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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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Consider the case of motion picture productions, since a flop generates very little sales revenue then its theoretical weight is small. However, a Disney film (which is typically very long lasting e.g. Snow White) would receive a much higher weight and would continue to generate revenue for many years, contributing to the weighted service life of the asset category.

To estimate depreciation rates, Soloveichik (2010) has used data on revenue payments to various artistic assets following release. In the case of movies for example, these would be box office and subsequent revenues via DVD and TV. Note that payments to artists are not the entire revenues since ownership is frequently shared (e.g. with publishers say). The following chart displays depreciation rates for various types of artistic originals, as calculated in Soloveichik (2010). 50 Figure 32: Depreciation rates used in BEA developmental estimates (Soloveichik, 2010) We are grateful to Rachel Soloveichik of the BEA for sharing this data with us and for valuable comments and advice.

-0.45

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Note to figure: Data presented as the mean depreciation rate over 5 year intervals. Television is broken down into fiction and non-fiction. Photography refers to commercial stock photography and fine art to reproductions.

The data show that life-lengths vary considerably depending on the specific asset type measured. First looking at the series for Movies, the data show the depreciation rate to be higher in the initial years after release. This reflects the profile of box office revenues, which were used in the estimation, since movies generate the majority of their revenue through cinemas in the first year after their release. After this point the rate of depreciation slows and settles at a fairly constant rate, reflecting the longevity of revenues generated through release on DVD and television. The average annual change, calculated in natural logs, in the index for movies is 5% p.a. The average change over the first twenty years is 6% p.a.. This is considerably slower than the rate of 20% used in the intangibles framework, suggesting a larger stock and contribution from theatrical movies than previously estimated. To reflect the long life-lengths of movies, but to allow for faster depreciation in the earlier years, we shall apply a rate of 7.5%.

In the case of television, Soloveichik estimates separate depreciation schedules for fiction and non-fiction. The data show that fiction (that is drama and such like) depreciates at a much slower rate than non-fiction. The reason is that non-fiction includes formats such as current affairs and documentary type television, where we would expect much shorter service lives.

For example, a programme covering the recent financial crisis produced in say 2008, would depreciate quickly and may be out-of-date by say 2010. The average rate for fiction is the same as that for movies, at 5% p.a., although the profile differs. Over the first twenty years, the average annual change is 9% p.a.. To allow for faster depreciation in the early years, and for conservatism, we shall apply a geometric rate of 10% to fiction, considerably slower than the rate of 20% currently used for all artistic originals. For non-fiction, the rate of depreciation is much higher, with an implied life-length of just 12 years, resulting in an average rate of decline of 41% over that period. This will also be our chosen rate.

Turning to Books, the Soloveichik data show a faster decline in the early years than either movies or fictional television, and a total life-length of 34 years. The average rate of decline over those years is 15% p.a., and 17% p.a. for the first twenty years. This suggests that the rate currently used, 20%, is reasonable, and we shall continue to use that rate in the case of Books.

For Music Originals, the initial profile is similar to that of Books, but slows in later years, implying a life-length of greater than 50 years. The average rate of decline over 50 years is 13% p.a., almost identical to the rate used in the construction of VICS (ref), and is 11% p.a.

over the first twenty years. Therefore for music we shall adopt the rate of 13.33% p.a. used by ONS.

The remainder of the rates presented are smaller categories considered to fall under the generic term 'Miscellaneous Artwork'. Although the profiles differ somewhat, the average rate of decline for 'Fine Art Reproductions', 'Theatrical Play Scripts' and 'Commercial Stock Photography' are all around 10% p.a.. Since we consider Art, Photography and Choreography under our definition of Miscellaneous Art, we shall also use a rate of 10% for this category.

Additionally Soloveihchik has calculated depreciation rates for 'Greeting Card Design' and 'Wallpaper Design'. Since Design is a separate asset in the intangibles framework we don't consider those asset types here, but note that the estimates of 15% and 42% p.a., for Greeting Cards and Wallpaper respectively, compare with 33% p.a used for Design in the UK dataset.

As Figure 38 shows, the US estimates do not match a true geometric profile, however when geometric rates are applied the impact on US capital stocks is limited (Soloveichik, 2010).

Since geometric rates have useful, elegant properties when used in growth-accounting analysis, we shall apply those rather than the exact rates implied in Solveichik (2010).





Additionally we feel that since copies of originals are internationally traded, and often produced, across borders, then US rates should be relatively applicable to the UK, particularly for the 4 major categories (Movies, TV, Books and Music). The following table summarises the depreciation rates for each component of artistic originals used for this report and compares them with rates used in previous work on intangibles (Haskel et al, 2009) and those used by the ONS.

Table 14: Depreciation rates, by asset

–  –  –

15.3. Calculation of Capital Stocks As laid out in our theoretical framework, the upstream sector produces finished knowledge (in this case, artistic originals), denoted P(N)N. The downstream sector produces consumption and physical investment goods, with one of the inputs being rental from the stock of finished knowledge produced in the upstream. The stock of finished knowledge can be represented in a perpetual inventory model (PIM), as shown in equation (3) and repeated below for

convenience:

Rt = Rt-1(1-δ) + Nt Where Nt is real upstream output in the current period, R is the accumulated stock of originals and δ is the geometric rate of depreciation.

