Long anticipated by industry insiders, Justin Bieber sold the rights to his music catalog to … [+]
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?
For many, intangible assets can be difficult to comprehend, much less value.
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
David Bowie successfully leveraged his IP in 1997 via Pullman Bonds.
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 changed the way consumers bought and listened to music. Eventually, it provided the music … [+]
“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.
Justin Bieber made history as one of the youngest artist to sell his music catalog rights for north … [+]
“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.
MetaKovan, showing the digital artwork non-fungible token (NFT) “Everydays: The First 5,000 Days” by … [+]
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
Intellectual Property, including patents, have risen in significance as a store of value for … [+]
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.
A “Search Room” at the patent office where searching of patents’ records was done in the past.
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.
Leann Pinto, President of IPwe, discusses minting 25 million NFTs at The Blockchain Hub in Davos.
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.”
“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.
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.
The author is indeed a Belieber not only in Justin, but also the tokenization of RWA.
