IP_Module_5

The maintenance of brand rights - such as registering and renewing trade mark registrations,
policing, prosecuting infringement and passing-off actions - is coordinated and carried out
consistently across the world rather than being left to the interests or abilities of local
management.

The licensing of brands, and the charging of brand royalties, rescues brands from the closed
world of the marketing department and makes their value the responsibility also of financial
and legal departments. Their position as an asset of the company - rather than a toy given to
amuse a junior brand manager for a few years - is crystallised.

International brands, whose marketing may be shared by more than one company within a
group or even by more than one division, are centrally co-ordinated to ensure maximum
coherence in terms of brand image, product development, advertising, etc. (e.g. Philip
Morris’ management of the Marlboro brand).

Brands can more easily be extended into new areas and licensed to other subsidiaries while
firm control is still kept on the integrity of brand equity (e.g. Nestlé’s extension of the Aero
brand through Chambourcy).

Operating companies are made aware that the brands they use are as much a shared resource,
and a property of common value as, say, research laboratories, recipes and patents.

Country managers can be made responsible for the local maintenance and development of a
global brand. Their contribution to brand value is after all a contribution to shareholder value
and should be rewarded accordingly.

Internal licenses, whether within the home country or overseas, increasingly incorporate the
payment of a royalty which reflects the true value of the asset being used rather than just
being a nominal amount to ‘cover administration’. Making a financial charge for the use of a
trade mark (or other intellectual property) focuses the user on the value of the asset and the
need both to protect and exploit that value.

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The royalties received from licenses to overseas subsidiaries can be used to repatriate funds
in return for the use of a genuine piece of property. This can have major fiscal implications.

New licenses negotiated within the group, with joint venture partners and outside the group,
can be placed in a context of genuine brand licensing and realistic royalty rates giving the
opportunity to negotiate much higher returns for the use of brands than has been the case
commonly in the past.

Brand valuation has made a critical contribution in all of these areas both in raising
awareness of the concept of brand value’ and in putting a monetary value to a brand.
Insisting that a brand has value is one thing; being able to state what that value is the best
way to make the maintenance and development of that value part of company strategy. It
also helps to communicate to the outside world that the company takes its brands seriously.

One field in which brand valuation and the concept of brand value is beginning to have an
impact is the area of trademark licensing. In recent years, there has been a marked increase in
the attention given to the licensing of trademarks as well as other intellectual property such as
copyright, patents and designs.

The notion of a license is a simple one: the owner of a piece of property allows another party
to make [commercial] use of that property in return can expect some form of compensation.
The party [individual or commercial entity] issuing the license is called the licensor; the party
receiving the license is called the licensee.

Licences need to define a number of elements, especially the following:

● The element of property to be licensed [for example, the right to use the trademark,
Orange].

● The entity to whom the property is being licensed [for example, the local education
centre now entitled to term itself an NIIT franchisee].

● The geographic extent of the licence [for example, only in India, or a particular state,
states or region].

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● The commercial extent of the licence [for example, only for the manufacture and
distribution of a particular product or class of product].

● The duration [for example, for a period of five years from the date of the licence].

Because of the desire of the owner of the property to safeguard what is being licensed and
ensure that the licensee does not undermine its value, licences usually include strict
provisions covering quality control for both production and marketing, reporting of
performance, collaboration with licensor and other licensees and conditions for termination.

Licenses will also define in one or more of a variety of ways the manner of calculating and
remitting compensation. ‘Royalty’ is assessed as a percentage of sales, mostly as a percentage
of gross profit or net profit. Often maximum or minimum amounts are stipulated, and also the
rate may decrease or increase with volume on a sliding scale.

It is also important to recognise that the amount of a pure royalty may be reduced or
eliminated by the use of other means of gaining compensation for the use of the brand: a
management fee, an extra contribution to advertising and promotional expenses, the rent on a
retail site or the price of a raw material that the licensee is obliged to purchase. For example,
agreements between Coca-Cola and its third-party bottlers do not require an explicit payment
for the use of the ‘Coke’ brand. Instead, the licensee will be required to purchase the essential
sticky brown concentrate for making a Coke-branded cola at a given price and in certain
minimum quantity.

Though the payment for these products may appear to be for a tangible transfer, it is clear that
the amount that can be demanded is influenced as much by the trademark rights that go with
the product as by the qualities of the products themselves. It is only by buying these
ingredients or products that the licensee can make use of the brand, and so the charge for the
use of the brand is hidden within the charge for buying the tangible elements.

5.20 VALUATION METHODOLOGIES

5.20.1 Introduction

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One of the core considerations in valuation is ‘brand strength’: the commercial viability of a
brand based on the positive touch points and experiential goodwill. Brand Strength is based
on attempts to access the relevant beliefs, associations and attitudes that are in consumers’
minds:

The explanation of the whole branding phenomenon put great emphasis on the meanings and
associations that a brand can create in the mind of the consumer. In other words, the obvious
place to anatomize the strength of a brand should be the consumer’s mind.

David Aaker, visualizes each brand name as a ‘box in the consumers brain’, in which are
stored away all the bits of information and associations to do with that brand. The whole box
is then in turn stored with positive or negative feelings. This is as good an image as any,
although like all metaphors for how the mind works it is likely to be too simplistic and we
can try to gather about what goes on the consumers mind:

Awareness – whether there is a box for our brand there at all, or whether it is easy to find.

Associations and beliefs – what is in the box? This is a big area in itself with many
dimensions to it.

Attitude – how the consumers feel about a brand, positive, negative, indifferent.

Each of these areas can be interpreted to tell us more about an aspect of a brand’s strength.
One could say a brand is strong because many people have heard of it or spontaneously think
of it, one could certainly say it is strong if many people express great loyalty or affection for
it. In their words and actions. Most importantly, a brand can be called strong if it is strongly
associated with imagery or functional benefits that we interpret as desirable for consumers.

Brand Strength is based on attempts to estimate the brand’s future performance and profit
streams, and thus put a financial value on the brand as corporate assets:

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There is perhaps a thin line between asking someone to rate a brand on ‘quality’ and asking
them to express a degree of personal preference for it, but this represents a shift from the
respondent’s perception of the brand to one about their relationship with the brand.

Ultimately, the bottom-line relevance of all the perceptual material described in the preceding
section is that it somehow translates into customer behaviour – it leads to them buying the
brand, staying with the brand, perhaps paying more for the brand.

Brand valuations will only even be credible if they are based on reliable forecasts, and
reliable forecasts must be informed with statistical valid historical data relationships. When
accompanied by sensitivity analysis they indicate the most likely parameters of a brand’s
performance. When forecasts are backed up with robust evidence, using for example,
econometrics modelling data or correlation analysis, valuations become a credible addition to
management decision-making.

In recognition of this, the use of market research tracking data to link ‘soft ‘ marketing
measures with ‘hard’ financial measures is one of the fastest growing areas of market
research.

5.20.1 Brand Equity Tracking Data

Marketing research tracking is an approach that monitors consumer perception of brands via
sample based surveys.

Internationally, there are three main sources of the ‘brand equity’ research:

i) custom design studies, offered by research supplier firms;
ii) advertising agencies, many of which have invested in the development and execution

of ‘brand equity’ research;
iii) proprietary system, developed specifically for the purpose of measuring brand equity,

by suppliers with a particular commitment to this field of research.

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Proprietary systems are represented by summaries of projects/valuation methods of the
developers of prominent valuation techniques, some of which include software:

BrandDynamics from Millward Brown
Brand Building from the NPD Group
Brand Equity Tracking from Tandemar

It should be noted that the following descriptions were obtained from the agency or research
firms concerned and are derived from their literature on the subject, including analysis
available on the respective web sites.

5.20.2 Young & Rubicam: The Brand Asset Valuator [Bav]™

Y & R decided upon a knowledge acquisition strategy that would enable the firm and its
operating companies to provide clients with the best brand-leverage opportunities. As part of
the implementation of the strategy, the largest worldwide surveys of consumer brand
perceptions were undertaken in the Summer of 1993 and Spring of 1998.

The process of building brands, BAV demonstrates, is reflected through a progression of four
primary measures:

● Differentiation
● Relevance
● Esteem
● Knowledge

These measures are used in BAV to evaluate current brand performance, to identify core
issues for the brands, as well as to evaluate brand potential.

Brands can be evaluated by these individual measures. But more important, the relationships
between the pillars show the true picture of a brand’s health, its intrinsic value, its muscular
capacity to carry a premium price and its ability to fend off competitors.

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5.20.3 Differentiation is First

The starting point for all brands is differentiation. It defines the brand and distinguishes it
from all others. Differentiation is how brands are born.

As a brand matures, BAV finds that differentiation often declines. It doesn’t have to happen.
Even after reaching maturity, with good management, a brand can perpetuate its
differentiation. A low level of differentiation is a clear warning that a brand is fading.

