DisneyLand Paris, Too Big to Fail ?

posted Oct 16, 2015, 9:27 AM by Julien Pillot


In a recent article titled “The Social Cost of Dishonesty”, we showed how imperfect markets—for example, where some parties have more information than others—require the intervention of impartial authorities to adjust the balance of power and maximize the public good. The social cost of dishonesty is even higher when such authorities are absent or when they’re captured by economic, corporate or electoral forces. We concluded with a number of questions that these issues raise in the worlds of journalism and finance.

In this article, the matter at hand is the ability of independent authorities to discipline a publicly traded company, Disneyland Paris, that is possibly being managed solely in the interests of its majority shareholder, The Walt Disney Company.

The agency theory, developed in the pioneering work of Michael Jensen and William Meckling, asserts that honest and efficient corporate governance, through properly designed incentives, can reduce the risk of one party’s making decisions that are contrary to the collective good in order to maximize its own interests.

Good for me, not so good for you

In financial economics, such “harvest strategies” often crystallize around obvious conflicts of interest, which can increase the risk of moral hazard or adverse selection. When corporate management fails to correct such problems, it is the responsibility of outside authorities to restore a level playing field or, if necessary, sanction any misconduct or market abuse.

In the case of Disneyland Paris, the risk of conflict of interest is obvious given that The Walt Disney Company (TWDC) is simultaneously its largest shareholder (39.8%); the holder of the park’s license, for which it collects generous royalties (€61.9 million for 2014 alone); its sole supplier, with no possible competition for new rides, decorative elements, etc; and, since the company was restructured in 2012, its sole creditor. Note that TWDC also controls 51% of the consolidated variable interest entities.

Suffice to say that from the beginning, TWDC has been in full control of the choices made by its French subsidiary, allowing it to set the broad strategic objectives, make crucial decisions, determine the level of royalties and even appoint members of the executive board (which are often employed by TWDC itself). At the same time, the company is unlikely to be exonerated of structural losses of the consolidated group or avoid its legal or moral obligations.

This being the case, it’s illuminating to look at Disneyland Paris’s corporate governance. The manager (in this case, TWDC) is remunerated on the basis of a fee set at 1% of annual turnover (€12.9 million in 2014), to which are added royalties for the use of intellectual property that vary between 5% and 10% of turnover depending on the products and services in question (this constitutes nearly 57% of the park’s net losses over ten years). To this one we can add the considerable advantages that the European amusement park gives TWDC for its service activities (merchandising, video-on-demand subscriptions, film receipts, etc) as well as the boost that the park’s colossal advertising and PR expenses (nearly 10% its annual revenue) provide to its galaxy of affiliates (Disney Hachette Presse, The Disney Store, as well as TWDC France via the Disney Channel and DVD publishing).

It should be noted that the CEOs appointed by TWDC in recent years have succeeded in boosting both Disneyland Paris’s attendance (up 18.3% since 2000) and its sales (up 33.4%). But at the same time, the park has shown an annual profit just once, in 2008, and then only because of the sale of assets.

Royalties or profits?

From the economist’s point of view, this intriguing situation—in which growing receipts are accompanied by rising deficits—has only one possible explanation: rising marginal costs bear witness to diminishing returns from the goods and services sold. In other words, under Disneyland Paris’s business model, each new customer costs more than he or she brings in.

Moving from this realization to suspecting that Disneyland Paris is subsidizing its customers for the sole purpose of artificially increasing the company’s turnover, paying hefty royalties to its parent company (suspected to pass through Luxembourg in complex tax-avoidance scheme) and devaluing its stock price (down 95% since 1989) so that it can cheaply buy back shares is not a great leap. It is one that Charity & Investment Asset Management (CIAM) did not hesitate to make. This month it filed a complaint with France’s Autorité des Marchés Financiers (the equivalent of the SEC in the US) and others demanding €930 million for damages suffered by minority shareholders because of biased actions taken by the park’s management.

