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A.Cesaretti – R. Moro-Visconti Music Recording Labels: Business Models and Valuation
1
Music Recording Labels:
Business Models and Valuation
Andrea Cesaretti and Roberto Moro-Visconti
November 18, 2021
Abstract
Record labels are companies, large or small, that manufacture, distribute, and promote the recordings of
affiliated musicians. Essentially, record labels work to sell the brand of the artist and the products they create.
While the internet and digital technology have made it easier for artists to succeed without record labels, they
still play major roles in the industry.
This paper shows which are the business models of record labels and how they can bring to market valuation.
Keywords: artist; music; concert industry; Internet; copyright; moral rights; compensation; business-to-artist.
1. Introduction
A record label, or record company, is a brand or trademark of music recordings and music videos, or the
company that owns it. Sometimes, a record label is also a publishing company that manages such brands
and trademarks, coordinates the production, manufacture, distribution, marketing, promotion, and
enforcement of copyright for sound recordings and music videos, while also conducting talent scouting and
development of new artists ("artists and repertoire" or "A&R"), and maintaining contracts with recording
artists and their managers. The term "record label", derives from the circular label in the center of a vinyl
A.Cesaretti – R. Moro-Visconti Music Recording Labels: Business Models and Valuation
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record which prominently displays the manufacturer's name, along with other information. Within the
mainstream music industry, recording artists have traditionally been reliant upon record labels to broaden their
consumer base, market their albums, and promote their singles on streaming services, radio, and television.
Record labels also provide publicists, who assist performers in gaining positive media coverage and arrange
for their merchandise to be available via stores and other media outlets
(https://en.wikipedia.org/wiki/Record_label).
The scenario in which record labels operate is complex and evolving. It is therefore advisable to
examine the historical evolution of the industry to understand the reasons for the coexistence of different
business models.
The recording industry is accompanied by the complementary concert industry. According to Koster
(2008) “for many years, the music industry has consisted of two main components: the concert industry and
the recording music industry. Throughout the 80s and 90s, thanks mostly to CD sales, the recording music
industry was dominant in terms of revenue and visibility. Reluctantly, the recording industry has joined the
digital world by signing agreements with a variety of organizations providing music downloading, in particular
with Apple and its iTunes downloading service. It earned 1.4 billion dollars from music downloading in 2007
(with another billion from other digital sales such a cellular phone ringtones). Obviously, digital sales have
fallen short of compensating the industry for its losses of physical record sales. The concert industry is re-
emerging as the potential dominant component of the music industry. In contrast to the recording industry, its
revenues have not been affected by illegal Internet downloading. On the contrary, it is making use of the
Internet to increase them. Recording artists are taking advantage of the weakening of the recording labels and
of the opportunities offered by the Internet to loosen their dependence on the labels. Finally, the once well-
defined separation between the concert industry and the recording industry may be disappearing: concert
organizers are getting into the recording business and majors are getting into the concert business”.
Figure 1 – Interaction between the recording and concert industry
In the field of music, the rights that can be evaluated are different and vary according to the legislation
of the various countries.
recording
industry
concert
industry
artists;
label
companies
A.Cesaretti – R. Moro-Visconti Music Recording Labels: Business Models and Valuation
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2. History
Record labels began emerging in the late 1800s when phonographs and phonorecords began to commercialize
as technology allowed mass production. By the end of the century, three record companies had established
themselves as the leaders of the industry: the Thomas A. Edison Company, Victor Talking Machine Company,
and Columbia Phonograph Company (https://exploration.io/what-is-a-record-label/).
The real beginning coincides with Edison's invention of the phonograph in 1877. The first record company in
history was the Victor Talking-Machine Company (then RCA Victor) which also produced turntables. It was
probably the first to pay an artist: $ 4,000 a song, plus 40 cents for each sale. However, it was Columbia that
invented the 33 RPM LP (1948) to hold 45 minutes of audio, while RCA created the 45 RPM (1949).
The golden age of record companies coincides with the 60s when they dealt with everything from studio
production to sales in record stores. It was their job to look for new artists, produce and package a record
product, manage the image and communication before distributing and selling the records to the public in
record stores. It wasn't just about finding a talented musician and printing his records by putting them in shop
windows, but about worrying about an artist's growth by committing to long-term work. The record company
sought out talents, financed them to produce the records after choosing the songs and arranging them, giving
them a graphic design, and curating the image for the artist.
Then the radios had to play the new songs and the artists were invited to the most popular TV shows.
There was a need to take care of the logistical and economic organization of the tours, perhaps allowing the
new unknown singer to join a famous star at the opening of the concerts. The artist under contract had to
guarantee an advance on sales that would allow him to concentrate only on the artistic part and on the writing
of the music.
The 80s saw the birth of independent labels (Indie). The Indie labels are founded by the artist himself,
which allows him to produce his music without more pressure from the music industry. In other cases, already
established artists, after having terminated the contract with a major, sign for an independent label. An Italian
example is the Soleluna label of the Italian singer Lorenzo Cherubini aka Jovanotti.
This allows artists to take advantage of their already acquired notoriety to have greater freedom in the
production of their albums. Independent labels, not having their commercial structure, enter distribution
contracts with the majors or with labels specialized in distribution, which allows them to have their works
available in record stores.
Many labels, born independent, have been gradually acquired by the majors (two examples are
American singer Frank Sinatra's Reprise Records, which has been owned by Warner Music Group for some
time now, and musician Herb Alpert's A&M Records, now owned by Universal Music Group). Similarly,
Madonna's Maverick Records (started by Madonna with her manager and another partner) was to come under
the control of Warner Music when Madonna divested herself of controlling shares in the company. Others,
while remaining autonomous, are joined by the majors in the production work.
The decline of record companies begins with the phenomenon of CD burning and finally with the
arrival of the internet. The traditional record company model falls in the early 2000s when peer-to-peer
becomes the system for listening to free music. Next, they have to start dealing with online platforms like
iTunes first and then with the streaming phenomenon.
If in the 1990s, there were still 6 major labels (BMG, EMI, Sony Music Entertainment, PolyGram,
Universal Music Group, Warner-Elektra-Atlantic), currently there are only three so-called majors (Sony Music
Entertainment, Universal Music Group, and Warner Music Group). Their worldwide market share is about
71.7%.
At the same time, the new ways of using music generated by the internet have favored the birth of
online labels (netlabels). A netlabel is a record label that distributes its music through digital audio formats
over the Internet. While similar to traditional record labels in many respects, netlabels typically emphasize free
A.Cesaretti – R. Moro-Visconti Music Recording Labels: Business Models and Valuation
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distribution online, often under licenses that encourage works to be shared (e.g., Creative Commons licenses),
and artists often retain copyright.
The fallout of this evolution on the Italian market in terms of revenues led to a decrease in sales of
physical record media (vinyl and CDs) which went from € 30.2 billion in the first half of 2018 to € 24.1 billion
in the same period of 2021 (-20.2%) and the growth in revenues from the digital distribution which went from
47.7 to 100.3 billion (+ 110.3%) in the same period.
(Photo by Eric Krull on Unsplash)
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3. The Business Models of the Labels
The analysis of the business model of music labels is a pre-requisite for the valuation patterns, as synthetized
in Figure 2.
