«Jonathan Haskel Imperial College Business School, CEPR, Ceriba, IZA and UK-IRC Keywords: copyright, IP, innovation, knowledge, investment, ...»
This is a measure that is used frequently in studies that try to estimate the value or size of the creative sector. It is important to note that the sales of UK-resident downstream firms rent from IP owned by upstream producers resident in the UK and worldwide. Conceptually this is not the correct basis for measuring UK investment in artistic assets. Also note that if this data is combined with upstream output, P(N)N, as is often the case, then there is a doublecounting issue which such studies largely ignore.
5: P(G)G [Upstream and Downstream output] e.g. sales of total “film industry”, as defined by the SIC Measurement of this term is common in attempts to value the creative industries. In practice it is an overestimate of creative output and reflects the reality of data measurement. Measured industry data are not conveniently split into the innovating and using sectors, and industries undertake a host of activity besides the creation of artistic originals including merchandising, marketing and product distribution. Instead industry output relates to both. Measurement is further complicated by the fact that there are often numerous downstream industries which in turn rent from a variety of different owners. For example, a t-shirt manufacturer may rent the right to produce merchandise for films, but they may also rent similar rights from the music/recording industry. The owners of those rights may be split between producers and This feature is not unique to artistic originals. Consider a firm such as Ford. The majority of its output is downstream since it represents the sale of final goods (vehicles). However, the firm also includes a significant upstream that the rest of the firm implicitly rents capital from. For example, the lab generates ideas through R&D. Likewise the units that design or brand the final goods are part of the upstream for those particular knowledge assets.
distributors (studios) in the case of film, and between artists and recording companies in the case of music.
Also note that upstream revenues accrue from all downstream users regardless of their residency or location. Likewise the UK downstream does not only rent from the UK upstream, rather it rents capital from the world upstream. So in the case of film, owners of UK IPRs generate revenue from cinemas and other downstream users worldwide, whilst the UK downstream rent IP from the world stock of films.
6: α.P(G)G [Proxy of Upstream output] e.g. sales of film producing companies as a proportion of the total film industry defined by the SIC This is a variant of the previous term, designed to produce an estimate more reflective of innovative or artistic output. As discussed, total industry output, P(G)G, is actually a sum of innovative output, P(N)N, and downstream output, P(Y)Y. Multiplying industry output by some factor is a way of removing P(Y)Y and deriving an estimate of upstream output or asset creation, P(N)N. ONS methods for Books and Music could be interpreted as an application of such an approach, but to the best of our knowledge no documentation on the reasoning behind the ONS methodology is available. Therefore we consider it more likely that the ONS method is an attempt to derive the cross-sectional sum of royalties based on sales in the downstream sector.
3.3 Summary Since little data on market transactions exist, for both conceptual and practical reasons our preferred methods for estimating investment in originals are those based on input costs or royalty payments. This way we can avoid the inherent difficulties of matching industry data to up and downstream activity. Estimation using microdata on upstream royalty revenues would provide the additional advantage of identifying the frequency and type of payments made i.e. payment for the right to use for a long period purchased outright; one-off payments for short-term use; payments for short-term use paid in multiple periods.
4. What assets should be counted as “Artistic Originals”?
In addition to identifying alternative approaches for measurement, one has to define just what assets to consider. Eurostat and the OECD have opined on this issue. We discuss their recommendations in the context of our theoretical model, and compare them with ONS practice. The following text is built around a summary of recommendations outlined in a Eurostat Taskforce report and further clarification issued by the GNI Committee, 10 in 2003 and 2004 respectively.
4.1. Eurostat Taskforce Criteria: identifying investment in artistic originals
The Taskforce set four criteria for identifying investment in artistic originals. The item:
1) Must be covered by copyright
2) Should have primary artistic intent i.e. where the original is the end product in itself, and not an interim part of the production process for another good 11
3) Must satisfy the capitalisation criteria (i.e. have a useful life of more than one year)
4) Should not be covered elsewhere in the National Accounts. Therefore software and valuables should be excluded On the first criteria, there may appear to be an inconsistency with the treatment of say R&D, which was also recognised as fixed asset in SNA2008 and will soon be capitalised in the National Accounts framework. That is, it is not necessary for R&D to be protected by patent in order to qualify as investment. The reason that much R&D is not formally protected by IPRs is that firms can still exploit the asset without formal protection, and they often prefer not to make their acquired knowledge public in any way. In contrast, in order to commercially exploit an artistic original, it must be protected by copyright. Also, copyright protection is automatic whereas patents are registered rights that must be applied for.
The fourth criterion explicitly recommends the exclusion of goods termed ‘valuables’, which are goods that are held as stores of value as an alternative to financial assets, and typically include items such as fine art or jewellery. In summary we do not consider it appropriate to exclude all other types of artistic capital simply because of the presence of ‘valuables’ in the Accounts. Although not necessary, a more appropriate treatment would be to estimate investment in remaining types of artistic capital and subtract off the measured data on Second meeting of the GNI Committee, 25-26th March 2004, State of play on Entertainment, Literary and Artistic Originals.
This does not mean the final asset is not an input to the production of final goods. It simply means that a component of the final asset should not be counted separately e.g. un-edited or animated images from a broadcasting original should not be counted separately to the final film/TV original that they are a part of. A potential grey area is the treatment of film or television scripts, which can be covered by a separate copyright, and a case can be made for considering them separately.
valuables. This would guarantee no double-counting of assets, and avoid the exclusion of a potentially significant area of investment. Further detail on ‘valuables’, how they fit into the National Accounts, along with our reasoning are provided in Appendix 1.
