Music in the Key of C-Notes
Bruce Springsteen has reportedly sold his master recordings and music publishing rights to Sony for an estimated $550 million in what's being called the largest catalogue deal in history. (Editorial Credit: Antonio Scorza / Shutterstock.com)
In the industry’s latest blockbuster deal, pop sensation Justin Bieber has sold his 290-song publishing and recording catalogue shares to the Blackstone-backed Hygnosis Songs Capital for $200M!!!
The sale has the 28-year-old joining a growing list of artists who have recently cashed out on their catalogues. But while those folks are cashing out, you have an opportunity to cash in!
Contemporary stars, from Justin Timberlake and Shakira to legacy artists like Bob Dylan and Bruce Springsteen, have sold large stakes in their work, and for astonishing sums. Springsteen’s catalogue went to Sony for a reported $550M!
A Tempting Investment Choice
Companies such as Warner Music Group, Universal Music Group, Hipgnosis Song Fund, Round Hill Royalty Fund Ltd., Reservoir Media and Music Royalties Inc. provide direct exposure to music revenues from the recent hyper-growth in global streaming platforms by acquiring song royalties for their shareholders. Their goal is to increase share value by accumulating a diversified portfolio of cash flowing royalties in order to pay increasing dividends.
In the current market climate of low yields and interest rates, music royalties are an increasingly appealing asset. Their low correlation with economic performance and high-income potential has more investors considering their financial power.
Stability of Streaming
Digital streaming has driven the growth in global recorded music revenues after 15 years of declines caused by piracy and the decline of the physical album. At a song level, new music royalty income generally sees its greatest income 3-12 months after release. Income then declines over the next 5-10 years. At this point, the remaining “tail” of income often fluctuates, but remains relatively stable.
Higher Yield in a World of Low Interest Rates and Dividends
Music royalties often have attractive yields. In the current market environment, investors are searching for opportunities to earn something on their cash without a high risk of losing their principal. In this context, music royalties can often look like a relatively appealing asset class. As of September 2020:
Royalty Exchange reports that the average annualized return on investment for catalogs sold on its platform was greater than 12%.
Hipgnosis Songs Fund’s dividend yield is 4.3%.
Mills Music Trust’s dividend yield is 9.6%.
It’s important to remember that music royalty income is not fixed. Music royalty cash flows for a song often decline over time, and the last 12 months’ royalty income does not necessarily mean the next 12 months’ income will be similar.
Low Correlation to Economic Activity
Music spending has historically shown little correlation to broader economic activity, holding up well relative to other industries during the COVID-19 pandemic. Historically, both recorded music and music publishing data have not seen a clear correlation with broader spending activity.
Risks to Consider
Despite the promise of investing in music royalties, there are risks to consider:
Complexity
Music royalties by nature are a complicated form of intellectual property. To invest confidently, you need to understand the different types of royalties, their lengths of ownership, the structure of their cash flow, and any buy-back rights that might be built into individual royalty deals.
Pricing & Valuation
Alternatives to the stock market has become popular, so it’s important to be aware of how those factors could play into the pricing of music royalty investments. Music royalties are hot right now, so they may be unjustifiably expensive.
Interest Rates
Since one of the main draws of music royalty investing is its ability to provide consistent cash flow, it’s natural to compare these investments to bonds or REITs (for rental income). As interest rates go up and investors can earn more yield via safer assets, the spread earned on music royalties can be impacted and demand for music royalties could fall.
Counterparty
Doing the necessary legal diligence to verify the chain of title and confirm the seller owns what they claim is imperative. Some special considerations that can add complexity to a transaction include liens on the seller’s asset, bankruptcies, divorces, and estates.
Technology
From Napster and 15 years of recorded music industry declines, to smartphones and streaming that have helped the industry return to growth, technological innovation can have a material impact on music royalties, for better or worse.
Regulatory
Many music royalty rates, especially those related to the musical composition copyright, are regulated. While most of the recent royalty rate decisions have been positive for music IP rights holders, future changes to rates could have a material impact on music IP cash flows.
Inflation
Most types of music royalties do not immediately react to price inflation. Many royalty rates have a structure set for multi-year periods, and streaming services haven’t been increasing prices to the consumer, resulting in a decline in their average revenue per user and per-stream royalty rate over time. In short, a sudden increase in inflation is unlikely to be reflected, at least in the near term, in music royalty rates.
My Own Experience
You know I’m always on the lookout for investing opportunities. My three sons and I just got into the Elevate Music SPV 2 fund. They have a diverse catalog that spans pop, Latin, hip-hop and country genres, and artists include Britney Spears, Kenny Chesney, Il Divo/Celine Dion, Leona Lewis, Kane Brown, Westlife, Jason Aldean, Gloria Estefan, Brantley Gilbert, Tyler Wood, and Lindsay Eli. Our levered returns are estimated at 15.5% based on LTM revenues. We’ll take that any day!
The Bottom Line: Should You Invest in Music Royalties?
Looking ahead, music royalties present an interesting and unique investment proposition for all types of investors. Given their unique qualities, they’re certainly not for everyone, but if you are looking for an alternative way of generating income while investing in the things you enjoy, they’re worth a look.
However, you should be very educated on the minutiae of how these investments work before diving in. Music royalties are a cool and emerging space, but successful investing requires lots of time, attention, and knowledge.