Can Creators Make Beliebers Of Companies?

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As Bit­coin

BTC
fell by 60% last year amidst a back­drop of a weak glob­al macro­eco­nom­ic cli­mate and high-pro­file cryp­to com­pa­ny fail­ures, lega­cy finan­cial insti­tu­tions con­tin­ued their invest­ment and devel­op­ment in the under­ly­ing blockchain and dis­trib­uted ledger tech­nolo­gies. At the Deal­book Sum­mit held in New York at the end of 2022, Lar­ry Fink, CEO of Black­rock, a $10 tril­lion asset man­ag­er, said, “the next gen­er­a­tion for mar­kets, the next gen­er­a­tion for secu­ri­ties, will be tok­eniza­tion of secu­ri­ties.” While there are a num­ber of projects in flight, Fink’s procla­ma­tion was the most vis­i­ble of sig­nals that point to an accep­tance of the tok­eniza­tion of real world assets (RWA) as the vehi­cle to make cryp­to and the under­ly­ing tech­nol­o­gy more tan­gi­ble. Iron­i­cal­ly, intan­gi­ble assets may be the impe­tus to make this happen.

Intan­gi­ble Assets: What Do You Mean?

Intel­lec­tu­al prop­er­ty (IP), includ­ing trade­marks, copy­rights, and patents, make up a large por­tion of what are known as intan­gi­ble assets—identifiable non-mon­e­tary assets with­out phys­i­cal sub­stance. Dur­ing the past two weeks, sto­ries involv­ing IP and how it’s val­ued and mon­e­tized piqued my inter­est. One sto­ry was about Justin Bieber’s music rights sale, while the oth­er focused on the tok­eniza­tion of 25 mil­lion glob­al patents as dynam­ic NFTs by US-based IPwe.

While seem­ing­ly worlds apart, the sto­ries fur­ther strength­en the argu­ment for the tok­eniza­tion of real world assets (RWA). For cre­ators and com­pa­nies, the earn­ings and val­ue derived from IP can be sig­nif­i­cant. For both camps, how­ev­er, the process can be opaque and wrought with inef­fi­cien­cy. As inno­va­tors con­tin­ue to explore the tok­eniza­tion of RWA, they should con­sid­er the data that point to intan­gi­ble assets as anoth­er store of val­ue that could fur­ther clar­i­fy The Road ahead.

How Musi­cians Mon­e­tize IP

While cre­ators argue that it is impos­si­ble to assign val­ue to their art, musi­cians have long lever­aged their IP (their music cat­a­logs) to dis­cov­er a price. The finance behind these deals can be artis­tic in its own right. Musi­cians have tapped the cap­i­tal mar­kets for some time. David Bowie made his­to­ry in 1997 by issu­ing a first of its kind Pull­man Bond, a $55 mil­lion Asset-Backed Secu­ri­ty col­lat­er­al­ized by the rev­enues dur­ing the bond’s tenor of his 25 albums record­ed before 1990. The 10-year bond priced at 7.90% yield, a 153 bps pre­mi­um to 10-year US Trea­sury notes—at cur­rent cred­it spread lev­els, this would equate to rough­ly a BBB credit—not bad for an intan­gi­ble asset. Iron­i­cal­ly, tech­nol­o­gy would play a sig­nif­i­cant part in the Bowie Bond story.

Technology Changes The Game

“Pres­sure pushin’ down on me

Pressin’ down on you, no man ask for”

Bowie, D. (1981). Under Pressure

MP3s, the dig­i­ti­za­tion of musi­cians’ IP, were just one of the new tech­nolo­gies that flour­ished in the internet’s ear­ly years. With­out an infra­struc­ture and sup­port­ing tech­nol­o­gy to mea­sure who accessed the IP and how often, music pira­cy rose and sales dropped. Bowie’s bond issue was down­grad­ed by Moody’s “due to weak­ness in sales for record­ed music.” For­tu­nate­ly, the bond matured with­out a default.

The evo­lu­tion of music stream­ing has enhanced the col­lec­tion of data and ana­lyt­ics, cat­alyz­ing dealflow in music IP. Tech­nol­o­gy has empow­ered musi­cians and investors to accu­rate­ly deter­mine how often, when, and who uses their IP to fore­cast future sales. This trans­paren­cy allows cre­ators and the indus­try to stan­dard­ize val­u­a­tion metrics.According to Music Busi­ness World­wide, slight­ly over $5 bil­lion was spent on the acqui­si­tion of music IP rights in 2021. In 2021, Black­stone invest­ed $1 bil­lion to estab­lish Hipg­no­sis Songs Cap­i­tal to invest in songs, record­ed music, music IP and roy­al­ties, rais­ing the bar for invest­ment in this form of IP.