5.20.4 Relevance as the Next Step

Differentiation is only the first step in building a brand. The next step is relevance. If a
brand isn’t relevant, or personally appropriate to consumers, it isn’t going to attract and keep
them – certainly not in any great numbers.

BAV shows that there is a distinct correlation between relevance and market penetration.
Relevance drives franchise size.

5.20.5 Brand Strength

A brand’s relevance and differentiation, viewed in relationship, represent Brand Strength,
which is a strong indicator of future performance.

Relevant Differentiation – remaining both relevant and differentiated – is the central
challenge of every brand. It is critical for all brands all over the world.

5.20.6 The Basis Of Esteem

BAV’s third primary measure is Esteem – how much consumers like a brand, hold it in high
regard. In the progression of building a brand, it follows Differentiation and Relevance. It’s
the consumer’s response to a marketer’s brand – building activity.

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Esteem is related to two factors: Perceptions of quality and popularity. The proportions of
these factors differ by country and culture.

BAV tracks the ways in which brands gain Esteem, which helps us consider how to manage
consumer perceptions. Through BAV, one could identify opportunities for leveraging a
brand’s Esteem.

5.20.7 Knowledge is the Successful Outcome

If a brand has established its Relevant Differentiation and consumers come to hold it in high
Esteem, Brand knowledge is the outcome and represents the successful culmination of
building a brand. Knowledge is not a consequence of media weight alone. Spending money
against a weak idea will not buy knowledge. It has to be achieved.

5.20.8 Brand Stature

As Brand Strength was found between Relevance and Differentiation, Brand Stature is
discovered in the combination of Esteem and Knowledge.

Brand Stature indicates brand status and scope – the consumers response to brand. As such,
it reflects current brand performance and is a strong strategic indicator. For example, Esteem
rises before Knowledge for a growing brand. If the data shows the opposite relationship, a
problem has been identified.

The BAV points out the wisdom of looking at brands in the entire brand landscape, which
will lead us to consider new possibilities for the brand, rather than risking the dangers of a
narrow vision of the category. The overreaching truth here is that properly managed brands
can exist eternally. And BAV gives us the diagnostic framework to help our clients build,
leverage and maintain the power of their brands.

5.21 MILLWARD BROWN: BRAND DYNAMICS™

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Brand Dynamics measures and explains a brand’s consumer equity – consumers’
predisposition towards a brand as distinct from other factors that contribute to the brand’s
financial equity (e.g. distribution strengths, production, efficiencies, patents etc.)

Brand Dynamics provides both consumer equity measurement and the diagnostic
understanding to inform tactical and strategic decision-making. Brand Dynamics is built on
over 20 years of continuous brand health tracking research and 8 months of R&D investment.
Key measures are validated against sales.

Launched in 1996, customized Brand Dynamics studies have been completed over 1300
brands in 15 categories across 19 countries. In 1998 one single study looked at 8 – 10 brands
in each of 50 categories in 7 countries around the world – providing a database on over 3500
brands by markets.

5.21.1 The Functioning of Brand Dynamics

This is a research-based measure, built on 4 key components:

● The consumer’s predisposition toward the brand – their likelihood of purchasing that
brand next, share of requirements (for packaged goods)

● The size of the brand – big brands achieve more sales for any given level of
consideration (i.e. consumers’ consideration ‘underestimates’ actual purchasing of big
brands)

● The type of consumer – Are they more attitudinally disposed to brands, or do they see
the category as a commodity where price is the key issue?

● The brand’s relative price (i.e. consumers’ consideration ‘overestimates’ actual
purchasing of expensive brands)

These four factors can be combined together in a mode to predict the likelihood of each
consumer buying the brand – a respondent level prediction of brand loyalty. Then category
expenditure data is added to provide consumer value – which is strongly correlated with
value market share.

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For categories where sales data are unreliable or unobtainable, Consumer Value is of
significance in its own right as a valid indicator of sales. Some clients place more faith in
consumer value than market share which can be distorted by promotions.

The importance of having a validated, respondent – based measure is to explain why some
consumers are more valuable than others. This is done via five equity building blocks which
form a Brand Pyramid. Consumers at each level of the Brand Pyramid can be targeted via
advertising and other marketing activity. Brand Dynamics provides specific and practical
diagnostics – driven marketing guidance.

5.21.2 Presence

The first step is to stimulate active knowledge of the brand – Presence. By active knowledge,
we mean unaidedly aware, have tried brand, or an endorsement of the brand on key image
dimensions which show they have an understanding of what the brand promises.

5.21.3 Relevance

To get to the next level, the consumer has to feel that the brand could meet their needs – and
do so at an acceptable price for them. Relevance can be thought of as a hurdle that the
consumer has to pass over before a stronger relationship with the brand can be developed.

5.21.3 Product Performance

The brand does not have to be better than its competitors. But it does have to offer an
acceptable level of product delivery. If a brand has a genuinely superior product and
consumers are aware of this, then this will form a brand advantage.

5.21.4 Advantage

Many brands may be acceptable, but for the brand to be more valuable to the consumer it
needs some form of ‘perceived advantage’. This can be a direct extension of some unique
aspect of the product delivery; however in many categories brands have little genuine product

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differentiation. For these brands, softer aspects such as saliency, emotional appeal,
personality and popularity can provide the advantage.

5.21.5 Bonding

The more the consumer feels that the brand is the only one that offers key advantages within
their repertoire, the greater the bond between the consumer and the brand, and the more loyal
they are likely to be.

The pyramid is the starting point for the analysis of the brand’s strengths and weaknesses.
For example, we can see below that Brand A has a similar level of presence, relevance and
product acceptability as Brand B, but has higher advantage and much higher bonding.

5.21.6 Source of Revenue

Does position in the Pyramid matter? Certainly. As might be expected, Bonded consumers
typically generate a disproportionate share of the brand’s revenue. As shown below, Brand
A’s revenue comes primarily from Bonded and Advantage groups. The generic brand gains
much of its business from consumers who stumble across the brand in store and buy it on
price – consumers for the generic have no Presence.

5.21.7 Brand Strength

Future revenue is an important component of a brand’s equity; it demonstrates how a brand’s
market share is underpinned by the consumer’s predisposition toward certain brands. While
Consumer Value tells us about the worth of the brand now, it is not a measure of market
share robustness, i.e. brand strength. However, a brand’s conversion profile does provide a
measure of its relative strengths and weaknesses.

Based on the results from the initial Brand Dynamics studies, three main types of pyramid
profiles were observed. These are shown below. The profile on the left shows the brand to

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have relatively high Presence and Relevance, but relatively low advantage and bonding. In
contrast, the middle profile shows the brand to be low at presence and relevance – but once
past these hurdles to have a relatively high conversion to Performance, Advantage and
Bonding. The third profile is one where the brand is positive all the way up the pyramid
(with the possible exception of Relevance) – particularly at Performance, Advantage and
Bonding.

5.22 NPD: BRANDBUILDER™

5.22.1 Background

Brand Builder was created in 1992 in order to address a variety of questions of strategic
importance to brand marketers: What’s happening in my category? Why is it happening?
How to create and maintain the consumer loyalty to my brands necessary to grow them,
extend them, shield them from competitive threat, thus making them – and keeping them-
profitable? At the head of every successful brand is a core franchise of loyal buyers for whom
the brand satisfies a high proportion of their needs. These behaviourally loyal buyers often
account for a disproportionate amount of the brand’s share and profits, as they seek out the
brand – and purchase it repeatedly – even in the face of competitive pressure.

5.22.2 The Link Between Attitudes and Behaviour

Not all repeat buyers are equally committed to the brand. Some hold beliefs about the brand
that are consistent with their loyal purchase behaviour; they are the brand’s “core” franchise.
Core consumers are truly committed – behaviourally and attitudinally – to the brand.

Others hold attitudes that are out of sync with their observed behavioural loyalty to the brand.
We call those with attitudes less positive than their purchasing behaviour “vulnerable”,
because their repeat purchasing is tied too strongly to price, or the attitudes that drive their
behaviour are important to few category buyers, making the brand vulnerable to competitive
offerings. Conversely, growing/strong brands typically “own” critical attributes among

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consumers that are not yet buyers. These “prospects” often become loyal buyers to the brand
over time.

The essence of BrandBuilder, then to identify and size these buyer groups via a unique
modelling process that fuses survey data with behavioural data, and to identify the specific
dynamics and attributes that drive brand loyal behaviour.

5.22.3 Attributes Driving Brand Loyalty

It is not sufficient to merely determine which brands are strong, and which are weak. In order
to provide information to help brand marketers shift their brands’ positioning in the proper
direction, it is vitally important to ascertain the specific attributes that drive behaviour at
three levels:

(1) At the category level,
(2) At the segment/form/usage occasion, demographic group level, and
(3) At the brand level.

