CS207 #5, 28 Oct. 2011 Gio Wiederhold Gates B12 10/28/2011 Gio: CS207 1
Jun 13, 2015
CS207 #5, 28 Oct. 2011
Gio Wiederhold
Gates B12
10/28/2011 Gio: CS207 1
Syllabus: 1. Why should software be valued? 2. Open source software. Scope. Theory and reality 3. Principles of valuation. Cost versus value. 4. Market value of software companies. 5. Alternate business models. Making money from free SW 6. Intellectual capital and property (IP). 7. Life and lag of software innovation. Marketing. Allocation. 8. Sales expectations and discounting. 9. The role of patents, copyrights, and trade secrets. 10. Licensing. 11. Separation of use rights from the property itself. 12. Risks when outsourcing and offshoring development. 13. Effects of using taxhavens to house IP.
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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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Intangibles
Book
value
Let’s ignore the intangibles, we cannot measure
them reliably.
Intangibles
capitalization of cost allowed under GAAP
Distribution
to Sales
Costs
→ Centroid of
revenue
time →
Sales lag . ←−−−−−−−−−−−−−→
Sales
Manufacturing & distribution delay
←→
←→ marketing lag
Marketing
← C
osts
development lag ←─→ Centroid of total
development cost .. ~60%→
Research,
Design, Implementation
Testing
Centroid of pre- sales marketing costs part of investment: IGE
Development done →
Revenues →
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Timing of expense
and income
Release to Production
Post-sales marketing, part of sales cost: CoGS
Centroid of revenue
sales lag . ←−−−−−−−→
Development done →
Revenues →
Costs
→
Research,
Implementation
&Test
ing
Sales
development lag ← → includes testing
← C
osts
Centroid of pre-sales
marketing costs time →
Marketing
β
↔
↔ marketing lag
← General
availability
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SW Lags
7 Gestation period →
Eff
ort
→
start 75% 50% 25% done
Development
Testing
35%→
@27.4% →
Lag delays benefits
of R&D investments
Estimate effective lag .
~37% →
~14% →
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Research growth limit
growth limit
Start-up development
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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 staff salaries
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21% effort
growth
62.5% Implementation
@0.29→
Research ends when
33% time remains → 12.5% Research
@0.65→
0.75 0.50 0.25 done start
0
40%
20%
80%
100%
60%
25% Testing
Implementation starts when
67% time remains →
Testing starts when
17% time remains →
33% time remains
Res., Imp, &
Test @0.27 →
Graph of start-up development
Development in mature
company with
12.5% research and
25% testing effort,
62.5% implementation
@0.46→
Testing starts when
←−−− 40% time remains
Res., Imp, & Test @0.42 →
Research ends when
← 65% time remains
Available
resources
Values based on finite integration, exp= 0.05
@0.85→
0.75 0.50 0.25 done
50%
25%
0
75%
100%
1.00
Rela
tive
Effort
→
38% effort growth at start
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I R
T
←Implementation starts when
85% time remains
5% company staff growth
done R&I
Testing
start
Effective lag =
Development period × Centroid fraction
Lag differs less than
development period
start
Testing
R&I done
start
R&I
Testing
done
done
done
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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. Don’t let valuable staff be idle b. Missing features should already be understood c. Rapid analysis of problems to allow next version fixes d. Any research should be done before major staff effort
3. Adequate testing to keep reputation
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1.50 1.25 0.75 0.50 0.25 done Release
version n-1
Effort
→
100%
25%
75%
50%
2nd Version substantial testing
56%
43% Testing during version n
interval
→ R&I @1.00
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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
• Interdependence viral
Consistent
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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CS207
in your brain
forever
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 o Skate to where the puck is going [Gretsky]
2. Discount rate 3. Resource prices Green alternatives
Benefits may depend on future price of oil – o if you assume future price = 3 x now, why not invest in oil instead
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Example Enterprise SW versus cloud
[Benioff:2009]
• SIEBEL enterprise 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
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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 10/28/2011 CS207 17
Advertising 1. Audience
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.
3. Logo & name Essential for branding
Metaphor
Negative?
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Vs. Superbowl? • Much buzz
• Huge audience • Your audience?
4. Timing Have Product ready
• Few bugs
• Clear operation
• Useful
2. Address
a. Buyers in corporations b. Users and employees
• Understand motivations for change
c. Both
Review Allocation
• When is allocation needed?
1. Tech. , Pharma company:
income due to R&D versus advertising
2. Financial Company:
income due to software versus investment experts
3. Internal ▬ product mix
• For the 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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Expense Rollover A valuation based on cost
1. Collect the expenses ei over the total lag period p
2. Adjust the expenses by a discount rate d, ai= (1+d)p-i
3. For year i = 1 → p estimate the R&D retained ri =1- 1/p
4. Aggregate retained to the end date, R = Σ ri x ei x ai
5. 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
But the estimation of m is verrrrrrrrrrry iffy Technological advances are rarely stable But could be used for a) advertising -- much untrustworthy data
b) stable maintenance component only 28-Oct-11 tCS207 20
m≈2 in the first model we used
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 It does not matter how EUsales sells it and what it charges
Complexities are required language, interface improvements
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Discussion
• A long-lived product is hard to displace if
It is well maintained,
but that becomes costly
Keeps up with all standards
• Internal replacement
Should be easier
But has not been in practice
Next week IP, IP protection, and IP licensing
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