Monday, November 7, 2011

ECB ABS Data Warehouse: Choice to make patent part of pitch or risk factor

As the Market Group and Sapient Global Markets look at the possibility of either a private placement or a public offering to raise funds for the ECB ABS Data Warehouse, they are faced with a choice.

Do they 'acquire' an exclusive on my firm's patent and make it a part of their pitch.  Or do they not 'acquire" an exclusive and disclose it as a risk factor.

The case for acquiring the patent and making it a part of their pitch is straight forward.

An ABS data warehouse that has patent protection generates at least 10x as much revenue as an ABS data warehouse with only an ECB endorsement.

Why shouldn't the ECB endorsement produce better results?  An endorsement is not a barrier to entry when you are providing a commodity product.  

The ABS data warehouse is a commodity product given that the ECB has specified the data fields it requires.  An endorsement is simply a certification of capabilities when it comes to capturing, processing, verifying and transmitting data in the ECB approved format.  

If the only competition were small firms that the issuers were not familiar with, the endorsement would let the Market Group/Sapient Global Markets data warehouse stand out.  

However, there are many potential competitors who don't need the ECB's endorsement as they already provide data to the ECB and are well-known to the issuers as being fully capable of running an ABS data warehouse.  Examples of this are Bloomberg, ThomsonReuters and BlackRock Solutions.

Without a barrier to entry, there are a number of firms that have an incentive to enter the European ABS data warehouse business to protect their US structured finance information franchise.  These firms include CoreLogic, LoanPerformance, Intex, Lewtan and Trepp.

Since they are protecting an existing franchise, they are likely to be very aggressive in how they price this product.  It is better for them to price the European ABS data warehouse to maximize market share with marginal profitability as this protects their US franchise than it is to try to maximize the profitability of the European ABS data warehouse.

From the perspective of issuers, when all vendors are capable, they will look for the vendor offering the lowest cost to themselves and their investors.

Without a barrier to entry in Europe, potential investors are looking at limited earnings across all the data warehouses because of competition.

Being an exclusive licensee of my firm's patent dramatically changes the revenue picture.  Unlike the ECB endorsement, the patent is a substantial barrier to entry that protects the ability to make a profit.  

To the extent that the business model requires interacting with US issuers or US investors, and by definition structured finance securities do as they are designed so that different tranches appeal to different investors around the globe, the patent would impair the ability to do that business.  Therefore, if you want to offer a structured finance data warehouse, you are going to want a license.

It is a matter of public record that I think the data warehouse has the opportunity to generate revenue closer to 5 basis points (0.05%) on the par amount of each structured finance security.  This revenue number has been independently confirmed.  

In Europe, there is the potential for annual revenue of approximately $1 billion flowing to one firm if that firm had my patent as a barrier to entry against competing firms, even those with an ECB endorsement. (According to the Association for Financial Market in Europe there were $2 trillion in outstanding European structured finance securities as of June 30, 2011.  $2 trillion times 5 basis points equals $1 billion.)  

Besides protecting the ability to make a profit, the patent also enhances the valuation that investors would put on a firm.

As I said, the Market Group/Sapient Global Markets has a choice.  I look forward to talking with any other interested parties about an exclusive license.

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