Content Library Valuation Considerations
Date May 12, 2020
A content library is a collection of various types of media that can span numerous genres and formats. A video content library generally includes, but is not limited to, a collection of films, television shows, and sporting events maintained in a number of formats that can include film, videodisc, videocassette, and digital. In the United States, the movie and television production industries still generate substantial revenues throughout a variety of avenues, earning in excess of $60 billion in 2019. The film libraries maintained by movie and television studios generate sizable revenue streams and typically represent a significant portion of the value of intellectual property maintained by industry producers. However, the considerations and factors contributing to the value of a content library or of individual title in a collection are subject to considerable judgment. Gordon Brothers understands the key factors a buyer or seller should consider when evaluating specific programs/films or an entire library.
The value of a content library represents the bundle of rights to sell and distribute a series of titles in various jurisdictions throughout the world. In general, the value ascribed to a content library is a function of the rights maintained by the owner and the expected future cash flows ascribed to these rights. It is common for the owner of a content library to sell or license these rights to third parties in certain jurisdictions, particularly within international markets. For example, Subscription Video on Demand (SVOD) companies such as Netflix seek to secure long-term exclusive licenses to certain titles or libraries. Of course, the sale or licensing of a portion of the bundle of rights associated with a title or content library reduces the value ascribed to the retained bundle of rights. Thus, a prospective buyer of a library should conduct due diligence to evaluate the individual titles included in a transaction and the markets in which each title may be sold and distributed. An important factor in evaluating a title includes the number of territories in which the title has yet to be sold and marketed.
In addition, the value of this bundle of rights can change significantly each year in line with ebbs and flows in market forces and the primary sources of revenue. For example, the value of content libraries declined over the past 15 years in conjunction with reductions in DVD sales. However, more recently there has been a rebound in popularity for these libraries because of strong demand for content from SVOD services such as Netflix and Amazon Prime. Thus, a potential acquirer of a title or library should evaluate the current and expected future cash flows of the property, including consideration of the anticipated direction of the market. Because of nationwide stay-at-home orders initiated since the COVID-19 pandemic, less new content is being produced and new sports content has essentially been halted, yet consumers are demanding more streaming content than ever before. For some content this has produced an increase in potential cash flow, although likely temporarily.
Beyond evaluating a content library via the estimation of expected future cash flows, individual film titles within the library can be evaluated and categorized based on their likely value. Factors to consider in assessing each film include recent revenue generation, age since initial release in theaters or on television, ratings, director, producer, starring cast, genre, and exposure to domestic and foreign markets. A common technique involves placing each film title within a library into four categories: the best category represents titles that generate significant revenues and the lowest category represents titles unlikely to justify the costs necessary to monetize them.
As one might expect, the overall quality and age of each title plays a significant role in the underlying value of the library. All other factors remaining constant, a newer title that was successful at the box office would likely have greater value relative to an older title that realized modest box office success. For example, an owner of a recently released blockbuster film may expect to generate significant levels of revenue in the immediate future, but an older title with limited box office receipts would likely possess a relatively small value. However, beyond a limited number of award-winning or classic titles, an owner tends to realize a large percentage of the benefits from ownership of a title within three years after its initial release.
The quality of the underlying physical and digital assets represents another factor that can impact the overall value of content libraries. A full collection of physical and digital assets for a library would command a premium relative to a similar library where a buyer would need to incur costs for the creation of subtitles or digital files before reaching a point of monetizing the assets. Similarly, a buyer should evaluate factors such as the image and sound quality of a library to ensure it is ready for immediate use and consider reducing the transaction price for any costs associated with digital restoration.
The value of a specific content library can involve a complex set of considerations that require a review of factors such as the identity of a likely buyer and their ability to access the necessary distribution channels to monetize the assets. For example, an international organization with a global presence would have greater latitude to pay more for a library given the additional resources available to exploit the intellectual property. In contrast, a company with a presence limited to North America would most likely need to license these rights to third parties within international markets, thereby forfeiting a portion of the revenue-generating ability of the intellectual property to the licensees. Of course, just because an organization possesses the resources to monetize the library does not necessarily mean it will pay a seller for this capability. In practice, many circumstances can dictate the buyer’s willingness to pay, including the number of other willing buyers and their financial resources.
Gordon Brothers’ valuation team has extensive experience in valuing content libraries including animated character copyrights, film and video libraries, sporting event libraries, song libraries, as well as other similar intangible assets, machinery and equipment, and inventory.