On the other hand, it is generally unnecessary, and may even be inaccurate; to ask consumers
to rate the importance of attributes themselves. It is far better to derive the importance of
attributes indirectly, through the measurement of behavioural loyalty on the one hand, and
consumer’s associations of specific characteristics of attributes with brands on the other. The
Brand Builder model uses a logic regression procedure to determine the key drivers of
behaviour at each of these three levels.

5.22.4 Key Principles on What Drives Behaviour

The attitudes measured must be tailored to the category, and must include all key dimensions.

● The larger the brand, the more likely it will be that the category drivers and the brand
drivers are the same,

● A brand that “owns” unimportant attributes can be described as a “niche” brand.

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● A “niche” brand can also be a “strong” brand, provided that the base of consumers
“driven” by its attributes is growing, or if its share of that niche grows over time.

5.22.5 Category Equity

In order to arrive at a complete view of the client’s proper strategy, it is also critical to
determine the extent to which the category itself is strong or weak. The Brand Builder defines
category equity as follows:

5.22.6 Category Equity Definition

The tendency of buyers in the category to buy based purely on brand:

● Preferences (“Brand Driven”) on price along (“Price Driven”), or to
● Expect to be able to buy their favourite brand, and still get an attractive Price

(“System Beaters”).

5.22.7 Some Category Loyalty Principles

Consumers are driven by Brand preferences in some categories, and price in others; very few
are Brand Driven, or Price Driven, across categories.

Historical patterns of marketing spending (e.g. high advertising spend), product quality
differentiation, and strong brand imagery, can all move a category into the “high equity”
quadrant.

Conversely, high levels of promotion spending, or erosions in product
quality/perceptions/differentiation, are likely to move categories into the System Beaters
quadrant, or into the Price quadrant.

It is easier to leverage a brand into a related category, than to category than to category
distant to it; if the target category has a similar pattern to the base category, consumer
expectations in the 2 categories will assist the brand transfer.

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Despite the category’s pattern, an individual brand’s buyers may act differently; a brand may
be Brand Driven in a Price category or Price Driven in a Brand Driven category.

5.22.8 Validation Evidence

In order to validate the predictive relationship between attitudes and behaviour, an R&D
study was conducted. It is discussed in detail in a series of Journal of Advertising Research
articles (Baldinger and Rubinson, 1996, 1997). It was found, in this work, that strong brands
tend to increase in market share from one year to the next, while weak brands tend to decline
in share.

In summary, Brand Builder addresses the key branding questions:

● How many loyal buyers exist, at the category, segment and brand level?
● What are the key attitudinal drivers, in the category segment and brand?
● Which brands are strong, and which are weak, based on their patterns of behaviour

and attitude? and
● What changes should be made in brand positioning, the product itself, or marketing

support, to improve the health of the brand?

5.23 TANDEMAR: BRAND EQUITY TRACKING PROGRAM™

Tandemar launched its Brand Equity Tracking program, with a focus on brand health
measurement, based on extensive exploratory research and validation work.

Tidemark’s Brand Equity Tracking program provides both attitudinal and loyalty measures to
quantify a brand equity score, and is supported by a strong set of diagnostic measures to tell
you what communication strategies will work or will not work to strengthen the equity of the
brand.

Tandemar has conducted Equity Reviews in over 50 different sectors in Canada, and has an
extensive database of Canadian norms and case studies to draw on for analysis purposes.

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Tidemark’s Brand Equity model is an evaluative framework which provides a way of
assessing the overall strength of consumer attitudes towards a brand. It is quantifiable,
measurable, and consistent form category to category. Canadian norms are available, based
on hundreds of case studies.

The parameters of the model are based on the learning from several international studies
(including market mix modelling), and have been supported by our own large scale study of
Canadian brands. Uniqueness and relevance are key brand delivery components, while
familiarity and knowledge are rooted in the salience of the brand to consumers. The
interaction of these dimensions indicates brand strength of ‘health’ brand opportunities and
brand vulnerability. These dimensions have been proved to correlate with purchase loyalty in
a variety of international studies, and have been validated by Tandemar in a large-scale
quantitative study in Canada.

5.23.1 Using Brand Equity in Valuation Procedures

There are many different proprietary approaches and systems for measuring ‘brand strength’
and ‘brand equity’. In this material, certain key resources have been highlighted, but there
are numerous other, less well known approaches. Their validity is to a great extent dependent
upon the nature, complexity and structure of the market, whether it is a consumer or business
to business market and whether the product or service is a frequent or an infrequent purchase.

In ‘fast moving consumer goods’ markets consumers tend to have a repertoire of brands,
which are often almost interchangeable, and the ‘share of requirements ‘for a particular brand
may vary for a whole range of relatively unpredictable reasons. By contrast, in many
financial or ‘durable goods’ markets purchase frequency is very low and inertia is a massive
influence on sales.

With many of these studies the number of respondents limits segmentation of the sample
results while timing of the research can affect the validity of the conclusions.

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Therefore, there is no one brand equity tracking model which is a ‘world beater’ in all
categories. Before approaching the consultant involved, the client should consider a number
of factors.

Why the final information is required

● The level of details of the information required
● The timescale in which the information is required
● Whether static or rolling data is required
● The amount that they are prepared to spend on the report
● The level of reliance they are prepared to place on the results

The key to success of the models described is arguably to marry simplicity and user-friendly
with a detailed and intensive information gathering engine. Category segmentation is a key.
The ideal model inevitably analyses a brand’s strength by segment i.e. by geography, by
lifestyle, by personality or by organizational associations.

5.23.2 David Aaker: Managing Brand Equity

David Aaker advocates a flexible approach to brand equity evaluation which he calls the
Brand Equity Ten.

He identifies what he believes to be the ten key aspects of brand performance which illustrate
the components of brand strength. He recommends that brands should be scored against the
following template:

5.23.3 Loyalty Measures

1. Price Premium

Measuring the additional price that consumers are prepared to pay for a brand. For example,
a structured questionnaire may be used to establish the relationship between cost and stated

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consumer preference for a number of similar goods. Or empirical evidence may be available
to demonstrate from historical data the actual relationship.

2. Satisfaction/Loyalty
Researching the customer’s level of satisfaction with a brand and the level of price sensitivity
allows the market to be segmented into ‘loyal users, price chasers and those in between.”
Perceived Quality/Leadership Measures

3. Perceived Quality
Statistical models can be used to correlate perceived quality and financial measures such as
returns on investment and stock return. The changes in perceived quality scores can be
measured across a variety of different sectors, allowing a comparison of relative brand health.

4. Leadership / Popularity
Leadership scales attempt to measure whether the brand is “a category leader, is growing
more popular or is respected for innovation”.
Associations / Differentiation Measures

5. Perceived Value
This measures whether a brand represents value for money and whether consumers have a
reason to choose one brand over its competitors. In the latter sense it is a similar measure to
perceived quality.
6. Brand Personality

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This is a particularly important factor where there are apparently only minor functional
differences between different t brands in a market. Brand personality “says something’ about
the consumers of different brands. The soft drinks market is an example of this. There may
be little discernible difference in taste between Pepsi and Coca Cola, so the marketing
functions in each company concentrate their efforts upon differentiating the products through
image.

7. Organizational Associations

Brand strength often goes beyond the product brand to the corporate brand which underlies it.
For example, companies might seek to gauge how consumers react over time to statements
such as:

● This brand is made by an organization I would trust.
● I admire the brand X organization
● I would be proud (or pleased) to do business with the brand X.

Awareness Measures

8. Brand Awareness

A simple measure of the distinctiveness of a brand’s personality and the effectiveness of its
advertising and communication campaigns. Loyalty and purchase build from this platform.
Performance relative to competitor brands is a key indicator of brand health.

Market Behaviour Measures

9. Market Share

Measuring a brand via market share can be a clear indicator of consumers’ perceptions and
satisfaction with that brand. A falling market share is usually a good indicator that the brand
is slipping in the consumers’ estimations, although distinctions clearly need to be made
between volume and value share.

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10. Market Price and Distribution Coverage

Brand strength can be measured by distribution percentage. Unlike market share these
measures are easier to define and are less subject to short term blips that may be caused by
price promotions. Measures like the percentage of shops stocking the brand, and the brands
accessibility to the percentage of consumers, are often used to judge a brand’s performance.

Aaker’s recommended approach to brand equity evaluation, outlined in more details in his
book ‘Building Strong Brands’, focuses principally on consumer-oriented measures of brand
strength60, although it also looks at market oriented measures.

5.24 BRAND FINANCE

Brand Finance, in 2009, came out with its Top 500 Global Brands listings. The top ten brands
were:
● Wal-Mart
● Coca Cola
● IBM
● Microsoft
● Google
● GE
● HSBC
● Vodafone
● HP
● Toyota

5.24.1 The Methodology Employed by Brand Finance in Calculating the Top 500
Global Brands was:

60(Free Press Business, First Edition, 1996).

