The “Secret Formula” for Choosing a Brand Name

Unarguably, one of the most important branding decisions to be made by an entrepreneur is the name of the venture. Some of the world’s most iconic brands not only have catchy names, but also names with a great story behind them. These stories often offer a glimpse at the company’s history, whether or not the name actually has anything to do with the product or service itself. The origin of the Apple name, for example, is tied to a story told by Steve Wozniak in his autobiography, in which Steve Jobs suggested the name after returning home from a stint in a commune which he referred to as an “apple orchard.” The name Google was the result of a misspelled search in the domain name registry, and a welcomed change to the company’s original name, “BackRub.” And who can forget Justin Timberlake (as Sean Parker) advising Mark Zuckerberg to “drop the ‘The’” from TheFacebook.

From these examples, and many more, we learn that the origin of the name is  arguably equally important as the actual name itself. From a sheer branding perspective, having these stories to tell about your company history can greatly aid in the building of a community around your brand – fostering loyalty and contributing to sustained success. In fact, some suggest that brand names that are directly related to a product or service are less likely to succeed than an extraneous name. Scrolling down any list of top brands reveals that this notion seems to be accurate. Perhaps the reason is that the disconnect between the name of a company and its offerings provides for much stronger and sustainable Brand Awareness, Brand Association, Brand Positioning, etc. when consumers are tasked with connecting a name to a product or service themselves rather than being told exactly what to expect. In my own mind, for example, I was tasked with creating the associations between the Disney name (which at its origin is simply a surname with no relation to animation) with family-oriented, funny, and wholesome cartoons. Because I have learned to associate the name with the product and accompanying emotions on my own, that bond is far stronger. Conversely, another animation brand that I have grown up with is Cartoon Network. The company offers a brand name that is immediately reconcilable with their offering. Over the years, it is possible that by allowing me to skip the step of creating this brand association on my own, the brand has fostered a less meaningful and sustainable relationship. Among many other factors, the difference in brand power in my mind is conceivably attributable to the mechanics of the brand name itself.

Given that the brand name is so important, entrepreneurs spend countless hours mulling over their options to find the perfect fit. Sometimes, however, there are roadblocks. In a recent U.S. circuit court case, an entrepreneur was denied the right to use “The Krusty Krab” as the name for his new restaurant venture. The Krusty Krab, a Bikini Bottom staple, is of course the name used by the fictitious restauranteur Mr. Krabs in the SpongeBob SquarePants cartoon show and movies. The case is an example of an interesting rule around trademark protection for things that are not officially registered with the Trademark Office and that originate from fictional sources. Having appeared in over 80% of SpongeBob episodes, in addition to 2 feature films, the court ruled that Viacom (the rights holder to SpongeBob) should retain the rights to The Krusty Krab. In court, Viacom successfully proved that diners at the proposed Krusty Krab restaurant would likely confuse the establishment with SpongeBob’s fictional employer. The courts have taken a similar stance in the past on trademark related cases, granting trademark protection to the Daily Planet (from the Superman universe), as well as the General Lee (from The Dukes of Hazzard).

When developing a brand strategy, brand name is a pivotal decision. The various components of Brand Equity can be bolstered by a solid name with an interesting origin story. Unsurprisingly, entrepreneurs tap in to any and all available resources while attempting to derive the perfect name. It is important, however, to remember that trademark protection can be awarded for things outside of the official registry. But just because a name may be protected, does not necessarily rule out the possibility of its use for your venture. Interestingly enough, Viacom itself has a history of lending its marks in the food business. A license of the Bubba Gump Shrimp Co. name from the hit movie Forrest Gump is responsible for the turnaround and massive success of a once declining seafood provider. In this case, Mr. Krabs was not quite ready to grant access to his infamous secret formula.

