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«Jonathan Haskel Imperial College Business School, CEPR, Ceriba, IZA and UK-IRC Keywords: copyright, IP, innovation, knowledge, investment, ...»

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Film, Television & Radio, Books, Music and Art: UK Investment in

Artistic Originals*

Peter Goodridge

Imperial College Business School and Ceriba

Jonathan Haskel

Imperial College Business School, CEPR, Ceriba, IZA and UK-IRC

Keywords: copyright, IP, innovation, knowledge, investment, productivity growth

JEL reference: O47, E22, E01

February 2011


This report reviews the definition of artistic originals and official estimates of investment in originals

as recorded in the UK National Accounts. It lays out a framework for measuring investment in the creation of knowledge assets and proceeds to estimate gross fixed capital formation in this asset type using a variety of methods, including new data. Throughout we compare with recent estimates produced by Soloveichik of the BEA. Finally we also consider the role of prices and depreciation, and use our new data to estimate the UK stock of artistic originals. Bringing these new data to bear suggests an upward revision to investment in 2008 of approximately £1.1bn. Combining these data with new depreciation rates suggests an upward revision of £3.5bn to the UK stock of artistic originals in 2008.

*Contacts: Jonathan Haskel and Peter Goodridge, Imperial College Business School, Imperial College, London. SW7 2AZ. j.haskel@ic.ac.uk, p.goodridge10@ic.ac.uk. This report reflects ongoing work with ONS on these issues. We are very grateful for financial support for this research from the UK Intellectual Property Office. We also wish to thank all those that provided us with data or insights into the workings of industries studied. In particular we wish to thank: Craig McLaren from ONS, Rachel Soloveichik of the BEA, both for her valuable advice and providing us with access to her data; Will Page and Chris Carey of PRS for their assistance in understanding the process of asset creation and commercialisation in the case of Music. This work contains statistical data from ONS which is Crown copyright and reproduced with the permission of the controller of HMSO and Queen's Printer for Scotland. The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. This work uses research datasets which may not exactly reproduce National Statistics aggregates. All errors are of course our own.

Table of Contents

1. Introduction 9

2. Background: Copyrighted assets or ‘Artistic Or

–  –  –

Appendix 1: Investment in ‘Valuables’ Appendix 2: Additional data according to the SIC Executive Summary This report contributes to the measurement of the UK creative sector. Here we focus on what the System of National Accounts (SNA) define as the creation of long-lived artistic original assets protected by copyright. The main outputs are revised estimates of UK investment from 1990-2008 and the total stock(s) of artistic originals. We also make contributions to the measurement of depreciation and prices. Artistic originals are, in order of magnitude in UK spending: TV & Radio, Books, Miscellaneous Art, Music and Film.

–  –  –

We regard this work as a step forward in the measurement of UK artistic asset creation and the contribution of the ‘creative industries’. We stress that for some assets our estimates should be regarded as preliminary, and that further work is required. In the case of Music, Books and Miscellaneous Art, accurate estimation requires a longitudinal analysis of the income earned by assets over their lifetime. We had hoped to include such estimates in this report, but legal and administrative complications have prevented us from doing so. We intend to collaborate with ONS in the near future, resulting in new estimates for Artistic Originals incorporated in the National Accounts, and so we anticipate an update to our estimates sometime in the near future. The following is a brief summary of the contents of

this report:

1. First, we take a general overview and compare official UK data with that from the US. We discover an interesting comparison, with UK estimates considerably lower on both an absolute and relative basis. In particular the UK seems to invest very little in Film relative to the US.

2. Second, we set out a framework for analysing artistic sector output and investment in artistic originals. Since little data on market transactions exist, for conceptual and practical reasons our preferred methods are based on input costs or royalty payments.

3. Third, we evaluate ONS measurement practice, highlighting a number of ways to build on official data. We plan to collaborate with ONS in the near future and if possible incorporate new estimates into the National Accounts (Blue Book 2012).

4. Looking at assets in more detail: i) for Film we estimate an upward revision using data on a broader range of UK productions; ii) similarly for TV & Radio we use data for a broader range of productions, but our final estimate is lower because we don’t assume a mark-up for upstream monopoly power; iii) for Books we generate a larger figure by estimating the cost of asset creation; iv) for Music we generate a slightly larger figure by estimating the cost of asset creation, but our data on royalties indicate a larger figure still; v) official data do not include GFCF in any other types of longlived artistic assets, which we estimate as substantial.

5. We use our framework to produce estimates of GFCF in Artistic Originals according to variety of methods and triangulate those data as a check on the quality of the results. A summary of these results are presented in the table below.

–  –  –

(1) Upstream Input costs: A) the-numbers.com B) OFCOM C) ASHE D) ASHE E) ASHE (2) Downstream Rental Payments, allocated over lifetime of individual assets, adjusted for additional capital revenues. Data unavailable for this report (3) Downstream Rental Payments: D) Based on aggregates: PPL/PRS/MCPS/VPL/BPI/ Live performance. Indicative only, accurate estimation requires a full longitudinal analysis as in (2) (4) Proportion of downstream revenues. Estimates for Books and Music are based on ONS method with new estimates for components (5) Approximation derived from aggregate industry output. Presented for information. Not suitable to use in estimating GFCF. A) ABI, alternative available from UKFC presented in Annex B) ABI D) ABI (6) Official ONS estimates based on: A) input costs B) input costs adj. for market power in private sector broadcasting C)proportion of revenues D) proportion of revenues E) no official estimate Note to table: All data are nominal and refer to 2007. In cases where we have more than one dataset for that method we choose what we consider to be the superior source. Green highlighted cells in rows (1) and (2) indicate the preferred method for final estimates. Patterned green cells in rows (1) and (3) indicate the second-best approach where data for the preferred method were unavailable. Orange highlighted cells in row (6) contain official data as recorded in the National Accounts.

