Tuesday, April 12, 2005

"Nano, nano"

Before it's even sold one TV, Canon and its SED Inc. joint venture with Toshiba has been sued for violating a patent license. Nano-Proprietary, Inc. owns a patent for the process of producing SED screens, but sold a royalty-free license to Canon back in 1999 for $5.5 million. That probably looked like a good deal back then, but given the potential revenues Canon is likely to get from using the license, it doesn't look so good now.

My inexpert and shallow reading of bits of the contract suggests that Nano-Proprietary will lose the suit and Canon will be able to produce SED TVs royalty-free. Canon has spent a lot of money on R&D and invested heavily in its subsidiary, so losing the license could be very costly. Therefore, it is possible that Canon will settle to avoid negative publicity and delays in the product launch. Ironically, Nano-Proprietary's very weak case increased the probability of pursuing legal action. There is very little to lose except legal fees and a remote possibility that some court or settlement could grant the company extra revenues.

Lawsuits like this one are the bread and butter of IP companies. Since a patent has a limited lifespan (unlike copyrights, which seem to be continually extended for Disney's sake), owners of patents are compelled to either develop them into products (as Canon has done) or license them at the best possible terms (as IP companies do). Sometimes patent holders sell the license too cheaply because they undervalued its potential, over-estimated its appeal, or simply were desperate for the revenue. In this case it seems Nano-Proprietary hoped that other companies would pursue SED technology and Canon would be motivated to sign an exclusive license. Its only recourse now it to attempt legal blackmail à la SCO Unix. This is just one cost of doing business for IP companies.

As a Canon shareholder, I don't think this is a huge problem. The worst case scenario would be a per unit royalty that would add to the overall cost of SED screens. More likely would be an extra lump sum payment to cover Toshiba or maybe to make the license exclusive. Most likely, this will only result in legal costs.

Wednesday, April 06, 2005

Why I bought a raft of index funds

My wife recently opened her first IRA (tax time you know), and I opened a 529 plan for Joshua. Since we didn't have much to invest, we were somewhat limited to a handful of options. Commissions would eat up too much of the investments if we tried to buy individual stocks and most mutual funds require $3000 initial deposit.

For Joy's IRA, we opened an account at USAA, which is where I have my IRA account. The best choice was USAA Extended Market Index Fund which tracks the companies that trade on US stock exchanges that are not part of the S&P 500 index. It's top holding is Berkshire Hathaway, which owns The Pampered Chef (and Dairy Queen and Gieko and Sees Candy and ...)

For Joshua's 529, I opened an account with the New York program. It has the advantage of low fees and a relationship with Upromise. California's plan has higher fees and no extra tax advantage. I've spread the investment evenly between the Vanguard Total Stock Market, Growth, Value, Mid-Cap, and Small-Cap Index funds.

I'm not as happy about the group of index funds as I would have been a few years ago because I think we are in the beginnings of a bear market when holding the market in general won't work as well as it did in the 1990s. (Read Thoughts from the Frontline for some reasons why this might be true.) But there are some very powerful advantages to indexing: low fees of course, but also low turnover. John Bogle, father of indexing, points out that high turnover costs more in taxable accounts and that commissions are a hidden fee paid by the funds shareholders. This is why I use turnover and fees when I pick actively managed funds.