogate for value, value of
intangibles come from derived income.
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100
101. Timing of expense
and income
Manufacturing &
distribution delay
Costs →
Release to Production
development lag
Centroid of total
development cost ..
Distribution
to Sales
←─→
Centroid of
revenue
Testing
~60%→
←
Research,
Design, Implementation
Sales lag .
−−−−−−−−−−−−−
→
Development done → ←→ marketing lag
Marketing
← Costs
Centroid of presales marketing costs
part of investment: IGE
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Sales
Revenues →
←→
SSTiC 2013
time →
Post-sales marketing,
part of sales cost: CoGS
101
102. Development done → β ← General
availability
Sales
Costs →
↔
development lag
←→
includes testing
Centroid of revenue
&Test
ing
Revenues →
SW Lags
←−−−−−−−→
sales lag .
← Costs
Research,
Implementation
1/18/2014
↔
Centroid
marketing lag
of pre-sales
marketing Marketing
costs
SSTiC 2013
time →
102
103. Lag delays benefits
of R&D investments
Estimate
effective lag .
growth limit
Effort →
~37% →
growth limit
start
1/18/2014
@27.4%
Research
75%
Gestation period →
→
~14% →
Testing
Development
35%→
50%
SSTiC 2013
25%
done
103
104. Start-up
development
A startup is unlikely to ramp up linearly
Use exponentional growth, exp 0.025
Assume
1. 12.5% research
Given that idea is clear, only towards for implementation
2. 25.0% testing
Minimal and risky
3. 67.5% left for implementation
• Overlap research and implementation until testing starts
• Overlap implemtation and testing until RPS
Results
Overall centroid
@0.27 before RPS -- later
Research from 1.00 to 0.33,
centroid @ 0.65 before RPS
Implementation from 0.67 to 0.00, centroid @ 0.29 before RPS
Testing from 0.17 to 0.00, centroid @ 0.08 before
Hiring rate at RPS 21%, at the limit for effectiveness
Ignore different
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staff salaries
104
105. Graph of start-up
development
100%
80%
Res., Imp, &
Implementation starts when Test @0.27 →
67% time remains →
60%
40%
20%
21% effort
growth
Testing starts when
17% time remains →
25%
Testing
Research ends when
33% time remains →
12.5% Research
62.5%
Implementation
@0.65→
@0.29→
0
start
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0.75
0.50
SSTiC 2013
0.25
done
105
106. Development in mature
company with
12.5% research and
25% testing effort,
62.5% implementation
38% effort growth
at start
Relative Effort →
100%
Res., Imp, &
5% company staff growth
Test @0.42 →
Testing starts when
←−−− 40% time remains
Research ends when
T
← 65% time remains
←Implementation starts when
85% time remains
Available
resources
75%
50%
R
I
25%
@0.46→
@0.85→
0
1.00
0.75
0.50
0.25
done
Values based on finite integration, exp= 0.05
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106
107. 2nd version
technical lag
Relative Effort
→
100%
Staff becomes available when prior version enter testing
25% Testing
for version n
75%
All 100%
Starts at .057
0.57→
50%
Research for
version n
release
25%
0.19→
Implementation
for version n
release
Research &
Implementation
←0.76
done
0.25
1.00
0.50
0.75
←−−−−−−−−−−− Version n development interval −−−−−−−−−−−−−→
1.50
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1.25
SSTiC 2013
107
108. Mature ongoing
technical lag
Effort →
Staff becomes available when prior version enter testing
75%
Overall
@ 0.63 →
Research &
Implementation for
version n release
50%
25% Integration
and Testing
@0.21
.
→
@0.77 →
Testing n-1
25%
1.50
1.25
0.25
done
1.00
0.50
0.75
←−−−−−−−−−−− Version n development interval −−−−−−−−−−−−−→
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108
110. Version development,
mature growth, much testing
100%
Effort →
Overall
@0.77→
Testing at 35% effort
75%
during version n
Research & Implementation
interval
effort towards version n
@0.33→
release
50%
@1.00→
25%
1.50
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1.25
Release
version n
SSTiC 2013
0.75
0.50
0.25
done
110
111. 2nd Version
substantial
testing
Effort →
100%
56%
43% Testing
during version n
All@0.61→
interval
T@0.33→
75%
50%
R&I @1.00 →
25%
1.50
Release
1.25 version n-1
0.75
0.50
0.25
done
Staff becomes available when prior version enters testing
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111
112. Growth and
Perception
E-commerce [this slide based on a 2001 CS99/73N class exercise]
• Gartner: 2000 prediction for 2004: 7.3 T$
• Revision:2001 prediction for 2004: 5.9 T$ drastic loss?
