The value and valuation of music libraries and copyrights, celebrity images and rights of publicity, and trademarks and brand names for musical groups, are all part of our practice area. And the issues of value for these assets, both when doing a deal and in litigation have become increasingly important.
Establishing Value And Damages
When working on a valuation project or a damages case involving intangible assets, many approaches may be taken, but all are a variation of the basic three:
- The market approach, in which the assets are valued by comparing them to similar assets in similar transactions;
- The cost approach, which answers the question: What would it cost to replace the image with a similar one; and,
- The income approach, which calculates the revenues earned as a result of the use of the intangible asset.
A. Market Approach
With the Market Approach, intellectual property and intangible assets are valued by comparing the assets in question to transactions involving similar assets that have occurred recently in similar markets. This approach is best if an active market exists that can provide several examples of recent arm’s length transactions and includes adequate information on their terms and conditions. Most intangible assets are not traded frequently enough to be able to establish comparable market value. Moreover, it is very difficult to get enough detail on the comparable transactions to be certain that a truly comparable situation exists.
B. Cost Approach
The historical cost to develop the asset is sometimes used to determine its value. According to economic theory, this is not an accurate approach because the cost to develop the asset and the market value are not necessarily the same. Keeping in mind the definition of fair market value, a purchaser of the asset will only pay an amount that will enable him to earn a reasonable return based on the expected revenue and expenses that will result from utilizing the asset. Generally, this approach is better suited to patents and technology that have not been developed commercially since it reflects the cost a company could avoid by purchasing, rather than duplicating, a similar research and development effort.
Costs that can be quantified include the following:
- Legal fees
- Application/registration and other fees
- Cost of models/drawings
- Personnel costs
- Developmental costs
- Marketing and advertising costs
This method does not give an indication of the economic benefit derived through ownership and utilization of the assets. Rather, it provides an absolute minimum value for the assets. A purchaser of the assets will only pay an amount that reflects the cost a company could avoid by purchasing, rather than duplicating, a similar production effort.
C. Income Approach
The best method for valuing a trademark with a significant history of use is the Income Approach. The Income Approach is based on determining the future income stream attributable to the asset under consideration. This approach is one of the most widely used methodologies in intangible asset valuation because the information required is relatively accurate and often is readily available. The information necessary to utilize this method includes the following:
- Future income stream
- Duration of the income stream
- Risk associated with the generation of the income stream
The value of the asset is calculated by taking the net present value of the revenue stream associated with the use of the asset. This method utilizes a forecast of revenue based on factors such as historical results, industry trends, and the competitive environment.
D. Relief from Royalty
The Relief from Royalty Method is a variation of the Income Approach that establishes the value of the intellectual property as the capitalized value of the royalties that the company is relieved from paying due to its ownership of the assets. This approach provides a measure of the value by determining the avoided cost. This method is appropriate to use when the assets in question have indirect or direct comparable licensing information to utilize.
Relief from Royalty is calculated by assuming that the business does not own the intellectual property and thus has to pay a royalty for its use. Essentially, the fair market value is the present value of those avoided royalties. The Relief from Royalty Method uses royalty rates that are based on marketplace transactions and uses a forecast of revenue as in the Income Approach.
Case Study– Value Of Celebrity Rights
In this case, two very well known entertainment figures had their photographic images misused and misappropriated by a consumer goods company. That company used their images in a display within the in-house catalog or magazine for the company. The two famous actors were asking for damages of $20 million apiece, for this one-time usage. The issues, therefore, were first, what is the value of a celebrity’s image in a commercial use? Second, what happens to that value if the celebrity has not approved the usage? Third, given that this was the first appearance in a commercial usage by one of these famous actors, what impact on value would that have? Finally, and most importantly, what would be the true market value for the use of these images?
This particular case illustrates quite dramatically that real market deals or contracts for the uses of the images of celebrities or other entertainment properties can be used as a true guideline for damages, when those same images or rights have been misappropriated. In other words, the real world can hold the key to appropriate litigation or arbitration settlements – if the comparisons and components of value are being fairly stated and analyzed.
