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The Green IP Revolution

Posted on Modified on by Foresight Valuation Group

Governor Arnold Schwarzenegger recently celebrated over a report released by the Cleantech Group and Deloitte which showed that California’s clean tech companies received the highest venture capital funding in the second quarter of 2010.

“California has led the world in enacting policies that harness the private sector to create the clean and renewable technologies needed to combat climate change and reduce our dependency on oil. And our efforts are paying off, as illustrated by a wave of green innovation all over the state that is spurring investment and creating jobs. These numbers showing California is getting the most clean tech investment is just the latest example that we are moving in the right direction of building our green economy and creating a brighter, more sustainable future for us all.”

The report’s preliminary 2010 second quarter results showed that clean technology venture investments in North America, Europe, China and India, totaled $2.02 billion across 140 companies. For North America, California led the way with $980 million in investment, more than two thirds the total share. As the Green revolution heats up in the Golden state, we at Foresight are keeping an eye on what this means for innovation and IP. Entrepreneurs and business owners know the importance of ideas and intellectual assets, which are often the result of years of research and development. Their IP lies at the heart of their Cleantech company’s competitive advantage.

Late last year the Obama administration, with an eye on Cleantech being the growth engine for the economy, developed a pilot program to accelerate the examination of green technology patent applications at the U.S. Patent and Trademark Office (USPTO). We had learned earlier this year that the Kappos Administration has been heavily involved in streamlining the USPTO and this appears to be an area of particular importance. This is what Commerce Secretary Gary Locke said when the program was announced:

“American competitiveness depends on innovation and innovation depends on creative Americans developing new technology. By ensuring that many new products will receive patent protection more quickly, we can encourage our brightest innovations to invest needed resources in developing new technologies and help bring those technologies to market more quickly.”

The average examination time in the past had typically been 30 months for green technologies. Not only has the time frame for examination been accelerated, barriers have also been lowered for what qualified as “Green Technology” subject matter for patent applications pending before the USPTO. When the Green Technology Pilot Program was announced in December 2009, the program was limited to inventions in certain classifications in order to assist the USPTO in balancing the additional workload and to gauge the resources needed for the program. The USPTO has determined that the classification requirement is unnecessary because the workload has been balanced with other mechanisms, and the requirement was causing the denial of petitions for a number of green technology applications that would have otherwise qualified for the program.

The Program is available to the first 3,000 applicants and ends on December 8, 2010. The Patent Office estimates that approximately 25,000 of the currently pending patent applications meet the requirements needed to be classified as a Green Patent. To date, more than 950 requests have been filed by applicants who wish for their application to be eligible for the Green Technology Pilot Program. Only 342 of those have been granted, primarily because many of the inventions weren’t in classifications that were eligible. The lifting of the classification requirements is expected to allow many more applications to be eligible for the program. If interested, applicants should act quickly and carefully weigh the Program’s benefits against the requirements needed–most notably, claim limitations, abbreviated restriction practice, and early publication.

The Oprah Winfrey Network – Deal or No Deal??

Posted on Modified on by Foresight Valuation Group

An IP Valuation Case Study (Part 1 of 2)

We would like to present the case of The Oprah Winfrey Network (OWN) as an example of how the values of intangible assets can sometimes be found in daily news stories. This case presents some interesting valuation questions and provides a rare glance into a highly publicized joint venture based primarily on intangibles.

The following story first appeared on USA today in January 2008:

“Oprah Winfrey is getting her own cable channel, called OWN: The Oprah Winfrey Network. A deal announced Tuesday with Discovery Communications will create a 50-50 cable and Web venture. In the cashless transaction, Discovery will contribute its Discovery Health Channel, to be converted to OWN in late 2009 and simulcast in HD. Launched in 1999, the channel reaches more than 70 million cable and satellite homes. Winfrey’s company, Harpo, will kick in her website, Oprah.com. “ 1

Putting our IP valuation experts’ hat on, we ask ourselves: is this a fair deal? For a 50-50 cashless deal to be fair, each party’s contribution needs to have about the same fair market value. OWN will be structured as a joint venture partnership where each party makes an” in-kind” contribution of assets – in this case: mostly intangible assets – in lieu of cash. It is this unique structure that makes it a very interesting IP valuation case study …

Let’s look at what each party is contributing to the deal:

1. Discovery – is contributing its Discovery Health Channel, which, by its own admission, was a struggling media entity at the time the deal was announced:

“Discovery Health faced an uncertain prognosis. It is drawing fewer than 200,000 prime-time viewers at a time when cable and satellite services want to cut payments for channels with small audiences. “They need audiences to jump-start (Health),” said SNL Kagan’s Derek Baine. He said that Discovery Health became profitable in 2007, with $7.4 million in cash flow on revenue of $141.8 million. Discovery spokesman David Leavy said those numbers are “a bit high” but would not be more precise.” 2

2. Oprah – Winfrey’s company, Harpo Productions, is contributing the website, Oprah.com, a very popular websites at the time the deal was announced, according to several sources:

“OWN will feature mostly original, nonfiction programming… focusing on topics Winfrey is known for — health, love, spirituality, child-rearing and personal growth. The channel will coordinate with Oprah.com, Winfrey’s Web site, which averages about 6 million unique visitors per month.” 3

“Oprah.com offers extensive expert advice, interactive workbooks, photos, video, inspirational stories, books and features to more than six million unique visitors with more than 80 million page views per month.” 4

What is the fair market value of each of the parties’ contributions into the OWN joint venture? Since we have no access to any of the parties’ detailed financial data (Harpo is privately owned), our analysis will be based on publicly available information.

