Some Basics Before Moving On…
The World Intellectual Property Organization (WIPO) has laid out some basics when it comes to putting a value on IP. So I am just going to quote a few of those from their web site here for the purpose of education.
First off, an IP must have exclusivity. WIPO says:
“The value of an IP asset essentially comes from the right the owner of that asset has to exclude competitors from using it. For an IP asset to have a quantifiable value it should:
- generate a measurable amount of economic benefits to its owner/user; and
- enhance the value of other assets with which it is associated.”
Okay, that is pretty clear. So WIPO goes on to say about value in general:
“The value of an IP asset represents the potential future economic benefits to the IP owner or authorized user. Value can be derived through:
- direct exploitation of the IP by integrating it within the product;
- sale or licensing of the IP to a third party; and
- other means, such as raising barriers to entry or reducing the threat of substitutes.”
Okay, for us fiction writers, that is also pretty clear. Hang on, it gets a little more complex. WIPO says:
“In order to be able sell, license or enter into any commercial arrangements based on IP, you need to be able to put a value on an IP asset. IP valuation is also beneficial in the enforcement of IP rights, for internal management of IP assets, and for various financial processes.”
Well, by general understanding of market conditions, we do this every time we publish a story. We set the price, or the cost of production of the paper copy helps set the price. But that is just a tiny part of that paragraph.
What about that simple little phrase “for internal management of IP assets…” Say, just for kicks and giggles, you have 20 stories and novels done. You have a publishing business of one type or another. What is the total value of those 20 stories and novels? I did a post looking at just the cost of production value. But in reality, what actually is the value?
And I will bet no one reading this has done that calculation for their own business past maybe the cost method, which is not a good method for fiction.
So moving on…
To even do a basic cost calculation of an IP, the WIPO says you need the following:
“To be able to value an IP asset, the asset should meet the following conditions:
- It must be separately identifiable (subject to specific identification and with a recognizable description)
- There should be tangible evidence of the existence of the asset (e.g. a contract, a license, a registration document, record in financial statements, etc.)
- It should have been created at an identifiable point in time.
- It should be capable of being legally enforced and transferred.
- Its income stream should be separately identifiable and isolated from those of other business assets.
- It should be able to be sold independently of other business assets.
- It should be subject to destruction or termination at an identifiable point in time.”
Well, those are all easy for us fiction writers. For just about all parts of what we do. They then go into reasons for needing this record, such as financing, licensing, and so on. Worth looking at as your business gets larger.
Finally, on this summary post, there are three major ways (a bunch of minor other ways that I will not get into ever) to value IP. I already started with the cost method, because, honestly, that is the easiest for everyone to understand. And at least allow a baseline.
The other two methods are called “Income” and “Market.” The market method is by far the simplest but seldom applies to fiction. It has in some cases and I’ll talk about that later. It really has lately in music with musicians selling their entire catalogs in different ways.
But for fiction, the most interesting way is the “Income” method. This method in different ways takes in the 70 years after author’s death valuation. This method is under battle a lot these days in courts. But you think your value of your business under the Cost method got big quickly, the income method will explode it.
So next post I will dig into the IP Valuation using the “Income” method. Might take me a couple of posts because this is where the other variations of valuation come in the most.
And let me stress again, not one bit of this has anything to do with your opinion of your own work. Or your investment in your own work. You created an IP. It has value. Figuring out that value is what these posts are all about.
(And one note cleaning up something in the last post. No one mentioned that I only used $50 per hour as my writing rate. Little local lawyers charge more per hour than that. I used to use $50 per hour when I was starting out. Now, if I used that method, my base rate is $250 per hour.