The Internet of Things: Too Far Away?

“The Internet of Things” has been a topic of interest in the technology circles for as many as 15 years. Like “Web 2.0”, “the Semantic Web” and “Cloud computing” it is a term that excites keen interest. But how much is hope, and how much, hype ?

The phrase “The Internet of Things” is generally accepted as being proposed in 1999 by Kevin Ashton, who was seeking to apply RFID to manage Procter & Gamble’s supply chain. The Internet of Things is understood by many people as a glamorous way to describe something that has always existed: sensors connecting “inanimate” machinery to a computer, maybe with a network of such sensors all connected to each other thrown in.  Other consider it to be the inclusion of RFIDs on every “thing” – from books to cars to cows – so that those “things” become capable of being tracked and we can easily capture things that we are interested to know about them. Another view is that “smart” grids and “smart” houses form the sum total of the Internet of Things. Right?

Not really. While it incorporates all of the above, the concept of The Internet of Things (IoT) involves much more than that.

Let’s first start with why it is called The Internet of Things. Why not just “connected devices”? Or M2M (machine-to-machine) communication?

At its most ambitious, it is supposed to emulate the way the Internet (IP) connects hundreds of thousands of smaller networks (our “traditional” IP is the Inter-network, or a network of networks). The idea behind the Internet of Things is this:  not only should ordinary objects that we don’t normally visualize as generators of information be connected to each other, many smaller networks of such objects should be able to “talk” to each other. Potentially, one should be able to connect all the objects on the planet to each other. Whether that is necessary of course is a different matter. However, it does point to the fact that the number of such devices in any network will be extremely high. (Consider for instance an electrical grid with thousands of “smart meters” on the network).

Considering its scale, therefore, The Internet of Things will be possible only because of developments in a number of fields, from nanotechnology to wireless sensors.

Applications

Potential applications include:

  • Energy – “Smart” grids leading to more efficient energy use and billing
  • Transportation – Transportation solutions that could track traffic conditions and ease congestion;  automatic emergency handling services (for example, eCall is an European initiative to deploy devices in all cars that will automatically send an emergency notification, data on the seriousness of impact, and coordinates to the emergency services in case of an accident )
  • Household applications – Smart homes
  • Healthcare – Care of the elderly and patients (For instance, implanted devices that can inform a caregiver automatically in case of a fall, or a drop in vital levels)
  • Environment– Monitoring pollution levels in water bodies
  • Security
  • Industrial applications

Developments

A number of ventures claiming to be associated with the “Internet of Things” have grown in the years since 1999, when the idea was first presented, and the present. Most of them revolve around specific products or services such as Netatmo’s “connected weather station” which allows users to track temperature and air quality inside their homes via sensors which are internet-enabled. Withings, a Paris-based company which raised $30 million in venture capital funding in October 2013, produces items such as wireless-enabled weighing scales and other consumer health devices, while Invoxia’s main offering is an audio device for iPhones/Android. In a very different field, Camgian Microsystems is notable for manufacturing hardware products (chips and sensors) that are usable in security and warfare applications. The Mississippi-based company has partnerships with DARPA, Boeing and Honeywell among others.

Unfortunately, most of these products are disparate in that they do not connect to the wider environment, or to other low-level devices (except phones and tablets). An ideal “Internet of Things” application would be, for instance, a weather station that also took into account your current health data (measured through another monitor and transferred to the weather station) and the current outside weather conditions and advised you to wake up and get more exercise (via a connected alarm clock/phone).

Thus, what is urgently needed is a set of common standards so that multiple different companies can build different products that are able to talk to each other. The plethora of platform providers currently being marketed for different uses makes it unlikely that this will happen any time soon.

The Way Ahead

An October 2013 Forbes article notes that the Internet of Things is definitely not here yet, but holds out hope for it by emphasizing the need for “open APIs and common standards”.  Besides this major challenge, other issues to be tackled include potential energy sources (especially important in view of the large number of devices on the network), sensor costs, as well as data privacy, security and ethical concerns.