While it is not for us to play the judge in this case, there does seem to be a preponderance of evidence from an economist’s point of view. Who benefits from the crime, after all? The intentional increase in Disneyland Paris’s turnover has allowed TWDC to reap substantial returns. The park’s repeated financial losses and the endless fall of its share price have, in turn, paved the way for the buyout of third parties: the park’s creditors in 2012, and a substantial portion of minority stockholders in 2015 after yet another recapitalization. This now gives TWDC ownership of nearly 82% of the company’s shares. At the same time, remaining minority stockholders—for whom the payment of hypothetical dividends now seems like a fever dream—received a proposition from Disney for a mandatory buy-back at €1.25 per share. CIMA has challenged this calculation, which it said intentionally undervalued the company. 

A good source of taxes

During this time, the French government examined its own situation with Disneyland Paris. It has no hope of tax receipts on nonexistent corporate profits and had already provided an endless series of gifts to the US company, including subsidized infrastructure, 4,800 acres of land sold at cost and loans at sub-market rates. In this situation, does it still have the ability to discipline—should such a thing happen—a company that pays millions of euros annually in local taxes and VAT, provides thousands of direct and indirect jobs, and which constitutes one of the top tourist destinations in France?

And even as this question reminds us of the debates around corporations that are so large or important that they can’t be subject to any decisions or actions that might weaken them—the famous “too big to fail”—the words of French playwright Jules Renard resonate: “It would be beautiful indeed to see an honest lawyer request the conviction of his own client.”

The Conversation

This article was originally published on The Conversation. Read the original article.

The secret of successful market launches: Passion!

posted Jan 20, 2015, 6:07 AM by Julien Pillot




In the age of Internet and overconnectivity, traditional marketing mix models appear increasingly inadequate to reveal the secret of successful product launches. What about passion?
 

"The Force is with you on #BlackFriday when #TheForceAwakens teaser hits @iTunesTrailers". 

This was the tweet (dated November 26) dedicated to all Star Wars fans following the official information feed. It should be said that the 7th opus of the Skywalker’s family galactic adventures – expected by the end of 2015 – provokes so much impatience than the introduction of a new Apple product. Aficionados made no mistake: viewed more than 100 million times in less than 10 days, the present trailer is nothing less than the most watched trailer of all time.

This is, for sure, a nice marketing ploy by Disney and Lucasfilm teams, able to turn the release of a simple trailer into a worldwide event. Upon closer inspection, such passionate and successful market launches reveal a major strategic dimension still denied by most of the traditional marketing mix models.

In essence, rollout strategies are of high importance for firms. Indeed, the long term market potential of many products and services is often revealed after the first few weeks of commercialization. When a new product quickly finds its public, not only are previous R&D choices validated, but reasonable return on investment becomes plausible. Yet it is precisely these returns which allows firms to reduce the sales price, yesterday’s novelty becoming progressively a commodity on which it is worth to capitalize on the long run through regular incremental innovations.

But then, what is the secret of successful product launches? Obviously, there is no single / right answer to such a question since every product and business is subject to its own (quickly or slowly) market penetration cycle. Let’s mention, for instance, electric vehicles. Despite few units sold in Europe, it would be probably short-sighted to present the Renault Zoe as a commercial flop. Indeed, making the electric vehicle a credible market standard engages car manufacturers in a race analogous to a marathon, not a sprint. In this particular case, promoting the product (e.g. creating the product awareness) and letting drivers try it on a larger scale, is already an effective rollout strategy. Because, car manufacturers are aware that only the prescription effect (on the long run) and policy incentives are likely to ensure favorable conditions to a true paradigm shift.  

The situation is clearly different for innovative products dedicated to the mass market and characterized by rapid obsolescence. Far more than on any other market, undertakings must prove capable of ingenious and inspired orchestration of their product launches. That can be achieved only by the development of a strategic multi-channel communication plan, specially adapted to the forthcoming product. However, the logic behind the enthusiasm and the excitement flowing from the announcement of a new version of the iPhone often exceeds the framework of traditional marketing mix models.

In such a context, the McCarthy 4P’s classification (Product / Price / Promotion / Place) – still too widely delivered in its most basic form in Universities and Business Schools – seem inopportune to take proper account of the actual reality (and complexity) of medias. One might argue that the model comprises a “Promotion” category (which encompasses, in a nutshell, elements such as sales organization and promotion, advertising, public relations, etc.), but in our view, it would be unwise to assess the potential effectiveness of a market launches by this sole yardstick. Admittedly, Promotion is an important element of rollout strategies, especially when the innovator embraces the new information technologies and networks such as media non-media channels, street marketing, webseries, and other viral and social marketing plans.

