CMU Trends Labels & Publishers Management & Funding

Trends: Value of music – the story so far

By | Published on Friday 30 June 2017

Rarely a week goes by in the music business news these days without at least one catalogue acquisition, a deal which sees the ownership or control of a set of music rights move from one entity to another.

Often it’s a major player in the music rights business growing its market share by acquiring the catalogue of an independent. But at the same time, in recent years we’ve seen a number of new players start bidding as well, often led by music industry veterans with the backing of a financial institution, usually private equity or a pension fund.

Most of the deals involving these kinds of professional investors centre on relatively large catalogues of songs or recordings. But could individual artists and songwriters be doing deals directly with these investors too?

You could argue that label and publishing deals are basically that, the sale of existing and/or future copyrights in return for upfront cash and investment. But could artists be doing deals directly with professional investors rather than music companies? And if so, what would those deals look like?

Would the artist be selling their copyrights outright in perpetuity, or could they just sell the rights to certain revenue streams for a certain period of time – so basically selling rights in their royalties rather than their works? And if so, does that mean artists could be doing deals with investors around royalties they earn from copyrights they previously assigned to a label or publisher?

New market places are now emerging online where artists and songwriters can do just that. Those deals may be different in structure to the big catalogue acquisitions being led by private equity and pension funds, though all these arrangements are seeking to exploit the value of music rights. Which poses one more question: how do you even value a music copyright?

As Music 4.5 puts the spotlight on ‘The Value Of Music’, we spoke to some of the people and companies participating in the event to get an overview of the business of selling rights and royalties – past, present and future.

BUYING CATALOGUES
“It is usually ‘traditional’ label and publishing execs backed by professional investors”, Steve Lewis says, when asked who – other than traditional record labels and music publishers – are bidding for large catalogues of music rights.

In the 2000s, he was that music industry veteran building a catalogue with private equity money through his company Stage Three Music, which he subsequently sold to BMG in 2010. At the time, the new BMG also had a private equity backer funding its many catalogue acquisitions.

To date, Lewis adds, there have mainly been two sets of professional investors backing music right acquisitions. Private equity funds like the one he worked with, “or pension funds, such as ABP who funded Imagem and the Ontario Teachers Pension Plan who fund Ole”. Though, he notes, “some high net worth and ultra high net worth individuals and family offices [who work for such individuals] are now also entering the market”.

Charles Johnson of SunTrust Robinson Humphrey, a bank which provides debt capital to entities acquiring and dealing in music rights, agrees that different kinds of investors may now be interested in buying music catalogues. “We are seeing traditional private equity firms as well as longer term institutional investors and family offices showing an interest”, he notes.

Of course, for these kinds of investors, there is little interest in taking a gamble on the next big thing, it’s all about investing in and earning from songs and recordings that are already generating revenue.

“They are mostly interested in music rights with a proven income history and where the copyrights are available for the long term”, Lewis confirms, though deals can also be done around specific revenue streams as well as full copyright ownership: “Some companies are also buying the writer’s share of publishing – as opposed to the copyrights themselves – and some are buying streaming royalty income only from labels and artists”.

In terms of what return those investors hope to see from the rights or royalties they acquire, well that obviously depends on who is investing, though you’d generally expect private equity funds and pension funds to have different ambitions. “Pension funds usually seek an annual yield”, Lewis says. “In a low interest environment, such as we have now, an 8% yield will look attractive. Whereas private equity funds seek capital growth and aim to sell for two and half times their investment after three to five years”.

But let’s get back to that crucial question. How does a professional investor work out what a set of music rights is worth? Alan Wallis specialises in valuing entertainment content and intellectual property for EY. “Value lies in the future”, he explains. “So go back to basic valuation theory and investigate the asset and how it earns income and establish net present value of those future income streams”.

Lewis concurs: “It’s about analysing historical income and cost of capital, and making a subjective judgment as to whether the rights have a long term future and growth potential – ie can the catalogue be better or more profitably exploited, maybe by eliminating overheads”.

Does the approach to valuing catalogue vary depending on whether you are buying an individual writer or artist’s copyrights versus a whole catalogue of songs or recordings? Wallis: “The approach and basis are the same, but perhaps the perceived risk is different. Simply because of the smaller catalogue size and the probable dependence on a few key compositions. And I am aware that some financial lenders also wrestle with notion of reputational risk with individual artists”.