4.2 Recommendations on the Scope and Valuation of GFCF The following headings outline the asset categories considered by the Taskforce, their recommendations on which types of originals should be capitalised in the National Accounts, and additional information we considered relevant to the discussion. The recommendations are summarised in Table 3 and we comment below.
a) Films GFCF in Film Originals should include the production of all short and long films that satisfy the above criteria, including translations and re-worked originals. However, only the edited final version should be capitalised, and not interim versions. It is important to establish the residency of the production country so the asset value is allocated to the correct country.
Establishing ownership is particularly important for Film where national tax/subsidy arrangements encourage activity in different locations. This is especially true for the UK where a significant amount of activity is funded by major US studios. In fact a number of the major production companies in the UK are subsidiaries of US producers. 12 13 Regarding valuation, the Taskforce recommend the use of production costs. ESA95 states that production costs should be defined to include compensation of employees (CoE), intermediate consumption (IC), taxes less subsidies (T-S) and depreciation (D), with a markup for operating surplus (β).
Production Costs = β(CoE + IC + (T-S) + D)
Initially there was some division among the Taskforce on whether costs should include rentals for embedded originals, since the investment in their creation will have already been counted e.g. where one original is used in the production of another, such as the soundtrack to a film.
It was later decided they should be included, and we agree with this recommendation.
b) TV & Radio stock programmes (e.g. fiction, documentaries, drama, music, arts, history & education, children’s) Both the television and radio industries categorise their programmes as either ‘Stock’ or ‘Flow’ productions. ‘Stock’ is defined in the heading above, whilst ‘Flow’ refers to genres such as news, sport or game shows which are unlikely to be repeated and therefore provide a natural break according to the capitalisation criterion.
In the case of sports we feel the distinction is less clear, with DVD releases of major events and re-runs on channels such as ‘ESPN Classic’ long after the original broadcast. The OECD explicitly recognise that sports broadcasts do often have a service life of more than one year, but recommend that, due to very fast depreciation rates, sporting rights be excluded from final estimates (OECD, 2010, p152). In the case of game shows, a differing view was taken by Soloveichik who argues that although one programme may be short-lived, the format and therefore underlying asset is long-lived (Soloveichik, 2010). This may be debatable since it could be argued that all formats are long-lived. But surely there has been some investment According to the ONS FTV release, in 2007, 62% of UK film exports were by UK subsidiaries of major US film companies. In the same year 56% of film imports were purchased by such subsidiaries.
One of the difficulties in capitalising assets protected by IPRs is the treatment of acquisitions of previous knowledge (Galindo-Rueda, Haskel and Pesole, 2010). The purchase (sale) of copyrighted assets from (to) abroad should be treated as imports (exports).
when a ‘title’ is re-produced either domestically or internationally for several years, even if the one-off programme itself is unlikely to be repeated. 14 The Taskforce also recommended the exclusion of advertising since it would generally be used for less than one year. Although we feel part of advertising expenditure certainly goes towards building brand and reputational capital, it is treated as a separate asset in the intangibles framework.
Regarding valuation, as always the preferred source would be recorded market transactions, but such data are rarely available. The Taskforce recommended the use of production costs.
They did note that firms often do capitalise such assets, but suggested it would not be possible to combine data from company accounts with aggregate sources due to the potential for double-counting.
c) Books & Pamphlets (Literary Originals) The Taskforce recommended that all investment in the creation of full books regardless of subject or style be included, and that audio or e-books be included provided they hold a separate copyright. The recommendation for sheet music and scripts is that if they are protected by a distinct copyright they can be recorded as a separate item under literary originals, but should not be included as a separate item within music or film.
Since newspapers and magazines generally have a service life of less than one year it was recommended they be excluded. A potential grey area is the treatment of journals, since their service life is often greater than one year, but data practicalities mean it can be difficult to disentangle them from magazines and similar publications.
Regarding valuation, for music, literature and images, it was recommended that royalty flow data from the rights management agencies should be used. A number of European countries apply the following formula: 15 Wj = Hj*(1+rj-ij) Obvious examples of this include numerous reality shows re-produced on an annual basis in a range of countries. For instance: ‘The X Factor’, ‘The Apprentice’ or ‘Big Brother’ to name a few. It may be however that it is more appropriate to consider these under branded investments, rather than investments in the creation of long-lived originals.
This formula is an approximation derived by the German National Statistical Office. Using data on royalties and interest rates from the early 1950’s, the NPV of royalties were estimated using 6 different service life and age-price profile combinations. The above formula was found to closely approximate the average of the six results.
Wj is the present value of originals produced in year j, Hj is the sum of royalties paid, rj is the annual growth rate of royalty payments, and ij is the interest rate.
Additionally the Taskforce recommended that estimates for growth in royalties (r) and the discount rate (i), be either annual or moving averages (up to 5 years) and produced independently.
Potential issues include the flows of payments between agencies which could give rise to double-counting, so these ought to be separated out. Questionnaires for the UK showed such splits to be conceivable, provided the business register is sufficiently detailed. For international flows, use of the Survey of International Trade in Services (ITIS) was discussed.
ITIS includes categories for “other royalties and licence fees”, “audio-visual services” and a memo item for “audiovisual transactions”. Of these the Taskforce noted that: the first is likely dominated by software-related flows but may include other types of royalties; the second includes limited distribution rights and fees for motion picture production; the third does not appear distinct from the first two categories, particularly the second.
Payments for one-off and longer-term use should also be considered separately: