SONY PICTURES MUSIC PUBLISHING CATALOG
SONY PICTURES MUSIC PUBLISHING CATALOGINTRODUCTIONOverview of the CatalogFollowing two previous sales of its music publishing catalog, in 1993 Columbia (now SPE) began creating new publishing entities to hold all musical works acquired for its productions, and SPE also entered into a worldwide publishing administration agreement with Sony/ATV Music Publishing. Currently, the Sony Pictures Music Publishing Catalog (“SPMPC”) consists of over 350,000 instrumental cues and portions of over 10,000 “songs” (titled score cues from albums, in which SPE owns 100% of the copyright as well as songs with lyrics, in which SPE owns smaller percentages of the copyrights), all derived from approximately 425 films and 320 television titles (including tens of thousands of individual episodes produced from 1993 to the present). Most of the instrumental cues are owned 100% by SPE, while SPE owns 50% or less of the copyrights in the songs.Monetization AlternativesSony Pictures is currently evaluating a monetization of the SPMPC. This memo outlines the benefits and drawbacks of three alternatives structures:Sale of copyrights with no restrictionsThis structure is likely to generate the highest sale price. However, this structure would create several drawbacks for SPESale of copyrights with restrictionsIt may be possible to structure a deal to provide SPE ongoing access to works and protect SPE’s interest by placing some restrictions on the buyer. However, SPE’s interests are unlikely to be fully protected by contract and restrictions will negatively impact valuationIncome stream saleThis is SPE’s currently preferred structure as it would more effectively address the majority of drawbacksHowever, this approach is likely to lead to the lowest valuationEvaluation ProcessAs part of a bake-off process, SPE will ask 2-3 investment banks to evaluate the proposed structure (under NDA). The bankers will be asked to address:Estimated value under each structureAny alternative structure that will provide SPE access and protections with limited impact on valuePreliminary list of buyersProposed auction process and timingBefore formally engaging a banker and proceeding with a sale, we will ensure that a sale under our preferred structure is compelling in light of the associated discount (if any). REVENUE HISTORYOver the last four years, the annual net publishers’ share of income (“NPS”) from the SPMPC has averaged about $13.9 million. Of that amount approximately 96.5% is a combination of Public Performance Income and Mechanical Income (collected by Sony/ATV) and the remaining 3.5% is Third-Party License Income collected directly by SPE.FiscalYearSony/ATV Income(Performance + Mechanical)Third-Party LicensesTotal2007$12,000,452$465,001$12,465,4532008$13,467,159$642,843$14,110,0022009$14,932,081$433,708$15,365,7892010$13,412,207$429,562$13,841,769Average$13,452,975$492,779$13,945,753Sony/ATV estimates that 90% of the income it collects on the SPMPC is from public performances and 10% is from mechanical licenses and other sources. So the breakdown of four year average NPS of the SPMPC is:Income SourceAverage NPSPercent of TotalPublic Performances$12,107,67786.82%Mechanical Licenses/Other$1,345,2979.65%Third-Party Licenses$492,7793.53%Net Total$13,945,753100.00%For a further historical view, the NPS derived from Public Performance Income and Mechanical Income for the SPMPC over the first 12 years that income was generated, as accounted by Sony/ATV, is as follows:FiscalYearSony/ATV IncomeFiscalYearSony/ATV IncomeFiscalYearSony/ATV Income1995 $770,2761999 $5,657,009 2003 $10,120,461 1996 $1,803,858 2000 $6,821,095 2004 $10,768,526 1997 $2,304,846 2001 $8,120,989 2005 $12,634,108 1998 $3,453,333 2002 $9,271,915 2006 $11,690,355 Third-party license income is not included in the above charts, as that source of publishing income was lumped together with income from the licensing of master recordings during that period.VALUE CONSIDERATIONSPrice and ValuationThe primary benefits derived from a sale of the SPMPC copyrights include lump sum cash payment and the recognition of the associated gain. Publishing catalogs are traditionally valued on a multiple of NPS with the multiple being influenced by the relative prominence of the music in the catalog, the estimated future performance of the catalog, and current economic market conditions in the music publishing industry. When Columbia Pictures last sold its music publishing catalog in 1988, the multiple was 10.5 times NPS. Income derived from the two prior sales of Columbia Pictures’ music publishing catalogs is as follows:1976 EMI Sale - $23,500,0001988 Filmtrax Sale - $52,000,000 + $10,000,000 for Futures (through 1992)In addition to general