CS 207 1 23 Sep 2011 Gio Wiederhold

CS 207 #1, 23 Sep 2011 Gio Wiederhold http: //infolab. stanford. edu/people/gio. html Gates B 12 1/12/2022 CS 207 fall 2009 CS 207 Fall fall 2011 1

Syllabus: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. The order is flexible Why should software be valued? Open source software. Scope. Theory and reality Principles of valuation. Cost versus value. Market value of software companies. Intellectual capital and property (IP). The role of patents, copyrights, and trade secrets. Life and lag of software innovation. Sales expectations and discounting of future income. Alternate business models. How to grow a software company: organic or by acquisitions Selling or Licensing SW. Separation of use rights from the property itself. Risks when outsourcing and offshoring development. Effects of using taxhavens to house IP. 1/12/2022 CS 207 Fall 2011 2

Topics 2011 For a motivation see Jeff Hawkins: What I wish I’d learned in college <A HREF=“http: //ecorner. stanford. edu/author. Material. Info. html? mid=2289”> Slides from all lectures: Why should software be valued? Open source software, theory and reality. Scope. <A HREF=“http: //infolab. stanford. edu/pub/gio/2010/CS 207 -1. pdf”> Intellectual capital and property (IP). Principles of valuation. <A HREF=“ http: //infolab. stanford. edu/pub/gio/2010/CS 207 -2. pdf”> Cost versus value. Market value of software companies. Sales expectations and discounting, . <A HREF=http: //infolab. stanford. edu/pub/gio/2010/CS 207 -3. pdf> Alternate business models. <A HREF=“ http: //infolab. stanford. edu/pub/gio/2010/CS 207 -4. pdf”> Life and lag of software innovation <HREF=http: //infolab. stanford. edu/pub/gio/2010/CS 207 -5. pdf> The role of patents, copyrights, and trade secrets. Managing IP. <A HREF=http: //infolab. stanford. edu/pub/gio/2010/CS 207 -6. pdf> Off shoring (Prof. Amar Gupta) <A HREF=http: //infolab. stanford. edu/pub/gio/2010/Stanford-Nov 09. pdf> Licensing. Separation of use rights from the property itself. Offshoring alternatives. Risks. <A HREF=http: //infolab. stanford. edu/pub/gio/2010/CS 207 -7. pdf> Effects of using taxhavens to house IP. <A HREF=http: //infolab. stanford. edu/pub/gio/2010/CS 207 -8. pdf> Acquisitions and growth. <A HREF=http: //infolab. stanford. edu/pub/gio/2010/CS 207 -9. pdf> 1/12/2022 CS 207 Fall 2011 3

Course Info Meets weekly, Fridays 2: 15 pm, Gates B 12. Me: Gio Wiederhold, Prof. Emeritus, Gates 436, hours by appointment gio@cs. stanford. edu For course updates and references see https: //cs. stanford. edu/wiki/cs 207/ Grading: 1 unit P/F for a brief paper + attendance Submit paper on-line by xx November 2011. Feedback in break. if a class is missed: 1 page report on related topic Optional: directed reading graded units for a relevant report about 3 pages, draft by 17 Nov 2011, on-line. 1/12/2022 CS 207 Fall CS 207 fall 2011 2010 4

Possible Paper Topics Your choice – but not on software engineering or software creation 1. IP in Open Source Software. [Miller. VC: 10] Keith W. Miller, Jeffrey Voas, and Tom Costello: “Free and Open Source Software”; IT Professional, IEEE , November 2010, p. 14 -17. 2. Innovation. [Adler: 09] Carlyle Adler: Behind the Cloud: The Untold Story of How Salesforce. com Went from Idea to Billion-Dollar Company-and Revolutionized an Industry; 2009. About Marc Benioff. 3. Ignoring IP in public statements: [Mandel: 09] Mike Mandel: The GDP Mirage: The failure to account for IP generation makes predictions of growth suspect, "Business Week", 9 Nov. 2009, http: //www. businessweek. com/magazine/content/09_45/b 4154034724383. htm. 4. Google’s growth: [Auletta: 09] Ken Auletta: Searching for Trouble; "New Yorker Magazine", 12 Oct 2009, pp. 46 -56. Audio: http: //www. airsla. org/broadcasts/New. Yorker 091018. mp 3 or Abstract: http: //www. newyorker. com/reporting/2009/10/12/091012 fa_fact_auletta. 1/12/2022 CS 207 Fall 2011 5

1 2 Background Two aspects to Software Economics 1. Minimizing the cost of building effective SW Much literature exists, taught as part of SW engineering Factors NO T the 1. Well educated people you top 2. Good languages expressive and constraining ic of C S 2 3. Good methods Waterfall, Spiral, Rapid prototyping, 07 Scrum, Extreme programming, Agile processes. And when the work is done 2. Maximizing the benefits of the SW the topic of CS 207 1/12/2022 CS 207 Fall 2011 6