Figure 2 – The business model value chain
3.1 Sources of revenues
In this complex and evolving scenario, several business models coexist for different types of artists and
types of record labels.
The revenues of a record label can therefore derive, in whole or in part, from:
− selling records,
− collecting the Musical Performance Rights accrued every time the music is played in front of an
audience or a cinema, broadcasting to the public via radio or TV, online use or ambient music
(under art. 73 of the Italian Copyright Law),
− collecting fees for private copying from SIAE, the major Italian Collecting Company under art.71-
sexies of the Italian Copyright Law. SIAE collects from the media manufacturers € 0.29 for each
hour of recording allowed and pays 25% to phonogram producers,
− when they enter in the so-called 360 deal with the artist, the labels make money off of every aspect
of the artist’s career since they participate in all aspects of an artist’s career, like touring,
merchandising, etc.,
− in the case of net labels and when traditional labels also distribute online, they collect royalty from
online digital platforms. In our experience, for example, Spotify (streaming) pays 0.00437$ per
play, ITunes 0.060$ per download, Apple Music (streaming) 0,005$ per play, etc.
3.2 Relationships with the artists
According to the level of artistic control, the agreements with the artists are, alternatively, the following:
sources of
revenues
relationships
with the
artists
relationships
with third
parties
A.Cesaretti – R. Moro-Visconti Music Recording Labels: Business Models and Valuation
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a. Equity deal (or “360 deal” already mentioned): the label manages the entire value chain of the artist and
participates in every aspect and source of revenues of the same (record sales, concert tickets, merchandise,
sponsorships, exploitation of the image). The contracting artist is entitled to royalties on the revenues that
the pieces performed or composed by him will accrue once published. Upon signing the contract,
especially when the label is a major, the artist can be awarded a fee as an advance for the phonograms
that will be made during the relationship;
b. Standard distribution agreement (or “in casting”): the record company finances the recordings, the
production of the supports, and the promotion and pays royalties on the sales to the artist, net of the costs
incurred. In this case, the artist waives the mechanical reproduction rights (DRM) and the phonogram will
therefore be the property of the label within the time limits set by the law under art. 75 of the Italian
copyright law (50 years from setting and 70 in case of legitimate publication);
c. Licensing: the artist has already completed the definitive master of the phonogram, and, for economic
consideration, he transfers the exploitation of the economic rights to the record company. The ownership
of the master, therefore, remains with the artist and once the license period has expired it will return to
the artist’s full availability. The production costs of the master are therefore borne by the artist who must
create the phonogram with his means. Similarly, the artist can undertake to create future pieces with his
means and license them to the label. It often happens that an independent label (Indie) is the owner of an
artist's master and licenses the phonograms to a larger label for a fee;
d. Distribution agreement: the ownership and the production of the phonogram remain with the artist (or its
label) which entrust to the record company exclusively the distribution of the song through physical copies
and/or by uploading it to digital platforms. For the service, the record company/distributor is paid a
percentage of the accrued royalties.
3.3 Relationship with third parties
In addition to the costs of production, marketing, etc. (when provided for in the contract), the record
company is required to pay:
− the fee for the recording of the performance and the related rights to the musicians and performers (art.
80 paragraph 2 of the Italian Copyright Law),
− the compensation for mechanical reproduction rights (DRM) to the publisher when the latter is a third
party concerning the record company.
For an in-depth analysis of these latter topics, see the next paragraph “Brief notes on rights on musical
works according to Italian law”
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(Photo by Brett Jordan on Unsplash)
3.4 The disruptive impact of digitalization
According to Waldfogel (2017):
Digitization is disrupting a number of copyright-protected media industries, including books, music,
radio, television, and movies. Once information is transformed into digital form, it can be copied and
distributed at near-zero marginal costs. This change has facilitated piracy in some industries, which in turn has
made it difficult for commercial sellers to continue generating the same levels of revenue for bringing products
to market in the traditional ways. The recorded music industry offers a vivid example. Revenue in the recorded
music industry had grown steadily throughout the twentieth century but began a precipitous slide in 1999 and
has now fallen by more than half. Yet despite the sharp revenue reductions for recorded music, as well as
threats to revenue in some other traditional media industries, other aspects of digitization have had the
offsetting effects of reducing the costs of bringing new products to market in music, movies, books, and
television. On balance, digitization has increased the number of new products that are created and made
available to consumers.
Moreover, given the unpredictable nature of product quality, growth in new products has given rise to
substantial increases in the quality of the best products and therefore the benefit of these new products to
consumers. We begin with a discussion of how digitization has threatened the traditional revenue sources for
some of these media industries, notably recorded music. We then turn to how digitization has greatly reduced
the cost of bringing new products to market in music, books, movies, and television.
The reduction in production costs has made the launch of new products in these markets much easier.
However, the disruptions and reductions of revenue streams have challenged the roles of the traditional
gatekeepers of quality in these industries, including book publishers, recording labels, movie studios, and
television networks. These developments have raised concerns that consumer welfare from these media
products would fall, on the grounds that high-quality products could not be produced profitably and consumers
would be flooded with low-cost and lower-quality products. However, the opposite scenario has emerged—a
golden age for consumers who wish to consume media products.
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4. Brief notes on rights on musical works according to the Italian law
A short recap of the Italian law (increasingly similar to that of other EU countries) eases a better
understanding of the business model of label companies.
The protection of copyright in Italy is governed by the law of 22 April 1941 n. 633 and subsequent
amendments including the transposition of the European Directive 2019/790 into national law.
The recognized protection is broad and complex. Figure 3 illustrates the financial flows that occur in
the music industry.
The protected rights for the various subjects operating in the music industry are then described: Author
and co-Authors, Publishers, Phonogram Producers (Record Company or Label), Musicians and Performers,
Media Manufacturers, Radio and Televisions, Copyright Collecting Companies.
(Photo by Jason Rosewell on Unsplash)
A.Cesaretti – R. Moro-Visconti Music Recording Labels: Business Models and Valuation
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Figure 3 – Financial Flows in Music
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5. The birth of copyright
Copyright protects not ideas, but only expressions. Music is born when it is written on a score, when it
is recorded or simply when it is performed for the first time or even just hummed. The fixation, in a phonogram
or on a score, is therefore not necessary for the creation of copyright. Performing a song in front of an audience
is sufficient in itself. For the birth of copyright, what is required is that the work is expressed, even if only
sung. In any case, with the transcription of the composition on a score, the copyright on the music also arises.
The copyright value chain is represented in Figure 4.
Figure 4 - Copyright value chain
5.1 Author and co-Authors
Only the Author (or Authors, when there are more than one) originally has the rights to the composition.
These are the moral rights of the author and the rights of economic use. While moral rights always and
inevitably remain with the Author, the rights of economic use are generally transferred by the Author to a
publisher.
Table 1 – Subjects and Owners of Music Rights
Subject of rights Owners of rights Rights
Musical work Author and Co-Authors
Moral rights and rights of economic use:
• DEM: Musical Performance Rights: accrued every time the
music is played - performances in front of an audience or a cinema,
broadcasting to the public via radio or TV, online use or ambient
music;
• DRM: Mechanical Reproduction Rights: accrued every time the
music is played on a medium - radio and television recording,
video, sound mechanic or DVD music playback, download and
streaming;
• Compensation for private copying (see below)
publisher
author and co-authors
Phonogram Producer - Record
Company or Label
Musicians and Performers
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Streaming is included in the DRM because when you listen to a song or watch a streaming video, small
consequential fragments of the work are copied for a very short period into the RAM of our computer through
a process called buffering.