economic factors, the multiple for any sale would also take into consideration any rights retained by SPE and the ongoing obligation to pay a portion of NPS back to SPE for contractual distribution to profit participants. SALE OF COPYRIGHTS WITH NO RESTRICTIONSBenefitsA sale of the copyrights with no restrictions is likely to yield the highest valuation. It opens the sale process to strategic buyers. It also increases the likelihood that financial buyers are able to use the copyrights as collateral when securing leverage for a purchase.DrawbacksAny sale of the SPMPC would result in the loss of an annual income stream that has been in the range of $13 to $14 million in the last three years and the loss of potential breakout income earned by hit songs contained in the SPMPC. A sale of copyrights without restrictions would also result in:Potential Loss of Master Recording Income on Masters Retained by SPEA sale of SPE’s publishing interests will also affect SPE’s ability to license its master recordings, because the new owner of publishing rights can create its own new masters of these compositions to exploit in lieu of the originals still owned by SPE. Loss of Control over Music UsageA transfer of SPMPC ownership results in loss of control over how the music associated with SPE’s films and television productions can be used.Strained Relationships with Separate Pot Income ParticipantsHistorically the buyers of Columbia Pictures’ music publishing catalogs have not provided accurate accountings, potentially straining SPE’s relationships with the highest level profit participants.Non-Contractual Relationship IssuesNon-contractual considerations and restrictions are not likely to be honored by a third-party buyer. SPE’s interest in maintaining a close relationship with John Williams, for example, may lead to seeking his consent for uses of his music even where it is not required under any agreement.Future Audits and LawsuitsMajor music publishers who are potential buyers for the SPMPC tend to focus on acquisitions and collections, not on overseeing third-party responsibilities. Under past sales agreements, SPE has filed two separate lawsuits (both settled) against EMI resulting from audits due to EMI’s failure to properly account to SPE for payments due to third-party royalty participants.Potential Corporate ConsequencesThe SPMPC is an asset affecting the overall valuation of SPE, and its sale may have unforeseen consequences in a corporate sale or merger.Restrictions on Future Use of Music by SPEOnce the SPMPC is sold, obtaining licenses from the buyer for the re-use of that music in future types of productions, for ancillary uses and for new media is difficult and expensive. SALE OF COPYRIGHTS WITH RESTRICTIONSDrafting Considerations for Sales AgreementsIf copyrights are sold outright, past experience has twice shown that it is highly unlikely for any sales agreement to allow SPE to retain all the rights or enforce all the restrictions that may be needed or desired in the future. Nonetheless, some of the negative impact of selling the SPMPC can be reduced by careful drafting of the sales agreement.Specific Rights for SPE to RetainA sale agreement could allow for SPE to retain the following rights in the SPMPC compositions:Use in all SPE productions, distributed products and acquisitions in all media, worldwide in perpetuityUse in all forms of advertisements and promotions for all SPE productions, distributed products and acquisitions in all media, worldwide in perpetuity, both in-context and out-of-contextUse in featurettes and making-of’s, both in-context and out-of-context, in all media, worldwide in perpetuityUse on DVD/Blu-Ray menus and extras, both in-context and out-of-context, worldwide in perpetuityUse in film clips, whether by SPE or licensed to any third parties, in all media, worldwide in perpetuityUse in all co-promotions and commercial tie-ins, both in-context and out-of-context, in all media, worldwide in perpetuityUse in all merchandise and in ringtones, mastertones and videotones in connection with SPE productions, distributed products and acquisitions in all media, worldwide in perpetuitySpecific Obligations and Restrictions on SPMPC BuyersAny sales agreement would also provide that:The buyer will be responsible for payment of the appropriate percentage of SPMPC income to SPE for distribution to profit participants.The buyer will abide by all restrictions, consents, etc. contained in all applicable talent agreements.The buyer will not make any use of SPMPC compositions that competes with SPE productions or with co-promotion partners.INCOME STREAM SALEBenefits to SPEFor SPE, a sale of income stream from publishing assets (“ISPA”) rather than the publishing copyrights themselves