The International Telecommunications Union in a 2005 report held out great promise for IoT’s applications, predicting everything from smart beverage machines to electronic wallpaper that changes according to one’s mood.  Sounds like a science fiction novel? As Arthur C. Clarke said:

“Any sufficiently advanced technology is indistinguishable from magic.”

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Krittika is a PGP-2 student at  IIM Ahmedabad and a member of the Consult Club. She is interested in technology and learning. She holds a B.E in Information Technology from Netaji Subhas Institute of Technology, Delhi.

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Importance of Intellectual Property in Mergers and Acquisitions

Last month, Google astonished quite a few analysts when it announced the acquisition of Motorola Mobility for $12.5 billion. The hefty amount meant that the software giant parted away with nearly a third of its $39 billion cash reserves. It also meant that Google deviated from its earlier M&A strategy of acquiring small companies with superior technologies which it could easily integrate into itself as it did with Android in 2005. It also signified a major upheaval in its operating strategy because now they have not only increased their headcount by 66% but they have also entered a space which they have relatively very little experience in and one whose dynamics are way different than the one they are used to. The question is despite such large differences, why did they take such a decision? While some may argue Google is trying to go the Apple way by making its own hardware and software (which if true, might take some time coming), the reality lies in Motorola’s intangible assets – patents and 24,500 of those (17,000 approved and 7,500 pending approval). Google believes that this portfolio can be used as a leverage to ward off the increasing number of patent litigations from Apple and Microsoft against the Android-based phone manufacturers like HTC and Samsung and thus build confidence in these manufacturers to continue using them.

Technology-Driven M&A Deals
Welcome to the world where the M&A transactions transcends the boundaries of products and customers and enters into intellectual property (IP) as a huge value addition prospect. In this knowledge economy where innovation is touted to be one of the supreme drivers of growth, IP protection takes centre stage because this model has been widely successful in encouraging innovation. So, when an M&A acquisition involves parties which are technology-driven, IP is bound to be a key asset whose importance will influence the deal in a big way.
When we talk of technology-driven M&A, we are talking of huge numbers. According to PwC, the total value of the technology deals i.e. in internet, IT services, hardware and software in US alone was $77 billion in 2008 (yes, this was the year when the world faced an economic downturn!), $53 billion in 2009 and $107 billion in 2010. If one takes the pharmaceutical sector alone where patents are considered to be the backbone of any company, there have been 1345 deals in the last 10 years with a cumulative deal size of $694 billion. When one comes to think of patents being at the heart of these companies, it’s difficult to ignore the value it can play in an M&A deal. According to Nader Mousavi, a leading IP transactional lawyer who has worked with big law firms like Sullivan & Cromwel and Wilmer Cutler Pickering Hale & Dorr in the US, “IP as a percentage of deal value in M&A has been growing over the last 30 years. IP rights have gone from, as a percentage of overall value of S&P 500 companies, in the teens to 85 % or more.”

