Music Industry Illustrates How to Value Intellectual Property
The owners of some of the world’s largest collections of music copyrights are looking for buyers.
How much would you be willing to pay for the legal rights to such well-known hits as “Monster Mash,” “Fever,” or “What a Wonderful World?” When it comes to valuing intellectual property (IP) assets, experts don’t rely on gut instinct. They use proven valuation techniques to get it right.
For Sale: Carlin Music
Carlin Music’s catalogue of more than 100,000 songs recently went up for sale. It includes well-known hits by such artists as Elvis Presley, AC/DC, Billie Holiday, Dolly Parton and David Bowie. Most of the copyrights are for iconic older songs that generate income when they’re played on the radio or streamed on a mobile device, used in television shows or commercials, and covered by other artists. Consumers also might pay for digital downloads and ringtones of songs.
The price tag for this collection is reportedly $250 million. The asking price represents a pricing multiple of about 16.7 times the company’s gross profit (roughly $15 million in recent years). That might seem like a lot, but the initial asking price has reportedly attracted various bidders, including trade buyers and financial investors.
Carlin Music’s playlist isn’t the only copyright portfolio on the market: There’s been a wave of consolidation in the music publishing sector. Deals have ranged from small family-owned assets to the $750 million buyout for a 50% interest in the Sony/ATV joint venture paid to Michael Jackson’s estate.
It’s also reported that Canadian music publisher Ole has been trying to sell its copyright portfolio for around $800 million. When valuing intellectual property, experts consider closed deals and pending offers involving similar assets, bearing in mind that some offers may be exploratory in nature and might not result in a sale.
Overview of Copyrights
Copyrights are a type of IP asset. They may be owned by the original creator (the artist) or a company that:
1. Employed the artist, or
2. Purchased the legal rights to the asset.
The owner of the asset may authorize others to use the copyright through assignments (transfers), licensing agreements or joint ventures.
The owner may also allow others to:
- Reproduce all or part of the work,
- Make new (derivative) versions,
- Distribute copies by selling, renting, leasing or lending them,
- Perform the work publicly, and
- Display the work publicly, directly or by means of film, TV, slides or other device or process.
Copyrights cover both published and unpublished original literary, musical, dramatic and artistic works. An artist doesn’t necessarily have to register with the U.S. Copyright Office to enjoy legal protections for these types of IP assets. However, registration creates a public record of the work, and registered works may be eligible for statutory damages and attorney’s fees in successful litigation.
Legal Life vs. Remaining Useful Life (RUL)
A key factor that affects the value of copyrights is when the legal rights expire. The legal life of a copyright depends on several factors, including whether it has been published, and, if so, the date of first publication.
As a general rule, for works created after January 1, 1978, copyright protection lasts for the life of the author plus 70 years. For an anonymous work, a pseudonymous work or a work made for hire, the copyright lasts for 95 years from the year of its first publication or 120 years from the year of its creation, whichever expires first.
Different rules apply for works first published prior to 1978. In some cases, pre-1978 copyrights may need to be periodically renewed with the U.S. Copyright Office to preserve the owner’s full legal rights. Contact your legal advisor for detailed guidance on older copyright rules.
It’s also important to recognize that some creative works may become less popular over time, especially without the continued promotional efforts of the original artist. Experienced valuation professionals evaluate an IP asset’s remaining useful life (RUL), which is the amount of time the work is expected to generate income.
Typically, a copyright’s RUL is much shorter than its remaining legal life. But some popular works — such as the iconic songs in Carlin Music’s portfolio — may have significant staying power. In addition, an IP asset may suddenly and/or temporarily surge in popularity if the original artist makes it big — or dies, reigniting the artist’s popularity. This can be difficult to predict.
Close-Up on Valuation Methods
Whether they’re appraising businesses or IP assets, valuation professionals use the three basic approaches. Here’s how the methodology may be applied to copyrights and other types of IP.
1. Cost approach. Under this technique, experts consider the cost to create (or recreate) the asset. For example, how much did the creator spend to create the copyright? Costs may include supplies, studio time, legal advice, and other direct and overhead expenses. Given the unique nature of IP assets and the exclusivity of the legal rights granted to the owner, the cost approach generally understates the value of successful copyright. So, it’s used as a “floor” for a copyright’s value.
In some cases, however, the cost approach may overstate the value of an unsuccessful copyright. For example, suppose an artist spends $100,000 to generate a piece of art that no one is willing to buy. Here, the value under the cost approach might exceed its fair market value.
2. Market approach. This technique evaluates how much similar assets have sold for (or are currently selling for). Based on the principle of substitution, the market approach assumes that similar IP assets will sell for similar amounts. Under this method, “comparables” are analyzed to determine a pricing multiple based on such items as revenue, gross profit and number of works in a collection.
There are several challenges to using the market approach, however. First, IP assets are one-of-a-kind creative works, and their popularity may be subject to consumer trends. What’s popular today may be passé tomorrow. So, finding true comparables can be challenging.
Moreover, the terms of many IP sales may not be made public — any data that’s available may be limited and may not be independently verified. In addition, IP assets are often sold together with an operating business, and it can be difficult to ascertain how much of the purchase price should be allocated to a copyright or other intangible that transferred from the seller to the buyer.
3. Income approach. Valuation professionals often rely on this technique when valuing IP. The underlying theory is that the value of an asset depends on its ability to generate cash flow in the future.
For example, some copyrights are valued by taking the difference between how much cash flow the owner is expected to generate with and without the copyright. Alternatively, the residual income from a copyright may be projected over its RUL. In either case, future economic benefits would be discounted to present value, using a discount rate based on the risk of the IP asset. Higher risk assets warrant higher returns (or discount rates), which lowers the asset’s value.
The relief from royalty method also falls under this income approach. Here, the portion of a company’s earnings that are attributable to an IP asset is estimated, using the royalty rate the owner would have paid for the use of the asset if it didn’t own it. The royalty rate is based on market data for licenses involving similar assets. Then the valuator selects an appropriate, risk-adjusted discount rate to determine the present value of the royalty payments.
Many Reasons to Value IP
It remains to be seen whether Carlin Music can find a buyer willing to pay $250 million for the company’s music portfolio — or, as some analysts speculate, the current owner is simply testing market conditions. But the active mergers-and-acquisitions market for music publishing companies could affect the methods that experts use to value copyrights in the future.
In addition to valuing IP assets for transactional purposes, a valuation expert can help estimate the value of these assets for financial reporting, tax compliance, litigation and licensing agreements. Contact your expert for more information.
WILLIAM P. ALLEN, CPA/ABV, CFE
Bill is a member of the American Institute of Certified Public Accountants accredited in Business Valuations (ABV); a Certified Fraud Examiner (CFE) accredited by the Association of Certified Fraud Examiners; and the New York State Society of Certified Public Accountants. He has more than 5 years’ experience in public accounting serving both commercial businesses and nonprofit organizations. As a member of the Brisbane team, Bill is responsible for valuation, forensic accounting, and litigation support services. Bill is a graduate of Le Moyne College and has worked with our Firm since graduating in 2006.