According to another interpretation, streaming falls within the concept of the Right of Communication to the
Public (copyright of the Author) which concerns remote broadcasting systems. Unlike the performance, the
audience is not present in the place where the music is played or broadcast but is reached from a distance.
5.2 Publisher
Confusion is often generated between the Publisher and the Record Company. This is also because
sometimes the label that produces a phonogram is also the Publisher of the work produced. However, these
are two distinct roles that do not always coincide. The Publisher is the person to whom the Author assigns the
economic exploitation rights on his composition. The Record Company, on the other hand, must obtain from
the Publisher the so-called Mechanical Reproduction License, to be able to register the work. Subsequently,
he will have to hire the musicians who will perform the work, a sound engineer, get a recording studio, etc.
Since the Publisher's function is to invest economically in the publication, dissemination, and
promotion of the work, the Author usually transfers half of the rights to the Publisher, i.e. 12/24 for the DEM
(Musical Performance Rights, i.e. public use of the work) and 50% for the DRM (Mechanical Reproduction
Rights, i.e. deriving from the recording of the work on sound carriers). However, these quotas can be
contractually modified by the parties provided that the minimum quotas foreseen for the protection of the
Author are respected, which are indicated on the back of each Declaration Bulletin (Form 112 / SIAE – The
major Italian Collecting Company). If more co-Authors participate for the same qualification (i.e., Authors of
the text or composers of the music), a co-Author cannot receive a share of rights greater than double that of
any other co-Author.
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(Photo by Marius Masalar on Unsplash)
5.3 Phonogram Producer - Record Company or Label
The art. 72 of the Italian law on copyright defines the Record Company as a "producer of phonograms"
since a phonogram belongs to the Record Company. A phonogram carries within itself the composition and
performance of a musical work, adding further value. Therefore, the rights of the Author, the rights of the
performing musicians, and the rights of the phonographic producer insist on it.
In turn, the Record Company must acquire, for a fee, the related rights of the musicians who performed
the piece and the copyright on the composition from the Author himself or more often from his Publisher.
Table 2 – Subjects and Owners of Phonogram Rights
Subject of rights Owners of rights Rights
Phonogram
Authors and Co-Authors Moral rights and rights of economic
use
Performers Related Rights (see below)
Phonogram Producer (generally a Record
Company or Label)
• Related Rights (see below)
• Fee for private copying (see below).
Art. 72 of the Italian Copyright Law (law 22 April 1941 n. 633), amended by Italian Legislative Decree
68/2003, recognizes the phonogram producer the following exclusive rights of economic use, without
prejudice to the rights of the author of the musical work:
a) to authorize the direct or indirect, temporary or permanent reproduction of its phonograms in any way or
form, in whole or in part and with any duplication process;
b) to authorize the distribution of copies of its phonograms. The exclusive right of distribution does not end
in the territory of the European Community except in the case of the first sale of the support containing
the phonogram made or permitted by the producer in a Member State;
c) to authorize the rental and lending of copies of his phonograms. This right does not end with the sale or
distribution in any form of the copies;
d) to authorize the making available to the public of his phonograms in such a way that everyone can have
access to them from the place and time individually chosen. This right does not end with any act of making
it available to the public.
The Producer, as well as the Artist, Interpreter, and Performer, is not granted an exclusive right of
communication to the public, but a right to compensation for the proper uses of this right.
Art. 73 of the Italian Copyright Law provides that "the producer of phonograms, as well as the
performers and performers who have performed the fixed or reproduced interpretation or performance in the
phonograms, regardless of the distribution, rental and loan rights due to them, are entitled to compensation for
the profit-making use of phonograms using cinematography, radio, and television broadcasting, including
communication to the public via satellite, in public dancing parties, in public establishments and on the
occasion of any other public use of the phonograms themselves. The exercise of this right is the responsibility
of the producer, who shares the remuneration with the performers concerned ". These uses are called, in
technical jargon, "secondary uses of the phonogram".
This right to compensation also applies when the use is carried out for non-profit purposes (Article 73-
bis of the Italian Copyright Law).
Finally, art. 76 of the Italian Copyright Law establishes a burden for the Producer: the copies of the
disc cannot be put on the market unless they are permanently affixed to the indications referred to in Article
A.Cesaretti – R. Moro-Visconti Music Recording Labels: Business Models and Valuation
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62 of the Copyright Law, i.e., the title of the work reproduced, the name of the author, the name of the
Performer and the date of manufacture.
Figure 5 - The services provided to the Artists by the Record Companies
5.4 Musicians and Performers
To achieve its purpose, a piece of music must be performed and that is played. The contribution made
to the musical work by the Performers and Performers is also the subject of rights: these are the so-called
related rights. The performance carries within itself the composition and, therefore, the rights of the Author
and the related rights of the Performers and Performers coexist on it. It is the Record Company (see above)
that will have to hire the musicians who will perform the work, a sound engineer, get a recording studio, etc.
The Italian Copyright Law as amended by the EU Directive 2019/290 dedicates articles 80 to 85 to
Performers and identifies them as "the actors, singers, musicians, dancers and other persons who represent,
sing, recite, declaim or perform intellectual works in any way, whether they are protected or in the public
domain including dubbing directors and voice actors"(art. 80). Art. 82 completes this definition, specifying
that the denomination of performing artists also includes those who support in the dramatic, literary or musical
work or composition a part of considerable artistic importance, even if as supporting artists, the conductors of
the orchestra and the choir, and orchestral or choral ensembles, provided that the orchestral or choral part has
artistic value in itself and not just a simple accompaniment.
The interpreter is the one who does not limit himself to performing the work as it was written, but,
through study and reconstruction work, understands its meaning, appropriates it, and chooses the technical
methods for its realization; in this way, he performs a mediating function between the author of the work and
the public who uses it.
The Italian Copyright Law provides for protection from both a patrimonial and moral point of view.
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Table 3 – Subjects and Owners of CopyRights
Subject of rights Owners of rights Rights
Performance
Author and Co-
Authors Moral rights and rights of economic use
Performers
• pay for live performances;
• related rights (see below)
• compensation rights (see below)
• additional remuneration (see below)
• moral rights (see below)
• remuneration for private copying (see below).
5.4.1 Related property rights in favor of the Artist
Art. 80 paragraph 2 of the Italian Copyright Law recognizes Artists, regardless of any remuneration
due for their live artistic performances, the exclusive rights to:
a) authorize the fixing of their artistic performances;
b) authorize the direct or indirect, temporary or permanent reproduction, in any way or form, in
whole or in part, of the fixing of their artistic performances;
c) authorize the communication to the public, in any form and manner, including the making
available to the public in such a way that everyone can have access to it from the place and at the time chosen
individually, of their live artistic performances, as well as the diffusion over the air and the communication by
satellite of live artistic performances, unless they are made for their broadcasting or are already the subject of
a fixation used for broadcasting. If the fixation consists of phonographic support, if it is used for profit, the
remuneration is referred to in art. 73; if it is not used for profit, the fair remuneration is referred to in art. 73-
bis;
d) authorize the making available to the public in such a way that everyone can have access to
them from the place and at the time chosen individually, of the recordings of their artistic performances and
related reproductions;
e) authorize the distribution of fixations of their artistic performances. The right does not end in
the territory of the European Community except in the case of the first sale by the right holder or with his
consent in a Member State;
f) to authorize the rental or loan of the fixings of their artistic performances and their
reproductions: the performer, even in the event of the transfer of the rental right to a producer of phonograms
or cinematographic or audiovisual works or sequences of moving images, retains the right to obtain fair
remuneration for the rental concluded by the manufacturer with third parties. Any contrary agreement is void.
