Monetizing Streams of Revenue Backed by Intangible Assets | IPWatchdog Unleashed

This week on IPWatchdog Unleashed I speak with Josh Harlan, who is the founder and managing partner of Harlan Capital Partners, a privately held investment firm based in Palm Beach, Florida, and which focuses on asset-based investments, including investments backed by media and intellectual property rights, and specifically the monetization of streams of revenue back by intangible assets. You can listen to our full discussion about monetizing streams of revenue backed by intangible assets wherever you get your podcasts (links here) or visit IPWatchdog Unleashed on Buzzsprout. We have also posted a complete transcript, and you can also watch the video on YouTube.

During our conversation, we speak about monetizing various investable streams of revenue in media, sports and IP, and we also make a hard pivot to then later discuss artificial intelligence and what those looking to invest in AI should be considering. We also discuss the viability of the fair use defenses that are presently being made in the ongoing lawsuits brought by copyright owners against AI developers and the likely future marketplace for monetization of training data and AI outputs.

As you will hear during our conversation, Harlan sees the possibility of some pretty big damages awards on a one-time basis for content creators and their copyright lawsuits against large AI developers, but he does not see that as an existential threat to the AI industry itself, which he sees as bringing in large amounts of revenue with large players who will have the ability to pay for content, both on the input and on the output side of the equation. And without providing any specific details, Harlan does confirm that he is currently investigating opportunities relating to training data aggregation, which he believes could be very interesting from an investment perspective.

Monetizing Asset Based Revenue Streams

“When I first started working with ICM, the Film and Literary Agency… I went into it expecting that the business was going to be quite volatile year to year,” Harlan explained. “But when we got under the hood, what was actually the case was that they had… accumulated all of these royalties or back-end participations in films and television shows. I was working with them in the mid-2000s, and they were still cashing a check every year from the original Star Wars, and they hadn’t represented George Lucas since the 70s. They were cashing a check from Pretty Woman every year, and they hadn’t represented Julia Roberts since the 80s.So, it was really striking to see how long-term those types of revenue streams could be, very predictable, very annuity-like. And that made a big impression on me and had a lot to do with developing the strategy that I pursued at my own firm.”

A lot of attorneys might understand the monetization of a stream of revenue as akin to what happens when you settle a case for your client and rather than taking the payout which may be yearly payments for a number of years the client sells the stream to an investor at a discount and is paid a lump sum.

According to Harlan this is in some ways similar, but not entirely apples to apples. In the case where you have a certain, guaranteed stream of revenue it is easy to determine the appropriate discount rate based on the value of the stream of revenue long term and to calculate a discounted present value that can be paid immediately. And while those types of deals can be done with intellectual property backed revenue streams, it is also common for him to invest in asset backed revenue streams that are less certain, or even speculative. For example, where you have distribution rights that you’re acquiring, and then you actively set them up on different platforms and see how they perform on those platforms. This presents a different kind of risk profile because a title may underperform, which needs to be evaluated from a risk-reward perspective.

“We view these things a little bit more holistically than some other people do,” Harlan explains. There are dedicated drug royalty funds. They’re only going to invest in drug royalties. There’s dedicated music royalty funds. They’re only going to invest in music royalties. We like to look at it a little bit more holistically than that and to look at a range of media, sports, and IP-related opportunities. Actually, media, sports, and IP is what we’ve been focusing on a lot in the last couple of years. We historically have also done investments related to litigation finance, insurance-related investments, several different kinds of hard assets that we’ve invested in. But about 80% of the capital we’ve deployed in the last two years has been related to media, sports, and IP. We see a lot of deal flow there.”

Focusing Too Much on the Technology of AI

“I think people are, are spending too much time thinking about technology and they’re not spending enough time thinking about the legal environment around the technology, particularly the intellectual property issues and the intellectual property issues with AI are both on the input side and the output side,” Harlan explained. “It reminds me to some extent… of the battles around piracy in the entertainment industry in the eighties and nineties.”

Harlan explained that with music the recording companies put out unencrypted CDs into the marketplace and had a huge privacy challenge. Learning from this mistake, the motion picture industry went to Congress and secured protection in the Digital Millenium Copyright Act that made it illegal to circumvent technological measures put in place to protect copyrighted works. So, even though the protections put on DVDs were weak, and could be broken, “no reputable hardware or software manufacturer was going to make it easy for you to copy a DVD,” Harlan explained. “The technology wasn’t really preventing anybody from copying DVDs at a certain point, but the law was definitely making it a lot harder to do that. So, to my mind, that’s a lesson for the whole AI economy in terms of law having a tendency once it gears up to trump technology.”

Harlan sees the possibility of “some pretty big damages awards on a one-time basis” for content creators in their copyright lawsuits against large AI developers but doesn’t see these legal issues as an existential threat to the AI industry.

“There’s going to be some kind of market clearing price for all of this stuff to be used as training data, whether it’s text images, video, geospatial data, whatever,” Harlan predicts. “There’s no doubt that what AI is going to bring to the world is going to have tremendous value. So, presumably there’s going to be companies that generate a lot of profit, which means that they’ll have the financial ability to pay large amounts of money to license the data. But it does suggest to me, if that’s where it’s going, that there’s going to be some pretty interesting markets for aggregating and distributing this kind of data.”

And without providing specific details, Harlan confirmed that he is currently investigating opportunities relating to training data aggregation, which he believes could be very interesting.