And what about the buyer? Does valuing catalogues when a traditional label or publisher is buying differ to when it’s a professional investor? “Yes”, Wallis confirms. “Labels and publishers – trade buyers if you like – will have the infrastructure, and can absorb the works they acquire into their existing catalogues, saving costs and overheads. A financial buyer will need that support”.

The music rights industry has evolved a lot over the years of course, and that has had an impact on how music rights are valued. The more obvious change is the shift in revenue streams – from CD to download to streaming. Though the changing nature of label and publishing deals also has an impact.

In publishing, in particular, deals have changed over the years so that writers rarely assign their songs to publishers for life of copyright anymore – indeed modern publishing deals give the publisher control of a writer’s songs for a much shorter time period. And more established writers often grant the publisher administration rights rather than actually assigning the copyright, which might be mere semantics in practical terms, but can also have an impact on what controls the publisher actually enjoys.

All of which is very relevant if you come to acquire that publisher’s assets. “You need to look at cashflows and recognise the period over which the rights are assigned or the terms of admin deal”, Wallis says, agreeing that changes in publishing deal conventions can make the valuing of music catalogues more complex. “This does not mean, necessarily, that there is no value beyond the admin period for instance”, he adds. “But there is a great risk of termination and the loss of that income”.

And what about the shift to streaming? Is that changing the way you value music rights too? “Well, it has certainly created more royalty statements!” Wallis observes. “The owners of catalogues that earn significant digital income will over time build up a great deal of knowledge” he agrees, which in theory should inform the valuation process. “My issue at present is do we really know, especially in publishing, what the move to streaming services and YouTube means for income growth in the longer term?”

Although we have talked about songs and recordings here – publishing and master rights – when it comes to professional investors, it has always seemed that there is more interest in buying into the former rather than the latter. Wallis concurs.

“Traditionally they preferred publishing, that’s right”, he says. “Because there are more sources of income and the copyright is longer. But I’ve been advocating for a decade now that catalogues of masters are worth investigating”.

Johnson at SunTrust agrees. “We have seen private equity firms, institutional investors and family offices all show an interest in acquiring publishing assets, though masters less so. That said, while we have not seen a great deal of interest in labels or masters from these investors to date, we do think that will change as streaming becomes more popular”.

NEW MARKET PLACES
While in the past professional investors were mainly in the business of acquiring whole catalogues of rights – meaning that, with a few exceptions, for individual artists and songwriters only conventional label and publishing deals were on the table – we are now starting to see a marketplace for smaller deals between rights owners and investors, which would include artists and songwriters selling both their rights and royalty streams.

Again, these investors are mainly interested in buying a slice of existing, proven works – so they are not necessarily replacing labels and publishers when it comes to new talent – but for artists and writers with something of a track record there are definitely new opportunities available. And – in the streaming age – that might include more grass roots artists who have built a fanbase organically and who can use streaming data to demonstrate the future financial potential of their output.

Two interesting companies facilitating these kinds of deals are Royalty Exchange and LIVAMP, both of which are presenting at the Music 4.5 event on ‘The Value Of Music’. The former is specifically focused on deals around copyrights and royalties, while on LIVAMP artists may be offering a slice of royalties or other income in return for investment.

To find out more about these two businesses, we spoke to Royalty Exchange co-founder Gary Young and LIVAMP Business Development exec Elizabeth Zavoyskiy.

TALKING TO GARY YOUNG AT ROYALTY EXCHANGE

CC: What was Royalty Exchange set up to do?
GY: Royalty Exchange was set up to be the online marketplace for buying and selling royalties. We’re the place where rightsholders can connect with investors who are interested in buying all or part of their royalties. Royalties are one of the few assets in the world that don’t have a transparent market for buying and selling them. Open, transparent and liquid markets create more value for buyers and sellers and allow people to get a fair deal. That’s our mission.

CC: Who are the rights owners who are selling? What are they selling?
GY: We’ve worked with songwriters, producers, artists, bands, publishers and record labels. So it runs the whole gamut.

When it comes to what those folks are selling, each auction is a little different. For example, some songwriters will come to us to sell only their public performance royalties from ASCAP. Others will sell their producer royalties paid by a major record label. And some want to sell their entire catalogue and copyrights.

