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-