hat do Bruce Springsteen, Paul Simon, the Red Hot Chili Peppers, and Neil Young have in common? Certainly formidable song writing pedigree and a string of hits.
But more recently what has made these artists bedfellows is their financial dealings: all have sold the rights to their back catalogues for hundreds of millions.
Bruce Springsteen recently sold the rights to his music to Sony for $500 million, the Red Hot Chili Peppers sold their music for a reported $140 million in May, Paul Simon netted $250 million for his folks songs in April and Neil Young sold rights to half of his back catalogue in January.
All of these deals are part of a music rights gold rush that has swept studios and the City over the last two years. Momentum has only gathered pace over the last year as hundreds of millions has poured into top musicians’ pockets.
“It’s just kind of accelerated when I think people thought it was going to temper off earlier in the year,” says Sachin Saggar, an analyst at Stifel who covers the space.
For the first 15 years of this century, music was unloved in the world of finance: illegal downloading cratered sales and the rise of streaming platforms initially delivered only small returns.
But in the last few years, the industry has turned a corner. Streaming platforms like Spotify and Apple Music have reached a scale where revenues are meaningful and companies such as Facebook, YouTube, TikTok and even the likes of Peloton are now paying artists to use their songs. For the first time in almost two decades, the industry is seeing growth.
Investors are attracted to the space because royalty revenue is “uncorrelated”, in industry parlance.
Unlike other assets such as stocks that tend to move in tandem to things like interest rates or GDP growth, music seems to march to the beat of its own drum. As RBC analyst Christine Zhou put it: “People listen to music in the good, the bad and the ugly times.”
Another attraction is the regularity of royalty income. The shift from buying music to renting it — in the form of streaming — means investors can now buy a product that pays out a hopefully predictable sum of money each year. That’s what money men love.
Merck Mercuriadis, boss of music investment fund Hipgnosis, says: “Great proven songs become a part of the fabric of our lives and as a result have very predictable, reliable and uncorrelated revenues. This makes them investable.”
The result? Billions have flown into the music rights market over the last few years. Bob Dylan, Shakira, Stevie Knicks and The Killers have all joined the gold rush.
Saggar says: “Music has gone from something that not many people had heard of as an investable asset class five years ago to being so front and centre.”
Covid-19 has only accelerated the trend. With live touring off the agenda, music lovers around the world have spent more time streaming their favourite tracks. And increased digital consumption of everything from Netflix to video games can bring in more revenues too when songs are used in the background.
London is at the forefront of this new musical money boom, with two of the most prominent funds in the space listed here. Hipgnosis, run by former music manager Merck Mercuriadis, listed in London in 2018. Chic founder Nile Rogers, an advisor, performed at the company’s IPO ceremony. Hipgnosis has so far raised £1 billion from investors and was the buyer of Neil Young and The Red Hot Chili Peppers’ back catalogues.
The other major player is Round Hill Music, which raised over £200 million in a listing in November 2020.
The big question facing these companies is whether they are getting value for money. Shot Tower, a specialist US media investment bank that has advised on deals in the space, put it like this in a recent report: “With all the hype around music over the last few years and record high valuations, the big question is whether the premium multiples currently being paid are justified?”
Some deals see catalogues acquired at 20 times past year’s earnings. That’s double the multiples catalogues were attracting just 10 years ago.
A flood of cash into the space — partly fuelled by low interest rates and deal hungry private equity firms — and the relative lack of big, high quality catalogues has pushed up prices.
Saggar says: “You’ve got two schools of thought: one is, valuations are getting ahead of themselves; or new money is coming in and they’re seeing something that the people who’ve been investing it for years aren’t seeing.”
High valuations are based on growth forecasts that are far from guaranteed. Not all songs are equal either: multiples that may be reasonable for one catalogue could be steep when applied to another.
“If you’ve bought something for the 60s or 70s, you’ve got something like a 50 year payment track record behind that,” Saggar says. “Whereas if you buy something that was only released two years ago you’ve only got two years of payment history and you know the revenue is going to decay to a certain level.”
New songs go through a process of “decay” after they are released where listens to the songs, and therefore royalties, steadily decline. Royalties will generally settle at a stable level after about a decade but predicting where that level might be is almost impossible.
“Ultimately you’ve got less risk in the older catalogue than in the new one,” Saggar says.
Firms like Hipgnosis hope to get around this by “active” management: rather than just sitting on their catalogues and watching the cash roll in, they will actively lobby for their songs to be used in adverts, games, films — anything that will bring in cash.
While simple in theory, in practice it can be more difficult.
Saggar says: “There’s a very confusing aspect to music in that there’s lots of different types of rights that you can buy, it’s not just: ‘hey, you bought this song’.
“You can buy the master recording rights, which is basically the composition of how one song is played. You can have the copyright, which is any derivative of that song you get some sort of income from. You can have things like admin rights or neighbouring rights.
“For someone to work a catalogue for sync income very well, you need the correct type of rights as ultimately what you need is control. What you want to do as an owner of a song is be able to sign off on being able to do these opportunities.”
Transparency over who owns what rights in the industry is low, making it difficult to gauge how successful active management will be.
“Where they don’t have control, it’s not saying that it’s impossible, it’s just harder,” Saggar says. “Your destiny is not in your hands to some extent. Inevitably it’s just getting all those ducks lined up in practice can be very difficult.”
To understand the difficulties, look no further than Taylor Swift. The mega star has been steadily re-recording parts of her back catalogue that ended up in the hands of Scooter Braun, a music manager she dislikes. The effort is an attempt to undermine the value of her historic catalogue. Swift’s new recording of her album Red was one of the biggest albums of this year.
Ultimately, none of this looks likely to derail finance’s new love affair with music. Money managers like what they are hearing.
As M&G, the FTSE 100 investment manager, put it in a recent note: “Music is always being consumed, it surrounds us wherever we go and technological advances are helping to change the way we consume music.
“Music royalties is steadily gaining recognition as an investable market with long-term growth prospects.”
In other words, it’s a hit.