In many deals, we’re even more flexible than that: rightsholders can choose to sell a portion of their royalties or even royalties from a single song. Unlike traditional deals, the rightsholders we work with don’t have to commit to an all-or-nothing deal, and they do not need to control their copyrights outright.

CC: Who are the buyers? How do the buyers value the rights they invest in?
GY: The buyers on our site are music fans, private investors and institutional investors. Generally, the buyers look at the music in the catalogue, then they examine the financials and decide the price they’re willing to pay.

Unsurprisingly, they value iconic songs or catalogues with a long track record of consistent royalties the most. When they evaluate each deal, the buyers want to see detailed financial information, a breakdown of the songs in the catalogue, and examples of the works.

CC: Despite the record industry’s high profile problems over the last fifteen years, do you think more people than ever are interested in investing into music rights?
GY: Yes! The investors on our site are interested in music royalties for two main reasons. First, catalogues can provide opportunities for income that isn’t available in the markets today. And second, music catalogues are uncorrelated assets, which means that the investment performance isn’t tied to the broad stock market and real estate market. Plus, collecting royalties from a great song is much more interesting than other income producing assets.

CC: Are the kinds of investors using your service only really interested in buying into proven rights – ie they are not replacing labels and publishers when it comes to brand new talent?
GY: Yes. They are only interested in buying into proven rights. They don’t plan on replacing labels or publishers when it comes to developing new talent. Labels and publishers are very good at that.

CC: Though, if artist can organically grow their businesses online, do you think market places like yours could become an alternative option to labels and publishers for new artists?
GY: Absolutely. We’re already starting to see it. Some of the rightsholders we work with come to us because they want to finance their next project independently and don’t want to sign a record deal or publishing deal. We expect this trend will continue.

TALKING TO LIZ ZAVOYSKIY AT LIVAMP

CC: What was LIVAMP set up to do?
LZ: We launched LIVAMP’s artist marketplace in late 2015 because we saw a clear gap in the way the creative community financed itself. We built out a marketplace connecting investors with musicians, and gave that community the tools to understand music rights and make the industry less of a black box than it’s traditionally been seen as.

CC: Who is investing?
LZ: When the platform first launched, high net worth individuals looking for new, non-traditional investment opportunities were the primary investors. Over time, we’ve begun co-investing in deals and earlier this year joined forces with Magna Entertainment, a large NYC-based investment firm, to commit $100m to this space over the next couple of years.

CC: How do investors value the artists they are supporting? What data do you provide to help them make investment decisions?
LZ: Investors, including ourselves, generally take a more analytical approach to investing. Our job is to make the music industry more tangible than it’s even been before to investors. We look at past history of traction and revenue, the team involved with the artist and any future near-term milestones that are contracted, ie touring, branded deals, sync placements, etc. To aid investors in their decision, we provide data on past revenue earnings, social growth, the team in place and any other markers that move the needle.

CC: Does streaming data make it easier to assess the potential value of investments of this kind?
LZ: Definitely, streaming data provides us with an understanding of an artist’s fanbase, traction for how singles and albums are performing, territories where the artist is most popular, and essentially an arsenal of key points for valuing an investment in the potential future upside of an artist’s career.

CC: How does your approach compare to crowd-sourcing platforms like PledgeMusic and Kickstarter?
LZ: I wouldn’t say that our approach is comparable to crowd-sourcing platforms like PledgeMusic and Kickstarter. PledgeMusic is effectively a merchandising and direct-to-fan platform for artists – Magna is also an investor in Pledge. Kickstarter differentiates in that it’s crowdfunding for more artistic projects and is less commercial than the investment deals we’re interested in. All three can certainly co-exist depending on what stage of development an artist is in. For example, some of the artists we work with use PledgeMusic as a revenue driver to create more value for investors.

CC: Do you see artists raising money this way as an alternative to a traditional label or publishing deal?
LZ: We see our method of investing as a complement rather than an alternative to traditional label/publishing deals. Labels provide one of things we look for when investing, and that’s making sure there’s an experienced team providing the resources and time to ensure the growth of an artist’s career as well as our investment. Our preference, as well as the preference of people who have invested through the platform, has actually always been to partner with labels and invest in their rosters across the board.

For more information about the Music 4.5 event ‘The Value Of Music’ taking place on 6 Jul in London click here



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