The revenge of the Lockwoods
While growing up near Dayton, Ohio, in the 1960s and ‘70s, David Lockwood often heard his father, George, preach that the value in a microchip came not from its manufacturer but from its designer.
The son had little reason to pay that fatherly wisdom much mind as he majored in history and philosophy at Miami University of Ohio, then went on to the University of Chicago Graduate School of Business and an investment banking career. His résumé included ten years with Goldman, Sachs & Co. and almost two years as managing partner of Reuters Group’s $400 million venture capital portfolio, then named the Greenhouse Fund.
But last year Lockwood’s career took an improbable turn, and his father’s words -- relating to the creative process and ownership of intellectual property -- suddenly resonated. In October he left Reuters to become executive vice chairman of one of Greenhouse’s portfolio companies, Santa Clara, California-based InterTrust Technologies Corp., which operates in the intellectual-property business. Its main product, digital rights management software, prevents online music and other copyrighted assets from falling into unauthorized -- or unpaying -- hands.
By March Lockwood had risen to CEO, and then sparks began to fly. He lopped two thirds of the staff and shuttered InterTrust’s custom software and hardware operations. What remained was a staff of 39 focusing solely on developing and licensing patents, now numbering 25. “My basic theory is that in the same way software commoditized hardware such as PCs, intellectual property will commoditize parts of software,” says the 42-year-old Lockwood.
The former Goldman banker isn’t engaging in mere intellectual sophistry. He shelled out more than $4 million of his own money to buy nearly 5 percent of InterTrust, whose share price, which approached $100 in early 2000, has recently hovered around $3, for a market valuation of $285 million.
Sony Corp. provided some vindication for Lockwood’s strategy in May when it signed a $28.5 million agreement to license digital rights management patents for consumer products. Thanks to Sony, InterTrust, which lost $28 million in the first half of this year, should turn its first profit in the second half.
Now Lockwood is hoping for even bigger paydays by taking Microsoft Corp. to court. In June InterTrust broadened a patent-infringement suit that it had originally filed in U.S. District Court for the Northern District of California in April 2001. InterTrust alleges 144 violations of 11 of its patents, in such Microsoft products as Windows Media Player and the Xbox game machine.
Lockwood won’t say what he might accept in a settlement. He notes, “The Sony licenses are only for the consumer field, but the litigation with Microsoft also covers enterprise applications,” which makes them more valuable. “Big companies will pay a lot more to manage and protect their proprietary information than the movie or music industry ever will to protect their content.”
Does David have a chance against the software Goliath? Curtis Karnow, an expert in intellectual-property law at Sonnenschein Nath & Rosenthal in San Francisco, says the odds are against InterTrust. He points out that security technologies are quickly outmoded, and Microsoft can use its clout to promote new solutions like embedding data encryption systems directly in computer chips, as it is doing in an alliance with Intel Corp.
But Lockwood believes that InterTrust will do just fine, regardless. “Microsoft’s operating system may have a 90 percent-plus market share on PCs, but it’s not the gatekeeper in mobile phones, set-top boxes and other devices,” he says. Intertrust could still pursue those non-PC applications.
Win or lose, the litigation has brought home the lessons of Lockwood’s youth: His father, now 74, developed 17 patents, including one of the first for nonvolatile semiconductor memory, but his employers, Bell Laboratories and NCR Corp., owned the rights. “Now things have come full circle,” says Lockwood. “The Lockwood family is getting its revenge.” -- Steven Brull
Atriax out, Centradia in
As Internet financial marketplaces go -- or went -- foreign exchange network Atriax was one of the more spectacular flops. The system closed in April after nine months in operation, embarrassing founders Citigroup, Deutsche Bank, J.P. Morgan Chase & Co. and Reuters Group and buttressing many analysts’ and traders’ arguments that the currency market doesn’t need more than one or two online trading venues.
They may be right -- in theory. Markets tend to consolidate down to a few large-scale liquidity pools, and shakeouts are under way not just in foreign exchange but also in equities (consider the recent acquisitions of electronic communications networks Brut, Island ECN and RediBook ECN) and fixed income (BondClick and Trading Edge were acquired, while BondBook, Visible Markets and many others closed).
Yet there are still more than a few electronic forex systems, ranging from Atriax’s global multidealer competitors, Currenex and FXall, to State Street Corp.'s proprietary FX Connect network to dozens of single-bank Web sites serving local markets. And even after Atriax’s demise, four European banks are trying to prove that there is room for one more consortium.
The four -- Spain’s Banco Santander Central Hispano, Royal Bank of Scotland, Italy’s Sanpaolo IMI and France’s Société Générale -- launched their London-based joint venture, Centradia, in January and won European Commission clearance to conduct forex trading in June.
Centradia will stand out from the crowd, insists chief executive officer Gloriana Marks de Chabris. With Currenex and FXall mainly pursuing large institutional trades via English-language Web sites and smaller players offering localized services in their home-country languages, Centradia wants to occupy the middle ground as a multinational, multilingual service for small and midsize companies. In addition to currencies, the platform handles money market and fixed-income transactions and distributes research reports.
What’s more, Centradia officials say they have no delusions of global grandeur. Although the group may eventually admit additional bank members, it serves only customers within the network. A client that does business with one Centradia bank can seek competitive prices from all participants. “It’s multiple quotes for people without multiple relationships,” explains Marks de Chabris.