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A discounted cash flow (DCF) technique, to discount estimated future royalties, at an
appropriate discount rate, to arrive at a net present value (NPV) of the trademark, and
associated intellectual property: the brand value.

5.24.2 Following were the Steps Employed in the Valuation Process:

• To obtain brand-specific financial and revenue data
• To Model the market to identify market demand and the position of individual brands

in the context of all other market competitors

5.24.3 Brand Finance Used the Following Three Forecast Periods:

1. Estimated financial results for 2008 using Institutional Brokers Estimate System
(IBES) consensus forecast

2. A five-year forecast period (2009-2013), based on three data sources (IBES, historic
growth and GDP growth)

3. Perpetuity growth, based on a combination of growth expectations (GDP and IBES)

To establish the royalty rate for each brand, which was done by:

1. Calculating the brand strength – on a scale of 0 to 100, according to a number of
attributes such as brand presence, emotional connection, market share and
profitability, among others

2. To use brand strength to determine ßrandßeta1 Index score
3. Apply ßrandßeta Index score to the royalty rate range to determine the royalty rate for

the brand
4. Calculate future royalty income stream
5. Calculate the discount rate specific to each brand, taking account of its size,

geographical presence, reputation, gearing and brand rating (see across)
6. Discount future royalty stream (explicit forecast and perpetuity periods) to a net

present value – i.e.: the brand value

5.24.4 Royalty Relief Approach

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BrandFinance uses a ‘relief from royalty’ methodology that determines the value of the brand
in relation to the royalty rate that would be payable for its use were it owned by a third party.
The royalty rate is applied to future revenue to determine an earnings stream that is
attributable to the brand. The brand earnings stream is then discounted back to a net present
value.

The relief from royalty approach is used for two reasons: it is favoured by tax authorities and
the courts because it calculates brand values by reference to documented third-party
transactions; and it can be done based on publicly available financial information.

5.24.5 Brand Ratings

These are calculated using Brand Finance’s ßrandßeta analysis, which benchmarks the
strength, risk and future potential of a brand relative to its competitors on a scale ranging
from AAA to D. It is conceptually similar to a credit rating.

The data used to calculate the ratings comes from various sources including Bloomberg,
annual reports and Brand Finance research.

5.24.6 Wal-mart

Brand Value (US$M): US$40,616
Brand Rating: AA
Rank 08: 4th
Domicile: US

Wal-Mart Stores Inc. is the world’s largest public corporation by revenue according to the
Fortune Global 500 ranking. During 2008, Wal-Mart finally emerged from decades of living
under a cloud of public opinion in the US.

The recession had fuelled rising demand both in the US and in the UK via its price leading
ASDA subsidiary. Revenues, profits, market cap and brand value had all marched ever

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upwards. At that moment, Wal-Mart owned a 20% share of the entire retail grocery and
consumables business in the US.

5.25 INDIAN PREMIER LEAGUE [IPL]

Twenty20 has taken the cricketing world by storm since its inception in 2003. It has quickly
become a permanent part of both the domestic and international cricket calendars and has
reignited and attracted wider interest in this most gentrified of sports. The BCCI’s
introduction of the Indian Premier League with its $1 billion television deal and player
auctions has generated a level of hype and razzmatazz never seen before in the game of
cricket that is akin to established football, basketball and baseball franchises. Intangible
Business, and MTI Consulting, carried out an in-depth analysis into the values of these new
brands created by IPL

5.25.1 Components of Brand Strength

5.25.1.1 Hard Measures

Heritage: largely irrelevant this year, but in future years, new teams will be added to the IPL
Popularity: consumer interest and behaviour; registered members, website visits,
attendances and TV viewing figures
International salience: a measure of each team’s relevance to an international audience
India salience: a measure of each teams relevance in its core market
Loyalty: demonstrates the ability of each brand to develop and sustain a lasting relationship
with supporters
Price premium: the strength and appeal of the brand allows premium pricing
IPL record: success on the field of play facilitates the acquisition of new fans and retention
of the existing fan base.

5.25.1.2 Panel Measures

Owner equity: a measure of the impact the franchise owner(s) have on the brand

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Awareness: a measure of how well-known each brand is.
Perception: reflection of the franchise image in the eyes of consumers.

5.25.1.3 Methodology

Brand values are a reflection of a brand’s ability to generate future income. It is a forward
looking study that uses historic performance and future trends to predict future activity.
Intangible Business & MTI gathered the publicly available sales data of 2008 for each
franchise. To determine the strength of the brands, each brand was scored on a series of
attributes that underpin the power and reach of each brand. These attributes were a mixture of
hard measures and soft measures of brand strength sourced from publicly available
information and from a qualitative panel of cricket fans from each test playing nation. Using
this data, each brand was then valued using the relief-from-royalty methodology.

5.25.1.4 Calculating Brand Value

The actual brand valuation calculation is relatively straight forward. It attempts to derive the
amount the brand owner would be willing to pay for its brand if it did not already own it. This
approach is called the relief from royalty methodology as it calculates how much the brand
owner is relieved from paying by virtue of owning the brand. The more complicated parts are
the components that contribute to the calculation. These three stages illustrate the process:

1. Forecast Sales

IB & MTI gathered 2008’s “historical sales” data for each franchise brand. Despite their
relatively short existence, it was assumed that the brands have indefinite lives such as the
more established sport franchises like the English Premier League (11 of the 12 original
members of The Football League formed in 1888 are still running.) The compound annual
growth rate (CAGR) was adjusted to reflect the brand’s long term ability for growth. This
reflects more accurately a brand’s growth prospects based on its current and historical
performance.

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2. Royalty Rate

To determine the strength of the brands, each brand was scored on three measures of brand
strength, provided from qualitative panel data –owner equity, awareness and perception. Each
brand was also measured on hard data including heritage, popularity, salience, loyalty, price
premium and IPL record. The average of these two total scores (panel brand score and hard
brand score) was then positioned between a royalty rate range. This determined a unique
royalty rate for each brand. The royalty rate appears to be a simple percentage but in fact this
hides the depth of understanding required to determine a rate that reflects accurately the
profit/cash flow generated by the brand alone –separate from other elements of product
delivery.

3. Discount Rate

Future sales were then multiplied by the royalty rate and reduced at the relevant tax rate.
They were then discounted to calculate the net present value of those future cash flows. The
discount rate reflects the time value and risk attached to those cash flows and for the purpose
of this exercise a 14% discount rate had been applied.

4. Testing

Results were tested and verified by sense-checks, such as to comparable commercial
transactions, and referenced to proprietary information on the value of leading brands, which
all share similar characteristics of value cash flow generation. These valuations were based
on an analysis of publicly available information and can’t be considered as necessarily
reflecting true past or future performance.

5. Key Issues

The valuation was carried out by assuming that the TWENTY20 format was here to stay.
Although according to IB & MTI, “it’s only a matter of time before politics and self-interest
attempts to upset the apple cart. In the medium-long term, it’s almost certain that either

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individually or collaboratively the other boards will attempt to launch rival competitions that
may either dilute the IPL or replace it as the premier domestic Twenty20 competition, but
given the IPL’s successful start, the size of the Indian market and the passionate Indian
cricket fans, rival competitions face a near impossible challenge and national boards would
be better off supporting the IPL.”

5.25.2 Building A Global Sports Franchise

To be considered alongside global brands like Manchester United and LA Lakers. IB & MTI
suggested the following factors as key building blocks towards developing a sustainable
global sports brand:

● Local Community
● Media Exposure
● Success

The Then Top Brands:

● Kolkata Knight Riders, $22.3m
● Delhi Daredevils, $18.7m
● Chennai Super Kings, $18.1m
● Mumbai Indians, £16.9m
● Kings XI Punjab, $15.1m
● Royal Challengers Bangalore
● Hyderabad Deccan Chargers
● Rajasthan Royals, $10.1m

5.26 GRAND METROPOLITAN

In 1988, GrandMet was the first U.K. Company to begin the practice of accessing the value
of recently acquired Brands (Smirnoff, Baileys, Haagen-Dazs, Green Giant and Burger King)
& then capitalizing the value on the balance sheet.

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Only acquired brands were included on the balance sheet despite the obvious value to
GrandMet of its internally generated brands. These “Intangible Assets” constituted 27 % of
the company’s assets.

Early valuations were based on historical earnings multiples, a method not currently seen as
accurately reflecting the true worth of a brand.

GrandMet also introduced a “brand equity monitor”. The purpose of this was not to place a
historical value on a brand, but to give management an idea of the performance of brands.
The factors measured could not be measured in purely profit and loss terms and the monitor
included both economic, consumer and perceptual measures of performance, which together
formed a subtle and responsive mechanism for tracking both brand health, and if necessary
financial brand value.