Monetizing A Prized Possession

“I Thought You’d Always be Mine, Mine”

Bieber, J. (2010). Baby

In last week’s report­ed sale, Bieber sold 100% of his rights to a por­tion of his music cat­a­log (290 songs pro­duced before Decem­ber 31, 2021) for north of $200 mil­lion. While not the largest of its kind—that title belongs to Bruce Springsteen’s $500 mil­lion cat­a­log sale to Sony in Jan­u­ary 2022—the deal is unique because at 28 years old, he is the youngest to cap­i­tal­ize on his IP at this order of mag­ni­tude. Pri­or to this, 41-year old Justin Tim­ber­lake sold his entire song cat­a­log for upwards of $100 mil­lion. (For all of you finance junkies, I empathize with the num­ber of time val­ue cal­cu­la­tions run­ning through your heads.)

Armed with data, Black­stone-backed Hipg­no­sis, made their largest sin­gle invest­ment in an artist’s IP to date. Bieber’s sale of over 150 mil­lion records, over 30 bil­lion streams, and army of 82 mil­lion month­ly lis­ten­ers (8th most pop­u­lar on Spo­ti­fy) made the oppor­tu­ni­ty to good to pass up.

Creators Begin To Leverage NFTs For Their IP

Even with a moun­tain of data, Bieber’s IP sales process is rumored to have tak­en place over months, per­haps point­ing to the inef­fi­cien­cies of trans­act­ing in IP. It’s clear that merg­ing ana­lyt­ics and IP into an asset that can be mon­e­tized– a task that has long been the holy grail for enter­tain­ers and artists alike – is one NFTs are deft to accomplish.

Per­haps the most famous exam­ple of this is MetaKovan’s $69 mil­lion pur­chase of Beeple’s NFT enti­tled, “Every­days: The First 5,000 Days.” While com­pa­nies and cre­ators explored the var­i­ous NFT use cas­es (see Topps’ Base­ball Cards), the mag­ni­tude of this sale launched an NFT mania kin­dled by the inter­est in all things cryp­to in 2021. When asked about his pur­chase, MetaKo­van cit­ed NFTs as a new tech­nol­o­gy that allows artists and col­lec­tors around the world to buy and sell art more eas­i­ly and democratically.

The S&P 500: The Rise Of The Intangibles

Like cre­ators, com­pa­nies (should) care deeply about their IP. Over the past 50 years, the mar­ket val­ue of intan­gi­ble assets has increased sub­stan­tial­ly. In 2020, intan­gi­bles account­ed for 90% of S&P 500 mar­ket val­ue. In dol­lar terms, intan­gi­ble asset val­ue has risen from $175 bil­lion in 1975 to $21 tril­lion in 2020. While tech­nol­o­gy is often cit­ed as the main dri­ver for this mete­oric rise, com­pa­nies have not ben­e­fit­ed from tech­nol­o­gy focused on mon­e­tiz­ing their IP. This, how­ev­er, is chang­ing dra­mat­i­cal­ly. Like oth­er more com­mon­ly under­stood RWA, tok­eniza­tion is tout­ed as a tool by which com­pa­nies can bet­ter under­stand and man­age the val­ue of their intangibles.

Real­iz­ing The Val­ue Of Intangibles

Tok­eniza­tion of this RWA, how­ev­er, faces hur­dles unique to the asset class. Tech­nol­o­gy com­pa­nies have entered the mar­ket giv­en its size and the struc­tur­al inef­fi­cien­cies cit­ed by oper­a­tors in the space. Found­ed in 2018, US-based IPwe is focused on enabling com­pa­nies to make more effi­cient use of their patent port­fo­lios through the use of pre­dic­tive ana­lyt­ics, AI, and blockchain technology.

Man­ag­ing a patent port­fo­lio can be cost pro­hib­i­tive. Com­pa­nies with large port­fo­lios can expect to employ in-house legal, licens­ing and engi­neer­ing resources. Exter­nal resources may include the need for vis­i­bil­i­ty tools (infringe­ment claim charts), legal exper­tise, bro­kers, and oth­er fees that can dri­ve costs to any­where between 5–30% of total deal val­ue, with the aver­age set­tling some­where between 10–20%. This doesn’t include the oppor­tu­ni­ty costs incurred because of extend­ed nego­ti­a­tion cycles, which can vary between 3–4 months to close a small license or patent assign­ment (sale) up to 1–2 years for cross-licens­ing deals between large patent holders.

