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Copyright valuation damages nevium 2013


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Webinar covering key concepts in copyright valuation and damages analysis, including apportionment, forecasting, royalty rates, and discount rates

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Copyright valuation damages nevium 2013

  1. 1. Copyright  Valua/on   and  Damages         State  Bar  of  California,     Intellectual  Property  Law  Sec7on     March  2013   Brian Buss, CFA Doug Bania, CLP1
  2. 2. Introduc/on   Founda1ons   Key   Copyright  Our  View  of  IP   of  IP   Concepts   Example   Valua1on   A financial and economic perspective on Copyrights2
  3. 3. Nevium Intellectual Property Solutions Brian Buss Doug Bania Develops supportable financial and economic Works closely with clients to develop licensing analyses for clients ranging from law firms to and monetization strategies for assets including entrepreneurs to fortune 500 corporations to trademarks, patents, brands, publicity rights and not-for-profit organizations. Brian applies his copyrights. Using his experience analyzing and experience in finance, banking and valuation to structuring intellectual property transactions, value individual assets and bundles of Doug serves clients as an expert witness, intellectual properties, calculate damages in IP negotiating transactions and in implementing IP infringement disputes, and develop return on strategies. Doug is an active member of San investment analyses to support strategic Diego’s Licensing Executive Society, currently decisions. serving as the Chair-elect. •  20 year career in Valuation, Financial Analysis, •  Certified Licensing Professional (CLP) Banking •  Charted Financial Analyst (CFA) •  MA in Television, Film and New Media Production; BA in Cinema •  MBA (SDSU); BA in Biology and Economics (Claremont McKenna College) •  Over 11 years experience in intellectual property •  Valuation and M&A experience on 5 continents advisory and management Complementary  skills  and  experience   3
  4. 4. Complementary Views on IP Chain Responsibility IP Development and Ownership A Financial and Economic View of IP IP Business IP Legal Management Management4
  5. 5. Responsibility ChainValuation Basics Valuation happens every day, only some valuations involve a formal analysis Art & Science . . . Value = Present Value of Future Benefits but not Magic Fair Market Value = price at which un- related parties would transact IP Valuation requires one more step compared to Business Valuation5
  6. 6. How Copyrights Can Be Valuable   Descrip7on Benefit   Barrier  to  entry,   •  Pricing  power  Monopoly exclude  others   •  Greater  profit  margins Value from  using Derived Ability  to  be   •  Value  of  license                                         From UsePermission compensated   (PV  of  royal1es+fees  –  costs)   when  others  use •  Value  if  sold •  Li1ga1on  award                                                 Seek  damages  if   (PV  of  award  less  costs)  Li/ga/on others  use •  Threat  of  li1ga1on                                       (force  “Monopoly”  or  “Permission”) Signals  innova1on,   •  Addi1onal  sales   uniqueness,  source  Promo/on •  Reduced  marke1ng   of  origin  to   consumers •  Incremental  margin6
  7. 7. Range of Copyright IssuesArt,  Music  &   An  LA  street  ar1st’s  work  was  used  without  permission  by  a  well-­‐  Entertainment   known  band  as  a  component  of  the  concert  backdrop     Reasonable  fee  for  use  of  lyrics  by  a  cover-­‐band    Texts  and   Value  of  a  published  Christmas  play  for  the  author’s  estate   ThewriBen  works   Fair  royalty  to  the  creators  of  a  comic  book  character  when  used   Challenge: as  the  basis  for  a  mo1on  picture  character  SoEware   A  soUware  developer  “used”  the  user-­‐interface  of  the  market-­‐ Reasonably leader’s  design  soUware,  knowing  that  the  “look  and  feel”  of   quantify the their  new  product  needed  to  match  the  “industry  standard”   economicPhotographs  &   Shoe  company  had  permission  to  use  an  ar1st’s  western   and financialArt   photography  with  marke1ng  materials,  but  used  certain   contribution photographs  on  the  shoe  box  without  permission   of copyrightsWebsite,   Son  started  a  new  company  using  Dad’s  website,  brochure  and  brochures   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  7
