Saturday, September 25, 2010
After looking at the issues facing our country in the last 2 years, one thing has become clear to me: technology has not been able to solve things that matter the most. The two things Americans spend most of their money are housing costs and healthcare. And the two areas that technology has been least helpful are in these areas. Technology has not helped bring about a rational housing market, discover fair market interest rates, or evolve a market place where houses are bought or sold in a fairer way. This goes for health care as well. While we have excellent mobile devices with entertaining content, we are struggling to create efficient housing and health care markets or education markets. More people seem to be able to gain access to iPAD and Android phones than decent housing, education and quality health care. Drawing from Einstein's PhD thesis on Random Motion of particles (Brownian Motion), particles travel in the path of least resistance. People do the same thing as well. They adopt and subscribe to the path of least resistance. Right now, the value in an iPAD is fair, efficient and easily accessible (the path of least resistance) than the value of owning a house or getting healthcare or electing the Congress or investing in the stock market (the trading volumes have plunged). When people face resistance in a path, they tend to drop that path. So, owning a house, obtaining health care or electing the right people are going to go out of fashion, while buying video games, music, iPAD are going to catch on - simply because it is so much more easier to do so. The younger generation has certainly moved away from owning a house (they all prefer renting), buying health care (they prefer community clinics) and not participating in electoral process (they dont see the right candidates) and have instead resorted to buying mobile devices of all sorts and making friends on online social network (resistance faced in the actual world??). Note how Apple's stock or FaceBook's private stock has shot up in a time of volatile housing and healthcare markets. Everyone knows that an iPAD cannot give you better health care, cook better food for you - yet we choose iPhones and iPADs over health insurance or buying quality food. It is not the fault of the consumer that we've become so, but the amazingly resistant paths that powers-that-be have created to owning houses or investing in healthcare or working the stock market. Maybe I should have an XBOX, PS3, WII, iPAD, iPhone, plenty of friends in the online world and a large monthly broadband bill. Why bother about health insurance or food or a roof over the head? They dont come handy in the online world that I may want to live in.
Tuesday, September 7, 2010
There has a been a research study which says that S&P 500 derives 67% of its value from Intellectual Property (IP) or Intangible assets. Think about it for a minute. The largest export from America today is IP. In a deteriorating business climate, what sets you apart from others are sustainable competitive advantages such as your workforce, patents, trade marks, copyrights, goodwill, client lists, trade secrets and other protected and escrowed intellectual properties. You owe it to yourself to start building and sustaining companies that hold IP value. Today, most of the manufacturing and even a large part of R&D processes can be completed outside the US. This means that cutting edge IP is probably the only thing that will fetch valuation multiples in the 7 to 10 times revenue range. VISA, WalMart, Google all command a high P/S multiple because they all hold vast amounts of IP in the form of technology that really sustains their businesses for tens of years. Any company that does not hold IP and in turn does not enjoy a sustainable competitive advantage tends to see lower P/S multiples. So, what do we at Accuserve see when we value intellectual property? Though there are guidelines out there, many fall short of the changing headwinds in the nature and protection of IP. Two major things contribute to how much an IP is worth: the business value of the IP and how much the IP is legally protectible/protected. The business value of the IP, in turn, depends on factors such as the stage of development, novelty of use, difficulty of reproduction, size of the target market, barriers to entry, government support, volatility of the cash flows expected to be generated by the IP, prevailing royalty rates for similar IP, geographic range of application, and ease of licensing. Legal protection examines things such as the time period of exclusion, litigation aggression, escrow facility, and freedom to operate. While financial analysis contributes to developing cash flows associated with the IP, a through understanding of the qualitative factors is required to create factor models that capture qualitative inputs. We are experts in doing that. Given the importance that IP holds in today's environment, it is important to get an IP valuation that is highly supportable and fetches the optimal price.