50 companies, each after
20% of the market
Extrapolated
growth
DisapCombipointment
natorial
growth
Examples
Artificial Intelligence
Databases
Neural networks
E-commerce
Perceived
growth
Perception level
Failures
Perceived initial growth
Invisible growth
0
1
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2
3
4
5
6
7
8
SSTiC 2013
9
10
11
12
13
14
15 ...
112
113. Advertising
1. Audience
3. Logo & name
Focused
Salesforce
In front of competitors
annual sale meetings 3x
1. Fake demonstrators in SF.
2. Give coffee, mugs, rides,
literature to attendees in NY
3. Hire all taxis in Nice, give
free rides to site in Cannes.
Vs. Superbowl?
• Much buzz
• Huge audience
• Your audience?
1/18/2014
Essential for branding
Metaphor
4. Timing
Have Product ready
• Few bugs
Negative?
• Clear operation
• Useful
2. Address
a. Buyers in corporations
b. Users and employees
c. Both
Understand motivations for change
SSTiC 2013
113
115. Trends
1998 : 1999
• Users of the Internet 40% 52% of U.S. population
• Growth of Net Sites (now 2.2M public sites with 288M pages)
• Expected growth in E-commerce by Internet users [BW, 6
Sep.1999]
books
music & video
Toys
travel
tickets
Overall
1999
7.2% 16.0%
6.3% 16.4% Centroid, in 1999
3.1% 10.3% ~1% of total market
2.6% 4.0%
1.4% 4.2%
8.0% 33.0% = $9.5Billion
%
1998
segment
90
80
70
60
50
40
30
20
10
E-penetration
Toys
0
98 99 00 01 02 03 04
0.3 1 3 9 27 81 **
Year / %
An unsustainable trend cannot be sustained [Herbert Stein, Council Econ. Adv, 1974]
new services
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115
116. Why me
US Treasury concern:
• Much software is being exported as part of
offshoring (offshore outsourcing)
• It is typically property – i.e., protected
• If it is not valued correctly – i.e., too low
1.
2.
3.
4.
Loss of income to the creators
in the USA
And loss of taxes
to the US treasury
Excessive profits
kept external to the USA
Increased motivation for external investment
• Book: How Multinationals avoid Taxes
Chapters available for review
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116
117. Ancestor in 1758 to sell clocks
to the King of Spain
Preparation & correspondence
over a year
Travel 49 days travel
Wait for appointment.
Sale arrangement 1 week
Travel back with gold pieces
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Rapid Change in business,
enabled by
1. The Internet
&
2.Containerized shipping
Today 255 years later
Gain interest 15 minutes
Sale arrangement 1 minute
Delivery of goods 3 days
Cost of shipping iPad $1.from China to Europe/US
Delivery of funds 1 minute
SSTiC 2013
117
118. Syllabus, part 3
25 July 2013 , 13:00-15:00
1.
2.
3.
4.
5.
6.
Licensing
Separation of IP rights from the property itself.
Outsourcing and offshoring development. IP flow.
Effects of using taxhavens to house IP rights.
Changing taxation.
Summary
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118
119. Multi Version product
effort and lag
Effort total = 8.6 x original effort
Test ratio: 37%
Overall
@0.42→
Testing
@0.38→
100
87.5
Releases:
1/18/2014
75.0
62.5
50.0
37.5
25.0
initial
ver.2
ver.3
ver.4
ver.5
SSTiC 2013
12.5
→
0.0
ver.6 latest
119
120. First to market
advantage
v1(O)
s(O)
Effort total = 8.6 units
Overall
@0.42→
Original Multi Version efforts and
lag
→
start Re-creation
Original product creation time
Competition (drawn to scale)
Growth Rate 20%/year average
Effort total = 5.4 units
Competition/ Original multi version source
Effort ratio R/O = 0.63
Time ratio (t(R)-s(R)/t(O)-s(O)) = 0.41
Effective Lag ratio = 0.23
Overall
@0.33→
100 75.0
t(O)=s(R)
50.0
25.0
0.0
t(R)
But at that point the original is 3.5 versions ahead of the competition!