  8. 8. Founda/ons  of     IP  Valua/on  
  9. 9. WhyOur first question: “Why do you need the Asset valued?” Strategy / Transactions Litigation Buying or selling Compliance Damages Licensing Fair value reporting Valuation Bankruptcy Purchase price allocation Build, buy or license Impairment testing IP portfolio alignment Estate transfers & contributions ROI, ROMI Transfer pricing Non-profit to for-profit Eminent domain Context  impacts  the  Analyst’s  approach  to   the  assignment    9
  10. 10. What Our 2nd question: “Which assets will be valued?” Marketing Assets Technology Assets Early on, Trademarks Patents Copyrights Copyrights All parties agree on what Publicity Rights Trade Secrets is being valued Domain Names Know-how / Research Customer Lists Test Results Relationships Relationships Practices / Procedures Practices / Procedures What other assets are related to the copyright(s)?10
  11. 11. Valuation Approaches for Brand IPHow Description Information Required •  Historical Cost to develop the IP Amount a potential buyer Cost •  Amount spent to promote, maintain and support the IP would pay to replace or Approach create an asset themself •  corrective advertising, replace or replicate (R&D expenses, Estimate of cost to time and effort) Present value of future •  Product-level earnings forecast Income economic benefits •  Apportion profits from products using the IP Approach received from ownership •  Reasonable royalty rates & licensing compensation of an asset •  For damages: But-for and As-is forecasts Value based on •  Comparable transactions research Market observed transactions •  Peer Group: market share, pricing strategy & results Approach involving comparable or •  Similar forms of IP, IP used in similar context similar assets Same  Approaches  as  Business  Valua7on  .  .  .          apply  as  many  methodologies  as  possible    11
  12. 12. Business and IP Valuation Chain Responsibility IP depends on other assets and resources in order to generate economic benefits The Key in IP Valuation: Tangible Assets / Apportion Natural Resources profits to the IP Other IP & IA The Intellectual & Property Products = Profits People Resources Capital Resources12
  13. 13. Key  Concepts  for  Copyright  Valua/on  
  14. 14. Concept 1: Responsibility Chain Apportionment Copyrights Trademarks Copyrights Present Intangible Value of Assets amongst Value of Patents Business Expected many assets = Future = = Benefits Intangible used to Assets generate Tangible Tangible “Benefit” Assets AssetsValue of Business > Value of copyrights owned by the Business14
  15. 15. Concept 2: Responsibility Chain Value for Whom       Licensor   For Licensor Value = Royalty – Cost to   IP Marketplace IP Compensation Develop & Own Transac7on   requires   Licensee benefit  for   mul7ple   Product Revenue Product For Licensee par7es   Marketplace Value = Revenue – Compensation Paid Customer (often a Royalty)15
  16. 16. Responsibility ChainConcept 2 (cont): Value to Whom 0 1 2 3 4 5Forecast Licensee Sales 1,000 1,300 1,495 1,645 1,727 1,761Growth 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) Both partiesTotal Benefits (50) 86 174 110 30 (58) expected toPresent Value @ 25% (50) 69 112 56 12 (19) benefitValue of IP to Licensee 180For IP Owner (Licensor)Up-front payment 50Promotions 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 141Total Benefits 50 (21) (25) 54 143 146Present Value @ 20% 50 (18) (17) 31 69 59Value of IP to Licensor 17416
