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Beginner's Guide to Investing in Music Royalties

Music Royalty Investments are Everywhere

April 25, 2024
Beginner's Guide to Investing in Music Royalties

If you have not paid attention to the news, there’s been an outpouring of investments in music royalties. Larger companies are moving into the music royalty space. Recently, Justin Timberlake sold the rights to his song catalog to Hipgnosis Songs Capital in a deal worth $100 million. Bruce Springsteen sold his music rights for over $500 million to Sony Music Group. And companies like Kobalt and Primary Wave are also acquiring catalogs.

Why is that?

What does the current music market look like?

Source: IFPI Global Music Report

Overall, music royalties took a dip in the mid-2000s. Spotify initially opened its doors in 2008, but didn’t launch in markets like the United States until 2011. However, it wasn’t until 2015 when streaming royalties — along with a global rebound in the overall music market — really took off.

Acceleration of streaming continues to increase with time. Streaming represents 65% of the global revenue share and there is a 21.9% growth in paid streaming services. It’s not just that streaming is growing; streaming is adding to the pie year over year.

How big can streaming get?

Source: IFPI Global Music Report

When we look at Goldman Sachs: Record Industry Annual Revenue Forecast, streaming revenue represents $21 billion. And Goldman Sachs is projecting it to be $52 billion by 2030, representing a steady increase in growth — flattening off to around 6% year over year growth.

Why is this important?

If we look at music royalties as an alternative investment, they tend to have a higher yield than traditional treasuries. At the time of this writing, the 10 Year treasury Rate is approx. 3.03%. Music royalty investments are traditionally overlooked because most investors didn’t have access to deal flow. The opportunity to purchase music royalties simply didn’t exist for most investors.

As an alternative investment class, music royalties are not correlated to other asset classes. Royalties continue to be generated, collected, and paid out regardless of macro-economic conditions. Even while inflation rises or the economy takes a hit, we still listen to music. And music listening generates royalties.

People are finally starting to take notice and investing massive dollar amounts in the music royalty marketplace. For example, Hipgnosis has spent $1 billion acquiring music catalogs.

How are music royalties generated?

Source: CD Baby

There are several recipients of music royalties, including the songwriter (which can often be the recording artist). The songwriter often writes a song and partners with a publisher to publish or admin the songwriter’s catalog. The record label is involved because they release the recorded music of the song to the general public and monetize it on streaming services, paid download services, and other channels. And then there is the artist who performs the song on the master recording.

All four of these recipients represent buckets we can package and sell on SongVest.

Music royalties can come from a variety of different sources. There are:

  • Performance royalties (e.g. radio broadcast)
  • Mechanical royalties (earned through the reproduction of copyrighted works in digital and physical formats)
  • Print (e.g. sheet music)
  • Sync Licensing (e.g. when a song is used in film or tv)
  • Non-interactive Digital Performance (e.g. SiriusXM)

Different organizations can pay these royalties; and these royalties can be packaged and sold.

What are SongShares?

A SongShare is a Regulation A+ SEC Qualified Offering which legally allows SongVest to fractionalize music royalties into shares you can purchase. A SongShare falls along the same lines of other companies fractionalizing other asset classes like fine art or real estate. Royalty payments are made quarterly for any earned royalties. SongVest aggregates all of the royalties per quarter, reconciles them, and pays them out via ACH transactions directly to the investor’s bank account.

What is the security?

SongVest securitizes the income from the contract between the seller and SongVest. The investor’s right is to receive income from the underlying contract. The term of the contract is normally life of copyright, seventy years after the death of the last author. SongVest monetizes the royalties that are being paid through that contract.

This issue of securities has been registered with the SEC and was designated qualified for sale to investors. These are royalty revenue contract income participation memberships, and are not equity participation securities per se. You will own a share in revenue stream from royalties contracts; these are not shares in SongVest as an enterprise.

What about liquidity?

SongVest is launching a secondary market where SongShares can be openly traded. This allows all SongShare holders to have a platform to trade their SongShares.

How do SongShares work?

There are several steps to launching a SongShare with SongVest.