eliminates issues related to SPE’s continued control of musical compositions and the use of those compositions in connection with SPE’s own productions, while still providing the same influx of cash as a sale of the SPMPC itself. Additional benefits to SPE of structuring a deal in this manner include:The buyer is a 100% net income participant, but has no right to dictate or limit SPE’s usage of the music.SPE retains all control and flexibility necessary to allow for the exploitation of the SPMPC while maintaining its relationships with both film/tv participants and talent.All collection procedures remain in place, including Sony/ATV’s administration agreement, allowing SPE’s sister company to continue to profit from the SPMPC.No need to audit the buyer for payments due on behalf of third-party participants, as SPE would continue to make those payments directly.A sale of the ISPA rather than the SPMPC itself obviates the need for extensive negotiation and predictive drafting of complex rights retention provisions in the sales agreement.Benefits to the ISPA BuyerBeyond having the same flow of income as would result from an outright purchase of the SPMPC, the buyer of the ISPA would enjoy some additional benefits as well:SPE’s current 10% worldwide administration fee with Sony/ATV would remain in place. If the buyer is not a worldwide publishing entity, the 10% fee may be a better administration deal than the buyer can obtain from any other publishing administrator.The buyer of the ISPA is removed from all obligations and liabilities with respect to composers and third-party participants.Potential Concerns of the ISPA Buyer / Potential to Negatively Impact ValuationA sale of the ISPA is a different model from more conventional publishing catalog sales, and potential buyers will require assurances that there are not any significant disadvantages to allowing SPE to retain control and ownership of the SPMPC. Some concerns that might be raised:SPE might not have an incentive to obtain maximum exploitation of the SPMPC, since the buyer is entitled to all of the profits.The following chart sets forth the reasons for SPE’s continued incentives to maximize income from Performing Rights, Mechanical Rights and Third-Party Licenses. Income Source% of ISPASPE Incentive to MaximizePerformance87%This income is generated automatically from SPE’s exploitation of audiovisual productions in all broadcast and streaming media. As this kind of exploitation is essential to the core business of SPE, there is every incentive to maximize performance rights income.Mechanical10%Virtually all of this income derives from the distribution of soundtrack albums on which SPE also receives an override royalty (for use of key art and the title of the applicable production). SPE has both a marketing and a financial interest in promoting sales of soundtracks, and accordingly SPE is incentivized to maximize mechanical rights income derived from the SPMPC.Third-Party Licenses3%Even though SPE will not be retaining income from musical compositions in the SPMPC, SPE will continue to own and retain income from the master recordings of those compositions which are licensed to third parties. Licenses for the compositions are necessary in order for the masters to be licensed, so SPE’s interests are aligned with those of the ISPA buyer.SPE might not have the incentive to obtain the most favorable administration agreement.After the sale, SPE will again begin to accumulate new copyrights, generating their own income to SPE, which will still require the services of an administrator for the lowest fee that SPE is able to obtain. While SPE will have an ongoing corporate interest in working with its sister company, as well as the Michael Jackson estate (which has a stake in Sony/ATV), it should be noted that the fees payable under SPE’s administration agreements are exceptionally low, and there is no reason to believe that SPE would not continue to negotiate for such low fees in the future.SPE will not license compositions in every instance where the buyer would want to issue a license.Generally, as discussed above, the incentives of SPE are squarely aligned with the income maximizing concerns of the buyer. However, there are some instances where SPE will have overriding concerns focused around SPE’s core film and television production businesses. So, for example, SPE will not license a song being used in a Coca-Cola co-promotion for a Pepsi commercial. However, SPE is unlikely to agree to an outright copyright sale with no restrictions. Assuming such competing licenses would also included in an agreement for the sale of the SPMPC as well, the sale of the ISPA only does not very from a sale of copyright with restrictions.SPE will license