Background on the Case
It was our job to state our opinion as to the fair market value for the use of Mr. A’s name and likeness and Ms. B’s name and likeness, as used in the matchmaking section of the consumer goods company’s Web site (Company Z), and in an in-store printed publication. Company Z utilized their images as follows:
- One stock photo of Mr. A and Ms. B was purchased from a photo service;
- Company Z’s in-store magazine distributed approximately 200,000 copies, solely within their retail stores; and,
- The images of Mr. A and Ms. B were displayed on Company Z’s Web site for approximately 35 days.
Our definition of “fair market value” for the images, in this case, is the market price Company Z would have paid for use of the images – as would have been agreed upon between a willing buyer (Company Z), and a willing seller (Mr. A and Ms. B). Although the use of the images was not in any way characterized as a direct endorsement or advertisement for Company Z’s products, we were asked to base our opinion of the FMV of these images, in this usage, as if it was a direct endorsement or advertisement for the associate products.
Company Z’s in-store magazine was printed in limited quantities Chart A below illustrates the relatively low print-run compared to the average print-run of a typical consumer-based magazine. This magazine was considered passive because it was available only in Company Z retail stores, and was not offered for sale anywhere. Therefore, this limited distribution translated into relatively few consumer impressions, which is a common basis upon which fees for celebrity rights or other advertised material are often negotiated. Ultimately, consumer impressions or circulation often serves as the determining factor for an appropriate endorsement fee structure in many cases. As a result, the fees paid to Mr. A and Ms. B for the usage would be a fraction of the fees that would be paid for their participation in a full-scale product endorsement advertising campaign, in which multiple images would be used in multiple magazine appearances, and with consumer impressions numbering in the tens of millions. Chart A compares Company Z’s limited magazine circulation to that of some of the more popular consumer goods magazines commonly used for product advertising purposes:
CHART A
In addition, we had to be aware of the fact that the image had been posted on Company Z’s Web site for roughly one month. This Internet version of the image was displayed for a relatively short period of time, and the impact of this event was relatively insignificant for several reasons. First, as shown in Chart B below, the traffic to Company Z’s Web site is, frankly, unsubstantial and less than meaningful. Particularly when compared to other E-commerce sites, the Company Z Web site traffic was, indeed, minimal. Second, the traffic on Company Z’s Web site, during the period of time that the images of Mr. A and Ms. B were displayed, did not experience any increase in activity. Finally, only 2 percent of the 45,000 visitors actually clicked through to the section where the image was used – in other words, only about 900 people actually viewed this particular image on the Company’s Web site.
CHART B
Since apparently no incremental revenues or activities were earned as a result of the use of the image, the income approach was rejected, and a combination of the cost and market comparable approaches was used. It was our task to establish what income levels Mr. A and Ms. B were earning from other advertising and endorsement deals, as well as to look at fees that would have to be paid to replace their image with that of other “A-list” actors.
Based on information available on this case and through research, we determined that an analysis of comparable endorsement deals was the most appropriate methodology. First we analyzed an array of comparable endorsement deals in the marketplace (see Chart C). Second, we looked at comparable deals that actually involved Ms. B, and focused on the endorsement deal that provided to her the largest possible fee: $10 million over a period of years. We analyzed deals with the following in mind:
- The fee for a single-use appearance or endorsement is vastly different from a full-scale advertising or endorsement campaign.
- We consulted with other professionals in related fields to establish current prices and values for the use of similar celebrity imagery.
- We established that Mr. A and Ms. B are, in fact, A-list actors, and would command fees at the upper-end of the range.
- We also were able to verify that there is no set price for hiring a celebrity for a single endorsement – or for any endorsement, for that matter.
- Celebrity endorsement fees are heavily based on the amount of exposure and the projected revenue that the endorsement or advertising campaign will realize for the company. Therefore, the greater the exposure and the higher the projected revenues, the higher the fee that would be paid to the celebrities and, in this case, the higher the amount of damages that would be owed to Mr. A and Ms. B from Company Z.
Based on all of our research through hundreds of deals, the maximum fee paid to an A-list celebrity for a one-time endorsement or ad would be no greater than $250,000, and then only under special circumstances.