Diageo now monitors a number of key financial and marketing drivers to establish the level
of brand equity. These drivers focus management’s attention on gaining customer awareness,
loyalty, market share and the brand’s ability to charge a price premium. It is this premium
which communicates the value of a brand to the company’s stakeholders.

There are a number of checks used by the Diageo staff to assess the trends in brand equity. A
sample of these measures includes awareness, advertising spend, market penetration and
share of display.

Management is able to gauge the relative health of brands from a flow of consistent and
reliable data. The fact that the vast majority of this data will never be included in the
company accounts is irrelevant; it provides instead a degree of strategic and operational
control over the group’s most valuable assets

The catalyst for these developments was the need to adequately reflect, from solely a
financial reporting perspective, the value of brands.

5.27 GODREJ

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The Godrej Consumer Product Limited, in 2007, underwent a Brand Valuation for 5 of its
products through Brand Finance, a UK based world renowned firm in marketing and
valuation expertise.

Brand Finance valued 5 major brands of GCPL:

● Cinthol
● Fairglow
● Godrej No.1
● Ezee
● Godrej PHD

The objective was to know the value of the brands & identification of demand drivers for
each brand, quantifying the potential branded business value uplift by leveraging brand
equity. Brand Finance in general, employs these methods for its valuation purposes:

● Cost Based Valuation
● Income Based Valuation: Royalty Prices
● Income Based Valuation: Economic Use
● Market Based Valuation

5.28 TELECOM BRANDS

5.28.1 Introduction

In 2008, Intangible Business, for the first time, published the values of the world’s largest
mobile telecoms brands.61 The brands of those in the top 100 were collectively worth over
$300bn. This is a heavily branded industry. With mobile services frequently generic – with
little to choose from between competitors – brands are generally the main differentiator. They

61 See its report at
<https://www.rankingthebrands.com/PDF/Top%2010%20Worlds%20Most%20Valuable%20Mobile%20Teleco
m%20Brands%202008.pdf>

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can inspire loyalty, help reduce customer churn, increase average revenues per user (ARPU),
attract new customers and encourage existing ones to trial new services and related products.

The World’s Most Valuable Mobile Telecoms Brands 2008 identified which brands were
succeeding in building value for their shareholders and which brands required additional
resources and attention. 500 of the world’s biggest operators were studied to produce the top
100. This section discusses key findings of the report.

5.28.2 Methodology

Brand values are a reflection of a brand’s ability to generate future income. It is a forward
looking study that uses historic performance and future trends to predict future value. Three
years of publicly available historical sales data was gathered for 500 of the world’s biggest
telecoms brands. To determine the strength of the brands, each brand was also scored on nine
hard measures, sourced from Informa Telecoms & Media, and nine measures of brand
strength from a panel of industry experts. Using this data, each brand was then valued using
the relief-from-royalty methodology to produce the top 100.

5.28.3 Hard Measures

Turnover: volume of branded mobile income
Subscriptions: number of active subscribers attached to each brand
Customer churn: proportion of customers leaving the brand annually
Market share: average market share in each main market of mobile telecoms users
Penetration: proportion of the market which has telecoms services
CAPEX: volume of capital expenditure invested in future benefits
EBITDA: earnings before interest, taxes, depreciation and amortization
ARPU: average revenue per user
Profitability: level of relative profitability of each brand

5.28.4 Panel Measures

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Share of market: measure of market share
Brand growth: projected growth based on 3-5 years historical data and future trends
Price positioning: a measure of a brand’s ability to command a premium
Market scope: number of markets in which the brand has a significant presence
Brand preference: a measure of relative pre-disposition or spontaneous selection of a brand
Brand awareness: a combination of prompted and spontaneous awareness
Brand relevance: capacity to relate to the brand and a propensity to purchase
Brand heritage: a brand’s longevity and a measure of how it is embedded in local culture
Brand perception: loyalty and how close a strong brand image is to a desire for ownership

5.28.5 Calculating Brand Value

Brand values are a reflection of a brand’s ability to generate future income. So this is a
forward looking study that uses historic performance and future trends to predict future
activity. The actual brand valuation calculation is relatively straight forward. It attempts to
derive the amount the brand owner would be willing to pay for its brand if it did not already
own it. This approach is called the relief from royalty methodology as it calculates how much
the brand owner is relieved from paying by virtue of owning the brand. The more
complicated parts are the components that contribute to the calculation. These three stages
illustrate the process, simply:

1. Forecast sales: Three years of historical sales data was gathered for 500 of the world’s
biggest mobile operator brands. The top 100 brands have been given indefinite lives as they
are all market leaders, with heritage and financially robust owners. The compound annual
growth rate (CAGR) is adjusted to reflect the brand’s long term ability for growth. This
reflects more accurately a brand’s growth prospects based on its current and historical
performance.

2. Royalty rate: To determine the strength of the brands, each brand was scored on nine
measures of brand strength, provided from qualitative panel data. This included share of
market, growth, price positioning, market scope, preference, awareness, relevance, heritage
and perception.

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Each brand was also measured on three years of hard data including turnover, subscriptions,
churn, market share, growth, penetration, average revenue per user (ARPU), and profitability.
The average of these two total scores (panel brand score and hard brand score) was then
positioned between a royalty rate range. This determines a unique royalty rate for each brand.

The royalty rate appears to be a simple percentage but in fact this hides the depth of
understanding required to determine a rate that reflects accurately the profit/cash flow
generated by the brand alone – separate from other elements of product delivery.

3. Discount rate: Future sales are then multiplied by the royalty rate and reduced at the
relevant tax rate. They are then multiplied by a discount rate to calculate the net present value
of those future cash flows. The discount rate reflects the time value and risk attached to those
cash flows and for the purpose of this exercise has been left at a flat 9% as these are relatively
low-risk, established brands.

5.28.6 Key Issues:

1. Economy: Telecoms firms are traditionally resilient to economic woes. However, few
industries look likely to be immune from the negative impact of the current financial crisis
which is truly global. The telecoms industry will be no exception. Brands will suffer but with
this comes opportunity for strong brands to steal market share from the weaker. Hatches need
battening down, focus needs sharpening and all brands will need to understand what drives
their value.

2. Brand Portfolios: Following acquisitions the dilemma always exists of whether to keep
the brand or transition another brand in its place. Different operators take different
approaches. In Hungary for instance, Telnor owns and operates the Pannon brand using the
Telenor blue logo whereas in other countries the Telenor name is used with the same logo.
Telefónica uses its own brand as well as others including Movistar and O2. América Móvil
also has the Claro and Telcel brands. Would it be better for these companies to merge their
portfolio of brands into one dominant brand? Local brands can have substantial traction
which, if dislodged, would be extremely detrimental. Generally, however, transitioning these
brands into one dominant brand in a sensitive fashion would increase the value of the whole.

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3. Emerging Markets: Africa, China, India and Latin America present the biggest
opportunities for mobile operators with the sheer size of the populations and economic
growth prospects. These markets have experienced significant growth in recent years
attracting considerable interest from international, acquisitive groups. As growth stagnates in
more developed markets of Europe and the US the attraction in emerging markets will only
increase.

4. Consolidation: Further consolidation is inevitable with synergies from merging
operations, the desire for cross-border brands and financial instability making more deals
look attractive. Customers are generally the main motivation for acquisitions in the telecoms
industry. However, as customer relationships are generally with the brand, particular attention
needs to be given to brand due diligence prior to the acquisition.

5.28.7 The World’s Most Valuable Mobile Telecoms Brands 2008, Top 3:

1. $30.8bn China Mobile

With 400m subscribers and 20% annual revenue growth driving income to near $50bn in
2007, China Mobile is the world’s biggest mobile telecoms operator. It also has the world’s
most valuable telecoms brand, worth $30.8bn. The China Mobile brand was also scored the
highest by the panel of industry experts and has the strongest overall brand score. Since
losing its monopoly China Mobile has continued to be the dominant operator, a status it is set
to continue enjoying.

2. $22.1bn Vodafone

Britain’s Vodafone group is the world’s second biggest mobile operator by both revenue and
subscribers. Its brand is the most geographically spread and is the second most valuable
telecoms brand in the world & the first-most valuable brand in EU, worth $22.1bn. Its
marketing investments, distinctive speech mark logo and vivid red colouring aid the brand’s
standout and the company’s consistently acquisitive and nimble management will ensure
brand value continues to grow with the company.

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3. $20.4bn Verizon Wireless

As the biggest mobile operator in the US with revenues of $43bn, Verizon enjoys a customer
base of over 70m. The brand’s significant advertising spends and 2,600 stores and kiosks
throughout the country ensure Verizon’s constant and consistent visibility. Verizon’s
relatively high ARPU and positive associations with the brand will contribute towards
maintaining and developing the brand’s equity.