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120
121. Sharing IP
2 situations
1. No product yet
2. Already have a product,
Selling to an independent exploiter
But want more growth
Sharing with a participant
Inventor
Developer,
Manufacturer,
Marketeer,
Seller
Inventor,
Developer,
Manufacturer,
Marketeer,
Seller
122. Selling IP +
Bundling & valuing the box
1. Piece by piece
or
2. Tranche of the company – say, all sales in Europe
3. Can include available knowhow (+) for maintenance
$
1. Package the box
Create a subcorporation to hold the rights to the IP+
2. Sell the subcorporation to European sales co.: SE
1. Receive a single payment matching the value
Requires a well-off buyer
2. Receive payments over time of equivalent NPV
3. Make a royalty (fraction of SE’s sales) arrangement
1.
2.
3.
1/18/2014
€
SE
A fraction of sales at SE commensurate with the amount of IP
A period that is sufficiently long to recover the IPs NPvalue
A premium to compensate the seller for the risk of SE defaulting
SSTiC 2013
122
123. Setting
License fees
Say you want to delegate sales in Europe to some company
EUsales that can do it easier over there
• How do you set the fees or royalties?
1.
You have computed a value of your SW of $1M
But without discounting, it is actually $1.6M = Σ(due old, slide 5)
You will also maintain the SW 1.36M = Σ(maintenance cost, slide 12)
The total due is $3M
2. You expect the European sales will be 40% of total, 20 000
•
The reason for not discounting is that funds arrive at the same times.
To earn the same you should charge 1./2.= $150/unit
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It does not matter how EUsales sells it and what it charges
Complexities are required language, interface improvements
SSTiC 2013
123
124. Setting
License fees
Say US company want to delegate sales in Europe to a local
company EUsales that can do it easier over there
• How do you set the fees or royalties?
You have computed a value of your SW of €1M
1.
But without discounting, it is actually €1.6M = Σ(due old, slide 5)
You will also maintain the SW 1.36M = Σ(maintenance cost, slide 12)
The total due is €3M
2. You expect the European sales will be 40% of total, 20 000
•
The reason for not discounting is that funds arrive at the same times.
To earn the same you should charge 1./2.= €150/unit
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It does not matter how EUsales sells it and what it charges
Complexities are required language, interface improvements
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124
125. Example of Free
• Adobe produced software to generate and read
markup text (pdf) for sale to companies.
minor business for internal publishing
• Arrangement with the IRS that if Adobe would
separate the reader and provide for free, it
would publish tax forms using pdf
huge business – now everyone needed a reader and
companies bought pdf generators to publish in pdf
• When patents ran out, others companies made
pdf generators available
Adobe still provides many pdf related services
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125
126. Cloud delivery
by salesforce.com
• Benioff Saleforce.com new entry:
$150.-month & user only -- monthly billing
Make interface look like Amazon – no training needed
Low risk for individual adopters
Still a high risk for a changeover in large businesses, where
changes are controlled by a risk-adverse IT manager or CIO.
Start focusing on small businesses
Hard to reach a broad market with little cash
Must make a lot of noise
Later sales force had to change its initial model
Deal with large companies
Deal with the Dot-com bust, when many companies failed
Business must remain flexible
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126
127. Rights are flexible
price
REco
rents
USco
owner
Covert Property to
cash minus rents
tenant
New owner
These rights can then be moved off-shore.
Income from these rights can avoid taxes.
Even easier to do with intellectual property
And invisible – not on corporate books
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127
128. Internal sale
Tangible example
1. A US company, USco needs cash. It owns a splendid HQ building
2. USco may sell its HQ building to a real-estate enterprise REco
with a provision that the REco will lease the building back to USco.
3. If USco has received a fair value for the building, USco's total tangibles
remain unchanged until it spends the money it received
REco may offer an attractive lease because of tax advantages.
4. Actually, REco can be set up by USco and controlled by USco,
which also remains its only tenant.
5. Nobody moves and few employees will notice a change.
o
o
o
There is a new brass plaque on the building
A sign `REco' on the door to the rooms housing the folk who maintain the HQ.
The public consolidated annual report of USco only lists the name and location
of the controlled subcorporation REco; the assets of both are combined.
6. Since the lease receipts at REco and payments by USco are similar,
the more complex financial flow is invisible.
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128
130. Internal sale
for intangibles
Procedure functionally identical to tangible example, but
• Even less visible
•
•
IP is a much larger fraction of corporate value than HQ
The consumers of the IP are the sales organizations
•
IP transactions are harder to value than buildings
Not the tenants
Typically involves three or more entities
1.