For this report we were required to produce estimates of investment, by asset category, back to 1990. However, since knowledge assets depreciate relatively quickly, then to construct reasonable estimates of the capital stock we require investment data for a longer time-series.

Therefore we extend our estimates using the profile of existing estimates already recorded in the National Accounts. We consider the results to be a reasonable approximation of GFCF in earlier years. For film we extend the series further using data sent to us by Soloveichik on joint UK/US production, implicitly assuming that co-productions with the US are a fairly constant proportion of total UK production.

To convert our estimates of GFCF from nominal to real values, for reasons already discussed we use an implied deflator for market sector output. Note that when comparing implied level of the capital stock we use the same GVA deflator in the construction of our own estimates and those for the ONS. Finally we apply geometric depreciation rates for each asset category as discussed in the previous section. The following charts present estimates of the UK capital stock for each asset category based on the data in this report. Each estimate is compared with the stock implied by official ONS data. Note, since ONS do not produce estimate for ‘Miscellaneous Art’ we have no data to extend our series. Neither do we have capital stock estimates with which to compare.

Figure 33: Real Capital Stock: Film, £mns, real

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Source: Our estimates, based on our new data on investment, and compared with estimates based on ONS investment and depreciation rates.

Note to figure: The price index (value-added) used is based in 2005. ONS stocks constructed using official data for Film Originals and a depreciation rate of 13.33%. We apply a depreciation rate of 7.5% for our estimate. Initial value for ONS estimate is 1986. Initial value for our estimate is 1971.

Figure 34: Real Capital Stock: TV & Radio, £mns, real

–  –  –

Source: Our estimates, based on our new data on investment, and compared with estimates based on ONS investment and depreciation rates.

Note to figure: The price index (value-added) used is based in 2005. ONS stocks constructed using official data for TV & Radio Originals and a depreciation rate of 13.33%. We apply a depreciation rate of 10% for fiction and 41% for non-fiction in our estimate. Initial value for each estimate is 1986.

Figure 35: Real Capital Stock: Music, £mns, real

–  –  –

Source: Our estimates, based on our new data on investment, and compared with estimates based on ONS investment and depreciation rates.

Note to figure: The price index (value-added) used is based in 2005. Each constructed using a depreciation rate of 13.33%. Initial value for each estimate is 1986.

Figure 36: Real Capital Stock: Books, £mns, real

–  –  –

Source: Our estimates, based on our new data on investment, and compared with estimates based on ONS investment and depreciation rates.

Note to figure: The price index (value-added) used is based in 2005. ONS stock constructed using a depreciation rate of 13.33%. We apply a depreciation rate of 20% for our estimate. Initial value for each estimate is 1971.

The data show that underestimation of GFCF has considerable implications for the measured stock of artistic originals, as does a lack of consideration of alternative depreciation rates for different types of artistic assets. The impact in film and books is particularly notable. For film, the higher estimates are due to a number of factors. First, our estimates for nominal GFCF are considerably higher, because ONS estimates are only based on just a sample of UK productions. Second, since ONS data for Film begin in 1986, the ONS data implicitly assumes that the stock of UK Film Originals prior to 1986 was zero. Third, the ONS stock is based on a geometric depreciation rate of 13.33% p.a. compared to a rate of 7.5% p.a. for our estimate (Long at al, 2010). For Books, the difference is driven by our estimates of nominal GFCF being much higher than those used by the ONS. Our assumed rate of depreciation is in fact higher (20% p.a. compared to the 13.33% p.a. used by ONS).

Overall, when comparing the aggregate stock over these four asset types, we find that in 2008 our data suggest that ONS series’ our lower than our capital stock of artistic originals by approximately £3.5bn, or 21%.

16. Conclusion This report has contributed to the measurement of the UK creative sector and the creation of long-lived artistic original assets protected by copyright. The main outputs are improved estimates of UK investment from 1990-2008 and estimates of the total stock of artistic originals where we also consider the role of depreciation and prices.

We find that official UK estimates are considerably lower than those for the US on both an absolute and relative basis. In particular the UK seems to record very little investment in Film relative to the US. Therefore we examine official data and methods and evaluate them in light of our conceptual framework and the recommendations of international bodies such as Eurostat and the OECD. We then re-estimate UK investment in artistic originals using a variety of methods. Using our preferred method for each asset type we show that in 2008, official UK data in the National Accounts estimated investment to be lower by 36%.

Similarly, in 2008, we show the real stock of artistic originals to have been underestimated by approximately 21%. This has considerable implications for the contribution of artistic (and more widely, knowledge) capital deepening in a growth accounting context, which we shall explore in the accompanying report: ‘The Role of Intellectual Property Rights in the UK Market Sector’ (Goodridge and Haskel, 2011).

Note that his project has focused on investment in copyright protected assets, where assets are defined to have primary artistic intent and a service life of at least one year. Another potential research area is spend on copyright, or more broadly IPRs, that is not restricted to investment.

For example, we have shown that only a proportion of UK spend on film is on the creation of UK-owned assets. Similarly a large chunk of spend in broadcasting is on the production of sports and news programming, excluded from our asset definition. In literary works, spend on copyright protected goods includes news, magazines and other intermediate goods, whilst in music it also includes jingles and the like. We may consider these other forms of expenditure in future work.

We regard this piece of 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 asset types our estimates should be regarded as preliminary only, 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 anticipate an update to our estimates sometime in the near future, should such data become available.



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