Music royalties are becoming a more appealing asset class in the present market context of low returns and interest rates because of their poor association with macroeconomic performance and strong income potential.
Music royalties are an appealing asset class for investors because of their stability, recurrent income, good relative returns, and historically lower exposure to more significant economic swings. Investors can get more money for investment from GreenDayOnline.
Why Are Music Royalties a Popular Investment Option?
“I believe everyone recognized that publishing catalogs, like a building, were assets that could be financed. And the investment banks’ projections for the number of streaming customers over the next ten years are astounding. As a result, investment bankers, hedge funds, and private equity firms all see this as an asset class.” Former CEO and Chairman of Sony/ATV Music Publishing, Martin Bandier.
Potential for Recurring Revenue
Music royalties are a dependable source of revenue. Music royalty money is collected by many different distributors, with payments sent to music IP rights holders regularly. Investors seeking a steady income stream prefer recurring payments, which are common in asset sectors like real estate.
Music royalty cash flows have become more stable as a result of streaming. After 15 years of reductions due to piracy and the demise of the physical album, digital streaming has fueled an increase in worldwide recorded music sales, as we highlighted in the State of the Music Industry. The ownership of music intellectual property assets and the royalties derived from them are now more secure.
And music royalties are typically highest 3-12 months following release. Over the following 5-10 years, income begins to drop. The remaining “tail” of revenue frequently fluctuates, but it stays relatively constant.
Take a look at a collection of songwriter performance royalty revenue for a real-world illustration of the effect of streaming growth. This portfolio covers hip-hop song interests, including a minority interest in Jay-Grammy-winning Z’s “Empire State of Mind,” sold through Royalty Exchange, an online royalty marketplace.
The collection includes songs published between 2001 and 2009, with 2009 being the average income-weighted release year. Following the release, we are investigating years 7-9 (i.e., the traditional “tail”) since Royalty Exchange supplied three years of catalog revenue data beginning in Q4 2015. The catalog’s yearly cash flow varies by roughly $30,000 each year, as seen in the graph. This catalog’s streaming revenue climbed 33 percent over the 12 months preceding to sale, supporting the catalog’s cash flow stability, just like streaming is fueling music industry growth. Again, each catalog will have its unique qualities. Still, in general, streaming assists in the offset of diminishing revenue from other media like downloads and physical (CDs and vinyl) sales. Music IP investors might have greater trust in the asset class because of the increased revenue stability.
In a world of low-interest rates and dividends, yield is king.
The returns on music royalties are often favorable. In today’s economy, investors are looking for ways to generate a return on their money while minimizing the danger of losing their principle. As of September 2020, for example:
- The yield on a 10-year US Treasury note was 0.7 percent.
- The dividend yield on the S& P 500 was 1.8 percent.
- The Vanguard High-yield Corporate Bond (VWEHX) yield was 3.9 percent.
Music royalties might seem a very tempting asset type in this setting. The following examples apply to 2020 data for a comparable period:
- According to the company, the average yearly return on investment for catalogs sold on Royalty Exchange’s platform was more than 12 percent.
- The dividend yield of Hipgnosis Songs Fund (SONG) is 4.3 percent.
- The dividend yield of Mills Music Trust (MMTRS) is 9.6%.
At the same time, it’s crucial to keep in mind that music royalty revenue is not constant. As previously stated, the revenue flow from music royalties for a song frequently decreases with time. In other words, royalties earned in the previous 12 months do not guarantee royalties earned in the next 12 months would be equal to or more significant. When we address the hazards of investing in music IP, we’ll go through this dynamic in detail.
Low Economic Activity Correlation
Historically, music expenditure has had little to do with overall economic activity. Music spending and associated royalties are holding up well compared to other industries during the COVID-19 pandemic, as seen in the State of the Music Industry. Historically, neither recorded music nor music publishing data have shown a solid link to overall spending. Goldman Sachs illustrates this lack of correlation in the chart below, which compares the recorded music industry’s 15-year decline due to piracy and subsequent streaming-driven rebound in personal consumer expenditures (PCE.) Since 2016, recorded music expenditure has exceeded PCE growth by 2.4x, according to Goldman’s “Music in the Air” study.
Music publication revenue has shown to be more robust to economic downturns. CISAC collecting data indicated a continuous increase throughout the Great Recession, as I highlighted in my last piece.
A few instances of music IP asset relationships to the larger market may be seen in public equities markets. The beta of Mills Music Trust is -0.65, which implies it moves in the opposite direction of the market. Hipgnosis Songs Fund is much less volatile than the overall market, with a beta of 0.21.
What are the main levers that active investors use to boost the value of music intellectual property?
Aside from the reasons stated above, music IP investors may strive to raise the value of their investment. To enhance value, active investors employ three key levers:
1) Developing new music IP by performing artists and songwriters.
Traditional record labels and music publishers devote a substantial amount of time and resources to recognizing outstanding performers and composers and assisting them in the creation and marketing of new music IP.
2) Identifying new ways to monetize current music IP via creative licensing.