5.29 Infosys

The value of the brand Infosys shot up 62 per cent to Rs 22,915 crore in fiscal 2006 against
Rs 14,153 crore in fiscal 2005.

Similarly, the market capitalization of the country's second largest software exporter grew by
35 per cent to Rs 82,154 crore during the year from Rs. 61,073 crore, the company said in its
annual report for 2005-06. The value of the Infosys brand was at 27.9 percent of its market
cap during fiscal 2006 against 23.2 per cent in 2005.

5.29.1 Generic Brand

Infosys had adopted the generic brand earnings-multiple model to value its corporate brand,
the company said. The concept finds mention in "Valuation of Trademarks and Brand
Names" by Mr. Michael Birkin in "Brand Valuation", edited by Mr. John Murphy.

Using the brand earnings-multiple model, Infosys based its valuation on the following
assumptions, among others the total revenues excluding other income after adjusting the cost
of earnings, the annual inflation at five per cent and five per cent of the average capital
employed used for purposes other than promotion of the brand and a tax rate of 33.66 per
cent.

Infosys annual report said it had used various models for evaluating assets off the balance
sheet to bring certain advances in financial reporting. "Such an exercise also helps the Infosys

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management in understanding the components that make up goodwill. The aim of such
modelling is to lead a debate on the balance sheet of the next millennium,'' it added.

5.29.2 Umbrella Concept

Goodwill is a nebulous accounting concept that is defined as the premium paid to tangible
assets of a company. It is an umbrella concept that transcends components such as brand
equity and human resources.

Corporate attributes including core competency, market leadership, copyrights, trademarks,
brands, superior earning power, excellence in management, outstanding workforce,
competition, longevity were built into this concept, the annual report said.

Infosys believes the client base was its most valuable intangible asset. Marquee clients or
image enhancing clients accounted for 48 per cent of Infosys' total revenues.

5.30 ANTI-COMPETITION ISSUES

The rationale for bestowing exclusive rights to the owner of intellectual property (IP) has
been understood as a means of reward and incentive to foster innovation. The ability to
exclude others from trading in a form of business activity has been a foul smell on the nose of
legislators across the world. Legislators from many countries have recognized the benefits for
economies and consumers flowing from competition between traders and introduced laws to
prevent monopolistic behaviour. In India this is reflected in the Competition Act. The tension
between these two legal and economic disciplines has been recognized for many years.

It has been noted by commentators and the courts that the ultimate objectives of IP and anti-
competition laws are complementary because both serve the common purpose of maximizing
consumer welfare, through innovation, industry and competition62

62 See, for example, Atari Games Corporation v Nintendo of America Inc (1990) 897 F 2d 1572 (Fed Cir 1990).
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Khan’s study (1999) indicates that patent holdings are associated with a higher likelihood of
anti-competition conduct for medium and large firms. This supports the hypothesis that
innovative, successful firms are more likely to garner anti-competitive attention. So a fine
line needs to be drawn that balances both the objectives of promoting competition while
encouraging innovation.

There have been studies from the United States which assert that in fact, there is a weak link
between IP protection and innovation in most industries. Rather, it is said, the incentive to
invent is brought about by the existence of competition rather than monopoly reward
although some commentators have acknowledged exceptions in certain industries such as
pharmaceutical, agricultural and chemical. Applying a sanity test to this discussion would be
to ask whether the firm who has developed an innovative product and built a business around
it falls away as the period of expiration of monopoly rights approached. In fact the enterprise
seeks to develop further technologies in order to retain a competitive advantage.

The Indian government is yet to indicate what policy approach it intends to adopt in drawing
this fine line. It is more than just a theoretical argument. Ultimately there will be grey areas
no matter what is decided. It is impossible to exhaustively identify the rules for determining
when a transaction is anti-competitive or merely just a reasonable exercise of monopoly IP
rights. As Lao has commented [p 10] in an understated way, ‘a dependable formula for
determining the optimal scope of protection for intellectual property, that would help resolve
the issue of antitrust limits on intellectual property rights from a policy perspective, is hard to
derive’.

The debate has tended to focus on the forms of IP that lead to the establishment or extension
of new markets or that enable control of markets such as patents, copyright, designs and
know-how. Trademarks are not so apparent in this discussion because it deals with product
differentiation although the brand may be strong enough that it could be said that licensing
conduct in respect of trademark rights may raise similar issues.

In any event licensing is recognized as the most common form of IP commercialisation. The
conditions that are contained within an IP licence will dictate the level of ‘anti-competitive
effect’. In order for entrepreneurs to confidently implement licensing strategies they should

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have clear minds on what may await them if they were to enter into the anti-competitive
swamp.

5.31 INDIAN RESTRICTIVE TRADE PRACTICES

The area of restrictive trade practices contained within the law is a complex area and the
source of much litigation. The purpose of this material is to give the reader an understanding
of these restrictive trade practices principles as a foundation for more detailed discussion on
the scope of the doctrine of restraint of trade.

At the risk of being too sweeping, the essential principles behind India’s restrictive trade
practices law are centred on the definitions of ‘market’ and whether an enterprise’s conduct
results in ‘substantially lessening competition’ of that market (the ‘SLC test’). Those
provisions that prohibit conduct without requiring the test of substantially lessening
competition are referred to as ‘per se’ provisions.

5.31.1 Anti-competitive Conduct

An enterprise is prohibited from entering into:

● a ‘contract’, ‘arrangement’ or ‘understanding’ (where ‘understanding’ has been
interpreted to be a meeting of two minds, although it may be possible that it includes a
situation where one party is aware of a course of action and does not commit to it,
although an expectation or hope will not be sufficient – see Halsbury’s Laws of India;

● that has the purpose of, effect or likely effect of ‘substantially lessening competition’
in the relevant market.

● Determining this second element involves a quantitative and qualitative assessment of
the impact of the conduct. The court will take account of normal commercial practice
and commercial realities. Some factors that are relevant include:

● the enterprise’s market share;
● market power;
● extent that the conduct keeps out competitors to the market;
● the barriers to entry;

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● extent to which the client’s freedom of action or choice as supplier is restrained;
● length of time of the restriction.

The enterprise will also be prohibited from entering into a contract, arrangement or
understanding that contains an exclusionary provision. An exclusionary provision is one
which has the purpose of preventing, restraining or limiting the supply of goods or services to
another person. The exclusionary provision must be part of a contract, arrangement or
understanding between competitors. Importantly this test is not subject to the SLC
(substantially lessening competition) test.

5.31.2 Price Fixing

An enterprise is prohibited from fixing the price of goods or services with a competitor or
potential competitor. This includes the controlling or maintaining of price for a discount,
allowance or rebate under an agreement, arrangement or understanding between competitors.
Importantly, there need only to be tow parties to the arrangement who are competitors. Such
conduct will automatically qualify as conduct that has the effect of substantially lessening
competition. There are some exceptions to this. It will not capture the establishment of a joint
venture where the conduct concerns provision of services, such as the supply of IP for
purposes of the joint venture, unless the effect is to substantially lessen competition.

5.31.3 Exclusive Dealing

An enterprise is prohibited from entering into an arrangement or refusing to enter into an
arrangement on the basis that restricts a client in a way it can deal with a competitor of the
enterprise if there is an adverse effect on competition. This may entail restrictions on how a
person acquires or resupplies goods or services or affects the acquiring and resupply of goods
or services in goods relation to a particular location. At the end of the day the arrangement
must have the effect of substantially lessening competition in the relevant market.

5.31.4 Mergers And Acquisitions

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The law prohibits an enterprise from acquiring shares or assets if that acquisition has the
effect of substantially lessening competition in the relevant market. In addition to the factors
referred to above courts have also considered a likelihood of the enterprise being able to
increase prices or profits, the availability of substitutes, market attributes such an innovation
and growth product differentiation, the chances of removal of a vigorous and effective
competitor and the extent of vertical integration63.

5.31.5 Exploitation of Intellectual Property

The law in essence provides that an enterprise may avoid contravention of the above
provisions if that conduct relates to the exploitation of the IP. This is discussed in more detail
below.

5.31.6 Market Power

If an enterprise has a substantial degree of power in a market it is prohibited from misusing
that power for the purpose of eliminating or substantially damaging a competitor, preventing
entry of any person into a market or preventing or deterring any person from competing
against the enterprise.

5.31.7 Resale Price Maintenance

An enterprise is prohibited from insisting that the purchaser of goods or services be re-
supplied at a price less than that specified by the enterprise. The SLC test does not apply to
this conduct.

The Competition Act, 2002 in its preamble64 itself reaffirms the objective for which it has
been drafted, enacted and enforced. The very striking feature of the Act is creating the office
of a Competition Commission as a specialized agency instead of making the provisions of the

63 See Halsbury’s Law of India, para [420-1345]
64 An Act to provide, keeping in view of the economic development of the country, for the establishment of a
Commission to prevent practices having adverse effect on competition, to promote and sustain competition in
markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in
markets, in India, and connected therewith or incidental thereto.

