Opinions expressed are solely those of the author and do not reflect the views of Rolling Stone editors or publishers.
We’ve all seen the recent headlines of one mega-catalog sale after the next. Without missing a beat, the tempo of music royalty investing has continued to accelerate into 2022. Big-name stars and iconic artists, from Sting to John Legend to Neil Diamond to Alice in Chains, are taking advantage of favorable market conditions to cash out.
Why are music royalties so popular?
According to Music Business Worldwide, an estimated $5 billion was spent on music rights acquisitions in 2021, with 2022 projected to be even bigger. Much like we’ve seen in classic cars, collectible trading cards, street art and NFTs, investors are turning more and more to assets that are non-correlated to the stock market.
So what’s driving catalog sales? The impact of streaming on the value of recent acquisitions has been exponential. In concert with harmonious market factors, such as low interest rates and favorable tax and estate planning environments, the availability of streaming data and social insights has made future earnings projections far more transparent and easier to analyze. These factors have skyrocketed the popularity of music as an asset class and have created a buzz amongst investors.
So, you want to get into the royalties game?
Captains of industry have catapulted new and innovative ideas to the forefront of today’s economy, capturing the attention of investors and entrepreneurs looking to capitalize on the hottest trends. The FOMO is real: Crypto, NFTs, cannabis and royalties are all striking a chord with not only investors, but the general public. But what if you don’t have a billion-dollar private equity fund or large family office? Can music fans and entrepreneurs without fat stacks get a piece of the action?
To get into big-name music royalties, you don’t have to be a major catalog buyer like Hipgnosis, Primary Wave, Tempo, Reservoir or my company, Vintage Amp. Getting into the royalties game is more accessible than ever. Here are a few tips and considerations to help you break down the barriers of entry in music royalties.
So, what are music royalties?
Before you dive in headfirst, what should you know in advance? Learning the intricacies of royalties can be overwhelming, so let’s break it down into soundbites.
Copyright, also known as intellectual property (IP), is the most fundamental component of each song and is broken down into two distinct parts:
• Sound recordings (masters) are copyrights related to the song’s original recording.
• Composition (publishing) are copyrights related to a song’s written lyrics or melody.
Simply put, royalties are payments derived from copyrights made to rights holders for the ability to use their IP.
For masters, rights are split into reproduction, performance and synchronization. That means anytime a song is reproduced or distributed (streaming, downloads, physical sales), performed or displayed publicly (digital or satellite radio), or there is a creation of a derivative work (song placement in a movie, television show or commercial), stakeholders get paid.
Publishing copyrights are similar with slight nuances. Rights are divided into mechanical (streaming, downloads, physical sales), performance (radio, bar, restaurant or live performance) and synchronization (a song played in a movie, television show or commercial).
Easy enough, right? Not exactly. Royalties are carved up more than a Thanksgiving turkey, but now you have a basic understanding of how royalties flow to rights holders.
How do you analyze a catalog?
So you’re ready to take the plunge? The next step is to understand how to analyze a catalog and determine its value. Here are a few core concepts you should familiarize yourself with:
• LTM: Stands for the last twelve months of revenue produced by a catalog. A multiple is applied to this number to determine its value.
• Dollar Age: This is the length of time a portfolio has generated revenue. The longer a catalog has produced consistent returns, the more valuable it is to buyers.
• Duration: Length of ownership has a massive impact on determining price — 10 year, 30 year and life of rights (LOR). For copyrights created after 1977, LOR is the artist’s life plus 70 years and provides the most significant advantage for annuitized income and resale value.
• Trend Rate: A visual representation of the trend lines (up, down or sideways) provides valuable insight into assessing future value and growth potential.
One of the biggest pitfalls new investors face when buying royalties is misreading the analysis. Don’t falsely assume the continuation of certain sources of earnings. One tip for alleviating this potential drawback is always to factor out non-repeatable anomalies, like one-time synchronization licensing, settlement and catch-up payments. The purchase price is determined by placing a multiple on LTM, so stripping out these numbers will give you a more factual basis.
Streaming your favorite song and getting a fractional payment of those royalties is much sexier than a blue-chip stock dividend. Still, music royalties aren’t the right fit for everyone. Understanding your risk tolerance, time horizon, liquidity needs and overall financial goals is critical to determining if royalties are the right fit for your portfolio. Potential illiquidity, loss of income and value erosion can be significant risk factors and a huge turnoff.
Connecting the dots between the financial markets and the music industry has been increasingly accessible. Companies like Royalty Exchange, SongVest and ANote Music provide user-friendly platforms and streamline the process for investors looking to get involved in the royalties space.
Will Rising Interest Rates and Inflation Burst the Catalog Bubble?
Interest in royalty-based investing seems to be continuing, but will the Fed and inflation cool off the good vibes? Even in a rising interest rate environment, catalog sales continue to boom in 2022. Although I don’t have a crystal ball, I don’t expect royalties markets to show signs of weakening. In my opinion and in the words of Christopher Wallace, “Sky’s the limit.”
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.