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Learn the basics of copyright valuation and the analytical approaches to copyright infringement damages
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1
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
5
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
6
The
Challenge:
Reasonably
quantify the
economic
and financial
contribution
of copyrights
Foundations of IP Valuation
Why
8
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
9
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
10
11
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
13
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
14
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
15
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
16
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
17
18
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
19
• 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
20
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
21
Responsibility Chain
Copyright
Valuation
&
Key Concepts
Bringing it all together
Why, What & How
Apportionment
Value for Whom
Royalty Rates
Discounting
Forecasting Future Benefits
22
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
24
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
25
• 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?
26
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
27
Nevium Intellectual Property Solutions www.nevium.com 858 255 4361
Managing intellectual property is
key to maximizing value