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Act to be entertained before any civil court. The Act prohibits jurisdiction of the civil courts
over to entertain any suit or proceeding in respect of any matter which the Commission is
empowered by the provisions of the Act65. To further extend the powers of the Commission
the Act has overriding effect therewith contained in any other law of the land66, which is
further fortified by the provision of application of other laws67. The Act has an unparalleled
provision to restrict the disclosure of the information obtained by the Commission for any
purpose of this Act68. The nation has felt empowered under the law by the Right to
information Act, 2005. Is the provision of section 57 a restraint to the provisions of right to
access of information provided under the Right to Information Act, 2005? The language of
section 57 makes this question debatable!

No law has the power to command without the teeth to bite the non-abiders. The Competition
Act, 2002 is no exception to it with the reminder that the Competition Act is a civil law and
its violation should be considered only a civil wrong. The Act prescribes detainment in the
civil prison and the liability to pay fine for non-compliance to the orders of the Commission
or failing to pay the penalty imposed as per the provisions of the Act69. The orders passed

65 Section 61: No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter
which the Commission is empowered by or under this Act to determine and no injunction shall be granted by
any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by
or under this Act.
66 Section 60: The provision of this Act shall have effect notwithstanding anything inconsistent therewith
contained in any other law for the time being in force.
67 Section 62: The provisions of this Act shall be in addition to, and not in derogation of, the provisions of any
other law for the time being in force.
68 Section 57: No information relating to any enterprise, being an information which has been obtained by or on
behalf of the Commission for the purpose of this Act, shall, without the previous permission in writing of the
enterprise, be disclosed otherwise than in compliance with or for the purpose of this Act or any other law for the
time being in force.
69 Section 42: (1)Without prejudice to the provisions to this Act, if any person contravenes, without any
reasonable ground, any order of the Commission, or any condition or restriction subject to which any approval,
sanction, direction or exemption in relation to any matter has been accorded, given, made or granted under this
Act or fails to pay the penalty imposed under this Act, he shall be liable to be detained in civil prison for a term
which may extend to one year, unless in the meantime the Commission directs his release and he shall be liable
to a penalty not exceeding rupees ten lakh.(2) The Commission may, while making an order under this Act,
issue such directions to any person or authority, not inconsistent with this Act, as it thinks necessary or
desirable, for the proper implementation with this Act, as it thinks necessary or desirable, for the proper
implementation or execution of the order, and any person who commits breach of, or fails to comply with, any
obligation imposed on him under such direction, may be ordered by the Commission to be detained in civil
prison for a term not exceeding one year unless in the meantime the Commission directs his release and he shall
also be liable to a penalty not exceeding rupees ten lakh.

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under the provisions of the Act shall be enforced as if an order or decree made by a High

Court70

With this background of the powers vested within the Commission, it would be prudent to

look for the business of the Commission in the domain of IP. As stated earlier, IP is a time

bound monopoly which is considered bad for the open market system but the TRIPS does not

curtail the private monopoly and advises the members to ensure that the rights in IP are not

going to become barriers to trade. IP is considered as the property of the new millennium and

the business environment can be imagined without IP. So it is a kind of limitation to go with

the IP monopoly which apprehensions of being counterproductive to the trade facilitation if

left unchecked! The objective of the Competition Commission is to curb the agreements

having the potential to adversely affect on competition and abuse of dominant position in the

open marketplace. The agreements include written and oral agreements, arrangements,

understanding between or among two or more parties/persons. The Competition Act has also

included the most vital player of the open marketplace without whom the market cannot

exist, the consumer. India is a country in which the Government, both at Central and State

level, is engaged in non-governing commercial activities. The Government holds monopoly

in some areas like railways, electricity, arms and ammunition manufacturing and atomic

energy and in most of the cases acts as the sole entity. The existence of Government owned

commercial entities have been covered under the scanner of the Act as the definition of the

‘entity’71 in the Act covers the Government-run enterprises. So the Competition Act is

70 Section 39: Every order passed by the Commission under this Act shall be enforced by the Commission in the
same manner as if it were a decree or order made by a High Court or the principal civil court in a suit pending
therein and it shall be lawful for the Commission to send, in the event of its inability to execute it, such order to
the High Court or the principle civil court, as the case may be, within the local limits of whose jurisdiction,__
In the case of an order against a person referred to in sub-clause (iii) or sub-clause (vi) or sub-clause (vii) of
clause (1) or section (2), the registered office or the sole or principle place of business of the person in India or
where the person has also a subordinate office, that subordinate office, is situated;
In the case of an order against a person, the place where the person concerned voluntarily resides or carries on
business or personally works for gain, is situated, And thereupon the court to which the order is so sent shall
execute the order as if it were a decree or order sent to it for execution.

71 Section 2(h): enterprise means a person or a department of the Government, who or which is, or has been,
engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles
or goods, or the provision of services, of any kind, or in investment, or in the business of acquiring, holding,
underwriting or dealing with shares, debentures or other securities of any other body corporate, either directly or
through one or more of its units or divisions or subsidiaries whether such unit or division or subsidiary or
located at the same place where the enterprise is located or at a different place or at different places, but does
not include any activity of the Government relatable to the sovereign functions of the Government including all
activities carried on by the departments of the Central Government dealing with atomic energy, currency,
defense and space.

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another step in democratization of business and commercial aspects of India without
compromising the sovereign power of the nation. There is no doubt that in the name of
creating a market regulator to curb anticompetitive practices, sovereignty of the nation cannot
be compromised. But in the name of sovereign power, the decision makers should not be
permitted to act like sovereigns enjoying all rights without any responsibility. To ensure the
same is the responsibility vested with the Commission. It is unfortunate that in dealing with
the issues in which a statutory body is involved the powers of the Commission have been
curtailed to make it virtually meaningless. The provision in the Act in this respect says that in
the course of any process before any statutory authority if an issue is raised by a party about
foul play in contravention to the provisions of the Act, the concerned statutory authority may
make a reference to the issue to the Commission72. Firstly, it is left at the sweet will of the
statutory authority to make a reference to the Commission to the raised issue. Secondly, the
Commission has been left with the option to provide an opinion after hearing the parties
involved in the issue. Once again it is left at the sweet will of the statutory authority to pass
an order at its will against the issue raised by a party. Then, what is the value of the opinion
of the Commission and the time consumed in the opinion delivery process? No law permits a
party to decide an issue arbitrarily and in this case the statutory authority has been vested
with the right to ignore the opinion of the Commission. Even the provision of citing a reason
in the order delivered by the statutory authority, when the order is contrary to the opinion of
the Commission, has not been incorporated. The time bar for the Commission to provide the
opinion within sixty days of receipt of such reference request once again makes a statutory
authority, which is a necessary party in the issue, not even to bother the opinion of the
Commission to pass an order in the issue raised after the expiry of sixty days timeline. The
logic fails before section 21[15] of the Act to establish a justified relation between
sovereignty and equity. The inclusion of Government departments in the definition of
enterprises is as good as the eyewash of section 21 of the Act to let a party decide the issue

72 Section 21 (1): Where in the course of a proceeding before any statutory authority an issue is raised by any
party that any decision which such statutory authority has taken or propose to take, is or would be, contrary to
any of the provisions of this Act, then such statutory authority may make a reference in respect of such issue to
the Commission.
(2) On receipt of a reference under sub-section (1), the Commission shall, after hearing the parties to the
proceedings, give its opinion to such statutory authority which shall thereafter pass such order on the issue
referred to in that sub-section as it deems fit; Provided that the Commission shall give its opinion under this
section within sixty days of receipt of such reference.

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herself to the exclusion of the other party and non-binding opinion of the Commission, if it
was sought by the issue deciding statutory authority party at all.

The provisions which provide contours for scanning the handshakes between the business
entities by the Commission for the sake of ensuring the healthy competition in the market
have got strength from the following three postulates of the competition law which is also
known as antitrust law:

1. prohibiting agreements or practices that restrict free trading and competition between
business entities. This includes in particular the repression of cartels;

2. banning abusive behaviour by an entity dominating a market, or anti-competitive
practices that tend to lead to such a dominant position. Practices controlled in this way
may include predatory pricing, tying, price gouging, refusal to deal, and many others;
and

3. supervising the mergers and acquisitions of large corporations, including some joint
ventures. Transactions that are considered to threaten the competitive process can be
prohibited altogether, or approved subject to remedies such as an obligation to divest
part of the merged business or to offer licenses or access to facilities to enable other
businesses to continue competing.

The reflections of these postulates are found in the Competition Act, 2002 with special
reference to sections 3, 4, 5 and 6.

