Denice R. Preston
In the current environment of low yields and high-interest rates, music royalties are an asset class becoming increasingly appealing. They have a low correlation to macroeconomic performance, and their lucrative potential for income has led to an increase in investors looking to invest in the music industry.
The catalog has songs that were which were made available between the years 2001-2009, with an income-weighted mean releases year in 2009. Royalty Exchange provided three years of data on catalog revenue starting in Q4 of 2015, so we’re looking at the years between 7-9 following release (i.e., the usual “tail”) in the graph from the graph that the catalog’s cash flow fluctuates between $30,000 and $30,000 annually. Similar to how streaming is driving growth in the music industry, The catalog’s stream income increased by 33% in the 12 months before selling, which supports the stability of the cash flow of the record. Each record will have its unique features, but generally, streaming can help counter declining revenue in other formats like physical (e.g., CDs, vinyl, and CDs) sales. More stability in income gives musicians and IP investors greater confidence in this asset category.
Recurring Revenue Potential
Music royalties can be an income stream that is recurring. A variety of distributors collects revenue from music royalty, which is paid out periodically to owners of music IP rights. Regular payments are a good option for investors looking for a predictable income source that is usually located in assets like real property.
Yield in a World of Low-Interest Rates and Dividends
Music royalties are often attractive yields. In today’s economic climate, investors are looking for ways to make money on their money without the chance of losing their capital. As an example, on September 30, 2020:
In this way, investment in music royalties can generally appear as an attractive investment category. In the same time frame of 2020 information, the following scenarios are valid:
Royalty Exchange reports that the average annualized return on investment of catalogs offered through its platform was more than 12 percent.
Hipgnosis’ Songs fund’s (SONG) dividend payout is 4.3 percent.
Mills Music Trust’s (MMTRS) dividend yield is 9.6 percent.
However, it is crucial to know that royalty revenue fluctuates and is not guaranteed. As we’ve already discussed, the cash flow of music royalty for a song can decrease in time. The previous twelve months’ revenue doesn’t necessarily mean the following year’s earnings will be similar or even more significant. This dynamic will be discussed further when we review possible pitfalls to taking a risk on music IP.
Low Correlation to Economic Activity
Music spending has traditionally shown little connection to economic activity. In the State of the Music Industry report, music expenditure and the associated royalties perform very well compared to other industries in the COVID-19 epidemic. Since the beginning, the recorded music industry and music publishing data haven’t had a direct connection to spending in general. In the chart below, Goldman Sachs highlights this lack of correlation by comparing the recorded music industry’s decline of 15 years because of piracy and the subsequent rebound driven by streaming versus personal consumption expenditures (PCE.)
What Are the Main Levers Active Investors Use to Increase the Value of Music IP?
Besides the previous reasons, Investors in music IP could help increase its value. Investors who are active use three significant ways to increase the value of their investment:
3) Decreased costs and payment times of royalties. The money flow from consumers to music IP rights holders is often complicated and requires several “middlemen,” such as agencies and collection societies. The payment timings between the rights owners and collectors could last between 6 and 12 months or perhaps longer. Labels, publishers, and royalty funds, who can manage their catalog of music, will try to cut down on the cost and time interval between payments to increase the flow of cash that shareholders can access.
What Are the Potential Pitfalls to Consider When Investing in Music?
There are myriad potential risks to be aware of before investing your money in assets for music. We will narrow the risks to the ones we view as the most crucial when buying music IP that generates income. In addition, we’re not considering the risks associated with creating and developing new musicians and songwriters.
Valuation Risk
When buying a music IP asset, There is always the possibility that you will pay more than you should. As an example, as we discussed previously, the revenue from music royalties generally decreases quickly within the first few years following the release before settling down at the end of year ten and up. If cash flow last year for a music catalog that is, on average, one year old, the implied 12.5 percent yield is likely to be significantly lower in year two if the flow of cash cash floral decay course. In contrast, if you pay 8x for a catalog that is more than 15 years old and has an income history that has been consistent and steady income, that 12.5 percent yield could remain stable in the coming years.
Journalists from the music industry Cherie Hu have written her essay on Hipgnosis, which examines its average acquisition multiple about the catalog’s age. In it, she writes, “Multiple sources I spoke with were concerned that this maturity mix would struggle in the long term to generate the returns Hipgnosis is promising for investors, especially given the 13.9x multiple that the fund is paying for its acquisitions.” Catalog age is only one factor to be considered in the valuation of music IP. Others include genre, royalty type, income diversification through songs, and termination rights. Ultimately, paying a fair price is essential to reap the most lucrative returns.
Counterparty Risk
It is crucial to conduct the necessary legal diligence to confirm the title chain and verify that the seller owns the property they claim to own. A few special considerations that may complicate a transaction include a lien on the seller’s assets, such as bankruptcies, divorces, and estates.
Technology Risk
Napster revolutionized music in the early 2000s, leading to 15 years of recording industry declines in music. The growth of streaming devices and smartphones has changed the trend and has brought the drive back to its development. Technology advancement significantly influences the royalty rates for music, either way.