The Impact of the Alice Decision on Corporate Patent Assets

The Impact of the Alice Decision on Corporate Patent AssetsThe Supreme Court’s Alice decision has introduced a dimension of uncertainty associated with the validity of many of the software patents held by operating companies today. There seems to be a consensus among some of the leading academic and judiciary experts supporting that conclusion, as seen in recent comments made by Stanford Law School’s Prof. Mark Lemley, as well as in recent comments by former Federal Circuit Chief Judge Michel. From a valuation and financial reporting perspective, there needs to be a serious examination of the post-Alice landscape implications on the value of patents as corporate assets. The results of such examination may lead to further action – which could range anywhere from additional disclosure requirements by regulators, all the way to actual corporate asset write-offs. This article highlights some of the key issues that need to be addressed by companies and regulators.

Financial Reporting for Intangibles: Overview of Existing Standards

In order to address the Alice decision and its impact on corporate disclosures, one needs to first understand the existing financial reporting requirements and how patents are presented as corporate assets. Under current accounting rules (US-GAAP and IFRS), internally generated intangibles, including patents, do not show as assets on the balance sheets of the companies that created them. Patents only show up on the balance sheet if they were acquired and paid for, either as a standalone portfolio or as part of an M&A deal where the assets of the target include patents. It is important to mention that these patents had no value on the books of the selling company either, so in most cases a transaction where patents are changing hands is the first time that the value of such assets is reported anywhere.

Take, for example, the Google acquisition of Motorola Mobility in 2012. The Motorola Mobility balance sheet on the eve of the acquisition showed virtually no value allocated to patents as corporate assets. Yet, the acquisition resulted in Google reporting $5.5 billion of patents as acquired assets on its post-merger balance sheet. The post-M&A valuation itself is conducted by valuation experts with no particular legal or technical knowledge, who assume that the patents are valid based on the due diligence done by the legal team of the buyers. Assessing the validity of patents as part of a post-merger purchase price allocation is outside the area of expertise of IP valuation experts, as well as the auditors in charge of reporting the deal. Once the pre-merger due diligence is complete, there is no further legal examination of the patents for purposes of financial reporting.

Implications of the Alice Decision on Financial Reporting of Patents

When looking at the financial statements of any company, one needs to keep in mind that there are two types of disclosures for patents: the reported patents, resulting from acquisitions; and the “invisible” patents, those emerging from the company’s own R&D efforts, which are not reported as corporate assets as all. It is usually the case that most of the company’s patents fall under the second category, and in particular when it comes to large tech companies that spends billions of dollars on R&D, resulting in many new patents filed every year.

There is an established process for recording losses related to the decline in value of patents acquired through acquisitions: these patents are tested periodically for “impairment”, a process that involves comparing the carrying amount of an asset (price paid for the asset, or its “book value”) to its fair value (as calculated based on current market conditions). An impairment loss is recognized when the carrying amount of patents is not recoverable and exceeds its fair value. Impairment testing is done when there is an indication that might trigger a decrease in the market price of the asset below its reported book value. There is a list of conditions that the regulators consider as triggers for impairment, including – among others – a significant adverse change in legal factors. It is a grey area involving discretion by management, subject to varying degrees of leniency by the auditors running these impairment tests. It is not immediately clear whether the post-Alice legal ambiguity should be considered a strong enough trigger for impairment testing of certain categories of patents, and if so, what type of testing should be applied, and who should perform the testing. Impairment testing is currently done by valuation experts who lack the legal background to assess the validity risk associated with the patents, and subsequently the assumption of validity is carried over from the original post-merger valuation. More guidance is needed from the FASB and the SEC on that topic since the process, as currently performed, does not lend itself to the inclusion of validity assessment by the valuation experts or the auditors.

While impairment analysis exists for reported intangible, there is no process whatsoever for writing off non-reported intangibles, which include all internally created patents as previously discussed. Since these assets are not on the balance sheet, there is nothing to write off in the first place and no basis against which to conduct an impairment test. From a pure accounting perspective – there is no place to record the loss, and no way to calculate the size of the loss. This does not mean that the markets will not factor that into the stock price, even without specific disclosure by the company. It may very well be that if companies start writing off acquired intangibles, stock analysts and investors could estimate the degree at which a similar write-off could be applied to non-reported patents, and adjust stock price expectations accordingly. While this is all highly speculative and there is no way of telling how stock markets will react, it is not unreasonable to assume that some companies with patents that are directly impacted by the Alice decision might see some sort of market price adjustment based on the higher invalidity risk associated with these assets, even if these patents are not on the balance sheets of these companies.