The Commission is to look into the agreements which are anti-competitive in nature and if
decided anticompetitive would be void as prescribed in Section 3. In short, the agreements
which bring a person or an association of persons into the dominant position are to be
considered anti-competitive to the exclusion of IP rights for either protection or to restrain
infringement. Although section 3 defines anti-competitive agreements, the Act leaves the
floor open to define and interpret an anti-competitive de novo in respect of each case.

The second in the check list of the anti-competitive trade practice is abuse of dominant
position to assure the existence of small fish in the sea of open market. The section 4 defines
the abuse of dominant position and prohibits it out rightly. The section 4 literally says that

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monopoly is bad and defines what is bad in reference to enjoyment of monopoly in the
market. There are a few important points to ponder upon in reference to the misuse of the
dominant position in the market. Firstly, the section 4 of the Act contrary to the previous
section does not come to exclude the dominant position acquired by IP monopoly. Secondly,
the dominant position is to be examined not only in reference to the other competitors in the
market but also in reference to the consumers. Thirdly, Section 4 also includes the misuse of
dominant power of an enterprise to use the poison of predatory price to wipe off the
competitors from the market. There is a complete chapter 16 in the Patent Act, 1970 to check
the malpractice of dominant position due to patent monopoly in the form of compulsory
licensing. Special attention has been given in patent law to ensure the availability of
medicines at an affordable price. Similar provision is present in the Copyright Act, 1957
under section 32 for granting license to publish a translation of a foreign work in a regional
language used in India for the purpose of teaching, scholarship or research after one to three
years, subject to the respective conditions, after the publication of the original work for which
otherwise the license is given after seven years. These provisions in different IP acts provide
threads to be tightened under the provision of section 4 of the Competition Act, 2002 to leave
little room for the abuse of dominant position to sustain.

The third set of issues at the scanner of the Commission, as provided in section 5 of the Act,
are related to maintaining the competitiveness in the market, to keep a tab on the mergers,
acquisitions and amalgamations of the enterprises. They have been very aptly named as
combinations to exploit the more dominant position in combination of major players. Section
5 prescribes the threshold limits for the joint assets or turnover resulting from handshakes of
enterprises and the Commission has the role of a watchdog to ensure that the provisions of
the Act have been complied with in forming the combinations of powerful market players.
Section 6 defines regulations to adhere with, to the extent of declaring the combination voids
if the combination causes or there are apprehensions of appreciable adverse effect on
competition within the Indian market. There is a provision under section 6 of the Act for the
parties involved in combination to approach the Commission within seven days from the
approval of the merger or amalgamation proposal or execution of any agreement for
acquisition to take the approval of the Commission for forming the combination. The
Commission, as prescribed in section 30, shall inquire about the declaration made about
forming the combination and the effect of the combination on competition. The consent of

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the Commission is to become an integral part of the due diligence procedure in the mega
deals in the Indian corporate world to face the danger of getting declared a void deal in the
time ahead. There is also a provision under section 19 for making an inquiry into certain
agreements and dominant position of enterprise for which the Commission may either take
suo moto cognizance of a deal or may entertain a complaint as prescribed or take a reference
made by the Central Government to inquire into a deal. The Commission is duty bound by
section 18 to eliminate practices having adverse effect on competition, promote and sustain
competition, protect the interests of consumers, and ensure freedom of trade carried on by
other participants in the market in India. If the Commission disapproves a combination then
the other legal authorities are duty bound under the provision of section 31(13) to disapprove
the combination.

The market would remain uneven if the position of any of the constituents remains weak.
This thought always remained in the mind of policy makers and to make the constituents at
equal footing and to ensure the balance the special emphasis was given to the consumers in
almost all legal instruments at both domestic and international level. The objectives and
principles of the TRIPS Agreement have been defined in Article 773 and Article 874 of the
Agreement; both the Articles show the concern for the consumers. The marketplace makes no
sense without consumers. The consumers do not compete in the marketplace with the
producers and service providers; even then they have been rightly safeguarded in the
Competition Act, 2002.

The existence of the provision for curbing the anti-competitive trade practice with reference
to the TRIPS Agreement is not a coincidence. The blur at the border line of the domains of
the IP laws and the competition law makes the anti-competitive issues related to IP very

73 Article 7: The protection and enforcement of intellectual property rights should contribute to the promotion of
technological innovation and to the transfer and dissemination of technology, to the mutual advantage of the
producers and users of technological knowledge and in a manner conducive to social and economic welfare, and
to a balance of rights and obligations.
74 Article 8: (1) Members may, in formulating or amending their laws and regulations, adopt measures necessary
to protect public health and nutrition, and to promote the public interest in sectors of vital importance to their
socio-economic and technological development, provided that such measures are consistent with the provisions
of this Agreement.
(2) Appropriate measures, provided that they are consistent with the provisions of this Agreement, may be
needed to prevent the abuse of intellectual property rights by right holders or the resort to practices which
unreasonably restrain trade or adversely affect the international transfer of technology.

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complex. Most of the top hundred global enterprises have a major share in their assets in the
form of IP. Section 3 is virtually defunct for the IP agreements in the name of restraining any
chance of infringement and protection of IP rights. If the patent licensing agreements are
carefully studied, it would not be difficult to point out anti-competitive conditions in them.
Even in the service agreements to the goods, under IP monopoly, all means are tried to keep
the IP within the control of the owner, leaving virtually no chance for infringement. The
chances for infringement are always there in IP as it has to enter into the market for its own
existence. There is no bank locker or manual lock to keep IP safe. It sustains on just legal
provisions. The non-existence of its physical properties makes the task more arduous to
manage it in the market while exploiting it commercially. Hence the pro monopolistic
approach is a must to exploit an IP throughout its life. Therefore, the exclusion of the IP
agreements from section 3 of the Act is justified. Again the million dollar question remains-
how to see anti-competitive provisions in those deals in which IP forms a major chunk of
assets? The fine line demarcating the anti-competitive agreements and justified IP agreement
is to be traced on a case to case basis in light of section 4 of the Act which does not exclude
IP while investigating abuse of dominant position.

5.32 APPROACH OF OTHER JURISDICTIONS

It is instructive to look at how other jurisdictions approached the tension between anti-
competition and maintenance of monopoly IP rights. The United States Fair Trading
Commission, the Japan Fair Trading Commission and the European Union have issued
guidelines concerning the likelihood of certain conditions falling foul of anti-competition
laws. None of them, however, have issued practical guidelines that are equivalent to the
‘relates to’ test.

5.33 RESTRAINT OF TRADE

The enterprise that imposes conditions in its licence that has the effect of restraining the other
party from carrying on part or all of its business must tread carefully to ensure that the
agreement will not be enforceable on the basis that it constitutes an unreasonable restraint of

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trade. This doctrine exists in Indian law in all states and territories as a matter of common
law.

The law does not prevent the restraints being imposed. It merely required that the restraint is
not unreasonable. This involves balancing the legitimate aim of protecting the interests of the
enterprise. So an enterprise that gives a licence to a distributor to access the database of
clients bears a risk that the distributor may use that know-how and information to compete
against the licensor. The imposition of a condition that restrains the licensee from competing
against the licensor prevents the licensee from spring boarding and getting a free ride on the
efforts undertaken by the licensor in developing that know-how. If the court finds that the
restraint is unreasonable then all of the restraint will be held unenforceable.

An enterprise that requires a party to enter into confidentiality agreements must be aware of
this potential difficulty. An obligation to keep information confidential can in essence be
another form of restraint of trade if the restriction on using the information prevents the
recipient from carrying on business. The period of the restraint will be critical and any
restraint that imposes a perpetual obligation will attract closer scrutiny from the courts. This
was the case in Maggbury Pty Ltd v Hafele India Pty Ltd (2001) 185 ALR 152. In that novel
foldaway ironing board hinge, Maggbury had taken steps to obtain patent protection but
required Hafele to sign a confidentiality agreement before disclosing the innovation to it.
Eventually negotiations broke down and Hafele began distributing its own version of the
invention. Maggbury had disclosed the confidential information to the public through various
trade fairs and through the patent application process. The confidentiality agreement did not
address whether the obligation of confidence lapsed one the information became public. The
court found that the confidentiality agreement would have prevented Hafele from carrying on
its business and to the extent that it imposed the obligation of confidence beyond the time
from when the information was made public it was unreasonable and should not be enforced.

The most common mechanism used by drafters of documents to guard against a restraint
being held as unenforceable is to frame the restraint clause in a cascading fashion as follows:

● maximum desired period of restraint:
→ next best desired period of restraint

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→ minimum desired period of restraint
● maximum territory in which the restraint applies;

→ next best desired territory in which the restraint applies
→ minimum desired territory in which the restraint applies
It is important that any agreement which contains a restraint clause also contains a clause that
enables any unenforceable clause to be severed from the agreement without affecting the
remainder of the agreement unless such restraints is a fundamental term of the bargain.

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