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

1. Copyright
Valua/on
and
Damages
State
Bar
of
California,
Intellectual
Property
Law
Sec7on
March
2013
Brian Buss, CFA
Doug Bania, CLP
1

2. Introduc/on
Founda1ons
Key
Copyright
Our
View
of
IP
of
IP
Concepts
Example
Valua1on
A financial and economic perspective on Copyrights
2

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. Complementary Views on IP Chain
Responsibility
IP Development
and Ownership A Financial
and
Economic
View of IP
IP Business IP Legal
Management Management
4

5. Responsibility Chain
Valuation 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 Valuation
5

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 Use
Permission 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
margin
6

7. Range of Copyright Issues
Art,
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
The
wriBen
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”
economic
Photographs
&
Shoe
company
had
permission
to
use
an
ar1st’s
western
and financial
Art
photography
with
marke1ng
materials,
but
used
certain
contribution
photographs
on
the
shoe
box
without
permission
of copyrights
Website,
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. Founda/ons
of
IP
Valua/on

9. Why
Our 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. 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. Valuation Approaches for Brand IP
How
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. 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 Resources
12

13. Key
Concepts
for
Copyright
Valua/on

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 Assets
Value of Business > Value of copyrights owned by the Business
14

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. Responsibility Chain
Concept 2 (cont): Value to Whom
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)
Both parties
Total Benefits (50) 86 174 110 30 (58) expected to
Present Value @ 25% (50) 69 112 56 12 (19) benefit
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
16

17. Concept 3: Royalty Rates
Level 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 Licensee
17

18. Concept 3: Royalty Rates
Allocation 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 roles
18

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 cannot
19

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. 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
typical
21

22. Responsibility Chain
Bringing it all together
Why, What & How
&
Key Concepts
Apportionment
Copyright One last
Value for Whom Valuation element
Royalty Rates
Forecasting Future Benefits
Discounting
22

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 guidebooks
23

24. Copyright
Analysis:
An
Example

25. Responsibility Chain
Copyright Valuation
Copyrights Require Other Resources
Tangible Assets /
Natural Resources
Two Steps:
People Resources x Copyrights
Products
Profits Determine
/ Services
Profits
Capital Resources then
Apportion
Simply . . . Profits to the
Copyright
Forecast Discount Value of
Profits
x Apportionment x Rate
= Copyright
25

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. Responsibility Chain
Copyright Valuation Example
Why 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
= $603
27

28. Nevium
Intellectual
Property
Solu7ons
www.nevium.com
858
255
4361
Managing intellectual property is
key to maximizing value
28