Nevertheless, the secret of a successful launch cannot lies in the sole firm’s capacity to over-communicate, because otherwise history would not be littered by such major failures than the Microsoft’s Zune, the France Telecom’s Bi-Bop or the Renault’s Twizy. A huge range of products ill-suited to the needs of their times, swiftly outmoded by competing offers… despite vocal promotional campaigns and the high credibility and prestige of the abovementioned brands.

That’s why we argue for the addition of a brand new « P » to the McCarthy’s classification: the “P” for “Passion”. In the area of experience marketing, the customer 2.0 is more than ever in search of meaning as recent history shows: from Beats to Apple, including Mercedes, brands used to success in launching new products are precisely the ones able to write their own legend and to tell consumers a great story. Such impassioned consumers are then ready to accompany the new product, from the teaser to the official release and beyond, and to become the front-line ambassadors of the brand…  In a word, innovative firms should remember Fredriech Hegel words: “nothing great in the world has ever been accomplished without passion”.

Read the French version on Les Echos in clicking on the image below
Article on lesechos.fr

Euro Disney and the agency theory - What if the firm's governance profile was the true reasons of a financial fiasco?

posted Dec 18, 2014, 2:04 PM by Julien Pillot


Here comes a brand new paper published on the website of the French leading economic newspaper : Les Echos.

Abstract :

On January the 13rd, Euro Disney shareholders will be asked to vote a new recapitalization plan. The third in just 23 years of operation !!! Behind the smokescreen of several loss-making years lies a complex business model as well as a governance profile likely to grant a single shareholder the abitily to benefit from unwarrented earnings. The present case is analyzed through the "agency theory" prism.

Whish you pleasant readings :)


(click on the image below to access the article)

Article on lesechos.fr

The hidden side of break-ups and other strategic moves in the IT sector

posted Oct 27, 2014, 8:28 AM by Julien Pillot   [ updated Oct 27, 2014, 11:07 AM ]

Very few industries appear as turbulent as the IT sector. To a greater extent than most businesses, IT firms are involved in the endless quest for innovation and strategic nimbleness. These fundamentals have a special general resonance with the current expansion of cloud computing and mobile Internet. In a sense, such innovations could be seen as “disruptive” within the meaning of Mackay and Metcalfe: these are new technologies, presenting attributes initially unfamiliar to consumers and undertakings, involving new uses and behavioral changes, and which requires major changes to infrastructure as well as a shift in market structures.

First stage of the rocket: to face such a significant paradigm shift, Big IT firms are looking for more agility and flexibility. Smaller businesses are, indeed, much more suited than Biggies to face the acceleration of technological change: lesser organizational constraints improve their responsiveness while greater proximity with consumers leads to higher product (or service) relevance and sound knowledge of latest trends. Furthermore, small-but-successful undertakings embrace highly-skilled and engaged coworkers, and perfect command of top-of-the-art technologies.

Top stage of the rocket: Biggies need fresh money to reassure financial markets. In a context of high capital volatility, risking shareholders' annoyance is not an option! In a sense, the collision between such a paradigm shift and the need for flexibility is a perfect "excuse" to force IT firms to operate some profitable break-ups. The reasons are twofold: either this is a way to capitalize on former successful acquisitions (e.g. eBay breaking-up with Paypal), or this is a means to disengage from underwhelming entities (e.g. the probable break-up between Symantec and Veritas). As a result, the IT sector is in ferment. In addition to the abovementioned break-ups, let’s mention in a nutshell:

  • The recent announcement of HP to divide itself into two entities. The former, HP Inc., will make computers and printers, while the latter, Hewlett-Packard Enterprise, will supply businesses with hardware and software and services (formerly EDS) ;

  • The announcement of JDS-Uniphase to split into on unit making optical materials and commercial lasers and another manufacturing network-testing equipment ;

  • The activist pressure on EMC to give-up its majority shareholding position in Vmware ;

  • Similar pressure on Cisco Systems ;

An astute observer will nevertheless notice straight away that the de-merged groups took particular care to give every entity a critical size to remain autonomous and competitive. For example, once achieved, HP’s break-up will create two “little giants”, each worth more than $50 billion annually. Evidence, if any, that such break-up are subject to the condition that de-merged entities remain in capacity to resist to future hostile takeovers. Despite these precautions, the insatiable appetite of other IT specialists such as Microsoft, Facebook, IBM or Google, bode well for a new wave of mergers and acquisitions. Basically, this wave will follow two different schemes:

