Music IP Valuation Workshop

MUSIC IP VALUATION WORKHOP

I P VALUATION FO R T HE MU SI C I N DUST RY

P R ESENTER HEAT HER BAL DWIN - MC DOW E LL

P R / I P P R ACT IT IONER

Heather Baldwin-Mc Dowell (Ipchampiontt)

MAJOR BENEFITS OF WORKSHOP•Participants will gain some understanding of what is meant by IP assets, Value and IP Valuation.

•Participants will learn the reasons or the circumstances which can lead to the conduct of an IP Valuation.

•Participants will get some understanding of the principle of and the differences between the three generallyused Valuation Methods such as Cost, Market and Income methods, including the Real Option Method.


WHAT IS AN IP VALUATION? “IF YOU DON’T KNOW IT, IF YOU DON’T MEASURE IT, YOU CAN’T MANAGE IT”

WHAT IS THE DEFINITION OF AN ASSET?What is the definition of an asset?

An asset is a resource that is controlled by an entity (such as a company or a business) as a result of past events (forexample, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets; orreduction in costs) are expected. Basically, the wealth of a business comprises of the following types of assets

Intangible Assets : Intangible assets are the non-physical property of a business. Traditionally, they wereconsidered to be the 'Goodwill' of a business, that is, the amount paid for a business in excess of the fair value ofits identifiable net assets. A wide range of intangible assets, such as customer's loyalty, well respected businessname/strong reputation, calibre and morale of employees, IP assets, etc, were clubbed under 'Goodwill.'

Intellectual property (IP) assets? IP assets are a sub-set of intangible assets and distinguished from other intangibleassets by the fact that these are created by law. As such, IP assets are legally protected and can be legally enforced.These can be independently identified, are transferable and have an economic life (in contrast to their legal life, which isgenerally longer than their economic life).IP assets include patents, industrial designs, trademarks, copyright and tradesecrets.


WHAT IS THE VALUE OF AN ASSET?What is the value of an asset?

The value of an asset is the value of the future economic benefits it brings. The value of an asset, whether tangible orintangible, can be estimated. Some assets are easier to value than others, and some valuations are more precise thanothers. Monetary or financial valuation is the process of determining or measuring reliably the value or worth of an assetin certain circumstances, the cost or price of an asset may be a good indicator of its value.

Value of an IP asset?

The value of an IP asset derives, in essence, from its ability to exclude competitors from a particular market. Whilst thelegal right grants exclusivity or the right to exclude, the economic right is based on exclusivity of use, that is, the ability tocontrol the use of the IP asset. For an IP asset to have a quantifiable value, it should: - generate measurable amount ofeconomic benefit to its owner/user. - enhance the value of other assets with which it is associated.

How to derive value from an IP asseta. Direct exploitation of the IPb. Through sale or licensing of the IPc. Even by not exploiting an IP asset (i.e., by merely owning it), it may be possible to add value.


WHAT IS IP VALUATION?In general, the need for intellectual property valuation services results from additional specificinformation about intellectual property being needed for management purposes. Usually,valuation services are offered by a professional specialised in valuation. The reason beingvaluation principles and techniques are not widely known and because, in most circumstances,it is useful to have a value opinion produced by an independent entity that has expertise in thesubject property (for example intellectual property)


WHAT IS AN IP VALUATION?IP valuation is a process to determine the monetary value of subject IP.

(1) Prerequisites for Undertaking IP Valuation To be able to do the valuation of an IP asset, it must be separately identifiable.

The IP asset must be subject to specific identification and a recognisable description.- There should be some tangible evidence or manifestation of the existence of the IP asset (e.g., a contract, a license, aregistration document, a computer diskette, a set of procedural documentation, a listing of customers, recorded on a setof financial statements, etc.)- It should have been created or have come into existence at an identifiable time (or time period) or as the result of anidentifiable event.- It should be capable of being legally enforced and legally transferred.- It should be capable of having its income stream separately identifiable and isolated from the contribution of otherassets employed in the business.- It should be capable of being sold, without selling the other business assets of the enterprise to the same buyer.- It should be subject to being destroyed or to a termination of existence at an identifiable time (or time period) or as theresult of an identifiable event.

PREMISE OF VALUEPremise of value : The value of an IP asset would depend on the context or circumstances in which it is being valued.For example, is it being valued in the context of a 'going concern' where it is 'alive and well' and performing its job, or is itbeing valued in a context of a going concern but where it is not being used?


