Smart Hollywood Summit: Begin Evaluating IP Metadata as Capital

LOS ANGELES — Metadata development creates future value, everyone knows that. So why is metadata often evaluated as an operating expense, and not as a capital expenditure?

That was the question Ed Klaris, CEO of IP rights and royalties firm KlarisIP posed to attendees of his presentation Feb. 27 at the Smart Hollywood Summit.

“In today’s digital economy, global organizations rely heavily on their intellectual property (IP), and over 67% of IP in the U.S. — which is 40% of the GDP total — does not get monetized at all,” Klaris said. “Why? Because it site in places it can’t be leveraged.”

And under current accounting rules, too many forms of IP just aren’t recognized as assets on balance sheets, and the value of those assets aren’t made explicit to firm management, investors or the public. Metadata development creates future value for IP, but often isn’t evaluated as a capital expenditure, he added.

Klaris used an example of why evaluating IP metadata as capital: In an acquisition deal, Company A acquires Company B and its respective portfolio of broadcasting assets, and Company B delivers all the associated legal, descriptive, technical, and financial data for the acquired assets in external hard drives, computers, and filing boxes. That means the acquiring company can either dedicate several full-time employees to associate the data, or hire an outside firm to organize, digitize, and categorize the metadata for the acquired assets.

“Those two outcomes are very different, because one is clearly an operating expense, and the other may be a capital expense,” Klaris said. “If Company A decides to devote $60,000 to organizing, digitizing, and categorizing the metadata for the acquired assets, what are the benefits they receive from the assets?” The investment in metadata generates more revenue, increases operational efficiency, and helps to manage legal and business risk, he said. Well-developed metadata cuts down on operating inefficiencies, saving manual labor hours and improving processes.

Treating that like a capital expenditure treatment provides advantages, including matching the spending directly to benefits over the long term, and avoiding the need for managers to recognize the entire cost of the project in the current period. If that metadata realization project is booked down as an operating expense, the entire cost of the project has to be recognized in the current fiscal period

Klaris shared research that shows business managers often make decisions based on how they impact immediate net incomes, not whether projects present pan out in the long term. Metadata projects increase the value of the content assets described, and “IP metadata investment behave like a capital expenditure,” Klaris said. “[They] promise to contribute indirectly to cash flows, not when the cost is incurred, but in future periods.”

For media companies, IP metadata makes it possible to quickly respond to and exploit new opportunities, improving speed to market for new products and geographical markets, enhancing marketing, advertising and branding efforts.

“Investments in metadata development are investments in future benefits,” Klaris said. “[And] metadata development expenditures act as capital expenditures.”

This year’s Smart Hollywood Summit was produced by the Media & Entertainment Services Alliance’s Smart Content Council with sponsorship by IBM Watson, MarkLogic, EIDR, Hammerspace, human-I-T, Independent Security Evaluators (ISE), KlarisIP, Testronic, FilmTrack, OnPrem, Mediamorph, RSG Media, Vistex, Vubiquity and Bob Gold & Associates.

Click here to download audio of the presentation. Click here to download the PDF.