  1. The strengthening of the ongoing concentration process in certain segments of the IT industry. Let’s mention, for instance, the recent strategic moves of IBM, Microsoft, Oracle, HP and Cisco to acquire, to divert extent, numerous small/medium businesses delivering network facilities, data centers and cloud solutions. It is now obvious that the cloud computing market and the one for associated business services are oligopolistic by nature. Biggies’ strategic challenge is to reach a critical size to take advantage, as fast as possible, of the network effects inherent in closed-user group service systems.                                                                                                                                                                                                                                                                          

  2. Strategic acquisitions of innovative start-ups which control highly valuable assets and technologies. Also, recent acquisitions of Twitch (bought by Amazon for $970 millions) and Whastapp (purchased by Facebook for $19 billion) remind us how much IT champions are likely to pay for audience-makers. With this new technologic paradigm comes new “essential facilities”, e.g. inimitable assets likely to give their owners an incontestable competitive advantage. Let’s imagine a situation in which the operation of a data center requires a very specific technology (with no substitutable asset is available at this time), then the owner of the said technology is de facto able to settle a monopoly price to its licensees.

In the second scheme lies the true epicenter of the upcoming battles in the IT sector: a merciless war for essential patents and technologies (read our previous developments relative of the patents war between Apple and Samsung). The discussions between HP and EMC – which have recently leaked in the economic press – can be seen as the will to reposition HP as a pure technological leader in the cloud computing sector. Even more interesting would be (if the present merger was to be completed) the timing of the takeover, materialized immediately after the group break-up.

Of course, all these developments are pure speculation… However, (re-)creating 2.0 champions on remnant materials of the 1.0 IT sector is the great challenge ahead for most of the alert, nimble and innovative entities flowing from the abovementioned break-ups. In such a turbulent sector, contesting the position attained by firms like Google (Search and Mobile OS), Apple (Mobile devices and software), Microsoft and Oracle (Cloud computing and software) looks like a Herculean work. Especially as the latter are also in the best position to develop (or purchase) the so-prized essential facilities…

(Photo Credits : The Break-Up, Universal Pictures, 2006, all rights reserved)

No, Tesla is (definitely) not turning its back on the patent system!

posted Aug 22, 2014, 12:08 PM by Julien Pillot   [ updated Aug 22, 2014, 12:09 PM ]




Today seems the perfect day to contrary the worn-out idea that patents actually hinder innovation. Such an awkward but widespread view mainly flows from some recent cases of patents misuse and abuse (patent wars, patent trolls, ...) largely reported in the news and – to some extent – likely to delay productive investments and eventually stifle innovation. However, it should not be forgotten that the very rationale of Intellectual Property Rights (IPR hereafter) is to grant innovators the exclusive right to make, use, or sell an invention for a limited period of time. As every economist does know, such a system rewards innovative firms for disclosing in-house innovations (which are most of the time the outcome of a long and costly research process) and, as a result, contributing to scientific and technological progress. In this way, the legal monopoly power provisionally conferred by the IP system to patent owners is no less than the appropriate incentive to spur global innovation and growth. No matter how damaging and mind-bending are Samsung/Apple lawsuits, some rare cases of patent disputes are by no means unlikely to challenge the global efficiency of the IP system.

 

But, you say, why such a sudden and imperative need to set the record straight on the virtues of the patent system? Quite simply because my summer readings have once again been affected by an impressive number of papers commenting on what Elon Musk, Chairman and CEO of Tesla Motor, published in June on the company’s blog with the arresting heading : “All our Patent Are Belong To You”. For most of economic experts, media and bloggers, Musk’s words depicted Tesla’s will to make its patent freely available to whomever wants to use them, including rivals. In suggesting that Tesla would let its patents fall in the public domain early, all these knowledgeable commentators of the economic life could not have been more wrong. Seriously, could you see a single reason that a listed company would like to waive its IP rights? Why should a listed firm invest millions of dollars in R&D and patenting without a return? No, Tesla is definitely not denying its IPRs, no matter what self-appointed experts says !