WHAT ARE SOME IP VALUATION TRIGGERS?There are numerous individual reasons or motivations for conducting an IP valuation. The valuation triggers refers to thereason or purpose of the valuation. These include some of the following:

Transactions:

Valuation triggers: Licensing of IP assets; franchising Sale or purchase of IP assets M&A; divestures, spin-offs Jointventure or strategic alliance Donation of IP assets

Enforcement of IP rights: Valuation triggers: Calculation of damages when IP right is infringed


QUESTIONS 10 MINS

VALUATION METHODS FOR IP

WHAT ARE THE IP VALUATION METHODS?“IF YOU DON’T KNOW IT, IF YOU DON’T MEASURE IT, YOU CAN’T MANAGE IT”

The Cost method: Cost method is based on the intention of establishing the value of an IP asset by

calculating the cost of developing a similar (or exact) IP asset either internally or externally. It seeks to

determine the value of an IP asset at a particular point of time by aggregating the direct expenditures and

opportunity costs involved in its development and considering obsolescence of an IP asset.

For example, if the IP owner has data relating to the cost it incurred for the preceding five years and wants

today's value of that IP, the cost incurred in its development, adjusted to inflation, will provide a current

value which, in turn, will be further adjusted for obsolescence to arrive at a final opinion of its value.

Intangible assets are not as easy to value as tangible assets.


THE MARKET METHOD

The market method is based on comparison with the actual price paid for a similar IP asset undercomparable circumstances. To do a valuation with this method, one needs to have:- An active market (price information, arm's length)- An exchange of an identical IP asset, or a group of comparable or similar IP assets- If the IP assets are not perfectly comparable, variables to control for the differences

The more information available on the nature and extent of rights transferred, including the detailed termsand conditions, the circumstances of the transaction (e.g., cross-licence, licence agreed in settlement oflitigation), the more accurate the valuation will be.

This method does not work well in the Creative sector as it is difficult to find an identical creation.Creatives are also not inclined to divulge information easily.


THE INCOME METHOD

The income method is based on the capitalisation of the income-producing capability of the property. Business assetsmust provide a return on and return of the investment required to create or purchase them. As appraisers, our task is toestimate the price at which a virtual buyer would be willing to pay and a virtual seller would be willing to accept for theanticipated returns from IPRs.

The underlying theory of the income method is that the value of property can be measured by the present value of thenet economic benefit (cash receipts less cash outlays) to be received over its life.The life of creative works are timeless properties that in some instances can last forever. There seems to be someevidence in support of that idea. Some works of art, music and architecture have been with us for hundreds of years.Leonardo da Vinci could not have anticipated that his Mona Lisa would tour the world, be endlessly reproduced, andattract millions at the Louvre.

The statutory term of protection of copyrights (creative works protected by copyright) varies from country to country.Article 7 of the Berne Convention for the Protection of Literary and Artistic Works fixes the minimal term of protectionto the life of the author and 50 years after his/her death. The individual countries are free to provide for longer terms ofprotection for copyright works as well as for other creative works.


QUIZIdentify the incorrect statement:

1) Cost method establishes the value of an IP asset by calculating how much was spent in its development

2) The Reproduction cost method contemplates the construction of an exact replica of the subject IP.

3) The Market method is the best method to use as it is based on comparing other similar transactions, similar to what you would do when buying a car or a house.

4) The income method values the IP asset on the basis of the amount of economic income that the IP asset is expected to generate, adjusted to its present day value.


HOW TO PREPARE FOR AN IP VALUATIONPreparation for an IP valuation will start with the conduct of one the three types of IP audits:

General purpose;

Event driven;

and Limited Purpose audits.

Once the data is collected and intangible assets identified using the Income method of valuation, a valuation can be done.


MOST APPLICABLE VALUATION METHOD USED IN THE MUSIC AND WHY?

Income Method: The income method values the IP asset on the basis of the amount of economic income that the IPasset is expected to generate,adjusted to its present day value. This method is the most commonly used method for IP valuation.