compositions in the SPMPC for its own uses on sweetheart terms.SPE’s licensing practices already require arm’s length, industry standard transactions for uses of music by internal entities not connected to the original production for which the music was written. The reasons are (1) SPE’s fiduciary obligation to the composers and lyricists as the publisher of their compositions and (2) SPE’s additional fiduciary obligation with respect to all profit participants in the film or program from which the music is derived.The ISPA value might decrease over time, as the assets become stale and are used less.This assertion, if it were true, would be equally a concern for a purchaser of the SPMPC as for a buyer of the ISPA. However, in actuality, although the greatest performance income is generally from an initial release in foreign theaters and on television, after the initial exploitation income fluctuates from year to year. While exploitation of some compositions may decrease, others may increase over time. For example, performance income may increase, as new streaming media (licensed by the PROs) are used to exhibit existing catalogs of films and television programs. Older film scores by A-list composers that have not been recently used in third-party trailers and advertisements can be freshly marketed. And music by relatively unknown new composers can become more popular as those composers gain notoriety in their careers (older film music by James Horner before TITANIC, for example, became highly marketable after TITANIC was released). The following is a chart showing the total annual music publishing income over the last twelve years derived from each of 16 films released over the last 16 years:FiscalYearFilm TitleANNUAL NPS BY FISCAL YEAR (IN THOUSANDS OF DOLLARS)1999200020012002200320042005200620072008200920101993RUDY17296944475216103153529451994LEGENDS OF THE FALL8539436460924843647264421995SENSE AND SENSIBILITY9141151212213317424824231996CABLE GUY2615825171325131214121996MEN IN BLACK172476122854886179106756867711998MASK OF ZORRO0783011378885126100127821181091999GIRL, INTERRUPTED000131535361951112582183062000CHARLIE'S ANGELSn/a0021549419414514713516667382001A KNIGHT'S TALEn/an/a01381134483325941352002PANIC ROOMn/an/an/a0010515874525429442003PETER PANn/an/an/an/a00306121315844402004SPANGLISHn/an/an/an/an/a002522939212005FUN WITH DICK AND JANEn/an/an/an/an/an/a001110448612006PURSUIT OF HAPPYNESSn/an/an/an/an/an/an/a0126234782007GHOST RIDERn/an/an/an/an/an/an/an/a01140108200821n/an/an/an/an/an/an/an/an/a04447Unlike the actual copyrights, the ISPA is not an asset on the books of the buyer and may not be able to be levered by a buyerCopyright itself is not a tangible asset, and the ISPA can be assigned, sold and licensed no less than the copyrights themselves.Structuring an ISPA SaleA sale of the ISPA is simpler than a publishing catalog sale, in that it does not require the same sort of reserved rights for the seller and restrictions on the buyer. However, a general accounting procedure must be established, and some other issues should be addressed before moving forward.Payment of Participants / ValuationPast music catalog sales have required the buyer to pay a fixed percentage (20% for most films, 25% for Embassy productions) back to SPE to allow for distribution to film participants. This arrangement has some advantages for SPE, because the 20% or 25% is poured into the gross for each motion picture, but participants are paid only a percentage of that gross – so the remainder is profit to SPE. However, placing the payment obligation on the buyers has been unsatisfactory and opened up SPE to potential accounting liabilities, because the buyers (now all under the umbrella of EMI Music Publishing) have not provided the required accountings on a regular basis, and only after extensive audits have payments been made. If the ISPA, rather than the SPMPC itself is sold, then the division of income can be handled by Sony/ATV, which would pay the participants’ share into gross, then pay the ISPA buyer the remainder of net income. In order to account for the need to pay participants, the evaluation of the ISPA should be based on 80% of NPS. Any separate pot music publishing participants (e.g., Jerry Bruckheimer and Brian Grazer) could also be paid directly by Sony/ATV, but they must be disclosed to any potential buyer.Accounting and PaymentThe core of the ISPA agreement is a semi-annual accounting of all net publishing income to the buyer. For public performance and mechanical income, this accounting can come directly from Sony/ATV (or such other administrator as SPE may use in the future). After taking out its administration fee (10%) Sony/ATV would pay the writers’ share (wherever not paid