In the absence of an agreement to be concluded between IMAIE (Mutual Institute for the protection of
Performers) and the competent trade unions of the confederation of industrialists, this remuneration is
established with the procedure referred to in Article 4 of the Italian Legislative Decree of 20 July 1945, no.
440.
The recognized protection is broad and complex. It is an exclusive power to authorize and not a right
to prohibit. It refers not only to the hypothesis of fixation on medium or over-the-air broadcasting or
communication to the public of a live performance but also to uses of a (possibly authorized) fixation of the
performance, such as direct or indirect reproduction, distribution (with the limit of exhaustion of the right in
the territory of the European Union in the event of a first sale allowed in a Member State), rental or loan.
For broadcasting, the right does not apply if the artistic performances are "rendered as a function of
their broadcasting or are already the subject of a fixation used for broadcasting"; this applies both in the case
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of scheduling made for a deferred transmission, and in any case of scheduling for broadcasting; in the
hypothesis of live performance rendered as a function of broadcasting, it seems obvious that the right to
authorize cannot be taken into consideration, falling within the scope of the contractual relationship of artistic
work.
As regards the right to rent, fix, reproduce, broadcast, and distribute art. 84 of the Italian Copyright
Law. mitigates the rigidity of art. 80 paragraph 2 of the law specifying that, without prejudice to the different
will of the parties, these rights are presumed to be assigned at the same time as the signing of a contract to
produce a cinematographic or audiovisual work or sequence of moving images.
(Photo by Samuel Sianipar on Unsplash)
5.4.2 Moral rights of the artist
Regarding the protection of moral rights, the Artist can, under art. 81 of the Italian Copyright Law, to
oppose the dissemination, transmission, or reproduction of his performance, representation, or performance
that may be detrimental to his honor or reputation. This rule is restrictive, limiting the protection only for the
damage to honor or reputation, and not also, for example, of decorum or respect for the full drafting of the
artistic performance, as it was not intended to give the Artist a power of veto. large enough to prejudice the
rights and interests in the reproduction and dissemination of the Author's work.
To complete the moral protection of the Artist, Interpreter, and Performer, it is customary to use, in
court, also art. 10 of the Italian Civil Code, which guarantees the right to the image.
Finally, art. 83 of the Italian Copyright Law provides, for the Artists who play the first parts in the
dramatic, literary, or musical work or composition, the right to have their name indicated in the diffusion or
transmission of their recitation, performance, or representation and to be permanently affixed to the records,
phonograph, motion picture film or other equivalent apparatus.
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5.4.3 Fair compensation
Art. 80 paragraph 2c of the Italian Copyright Law, recalls articles 73 and 73-bis of the same law, which
provide for a fee "for the use of phonograms using cinema, radio and television broadcasting, including
communication to the public via satellite, in public dancing parties, in public establishments and on any other
public use of the phonograms themselves. The exercise of this right is the responsibility of the Producer, who
shares the remuneration with the Performers concerned". These uses are called, in technical jargon, "secondary
uses of the phonogram".
Performers and the Producer of the phonogram used are entitled to fair compensation when the use is
made for both non-profit and non-profit purposes, while no compensation is due for use for teaching purposes
and the institutional communication made by the State Administration or by entities authorized to do so by the
State.
The exercise of this right is the responsibility of the Producer, who shares the remuneration with the
Performers concerned.
The amount of the remuneration and the quotas and methods are determined by the Italian Decree of
the President of the Cabinet (DPCM) 1 September 1975 (2% of gross receipts or of the shares of gross receipts
corresponding to the part that the record occupies in its public performance by the categories of users referred
to in paragraph 1 of art.73 of the Italian Copyright Law), and, as regards broadcasting, from the DPCM July
15, 1976 (1.50% of gross receipts - fees and advertising, separately for radio and television - referable to the
actual use of the record or similar device, respectively in radio and television).
The obligation to pay the remuneration exists only in the case of the use of discs intended for trade or,
regardless of the distribution, rental, and loan rights.
Another right to compensation has been attributed to Artists for services rendered for a cinematographic
or audiovisual work by art. 16 of Italian Law 6 February 1996 no. 52. To implement EEC directive 93/83, the
Government was delegated to issue, by legislative decree, provisions that "provide for fair compensation in
favor of performers who have performed their interpretations in cinematographic and audiovisual works for
the use of the same in television broadcasters that broadcast over the air, via cable and via satellite ".
The integration of art. 84 of the Italian Copyright Law took place with the Italian Legislative Decree
26 May 1997, n. 154 and the already mentioned EU Directive 2019/790: "the performers and performers who
in the cinematographic and assimilated work, including the broadcasted theatrical work, support a part of
considerable artistic importance, even if as supporting artist, it is up to, for each use of the cinematographic
work and assimilated through communication to the public over the air, via cable and satellite, an adeguate
and proportionate remuneration to be paid by the issuing bodies. For each use of cinematographic and similar
works other than that provided for in paragraph 2 and article 80, paragraph 2, letter e), performers and
performers, as identified in paragraph 2, are entitled to an adeguate and proportionate remuneration to be paid
by those who exercise the exploitation rights for each distinct economic use. The remuneration provided for
in paragraphs 2 and 3 cannot be renounced and, in the absence of an agreement to be concluded between the
parties, by the Italian Communications Guarantee Authority ".
With the transposition of the EU Directive 2019/790 into national law, the Italian copyright law
provided that authors and performers were entitled to an “adequate and proportionate remuneration” instead
of a "fair compensation". The difference is that, while fair remuneration is intended to compensate for a
potential damage that would arise to the author in the form of an economic loss resulting from the uses
permitted by law through exceptions or limitations to copyright, the "adequate and proportionate
compensation" is a right that derives from the creative activity of the author, that is the right to be assured of
a compensation proportionate to his own creative contribution
1
.
1
See: Luciano Daffarra, C-Lex Studio Legale, “Diritto d’autore: cosa stabilisce la direttiva DSM sull’equo compenso”
(Copyright: what the DSM directive on fair compensation establishes), 18/2/2021 in
https://www.agendadigitale.eu/mercati-digitali/direttiva-dsm/.
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5.4.4 The additional remuneration
Under art. 84-bis of the Italian Copyright Law, introduced by the aforementioned Legislative Decree
22/2014, and in force since 26 March 2014, if a transfer or assignment contract gives the artist, interpreter, or
performer the right to demand a non-recurring remuneration, the artist, interpreter or performer, has the right
to obtain an additional annual remuneration from the producer of phonograms for each complete year
immediately following the fiftieth year from the lawful publication of the phonogram or, in the absence of
such publication, at the fiftieth year from its lawful communication. to the public. The renunciation of the right
to obtain such remuneration has no effect.