Significance of IP in M&A Strategy
Reducing Pressure on Internal R&D – In this knowledge economy, more and more companies are turning to an open innovation process in which they buy or license innovations to supplement and even replace their internal R&D. With the increasing emphasis on innovation and decreasing technology life-cycles, it’s imperative that a company looks into the ROI of its internal R&D. This will not only help them manage their R&D expenses better but also increase the number of innovation available to them and increase the speed of their product introductions. For this, it’s essential that the companies study the patent landscape and implement strategic analyses. These analyses will help them in identify the target which is active in the desired technology domain.
Bridging the Technology Gap in the Core Business – Companies are always looking at ‘synergy’ in any M&A deal. Many a times this synergy can be derived from complementary technologies. The addition of this technology to their portfolio would mean end-to-end integration of all components required to launch the product in the market. Take the case of the acquisition of SwitchOn networks by PMC-Sierra for $ 450 million. SwitchOn was a pioneer in wirespeed packet classification and inspection technology. It provided standard semiconductor and software components to enable applications such as QoS, Load Balancing, URL Switching Firewalling, etc. at wire speeds exceeding OC-48. It also had a patent pending on this technology, which on being granted would provide it the right to exclude any other company from using this technology. PMC-Sierra, on the other hand had expertise in broadband communications and has worldwide technical and sales support network. The addition of SwitchOn’s packet classification expertise was complementary to PMC-Sierra’s broadband communications strategy. With SwitchOn’s acquisition, it also acquired its patent which helped it achieve the strategic leverage in its domain.
Mitigating IP Litigation Risks – In a recent survey of Wall Street professionals conducted by CRA International, 75% of respondents indicated that patent litigation exposure was “important” or “very important” in valuing investment opportunities. Well, who could be in a better position to vouch for this than our beloved Google! In order to protect itself from the barrage of patent litigations involving Android, the count of which had reached 37 by March this year, it was no less than desperate to look for a strong patent portfolio. After the Nortel loss, when it bid an amount of $‘Pi’ billion for 6000 patents, it would have realized the actual seriousness which surrounds such patents not only in terms of money but also the business sense that they make. Its acquisition of Motorola Mobility is testament to the fact that a sound patent portfolio is one of the best cushions to have in the technology space.
Patent Trolls – Strong patent portfolios have been the targets of several non-practicing entities (NPE) also referred to as trolls. These NPEs acquire companies having strong patents but are in either in distress or are ready to be acquired (read: sell their patents) for the amounts offered by the NPEs. However, the NPEs do not develop any products around those patents. They initiate patent litigations against the practicing companies with the sole intention of receiving generous settlement amounts. While the jury is still out on the ethical part of this business model, as far as it legal, a few companies continue to do it and successfully so. Firms like Intellectual Ventures, MOSAID, Tessera etc. have portfolios running into thousands of patents. All they do is find a hot patent and assert it against large companies.

Non-Technology Driven Deals
All the technology-driven M&A deals would tend to focus on the patent portfolio which is at stake. However, there are other forms of IP like copyrights and trademark, which can figure in the strategic objectives of a company. Here are a few reasons which would cause IP to influence a company’s M&A strategy:
Improve Distribution Channels – The merger of AOL and Time-Warner was one which involved equals in their respective industries. Time-Warner had a huge collection of copyrighted entertainment media including content magazines, movies, books, music and programming. However, with the increasing penetration of internet it was looking at alternate distribution channels to reach out to its audience. Thus, the decision to merge with AOL, which had become a huge brand in the internet space made a lot of sense.
Build a Brand Presence – When Indian tea-maker Tata was faced with the decision of expanding its foothold in the lucrative US and European market, acquiring a famous brand in these regions was the obvious answer. Thus, the acquisition of Tetley saw the light of the day. The deal catapulted Tata Tea into the global arena, as Tetley is an international brand with a presence in over 44 countries. Tetley has a presence in India, Canada, the US, Australia and Europe, and is the world’s second largest tea brand. The acquisition helped Tata to cash on the widely recognized Tetley trademark and use its expertise and infrastructure in sourcing teas worldwide for the Indian market too.

IP Related Issues in M&A
Valuation – There has already been a paradigm shift in the IP due diligence process which is currently being undertaken by firms that identify IP as central to their long term objectives. They look at it from a value addition perspective rather than the traditional transactional perspective and thus, conduct a comprehensive due diligence using the latest tools and analyses. However, valuation still remains the trickiest part. This is so because IP valuation has no fixed model and is largely contextual. Risks, timing, cash flows, option value, alternatives and intended use (e.g., defensive, offensive) of specific IP assets form the pillars on which the valuation may be based. At the same time, CFOs are confronted with an ever-changing landscape of tax, financial and regulatory reporting requirements that impose differing and sometimes ambiguous standards for valuing IP.
Anti-trust Regulations – Most anti-trust laws prohibit M&A which will significantly ‘lessen’ the competition or lead to a monopoly in the market. Such issues are more serious when it comes to patents, as they by nature provide the holder the right to exclude anyone from practicing the patent.
With the growing importance of a knowledge-economy in today’s context it is beyond doubt that IP will be a key consideration for the companies as they carve out their strategic objectives. IP will thus, play an increasing role in fuelling the future M&As especially in the technology-intensive industries.