Copyright Valuation and Damages - Nevium 2013

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Copyright Valuation and Damages

State Bar of California, Intellectual Property Law Section

March 2013

Brian Buss, CFA

Doug Bania, CLP

Introduction

Our View of IP Foundations

of IP Valuation

Key Concepts

Copyright Example

A financial and economic perspective on Copyrights

2

3

Responsibility Chain Complementary Views on IP

A Financial

and

Economic

View of IP

IP Development

and Ownership

IP Business

Management

IP Legal

Management

4

Responsibility Chain Valuation Basics

Art &

Science . . .

but not

Magic

Value = Present Value of Future Benefits

Fair Market Value = price at which un-

related parties would transact

Valuation happens every day, only some

valuations involve a formal analysis

IP Valuation requires one more step

compared to Business Valuation

How Copyrights Can Be Valuable

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Description Benefit

Monopoly

Barrier to entry, exclude others from using

• Pricing power

• Greater profit margins

Permission

Ability to be compensated when others use

• Value of license (PV of royalties+fees – costs)

• Value if sold

Litigation Seek damages if others use

• Litigation award (PV of award less costs)

• Threat of litigation (force “Monopoly” or “Permission”)

Promotion

Signals innovation, uniqueness, source of origin to consumers

• Additional sales

• Reduced marketing

• Incremental margin

Value

Derived

From Use

Art, Music & Entertainment

An LA street artist’s work was used without permission by a well-known band as a component of the concert backdrop

Reasonable fee for use of lyrics by a cover-band

Texts and written works

Value of a published Christmas play for the author’s estate

Fair royalty to the creators of a comic book character when used as the basis for a motion picture character

Software A software developer “used” the user-interface of the market-leader’s design software, knowing that the “look and feel” of their new product needed to match the “industry standard”

Photographs & Art

Shoe company had permission to use an artist’s western photography with marketing materials, but used certain photographs on the shoe box without permission

Website, brochures

Son started a new company using Dad’s website, brochure and promotional materials

Designs How and when does a fabric pattern yield additional profits from the sale of garments by chain-store retailers?

Value to prospective lender for a library of copyright-protected designs in the event of bankruptcy

Range of Copyright Issues

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The

Challenge:

Reasonably

quantify the

economic

and financial

contribution

of copyrights

Foundations of IP Valuation

Why

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Buying or selling

Licensing

Bankruptcy

Build, buy or license

IP portfolio alignment

ROI, ROMI

Our first question: “Why do you need the Asset valued?”

Fair value reporting

Purchase price allocation

Impairment testing

Estate transfers &

contributions

Transfer pricing

Non-profit to for-profit

Eminent domain

Damages

Valuation

Strategy / Transactions

Compliance Litigation

Context impacts the Analyst’s approach to the assignment

What

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Early on,

All parties

agree on what

is being valued

Our 2nd question: “Which assets will be valued?”

Trademarks

Copyrights

Publicity Rights

Patents

Copyrights

Trade Secrets

Marketing Assets Technology Assets

Domain Names

Customer Lists

Relationships

Practices / Procedures

Know-how / Research

Test Results

Relationships

Practices / Procedures

What other assets are related to the copyright(s)?

Valuation Approaches for Brand IP

Description Information Required

Cost

Approach

Amount a potential buyer

would pay to replace or

create an asset themself

• Historical Cost to develop the IP

• Amount spent to promote, maintain and support the IP

• Estimate of cost to replace or replicate (R&D expenses,

corrective advertising, time and effort)

Income

Approach

Present value of future

economic benefits

received from ownership

of an asset

• Product-level earnings forecast

• Apportion profits from products using the IP

• Reasonable royalty rates & licensing compensation

• For damages: But-for and As-is forecasts

Market

Approach

Value based on

observed transactions

involving comparable or

similar assets

• Comparable transactions research

• Peer Group: market share, pricing strategy & results

• Similar forms of IP, IP used in similar context

How

Same Approaches as Business Valuation . . . apply as many methodologies as possible

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Responsibility Chain

The

Intellectual

Property

& Products Profits

People Resources

Tangible Assets /

Natural Resources

Business and IP Valuation

The Key in

IP Valuation:

Apportion

profits to the

IP

IP depends on other assets and resources in order to

generate economic benefits

=

Capital Resources

Other IP & IA

Key Concepts for Copyright Valuation

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Responsibility Chain

Present

Value of

Expected

Future

Benefits

Value of

Business =

Intangible

Assets

= =

Trademarks

Patents

Tangible

Assets

Intangible

Assets

Tangible

Assets

Concept 1: Apportionment

Copyrights

amongst

many assets

used to

generate

“Benefit”

Value of Business > Value of copyrights owned by the Business

Copyrights

IP

Marketplace

Product

Marketplace

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Responsibility Chain

Licensor

Concept 2: Value for Whom

Transaction requires benefit for multiple parties For Licensee

Value = Revenue –

Compensation Paid (often a Royalty)

Licensee

Customer

For Licensor

Value = Royalty – Cost to

Develop & Own IP Compensation

Product Revenue

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Responsibility Chain Concept 2 (cont): Value to Whom

Both parties

expected to

benefit

0 1 2 3 4 5

Forecast Licensee Sales 1,000 1,300 1,495 1,645 1,727 1,761 Growth Rate 30% 15% 10% 5% 2%

Annual Royalty Rate 8.0% 8.0% 8.0% 8.0% 8.0%

For IP User (Licensee)

Up-front payment (50)

Annual Fee (5) (5) (5) (5) (5) Additional Profit Margin 15% 20% 15% 10% 5%

Additional Profits - 195 299 247 173 88

% of Sales Royalty - (104) (120) (132) (138) (141)