The total amount that the phonogram producer must reserve for the payment of the additional annual
remuneration corresponds to 20 percent of the revenue that the phonogram producer has received, in the year
preceding the one in which said remuneration is paid, from the reproduction, distribution, and making available
of the phonogram in question, after the fiftieth year from the lawful publication of the phonogram or, in the
absence of such publication, after the fiftieth year from its lawful communication to the public. Revenue is
defined as the revenue that derives from the producer of phonograms before the deduction of expenses.
Collective management companies, in possession of the requirements set out in the decree adopted
under Article 39, paragraph 3, of the Italian Decree-law of 24 January 2012, no. 1, converted, with amendments,
by law 24 March 2012, n. 27, administer the right to obtain the additional annual remuneration due to artists,
performers, referred to in the first paragraph.
The producers of phonograms are required, at the request of the artists, performers, or of the collective
management companies referred to in the third paragraph to which the performers have granted a mandate, to
provide all information necessary to guarantee payment of the remuneration. annual supplement referred to in
the first paragraph.
If an artist, interpreter, or performer is entitled to recurring payments, no advance payment or
contractual deduction is deducted from the payments made to him after the fiftieth year from the lawful
publication of the phonogram or, in the absence of such publication, after the fiftieth year. year from its lawful
disclosure to the public.
5.5 Media manufacturer
Private copying, in the context of Italian Copyright Law, is a case provided for by the law which
consists of the right to make copies of work against payment of the so-called contribution for private copying
which is already included in the cost of the memory media. (Legislative source: art.71-sexies of the Italian
Copyright Law). Private copying is therefore permitted as an exception to the exclusive right of reproduction.
However, this does not mean that authors, artists, and phonogram producers do not receive any compensation.
The fees are paid for the purchase of the devices that allow recording (burners for example) and the media on
which to record (blank CD-ROMs, USB keys, hard disks, etc.). Whoever buys an audio CD-ROM, in addition
to paying the price of the support, pays € 0.29 for each hour of recording allowed. Those who manufacture or
import these products must pay the fee. The collection is entrusted to SIAE (the major Italian Collecting
Company) which pays 50% to authors and their successors in title, 25% to phonogram producers, and 25% to
performers.
5.6 Radio and television broadcasting
The rights relating to radio and television broadcasting are governed by Article 79 of the Italian
Copyright Law, in the text amended by the Legislative Decree 68/2003.
The latter assigns the following exclusive rights to subjects who carry out radio and television
broadcasting activities:
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a) to authorize the fixing of its broadcasts by wire or over the air. The right does not belong to the cable
distributor if it simply retransmits the broadcasts of other broadcasting organizations by cable;
b) to authorize the direct or indirect, temporary or permanent reproduction, in any way or form, in whole or
in part, of the recordings of its broadcasts;
c) to authorize the retransmission by wire or over the air of its broadcasts, as well as their communication to
the public, if this takes place in places accessible by paying an entry fee;
d) to authorize the making available to the public in such a way that everyone can have access to them at the
place or time chosen individually, of the fixes of their broadcasts, whether they are made on wire or over
the air;
e) to authorize the distribution of the fixes of its emissions. The distribution right does not end in the territory
of the European Community, except in the case of the first sale made or permitted by the owner in a
Member State.
The rights referred to in letters c) and d) do not end with any act of communication to the public or
making available to the public.
Broadcasting operators also have the exclusive right to use the setting of their broadcasts for new
broadcasts or retransmissions or new recordings.
The expression broadcasting refers to radio and television broadcasting. The expression on wire or over
the air includes cable and satellite broadcasts.
These exclusive rights can be exercised without prejudice to those provided by the same law in favor
of other subjects, such as the author, the phonograph producer, the film producer, and the performers.
Following the entry into force of the Italian Legislative Decree 26 May 1997 no. 154, the duration of
these rights has been extended to 50 years from the first diffusion of an issue.
5.7 Copyright Collecting Company
They are public, private, or hybrid entities that deal with the intermediation of copyright and related
rights as well as the collection and redistribution of the proceeds relating to these rights. These companies
normally receive mandates from authors, publishers, producers, interpreters for the management and protection
of their rights and, based on this mandate, license the protected works, and collect royalties.
6. Music and structured finance
Structured finance is changing the music industry, providing new tools to lever up value. What
eventually matters is, however, the underlying business and its value drivers.
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(Photo by Matthew Davis on Unsplash)
6.1 The beginnings
The first case of securitization of music rights was represented by the "Bowie Bonds". It was an issue
of 10-year bonds worth a total of $ 55 million with an interest rate of 7.9%. According to the prospectus of the
issue, the collateral was represented by " Rights to David Bowie's master tapes and
publishing catalog transferred into a vehicle company ( Bowie's 25 records sell 1 million units/year ) ". In
summary, it consisted of the "Publishing Rights" and the "Recording Rights" according to the "Copyright Law"
of the United States of America which can be compared to the "Mechanical Reproduction Rights" (DRM)
governed by Italian law. The loan was also guaranteed by the EMI record label which had recently signed a $
30 million deal with Bowie. All the bonds were underwritten by the Prudential Insurance Company of
America.
At the time of issue (1997), Moody assigned Bowie Bonds a rating of A3 (the seventh highest
rating). In 2004, Moody's lowered the rating to Baa3 (just above "junk") bonds due to the destruction caused by
the new digital formats of music combined with piracy encouraged by the introduction of systems "Peer-to-
peer" such as Napster. Despite this, Bowie's bonds were liquidated in 2007 as originally planned and the rights
to the song proceeds returned to Bowie.
The Bowie’s loan was structured by David Pullman's "The Pullman Group, LLC " who subsequently
replicated the experience with the securitization of the rights of the "Holland- Dozier- Holland" team (1998),
Ashford & Simpson (1999), and James Brown (1999).
It is interesting to note that Pullman's later structured operations involved the rights to catalogs of
various artists, rather than a single (eg Rod Stewart, Tupac Shakur, Kim Carnes,
Jake Hooker, Duane Hitchings).
6.2 The decline in bonds and recovery thanks to streaming
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Towards the end of the last century, as mentioned, network file sharing systems emerged and
stimulated piracy. Furthermore, the advent of marketplaces such as iTunes has radically changed the buying
habits of music lovers. Before iTunes, people had to buy an entire LP even if they liked one or two
songs. Today you can only buy those two.
In the following years, however, streaming has established the possibility of listening to music without
having to store it on a medium (for all: Spotify). This telecommunication system has made it possible to
increase the volume of diffused music and the consequent flows of royalties with the further consequence of a
renewed interest in structured finance in this sector. The most current cases are presented below.
6.3 ANotes
"ANote Music" ( https://anotemusic.com/ ) is a platform managed by a Luxembourg company that
acts both as a primary market as it manages the first issue of financial instruments (which it defines as
"Shares") linked to music rights and as a secondary market as it manages, through its platform, exchanges
between investors. Transactions are recorded in the Blockchain (it is not known which one).
The collaterals vary according to the offerings. Some examples are recalled in Table 4.
Table 4 – Artists and Collateral
Artist Collateral
The Vibrations
Image rights on the next 180 live concerts
Absolute zero
DRM
"Irma Records " Catalog
DRM and Synchronization (e.g. soundtracks)
The emissions are substantially destined to the retail market.