Centradia operates in six languages and plans to add Scandinavian and Eastern European languages as other banks join. The company, which has fewer than 50 employees, won’t disclose volume figures, but Marks de Chabris says “a couple of hundred companies” are trading an average of one to two times a week, with some transactions as large as millions of euros.
The forex market may just be big enough to accommodate multiple players -- especially if they carve out niches like Centradia’s. Robert Iati, a research director of TowerGroup, a Needham, Massachusettsbased research firm, describes Centradia as “second- or third-tier non-U.S. banks targeting midmarket non-U.S. customers.” Overall, electronic platforms have garnered between 11 and 14 percent of the more than $1 trillion in daily currency volume, according to TowerGroup.
Marks de Chabris, who before joining Centradia was chief operating officer of the defunct BondClick (which merged last year into London-based MTS Group’s BondVision), says that because the banks regard Centradia as a utility, earnings are less important than system availability and reliability. “Being profitable is not the point,” she asserts. “The banks aren’t in this game to make money.”
Atriax’s owners didn’t make money either. Then again, they wanted to. Maybe that’s where they went wrong. -- Jane Adams
Kilsby’s technology frontiers
As founder of pan-European exchange Tradepoint Financial Networks, Richard Kilsby spent much of the past five years trying to shake the major equities exchanges out of their low-tech complacency. Since stepping down as CEO after Tradepoint merged last year with SWX Swiss Exchange to form Virt-x, Kilsby has taken on several new roles that give him plenty of opportunity to rattle the business world even more.
In July he co-founded Efficient Frontiers, a securities industry consulting firm specializing in market structure, electronic trading and other operational issues. But that’s just what he calls his “day job.”
The 50-year-old is simultaneously serving as chairman of two U.K. software companies: IntaMission, a Windsor-based developer of technology infrastructures that are more easily changed and upgraded than traditional systems; and London-based Enigmatec Corp., which creates rules-based software that Kilsby expects to be used in trading systems as well as nonfinancial applications. He is also a director of AKJ, a Norway-based electronic agency brokerage, and of Cargo Solutions, which provides risk management services to the marine cargo industry.
What’s the common theme? “To find instances where change is affecting markets and to get involved,” Kilsby explains.
Kilsby knows all about change in the financial sector, and in London’s Efficient Frontiers he joins a veteran team that includes John Woodman, a former chief operating officer of Knight Securities. Their partners -- exInstinet Corp. CEO Douglas Atkin and Council on Foreign Relations senior fellow Benn Steil -- hold down the fort in New York. Kilsby’s pitch to potential clients: “The pace of market change has never been greater, and the firms that can anticipate what is going to happen rather than simply reacting will be the winners.”
Where does he find the time for so many pursuits? “I’m working harder now than when I was at Tradepoint,” sighs Kilsby. “The idea was to have time to do other things, including flying once a week.”
Kilsby, who did manage to get a seaplane license this summer while taking a break in the Florida Keys, is not the only high-flying member of the family; his wife, Susan, was promoted in April to co-head of European M&A at Credit Suisse First Boston. -- Andrew Capon
Aim low, fly high
Not so long ago, Internet entrepreneurs liked to talk about low-hanging fruit -- easy pickings that would fatten their fledgling businesses and sustain them for the harder climb to ever-juicier rewards. Few made it to the top, but some are still trying.
Take David Gershon. A foreign exchange options trader in the 1990s, he saw major dealers rushing to form online marketplaces like FXall and the now-defunct Atriax. Not one to run with crowds, Gershon aimed lower with an e-business named Super-Derivatives that served just his corner of the currency market. He focused on filling a specific need: helping traders to work around the imperfections in theoretical pricing models to arrive at accurate quotes.
“The Black-Scholes model is magnificent,” says Gershon of the widely used pricing method for options. “But it is a very rough indicator of market pricing. We bring the right price using a smart, tested model.”
CEO Gershon, 38, launched SuperDerivatives.com in January 2001. By the end of that relatively calm year in the forex market, the site had more than 1,000 users in more than 250 institutions. This year has been more volatile, and Gershon reports a new wave of interest. He won’t reveal specific numbers but says that several hundred financial and nonfinancial corporations are on board; the nonfinancials use the site to help mark derivatives to market in accordance with Financial Accounting Standard 133.
“It goes beyond what we can get elsewhere,” says one user, a London-based trader of nonstandard, so-called exotic options who asked not to be identified. “The speed is very good, and the site is designed in the way that smart traders think.”
SuperDerivatives subscribers receive live market data, six years of historical data, extensive graphic capabilities and portfolio management tools for pricing and tracking standard vanilla options as well as dozens of exotic instruments.
“The key is that we provide an accurate, realistic benchmark in real time,” says Gershon. An Israeli native with advanced degrees in physics (Tel Aviv University) and finance (Northwestern University), he was global head of exotic options at Barclays Capital before starting SuperDerivatives in 1999. With financing from Hyperion Partners, mortgage-backed securities pioneer Lewis Ranieri’s investment firm, Gershon set up headquarters in London but incorporated in Delaware. SuperDerivatives has been working to raise its U.S. profile since opening a New York office in March, and Gershon is sounding ever more ambitious.
“Long term we want to be the Reuters or Bloomberg of derivatives -- a central hub for currency, equity, fixed income and possibly energy,” says Gershon. How long is long term? “Two years for sure.”-- Jeffrey Kutler
