When companies liquidate assets, it's usually the "hard" assets—servers, desktops, monitors, and telephone systems—that are quickly pushed onto the used equipment market at bargain prices. Until now, most virtual assets—enterprise software and other intellectual capital—have either been chucked into circular files or boxed away in a vacated office corner.
That’s likely how former retailer Service Merchandise would have handled its virtual IT assets if bankruptcy had occurred a year or two ago. But today, thanks to a new marketplace that buys and sells used enterprise software and business intelligence applications, the retailer is getting some money for its virtual assets as well.
How virtual assets are sold
Service Merchandise is just one of several companies that has turned to IP Recovery, an Aspen, CO-based company launched this April to facilitate the buying and selling of used enterprise software and other intellectual property nationwide.
Once a retailer with 400-plus nationwide stores dealing in housewares and jewelry, Service Merchandise went into liquidation on Jan. 4, 2002. To handle the sales of assets, CFO Mike Hogrefe turned to CONSOR Intellectual Asset Management, a company dealing in the resale of durable assets. They in turn contacted IP Recovery.
When you visit the retailer’s former e-commerce site, you won’t find the typical "gone out of business, thanks for everything"’ message. Instead, there’s a clear explanation that the retailer is interested in selling its intellectual properties. You can click on “Disposal of Intellectual Property” and then choose the type of assets you’re interested in. One list reveals the resale of a custom e-commerce suite written in NetDynamics to run on Sun Solaris. Also up for grabs is a two-year-old software license for Arthur Planning. The full list of assets spans several pages.
The aspect of buying and selling used software apparently doesn't disturb too many parties or vendors, although obviously some giant players aren’t thrilled with the new business approach.
Convincing vendors not a big issue
With the exception of Microsoft, whose drum-tight licensing agreement and team of salespeople have been resistant to IP Recovery's resale market pitch, six large software makers approached IP Recovery and have agreed to the sales approach.
"We've looked at 200 different software contracts," explained IP Recovery director Gabriel Fried. "In many cases, assignment of the contract can only be made with the prior written consent of the original vendor, but the consent should not be unreasonable."
What makes the new business model work is that buyers are happy to get top-notch software for a fraction of the retail cost, and most software manufacturers actually don't object to the resale. After all, said Fried, they're not losing a sale—they’re actually gaining a new customer, complete with service contract arrangements and eventual upgrade purchases.
For CIOs and CTOs of midsize companies, the new market of virtual assets can bring deep discounts. Companies with limited revenue that might not be able to afford top-shelf software can now buy used systems for around 5 to 20 cents on the dollar, typically. A custom system that cost one failed dot com a million dollars to create will probably sell for somewhere between $50,000 and $200,000, said Fried. IP Recovery's average selling prices are in the $50,000 to $100,000 range.
Who's selling what to whom?
According to Fried, the new business venture was spawned by several factors: an explosive adoption of enterprise software during the dot-com years, exhaustive data collection preceded by an implosion of hundreds of e-commerce businesses, and today’s mandate for IT cost efficiencies.
Fried estimates the U.S. market for used software and business intelligence to be worth $1.5 to $3 billion per year in terms of "the total recovery available to potential sellers."
The assets vary considerably. IP Recovery sees enterprise software systems that handle HR functions, inventory management, and corporate finances, but also deals in custom-built e-commerce systems—the kind that some brick-and-mortar companies built and then shut down.
"They own the code," said Fried, "but a lot of them have put those systems on the block."
IP Recovery's second market is the resale of business intelligence, including companies' digital repositories, such as workflow and transaction patterns. IP Recovery doesn't resell desktop software or server operating systems, because the margin is too small, said Fried.
It's not only companies on the skids, though, that come to IP Recovery. Sellers and buyers come in four flavors:
- Firms that have ceased operations. These are companies that come to IP Recovery before or after bankruptcy court.
- Firms migrating systems (scenario 1). A company migrating from an old license of a Lawson financial system to new PeopleSoft package might look to resell an old license.
- Firms migrating systems (scenario 2). A company using a three-year-old Lawson financial system might choose to migrate to PeopleSoft. The company has depreciated the cost of the old license. But by reselling the old software, IP Recovery helps the firms find new money.
- Companies in the process of merging operations. In this case, two companies may find they've got two different kinds of software performing the same functions. Rather than run parallel systems, they choose to eliminate one and sell it.
"IT managers and others can go out and purchase software licenses for software at a pretty steep discount to the marketplace," explained Hogrefe. "So it’s pretty viable for a company to acquire some assets at a pretty reasonable cost."