The first issue takes place based on a "Dutch Auction". In the case of the issue relating to “Le
Vibrazioni”, the initial offer was for a total of € 250,000 divided into 10,000 shares offered at € 25 each. The
company reports that “the initial price was determined at a multiple of 2.77 on the annual average of the last
3 years of royalties linked to the band's image rights. Once live activity returns to normal, this corresponds to
an expected annual return of over 20% based on the last 3 years. "
As of 2 September 2021, all the shares were placed. The price, as of September 5, 2021, was 25.06
euros.
It is not known what percentage of royalties investors will receive. The contract between Le Vibrazioni
and ANote Music (https://anotemusic.com/catalogue-le-vibrazioni-image-rights/) in paragraph 2.1
(Percentage of the Catalogue’s Royalty Interest to be offered) reads: " As settled and communicated between
us and ANote Music " (even the company's website does not contain any information on the matter) while the
contract with the Absolute Zero provides a percentage of 15%.
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7. The "Non-Fungible-Tokens" (NFT)
(Photo by Fakurian Design on Unsplash)
At present, it appears that the preferred vehicle for raising finance in the music field is
NFTs. According to DappRadar , a company that analyses decentralized applications, including Blockchain-
based NFT sales platforms, the phenomenon has exploded in the last 12 months and only in the first half of
2021 has produced an estimated sales volume in the order of 2.5 billion dollars.
In a nutshell, when a user buys a song, for example, on iTunes, he can download it, archive it on digital
media and listen to it according to his needs. By purchasing an NFT linked to the song, the user, in addition to
all the above, can resell the Token taking advantage of the market trend.
A non-fungible token (NFT) is a unit of data stored on a digital register, called a Blockchain, which
certifies that that Token is unique and therefore not interchangeable and can be used to represent rights on
digital elements such as photos, videos, audio, etc. (however, it is also possible to hypothesize NFTs linked to
physical elements)
2
.
Whoever buys an NFT does not buy the work itself, but simply the possibility of demonstrating a right
to the work, guaranteed through a Smart Contract. The object of the sale is not the work, but the same token
that in the digital world acts as a Certificate of Authenticity (COA). The original piece of music remains with
the Author or Publisher; rights to a digital copy of the same are acquired through the NFT.
In other words, it all starts with a digital version of the artwork which is nothing more than a sequence
of bits. An encrypted key (hash) is then associated with this sequence. The hash is then stored on a
Blockchain to provide the owner with proof of ownership of the NFT separate from the copyright on the work.
The storage in Blockchain, which is unalterable, guarantees that the NFT does not change (the
certificate is unique and cannot become something else over time) and on the other hand certifies the "transfer
of ownership" of the hashes managed by the NFT.
2
For the various issues related to copyright, see: https://www.altalex.com/documents/news/2021/05/24/boom-nft-tra-
arte-proprieta-intellettuale-e-diritti-asta
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If the Blockchain on which hosted its token will continue to be active, the owner can prove his rights
without the need to turn to intermediaries and without time limits
3
.
Even in the case of NFTs, the rights associated with them vary (and are contained in its Smart
Contract). They can consist of the right to receive a royalty share, in the (fractional) ownership of the copyright
of the work with all the related exploitation rights, they can only attribute the right of transferability of
the token, they can associate other rights (e.g., access to live events of the artist). Of course, in the case of
music, these can be downloaded by the investor.
Generally, the NFTs are created directly from the issuer on platforms such Open Sea, Mintable,
Opolous, etc. It should be noted that most platforms do not exercise any compliance function; therefore, anyone
can create NFTs linked to works of third parties or could create an NFT linked, for example, to a digital
photograph of a work in his possession, but whose author had not granted the right of reproduction and/or
commercial exploitation, etc.
As in the case of ANotes, the platforms dealing with NFT act in place of the primary and secondary
market. The issuer, in the first phase, can decide whether to resort to the auction with the relative duration or
to set a price. As mentioned, the characteristics of the issue are all decided by the issuer.
8. Intangible assets valuation according to IVS 210
According to IVS 210 § 20.1. “an intangible asset is a non-monetary asset that manifests itself by its
economic properties. It does not have physical substance but grants rights and economic benefits to its owner”.
§ 20.3. indicates that there are many intangible assets, but they are often considered to fall into one of
the following five categories (or goodwill):
(a) Marketing-related: marketing-related intangible assets are used primarily in the marketing
or promotion of products or services. Examples include trademarks, trade names, unique trade design
and internet domain names,
(b) Customer-related: customer-related intangible assets include customer lists, backlog,
customer contracts, and contractual and non-contractual customer relationships,
(c) Artistic-related: artistic-related intangible assets arising from the right to benefits such as
royalties from artistic works such as plays, books, films and music, and from non-contractual
copyright protection,
(d) Contract-related: contract-related intangible assets represent the value of rights that arise
from contractual agreements. Examples include licensing and royalty agreements, service or supply
contracts, lease agreements, permits, broadcast rights, servicing contracts, non-competition
agreements and natural resource rights, and
(e) Technology-based: technology-related intangible assets arise from contractual or non-
contractual rights to use patented technology, unpatented technology, databases, formulae, designs,
software, processes or recipes.
3
About the doubts of the undersigned on the future of the Blockchain, I refer to my article:
http://www.andreacesaretti.net/empowerment/2020/10/29/leffetto-distruttivo-delleuro-digitale/)
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(Photo by Markus Spiske on Unsplash)
OECD (2017) distinguish between:
(a) Commercial intangibles: patents, know-how, industrial designs and ornamental models used to
produce a good or to provide a service;
(b) Marketing intangibles, as a special category of commercial intangibles, including trademarks,
trade names, customer lists, distribution channels, symbols or logos or unique names which have promotional
value.
Other, more precise classifications distinguish first between intangible goods linked to marketing and
technology, to which should be added the world of the Internet (hence the subtitle of this book).
IVS 210 § 30.1. recalls that the three principal valuation approaches described in IVS 105 Valuation
Approaches (income approach; market approach; cost approach) can all be applied to the valuation of
intangible assets.
In terms of intangible resources, specific valuation issues arise, which derive from the nature of these
assets. The reproducibility of such goods, the absence of rivalry in consumption (the use of a branded product
by a consumer does not prejudice a simultaneous use by others) and scalability can be noticed (examined below
in par. 2.14.).
The empirical approaches are based on the practical observation of the market prices of the intangible
goods, identical in characteristics, from which formulas and parameters of evaluation can be derived. The use
of practical criteria is dictated by the speed of updating the value of the fixed assets in similar and homogeneous
companies.
Analytical approaches, on the contrary, are more reliable because they are accepted by theory and
consolidated by practice, even if they are often less intuitive.
The three principal valuation approaches described in IVS 105 Valuation Approaches (consistent with
IFRS 13 – Fair Value Measurement) used -individually or in a complementary way - by professional practice
for the economic estimation of the value of intangible assets are:
1. The cost approach (reconstruction or replacement capital);
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2. The (incremental) income approach;
3. The market approach.
The following subparagraphs contain a detailed description of the different valuation approaches (cost,
income, and market) mentioned above.