How to determine economic income:

a. Project the revenue flow (or cost savings) generated by the IP asset over the remaining useful life(RUL) of the asset.

b. Offset those revenues/savings by costs related directly to the IP asset. Costs: labor, and materials, required capital investment, and any appropriate economic rents or capital charges

c. Take account of the risk to discount the amount of income to a present day value by using the discount rate or the capitalization rate

Given the different measures of economic income that may be used in the income approach, an essential element in the application of the income method is to ensure that the discount rate or the capitalisation rate used is derived on a basis consistent with the measure of economic income used.


QUESTIONS 10 MINS

HOW TO ESTABLISH OWNERSHIP OF SPECIFIC IP RIGHTS?

Where subject asset has or may have been created through the efforts of several individuals or (on contract basis)Collective Management Organisations (CMOs) and Music Publishers.

Examples:

Copyright assets

Mechanical rights

Synchronisation rights

Contracts with a publisher.

The best way to establish ownership is through establishing a legally binding chain of ownership. This will often beone the outcomes of an IP Audit and valuation process.


The Trinidad James “Uptown Funk Story”

QUIZ

Q1. Identify the incorrect statement:

1) You can add value to an IP asset even by not exploiting that IP asset

2) The value of an IP asset would be different depending on whether it is being valued in the context of a ‘going concern’, or in the context of a forced liquidation or an orderly disposition of assets

3) A valuation is only undertaken in the context of licensing, franchising or sale of an IP asset

4) Sometimes, the cost or price of an asset can be a good indicator of its value


COMPLETION OF AN IP VALUATIONMoving from an IP Valuation to the development of an IP Asset Management plan

An IP management strategy consists of more than just maintaining a register of background. An IP management strategyshould ensure that the importance of IP is recognised globally. Efforts must put in place to optimise the value (which maynot be solely financial) of IP assets through the most appropriate methods of protection and utilisation.

Some strategies for good IP asset management:- Establishing an IP Management Strategy and Process- Identifying and Recording IP- Making Decisions to Protect Important IP- Promote IP awareness- Establishing an IP/commercialisation/utilisation committee- Ensure that everyone involved in IP related matters and utilisation has at least a basic understanding of the nature andtypes of IP


THE DAVID BOWIE STORY: IP FINANCING INNOVATOR

QUESTIONS 10 MINS

POINTS TO REMEMBER What is Valuation

• Valuation is a process of determining the value or worth of an asset

• Valuation often combines objective and subjective considerations

• Valuation is an opinion about the result of a virtual transaction

Benefits of IP Valuation

• Better idea of the overall value of the business and the impact of IP assets

• A tool to measure and manage the IP assets

• Security and backing for lenders

• Can result in taxation benefits (taxation deductions)

• Can reduce the proportion of business’ net worth attributed to goodwill – important when selling a business


REFERENCESMonetisation of Copyright Assets by Creative Enterprises

https://www.google.tt/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjUjeHU8KDLAhVE_R4KHc0LD4kQFggaMAA&url=http%3A%2F%2Fwww.wipo.int%2Fedocs%2Fpubdocs%2Fen%2Fcopyright%2F955%2Fwipo_pub_955.pdf&usg=AFQjCNF05C9ZSzUCoWYotuOlr-p9vgesRA&sig2=XwF6xtgQDpAUo3uiAYGxJw&bvm=bv.115339255,d.dmo

WIPO IP PANORAMA COURSE: IP AUDIT MODULE 11: http://www.wipo.int/multimedia-video/en/sme/multimedia/flash/11/

WIPO IP PANORAMA COURSE: IP AUDIT MODULE 11 PDF:http://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_11_learning_points.pdf

IP AUDIT - A "HOW TO" GUIDE By Ian Cockburn


http://www.wipo.int/multimedia-video/en/sme/multimedia/flash/11/

http://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_11_learning_points.pdf

CONTACT INFORMATIONPresenter: Heather Baldwin-Mc Dowell

Email: [email protected]

Skype: musicpassion26

Tel: 678-7678

FB: Ipchampiontt: https://www.facebook.com/Ipchampiontt/?ref=hovercard

“IF YOU DON’T KNOW IT, IF YOU DON’T MEASURE IT, YOU CAN’T MANAGE IT”


mailto:[email protected]

https://www.facebook.com/Ipchampiontt/?ref=hovercard

“IF YOU DON’T KNOW IT, IF YOU DON’T MEASURE IT, YOU CAN’T MANAGE IT”

Thank you

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Music IP Valuation Workshop