directly), pay SPE a percentage (20%) for gross participations (discussed above), pay any other separate pot participants, and remit the remainder directly to the buyer. The buyer should have direct audit access to Sony/ATV, parallel to the audit rights of SPE. For third-party exploitations directly licensed by SPE, SPE must have its own procedure to account semi-annually to the buyer, taking out the same 10% administration fee that Sony/ATV would otherwise charge, paying all composers and participants, and again remitting the net to the buyer. [discuss – would we lose this right??] Exclusion of Future CopyrightsThe 1988 Filmtrax catalog sale included an option for 5 years of future copyrights (1988 through 1992). We currently recommend against a future sale in the currently proposed deal.Better to start rebuilding the catalogThe SPMPC and the ISPA derived from it are valuable assets accumulated gradually over time and, as in the present circumstances, SPE has been able to sell those assets when necessary for substantial fees. The sooner that SPE again begins to accumulate and maintain new copyrights and the income stream therefrom, the sooner the future SPMPC will begin to increase its asset value on the books of SPE.Futures valuation and futures liabilities are speculativeThe current economic climate would likely lead to a low estimate of the value of income from future compositions. Also, as film profit participations in music publishing income are expected to increase in number and in percentages of NPS, any agreement that reserves only 20% for participations may not be sufficient to cover the liabilities of SPE – meaning that either SPE would have to retain a higher reserve (making the deal less valuable to the buyer) or risk being out of pocket for some participants. Limited Time Period / Buy Back OptionThe music publishing business, like the film clip and ancillary product businesses, is an automatic extension of the primary film and television businesses of SPE, since every film and program generates new music copyrights. If SPE is to have the maximum flexibility with respect to that ongoing business in the future, then the sale of the ISPA should be structured as an acquisition for a limited period of time (e.g., 10 years) rather than a permanent assignment. Then, when the term has expired, the full ISPA would again be available to SPE for production of regular income or, if need be, for future re-sale as part of the larger music catalog incorporating all of the copyrights that SPE has accumulated during the term. The downside is that a term limitation would likely reduce the sales price, but if the price is enough to satisfy SPE’s current needs, then the future value of having the rights revert back should be considered. An alternative to the term limitation would be a buy-back provision with a price based on a premium over the purchase price (e.g., 130%). The buy-back option would not affect the sales price, and would still allow SPE to regain its publishing income stream, only if it were later determined to be of sufficient value to the company. APPENDIXA Brief HistoryEarly YearsFrom its first sound pictures until 1963, Columbia Pictures entered into agreements under which various music publishers (Bourne, Inc., Irving Berlin Music, Shapiro/Bernstein, etc.) were assigned the copyrights in the new music created for Columbia’s motion pictures and television programs. Those agreements allowed Columbia to receive a portion of the publisher’s share of income and to retain the right to use such music in future productions without payment or prior approval. In 1964, Columbia created Screen-Gems Columbia Music and Colgems Music Corporation, to own and administer all music acquired for use in its television and motion picture productions on its own behalf.EMI SaleOn June 30, 1976, Columbia Pictures sold its music companies, both domestic and foreign, to EMI Music Corporation and EMI Overseas Holdings, Ltd (“EMI Sale”), retaining certain rights to use the music without any payment to EMI. EMI was required to pay Columbia 20% of the publisher’s share of royalties, to be passed through to participants. After the EMI Sale Columbia set up new publishing entities in order to re-grow and expand its publishing assets. Filmtrax SaleTwelve years after the EMI Sale, on March 31, 1988, Columbia Pictures again sold its music assets, including music catalogs acquired by Columbia (Mills Music, Al Gallico Music, Easy Listening Music, Algee Music Corporation, the Embassy Television music catalogs, the catalogs of Merv Griffin Productions and the TriStar Pictures music catalogs), this time to Filmtrax Copyright Holdings, Inc. (“Filmtrax”) (“Filmtrax Sale”). In connection with the Filmtrax Sale, Columbia