Why Are Investors Snapping Up Music Rights?

The music rights to Pink Floyd’s back catalogue, which includes hits like Comfortably Numb and Another Brick in the Wall, might sell for $500 million.

Apart from music companies, the bidders include private equity giant Blackstone Group and other Wall Street players.

Earlier, music companies were the main players in the market for music rights.

However, competition has increased as Wall Street now sees music rights as an interesting asset class.

Investment companies are scouting for deals to buy music rights from artists who would prefer a one-time payoff, rather than get years of royalties.

As a result, prices for music rights have skyrocketed in recent years.

Apart from Pink Floyd, popular artists like Bruce Springsteen and Bob Dylan have sold off their music rights for $500 million and $400 million respectively, sums that were unheard of in the industry a few years ago.

How Streaming Saved A Struggling Industry

After the rise of the Internet, the music industry struggled as it dealt with the rise of piracy.

Pirated songs yield no royalties for artistes and no revenues for the record labels and distribution companies.

But, with the rise of Spotify and other streaming apps that offered free packages, a wide range of choices, and cheap subscription plans, royalties began flowing in once again.

Though music piracy does exist, it has reduced significantly since these apps offer free music along with several other convenience features that make listening a smooth experience.

For instance, pirating songs would require one to visit shady sites, and download music, with the added burden of sorting it out — a streaming platform doesn’t involve these hassles.

According to Goldman Sachs, growth in global music revenues is set to grow to record highs as streaming revenues continue growing, while physical and downloaded music die out.

In addition to streaming platforms, other platforms such as TikTok, Instagram, and other short-form content platforms, allow creators to use music in their short-form content.

Each play yields royalties for the creators of the music — a significant revenue stream that wasn’t even in existence until a few years back.

With some of these reels/videos being replicated by millions world-wide, a viral 10-second video could popularise songs and artistes — increasing the possibility of earning higher royalties.

Kate Bush’s Running Up That Hill and Metallica’s Master of the Puppets became popular on streaming apps after these songs featured in Stanger Things fourth season.

In 2020, streaming revenues contributed to 62 per cent of the music industry’s global revenues.

Wall Street has taken notice, but the search for value has taken them beyond the stocks of music companies or streaming platforms.

Now, investors are looking to directly buy music rights as a quasi-fixed-income investment.

The yields for established artistes usually are expected to be in the neighbourhood of 5-10 per cent, which is a significantly higher return in a low-interest rate scenario.

Riskier, lesser-known record rights seller for higher yields of 10 to 20 per cent. Some funds like Hipgnosis Songs Fund and Lyric Capital have dedicated themselves solely to raising money to fund purchases of music rights.

The Hipgnosis Song Fund owns the rights to Shakira’s catalogue of 145 songs. Investor Bill Ackman has compared music to essential needs like ‘food and water’.

Most investors believe that the listenership is unlikely to be affected by external economic scenarios, making it an attractive asset class. Music rights are a broad term for various rights associated with the lyrics (publishing rights), and the actual recordings.

Publishing rights royalties are divided between the writer and song publisher when the lyrics are used to create a song.

On the other hand, recording rights are held by the record label companies who pay a certain sum to the artiste as a royalty.

As new social platforms like the Metaverse continue growing, the opportunities for streaming music will also grow. For investors, the predictability of streaming revenues makes these investors relatively safer as well.

Streaming Platforms Have Several Tailwinds

Streaming platforms, which were once dependent on external funding, might be on their way to profitability.

More advertising dollars are likely to shift to these platforms as targeting is much easier compared to traditional audio platforms like terrestrial radio.

For instance, someone playing a gym playlist might receive more health product recommendations in their advertisements — which is impossible with traditional channels.

Radio often gets away without paying much in revenue, unlike streaming platforms that have come under intense scrutiny.

In addition, major royalty labels have been reducing the royalties that streaming platforms must pay the labels.

In 2017, Spotify paid 79 per cent of its revenue in royalty payments, while the number dropped to 73 per cent in 2021.

Further, subscription revenue, which is high-margin, contributes to around 87 per cent of revenues. The survival and growth of streaming platforms are not a major question anymore, which is a positive sign for the music industry.

This article was first published here.