Steven Rayson, CBV, CFE, is a senior manager of the valuation, fraud and litigation support team at Toronto-based firm Deloitte/Mintz & Partners, which offers audit, tax, consulting and financial advisory services

If you’re under 35, the chances are good that you spent at least one childhood afternoon watching The Kids of Degrassi Street or its sequels on CBC. Today, kids across Canada (on CTV) and in the U.S. can watch Degrassi: The Next Generation on TV, view episodes on a website and download specially produced Degrassi ‘mini’ episodes to their cell phones.

Like few others, the producers of Degrassi have embraced the new digital-media reality. Some Canadian specialty channels, such as The Score and Business News Network, also allow cell phone users to download short clips of content.

More often, however, content is downloaded without the permission, or even the awareness, of rights holders. Consumers subscribe to the myth that it is acceptable to ignore the rights of content owners and rights holders, and they take advantage of the ease with which digital content can be copied or transmitted. These factors have led to ‘revenue leakage’ when films, videos and TV shows are made available in a digital format.

Revenue leakage is of particular concern for Canadian content owners and rights holders, as Canada leads the developed world in broadband Internet penetration, according to the Organisation for Economic Co-operation and Development.

When revenue leakage threatens their revenue stream, producers and broadcasters should look to a digital royalty audit as one way to gain assurance that they are receiving the revenues due to them. Digital royalty audits are a departure from traditional royalty audits in several respects.

A digital royalty audit:

• Begins with a look at the platform on which the content is consumed. In addition to traditional platforms such as TV, we now have mobile devices, satellite radio, video-on-demand, the web and Internet protocol television (IPTV).

• Looks at the format in which the content is created. The format determines the content’s nature, quality, and the platform(s) on which it may be consumed. Some newer formats include cell-phone ring tones and podcasts.

• Considers the legal nature of the rights. For example, are the rights based on a trademark, brand rights, the use of a technology or a copyright?

• Examines the fee structure. If the fee structure is based on revenue sharing, the formula allocating revenue must be analyzed. Is the fee structure tiered, whereby a threshold must be met before a certain payout is triggered? Is there a value-in-kind fee structure?

Rights holders often depend on the good faith of their business partners and the operation of their reporting systems to ensure reliable revenue reporting. However, in many cases, self-reported statements are incorrect for various reasons, including errors, misinterpretation of contracts and, in some cases, fraud.

The method of recourse to pursue all revenues to which the rights holder is entitled will depend on the circumstances. While the discovery of fraud, or possible fraud, may require special handling, most cases of errors and misstatements can be cleared up through a discussion with the licensor.

So how does one measure the actual revenues due to a rights holder? The first step is to understand exactly how the revenue model to be tested generates revenue. That is, digital royalty auditors must learn the process by which the sale or order for the digital content is converted to a cash payment. This may differ from situation to situation, but some of the more popular revenue models are the pay-per-view or pay-per-download model, and a subscription for limited or unlimited usage.

Business valuators traditionally make use of statistics published by independent parties – such as Statistics Canada – to help in calculating information. In cases of suspected fraud, digital royalty auditors may analyze piracy trends and study patterns of content consumption to build reasonably accurate models of revenue leakage.

The proliferation of new partnerships, business models, platforms and formats to distribute and sell digital content has just begun. Operating in Canada’s smaller marketplace, Canadian TV and film producers are seeking creative new ways to generate more revenue. As a result, the complexities surrounding the distribution of digital content will only increase, creating a much greater need for producers to obtain assurance that they are receiving their fair share.