Platt Perspective on Business and Technology

Quantifying business intelligence valuation in terms of systems-indeterminacy 7: deterministic and stochastic valuation models and methodologies and their alternatives 3

Posted in macroeconomics by Timothy Platt on January 13, 2014

This is my seventh installment to a series in which I discuss and analyze the valuation of information in a business context and from a due diligence and risk remediation perspective, and in terms of what in a physical systems context would be called quantum indeterminacy (see Macroeconomics and Business, postings 137 and following for Parts 1-6.)

• I discussed seller and buyer perspectives on the valuation of business information in Part 5 and Part 6 respectively,
• As they would arise when determining fair market value where a more deterministic valuation model approach would apply.
• And I at least began a discussion in those two postings on the reconciling of seller and buyer determinations in establishing a mutually agreed to, realized fair market value.

My goal for this posting is to open up this discussion to bring in the uncertainties and indeterminacies that arise when potentially marketable business intelligence cannot be fully knowable for content or potential value to buyer or seller, or both. And as noted at the end of Part 6 of this series, I will consider two working examples where this overtly applies:

• Proprietary trade secrets which in this case I assume to be wholly owned by the potential seller and without competing claims of ownership or other encumbrances,
• And marketable predictive business intelligence, as offered from a selling source that has a measure of credibility for this type of product offering, and where specific information would be exclusively offered to a successful buyer.

And I begin this discussion by repeating and stressing a detail that I noted more in passing above: “when potentially marketable business intelligence cannot be fully knowable for content or potential value to buyer or seller, or both.” And as a working example, I return for purposes of this discussion to consider a specific trade secret that I first began to discuss in Part 5: the secret formula for Coca-Cola, and more specifically for that company’s flagship product, Coke classic.

I suggest reviewing Part 5 and its discussion of Coca-Cola and its trade secret recipe, to supplement what I write of this here. But I note from that posting that I acknowledged that this trade secret has been the source of an entire industry’s worth of directly realized monetary value, and both in creating the Coca-Cola Company as a globally reaching business enterprise, and for spawning a seemingly endless number of competitors with their alternative cola products. I also briefly outlined a line of argument that would at least strongly question the overall value that the Coca-Cola Company obtains now from still holding this trade secret as a proprietary and successfully guarded in-house secret, when their brand name dominates their market at least as much as any of their specific products do. People buy Coca-Cola because it is Coca-Cola and in spite of the sea of alternative cola beverage products available to them. And as a part of that argument I also noted how different a loss of exclusivity to this secret recipe would have been, if their trade secret recipe had become publically held knowledge when this company was still in its early stages and just beginning to build its secret recipe-based cola beverage name and its name recognition for it.

This is all about uncertainty in valuation and I continue my discussion of this here, where the Coca-Cola Company is considered from the perspective of a business intelligence seller, or at least a business intelligence provider, and according to two alternative universe scenarios.

• In the first scenario, which I will call the Young Coke alternative, the founders and owners of this company lose exclusive control over their secret recipe for their new product. Another company starts producing and bottling knock-off Coca-Cola syrup, and bottling and selling what is essentially the same product and even a Coke alternative that is acknowledged as being a same product – but without paying licensing or other fees and without permission to do so. The Young Coca-Cola Company takes them to court, seeking recompense. And claims that they would make in their suit against this upstart imposter would hinge on the value that they can convincingly argue they have lost from this theft. But this is still a largely unknown product and it does not have a track record of revenue generating performance for anyone, so any court ruling-determined valuation, based on likely future revenue loss to the inventing company is likely going to be greatly less than what the Coca-Cola secret recipe has in fact historically generated. The issue here is that when the Young Coca-Cola Company loses control over its secret recipe, absent a business and revenue generating track record, the value of this trade secret is largely indeterminate and depending on the judge and jury, might be ruled larger or smaller. But relative to actual historical performance from the Coca-Cola Company maintaining this secret it would be smaller than that and by a lot.
• In the second scenario which I will call the Fully Mature Coke alternative, the real-world current day, mature Coca-Cola Company finds that some outside party has acquired its secret recipe to Coke classic through industrial espionage. And the perpetrators of this theft begin producing their own cola syrup and bottling and selling it according to this now-formerly secret recipe. With Coca-Cola’s name recognition, any court-ordered restitution ordered is likely going to be very substantial, and certainly in comparison to the ruling that the Young Coca-Cola Company would see. But it is also likely that Mature Coke’s actual financial loss would, proportionately at least to overall business performance, be much more modest than the loss that Young would face.

This brings me to what I would argue to be a core observation. Young, the Coca-Cola Company faces lower potential realizable loss of returns from loss of control of their trade secret recipe, at least in absolute terms and as a matter of overall net revenue numbers. Their trade secret product has no track record so any likely loss would be more modest than would be determined for a more mature business with a revenue generation record arising from it. Old, this ostensibly same Coca-Cola Company would also face lower actual loss of revenue and certainly as a proportion of their overall expected business activity. Actual realized loss would peak somewhere in the middle, when the Coca-Cola Company had developed enough name recognition for their holding this secret to represent real market value, and before they have in effect locked in their market share through generations of name brand support and recognition. And statistically, if this set of now three scenarios could be repeatedly independently played out as a thought experiment, the true value of this trade secret as a trade secret would smoothly rise until it hit a mean value maximum, and then it would smoothly drop down again.

I write this in terms of value of this business intelligence to a potential seller, or in this case a potential trade secret loser. And I note in this context that timing and context can be everything. I am going to continue this discussion, still considering trade secret business intelligence, but from a buyer’s perspective. Then I will consider the working example of predictive business intelligence and the production and sale of predictive business insight. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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