How Do You Value Intellectual Property?

How do you value intellectual property?

Intellectual property (IP) is a term that covers various types of creations of the mind, such as inventions, artistic works, designs, symbols, names, and images.

IP is protected by law through patents, copyrights, trademarks, and other legal instruments that grant the owner exclusive rights to use, exploit, or benefit from their creation.

How do you determine how much a song, a logo, a movie script, or a celebrity brand is worth?

This is a question that many entertainment reporters face when they write about the business side of the industry.

Whether it is a licensing deal, a merger and acquisition, a lawsuit, or a bankruptcy, knowing how to value IP can help you understand the motivations and outcomes of these transactions.

In this article, we will explain the basics of IP valuation and provide some examples of how it is done in practice.

We will also give you some tips on how to use IP valuation in your reporting and storytelling.

How Do You Value Intellectual PropertyCourtesy:U.S Chamber Of Commerce
How Do You Value Intellectual Property
Courtesy:U.S Chamber Of Commerce

What is IP valuation?

IP valuation is the process of estimating the monetary value of an IP asset.

It can be done for various purposes, such as:

  • Selling or licensing IP to another party
  • Buying or acquiring IP from another party
  • Securing financing or investment based on IP as collateral
  • Settling disputes or litigation involving IP infringement or damages
  • Accounting for IP on financial statements or tax returns
  • Managing IP portfolio and strategy

There are three main methods of valuing IP: the cost method, the market method, and the income method. Each method has its advantages and disadvantages, depending on the type and purpose of the IP asset.

The cost method

The cost method values IP based on how much it cost to create or replace it.

It considers the expenses incurred in developing, acquiring, maintaining, and protecting the IP asset.

For example, the cost method may include the following factors:

  • Research and development costs
  • Legal fees for obtaining and defending IP rights
  • Marketing and advertising costs for promoting the IP asset
  • Depreciation and amortization costs for reducing the value of the IP asset over time

The cost method is simple and objective, but it does not reflect the actual market value or profitability of the IP asset.

It also does not account for the intangible benefits or risks associated with the IP asset, such as reputation, customer loyalty, competitive advantage, or obsolescence.

The market method

The market method values IP based on how much similar or comparable IP assets are sold or licensed for in the market.

It uses data from transactions involving comparable IP assets to estimate the fair market value of the IP asset in question.

For example, the market method may use the following sources of data:

  • Royalty rates or fees paid for licensing similar IP assets
  • Sale prices or valuations of similar IP assets in mergers and acquisitions
  • Industry benchmarks or standards for valuing similar IP assets

The market method is more realistic and relevant than the cost method, but it requires reliable and comparable data from the market.

It also assumes that the market is efficient and competitive, which may not be true for some types of IP assets that are unique or have few substitutes.

The income method

The income method values IP based on how much income or cash flow it generates or contributes to.

It projects the future income or cash flow attributable to the IP asset and discounts it to its present value using an appropriate discount rate.

For example, the income method may use the following steps:

  • Identify the income or cash flow stream associated with the IP asset
  • Estimate the remaining economic life or useful life of the IP asset
  • Adjust the income or cash flow stream for taxes, expenses, risks, and growth factors
  • Apply a discount rate that reflects the risk and return of the IP asset
  • Calculate the present value of the income or cash flow stream

The income method is more comprehensive and flexible than the other methods, but it involves many assumptions and uncertainties.

It also requires a thorough understanding of the business model and strategy of the IP asset owner.

How to use IP valuation in your reporting

You can use IP valuation to enhance your reporting and storytelling in various ways.

Here are some examples:

  • You can use IP valuation to compare and contrast different deals or transactions involving IP assets. For example, you can compare how much Disney paid for Lucasfilm versus how much Netflix paid for Millarworld.
  • You can use IP valuation to explain and evaluate the performance or potential of different companies or artists based on their IP assets. For example, you can explain how Taylor Swift’s re-recording of her old albums affects her net worth and bargaining power.
  • You can use IP valuation to identify and highlight trends or opportunities in the entertainment industry based on changes in technology, consumer behavior, or regulation. For example, you can highlight how streaming platforms are creating new ways to monetize their original content.

Conclusion

IP valuation is an important skill for entertainment reporters who want to understand and communicate the business side of the industry.

By learning the basics of IP valuation and applying them to your reporting, you can provide more insight and value to your readers.

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