Parent company, creator, or sponsor
2.
Creates and maintains the IP
IP holding company, often in a tax haven
3.
Buys IP initially and pays for its maintenance. Licenses its use.
IP consumer: selling company
4.
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Buys license to use the IP in products it sells, pays royalty to IP holder
Off shore IP generators more to come
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130
131. Offshoring
Task transfer to Enterprises in Foreign countries
Two aspects:
1. Work migration: jobs are moved to
lower-cost countries
2. Support software etc. is moved to enable
similar productivity in those countries
Income is generated by people and
(intellectual) capital
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131
132. Types of
Foreign Entities
• Independent Foreign Contractors
IFC may serve multiple customers
Share trade secrets with competitors
IFC
Owners need contracts to protect the IP
Hard to monitor and enforce
• Owned, Controlled Foreign Corporations
CFC provides much more control over IP
Ownership often in third-party countries
Avoids taxation of sales to other countries
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CFC
132
133. Hypothesis
• Offshoring of jobs is effective because of concurrent
Intellectual Property (IP) transfer
• Much of that IP is corporate property
• Transfer of corporate IP & IP rights is poorly
understood
IP as property is not well defined, hard to measure
There are many components to IP, coming from
Open source, R&D, marketing, reputation as
Patents, copyright, trade secret (covered by NDAs)
• Even if hard to value, IP & IP rights is a significant export
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133
134. Knowledge
is the Link
To be effective a worker has to know what has to be done
•
That knowledge consists of
The technology
• call center employees
• engineers
technicians
● managers
●
Documentation, prior versions, quality control
The business methods
•
How technology in the product is marketed
The flow from buyers to improved products and methods
Companies distinguish themselves by proprietary IP
1.
Patents, sometimes Copyrights
2.
Confidential Documents
3.
Knowledge within its people - protected by NDAs
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SSTiC 2013
Trade
secrets
134
135. Transfers of rights
tangible ≈ intangible
Creator
Rights to tangible
Owner
$ Price
Creator
Rights to intangible
$ IP value ??
Lease
€ rents
Use
Use Rights
Owner
€ fees
Use
But setting the right value is harder, and easily misused
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135
136. IP flow in the
Hard-& Soft-ware industry
Design &
validation
in US
Development, testing
in the US
and at CFCs
manufacturing,
distribution
Product Sales within
the US
CD creation
Internet
Product Sales
external to the US
Income is taxable
1/18/2014
Technical IP
Investment
Part of income is due to
US contribution & taxable
SSTiC 2013
136
137. Flow of IP in the
financial industry
say: INYB investment bank
INYB
system
experts
in the US
INYB finance
experts
within the US
Design &
feedback
Technical IP
Investment by INB
Operations of
INYB
Finance experts
at INYB site
within the US externat to the US
external to the US
Operations
of INYB
Service Sales
within the US
All US Income is taxable
1/18/2014
Programming
and testing
Financial IP
Investment by INB
Service Sales .
external to the US
Income due to
technical US
contribution is taxable
SSTiC 2013
137
139. Taxhavens
Places where
1. Taxes are low
2. Financial and IP supervision is minimal
3. Reporting requirements are minimal
• Three cooperating types are needed
Dutch sandwich
1. Primary tax havens (about a dozen countries)
Small populations,
Can live largely of license fees
Cayman Islands,pop.50K, 90K companies @ 3000/year
2. Semi-taxhavens (more, but diverse)
Large populations, need jobs
Enact, often temporary, tax benefits for foreign work
3. Conduit taxhavens (few, small, financially active countries)
trusted, separate taxhaven activities by ringfencing
can shuffle funds invisible among locations
1/18/2014
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139
143. Forest Labs flow
[from Business Week 14 May 2010]
0. Initial transaction:
0. Initial transaction
IP rights transfer
IP rights transfer
to Bermuda
to Bermuda
Cost $5
$64
IP rights
FFBV
FLI ($17+0.11 Irish tax)
Forest
Labs.Research,
St. Louis, MO FLR
$99
6
FRX
$76
$5
$7
a
FLH b
$2.38 US taxes for public use
7
$50 available for new investment?
