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Music catalogs do huge business. Are they overrated?




In the 2006 book Northern Songs: The True Story of the Beatles Song Publishing Empire, journalist Brian Southall has captured a music industry mantra: For songwriters and publishers, the five most important words are always the same, never give up to copyright.

For generations of popular musicians who have stuck to this ethos, the strategy is paying off. Song catalogs from the baby boomer era and beyond are fetching huge sums for publishers, private equity firms and others looking to capitalize on the music industry’s recovery.

Bruce Springsteen struck a deal with Sony Music Entertainment in December to sell his master recordings and songs for $500 million. Warner Chappell Music earlier this month bought David Bowies’ songwriting catalog for $250 million. A variety of rights and assets from artists such as ZZ Top, Tina Turner and Paul Simon have all been sold in the past year.

Music Business Worldwide Trade Publication estimated that more than $5 billion changed hands through music rights acquisitions last year, including releasing assets and recordings, with more to come in 2022. The buyers would surround Phil Collins.

Music assets are selling at unusually high valuations. Over the past 25 years, songwriting catalogs have typically sold for around eight to 12 times publishers’ net share, or the amount of revenue generated from songs less royalties paid to performers and songwriters. Today, valuations are 25 to 30 times publishers’ share, according to industry experts and executives.

This has led some insiders to suggest that investors are paying too much.

Average earnings don’t increase by multiples over a five-year period, said music publishing veteran Matt Pincus. So, if the price is rational, they are excellent investments, because they are quite stable. But theres an upper limit on the price.

The sector attracts some of the biggest players in finance. Entertainment investment veteran Sherrese Clarke Soares launched Newark, N.J.-based HarbourView Equity Partners in October to buy music rights with $1 billion backing from Apollo Global Management. . This month, All of Me singer John Legend sold his songs to private equity giant KKR and music company BMG for an undisclosed sum.

It’s been fast and furious, with big money chasing a limited number of legacy catalogs, said Los Angeles-based music attorney Bill Hochberg, who represents the estate of Curtis Mayfield. And now, with John Legend, it’s not just legacy, but more recent stuff. There’s a lot of money out there, and it’s an asset class that’s pretty hot with the Wall Street crowd and the private equity money.

The idea of ​​music catalogs as big-ticket investments isn’t new. Michael Jackson paid $47.5 million in 1985 for ATV Music, home to Beatles classics including Help and Yesterday, then merged it with Sony Music Publishing. In 2016, Sony Corp. paid $750 million for Jackson Estates’ stake in Sony/ATV.

Songwriting catalogs are stable assets that generate consistent revenue through radio play, record sales, streaming, and placement in movies, TV shows, and commercials. These are safe bets for institutional investors like pension funds to put their money in, especially when interest rates are low and bonds aren’t paying attractive returns.

But why are investors willing to spend so much on music rights? The meteoric growth of the recorded music industry, thanks to streaming services like Spotify and Apple Music, has once again made music catalogs popular. Total consumption of albums in the United States increased by 11% last year, according to an annual industry report by MRC and Billboard.

Additionally, older music is becoming a bigger part of Americans’ streaming diet. Catalog music accounted for 70% of album consumption in 2021, down from 65% in 2020. Consumption of current tracks fell 4% in 2021, while catalog listening jumped 19%. The report attributes a mild nostalgia to old favorites during the COVID-19 pandemic, amplified by the proliferation of music on TikTok and home fitness platforms like Peloton.

The growth of the NFT market and the potential use of music in the metaverse has also fueled investor enthusiasm, said Bill Werde, director of the Bandier music business program at the University of Washington’s Newhouse School of Public Communications. Syracuse.

You can look at the numbers and see two key data points very quickly, said Werde, who was formerly Billboard’s editorial director. One is that data continuously increases, increases. And second, as streaming data grows and grows, catalogs become an increasingly large percentage of that viewing. … It doesn’t take a genius to say, Well, we should probably own the catalog.

