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Copyright  Valua/on  and  Damages  

     

State  Bar  of  California,    Intellectual  Property  Law  Sec7on  

 March  2013  

Brian Buss, CFA Doug Bania, CLP

Introduc/on  

Our  View  of  IP  Founda1ons  

of  IP  Valua1on  

Key  Concepts  

Copyright  Example  

A financial and economic perspective on Copyrights

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Nevium Intellectual Property Solutions

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Develops supportable financial and economic analyses for clients ranging from law firms to entrepreneurs to fortune 500 corporations to not-for-profit organizations. Brian applies his experience in finance, banking and valuation to value individual assets and bundles of intellectual properties, calculate damages in IP infringement disputes, and develop return on investment analyses to support strategic decisions. •  20 year career in Valuation, Financial Analysis,

Banking •  Charted Financial Analyst (CFA) •  MBA (SDSU); BA in Biology and Economics

(Claremont McKenna College) •  Valuation and M&A experience on 5 continents

Brian Buss Works closely with clients to develop licensing and monetization strategies for assets including trademarks, patents, brands, publicity rights and copyrights. Using his experience analyzing and structuring intellectual property transactions, Doug serves clients as an expert witness, negotiating transactions and in implementing IP strategies. Doug is an active member of San Diego’s Licensing Executive Society, currently serving as the Chair-elect.

•  Certified Licensing Professional (CLP)

•  MA in Television, Film and New Media Production; BA in Cinema

•  Over 11 years experience in intellectual property advisory and management

Doug Bania

Complementary  skills  and  experience  

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Responsibility Chain Complementary Views on IP

A Financial and

Economic View of IP

IP Development and Ownership

IP Business Management

IP Legal Management

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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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Descrip7on 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  royal1es+fees  –  costs)  

•  Value  if  sold

Li/ga/on Seek  damages  if  others  use

•  Li1ga1on  award                                                (PV  of  award  less  costs)  

•  Threat  of  li1ga1on                                      (force  “Monopoly”  or  “Permission”)

Promo/on

Signals  innova1on,  uniqueness,  source  of  origin  to  consumers

•  Addi1onal  sales  •  Reduced  marke1ng  •  Incremental  margin

   

Value Derived

From Use

Art,  Music  &  Entertainment  

An  LA  street  ar1st’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  wriBen  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  mo1on  picture  character  

SoEware   A  soUware  developer  “used”  the  user-­‐interface  of  the  market-­‐leader’s  design  soUware,  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  ar1st’s  western  photography  with  marke1ng  materials,  but  used  certain  photographs  on  the  shoe  box  without  permission  

Website,  brochures  

Son  started  a  new  company  using  Dad’s  website,  brochure  and  promo1onal  materials  

Designs   How  and  when  does  a  fabric  paXern  yield  addi1onal  profits  from  the  sale  of  garments  by  chain-­‐store  retailers?  

Value  to  prospec1ve  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

Founda/ons  of    IP  Valua/on  

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  Valua7on  .  .  .          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  Valua/on  

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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          Transac7on  requires  benefit  for  mul7ple  par7es  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 5Forecast 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 StatementRevenues

Gross Sales 1,000 100%Discounts 5 1%

Net Revenue 995 100%

Cost of Sales 450 45%Gross Profit 545 55%

Operating ExpensesSales & 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

Fina

ncial  R

isk  to  Licen

see   $ / 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

Research  &  

Create  

Test  &  Ado

pt  

Publish  

Market  

Distrib

ute  

Service  /  

Supp

ort  

Resign  /  

Adop

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  mul7ple  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 HighWebsite 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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Managing intellectual property is key to maximizing value