a company called USco may sell its headquarters building to a real-estate enterprise REco, with a provision that REco will lease the building back to USco (see the figure here). If USco receives a fair value for the building, USco’s total tangibles remain unchanged until it starts spending the money it received for the sale. REco may offer an attractive lease because it is located in a taxhaven. an additional strategy by USco is to set up REco so it remains under the control of USco, also its tenant. Nobody moves, and few employees would notice any change. there may be a new brass plaque on the building and a sign saying “Reco” on the door to the rooms housing the people who maintain the building. USco’s consolidated annual report, delivered to its shareholders and the IRS, needs to list only the name and location of the controlled subcorporation REco; the assets of both are combined. Since the lease receipts and payments cancel out, the more complex financial flow is externally invisible. Property Rights

Rights to iP sold to an offshore subcorporation.

usco

Convert Property
to cash
minus rents
rents price

owner
tenant

new owner

reco

 

gains due to having and using IP.

Definitions. Since the revenue aspect of software economics has been ignored in CS curricula, this article introduces several concepts from the literature of business economics and IP generation and exploitation. 25 Within the context of software, many general definitions can be simplified; for instance, manufacturing costs can be ignored, since software products are easy to copy. The cost of equipment is minor when developing and producing software. For tangible products (such as computers), material costs are significant, but for software the cost of tangible media is negligible. The value of software is hence assignable solely to the intellectual effort of its designers, implementers, and marketers. Even the content of a tangible master file and the content in the memory in a cellphone is an intangible. Everything inside the dashed lines of Figure 1 is intangible; only the money surrounding it is real.

If an owner of software protects
that ownership, the software is consid-
ered IP. To protect its IP an enterprise
would disallow purchasers of copies
to make further copies that might be
sold. The means of protection vary,
including asserting copyrights, reg-
istering trademarks, making copying
difficult, only releasing binary images
of the code, and threatening prosecu-
tion. The IP held within the owning en-
terprise is primarily protected by keep-
ing the source code secret.

Without protected IP, a company’s income would be at the routine level provided by commodity products, with margins after production and distribution of, say, 10%, insufficient to invest in innovation. Having IP without a knowledgeable staff to exploit it is equally futile. 17 When a high-tech company is acquired, senior staff are typically required to remain until its processes are solidly embedded within the purchaser. Even a startup, with no identifiable IP, will have some specific ideas and concepts in the minds of its founders that form the seeds of growth. Time and money are required for such seeds to mature into IP and then into salable products, a delay referred to as “economic gestation time” or “lag.” 30

Protected IP and staff knowledge and expertise within a company are the intangibles that together represent the enterprise’s IP. The employees who know how to exploit it complement the IP; such integration is essential for success. The combination of labor and IP leads to non-routine profits. The margins are then typically greater than 50%, even after spending on R&D, allowing further investment and growth.

iP and Jobs

All subsequent developers on a software project benefit from the work that has gone before, that is, from the IP already in place. That IP complements the knowledge due to education and prior experience new employees bring to the job.

The importance of IP to employee productivity becomes clear when companies grow to a size that offshore-outsourcing of jobs is considered. The new offshore workers, whether testers providing quality assurance, maintenance programmers, sales staff, or call-center employees, receive material representing IP that exists in the parent company at the time. Offshore researchers also build on requirements for innovation and the experience collected by the parent company.

 

splitting intellectual capital Intellectual capital is the know-how of the work force and the IP it has generated. As a company matures its IP grows and becomes its major asset. Risk of IP loss due to employee turnover be-