Implications of the Alice Decision on Compliance with Securities Laws

Financial reporting is the main channel for companies to communicate information to shareholders and markets at large. Financial reporting by US publicly traded companies is regulated by the SEC, and is governed by a set of securities laws and regulations. One should therefore look up to the SEC for guidance related to the post-Alice disclosure requirements to be imposed on companies. More specifically, both Sarbanes-Oxley (SOX) Act as well as Rule 10b-5 compliance are issues that warrant a closer look:

The Sarbanes-Oxley (SOX) Act requires management and auditors to establish a level of internal controls that would guarantee the accuracy of reported financial statements. All financial reports need to include an Internal Controls Report showing that a company’s financial data are accurate and that adequate controls are in place. Criminal and civil penalties are imposed for noncompliance. Section 302 requires the CEO and CFO to certify that the reports “fairly present in all material respects the financial condition and results of operations” of the company for the periods included in the report. When it comes to IP, the guidelines for SOX compliance are vague and there’s no clear set of steps that companies apply to their IP portfolio to guarantee compliance. This approach might change post-Alice, if large portfolios are at risk of invalidity. It could certainly be considered a “material aspect” yet it is unclear what set of best practices will emerge and how the SEC will enforce them.
The 1934 Securities Exchange Act’s rule 10b-5 lays the foundation for the SEC to investigate possible security fraud claims. Rule 10b-5 violations cover cases where executives make false statements in order to drive up share prices, or where they withhold negative information that could have an adverse impact on stock prices. Violations of 10b-5 open the door to shareholders’ class action litigation as well, especially if stock prices experience fluctuations that can be attributed to material misrepresentations by management. This could create an additional risk of litigation or SEC investigation for companies with a large concentration of patents directly affected by Alice, and should motivate these companies to take a closer look at the value of their IP portfolio and determine whether additional disclosures are prudent under the circumstances.

Article first published on IPWatchDog

Unlocking Value Creation Opportunities in the Internet of Things (IoT)

The global enthusiasm surrounding the ecosystem known as the ‘Internet of Things’ (IoT) has positioned data as one of the most valuable assets that a company can own and monetize. According to IDC, the worldwide market for IoT applications (intelligent and embedded systems, connectivity and security services, infrastructure services and platforms) reached $1.9 trillion last year, and is expected to more than triple to $7.1 trillion by 2020.

The valuation of technologies in the emerging IoT ecosystem will largely depend on the revenue models around data monetization through control of he IoT data value chain. It is becoming clear that controlling the data value chain from the point of data collection to the point of data analytics is key to unlocking these value creation opportunities. Hence, companies proceed through acquisitions to get better control over the value chain. Google’s $3.2 billion acquisition of Nest Labs, followed by the recently announced $555 million acquisition of Dropcam, granted Google access to home data collection endpoints through Nest’s growing inventory of home automation devices and Dropcam’s home security cameras.

There are several areas where IoT data analytics can increase original equipment manufacturer (OEM) profitability and create new revenue opportunities, including longer asset uptime, enhanced customer experience and reduction in maintenance and service costs. As seen from GE’s launch of its Industrial Internet platforms in 2012 to airlines, energy companies, hospitals and other industry segments, there are some interesting opportunities related to the value creation associated with data in the IoT ecosystem. These opportunities exist not only in the industrial space, but also in consumer-facing IoT applications such as home automation and wearables, as well as in industries such as agriculture.

Putting privacy and security concerns aside, data represents the promise of new economic benefits that are only possible when big data is leveraged in big ways.

To read the full blog, published on IAM Magazine, click here.

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