[Design Hermann Zschiegner]
1/18/2014
SSTiC 2013
143
144. With Taxhavens:
Three-party flow
Parent corporation
Offshore
job sites
Salaries
Initial
purchase
$
$$
License
fees
$
Sub corporation
“CFH”
Integration
Highvalue
Products
IP documentation
purchased the
rights to IPb
1/18/2014
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144
145. Capital and IP
creates more IP and Income
Capital and IP
in CFH
Capital & IP
at source
Income
Income
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145
146. Example
Apple paid less than 2% corporation tax on its profits outside
the US, its filing with US regulators has shown.
The company paid $713m in the year to 29 September on foreign pre-tax profits of $36.8bn, 1.9%.
It is the latest company to be identified as paying low rates of overseas tax, following Starbucks,
Facebook and Google in recent weeks.
It has not been suggested that any of their tax avoidance schemes are illegal.
All of the companies pay considerable amounts of other taxes in the UK, such as National
Insurance, and raise large sums of VAT.
Apple's figures for foreign tax appear on page 61 of its form 10-K filing with the US Securities and
Exchange Commission (SEC), used to summarize the performance of public companies.
It had paid a rate of 2.5% the previous year.
Apple channels much of its business in Europe through a subsidiary in the Republic of Ireland,
which has lower corporation tax than Britain.
But even Ireland charges 12.5%, compared with Britain's 24%.
Many multinational companies manage to pay substantially below the official corporation tax rates
by using tax havens such as Caribbean islands. http://www.bbc.co.uk/news/business-20197710
1/18/2014
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146
147. Capital flow with
a taxhaven
Controlled Foreign
Holding Company
Source
IP Creator
I PIP
CFH
IP license
Buy-in
Tax havens:
Income
CFC
IP consumer
Income
Capital and IP
Vanuatu
Cayman islands
Barbados
Capital
Royalties
Capital
US
taxes
Fees
Foreign
taxes
Tangibles are harder to move than IP
1/18/2014
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147
148. Job Flow @
different levels
of personnel
$
IP
Parent ------------------------ CFC
Is knowledge transmitted from the top or
acquired from experience at the bottom?
1/18/2014
SSTiC 2013
148
149. Longer term
effect
• Repatriation of €->$ from the CFH to the US is taxed.
• Current workers are paid by the CFH.
US and offshore employees are unaware of the source of their
paycheck
The CFH acquires an increasing fraction of the IP
The CFH is paid an increasing fraction of the income
The CFH in time can becomes richer than the company.
• It is more efficient for the company to invest in low-tax
countries and create jobs there.
Job losses in the U.S. increase
• Eventually the CFH can buy the parent company.
Control by stockholders is gone as well
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149
151. Flows are messy
Fabless Chip Manufacturer
MNC
S
Sales
Delaware
Typical FCM
One-time
Buy-in
IP
6-year rights
royalty tranche
FCM-I
International Ltd
Isle of Man
Owns
US
Revenue
~40%
FCM-D
Design & development
Costshare
payments
IP:
designs
IP use licensing
U>S.
documents,
knowhow
profit
MNC
A
SG&
A
U.S.
offshore
FCM-H
BV
Netherlands
FCM-I
Ireland
Offshore
Revenue
Chip and board manufacture
offshore
~60%
FCM Products
1/18/2014
SSTiC 2013
OEM fabricators, US and offshore
151
152. Not all taxhavens
are offshore: Delaware
Formal
HQ of HQ of
Coca-Cola, Ford, General Motors,
Google, Hewlett Packard, Intel, Kentucky
Fried Chicken, Texas Instruments and
200,000 more corporations
owner:
Corporation Trust,
a subsidiary of
Wolters-Kluwer, a
Dutch publishing house.
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[Shaxton:11]
152
153. Future:
Outsourcing and IP export
Need Increased understanding and accounting for IP exports
in the past handled by customs officials imposing `toll charges’
(making them visible)
To rationalize political concern by populists & traditional conservatives
versus strong lobbyists pressures and globalists
Correct pricing, licensing and its taxation of IP exports
• will increase corporate profits in the U.S.
• reduce cash in offshore accounts, more for U.S. investment
• provide taxes that could be used to compensate
• for R&D support provided by the government
• for educational costs
• for unfunded retirement benefits of workers whose IP was outsourced
• Is unlikely to stop offshoring substantially
• Amounts would be large in a number of cases
• But ….
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153
156. Corporate income
$B
1500
1400
1300
1200
W
US total worldwide
corporate earnings
$1,550B /year
US corporate earnings
sources → destinations
$620B
D
available for
corporate
dividends
&
(less during 2008-2009)
investment
in the U.S.
