Challenge,  Misc,  publishing

Adding Fun and Games to Copyright Valuation…

The Music Industry Is Always Ahead

of the Publishing Industry…

Often by about a decade.

That seems to be the fact in the case of valuation of copyright. I assume that everyone has heard of major song writers and artists selling entire catalogs. Justin Bieber just did it, lots of older artists have done it for tons of money. Each deal is different and interesting. But they all had one thing in common. There was a valuation of the catalog of songs and such owned by the artist.

So thanks to a New York Law Journal article, some of the methods used to value an artist’s music catalog are discussed. They are the standard three I know and have talked about, with one major exception.

Now understand, writers, your books and stories and articles and collections and so on are your catalog. Yeah, I know you don’t think about that, but get used to it.

And by the way, a lot of these music catalogs are going to hedge and equity funds that will use the money for steady income for their investors. That means the managers will have a fiduciary duty to maintain and work the catalog and keep it fresh and earning over the years.

(Hmmm, remind me about equity funds as a way to protect writing assets and keep them alive and publishing into the future… hmmmm….)

Can you imagine King selling his catalog? Sure, I can. How about Koontz or the Cussler Estate? Sure And once it starts in books, hang on to your hat.

So in the last major post on this topic I said you should count the number of titles in your catalog, how long the copyright will last at best guess, and so on.

So you have how many titles you have, how much money those titles each has made over the last number of years, any licenses or contracts involved. Got all that? Good.

For the purpose of going forward, we are going to ignore the Cost and Market Approaches to valuation and just focus on the Income Approach. The other two only apply rarely in copyright and I talked about the cost approach a while back.

Now quoting the article directly because it is just easier than doing it any other way… Remember, this is from an article about music catalogs. Not book catalogs.

“The “income approach” estimates the value of a music catalog based on the annual royalty stream the music catalog is expected to generate in the future. If earnings are expected to remain stable into perpetuity, the annual income stream is capitalized (capitalization of earnings). If earnings are expected to change substantially from year to year or the holding period of the asset can be reasonably estimated, the discounted-cash-flow method is applied …”

The key with both of these is a number of factors, the biggest being trying to get an estimate of the future income of a catalog.

Factors that come into play are the popularity and trends (meaning you write vampire dog fiction and it is popular for a short time and then fades), the number of books in the catalog and how many of them are high earners and how many are middle earners and how many have not hit any stride yet.

So you look and judge each book in your catalog by not only historical sales, but by trends and genres and much more. (Yes, really complex.)

If after all that, your income from your catalog is steady and growing, then you can use a capitalization method. In music, this factor can be from 5 to 15, depending on life of copyright and a dozen other factors. No telling what it would be in books, but likely much, much higher.

So say your income per year is $100,000. and is steady and growing slightly and because of factors like you having estate planning and being in good health on top of that, the factor could be 15 or 3o or more.

Using just 15, that would mean your catalog value at the moment would be 1.5 million. (Kris and my combined catalog is far over 100,000 per year and we are healthy and have estate planning. You can do the math.)

This capitalization approach fits what Indie Publishers are doing.

The discounted cash flow method (or as I call it, the “Spoiling Banana” method takes in all sorts of factors, such as estate issues, short term copyright terms, possible copyright reversion actions by heirs, and so on. Also, it takes into account wild swings of income, like a movie deal one year and nothing for six more years. Things like that.

In this method, there is the nasty word diminution that is combined with the discount rate. Using that method, (got to figure both discount rate and diminution rate and deciding what they are is just a cluster f**k) the same $100,000 yearly catalog would be valued (if lucky) around $700,000.

So music industry using the Capitalization Method of the Income Approach is ahead of the book industry, as normal. The Capitalization Approach fits what I was struggling to find in my earlier post.

Thanks, Kris, for pointing me to the music industry. Some amazing articles on what is happening with all the catalog sales. And why.

Selling catalogs to Alternative Investment Managers of Equity Funds and Hedge funds is in our future. Books are property, and with the right management can continue on into the future, well past an author’s death.

Damn I love this new world.

 

 

6 Comments

  • Kris Rusch

    You’re welcome. I’ve been struggling with you. So, really, you can thank NPR and my drive home and a business reporter from Billboard discussing this trend. I knew the change was coming. Didn’t really think it was here until she made a passing comment about valuation…

  • Filip

    First: thanks for the series, it’s incredibly useful to get this in easy to understand, bite-sized chunks.

    Secondly: wouldn’t the spoiled banana approach be useful from a tax perspective, where you could depreciate the value of the catalog in order to offset profits?

    If so, is it possible to argue a high valuation based on predicted future revenue stream and then banana it to offset taxes, or are they opposite approaches and should never be combined?

    TIA!

    • dwsmith

      Tax a different thing, Filip. I’ve been trying to figure the ways of valuing modern publishing copyright. That valuation is ahead of any kind of tax work, or estate work, or anything like that. Those are all different paths you can take after a valuation. Have nothing to do with the valuation itself.

      And would you “argue” as you put it with? For a high valuation or low valuation. Your income and past earnings and size of the catalog and nature of the copyright is what sets it. No one to argue with.

  • Kate Pavelle

    Doing this exercise, even with coffee-money or pizza income, is really useful. It makes one realize that damn, the monthly reports may not add to as much as I’d like, but this valuation formula adds up to a chunk I’d definitely fight for if it was, say, a house. Or inherintance, or any other kind of property I could see as a tangible *whole.*

    The problem with not seeing writing as a whole is that it’s so incremental. Heck, crows have better long-term planning skills than I do! But once I run the numbers, I see something less abstract and more tangible. It may not look like much from month to month, but it adds up and it’s definitely worth fighting for!

    This, in it’s rational and no-nonsense way, is the best method, so far, to kick my imposter syndrome to the curb. Thank you, Dean!
    And for those who haven’t done the catalog, do it. Yes, it will be work in that you’ll have to dig through your hard drive and various backup devices in your hunt for the lost and the forgotten. And you’ll need to put them on the list to give them cover and publish them. But it all adds up, and the numbers just might put a smile on your face.

    • dwsmith

      Kate, yes, exactly. Amazing how the awareness changes your attitude toward writing and smooths out the bumps.

      Also makes you realize that no writer dare go into bankruptcy at any point past the first book or two. A friend of mine, major writer, died without everything a mess and his family didn’t know what to do, and didn’t ask anyone, and just took everything into bankruptcy. No clue how that will shake out.

  • C.E. Petit

    Semiserious quibble: The average (since the early 1930s) has been just over twelve years, not a decade. And not just in financial practices, either; there was an almost-exactly-twelve-years gap between the first broad attack of music labels on file-sharing and that of publishers on file-sharing, and a similar gap in the dropping of unlawful work-for-hire provisions as industry-default contract language.

    The key point is that “it’s a pretty long time in internet years — at least two CEOs and three elections to Board of Directors — so repeated failure to notice/change probably means something.”

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