Cs207 2
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1. The document provides instructions for a directed reading course, including defining a topic of study, signing up under the instructor's course section, and draft/feedback deadlines of November 19th and 25th respectively, with a final report due December 2nd. 2. The syllabus outlines topics for the software valuation course, including why software should be valued, open source software, principles of valuation, market value of software companies, intellectual property, and risks of outsourcing. 3. The review discusses how understanding software value allows for rational design and business decisions, and could improve software education by considering quality over quantity in assignments.
![Value
Profit margins are the excess left after
CoGS [Cost of Goods Sold] and business costs
(SG&A, capital cost, tax) are are deducted
Conclusion from last week
If goods are sold based on their manufacturing cost, there
is no accounting for the value added due to their
uniqueness.
If anyone can compete profit margins will be modest.
• Uniqueness has value because it raises profit margins
• Uniqueness in software in not a tangible
07-Oct-11 CS207 Fall 2011 5](https://image.slidesharecdn.com/cs207-2-111026225622-phpapp02/85/Cs207-2-5-320.jpg)
![Software is
slithery !
Continuously updated Life time
1. Corrective maintenance 100%
bugfixing reduces for good SW 80%
2. Adaptive maintenance 60%
externally mandated
40%
3. Perfective maintenance
satisfy customers' growing 20%
expectations
[IEEE definitions] Ratios differ in various settings
07-Oct-11 CS207 Fall 2011 18](https://image.slidesharecdn.com/cs207-2-111026225622-phpapp02/85/Cs207-2-18-320.jpg)
![Topics for paper
• Something your are interested in / wondering
• Value in Apple about
• Value in Microsoft
• Value in Google
• Value in Facebook
• Value in a company you plan to start
• Value of education when starting a company
• Company failures -- real or potential (HP)
• Accounting for intangibles
• 9% income + 9% corp.+ 9% sales tax [Cain]
07-Oct-11 CS207 Fall 2011 19](https://image.slidesharecdn.com/cs207-2-111026225622-phpapp02/85/Cs207-2-19-320.jpg)
Cs207 2
- 1. CS207 #2, 7 Oct 2011 Gio Wiederhold http://infolab.stanford.edu/people/gio.html Complementary Directed Reading Projects: 1. define the topic you‘d like to study and email me a brief memo. I can either provide readings then or we can discuss it further by appointment 2. Sign up for a directed reading course at your level (UG or Grad) in EE or CS. Use my Directed course Section Id, either 17(CS) and 65(EE). The number of units should be about the (number of hours/week you plan on) / 4. 3. Draft due 19 Nov. Feedback from me 25 Nov. Final report due 2 Dec.2010 4. Topics later today. <lost message> 07-Oct-11 CS207 Fall 2011 1
- 2. Syllabus: 1. Why should software be valued? 2. Open source software. Scope. Theory and reality 3. Principles of valuation. Cost versus value. 4. Market value of software companies. 5. Intellectual capital and property (IP). 6. The role of patents, copyrights, and trade secrets. 7. Life and lag of software innovation. 8. Sales expectations and discounting. 9. Alternate business models. 10. Risks when outsourcing and offshoring development. 11. Licensing. 12. Separation of use rights from the property itself. 13. Effects of using taxhavens to house IP. 07-Oct-11 CS207 Fall 2011 2
- 3. Review: Knowing what software is worth • Allows rational design decisions, as Allocating development efforts Programming investment for long-lived SW Understand limit to Software Life • Allows rational business decisions, as Choice of business model Where and when to invest How to assign programming talent • Improve focus of education in software Consider quality, not just quantity in assignments Effectiveness of curriculum 07-Oct-11 CS207 Fall 2011 3
- 4. Economic Loop again 07-Oct-11 CS207 Fall 2009 fall 2011 4
- 5. Value Profit margins are the excess left after CoGS [Cost of Goods Sold] and business costs (SG&A, capital cost, tax) are are deducted Conclusion from last week If goods are sold based on their manufacturing cost, there is no accounting for the value added due to their uniqueness. If anyone can compete profit margins will be modest. • Uniqueness has value because it raises profit margins • Uniqueness in software in not a tangible 07-Oct-11 CS207 Fall 2011 5
- 6. Examples → Gad- Soft- Income allocation get ware 525M 525M Sales revenue = units sold x unit price 140% 162% after Product revenue 375M 325M after Distri- 100% 100% butor Distri- 284M 300M Gross income markup after butor 76% 92% markup Prod- 250M 225M after Operating income uction over- 67% 49% cost head 164M 160M after Net income 44% 42% Mark eting, Research after 154M 154M Admin. Earnings 41% 47% Capital CoGS cost after 100M 100M SG&A R&D Taxes Profit 27% 31% $$