 

Musk’s announcement is nothing less than a strategic and commercial move whose purpose is to clarify Tesla’s competition policy regarding IP and licensing. In a sense, Musk could have summarised his statement to a single phrase that almost every experts failed to notice : “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology”. In this context, “in good faith” means that Tesla Motors will now allow third parties to use its patented technologies on condition that users undertake not to produce replica of Tesla’s cars or to sue Tesla for patent-infringement (assuming that Tesla eventually uses their other patents). Though this announcement, Tesla actually openly invites third parties to enter into cross-licensing agreements, e.g. agreements between two companies to licence one or more patents to each other with no financial counterpart.

 

Behind the smokescreens of intense patent disputes (to whom press gives a great deal of coverage), such a commercial deal is pretty classic in innovation industries. From an economist’s perspective, and potential collusion problems put apart, cross licensing of old technologies has to be encouraged. Once most of the monopoly value of old technologies has already been extracted by the patent owner, cross licensing appears to be the most efficient way to accelerate the diffusion of innovations and to reduce R&D costs. Basically, cross licensing promotes innovation and stimulates competition. Tesla is no more a start-up seeking to defend the exclusive use of its old patented technologies at all costs, but a dominant firm looking to improve its products through technological partnerships. Musk acknowledge that to sustain its leadership, Tesla needs to acquire (eventually for free) complementary technologies and should not waste its resources in long, complex, costly and uncertain legal disputes.

 

It’s a pity that economic experts and journalists felt into the trap of sensationalism in making headlines on Tesla’s appeal for a urgent patent reform or Tesla’s unreserved eulogy of the open source system. In my opinion, the worthy story to tell was – by far – the one of a successful company that is now adapting its strategy to cope with new development challenges. As every innovative firm seeking for competitiveness in the long run, Tesla has to find a business model corresponding to its size, intentions and ambitions. No, Tesla is definitely not turning its back on the patent system, but rather the opposite : Musk’s firm will now exercise its IPRs to the fullest extent of the patent law. Because IPRs are more than ever the best (renewable) fuel for innovation and growth !!!



Precepta (Xerfi Group), 7 months later...

posted Aug 6, 2014, 8:09 AM by Julien Pillot   [ updated Aug 6, 2014, 8:09 AM ]




After (too) long lethargic months, now is the time to finally dust off this website. There is a simple reason for my long silence : last January, I quit most of my academic duties to join Precepta (Xerfi Group) as full-time Senior Business Analyst and Head of the Media Division. As the French leading institute in sectorial analyses and market strategies, Precepta gives me the chance to further explore my passion for supply-side economics, especially innovation and private strategic moves in a changing world.

At first, such a U-turn left very little time to fed this website with up-to-date information ; and even now that the “cultural acclimation” to my new job is done, I cannot be sure to be able to update the highlights session as often as in the past. So, “wait & see” is more than ever on the agenda.

By the way, I would like to use this post to announce the imminent launch of a brand new session on this website. Currently under construction, the forthcoming “Precepta Studies” page will soon present the key insights of all the studies conducted by myself for Precepta. This session will also include video teasers, short summaries and, of course, commercial links (because everybody has to eat, right?! ^^). I wish you further stimulating reading of these pages.

That’s it.

It just remains for me to wish all of you great summer holidays.

 

What can we learn from the acquisition of Nokia by Microsoft?

posted Oct 2, 2013, 3:08 AM by Julien Pillot


In this brand new publication for EconomieMatin.fr, I aim at decrypting strategic moves in high-tech sectors through the lens of the recent acquisition of the Mobile Division of Nokia by Microsoft. In a nutshell, the present article :

1/ shows how (and to what extent) industrial economics can be predictive ;

2/ explains the rationale of current and future moves - mainly concentration and vertical integrations - on the smartphones market ;

3/ draws some lessons from later experiences in high-tech industries, especially as regards to efficient ways to manage innovation.   

I wish you compelling reading (click on the image to access the article).

The hidden stakes and challenges of patent wars

posted Aug 27, 2013, 5:04 AM by Julien Pillot


Although patent litigations are commonplaces in innovative industries, there is very little occurrence of cases whose fame spreads beyond the borders of Courts to reach and interest a wide audience of non-specialists, from users to politicians. The ongoing patent war which involves the main smartphones manufacturers (especially Apple and Samsung) – culminating in the veto ruled on August 3 by Barack Obama over a decision held by the International trade Commission (ITC) –ought indubitably to be put in this category. Behind such legal disputes lie massive economic stakes which provide little ground for rapid resolution of a systemic conflict.