8.1
Cost approach
The cost of tangible assets is typically known or can be estimated when the asset is acquired. The
economic benefits and their occurrence may be reasonably estimated. In contrast, the cost of many intangibles
is unclear, as they are not the result of a project that can be separated from the business activities.
The economic benefits that will be derived from the investment in intangibles are typically hard to
estimate. Due to the intrinsic risky nature of innovation, many projects will fail and be abandoned and provide
little or no benefit to the firm.
The cost approach, according to IFRS 13, reflects the amount that would be required currently to
replace the service capacity of an asset. Deriving fair value under this approach, therefore, requires estimating
the costs of developing an equivalent intangible asset. But, as noted above, it is often difficult to estimate in
advance the costs of developing an intangible. Unless these difficulties can be overcome, the cost approach
would be impracticable (Lennard, 2018).
Within this framework and provided that these limitations are clear, reference to the cost may still give
some useful insights for valuation.
According to the cost approach, the value of an intangible asset is determined by the sum of the
capitalized costs, incurred for the realization of the intangible or to be incurred to reproduce it (restoration of
rights and brand accreditation represented, in general, by advertising, promotional and distribution network
investments ...).
The limitation of this approach lies in the fact that it does not consider maintenance costs and the
opportunity cost of time and that it does not apply to assets capable of generating income.
The main difficulties in applying this approach relate to the difficulty in finding costs incurred in the
past, especially if the costs have been incurred over several years and have not been capitalized.
There are broadly two main approaches that fall under the cost approach: the replacement cost and the
reproduction cost. However, most intangible assets do not have a physical form that can be reproduced, and
assets such as software that can be reproduced generally derive value from their function/utility rather than
their exact lines of code. As such, the replacement cost is most commonly applied to the valuation of intangible
assets.
Replacement cost approach: it assumes that a market participant would pay no more for the asset than
the cost that would be incurred to replace the asset with a substitute of comparable utility or functionality. This
approach requires an assessment of the replacement cost for the intangible asset new, that is “the cost to
construct, at current prices as of the date of the analysis, an intangible asset with the equivalent utility to the
subject intangible, using modern materials, production standards, design, layout, and quality workmanship”
(Reilly and Schweihs, 2016). The replacement cost is then adjusted for an obsolescence factor relative to the
intangible asset.
8.2
Income/financial approach
It is based on past and future economic benefits that can be linked to an intangible, both in terms of
license revenues (royalties) and incremental revenues.
The income approach essentially converts future cash flows (or income and expenses) to a discounted
present value. The calculation may be like that of value in use. However, to arrive at fair value, the future
income must be estimated from the perspective of market participants rather than that of the entity. Therefore,
applying the income approach requires an insight into how market participants would assess the benefits that
will be obtained from an intangible asset (Lennard, 2018).
In the context of income approaches, intangible assets have value to the extent that they can incorporate
a competitive advantage in the form of multi-period excess earnings. This is a pure income estimate, in which
intangible assets act as Primary Income Generating Assets. Income approaches are based on estimates of future
economic benefits, for example through discounted cash flows.
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The income approaches include the financial ones: so the estimate of incremental cash flows or the
criterion of discounted cash flows, functionally linked to the market approaches from which it derives some
parameters (in fact, market) for the estimate of the value of shareholders' equity and financial debts.
The linking parameter may be represented by the EBITDA that is simultaneously an economic and
financial margin, representing the difference between monetary operating revenues and costs.
The main variants are:
1. The Relief-from royalty approach: which allows estimating the income of the intangible asset by
deducting from the notional royalties that would be paid to a third party for the use of the intangible
under license any direct and indirect costs of maintenance/development of the asset itself not already
deducted from the notional royalty;
2. The premium profit approach or with-and-without approach: indirect approach of determining
the economic advantage (premium price), which consists in comparing the performance of the
company that disposes of the intangible asset in question with that of a similar company without such
an asset;
3. The Excess earnings approach: to be used to estimate the value of an asset that plays a significant or
primary role, based on which the notional income is obtained by calculating the income that the firm
would record if it was disposed of the ownership of all the other assets to regain the right to use them
through licensing or rental or rental contracts. The concepts behind the excess earnings approach were
first described in 1920 in the United States Internal Revenue Services’ Appeals and Revenue
Memorandum (ARM) 34. Whether applied in a single-period, multi-period, or capitalized manner, the
key steps in an excess earnings approach are:
(a) Forecast the amount and timing of future revenues driven by the subject intangible
asset and other supporting (i.e., contributory assets).
(b) Forecast the amount and timing of expenses that are required to generate the revenue
from the subject intangible asset and related contributory asset.
(c) Adjust the expenses to exclude those related to the creation of new intangible assets.
Profit margins in the excess earnings approach may be higher than profit margins for the overall
business because the excess earnings approach excludes investment in new intangible assets. The
Multiperiod Excess earnings approach is a variation of the discounted cash-flow approach. Rather
than focusing on the whole entity, this approach isolates the cash flows that can be associated
with a single intangible asset and estimates the fair value by discounting them to present value.
4. The Greenfield Approach: the value of the specific intangible is determined using cash flow
projections that assume the only asset of the business at the valuation date is the specific intangible.
All other tangible and intangible assets must be bought, built, or rented (see IVS 210, § 90);
5. The Distributor approach: a variation of the multi-period excess earnings approach sometimes used
to value customer-related intangible assets. As distributors generally only perform functions related to
the distribution of products to customers rather than the development of intellectual property or
manufacturing, information on profit margins earned by distributors is used to estimate the excess
earnings attributable to customer-related intangible assets. The distributor approach is like the relief-
from-royalty approach when a Profit split is used to estimate an appropriate royalty rate.
6. Real options are used to evaluate flexible investment projects with uncertain outcomes (typically
patents). Real options are a fundamental characteristic of scalable investments.
7. Discounting of differential (incremental) income or cash flows: this is based on quantifying and
discounting the specific benefits and advantages of the intangible asset compared to "normal"
situations, i.e., products for example not marked or covered by a patent. Incremental income is
obtained by the difference between revenues and costs relating to the intangible asset, with discounting
of the differential flows and with the exclusion of extraneous or immaterial income components.
8.3
Market approach
The market approach considers the prices and other relevant information generated by market
transactions involving identical or comparable assets.
Many intangible assets, however, are not traded: Lev attributes this to ‘contracting difficulties,
negligible marginal costs and fuzzy property rights’ (Lev, 2001).
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As IAS 38 notes: “an active market cannot exist for brands, newspaper mastheads, music and film
publishing rights, patents or trademarks, because each such asset is unique” (IAS 38, par. 78).
Unicity is a factor of strength but also a weakness: whereas unique intangibles (e.g., a patent) command
a premium over other external assets, they are hardly comparable, making valuation more difficult.
Many intangible assets are ‘context-specific and so they may have little or no value to a purchaser
(Haskel and Westlake, 2017).
When applicable, this approach is based on a comparison with similar assets, in terms of income or
incremental assets, or on the analysis of comparable transactions and market multipliers.
The main limitation of this approach concerns the information asymmetries structurally connected with
the secrecy of intangible assets, which make the information necessary for comparisons challenging to find.
Package transactions involving multiple assets or intangibles make the valuation of stand-alone
intangibles based on an empirical approach more complicated. These difficulties are even more evident
considering that, as anticipated in paragraph 2.10., from an accounting point of view, according to IAS 38,
there is no active market for intangible assets, which tend to be not accounted for, and their fair value seems
difficult to estimate.