Timing is also a factor. Some of the artists who now sell their catalogs were part of the generation of songwriters-musicians who began claiming copyrights to their own songs. This pop and rock revolution came after the days of Manhattans Tin Pan Alley and the Brill Building’s songwriter, when performers were less likely to write and own their gear. Between their 70s and 80s, these songwriters-artists are looking for new guardians for their work. In a high-profile example, 80-year-old Bob Dylan struck a deal in December 2020 to sell his 600-song catalog to Universal Music Publishing Group for an estimated $300 million.

The booming price tags reflect a trend happening in the entertainment industry, including in Hollywood, where production companies launched by Reese Witherspoon, LeBron James, Will Smith and the Russo Brothers are doing astronomical business. Media companies have signed nine-figure production deals for creatives such as Shonda Rhimes, Ryan Murphy and JJ Abrams to fuel their video streaming ambitions.

While the prices for some deals have shocked analysts, these may be more rational than those occurring in music, according to Pincus, who sold his Songs Music Publishing at Kobalt Capital in 2017. At least TV showrunners can increase in value when they create new hits.

On a catalog of previously released songs, you already know what the hits are, said Pincus, who now runs an investment vehicle called Music. The only thing that moves revenue is the broader economics of the industry. It may be more rational to invest in successful people than to buy existing successes for very large multiples of their historical earnings.

Copyright holders can increase the value of musical assets by creating derivative works, such as Broadway musicals, coffee table books, biopics and documentaries, which have proven popular on video services streaming like Netflix. universal music, Warner Music and BMG, for example, have been active in making music-related films.

Stéphane Hubert, who heads mergers and acquisitions for BMG in Los Angeles, says there are opportunities to introduce these vintage artists to young listeners and people outside of the US and Britain. Country music and American rock artists have plenty of room to cross paths internationally, he said.

BMG and KKR acquired the music interests of ZZ Tops last month, following recent deals for BMG to buy a bundle of rights held by Tina Turner and recordings by Mtley Cre. Asset manager Pimco has has teamed up with Bertelsmann-owned BMG to join the catalog frenzy, according to people familiar with the matter.

When we acquire ZZ Top, we’re not just acquiring a treasure chest that’s going to earn us a return every year, Hubert said. We were looking for a catalog that we can continue to work on with ZZ Top management to bring it into the future, to introduce it to new demographics and new formats.

But there are limits to how much copyright holders can raise revenue from older music, Pincus said. Mechanical royalties, one of the most important sources of revenue for publishers, are set by the US government through compulsory licensing. ASCAP and BMI, the largest US performing rights organizations (which collect publishing royalties from radio and other sources), are governed by consent decrees.

The problem is that in music publishing, songwriting copyrights are 66% regulated almost everywhere in the world, which means the economy is essentially fixed, Pincus said. Your ability to influence the economics of income from the assets you purchase is therefore limited.

Placement rates in movies, TV shows and commercials can be negotiated. A viral video on social media thinks the man who filmed himself skateboarding and drinking cranberry juice at Fleetwood Macs Dreams on TikTok may lead to a viewing boom.

But few artists have a repertoire that can support a successful musical, and rights are often shared by multiple parties, making it difficult for everyone to agree and limiting potential benefits for investors.

Nonetheless, Hubert said such offerings have become more attractive as legacy acts and current artists build into brands.

If you had asked me five years ago, I would have said that buying music assets that are passive income streams isn’t very attractive from an investment perspective, Hubert said. As a buyer, if you can work with the artist, you can still make a profit.

The profitability of mega-deals depends on how quickly the music industry grows.

Goldman Sachs predicted last year that the number of music streaming subscribers worldwide would reach 1.28 billion by 2030, up from 443 million in 2020. This will depend on the growth of streaming in Africa, the Middle East and other emerging markets as the United States matures.

But while the music industry is booming right now, Werde said it’s not a bubble.

If I can count on one thing, looking at the history of the music industry, it’s that you can always count on people saying people are paying too much to release assets, Werde said. And usually that’s not the case.




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