FIRRMA and its Impact on That Which it Seeks to Protect

The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) was signed into law by the current Administration on August 13, 2018, to protect US technological superiority and address national security risks associated with the ability of foreign parties to obtain equity interests in domestic businesses and influence decisions or obtain information related to critical US technologies. However, FIRRMA poses a threat to a wide range of innovative industries, including Biotech, Aerospace, and Nanotechnology, by adding increased governmental scrutiny that may restrict the funding needed by entrepreneurs seeking to build the next-gen technologies. Without the funding necessary to take the risks necessary to develop these next-gen technologies, FIRRMA may erode the technological superiority it seeks to protect. Moreover, the pace of innovation in other parts of the world may increase as corporations are free to accept the investments that US companies are denied because of FIRRMA.

FIRRMA is designed to reform and modernize the review process of the Committee on Foreign Investment in the United States (CFIUS) and gives CFIUS authority over technology transfers. FIRRMA modified and broadened the power of the president and CFIUS by expanding the scope of foreign investments in the US subject to national security review. CFIUS’ authority applies to the technology transfers of US businesses to foreign organizations as well as domestic organizations that are controlled by a non-US person. While FIRRMA will not be fully implemented until February 2020, the US Department of the Treasury issued temporary regulations in October 2018 through a pilot program to address what it considers to be critical American technology and intellectual property from potentially harmful foreign acquisitions.

The pilot program implements two sections of FIRRMA that did not take effect upon FIRRMA’s enactment. The first section expands the scope of transactions subject to review by CFIUS to include certain investments involving foreign persons and critical technologies. The second section makes effective FIRRMA’s mandatory declarations provision for all transactions that fall within the specified scope of the pilot program. The regulations state that the pilot program establishes mandatory declarations for certain transactions involving investments by foreign persons in certain US business that “produce, design, test, manufacture, fabricate, or develop one or more critical technologies.” The language of the temporary regulations may be concerning to businesses seeking investment due to the broad language it contains and without these investments, there will be a negative impact on the types of R&D efforts that facilitate the creation of innovative technologies that generate intellectual property portfolios that can be licensed.

The regulations also state that the purpose of the pilot program is to assess and address ongoing risks to the national security of the US resulting from two urgent and compelling circumstances: (1) the ability and willingness of some foreign parties to obtain equity interests in US business in order to affect certain decisions regarding, or to obtain certain information relating to, critical technologies; and (2) the rapid pace of technological change in certain US industries. While the regulations state that the current Administration “supports protecting our national security from emerging risks while maintaining an open investment policy,” it is unclear how this Administration will utilize this program and how it may impact funding in the US and the downstream impact that this lack of funding may have on IP licensing. In the first quarter of 2018, net foreign direct investment into the US has declined from $146.5 billion in the first quarter of 2016 to $89.7 billion for the same quarter in 2017 to $51.3 billion for the first quarter of 2018.  While most of the decline is attributed to general economic factors, many believe that it also reflects fears of what the administration is going to do given their stance on China and the threat of trade wars and tariffs.

The expansion of CFIUS authority over investments through FIRRMA may lead to decreased interests from foreign individuals, business, and funds that, in part, created an environment for US businesses to secure the technological superiority this Act now seeks to protect. If that is the case, we may see significantly less investment in the industries covered by the pilot program which includes many industries at the forefront on IP licensing activity such as: Computer Storage, Semiconductor, Battery, Aerospace (Aircraft manufacturing, Space Vehicles and Propulsion), BioTech, Wireless Communication Equipment and Nanotechnology.

It is too soon to know the impact FIRRMA will have on US businesses that seek investment to fund the type of research and development necessary to maintain the pace of innovation that led to the US holding a strong position in technological advancement; however, given the current decline in funding, there is a real possibility that these new regulations that are being imposed on US innovation companies may further restrict the funding necessary to drive the US technological superiority that FIRRMA was created to protect.

When Big Iron Meets Big Data: Unlocking Value Creation Opportunities in the Internet of Things – Industry Report

Efrat Kasznik Foresight ValuationThe physical world is becoming an information system, where connected objects and devices can both sense the environment and communicate data. The global enthusiasm surrounding the ecosystem known as the ‘Internet of Things’ (IoT) has positioned data as one of the most valuable intangible assets that a company can own and monetise. 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. IDC expects the number of installed IoT units to grow at an annual rate of 18% to 28 billion units by 2020.