Total Benefits (50) 86 174 110 30 (58)

Present Value @ 25% (50) 69 112 56 12 (19)

Value of IP to Licensee 180

For IP Owner (Licensor)

Up-front payment 50

Promotions Commitment (130) (150) (82) - - Promotions Commitment % 10% 10% 5% 0% 0%

Annual Fee 5 5 5 5 5

% of Sales Royalty 104 120 132 138 141

Total Benefits 50 (21) (25) 54 143 146

Present Value @ 20% 50 (18) (17) 31 69 59

Value of IP to Licensor 174

Income Statement

Revenues

Gross Sales 1,000 100%

Discounts 5 1%

Net Revenue 995 100%

Cost of Sales 450 45%

Gross Profit 545 55%

Operating Expenses

Sales & Marketing 100 10%

General & Admin 75 8%

Research & Development 50 5%

Depreciation 35 4%

Other 15 2%

Total OpEx 275 28%

Operating Income 270 27%

Other Income / (Expense)

Interest, net (55) -6%

Non-recurring (45) -5%

Sale fo Assets 85 9%

Total Other Income (15) -2%

Pre-tax Income 285 29%

Tax Expense (100) -10%

Net Profit 185 19%

Not all

royalties are

the same

Concept 3: Royalty Rates

Best for Licensor

Best for Licensee

Fin

anci

al R

isk

to L

ice

nse

e $ / Unit made

$ / Unit Sold

Gross Sales ($ invoiced)

Gross Sales (Collections)

Net Sales

Gross Profits

EBIT

Net Profits

Level of Benefit Drives the Royalty

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Concept 3: Royalty Rates

Licensor Activities

Re

sear

ch &

C

reat

e

Test

& A

do

pt

Pu

blis

h

Mar

ket

Dis

trib

ute

Serv

ice

/

Sup

po

rt

Re

sign

/

Ad

op

t

Licensee Activities

Reasonable Royalty considers:

the level of benefit, and the allocation of roles

Allocation of Roles Drive the Royalty

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Concept 4: Forecasting Future Benefits

Asset Remaining

Life (Years)

Cash Flow ($)

Asset

Value ($)

IP: Remaining Life, Cash Flow & Value

• IP and the products that use IP

have life spans

• Benefits from the IP will grow, peak

and then decline as other IP and

other products take their place

• Companies can expect perpetual

growth, IP cannot

Guiding Concepts

Total Contribution

Patents

IP: Relative contribution

Trademarks &

Other Intangibles

Time

Product Life Cycle Products & Businesses

IP Remaining

Life

Business Revenues Benefit

Today’s

Products

Products

In-development

Future

Products

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• Market outlook

• Economic trends

• Peer group analysis

• Competitive product analysis

• Pricing and discounting history

• Pricing strategy

• Share of product portfolio

• Product life cycle stage

• Cost to “clean” or “repair”

Building Benefit Forecasts Remaining Life, Cash Flow & Value

But-for v. As-Is

Tie the forecast to the facts

Concept 4 (cont): Forecasting Future Benefits

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Responsibility Chain Concept 5: Discounting Future Benefits

WACC =

WARR

Rates from

15 – 30% are

typical

The Discounting Formula:

• FB = forecast benefits

• R = discount rate

Two Key Concepts

WACC = WAAR Principal of Substitution

One last

element

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Responsibility Chain

Copyright

Valuation

&

Key Concepts

Bringing it all together

Why, What & How

Apportionment

Value for Whom

Royalty Rates

Discounting

Forecasting Future Benefits

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Financial Performance: historical, trends, forecasts, ratios

Timelines: chronologies, histories and event charts

Market Share: market positions, market maps

SWOT / Porters: identify forces shaping the business

Scoring Analyses: confusion scores, comparable claims, brand

strength scores

Company Language Analysis: what competitive advantage the

Company has claimed

Surveys and Intercepts: consumer preference, confusion

Royalty Rates: benchmarks, surveys and comparable

transactions

Best Practices: licensing and transaction practices as described

in texts and guidebooks

Tools for the Narrative

Supportable

analysis

requires a

cohesive

narrative . . .

and lots of

tools

Combine Concepts & Build the Narrative

The Qualitative is as important as the Quantitative

Copyright Analysis: An Example

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Responsibility Chain

Copyrights x Products

/ Services Profits People Resources

Tangible Assets /

Natural Resources

Copyright Valuation

Two Steps:

Determine

Profits

then

Apportion

Profits to the

Copyright

Copyrights Require Other Resources

Capital Resources

Value of

Copyright

Simply . . .

Forecast

Profits x Apportionment =

Discount

Rate x

The Apportionment Challenge

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• Company Language Analysis

• Website Analytics

• Comparable licensing transactions

(“CUT”)

• Excess profits (“CPM”)

• Feature count and comparison

• Promotional Use Analysis

• Share of product portfolio

• Surveys / Scoring / Interviews (the

qualitative)

• Rules of Thumb?

Tools to Apportion Economic Benefits

Always best to use multiple tools

The Framework

How big is this box?

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Responsibility Chain Copyright Valuation Example

That’s all

Value of

Copyright

Forecast

Profits x Apportionment =

$1,000 year 1

x = $150 year 1

PV of Future Benefit

Apportionment Results

Analysis Type Low High

Website Analysis 5% 20%

Company Language 15% 25%

CUT 8% 12%

Use

% of Profits to IP

15%

= $603

Why Value: Sale of copyright to un-related party

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Nevium Intellectual Property Solutions www.nevium.com 858 255 4361

Managing intellectual property is

key to maximizing value