  17. 17. Concept 3: Royalty RatesLevel of Benefit Drives the Royalty Best for Licensor Income Statement Revenues Gross Sales 1,000 100% Discounts 5 1% $ / Unit made 995 Financial  Risk  to  Licensee   Net Revenue 100% $ / Unit Sold Cost of Sales Gross Profit 450 545 45% 55% Not all Operating Expenses royalties are Gross Sales ($ invoiced) Sales & Marketing 100 10% the same General & Admin 75 8% Gross Sales (Collections) Research & Development Depreciation 50 35 5% 4% Other 15 2% Net Sales Total OpEx 275 28% Operating Income 270 27% Gross Profits Other Income / (Expense) Interest, net (55) -6% EBIT Non-recurring Sale fo Assets (45) 85 -5% 9% Net Profits Total Other Income Pre-tax Income (15) 285 -2% 29% Tax Expense (100) -10% Net Profit 185 19% Best for Licensee17
  18. 18. Concept 3: Royalty RatesAllocation of Roles Drive the Royalty Licensor Activities Test  &  Adopt   Research  &   Distribute   Service  /   Resign  /   Support   Market   Publish   Create   Adopt   Licensee Activities Reasonable Royalty considers: the level of benefit, and the allocation of roles18
  19. 19. Concept 4: Forecasting Future Benefits Product Life Cycle Products & Businesses IP: Relative contribution Total Contribution IP Remaining Business Revenues Benefit Patents Life Trademarks & Other Intangibles Future Products Products Today’s In-development Products Time IP: Remaining Life, Cash Flow & Value Guiding Concepts Asset Remaining •  IP and the products that use IP Life (Years) have life spans •  Benefits from the IP will grow, peak Asset Value ($) and then decline as other IP and other products take their place Cash Flow ($) •  Companies can expect perpetual growth, IP cannot19
  20. 20. Concept 4 (cont): Forecasting Future Benefits Remaining Life, Cash Flow & Value Building Benefit Forecasts •  Market outlook •  Economic trends •  Peer group analysis •  Competitive product analysis •  Pricing and discounting history •  Pricing strategy •  Share of product portfolio But-for v. As-Is •  Product life cycle stage •  Cost to “clean” or “repair” Tie  the  forecast  to  the  facts  20
  21. 21. Concept 5: Responsibility Chain Discounting Future Benefits The Discounting Formula: •  FB = forecast benefits •  R = discount rate WACC = Two Key Concepts WARR WACC = WAAR Principal of Substitution Rates from 15 – 30% are typical21
  22. 22. Responsibility ChainBringing it all together Why, What & How & Key Concepts Apportionment Copyright One last Value for Whom Valuation element Royalty Rates Forecasting Future Benefits Discounting22
  23. 23. Combine Concepts & Build the Narrative The Qualitative is as important as the Quantitative Tools for the Narrative Financial Performance: historical, trends, forecasts, ratios Timelines: chronologies, histories and event charts Supportable Market Share: market positions, market maps analysis SWOT / Porters: identify forces shaping the business requires a Scoring Analyses: confusion scores, comparable claims, brand cohesive strength scores narrative . . . Company Language Analysis: what competitive advantage the Company has claimed and lots of tools Surveys and Intercepts: consumer preference, confusion Royalty Rates: benchmarks, surveys and comparable transactions Best Practices: licensing and transaction practices as described in texts and guidebooks23
  24. 24. Copyright  Analysis:     An  Example  
  25. 25. Responsibility ChainCopyright ValuationCopyrights Require Other Resources Tangible Assets / Natural Resources Two Steps: People Resources x Copyrights Products Profits Determine / Services Profits Capital Resources then ApportionSimply . . . Profits to the Copyright Forecast Discount Value of Profits x Apportionment x Rate = Copyright25
  26. 26. The Apportionment Challenge The Framework Tools to Apportion Economic Benefits •  Company Language Analysis How big is this box? •  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? Always  best  to  use  mul7ple  tools  26
  27. 27. Responsibility ChainCopyright Valuation ExampleWhy Value: Sale of copyright to un-related party Forecast Value of Profits x Apportionment = Copyright Apportionment Results % of Profits to IP Analysis Type Low High $1,000 $150 That’s all year 1 x Website Analysis 5% 20% = year 1 Company Language 15% 25% CUT 8% 12% Use 15% PV of Future Benefit = $60327
  28. 28. Nevium  Intellectual  Property  Solu7ons   858  255  4361   Managing intellectual property is key to maximizing value28