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Rockstar gives us a lesson in accounting

Simon Crompton

The title of John Veschi’s presentation was not promising. ‘IP and 20th century accounting principles’ hardly suggested stimulating debate. But John, with whom I made up a panel at the IP Summit in Paris this week, surprised us all with an intriguing and highly personal talk

John is the CEO of Rockstar, the company that was set up by a consortium of Apple, Microsoft and others in 2011 to run the patent portfolio it bought from Nortel Networks at auction for $4.5 billion. John argued that IP should be carried on companies’ balance sheets. If it had been, Nortel would not have gone bankrupt.

The problem is that accounting principles do not have any way to recognise the value of IP – unless there is a transaction, such as a sale or licence. The value is not even zero on the balance sheet: it’s not there at all. As a result, CEOs feel no pressure to know the value of their IP.

Explaining a slide showing a typical corporate structure, Veschi said:

Imagine I am the CEO. The board is my wife, and the CFO, general counsel and so on are my children. As with any husband, you can bet that whatever keeps my wife up at night also keeps me up. The audit committee on the board makes sure I know when it is concerned.

But IP counsel only reports into the general counsel, not any part of the board. It is like one of my kid’s music teachers. I’ll talk to her now and again, but she’s hardly a day-to-day concern.

The accounting situation has shaped an entire generation of chief executives, John said: “CEOs today move between companies, and to them the balance sheet of Starbucks looks much the same as Nortel; neither has IP on it. Yet when Nortel was sold, the IP turned out to be 50% more valuable than the rest of the company put together.”

“At one point, we had an opening on the Nortel board, and I suggested that the new person should have some experience of IP. You should have heard the laughs around that room. That seems ridiculous now.”

When I questioned him, John admitted there was no easy way to value IP. There is cost of filing, cost of R&D, revenue from licensing – all are highly inaccurate, but anything else requires highly speculative calculations about the future of the industry concerned.

John likened the problem to that of valuing stock options, which everyone thought was impossible until pressure led to the implementation of the Black-Scholes pricing model. I think that’s a little bit of a stretch – stock options refer to a market, equities, that is highly liquid, relatively stable and well understood. Patents are none of those. Indeed, the fact that Nortel would be highly unlikely to fetch $4.5 billion for its patents today shows how unreliable valuation is.

But the problem is a genuine one that has led to some counter-intuitive results. IP professionals everywhere could do with understanding a little more of the accounting side of what they do.


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