Current State 1. Software producers traditionally care about ØCost of writing software ØTime to complete products ØCapabilities cr 2. When the value is a concern ØBusiness people ØEconomists ØLawyers ØPromoters 1/12/2022 te a e life e us inconsistent CS 207 Fall 2011 7

What is the problem? Say you create some great software and then ship it on a CD to a company that sells software. • Let’s assume they get the exclusive right to the SW. 1. 2. 3. 4. • What should the selling company pay you? The cost of the CD and mailing it? about $10. -? The amount it cost you to write the SW: 5 months at $10, 000/month = $50, 000. - ? Half of their sales that year (~ 50% is their cost of selling) : 50% of 10, 000 copies at $49. 99 = $250, 000. - ? 50% of their $2 M lifetime sales = $1, 000. - ? How does what you get affect your obligations? 1/12/2022 CS 207 Fall 2011 8

Why is value a Concern • Making decisions about creative tradeoffs ØElegance versus functionality ØRapid generation versus maintainability ØCareful specification versus flexibility • Dealing with customers Dijkstra model: for self-satisfaction Engineering model: formal process driven Startup model: see if it sticks to the wall • Gain respect: know what you are doing 1/12/2022 CS 207 Fall 2011 9

Other professions versus CS • Architects of buildings Know if they are designing public housing or a castle That helps specify the type of furnishing and fixtures: zinc / nickel • Car Designers Produce ~1 M/year or ~1 K/year Know if they are designing a people’s car or a Siddeley That helps specify the level of sound insulation and parts’ life time 1/12/2022 CS 207 Fall 2011 cr Don’t consider in planning if the software will be widely used, Bugs, when encountered by many customers, are costly May spend much time refining software that will be used rarely ea te • Software engineers 10

Why now Worrying about economics is a sign of a maturing field Phases: 1. Get new stuff to work 2. Getting adequate performance 3. Get it to be sufficiently reliable to be useful 4. Get it into routine production 5. Increase capacity 6. Make it safe 7. Make it affordable 1/12/2022 CS 207 Fall 2011 11

Why me US Treasury concern: • Much software is being exported as part of offshoring (offshore outsourcing) • It is typically property – i. e. , protected • If it is not valued correctly – i. e. , too low 1. 2. 3. 4. 1/12/2022 Loss of income to the creators in the USA And loss of taxes to the US treasury Excessive profits kept external to the USA Increased motivation for external investment CS 207 Fall 2011 12

Value depends on use When the value is a concern e us ØBusiness people ØEconomists Ø Effects on national productivity ØLawyers Ø Settlement of disputes and infringements ØPromoters inconsistent Ø Income from sales or businesses improvements Ø Price or license determination Ø Motivating investments 1/12/2022 CS 207 Fall 2011 13

1987 Quote “Some day, on the corporate balance sheet, there will be an entry which reads, ‘Information'; for in most cases the information is more valuable than the hardware which processes it. ” -- Grace Murray Hopper 1906 -1992 Rear Adm. , US Navy, 1943 -1986. Early Univac programmer, when they cost > $1, 000 contributor to the development of COBOL language and compiler given away at no cost to Univac purchasers 1/12/2022 CS 207 Fall 2011 14

Open Source software? Should software should be a free good? Implicit in that view is that government, universities, and foundations should pay for software development, rather than the users. 1. Programmers are creative artists, creating beauty and benefits for all of Mankind ! vs. 2. Software is an industry. SW revenue is $121 B per year in the U. S. alone, well over 1% of the US GDP. Non-software companies spend yet more for business-specific software. Over 4. 8 million people are employed in IT, earning nearly $333 B annually. • It is unlikely that universal free software is an achievable and even a desirable goal. 1/12/2022 CS 207 Fall 2011 15

Open Source Practice • Appropriately, open source initiatives actually focus on software that deserves wide public use and should be freely available to students and innovators, as editors, compilers, and operating systems. • Much open source software is incorporated into Commercial software, that is not made freely available, Ø even if it should be. (GPL license [Miller. VC: 10]+) 1/12/2022 CS 207 Fall 2011 16

What’s left to value? • Common software that is sold or licensed • Software that enables Internet Services • Software that is written inside companies to improve their business • Software purchased from vendors by government to improve its operations Ø Military, Social Security, IRS, Healthcare, . . . 1/12/2022 CS 207 Fall 2011 17

Economic Loop 1/12/2022 CS 207 Fall 2011 18

Accounting simplified Sales = units sold x unit price 1/12/2022 Research COGS In co Operating m e Gross Admin. overhead Distributor markup Production cost SW company revenue CS 207 Fall 2011 Net Capi Earnings tal Tax cost -es Profit 19

Next Week • How to value software Ø What is valuable in software Ø Where does the value derive from • Questions? Ø Email to Gio@cs. stanford. edu Sign-up starts 1/12/2022 CS 207 Fall 2011 20