 

An exceptional measure for an exceptional conflict? President Barack Obama’s intrusion in the legal conflict between Apple and Samsung – that seeks to overturn an ITC decision adverse to Cupertino’s interests – is a fine evidence of the economic and somewhat politic importance of the patent war. In essence, the vetoed decision provided an import ban in the US of Apple products that infringe Samsung’s patents. There is no intending to comment Obama admin’s decision here, while most of the experts would like to see in this veto protectionism tendencies. Rather, this article aim at shedding a specific light on the real stakes hidden behind such a global and systemic legal battle which directly or indirectly involves every multinational technology and software corporations (Apple, Samsung, Microsoft, Nokia, HTC, Motorola, RIM, etc…). This must be done through a two-step analysis.

 

Hindering competitors

 

In the suitable identification of the different markets impacted by the patent war probably lies the first instinct of the economist seeking for the real motives of such legal quarrels. In the present case, the economic dimension of the conflict is much larger than the sole smartphone market and encompasses the wider sector of wearable connected devices. As a preliminary point, it is worth to distinguish the smartphone market from the operating system (OS) one. 

 

Presenting an over-increasing number of connected mobile devices (smartphones, tablet PCs, while smartglasses and smartwatches are coming) whose worldwide sales tend to overshoot the ones of traditional computers (including laptops), saying that the device market skyrockets would be an understatement. However, most of the added value does not flow from this market but from ecosystems (mobile apps and commerce) for which devices are just the gateway. Although inter-related, the number of connection requests via a certain type of OS or internet browser is now seen as a major performance index just like sales of devices and softwares. Indeed, built on mobile operating systems (mainly proprietary such as iOs, Android, Windows Phone 8, etc.) featuring some interoperability restrictions, these ecosystems grant manufacturers (of both mobile terminals and compatible accessories) and apps developers’ the adequate alignment of their objectives. As for the consumer, he is basically urged to acquire ecosystems-friendly devices in order to benefit from network effects. It is therefore not surprising to observe the fierce competition in which manufacturers are engaged to make their ecosystem dominant: once the consumer has entered the ecosystem, he will probably “stay” for a long period. Each new specific (irrecoverable) investment made during this period tends to increase the switching costs and, then, strengthen the lock-in effect.

 

As an integrated operator, Apple is active on the two complementary sides of the market. As for Samsung, albeit not an exclusive supplier of Google products (such as Android), the Korean firm is now Mountain View’s first growth driver on the OS market, so that commercial successes of the former on the devices market partly found the leadership on the latter on the OS market. Then, it is not unconceivable to consider such a patent war as series of proceedings which does not aim so much to assert IPRs than hindering rivals’ competitiveness in strategic markets. Actually, the global dimension of the conflict, in which majors bring lawsuits in the world’s largest marketplaces (USA, Japan, South Korea, France, Germany, Great Britain …), has probably to be seen as forum shopping, e.g. a practice adopted by plaintiffs to have their legal cases heard in the court thought most likely to provide a favorable judgment. One might see in such overexposed proceedings a sort of nuisance suits whose main objective is to obtain rulings likely to significantly hinder rivals’ market strategies (damages, products’ ban…) as well as harming their image and reputation.

 

Although the strategic significance of achieving a dominant position in industries characterized by strong network effects is now well established (Windows is a perfect example), patent wars are nonetheless destructive schemes for undertakings’ resources… which will not be invested in productive activities. Rivalry on judicial grounds rather than competition on the merits naturally leads the economist to the second stake of such legal battles: the (economic) exploitation of patents known as essentials.   

 

The essential patents case

 

It is indeed necessary to draw a distinction based on the nature of disputed patents. While most of Intellectual Property litigations are about substitutable patents, some of them involve standard-essential patents, e.g. patents that claim inventions that must be used to comply with a given technological standard. In a nutshell, standardization is vastly profitable in high-tech and innovative industries as it can help both to avoid diseconomies and the slowdown in the rate of technological diffusion flowing from format wars. At the opposite, consumers have to accept a certain degree of concentration of economic power and freedom of choice limitations in order to plainly benefit from network externalities.