CHART C
Analysis Of Comparable Endorsement Deals
We thoroughly analyzed a range of endorsement contracts to assist us in establishing appropriate FMV compensation for the usage of the images by Company Z. It is important to note that the majority of endorsement contracts of this type are built around an entire advertising campaign. Rarely is an endorsement fee paid for a single usage and a single stock photo for insertion in a single magazine, a single time. However, in addition to the endorsement fee paid for use of the celebrity image, there is oftentimes an insertion fee. In other words, a celebrity is entitled to a fee for use of his or her image on a flat fee, and an incremental fee for each time the image is used. However, in large endorsement deals such as those entered into by Catherine Zeta-Jones, Celine Dion and others, the fees are usually negotiated based on a fixed amount over a fixed period of time. Chart D below features examples of endorsement deals, where an actor or actress grants the use of his or her image on a broad-based endorsement and advertising campaign over a period of time.
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During the discovery process, we were fortunate to have furnished to us the actual details of one of Ms. B’s endorsement contracts. In this particular contract, Ms. B granted the use of her image on all advertising and endorsement for a major consumer brand, for a period of three years. Included in the endorsement rights for which she has signed a global usage contract for three years are: Broadcast television, cable television, satellite television, print magazines and newspapers, billboards, bus shelters, catalogs, fliers, sales-promotion material, etc. Chart D shows a comparison between the usages of Company Z of the images of Mr. A and Ms. B, compared to the usage rights being granted by Ms. B to the other consumer-goods company. The comparison is very revealing; the number and breadth of uses of Ms. B’s image is startlingly broad compared to the one-time use by Company Z. We then analyzed this contract of Ms. B’s, which provides to her a total of $10 million over three years. We went through the following analysis:
- First, we allocated half, or $5 million, to use of her image in the United States;
- We extrapolated the portion of the contract attributable specifically to Ms. B’s appearances in print advertising.
- We then divided the annual print advertising budget by the average cost of a magazine advertisement, to determine the total number of ads placed by the consumer-goods company in a single year.
- We then established the number of print usages of her image over the three-year period.
As a result, we were able to determine that this portion of Ms. B’s contract, attributable to print advertising, divided by the total number of ads she is estimated to have appeared/will appear in, results in an imputed payment to her of less than $25,000 per insertion.
In addition to this single-use insertion fee, we incorporated a one-time talent fee of three to five times that insertion fee; the total of the insertion fee plus the talent fee would be the market compensation due to Ms. B for her unwitting participation in Company Z’s in-store magazine.
For the purpose of being conservative, we applied the same compensation structure to Mr. A’s involuntary participation the magazine of Company Z – even though Mr. A would have far less value, and would receive far less compensation for an endorsement in the health and beauty industry, in which Company Z operates.
The resultant calculations indicate that an appropriate measure of the FMV for the use of Mr. A and/or Ms. B’s image and likeness by Company Z, in a one-time usage in its magazine, is as follows:
- Range: $40,000 – $300,000
- Mean: $135,000
- Median: $110,000
Conclusions
The overall purpose of this article has been two fold: First, to illustrate how valuation and establishment of damages for music and celebrity rights and all forms of entertainment can be established. It should be clear that whether the issue is the value of a famous actor’s image in an endorsement, or whether it is the music copyrights held by the family of a deceased musician, value can be established both for the purposes of doing a deal, as well as to be used as damages calculation in arbitration and litigation.
The second overriding purpose of this article is to illustrate that market comparables and market deal parameters can be used successfully in arbitration and/or litigation to help establish value and damages. In other words, the value of music rights, trademarks, celebrity images or other entertainment properties established in an arms’ length deal such as a license, can be the basis and indicator of value in an arbitration or litigation.
At the beginning of this article we discussed three primary methods of value: income, cost and market. Over the years we have worked on valuing copyrighted materials for clients such as the Estate of Dr. Seuss, Sesame Street, Studio 54, Jesse Ventura and the WWF, and The Allman Brothers. We have set licensing strategies and done deals for entertainment properties ranging from LucasFilms and Uptown Music, to MGM/United Artists, Marvel Entertainment, Sony, and the Vatican Library. What we observed in today’s environment is that, first; there is an increase in the amount of litigation, arbitration and dispute surrounding music, celebrity and entertainment properties. Second, the guidelines and standards for establishing value for these assets have become increasingly important – when doing a deal, in arbitration, when establishing value for the estate of a music and copyright holder, and/or in litigation and arbitration.
Valuation methodologies have changed, licensing and extension strategies have become more sophisticated, and the ability to quantify the value of existing and future uses of entertainment properties has improved exponentially.
One final thought – good research and thorough knowledge of the marketplace is indisputably the foundation of a well-reasoned analysis of value and damages.