CS207 #1, 25 Sep 2009

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CS207 #1, 25 Sep 2009 CS207 #10-last, 3 Dec 2010 Gio Wiederhold Gates B12 Any make-up reports submitted by 25Nov10 were marked on the sign-up sheets. All reports are due by Friday 10Dec2010. 4-Dec-10 CS207 1 Syllabus: 1. Why should software be valued? 2. Principles of valuation. Cost versus value. 3. Market value of software companies. 4. Intellectual capital and property (IP). 5. Open source software. Scope. Theory and reality 6. Life and lag of software innovation. 7. Sales expectations and discounting. 8. Alternate business models. Licensing. 9. The role of patents, copyrights, and trade secrets. 10. Offshoring [Prof. Gupta] 11. Separation of use rights from the property itself. 12. Effects of using taxhavens to house IP. 13. Growth organic and through acquistions 14. Risks when outsourcing and offshoring development. 4-Dec-10 CS207 2 Topics Covered Why should software be valued? Open source software, theory and reality. Scope. <A HREF=“http://infolab.stanford.edu/pub/gio/2010/CS207-1+background.pdf”> Intellectual capital and property (IP). Principles of valuation. <A HREF=“ http://infolab.stanford.edu/pub/gio/2010/CS207-2+valuation.pdf”> Cost versus value. Market value of software companies. Sales expectations and discounting,. <A HREF=“http://infolab.stanford.edu/pub/gio/2010/CS207-3+business.pdf”> Alternate business models. <A HREF=“ http://infolab.stanford.edu/pub/gio/2010/CS207-4+SalesModels.pdf”> Life and lag of software innovation <HREF=“http://infolab.stanford.edu/pub/gio/2010/CS207-5+Allocate&Lag.pdf”> Innovation (Tessler) <A HREF=http://infolab.stanford.edu/pub/gio/CS99I/nber_w14548.pdf> Measuring Software (Zeidman) <A HREF=http://infolab.stanford.edu/pub/gio/CS99I/ZeidmanCLOC.pdf> The role of patents, copyrights, and trade secrets. Managing IP. <A HREF=http://infolab.stanford.edu/pub/gio/2010/8+IPprotection&offshoring.pdf> Effects of using taxhavens bb <A HREF=http://infolab.stanford.edu/pub/gio/2010/CS207-9+Taxhavens.pdf> Acquisitions and growth. Final <A HREF=http://infolab.stanford.edu/pub/gio/2010/CS207-10+Summary.pdf> 12/4/2010 CS207 3 Your plans • If you are interested in selling your product or • Want to start your own business Look at similar a businesses: 1. Their Annual reports or their 10K SEC filings And analyze their numbers, don’t just read the CeOs introduction “Listen and you will be very happy, but look and you will be terribly sad” quoted by Yusif al Sayigh, at the 1978 World Economic Outlook Conference 2. Data for their business segments 3. Historical events that can reoccur as bubbles and trends 4-Dec-10 CS207 4 Looking at 10Ks 1. Wiederhold: How M.A.T.; to appear 2011 2. http://www.bloomberg.com/insight/lexapro.html 2 4-Dec-10 CS207 5 Balance Sheet 4-Dec-10 CS207 6 Consistency in plans When comparing business alternatives • Give each choice the same chance 1. Temporal consistency Computing versus communication . Local versus Cloud in 2012 o Skate to where the puck is going [Gretsky] 2. Discount rate 3. Resource prices Green alternatives . Benefits may depend on price of oil – o if 3 x now, why not invest in oil instead 12/4/2010 CS207 7 Segment metrics Compustat 4-Dec-10 CS207 8 Income Enterprise SW versus cloud [Benioff:2009] • SIEBEL sales force management $ 1. Price $1,500 per seat, at 200 users = 300,000 2. $54,000 for support (18%) /year, x 5 = 270,000 3. $1,200,000 consulting for installation =1,200,000 4. $100,000 admin.personnel/year, x 6 = 600,000 5. $ 30,000 training / year, x 6 = 180,000 6 years’ usage Total = 2,550,000 Note that the customer’s total is >> than the price 12/4/2010 CS207 9 Example Enterprise SW versus Cloud→ *Benioff:2009 “Why Clouds”+ • SIEBEL sales force management $ 1. Price $1,500 per seat, at 200 users = 300,000 2. $54,000 for support (18%) /year, x 5 = 270,000 3. $1,200,000 consulting for installation =1,200,000 4. $100,000 admin.personnel/year, x 6 = 600,000 5. $ 30,000 training / year, x 6 = 180,000 6 years’ usage Total = 2,550,000 The customer’s total is >> than the price seen initially 12/4/2010 CS207 10 Cloud delivery by salesforce.com • Saleforce.com: $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 12/4/2010 CS207 11 Advertising 1. Audience 3. Logo & name Focused Essential for branding Salesforce Metaphor In front of competitors 4. Timing annual sale meetings 3x Have Product ready 1. Fake demonstrators in SF. 2. Give coffee, mugs, rides, • Few bugs literature to attendees in NY • Clear operation 3. Hire all taxis in Nice, give Negative? • Useful free rides to site in Cannes. Vs. Superbowl? 