1100
1000
1,250B from
domestic sources
W-F
900
800
700
500
400
300
200
100
US tax paid on US
Corporate earnings
$335B
U US-sourced
earnings moved
abroad = $300B
600
US corporate
tax revenue
$340B
available in
taxhavens
for corporate
investment
SSTiC 2013
200
100
0
(100)
$690B
Earnings on $1,800B
income from foreign
sources = $400B
400
300
R
T
F
1/18/2014
$B
(200
)
(300)
156
158. Proposal: Eliminate
corporate taxation and
full income taxation
No corporate taxation and
no reductions on dividend and capital
gains taxes
• Removing a component of US tax revenues is worrisome
• But now no `double taxation’ Corporate + Shareholders
Revenues from corporate taxation are decreasing,
Its contribution to the US economy in 1994 was already less than 2.5%
of GDP.
The 2008 recession lowers the amount of corporate income tax colected
A linear extrapolation of the trend in corporate tax rates
makes the revenues from corporations zero by 2050!
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158
160. Economic
Models
[Orrell: Economyths+]
• Used to predict effect of policies and tax changes
use assumptions based on: counterexamples
Equilibrium ignores dynamics and lag: housing
Normal distribution based on additive model
many effects are multiplicative: power-law
Symmetric distribution value S-curve not centered:
downside risk hurts more than upside gain
Rational behavior perfect foresight: shopping
• Governments get poor advice
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160
161. Estimate
Taxed item
Action
Change
Abolish
($143.3B)
Corporate income tax (CIT)
for C-corporations -- not Scorps. LLCs
Dividends to individuals
Motivation and result
75
%
$30.4B
Tax as
income
Capital gains by
individuals
Effect of taxation of
greater dividend
Corpayouts
porate
Direct effect of investment
$69.0B
$9.6B
$20.4B
Treat all sources of individual
income identically
Tax on compensation of shareholders for their increased
taxes.
Purchases (based on DoD
spending)
Research credit , similar corporate No $ change. No
tax, no tax credit
tax deductions (loopholes),
corporate AMT
Indirect effect of increased
No effect of
investment and repatriation of
“Laffer curve”
offshore holdings
1/18/2014
Cannot be administered fairly
SSTiC 2013
If incentives are still desired, they
must be replaced by explicit
grants
No trustworthy data
(7.2%) of business161
tax
162. Why now
Worrying about economics is a sign of a maturing field
Phases:
1. Get new stuff to work
2. Getting adequate performance
3. Get it to be sufficiently reliable to be useful
4. Get it into routine production
5. Increase capacity
6. Make it safe
7. Make it affordable
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162
163. Problems
•
There is a lack of trustworthy data
1. $ 209M
spent
[US commerce department, 2003]
+
4 663
jobs lost [U.S. labor dept, 1Q04]
2.
+
$2 400M
50 000
•
Attitudes are inconsistent
income [Business week, in 2003]
jobs gained [Indian NAS&S Cos, Fy04/4]
Greenspan 1: IP rights have assumed increasing importance [27Feb03]
Greenspan 2: Our economy is best served by full and vigorous engagement in the
global economy – when defending reducing protection
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[11Mar03]
163
164. Related Intellectual
capital issues
Not all intellectual capital is owned, property, IP
1. Education: Services that transmit valuable,
but non-proprietary knowledge to others.
If receiver pays, certainly can take it anywhere
If the state pays, can it / should it be reimbursed? Now not.
2. Publication: IP placed into the public domain is no longer IP
Who benefits?
The reader gets knowledge / The writer gets fame
Society becomes more egalitarian, effective
• These 2 aspects can easily confuse IP discussions
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164
165.
Symmetry
Exports and Transfers go both ways
• There is innovation everywhere
• If the U.S. imports IP, the receiver should pay
Basic and fundamental research in the U.S. is declining
Growth was motivated by WW II experience [Vannevar Bush]
Many countries now fund fundamental research
The ratio of applied to basic research is increasing
Industrial research is mainly applied
Technological research is rarely basic
Development requires more resources
B
F
A
D
Industrial and management infrastructure
Good in the U.S
Demonstration and Beta sites - early adopters
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165
166. Discussion
• Many parameters used
to estimate IP
Uncertainty !
But better than not
knowing what’s going
on.