It is worth commenting a little more on the second row of the above table. We had hoped to estimate the value of investment as the discounted sum of royalties earned over the life of individual assets. This has not proved possible in time for the publication of this report. The estimate of £1,260m for Music (2007) in row 3 is a cross-sectional sum of royalties that accrue to assets of all vintages, including estimates of implicit royalties based on revenues from recordings and live performances. Under certain conditions it can be shown that the cross-sectional sum of royalties is a proxy of annual investment, however the assumptions required are unrealistic in the context of Music. Without a full longitudinal analysis, we are unable to comment on the validity of this figure as a proxy for investment. For conservatism we use the estimate of £209m, presented in row 1. We accept that this is likely an underestimate and expect a more accurate measure to lie in between the figures presented in rows 1 and 3.

We are unable to present a similar figure for books, as although we have some limited data on the royalty rates that accrue to authors, we have little data on those that flow to publishers who also have ownership rights to original assets.

6. From the array of methods and estimates summarised in the table above, we make a decision on our final estimate for each asset, and explain the reasoning behind our choice, whether it be conceptual or practical. The following chart compares our new estimates of investment with those produced by the ONS (2008) for the five asset categories and a final aggregate. Overall spend in 2008 was approximately £4.3bn, exceeding official estimates of approximately £3.2bn. We estimate TV & Radio at £2.2bn, lower than the official estimate of £2.8bn, but we estimate Film, Books, Music and Miscellaneous Art to all be higher than official estimates. When using our alternative measure for music, we reach an aggregate figure of £5.5bn. We would expect this figure to increase if estimates for Books and Miscellaneous Art were to be based on the royalties and revenues that flow to those asset types.

Investment in Artistic Originals, 2008, Current Prices (£m)

–  –  –

Source: ONS estimates are from the National Accounts. For this report, sources are: i) Film, thenumbers.com, UK Film, Council, British Film Institute; ii) TV & Radio, OFCOM; iii) Books, ASHE;

iv) Music, ASHE, Alternative estimate, ‘PRS for music’; v) Misc Art, ASHE Note to figure: All data are nominal and are for 2007. Light blue bars show our final estimate and are compared to investment as measured by ONS and recorded in the National Accounts. The latter are affected by an assumed mark-up for monopoly power in private sector broadcasting, highlighted with the stacked purple contribution for ‘ONS TV & Radio’ and ‘ONS Total’. For music we have an alternative estimate based on royalties generated by UK music originals, shown by the dark blue stack for ‘This Report, Music’ and ‘This Report, Total’.

The chart shows that for most asset categories, our calculations have resulted in higher estimates of GFCF than those in the National Accounts. The exception is TV & Radio, but this comparison is not like-for-like. As referred to in the report, measures of investment can include additional rents earned by monopoly owners of IPRs if revenues are used in the estimation. Our interpretation of the ONS method is that it includes a factor to account for those additional rents, whereas we make no such allowance. The result is that private sector production is multiplied by a factor of around 4 in recent years.

7. To construct estimates of the UK capital stock of artistic originals we need to define suitable price indices and depreciation rates. For prices, we discuss a variety of options but settle on an implied output deflator. For depreciation, we draw on the ground-breaking work of Soloveichik (2010) of the BEA, using the reasonable assumption that US and UK originals depreciate at similar rates. We bring these data together and present estimates of the UK stocks compared with those implied by the National Accounts. The result is an upward revision of the UK stock of around £3.5bn, even when estimates for ‘Miscellaneous Artwork’ are excluded.

1. Introduction This report is part of a broader project aimed at measuring investment in intangible or knowledge assets, and the contribution of knowledge to growth. In recent years there has been a great deal of interest in the value of what has been termed the ‘creative sector’ and the industries that reside within it. We aim to contribute to this discussion using the framework laid out in Haskel et al (2009), specifically in this report to industries that invest in long-lived artistic assets formally protected by copyright.

The standard approach taken in measuring the creative sector is to select industries from the Standard Industrial Classification (SIC) that are considered ‘creative’, collate measures of output, and then present ‘creative output’ as a share of aggregate output. Some examples are numerous analyses by the Department of Culture, Media and Sport (DCMS, 2010), a report by the World Intellectual Property Organisation (WIPO, 2003), and an ONS analysis based on the Input-Output tables (Mahajan, 2006). However, there are a number of issues with this approach.

First, there is considerable debate on which industries should be considered ‘creative’. These industries and sub-industries are discussed in more detail in the WIPO report (WIPO, 2003), which introduces definitions such as ‘core’, ‘interdependent’, ‘partial’, and ‘non-dedicated support’ according to the extent and way in which industry activity (as defined by the SIC) is based on copyright. For example, the publishing industry primarily exists for the purpose of producing and distributing copyrighted literary works, and is therefore considered a ‘core’ industry. ‘Interdependent’ industries are those whose function is to facilitate the production or distribution of originals. Sticking with our literary example, this could include the manufacture or distribution of e-book readers or paper. ‘Partial’ industries are those whose activity is related to protected works, this could include the manufacture of merchandise for a particular book or literary brand such as Harry Potter. ‘Non-dedicated support’ covers the remaining industries in which a portion of activity facilitates the production or distribution of protected works, such as the wholesale or retail industries.

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