Wednesday, June 21, 2006

IP, Reputation, and Google Trends in Assessing a Business-Just Thank Dan

Dan O'Leary of The Intrinsic Value has done some insightful work using Google Trends. This is a fascinating tool and Dan has recognized its potential while it is still in its early stages.

Google Trends provides a comparative analysis of search queries to examine what specific search terms are being entered into the Google search engine, and their relative frequency. For anyone concerned about PR, about relative sales analysis, etc...essentially how various brands may be perceived versus their competition.

Brand names with sustainability truly provide a competitive advantage to a business. The customer knows the name and the image it represents. Distributors and retailers are almost forced to stock the product. Pricing flexibility is inherent in such a brand.

Dan has done some intriguing work to forecast demand for new Harley Davidson motorcycle demand. He has found that new shipments of Harleys have coincided with periods
of declines in "Used Harley" searches. Innovative and out-of-the-box kind of analysis.

Previously, Dan had done some interesting work in studying high-risk mortgage lending
by searching for interest only, home equity, and credit score trends. One can see how information like this could prove very useful in analysing small community banks.

The ultimate test of a great brand I believe comes from superior returns on capital when compared to an industry or industry in general. But there are other drivers of value that extend beyond brand as well. Intellectual capital is clearly one of the success factors.

Consider a company like Dolby Laboratories (DLB)
a business with some 40 years of brand creation behind it that derives 75% of its revenues from the licensing of its intellectual property. As the company indicates in its 10K:
We have a substantial base of intellectual property assets, including patents, trademarks, copyrights and trade secrets such as know−how. We have 928 individually issued patents and over 1,000 pending patent applications in nearly 35 jurisdictions throughout the world. ... We derive our licensing revenue principally from our Dolby Digital technologies.
We pursue a general practice of filing patent applications for our technology in the United States and various foreign countries where our customers manufacture, distribute, or sell licensed products. We actively pursue new applications to expand our patent portfolio to address new technology innovations. We have multiple patents covering unique aspects and improvements for many of our technologies.
We have over 800 trademark registrations throughout the world for a variety of word marks, logos and slogans. Our marks cover our various products, technologies, improvements and features, as well as the services that we provide. Our trademarks are an integral part of our licensing program and licensees typically elect to place our trademarks on their products to inform consumers that their products incorporate our technology and meet our quality specifications.
There is some value in this IP. Clearly, licensees of the technology find it important to place the trademark on their products. Historically, this has been a cash generative, high ROIC business. Deeper analysis of the specifics of the quality of the IP is needed to understand the business. Harken back to the Research in Motion (RIMM) versus NTP lawsuit and the ultimate settlement.

At times, many of us as value investors focus strictly on the "numbers." Often waaay too strictly!! Endless recitations of ROIC, and valuation ratios provide some comfort, but little understanding. Other aspects of a business accessible through informal, anecdotal surveys; informal canvassing of customers, suppliers, or competitors; or trend surveys such as Dan has proposed can help us gain insight into the deeper aspects of a business.

The art of investing is evolutionary...the process of constantly evaluating new ideas and approaches is imperative to understanding the sustainable competitive advantage of a business.
Again, such analysis in my opinion is an adjunct to the primary tests of looking at a business. If the business cannot produce a fairly regular stream of operating cash flow and ultimately free cash flow, more exotic metrics will not help you create value. Return on invested capital above the cost of capital will.

But the sustainability of that competitive advantage often is derived from brand, from IP, and from reputation.

Disclaimer: Neither I, my family, nor clients have a current position in Harley -Davidson, Dolby or Research in Motion.


At 6:49 PM, Blogger Dan O'Leary said...

Kind words...

I'm reading a book now that you may find interesting: The Economic Structure of Intellectual Property Law. Authors: W. Landes & R. Posner


At 9:30 PM, Blogger Jay Walker said...

Yes, I'd just read his piece the other day too. It'll be very interesting to see how this new tool begins to be used. In my other life (, I'd used Google to show some trends relating to learning disabilities.

Interesting stuff Rick.

Jay Walker
The Confused Capitalist


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