 

The definition of standards – which mostly results from the pooling of numerous technological patents – is most of the time endorsed by standards bodies. In order to prevent any logjam in the standard-setting process (or the innovation one), the most fundamental patents are referred as “essential patents” and are basically submitted to FRAND licensing. As a reminder, FRAND policies are licensing obligation under which patent holders are required to license third-parties under Fair, Reasonable and Non-Discriminatory terms. The purpose of such policy is to provide innovation incentives. License fees are therefore (and somewhat ideally) set to ensure that third-parties are not excluded from the innovation process while patent holders can take advantage of previous R&D investments. However, a major difficulty flows from standardization since the market value of essential patents is very likely to be disconnected from the value related to the pioneering effort.

 

Indeed, essential patents are technological monopolies which grant holders an important coercion power. Such a power is somewhat an inherent element of the standard-setting process since, once the standard designed and promulgated, the whole production chain will make specific investments (called sunk costs) structured around some essential patents… which results in a rise of the market value of the latter and encourage holders to increase expected license fees (introducing the notions of patent hold-up or patent ambush). Disputes eventually results in negotiations and commitments between parties; resolution of claims before the courts constitutes the exception rather than the rule.

 

Conclude the patent war: looking for the appropriate remedy


This article is mainly about essential patents. To date, the various controls and safeguards put in place by Courts in order to limit opportunistic lawsuits have apparently dropped the ball while legislative arsenals (sometimes very heavy) supposed to prevent patent infringements do not seem dissuasive enough vis-à-vis the huge economic stakes. However, such a latent legal uncertainty distorts competition, curbs innovation and may hinder employment. In a sense, President Obama’s intervention has probably been driven by the importance of these economic stakes. It is nevertheless true that such patent disputes involves economic issues relative to the valuation of innovative efforts for which economics seem the most likely to find suitable and operational solutions. Research works carried out by economists in recent years gave rise to some interesting guidelines to limit patent misuse, from the most restrictive (ex ante contractual commitment on the license fee) to the most “liberal” (implementation of an ex ante auction scheme in which every single bidder indicates its own willingness to pay).    

 

Finally, it is even possible that the appropriate remedy flows from the market itself. Indeed, some undertakings suggest innovative solutions in order to avoid situations characterized by legal uncertainties. For instance, the social network Twitter formed in 2012 a very interesting private initiative named « Innovator’s Patent Agreement » (IPA). This real alternative approach aims at restricting patent misuses. In a nutshell, IPA holds that companies can only use patent for defensive purposes and as the original inventors intended. Although this agreement have already seduced innovative companies (such as Facebook or Foursquare), in the other hand its very recent implementation still does not presume the real impact of IPA on high-tech industries. Whereas the emergence of such agreements is undoubtedly a key step towards business moralization –for which patent abuses might be seen as some of the darkest shortcomings – some major hurdles (including political impulsions, consumers’ awareness, and strengthening of tools both dedicated to economic assessment and legal control) have yet to be overcome. Far from having delivered its verdict, the patent war is still in its early stages.



New Press Release: The Hidden Stakes and Challenges of Patent Wars

posted Aug 20, 2013, 11:26 PM by Julien Pillot

I have been approached in recent weeks by Economie Matin - French famous pure player in economic information - to join their team as an "expert". Published on a monthly basis on their website, my articles will especially (but not exclusively!) focus on competition, Intellectual Property and eco-innovation issues.

Here comes my first contribution for Economie Matin intitled "The Hidden Stakes and Challenges of Patent Wars" in which I stress the economic rationale of global and systemic legal disputes involving essential patents. By clicking on the image below, you will access the French version on EconomieMatin.fr while the English translation will be available soon on these pages.

I would like to thanks the staff of Economie Matin once again for their reception and the opportunity to contribute to making Economics accessible to a wide audience.

Football Economics

posted Mar 6, 2013, 6:50 AM by Julien Pillot   [ updated Mar 6, 2013, 6:51 AM ]

Just click on the picture bellow to read my new article on football economics in which I point out the structural difficulties the French football have to deal with and the limits of its current business-model.



May I thank Jérôme Latta and the entire editorial staff of Les Cahiers du Football for having given me the opportunity to publish on their pages.

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