The valuation of technologies in the emerging IoT ecosystem will largely depend on the revenue models around data monetisation. The IoT data value chain, described by McKinsey in a recent IoT study as “sensor driven decision analytics”, includes the following elements:

  • Sensors and actuators are embedded in physical objects;
  • The objects are linked through wired and wireless networks;
  • The networks churn out huge volumes of data;
  • The data is analysed using data analytics platforms and applications; and
  • The analytics generate actionable decisions, which flow back into the IoT ecosystem.

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. This is key to understanding the valuation of recent large IoT acquisitions, such as Google’s $3.2 billion acquisition of Nest Labs. Google augmented its data analytics capabilities by acquiring control of the physical objects that collect the data. The acquisition granted it access to home data collection endpoints through Nest’s growing inventory of home automation devices.

One of the early leaders in IoT data analytics and monetisation is General Electric (GE), which developed advanced capabilities around the data collected through its vast network of industrial deployments referred to as the ‘industrial Internet’. At a recent conference in San Francisco, a speaker from GE Intelligent Platforms – the business unit responsible for GE’s IoT data analytics efforts – described how competition from small original equipment manufacturer service operations pushed the industrial giant to take the plunge into big data analytics. According to GE’s 2013 annual report, service revenues represent 75% of GE’s industrial backlog and 75% of its industrial earnings. Seeing the threat to its service revenues segment from smaller service operations, GE originally launched a massive data collection effort which aimed to leverage data as a strategic asset that cannot be replicated by smaller competitors or, in GE’s own words: “merge big iron with big data to create brilliant machines”.

There are several areas where IoT data analytics can increase original equipment manufacturer profitability and create new revenue opportunities, including longer asset uptime, enhanced customer experience and reduced maintenance and service costs. GE started launching its industrial internet platforms in 2012 to airlines, energy companies, hospitals and other industry segments. According to company reports, the products have brought in $290 million in revenues and another $400 million through the end of 2013. The examples below illustrate some of these data platforms and their benefits in different industrial areas:

  • Transportation – RailConnect 360 collects and analyses performance data during locomotive operations, automating diagnostics to enable optimal and proactive repairs and advanced planning of resources and materials for building, running and routing locomotives.
  • Energy management – Grid IQ Insight provides utilities with advanced analytics of data collected from equipment along the grid to predict, manage and forecast potential problems that a utility’s electrical grid may face. The software monitors data (eg, electrical usage, grid performance and weather) to lower operating expenses and increase revenues.
  • Aviation – Flight Efficiency Services collects real-time data generated by an aircraft and analyses it to improve an airline’s overall efficiency in four areas: fuel management, flight analytics, navigation services and fleet synchronisation.

As seen from these examples, 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.

Revisiting Patent Valuation: Lessons Learned from Toilets, Singularity and the Triple Bottom Line – Industry Report

The Singularity University in Silicon Valley has an ambitious mission when it comes to educating its international, diversified student base: the 10^9 challenge, which involves developing ideas that improve the lives of at least one billion people over the next 10 years. In the eyes of visionary founders Ray Kurzweil and Peter Diamandis, these large-scale, ambitious ideas on the critical path to solving world problems should be top of mind for innovators worldwide. Looking at patents through the ‘Singularity’ lens, it quickly becomes clear that high patent value does not always correlate to the magnitude of the underlying innovation. On the contrary, many valuable patents today derive their value from the size of the product market employing the underlying invention, which might be a very small and marginal feature whose value can be traced back to a few words in the patent claims. That type of analysis is focused on ‘enforcement valuation’ based on the breadth and coverage of the claim language, as opposed to the magnitude of the problem that the invention is addressing. The questions then become whether patents are valued the right way and whether there is a better way to measure the value of patents that would reflect the impact of the underlying innovation on people and markets. Continue reading “Revisiting Patent Valuation: Lessons Learned from Toilets, Singularity and the Triple Bottom Line – Industry Report”

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