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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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Second, measuring the economic size of the creative industries is inadequate for measuring creative activity or the input of creative workers, as it takes no account of creative activity in outside industries. For instance, if we consider investment in design, data for 2006 show that around half of investment in design was undertaken on the own-account of firms outside the design industry. A simple measure of output for the design industry could miss as much as half of actual activity. Such an approach also measures all industry output that is in fact noncreative. For instance, expenditure on staff or equipment for administration or other noncreative business processes. Importantly, such an approach also introduces potential for double-counting, since the output measure can include investments in tangible or intangible assets already counted elsewhere.

Therefore, rather than seeking to define what is and what is not creative output, and what industries should be considered part of the creative sector, the plan of this paper is to set out a framework to identify and measure investment in long-lived assets formally protected by copyright, and the associated capital stock. We then use those data in a growth-accounting analysis to estimate the contribution of copyrighted assets to UK market sector growth. The results of that exercise are presented in the accompanying report, ‘The Role of Intellectual Property Rights in the UK Market Sector’ (Goodridge and Haskel, 2011). This project has meant an improvement to the underlying data and outputs of the broader intangible framework summarised in Haskel et al (2009) for the UK and Corrado, Hulten and Sichel (2006) for the US.

1.1 Defining the components of the UK National Accounts Since investment in Artistic Originals is one of the few categories of intangible investment already recorded in the National Accounts, as part of this report we also evaluate official estimates in light of our conceptual framework, and compare data from the National Accounts with our own estimates. As mentioned, a forthcoming report from ONS will set out fully the methods involvd. Data for investment, and the underlying component terms used to estimate it, are discussed in Section 6. For simplicity, we define those series’ here.

1) Film For Film the ONS use input costs as the basis of estimation. The underlying series is based on the funds provided by production companies and funding partners. Within the UK, amoung examples of channels producing film is Channel 4. Data can be publically found in the Channel 4 Annual Report(s). For example, funding of £39m is recorded for 2009 (Channel 4, 2009. p71). Hereafter, these data shall be referred to as ‘measured UK investment in Film Originals’ or similar.

2) Television and Radio For TV & Radio the ONS use input costs as the basis of estimation. The basis for the data are the production costs incurred by companies with a public service licence.

Within the UK, examples of channels with a public service licence are BBC, ITV, Ch4 and S4C. All series’ used can be sourced from the Annual Reports for each of these organisations.

Hereafter, the aggregate for these data shall be referred to as ‘measured UK investment in TV & Radio Originals’ or similar.

3) Books Estimates for books are based on an assumed fraction of book sales. As shown later in the report, assuming the presence of certain conditions, this can be shown to equate to annual investment.

4) Music Estimates for Music, or recording originals, are produced on the same conceptual basis as those for Books, namely an assumed fraction of music sales.

5) Miscellaneous Artwork At present the UK National Accounts include no estimates for any other form of artistic assets such as photography/images, choreographed routines, fine art, greeting card design etc. We do produce some preliminary estimates for this diverse group of assets, and we refer to it as ‘Miscellaneous Art’.

2. Background: Copyrighted assets or ‘Artistic Originals’ in the SNA Investment in copyright-protected assets is one of the few categories of intangible or knowledge investment included in the System of National Accounts (SNA), formally referred to as ‘Entertainment, Literary and Artistic Originals’ since the 1993 revision of the SNA. The European System of Accounts 1 (ESA) states that the valuation of originals ought to be based on prices paid, production costs or the discounted value of future receipts. Receipts are in the form of licence fee payments, 2 recorded as service transactions and paid to the owner of the asset, with payments recorded as a flow of property income. Sale of the asset itself (i.e. of the full asset rights) is treated as negative fixed capital formation for the seller, and positive fixed capital formation for the purchaser.

ESA refers to the formalisation of SNA recommendations into EU legislative requirements.

SNA 2008 has introduced additional changes to reflect the measurement of i) licences to re-produce and ii) licences to use. This distinction is discussed in greater detail later.

The immediate measurement problem is that data on market transactions for originals are rare, since they are often created on the organisations own-account. Therefore, in practice, production costs or discounted future revenues tend to be used when estimating investment.

To get an idea of initial estimates, Table 1 below compares current official data on investment or gross fixed capital formation (GFCF) in artistic originals as a percentage of Gross National Product (GNP) for European Economic Area (EEA) countries in 1995 and 2001, taken from a report produced by the Eurostat GNI Committee. 3 As can be seen, estimates for the UK are the highest of those presented for EEA states. Data for the US in 2002 are also included for comparison, based on experimental estimates outlined in Soloveichik (2010). The disparity suggests there may be some undercapitalisation in the EEA countries including the UK, although it should be noted that the US estimates are reflective of the size of the film, television and music industries in that country.

–  –  –

We know from Table 1 that US estimates are considerably higher as a share of GDP than those for the UK or other EEA countries. Therefore Table 2 makes a direct comparison between official UK estimates and developmental BEA estimates (Soloveichik, 2010), by category. Since only four of the five assets covered in the BEA work are currently capitalised in the UK, column 3 adjusts the US data so it can be compared with the UK on a like-for-like First meeting of the GNI Committee, 5-6th November 2003. Report of the Task Force on Entertainment, Literary and Artistic Originals.

basis. That is, miscellaneous artwork is excluded from the US investment figures, and the percentages are re-calculated accordingly.