  1. Royalty Agreement: SongVest performs an analysis on the royalty streams for the song or the catalog. SongVest generally reviews the past three years of data and presents the rights holder with a valuation range. Once the rights holder decides what they want to sell their catalog for, SongVest can go straight to purchase or offer a VIP auction. A royalty agreement is signed.
  2. VIP Auction: Investors bid on SongShare units via SongVest’s VIP Auction to set the price of the units for purchase. All of the available shares are laid out at a starting price and the market decides the best price. For example, when all of the shares are allocated at the initial price, the price of the SongShare can move to a higher priced tier, which moves the initial shares out. Investors then have to bid at the next higher priced level.
  3. SEC Qualification: After the auction, SongVest submits the final bid price to the SEC for qualification.
  4. SongShares Sale: VIP Auction bidders have the opportunity to purchase their reserved number of SongShares before the general public.
  5. Investor Payout: Once the SongShare is qualified and the SongShares have been purchased, they will show up in the investor’s SongVest dashboard. SongVest handles the Letter of Direction and assignment from royalty payers. SongVest collects payouts and distributes to investors quarterly.

Where does SongVest get deals?

Historically, it is not easy for investors to participate in royalty streams from rights holders. How do deals come to SongVest? SongVest’s CEO, Sean Peace, is a music royalty vet and SongVest has nurtured a deep network of artists, managers, and music industry connections who trust SongVest to fairly value their rights and take their rights to market.

If a rights holder is interested in launching a SongShare, how does SongVest evaluate an existing catalog?

Evaluating Catalog

What are some questions SongVest asks when evaluating a catalog? SongVest generally reviews the following aspects:

  • What rights are being sold? Type of rights often include writer’s share, publishing, master, et al. SongVest still offers catalogs via a normal auction where investors purchase 100% of that asset. In this case, SongVest isn’t splitting the asset up into a security at all. The first question is: As an investor, what right am I buying?
  • What is the specific type of income? An investor might only be buying the performance rights, writer’s share, mechanicals, or others. For example, it’s possible investors are buying the writer’s share and only one of these types of income.
  • Who is paying the income? This can be a distributor, a performance rights organization, etc.
  • What is the term of the contract? Usually, everything we sell on SongVest is life of copyright. But shorter term assets are possible.
  • What are the last 12 months of royalty payments?
  • What does the trend look like? Are royalties going up, down, sideways?

Are the royalty stats accurate?

All of the royalty income is provided by the royalty payor, the organization paying the royalties. SongVest gets the detailed data and we get to see — by song — the specific details of all royalties paid out by that organization. SongVest performs a deep review of the song details to determine macro trends within the catalog.

Public streaming data is also cross-referenced via Chartmetric, a data platform that provides comprehensive streaming data for music industry professionals. Chartmetric provides detailed data for each song, down to the number of spins.

Pricing a Catalog

Catalogs are generally priced via a multiple, a metric used to price music royalties and catalog assets. A multiple simply means reviewing the last twelve months of data and assigning a multiple to it. The result is the valuation of the asset.

For example, if the royalties of an asset over the last twelve months are $10,000 and the multiple is 10x, then the valuation is $100,000. The multiple can range from the low end of 5x to a high end over 20x, and varies depending on the type of royalty income and age of the catalog.

Large investors like Hipgnosis, Sony, or Primary Wave are buying catalogs at a higher multiple — generally 12–20x. Investors of this size are generally interested in acquiring large, high-profile catalogs from legacy artists.

There is no guarantee of any future performance or result. The data herein presented is for informative purposes only and does not constitute an indication of any future performance or result.

Conclusion

Music royalties provide investors access to a growing, alternative asset class and they provide investors with a long-term royalty stream — normally life of copyright. Typical multiples on music royalties range from 5x to 20x.

Now may be a good time to invest at SongVest because our current multiples are much lower than what the larger investment funds are paying for the same type of asset. Where the larger investment firms are often paying a 12x–20x multiple on their catalogs, SongVest investors can access the same type of asset class for somewhere between 6x–10x.

We are always happy to help rights holders, artists, fans, and investors understand the marketplace. If you have any questions, please visit SongVest.com.

If you are interested in bidding on music royalty auctions, please create your free account at SongVest.com.

If you are a rights holder or an artist and would like your music royalties evaluated, please request a free evaluation here.

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