US-based IPwe is tak­ing a mul­ti-step approach to enabling their clients to effi­cient­ly man­age and com­mer­cial­ize one of their most valu­able intan­gi­ble assets, their patent port­fo­lios. Ms. Leann Pin­to, Pres­i­dent of IPwe, said the first step was to make it as easy as pos­si­ble for com­pa­nies to under­stand and use what they own. A patent lawyer by trade, Ms. Pin­to is extreme­ly famil­iar with the chal­lenges that mar­ket par­tic­i­pants face. Pri­or to join­ing IPwe, she led IBM’s
IBM
Patent Licens­ing efforts in the Unit­ed States & EMEA. Dur­ing our con­ver­sa­tion, she cit­ed struc­tur­al and oper­a­tional chal­lenges that trans­lat­ed into many hours and dol­lars spent nego­ti­at­ing deals in her pre­vi­ous roles.

“The fun­da­men­tal prob­lem in the IP space with patents and intan­gi­ble assets, is that they are under­uti­lized, under­val­ued, and gen­er­al­ly mis­un­der­stood.” Ms. Pin­to con­tin­ued, “result­ing in low trans­ac­tion, com­mer­cial­iza­tion and financ­ing [vol­umes], due to a lack of trans­paren­cy, liq­uid­i­ty, and no stan­dard­ized val­u­a­tion met­rics.” Infor­ma­tion asymmetry—an imbal­ance that can cre­ate dis­trust among coun­ter­par­ties and dimin­ish liquidity—is a hall­mark of inef­fi­cient mar­kets. IPwe believes tok­eniza­tion elim­i­nates this mar­ket hurdle.

The com­pa­ny announced the tok­eniza­tion of 25 mil­lion active patents as dynam­ic NFTs and the launch of its Smart Intan­gi­ble Asset Man­age­ment (SIAM) plat­form at The Blockchain Hub at Davos, which ran con­cur­rent­ly with the World Eco­nom­ic Forum. Part­ner­ing with Casper Labs, IPwe tok­enized pub­licly avail­able data on the exist­ing patents to pro­vide patent mar­ket par­tic­i­pants (own­ers, buy­ers, sellers,and investors) with a dig­i­tal rep­re­sen­ta­tion of asset own­er­ship. The tok­eniza­tion of the patent infor­ma­tion on the Casper Blockchain estab­lish­es a cen­tral point where com­pa­nies that own IP can com­mu­ni­cate pub­lic, his­tor­i­cal infor­ma­tion (issue date, pri­or­i­ty, expi­ra­tion, own­er, assignee) about their assets in a trans­par­ent man­ner. SIAM enables its sub­scribers to then add pri­vate data, includ­ing licens­ing, trans­ac­tion, asser­tion and pros­e­cu­tion his­to­ry, to the NFT. In com­bi­na­tion, the pub­lic and pri­vate data can then be ana­lyzed to assess mar­ket val­ue that can be com­mu­ni­cat­ed to mar­ket par­tic­i­pants and lever­aged for more effi­cient IP transactions.

Com­pa­nies, unlike cre­ators, have been less com­fort­able with NFTs, and get­ting them com­fort­able with the tech­nol­o­gy will be crit­i­cal. Much of her time is spent over­com­ing the neg­a­tive con­no­ta­tions and gen­er­al mis­un­der­stand­ings inher­ent with NFTs, blockchain and cryp­to. Cou­pled with a lack of under­stand­ing around their own IP assets, the task is daunt­ing. While future prod­uct inno­va­tion (ie frac­tion­al­iza­tion) can be envi­sioned, edu­ca­tion and suc­cess­ful exe­cu­tion of the first steps will be critical.

“Our job is to help enter­prise under­stand that blockchain is cre­at­ing actu­al com­mer­cial oppor­tu­ni­ties and val­ue real­iza­tion. The nature of IP is chang­ing; it is becom­ing an enabler of com­mer­cial oppor­tu­ni­ty. Tok­eniza­tion allows busi­ness­es to real­ize this com­mer­cial oppor­tu­ni­ty more quickly.”

The Continued Tokenization of RWA

“Yeah, you’re lookin’ at the truth, the mon­ey nev­er lie, no”

DJ Khaled b/w Justin Bieber. (2017). I’m The One

For cre­ators and com­pa­nies alike, IP val­u­a­tions are crit­i­cal. In order to accu­rate­ly assess and com­mu­ni­cate this val­ue, bar­ri­ers to effi­cien­cy need to be removed. Whether a musi­cian or a phar­ma­ceu­ti­cal com­pa­ny is sell­ing its IP, they must have a firm under­stand­ing of the dri­vers of val­ue in their mar­kets. For buy­ers, licensees, and investors of this tech­nol­o­gy, trans­paren­cy into these fac­tors is also crit­i­cal. The trend toward the tok­eniza­tion of RWA is clear­ly one of the tools that will enable this to occur. Time will tell, how­ev­er, if like the author, the S&P 500 will become Beliebers in NFTs.

Bonus Feature

For those of you that stuck with the cre­ator and com­pa­ny thread and read to the end, I leave you with this promised East­er egg from 2012.

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