–  –  –

Note to table: Artistic Originals are currently not capitalised in the US, whilst they are (partially) in the UK. Therefore, as a % of GDP, the above data are not quite on a like-for-like basis. For Column 3, implied US GDP has been adjusted to account for the differing definitional coverage of artistic originals i.e. since miscellaneous artwork is not included at all in the UK, $5bn is subtracted from the US aggregate for originals and GDP, and the percentages are re-calculated accordingly.

Inspection of investment in each category as a percentage of GDP reveals that UK data for Film, Books and Music are considerably lower than the estimates for the US and gives some indication of potential “missing” investment in the UK data. Of course we do need to remain aware of the vast size of the film and music industries in the US, which will impact any comparison.

To summarise, the data for the US provides an interesting comparison with that for the UK.

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. This could reflect the central role of Hollywood in both the funding and production of motion pictures, mis-measurement of UK asset production, or both.

3. Theory: Review of Methodological Approaches for estimating Investment

3.1. Model of the artistic sector To understand the various measurement methods available, we need to set out a simple model, analogous to that used by Corrado, Goodridge and Haskel (2010).

Consider an economy with an innovation sector and a final output sector. The innovation sector, or upstream, produces artistic originals which are used as an input in the final output, or downstream, sector: the film production (upstream) and cinema industry (downstream) for example. In this economy we may then write the value of gross output in the artistic/innovation sector as P(N)N. This is equal to factor and intermediate costs in the sector times any mark-up (μ) over those costs, where μ represents the monopoly power of the artist

due to protection from intellectual property rights (IPRs) for a unique asset:

P(N)N = μ(ΣP(X)XN + P(R)RN)(1)

Where X is a vector of inputs to the innovation sector (such as labour, capital, materials etc.), P(X) their competitive prices, and μ the mark-up over competitively priced inputs. P(R)RN are the rental payments for the use of other originals in production e.g. the use of a music original in film production.

Consider next the final output sector, which uses the artistic good. If they buy the asset rights (or some component) outright, then their input costs are P(N)N plus the costs of labour, intermediates and other forms of capital. If they rent the good e.g. pay a licence fee, P(R)R,

for T years to the IPR-holding innovation sector then capital market equilibrium implies that:

–  –  –

Equation (2) says that the asset value of the good must equal the discounted rental payments from the users of the good. 4 This condition is set out in, for example, the classic paper of Romer (1990).

The final output sector, which uses the artistic good, produces output, P(Y)Y

–  –  –

where P(X)XY are made up of labour, capital and materials payments in the using sector, and P(R)RY are the rental payments for using the artistic capital created in the innovative sector.

We assume that the final output sector is competitive and so there is no mark-up, μ.

The final equation simply aggregates both the innovative and output sectors.

–  –  –

A value-added figure for the same aggregation is simply the sum of factor incomes to labour and capital in each sector, including the income generated by artistic originals. Or put another way, aggregate value-added is aggregate gross output excluding materials and adjusted for rental payments that flow from the downstream to the upstream.

The above framework is represented in Figure 1 below, using the example of movie production.

Figure 1: Theoretical Framework. Upstream and Downstream. E.g. Movies

–  –  –

At first it may appear that there is a measurement issue in the sense that both the upstream and downstream are renting from the artistic stock. This is not the case in this model. The upstream is renting a different type of asset to that which it is producing. For example, the producer of broadcasting assets is renting music assets.

The above framework is also represented in Figures 5-8, alongside some notes on each sector, some practical data considerations, and notation for recommendations and methods to estimate GFCF. How then are we to measure investment in the creation of artistic originals, P(N)N? There are four broad approaches a. Input cost based: Upstream Production Costs The first method is to estimate the cost of asset production in the upstream sector, using data on input costs (labour, capital and materials) i.e. measures for the right hand side of (1). This is the approach taken in valuing investment in R&D using a survey of R&D performers (BERD). A variant of this approach is to just use labour input costs and apply a factor to cover other costs of production. This is the approach used for own-account software investment in the UK National Accounts (Chamberlin, et al, 2007), and for knowledge assets such as ‘Design’ in the intangibles framework (Haskel et al, 2009).

One difficult issue is treatment of the use of artistic goods in the upstream sector e.g.

payments for the use of music as an input to a movie original. It has been argued that this potentially leads to double counting. However, this would only be so if the measured input was the total asset cost of the recorded original, P(N)NREC, rather than the rental payment for its use, P(R)R. Provided the rental payment is used, and the payment is for the use of a different asset, then there is no double-counting. We expand on this issue later.

A second issue is whether or not to include an estimate for μ, the mark-up applied by the upstream monopolist. Assuming the copyright is enforceable then such a mark-up almost certainly exists since that is the very purpose of copyright protection, but there is little evidence of its magnitude. In reality the mark-up is likely to vary greatly not only by asset type but also by individual asset. 5 b. Creative sector output: asset sales A second approach is to measure the left-hand side of (1), P(N)N, using data on the value of sales of the upstream/artistic sector. This is equivalent to measuring tangible investment by the value of sales of the investment goods industries. To do so one has to select industries that are considered part of the upstream or ‘creative sector’ and collate measures of their output, as in analyses produced by DCMS, WIPO and the ONS. 6 The mark-up will be proportional to the commercial success of the individual asset. Therefore an estimate for the μ generated by say, Harry Potter, would differ greatly from that generated by the authors of this report.

The WIPO and ONS analyses can be found at:

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