2. Address • Much buzz a. Buyers in corporations c. Both • Huge audience b. Users and employees • • Your audience? Understand motivations for change 12/4/2010 CS207 12 Customer Segmentation • Getting a broad market presence is very hard . Superbowl advertising: 30 seconds costs $3M o Apple 1984: Macintosh o Hulu 2009: Internet video player ? Find narrow markets that are now not well served . Professional groups o Use professional magazines o Establish credibility through publishing . Social networks o Participate . Health concerns by symptoms or diagnoses . Educational specialties 12/4/2010 CS207 13 `Buzz’ Customer and potential customer interaction • In the relevant community The most powerful sales tool Novelty and quality drive buzz Advertising effect is complementary • Simple stories for the press . Writers look for good guys vs bad guys stories . Don’t have time to dig deep . Match public events o Be ready - security SW when there is a big break-in; … • Direct mail ? Sometimes for a specific off-the-net audience 12/4/2010 CS207 14 Use your income to grow IP: R&D and • Advertising 25% of business spending Google Adwords /Adsense to trigger where ads go . Show your ad on top or on the side of a search . Show your ad on relevant web pages o Charge by show (eyeballs) or click-through o Do that until money runs out o Allocate among competitors according to money made available Google tools for measuring Google’s ads impact . measurements in other media are ad-hoc . could be disregarded, but still contribute to the perception. Perceptions is also IP, embodied in trademarks etc. 12/4/2010 CS207 15 Growth • Organic • Through acquisitions a. Product R&D investments a. Additional products New versions novel – first b. Product Marketing complementary New, broader applications anti-competetive c. Fundamental R&D b. Product improvements d. Trademark promotion c. IP: Patents … →as as with with a. a e. Curiosity-driven R&D ? d. Knowhow of staff • Paid for by a. Profits on existing products (after dividends are paid out) b. New investors: venture funders before / stockholders after going public c. Loans Interest on loans up to x can be deducted from taxes 12/4/2010 CS207 16 Growth Based on 100 top public SW companies Q1 2009 Source: http://www.ipo-dashboards.com/wordpress/2009/08/how-long-does-it-take-to-build-a-technology-empire/ sybase [Database] Compuware [services] SuperMicro National [lab] Instruments (UK) Mentor Microsoft Blackbaud [CAD] [non-profit acctng] Adobe Ciber EA Quality Systems . [consulting] [med.offices] Oracle 12/4/2010 CS207 17 Categories * * Graph includes some hardware companies • Rocket Ship: 28% . Autodesk, Electronic Arts, Interwoven→ Autonomy, Sybase, Novell . Adobe (Xerox Parc), McAfee (Lockheed), Salesforce (Oracle) had substantial IP headstarts • Hot Company . Microsoft, Oracle • Slow Burner . SPSS, Ciber inc Consultants, Quality Systems • Missing . Lotus (1982-1983 to $53M, but acquired 1995 by IBM) . Macromedia, acquired by and now incorporated in Adobe, ….. Google (does not sell Software) 12/4/2010 CS207 18 Rocketship list 3-6 years to $50M Rev. 2nd largest Not all Rockets make it to Space largest Net income is convoluted due to acquisitions, write-offs, etc. More lists after End-of-Course slide 12/4/2010 CS207 19 4-Dec-10 CS207 20 Acquisitions • A common path for a. Exit from a startup venture seller b. Growth of a larger company buyer • 2 parties at `Arms-length 1. Willing seller 2. Willing buyer . Assumption here: no funny business o Buyer has funded seller, formal/ informal restrictions o Selling a non-exclusive license o Seller is object of a legal proceedings, as patent suit o Seller is bankrupt Both parties must agree on the value . Both parties should understand intellectual property 12/4/2010 CS207 21 Example: Adobe events Unix Peter Deutsch Alladin OpenSource PostScript reader Free PC? HTML reader PPT Jonathan Gay → Flash, Dreamweaver Unix Mac Nick Corfield founds Frame Tech. for WYSIWG Mac PC Paul Brainard (Stanford) develops PageMaker, founds Acquisitions: Mac&PC Aldus, Frame Macromedia 1976 Xerox Parc uses Press language PhotoStyler → Photoshop PhotoMerge → Photoshop Elements to drive its new Dover laserprinter TypeAlign 1978 John Warnock joins Parc OCRsystems Dec.. 1982 Unix NexT 1993 1984/1985 Mac PC Internal Acrobat products: Mac PC IRS adopts free Reader 12/4/2010 Illustrator CS207 InDesign 22 ImageReady Growth 4-Dec-10 CS207 23 Components of IP in an Acquisition Code Name typical value salvagable Patents: Patents . Modest, 5-20% if any TM: TradeMark . (incl. “buzz”) . Can be high ? SaP: Extant salable products .
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