- 7. Quick definitions: Intangibles In a business there are 3 parts that have value (Contribute to potential income) 1. Tangible goods: buildings, computers, working capital 2. The know-how of management & employees 3. Intellectual property: Software, designs, methods, etc. • 2. + 3. make up the Intangible Capital of a company. • Software is an intangible good If it is owned then it is Intangible Property 07-Oct-11 CS207 Fall 2011 7
- 8. Intangibles • Product of knowledge by Cost of original >> cost of copies 1. Books authors 2. Software programmers 3. Inventions engineers 4. Trademarks advertisers 5. Knowhow managers 6. Customer Loyalty Interacts with long-term quality 07-Oct-11 CS207 Fall 2011 8
- 9. Ownership Claimed via 3. Patents 2. Copyright 1. Trade secret More on those issues another day 07-Oct-11 CS207 Fall 2011 9
- 10. Approaches to assess IP • Technical alternatives 1. Income Prediction $ Based on expected sales, life, lag 2. R&D roll-over Based on life and effectiveness of R&D ∫ ×1.? • Broader alternative approaches 3. Market capitalization (Market Cap) Covers everything the shareholders value 4. Comparisons with another existing businesses With other companies based on industry, operational similarity and then check their performance based on ratios royalties gathered, costs/earnings (price/earnings needs market cap) 07-Oct-11 CS207 Fall 2011 10
- 11. Fraction of intangibles • Principle The sum of all future income discounted to today (NPV) Implicitly estimated by shareholders through the market cap • Example: Market Cap value of a company (SAP, 2005) Largely intangible – like many modern enterprises 1. Market cap = share price × no. of shares €31.5B 100% 2. Bookvalue = sum of all tangible assets € 6.3B 20% Equipment, buildings, cash 3. Intangible value per stock market €25.2B 80% Intangible/tangible = 4 x . How much of it is software at SAP ? 07-Oct-11 CS207 Fall 2011 11
- 12. Basis for SW value as of today • Sum of future income Independent of cost Sales = price x copy count Maintenance fees if service subscription • Minus sum of future costs Cost of goods sold Cost of marketing Cost of doing business Cost of maintenance • Discounted to today To account for value of money and risk 07-Oct-11 CS207 Fall 2011 12
- 13. Discounting • Standard economic accounting principle Getting $1 next year is less valuable than getting $1 today. 1. If no risk of getting it later, discount by available interest rate Say 4%, 1-year off is $0.96, 5-year is $0.855, 15 year only $0.542 Formally, use Federal bonds rates for that period 2. If there is a risk - likely in business – use risk experience Say 15%+4%: 1-year is $0.81, 5-year is $0.349, 15 year only $0.042 Tables per industry are available (at a price), based on past experience Discounting has a large effect on income estimates Makes looking into the future less risky 07-Oct-11 CS207 Fall 2011 13
- 14. Market cap : Issues only a hint • Stockholders don’t know what is really going on Wisdom of the masses? Are fed limited information Indirect indicators are delayed: sales by principals • Market cap is unreliable due to high variability Market bubbles mislead Option values are hard to judge • In a multi-product company Allocate income to each product line Over time, many factors should even out 07-Oct-11 CS207 Fall 2011 14
- 15. For that hint: Adjust market cap $M of some company Reduced Market Cap Deal with the argument: “Market cap is due to bubble !” 07-Oct-11 CS207 Fall 2011 15
- 16. A better, direct approach • Value the software specifically by income over its lifetime • But software is not stable over time: Slithery Getting long-term income requires maintenance Maintenance enables long-term income • Much more so than other intangibles Books, music, • Similar to some intangibles that contribute to life Costumer loyalty, trademarks 07-Oct-11 CS207 Fall 2011 16
- 17. Maintenance is beneficial depreciation / year = 1 / lifetime years 13 Lifetime maintenance cost 12 11 10 100% 9 90 8 80 7 70 6 60 5 50 4 40 3 30 2 20 1 10 0 PCs cars software intangibles Typical Life 3years 5 years 12 years 18 years Maintenance 2%/year 5%/year 15%/year 13.75%/year Maintenance cost 6% 21% 80% most over asset life Depreciation 33/y. linear 20%/ y. linear 8%/y. linear 12% geometric 07-Oct-11 CS207 Fall 2011 17
- 18. Software is slithery ! Continuously updated Life time 1. Corrective maintenance 100% bugfixing reduces for good SW 80% 2. Adaptive maintenance 60% externally mandated 40% 3. Perfective maintenance satisfy customers' growing 20% expectations [IEEE definitions] Ratios differ in various settings 07-Oct-11 CS207 Fall 2011 18
- 19. Topics for paper • Something your are interested in / wondering • Value in Apple about • Value in Microsoft • Value in Google • Value in Facebook • Value in a company you plan to start • Value of education when starting a company • Company failures -- real or potential (HP) • Accounting for intangibles • 9% income + 9% corp.+ 9% sales tax [Cain] 07-Oct-11 CS207 Fall 2011 19
- 20. Next Class • Cost of maintenance resources needed • Combine it with income Estimate sales • Subtract costs Sales etc • Discount it all life if well-maintained • Estimate current value 07-Oct-11 CS207 Fall 2011 20