Labels, publishers, and royalty funds that can license their music IP will “work” their current library of songs by looking for new licensing possibilities in cinema, television, advertising, cover songs, and video games.
3) Lowering the cost of royalty collections and the time it takes for them to be paid.
The money transfer from end-users to music IP owners is complicated, and it often includes many “middlemen,” such as collecting organizations and agencies. Payments to these collectors and rights holders might take anywhere from 6 to 12 months. To optimize cash flow accessible to shareholders, labels, publishers, and royalty funds with the capacity to control their library of songs will aim to reduce these expenses and the time lag between payments.
What Are the Pitfalls to Avoid When Investing in Music?
When investing in music IP assets, there are several possible dangers to be aware of. When it comes to obtaining income-generating music IP, we’ll narrow down the risks to the ones we think are most significant. We are not, for example, taking any chances in terms of discovering and nurturing new artists and composers.
Risk of Valuation
There’s always the risk of overpaying when obtaining a music IP asset. Music royalties often fall dramatically in the first few years of the following release before stabilizing in years ten and beyond. If you paid eight times last year’s cash flow for a one-year-old song library, the indicated 12.5 percent return in year two would be significantly lower if the cash flows follow a regular decay pattern. On the other hand, if you spent 8x for a 15-year-old catalog with a track record of reliable revenue, the 12.5 percent return will likely be more stable, with everything else being equal.
“Several sources I spoke with were concerned that this maturity mix would struggle in the long run to create profits Hipgnosis seems intriguing for investors, particularly considering the fund’s 13.9x multiple is paying for its acquisitions,” Cherie Hu, a music business writer, writes about Hipgnosis in an article that evaluates the average acquisition multiple for the firm concerning the catalog age. The age of a catalog is just one thing to consider when valuing music IP. Royalty type, genre, revenue diversification per song, and termination rights are others. In conclusion, to create appealing results, paying a fair price is crucial.
Risk of a Counterparty
It’s critical to do due diligence to validate the chain of ownership and that the seller possesses what they claim. Liens on the seller’s assets, bankruptcies, divorces, and estates are some of the specific concerns that might complicate a deal.
The Threat of Technology
In the 2000s, Napster rocked the music business, resulting in a 15-year decrease in recorded music sales. This trend has been reversing because of the rise of cellphones and streaming, which has aided the industry’s return to growth. For better or worse, technological advancements may significantly influence music royalties.
Many music royalty rates, particularly those relating to the copyright of musical compositions, are controlled. While most previous royalty rate decisions have been favorable to music IP owners, future rate adjustments might have a significant influence on music IP cash flows.
Risk of Inflation
Most forms of music royalties do not respond to price changes promptly. As previously stated, many royalty rates are governed by a multi-year rate structure. Professors Peter Alhadeff and Caz McChrystal reported in a 2011 research article that regulated US physical, mechanical royalty rates paid to composers and publishers have been “devaluing consistently against inflation since 1976.” On the other hand, unregulated royalty rates often last longer than a year. Meanwhile, streaming services like Spotify haven’t concentrated on raising consumer costs, reducing average income per user and per-stream royalty rate over time. In other words, a sharp rise in inflation is unlikely to be reflected in music royalty rates shortly.
What Is the Best Way to Invest in Music Intellectual Property?
There are three ways to invest in music intellectual property:
- Publishers and record labels
- Royalty money for music
- Purchases of music IP assets on a direct basis
Publishers and Record Labels
Because of most traditional record labels and publishers, it is challenging to acquire direct financial exposure (e.g., Concord Music). Standard labels and publishers are going public. Warner Music Group priced its initial public offering in June 2020, while Vivendi’s subsidiary Universal Music Group is planning an IPO by 2023.
Royalty Trust Funds
Most music royalty funds are private, although a handful is open to the public. Hipgnosis Songs Fund and Mills Music Trust are two publicly listed corporations that control music royalty rights and distribute the most available cash flow to shareholders after expenditures. Shamrock Capital, a private equity firm focusing on music and other creative IP, has concluded a $400 million fund. Round Hill Music has announced that it is now soliciting funds for its third music intellectual property fund. On the other hand, these private royalty funds often have sizeable minimum investment amounts ($5 million or more), indicating that their target investors are institutions and ultra-high net worth individuals.
Directly Purchasing Music IP
The private market is where music IP is purchased directly. Royalty Exchange and other online marketplace platforms make direct ownership of music IP assets more accessible to the typical investor. The Royalty Exchange provides lower transaction sizes ranging from $5,000 to less than $1 million and passive interests in a library of songs, in which an investor merely receives continuing dividends, similar to “mailbox money” that you sit and wait for. However, rather than depending on (and paying) the administrators of a record label, publisher, or music royalties fund to assess the library appropriately, an investor must do some work independently.
Stability, recurring income, attractive yields, and correlation benefits are all advantages of music IP.
Many people find music IP investment appealing due to increased stability, recurrent income, good relative returns, and the absence of volatility in the larger market. Interested investors have various options for getting into this exciting asset class. Still, they should consider their preferences for investment size, liquidity, growth vs. dividend yield, and active vs. passive ownership before deciding.