«Jonathan Haskel Imperial College Business School, CEPR, Ceriba, IZA and UK-IRC Keywords: copyright, IP, innovation, knowledge, investment, ...»
i) Payments for permanent transfer of specific (not necessarily all) rights associated with the original i.e. for indefinite use ii) Payments for a time-limited transfer of rights iii) Payments for the one-off use of an original Such data would raise the possibility of splitting the original into constituent rights. There is disagreement over whether originals are divisible, and whether the sale of some right(s) changes the value of the asset, or whether it is just the sale of a service. In principle, the Taskforce felt the sale of a right(s) would diminish the value of the original to the owner, and generate value for the purchaser. Note that such distinctions are consistent with our framework. Payments for permanent or exclusive transfer of (some) rights would represent the purchase of (some component of) the asset, P(N)N, and the payment equivalent to the discounted sum of expected future royalties.
d) Music (Recorded Originals) As with Film it is important that to ensure that only the edited final version is recorded as GFCF and there is no double-counting. It was recommended that all media types be included, including music videos, but that advertising jingles be excluded. The recommended method is data on royalty flows mediated by the Collecting Societies.
One potential issue is estimation of investment in music videos, due to SIC definitions. In SIC03 16 video production is wrapped up within motion picture production (film). Although it should be possible to avoid double-counting, there is potential for mis-classification e.g. part of GFCF in music originals incorrectly allocated to Film.
e) Slogans/Brand names The Taskforce felt that although protected under Trade Mark, they should not be considered as originals. Although we do not agree with the broader judgement that branding is not a form of capital, we already count such investments in the broader intangibles framework (Haskel et al, 2009). Therefore they will not be included in our estimates for artistic originals.
f) Technical/Architectural Drawings & Models The Taskforce felt these items ought not to be considered, even if they have copyright protection, since their primary use is as an input to construction output. Therefore they fail to meet the criterion that assets should have primary artistic intent.
However, provided such blueprints (or prototypes or scaled models) have a service life of one year it is clear that they should be treated as capital, even if not as artistic originals. That is, if they are used as an input to the production of numerous structures across a period of more than one year, then they should be considered as a distinct asset. Although we do not include such assets in our estimates of artistic originals, they are included in the broader intangibles framework under “Architectural and Engineering Design” (Haskel et al, 2009).
g) Paintings, sculptures, antiques, fine art & jewellery The Taskforce recommended these be excluded to avoid double-counting, as according to the fourth capitalisation criterion and the presence of ‘valuables’ in the National Accounts.
However, ESA95 does reference portraits, images, reproductions and pictures in its SIC07 does separate these activities at five-digit level, but much of our data is classified according to SIC03 since much of the historical data has not yet been transferred to the new classification.
Additionally, post-production activity for motion pictures, video and television remain combined in SIC07.
discussion of what should be included as artistic originals. As discussed in Appendix 1, the potential for double-counting and the rationale for exclusion are not clear.
h) Photographs & Images (reproductions or copies from books) The Taskforce recommended these be included provided they are covered by copyright. Data for such assets are more limited than that for other asset types.
i) Maps The Taskforce recommended that maps be included, and noted that in any case, it is unlikely their royalty flows could be separated from those for other publications.
Our preferred asset breakdown As a minimum, the Taskforce recommended that originals be defined to include Films, TV & Radio stock programmes, literary and musical works, and that other categories such as photography/images could also be included provided they meet the criteria listed above.
Broadly in line with these recommendations, we estimate investment in artistic originals for the asset categories listed below. In doing so we compare data from a variety of sources, and our final estimate is chosen according to conceptual preferences, data quality and methodological practicalities. The final category, Miscellaneous Art, includes assets such as artwork, photography, images, choreography and maps, where data are available and where they are not counted elsewhere. The following section discusses some of conceptual and practical measurement issues posed in the case of each asset.
2) TV & Radio
5) Miscellaneous Art
5. Measurement Issues: by asset The section above set out the asset categories considered to meet the criteria for artistic originals. In this section we review numerous measurement issues in the context of specific assets, namely: ownership, embedded originals, divisibility, outsourcing and double-counting.
5.1 Film Performance.vs. Ownership For Film, determining the value of investment requires information on the residency of the owner of the final original. For instance, if a film is produced wholly or partly in the UK but the final asset is owned by a Hollywood studio, then the licence fees and royalty payments flow to the US, and the investment should be recorded in American output. Consider an example such as a Harry Potter movie, and let us assume that all of the filming took place in the UK, was carried out by a UK production company, and that the majority of the cast and crew were UK residents. However, also assume that the movie is owned by (i.e. the asset rights belong to) a Hollywood studio. In this example, the film is certainly part of UK production, since the intermediate purchases and the payments for services from labour and capital all took place in the UK. But if the asset is owned by a US studio then the investment is American. That is, the production is part of UK output as recorded in the National Accounts, but within output, the expenditure is allocated to exports rather than investment. In practice measurement is less straightforward: it is likely that the UK production company would retain some proportion of the asset rights, and the US studio would acquire the remaining (larger) proportion. In addition the scriptwriter, and possibly the author of the literary work behind it, may also be granted some proportion of rights. So continuing with the Harry Potter example, it is likely that some part of production does represent UK GFCF.
It is now clear that data on ‘UK productions’ are not conceptually consistent with UK investment in Film Originals. A film that is classified as a UK production is not necessarily owned by a UK organisation. Instead the classification for UK-certification is based on criteria set by the UK Film Council (UKFC). That is, a film must either pass a so-called ‘Cultural Test’ or be an official co-production (qualification for which is via official treaties).