Discovery Health Network. A cable network is a media property that includes a bundle of tangible (equipment, infrastructure) and intangible (broadcasting rights, content, and subscribers) assets. The most valuable asset for cable networks is their subscriber list, which is an intangible asset. Cable network values are often benchmarked using valuation metrics such as the ‘value per subscriber’, or ‘cash flow multiple’. We have looked at some transactions involving similar cable networks, and found two relevant data points relating to similar “lifestyle” channels: Bravo and Oxygen (another media venture backed by Winfrey), both purchased by NBC 5.

The table shows a wide variation in the value per subscriber metrics: while NBC paid $23 a subscriber for Bravo, it only paid $13 a subscriber for Oxygen (some analysts called the Oxygen deal a “bargain”). However, the table also shows that prices seem to be more correlated with the annual cash flow generated by the network, with a ‘cash flow multiple’ (=total value/annual cash flow) of around 8-9. While Discovery Health Channel has 70 million subscribers (it’s part of the large Discovery family of channels), that particular channel has been around since 1999 but only turned a profit in 2007, generating a mere $7 million in cash annually. It does not seem right to compare it on a value per subsriber basis to Oxygen, with a similar number of subscribers, since Oxygen generates almost 15 times as much cash flow as Discovery Health. It seems more appropriate to apply the cash flow multiple to the cash flow generated by Discovery Health (about $7 million a year), as that ratio is better correlated with acquisition prices:

Discovery Health’s Fair Market Value ($mill) =

9 x 70 mill subs = $63 million

>> we believe that the fair market value of the Discovery Health Channel in early 2008 was probably less than $100 million,

Oprah.com Website. A website is a bundle of intangible assets (domain, content, code, back links, etc), that are mostly protected by Copyright laws. Websites can largely be classified into E-commerce sites (selling goods & services online, ie. Amazon.com) and content driven sites. There are various models for valuing Content-driven websites, most of which are primarily based on web analytics related to traffic (i.e., are a function of the number of unique visitors, number of web pages viewed, etc). The Oprah.com website can be classified as a Content-driven website, and therefore, we have turned to comparable transactions around the time the deal was announced to figure out the prices paid for similar web properties.
An analysis of news articles from the 2005-2007 time period reveals that an often-quoted average ‘value per unique monthly visitor’ in web content deals was around $38 per visitor 6. In addition, larger sites seemed to be generating a higher price per visitor than smaller sites, ranging anywhere from $20 to over $200 7. We found two relevant data points related to transactions that took place in late 2007, and involved large content driven web properties:

We believe that the Oprah.com site should be valued at least at the average price of $38/visitor, but more likely at the $55-$65 range (or even higher, since it’s larger than both deals presented above) using the 6 million unique visitors, as reported by Harpo:

Oprah.com’s Fair Market Value ($mill) =

$38 x 6 mill unique visitors = $230 million
$60 x 6 mill unique visitors = $360 million

>> we believe that the fair market value of Oprah.com website in early 2008 was at least $200 million, and probably higher than $300.

Our analysis leads to an interesting valuation “puzzle”: why would Oprah Winfrey, one of the savviest business people in the world, be entering a 50-50 joint venture where the fair market value of her contribution is at least two or three times that of her partner’s?

While we cannot give a definite answer, we think that we have a few possible explanations, which we will share with our readers in Part 2 of our discussion of the OWN deal. In the meantime, we would be interested in your opinions – what would you advise Oprah Winfrey: Deal, or No Deal ?!…

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1 http://www.usatoday.com/money/media/2008-01-15-oprah-cable-channel_N.htm
2 Ibid.
3 http://www.washingtonpost.com/wp-dyn/content/article/2008/01/15/AR2008011501562.html
4 http://www.targetmarketnews.com/storyid01160802.htm
5 http://www.nytimes.com/2007/10/10/business/media/10oxygen.html?_r=2
6 For example: http://www.websitebroker.com/articles/website-valuation/simple-ways-to-value-your-website
7 http://seekingalpha.com/article/92809-valuation-metrics-of-large-vs-small-website-acquisitions?source=article_lb_author

From Hybrid Batteries to Fireworks….

Posted on Modified on by Foresight Valuation Group

Welcome to The Foresight Blog, a new blog from Foresight Valuation Group, based in Silicon Valley, California. Foresight is a boutique intellectual property (IP) consulting firm that provides analytical services around the management and commercialization of intangible assets, with a particular focus on IP valuation.

Our name, Foresight, represents the clarity and transparency we bring to the often confusing and misunderstood field of IP valuation and strategy. Our location, at the heart of one of the world’s most innovative regions, provides a very unique insight into technology and the entrepreneurs and inventors that create it. We’ve timed our launch to coincide with World IP day (April 26), which globally celebrates IP rights and our commitment to shedding light on the critical role of IP around the world.

A few words about our bloggers, Efrat Kasznik and Naheed Hasnat. For over a decade we have worked in the field of IP consulting, and have also taken a hiatus or two to establish a few start ups. In addition to our passion for IP, we share a strong friendship, the love of cooking, environmental issues and many other things… Throughout our IP careers, we’ve helped commercialize some exciting technologies, have been experts on complex corporate patent infringement disputes, and have been asked to value a host of technologies — from hybrid batteries to fireworks. Our start up experience took us on a wild ride through some of the valley’s best and worst times, from building data networks in the early days of data communications, to providing energy efficiency services to homeowners during the tough times of the recent economic recession.

The Foresight Blog is a place for us to bring our personal interpretation of current events, share some of our experience living and working in the valley, and most importantly, create a platform for healthy debate around IP issues. Please send us topics that you would like us to address in future blogs, we look forward to hearing from our readers. We hope that you will join us for the ride!

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