• Many choices now
a. Technical options
b. Business options
Interact with each other.
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166
168. Numbers
2009
T B M K
$ .
14, 259, 800, 000, 000
US GDP
.
.
14, 014, 800, 000, 000
US GNP
.
.
2, 524, 000, 000, 000
US tax revenues
.
21, 584, 866, 000, 000
US business revenue
US business net income 1, 614, 866, 573, 000
894, 900, 000, 000
US business taxable.
204, 996, 000, 000
US tax on business .
143, 000, 000, 000
US tax on C-corporations
US tax paid by multinationals
75, 182, 000, 000
Home mortgage interest
5, 400, 000, 000
Research credit
.
123, 570, 203, 000
Dividends @15% .
231, 547, 946, 000
net Capital gains
.
1/18/2014
SSTiC 2013
%
#M
5.8
75%
1.7
18.1% 25.4
9.6% 20.3
168
171. References
Gio W.: Valuing Intellectual Capital, Multinationals and Taxhavens; series Management for
Professionals, Springer Verlag, New York , to appear March 2013.
Gio W.: "Follow the Intellectual Property: How do Companies pay Programmers when they
move the related IP rights to Offshore Taxhavens?"; Communications of the ACM
(CACM), Vol.54 No.1, January 2011, pp.66-74.
Gio Wiederhold, Amar Gupta, and Erich Neuhold: "Offshoring and Transfer of Intellectual
Property"; Information Resources Management Journal (IRMJ) Vol.23 No.1, JanuaryMarch 2010, pp.74-93.
Gio Wiederhold, Shirley Tessler, Amar Gupta, and David Branson Smith: "The Valuation of
Technology-Based Intellectual Property in Offshoring Decisions"; The Communications
of the Association for Information Systems, Vol.24 No.31, Jan 2009.
Gio Wiederhold: "Determining Software Investment Lag"; Journal of Universal Computer
Science (JUCS), Springer Verlag, Vol.14 issue 22, 2008, ISSN 0948-695x;
Wiederhold, Gio: "What is Your Software Worth?"; Communications of the ACM, Vol.49 No.9,
Sept.2006, pp.65-75.
Gloria T. Lau, Kincho H. Law, and Gio Wiederhold: " Analyzing Government Regulations
Using Structural and Domain Information"; IEEE Computer, Vol.38 No.12, Dec. 2005,
pages 70-76.
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172. Topics see
http://infolab.stanford.edu/pub/gio/cs207/
For a motivation see Jeff Hawkins: What I wish I’d learned
in college
<A
HREF=“http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2289”>
Slides from all lectures:
Why should software be valued? Open source software, theory and reality. Scope.
http://infolab.stanford.edu/pub/gio/cs207/CS207-1.pdf; last year.... cs207/CS207-1-2011.pdf
>*
Intellectual capital and property (IP). Principles of valuation.
http://infolab.stanford.edu/pub/gio/cs207/CS207-2.pdf; last year.... cs207/CS207-2-2011.pdf
Cost versus value. Market value of software companies. Sales expectations and discounting,.
http://infolab.stanford.edu/pub/gio/cs207/CS207-3.pdf; last year.... cs207/CS207-3-2011.pdf
Alternate business models.
http://infolab.stanford.edu/pub/gio/cs207/CS207-4.pdf; last year.... cs207/CS207-4-2011.pdf
Life and lag of software innovation
http://infolab.stanford.edu/pub/gio/cs207/CS207-5.pdf; last year.... cs207/CS207-5-2011.pdf
The role of patents, copyrights, and trade secrets. Managing IP.
http://infolab.stanford.edu/pub/gio/cs207/CS207-6.pdf, last year.... cs207/CS207-6-2011.pdf
Off shoring (Prof. Amar Gupta) from 2009
http://infolab.stanford.edu/pub/gio/2009/Stanford-Nov09.pdf>
Licensing. Separation of use rights from the property itself. Offshoring alternatives. Risks.
http://infolab.stanford.edu/pub/gio/cs207/CS207-7.pdf; last year.... cs207/CS207-7-2011.pdf
Effects of using taxhavens to house IP.
http://infolab.stanford.edu/pub/gio/cs207/CS207-8.pdf; last year.... cs207/CS207-9-2011.pdf
Acquisitions and growth, Summary .
http://infolab.stanford.edu/pub/gio/cs207/CS207-9.pdf; last year.... cs207/CS207-10-2011.pdf
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