The main approaches are:
1. Empirical approach: the income attributable to the exploitation of a given intangible asset is multiplied by
an expressive coefficient of the strategic strength of the asset, which depends on factors such as leadership,
loyalty, market positioning, trends, marketing investments, internationality, legal protection ...;
2. Valuation of the differential (incremental) assets, through indicators of the market surplus value, such as
the Q of Tobin, which relates the market value of the activities of a company to their replacement value; if
the index is higher than the unit, this is due to the presence of implicit goodwill which can depend, among
other things, on the value (not accounted for) of the intangible.
3. Price / Book Value index, which compares the stock market price (of a branded or other intangible listed
company) to the book net assets, bringing out a surplus-value (if the index is greater than 1) partly
attributable to intangible assets.
9. Copyright and Artistic-related (creative) intangibles
Copyright is a form of intellectual property that grants the creator of an original creative work an
exclusive legal right to determine whether and under what conditions this original work may be copied and
used by others, usually for a limited term of years (https://www.lexico.com/en/definition/copyright). Copyright
protects the form of expression of an idea, not the idea itself.
Article 2 (viii) of the Convention Establishing the World Intellectual Property Organization (WIPO)
states that Intellectual Property Rights (IPR) relate to: “…literary, artistic and scientific works; performances
of performing artists, phonograms, and broadcasts; inventions in all fields of human endeavor; scientific
discoveries; industrial designs; trademarks, service marks, and commercial names and designations; protection
against unfair competition; and all other rights resulting from intellectual activity in the industrial, scientific,
literary or artistic fields” (www.wipo.int/treaties/en/convention/trtdocs_wo029.html#P50_1504).
According to Gilbert (2009), the copyright benefits from a specific bundle of legal rights that provides
the author/creator the right to authorize or to prohibit the uses of the copyrighted work. Generally, the author
of the original work owns the copyright, even though there are exceptions to this rule. Copyrights can be sold
or transferred by assignment or by licensing. From a valuation perspective, copyright-related intangible assets
have similar economic and legal characteristics to other types of commercial intellectual property. The author
has the right:
• To reproduce all or part of the work;
• To make new (derivative) versions;
• To distribute copies by selling, renting, leasing, or lending them;
• To perform (that is, to recite, dance, or act) the work publicly;
• To display the work publicly, directly, or employing film, TV, slides, or other devices or processes.
Copyrights are typically transmitted with assignments (unconditionally) and licenses.
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According to Wogsland R. M. and Hall J. C. (2011), the current copyright structure of the music
industry is designed to protect the profits of recording labels (and other holders of copyright), but it may not
maximize the cultural wealth of society with regard to music.
Copyright valuation approaches typically follow the IVS 210 methodologies:
1)
The market approach (royalty rate; peruse compensation) is commonly used in a copyright valuation
analysis. There is an active market concerning the fee simple sale of copyrights;
2)
Income approach (incremental / differential income; profit split; residual income, etc.);
3)
Cost approach (less used).
Copyright assets typically have little intrinsic value unless they become viral (through social networks
or other media platforms). Value can be extracted with direct exploitation, sale, or licensing.
Digitalization is deeply reshaping the copyright industry. As an example, the digital world has turned
millions of people into active photographers. The photographs that we capture are our creations and, without
any action on our part, are intellectual property that belongs to us. What is the monetary value of our IPR in
these photographs? Very little, if anything. There is the potential for monetary value if we choose to exploit
these photographs to obtain some economic benefit (Smith and Yossifov, 2013).
Whereas the intrinsic value of IPRs is typically negligible, copyrighted material may in some cases
produce some economic benefit for its owner if it is marketable.
Evaluation of IPRs may be conducted using the market, income, or cost approach illustrated by IVS
210. The cost approach has limited validity unless it is linked to the economic and financial exploitation of the
IPR. Royalties are an important form of remuneration, even in their hypothetical form (relief from royalties).
An assessment of the reasonable royalties that would be payable under a license agreement is a useful
benchmark for valuation.
A synthesis of the valuation approaches is represented in Figure 6.
Figure 6. – Copyright Valuation Approaches
The useful life of copyright is typically long. In general, the copyright lasts for the duration of the author's life
plus 70 years. If the work is done anonymously or under a pseudonym, the period extends for 95 years beyond
the publication of the work or 120 years from the creation of the work, whichever is shorter
(https://www.fool.com/knowledge-center/how-to-calculate-the-annual-amortization-of-copyri.aspx).
The copyrighted duration may so be considered almost unlimited, even if exploitation rights granted
by publishers are often consistently shorter.
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Artistic-related intangibles represent a heterogeneous category that includes plays, ballets, books,
magazines, newspapers, other literary works, musical works such as compositions, song lyrics, and advertising
jingles, pictures, photographs, video, and audio-visual material, including motion pictures, music videos,
television programs, broadcast rights, etc.
Most of the artistic-related intangibles are protected by copyright.
Copyright is a form of intellectual property that grants the creator of an original creative work an
exclusive legal right to determine whether and under what conditions this original work may be copied and
used by others, usually for a limited term of years (https://en.oxforddictionaries.com/definition/copyright).
Artistic intangibles are increasingly digitized, through thematic or general websites (see for instance
YouTube), where videos, music, etc. are uploaded and shared. These sites are mainly accessed free, and their
revenue model is mostly based on advertising.
Valuation is mostly based on royalty projections. The period is long: typically, the public law duration
of a copyright expires 50 to 100 years after the creator dies, depending on the jurisdiction. This extension
influences valuation approaches and assimilates these creative intangibles to perpetual trademarks or other
intangibles with infinite life. In these cases, any terminal value approaches zero (being TV / ∞ → 0) and so is
not considered in the formulation.
Even artwork does not have a determinable useful life, and its potential value may so be considered
perpetual.
Artwork, especially if first-class, represents pieces that are held for capital appreciation purposes as a store of
wealth. Artwork may not produce any periodical return, if it is not merchandised or made visible to a paying
public, even digitally through the web. Consistently with IAS 16, artwork can be accounted for using a:
1. Cost model, under which you hold your assets at cost less depreciation less impairment loss; or
2. Revaluation model, under which you hold your assets at fair value at the date of revaluation less
subsequent depreciation less subsequent impairment loss.
Creative assets (as the other intangibles) do not autonomously produce any interest rate and may yield
a royalty stream or a potential royalty that can be used as a clue to estimate their value. Digitization of artistic-
related intangibles, whenever possible (e.g., the transformation of a paper book into a digital edition) increases
potential fruition and, in some cases, scalable value.
Copyright authorship entitles to monopolistic rents (since the creative work is protected) with
consequent pricing power and protected profitability.
References
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Koster A., (2008), The Emerging Music Business Model: Back to the Future?, Journal of Business Case
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Lesser, B. (2018). 16 Record Labels Shot the Artists, but They Did Not Share the Equity, Geo. J.L. &
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Mentality, Journal of Electronic Commerce Research, Vol 14, No 4, Page 315
Pitt I.L. (2015) Roles of Publishers, Record Labels, and Producers. In: Direct Licensing and the Music
Industry. Springer, Cham.
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