also entered into an Administration Agreement granting Filmtrax exclusive administration rights in all newly acquired musical works for a term of five years ending December 31, 1992, after which Filmtrax had the option to purchase those musical works as well. During the period of the Administration Agreement, Filmtrax sold all of its music assets to EMI, and EMI then exercised its option to purchase the additional catalog. Music Publishing Income StreamsThe SPMPC generates NPS income through a several sources, corresponding to the various different types of exploitations that copyright ownership allows. Each income source varies as to the method of collection and the degree of activity required for administration. The three primary sources of income for the SPMPC are:Public Performance IncomePublic performances of musical compositions are licensed through performing rights organizations (PROs) in each territory of the world (ASCAP, BMI and SESAC in the US). For music contained in motion pictures, television programs and other audiovisual productions, the PROs issue licenses to every performance venue, including television networks, local stations, Internet websites and movie theatres (except in the US, where theatrical film exhibitions are exempt from performing rights payment obligations under a federal consent decree dating back to the 1940s). The amount of the license fees collected depends on a variety of factors formulated by the PROs. The PROs take a small percentage of the fees collected then portion out the rest among all of the musical compositions being exploited, using formulas based on a combination of actual usage and statistical surveys. The portion of public performance income allocated to each musical composition exploited in a given semi-annual period is then paid by the PROs 50% to the publishers of that composition and 50% directly to the writers. Since the SPMPC is constantly being exploited worldwide through the general distribution and broadcast of SPE’s productions, public performance income is by far the largest source of music revenues to SPE. Monies collected by the PROs worldwide are paid to the local US societies, which in turn pay the 50% “publishers’ share” to Sony/ATV Music Publishing, as administrator of the SPMPC. Sony/ATV then takes out its 10% administration fee and pays the remainder to SPE.Mechanical IncomeMechanical licenses must be issued whenever a musical composition is included on a sound recording. License fees in the US are statutory rate of 9.1? per composition per unit sold, but lower rates are often negotiated between record distributors and music publishers. Elsewhere in the world, mechanical license fees are based on a percentage of the sales price of sound recordings. These royalties are paid by the record distributors either directly to the publishers or to a collection agency (usually The Harry Fox Agency [“HFA”] in the US), which takes out a small fee and then pays the remainder to the publishers. The publishers retain 50% and pay 50% to the writers of the composition. For the SPMPC, the primary source of mechanical license income is from soundtrack albums. Sony/ATV collects the mechanical royalties through HFA, takes out its 10% administration fee, and splits the remainder 50% to SPE (the industry standard “publishers’ share”) and the 50% to the writers of the composition (the industry standard “writers’ share”).Third-Party LicensesSynchronization licenses are required when musical compositions are attached (“synchronized”) to any audiovisual product (e.g., commercials, trailers, films, television programs, webcasts, etc.). Uses of musical compositions in connection with products other than sound recordings (e.g., slot machines, greeting cards, toys, etc.) also require similar licenses. Unlike income from public performances and mechanical royalties, income from these types of licenses is not generated automatically in the course of SPE’s exploitation of its own audiovisual productions and soundtrack albums. Instead, the SPE Music Group markets the SPMPC to third parties for use in their audiovisual productions and other products. Fees vary up to hundreds of thousands of dollars for national advertising campaigns. After these fees are collected directly by SPE, 50% is paid to the writers of the composition being licensed, and the SPE retains the rest. No administration fee is payable to Sony/ATV for these uses except in the very rare case where the specific use is generated through the marketing efforts of Sony/ATV, in which case Sony/ATV deducts its 10% administration fee, pays half the remainder to SPE and the other half to the writers of the composition. ................
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