How songs get distributed and owners compensated for them have upended the music industry. Through it all, copyright royalties have remained attractive – especially when they are associated with hits.
With millions of investors facing negative interest rates worldwide because of tepid growth and nervous central banks, investors are hungry for alternative investments that offer higher yields – even if they generate more risk. Enter music royalties, a proven income stream with the potential for growth in a changed technology landscape.
About $3.2 billion is currently invested in funds focused on music royalties, according to Massarsky Consulting, a New York firm that performs catalog valuations for music publishers and record labels, as reported in The Wall Street Journal.
Today, there are at least a half dozen companies, some public, offering the investors the opportunity to participate in future revenue streams. If the songs are classics, they stand a good chance of still being relevant five, ten and even fifty years down the road.
Some royalty funds claim they actively manage their IP portfolios, seeking new licensing deals that will generate greater income.
If the packager is a co-investor that owns part of the copyrights or of their future revenue, they may be in the position to improve returns, for example, by encouraging movie and television producers, and advertisers, to use a particular song (synchronization rights) in a project creating new revenue streams. This is akin to brand extension, i.e. a new market for old material.
Hipgnosis, or Hipgnosis Songs Fund Ltd, a specialist music intellectual property investor that trades on the London Stock Exchange (LON: SONG), has raised over $500M and has built a catalog of over 5,000 songs, reports Music Business Worldwide. Not all of its artists are well-known, creating potential for future benefit, but also greater risk. While its catalog’s streaming income continues to rise, it is only a portion of Hipgnosis revenue (see chart below).
Hipgnosis Revenue Sources
Not Entirely New
Purchasing future royalty streams or partial intellectual property rights associated with them is not new. Income associated with receivables generated by tangible assets, like real estate, and intangibles, such as pharmaceutical patents, have long-been packaged and sold to investors as alternative investments. Some have performed well for seller and buyer.
This form of financing – known as “factoring” in the apparel industry – allows asset owners take risk off the table by accepting a discount on expected revenue generation in exchange for receiving the future cash-flow now. Investors make a calculated risk on the amount the stream is likely to generate over a period of time – hopefully more than they pay to the owner. It can be a win-win, but tastes change and predicting music revenues has not been easy over the past twenty or so years, nor has the nature and pace of technological change.
“Streaming revenue—which rose 34% in 2018 and is expected to keep growing, according to the International Federation of the Phonographic Industry—has injected new life into an industry that had revenue declines from 2001 to 2014 amid illegal downloading,” reported The Journal (see graph).
“Our typical proposition to a songwriter is, give us half your copyrights, you’ll take some liquidity, take some money off the table, but you also have a great partner who’s working their butt off to add value,” says a Round Hill Music Chief Executive, Josh Guss.
Bowie Bonds Redux
One of the best known music royalty deals involved David Bowie in the late 1990’s. The debt offered investors were called “Bowie Bonds.” It was a success for Bowie, a visionary, but less so for investors who encountered distribution changes when groups like Napster, an early file-sharing vehicle that was shut-down by court order, decimated CD sales and made copyright theft acceptable to millions.
With the leading streaming services like Spotify, Pandora, YouTube and Apple Music are paying musicians and song writers slightly more than they had in the past, and have been known to pay celebrity artists better, rights associated with iconic songs like “I Saw Her Standing There” and “The Best Day of My Life” can be attractive investments if buyers refrain from overpaying and are clear which revenue streams they are buying over which period of time.
Just how attractive remains to be seen, as tastes shift and technologies evolve. Stay tuned to find out who are the bigger winners – the artists, the primary investors (the funds) or secondary investors, such as institutions and individuals. Hipgnosis owns stakes in songs from such artists as Beyoncé, Bruno Mars and Justin Bieber.
While music-royalties funds tend to attract institutional investors, there is a way for smaller investors to get involved. Online marketplaces such as Royalty Exchange and SongVest allow individuals to buy slices of song catalogs in transactions that are typically far smaller. A “share” in five tracks by rapper Cardi B, including No. 1 hit “Bodak Yellow,” recently sold for $125,300.
Image source: musically.com; collegefashion.com; IFPI