The incentive for UK certification is to benefit from tax relief which has the additional requirement that 25% (70% prior to 2007) of total production costs be spent in the UK. A film-producing company (FPC) does not need to own the final rights to the film to benefit from tax relief. Further information on UK film classification is provided below in Box 1.
Box 1: UK Film Council: UK Certification
Films can acquire UK certification in two ways:
• Schedule 1/Cultural Test
1) Until 2007, Films were certified as ‘British’ under Schedule 1 of the Films Act (1985) provided they met certain criteria, the main one being that at least 70% of spend took place in the UK. Since 2007, certification has depended on passing a ‘Cultural Test’ which allocates points for British content according to subject matter, characters, location and cast. Films that score 16 from a possible 31 points receive UK certification.
2) Certification via co-production requires official bilateral treaties or membership of the European Convention on Cinematic co-production. The UK currently has active treaties with Australia, Canada, France, India, Jamaica, New Zealand and South Africa and is also signed up to the European Convention.
Tax Relief The main benefit of UK-certification is that it is essential for qualification for UK Tax Relief.
Additional criteria are:
• The film must be intended for theatrical release
• The FPC must be within the UK corporation tax net, but does not need to own the final asset • 25% of costs (pre-production, principal photography and post- production) must have been incurred in the UK, that is the good or service must have been ‘used or consumed’ in the UK, irrespective of the nationality of persons carrying out the activity It is worth considering here the measurement of knowledge investment in cases where the asset is owned by non-UK organisations, in the context of R&D. In the ONS satellite account, for R&D performed in the UK but funded from abroad, 10% of spend is allocated to UK GFCF even though the UK does not own the final asset (Galindo-Rueda, 2007). It could be argued that a similar method ought to be applied to UK film production. Some additional data on the share of expenditure that took place in the UK, by type of production, is provided in Table 7.
A similar conceptual issue is present in the construction of the ONS R&D satellite account (Galindo-Rueda, 2007). In the case of R&D performed by a UK firm but funded by the ‘Rest of World’ (RoW), the funder is deemed to own 90%, and the performer 10%. Applying a similar principle to artistic originals would mean that if the final asset was owned by a US studio but created in the UK, then 10% of GFCF would be allocated to the UK, and 90% to the US. However, such an approach appears quite arbitrary in a National Accounts context.
Additionally, this convention is not based on international guidance. In the US, R&D ownership is allocated to the funder, although where data on the funder is unavailable, ownership is allocated to the performer instead. The reasoning is that the incentive to fund is based on future ownership and that although cases of shared ownership do exist, they tend to be rare. The ONS intends to look into this issue further in the context of R&D, using a new question in the BERD survey.
Rental of copyrighted assets in the production of new assets i.e. embedded originals A further issue is that services from different asset types are sometimes rented in the production process. Continuing with the example of Harry Potter, one of the inputs to the film is the book used as the basis of the script. Others include music recordings used in the soundtrack. Therefore the production costs include the royalty payments made to the author, J.K. Rowling, and musical artists. This is the correct treatment and not double-counting.
Conceptually it is similar to, say, a firm using capital to produce an aeroplane, and a separate firm in the airline industry renting that aeroplane to provide transport services. Therefore, we will follow the Taskforce recommendation and not attempt to exclude royalty payments to other forms of artistic capital from production costs.
It is worth re-iterating that there is a crucial difference between the sale of an asset and licensing. The first is a sale of permanent asset rights and would represent negative GFCF (e.g. to Rowling and her publisher, but positive GFCF for the film company). The second are rented services, with associated royalties or licence fees that flow to the owner of the asset (e.g. Rowling) as Gross Operating Surplus. It is correct to treat the latter as both a cost of production in the case of the film, and capital income earned by the book.
Scope and divisibility of the final original This takes us onto another point. Do we consider say scripts or sheet music to have already been counted within the value of the film or recording original, or should they be treated as separate originals in their own right? The Eurostat Taskforce recommends that if scripts are covered by a separate copyright then they can be recorded as a distinct component, but within the category of literary originals, rather than Film (or Television). Conceptually the correct treatment depends on whether the value of the copyrighted asset is divisible and a case can be made either way.
In the work by Soloveichik (2010), sheet music is considered as a separate item within Music Originals, with its revenues contributing to the valuation of investment. A sensible general approach would appear to be the following. Where estimates are based on production costs then it is reasonable to assume that it is not possible to accurately decompose the asset value into constituent parts and that the value of the script/sheet music is already embedded in the value of the final asset. Where data on royalties are available then it should be possible to count payments for scripts/sheet music as distinct categories. This may benefit final estimates disaggregated at industry-level as the owners of rights to say, a soundtrack, will not necessarily be the same as the owners of the rights to a film.
Summary: Film Replicating the BEA approach and building bottom-up estimates using data on UK titles requires identifying films where ownership rights are held in the UK. Data for films considered to be 100% owned by UK resident firms could be used to inform a lower-bound estimate. An upper-bound estimate would include some percentage of the costs of all other UK-located productions and co-productions. Estimation is complicated by the fact that 100% ownership of rights is rare, and it is common for rights to be split among the primary funder(s), other investors, the distributor (studio), co-producers, writers, lead actors and directors, in private arrangements that differ case-by-case.