The boom in the music rights market continued in 2023. In January of the new year, Primary Wave announced that it had acquired all the recorded music rights and income streams from the Atlantic years of the British rock band YES, as well as the music rights of the two former members of the US rock band, The Doors, Robby Krieger and Ray Manzarek.[1] Shortly afterwards, it was announced that Justin Bieber had sold his entire music publishing copyrights (including the writer’s share), master rights and neighbouring rights for an estimated US $200 million to the private Hipgnosis Songs Capital Fund, backed by Blackstone.[2]
This underlines the relevance of the series “Music as an Investment”, which aims to examine the current boom in the market for music rights and to find an explanatory approach to it.
Music as an Investment – part 7: An Explanation
Part 1 of the series looked at the rights deals of the three music majors Universal Music Group, Sony Music Entertainment and Warner Music Group, in which large amounts of money were spent on publishing and master rights. For example, Sony Music Group has paid US $911 million for the acquisition of music rights in the ten months to March 2022, including US $550 million for the publishing and master rights of Bruce Springsteen. However, Universal Music Group and Warner Music Group have also invested hundreds of millions of US dollars in music rights in recent years. The majors entered in bidding wars to buy the most lucrative rights catalogues and thus drive up their prices.
A typology of music rights exploiter
In the meantime, however, not only the traditional music content exploiters are getting involved, but also large investment funds. Warner Music Group is getting financial help from Influence Media Partners, which is a subsidiary of BlackRock, an investment company that manages several trillion US dollars in investor assets. Another investment giant, the Blackstone Group, is backing Hipgnosis by taking a stake in Hipgnosis Song Management and jointly launching the US $1.0 billion Hipgnosis Songs Capital fund. Hipgnosis, which is analysed in more detail in part 5, represents a new form of music rights exploitation company that views song catalogues as an asset class and speculative object to generate returns of investment for their clients. The rights exploiter Round Hill (part 4), which was founded by former hedge fund manager Josh Gruss in 2010, operates in a similar way. Round Hill has set up several music royalty funds in which investors can invest their capital. For this purpose, not only the rights of individual artists have been acquired, but also entire music publishers, such as Carlin America in 2017.
Other players in the music rights market also operate a business model by acquiring music publishers and music labels. BMG Rights Management, which was described in detail in part 2 of the series, takes a comparatively traditional approach. After BMG had sold its huge music publishing company in 2007 and its label conglomerate a year later and effectively had exited the music market, it made a comeback in 2009 with the help of the US investment company Kohlberg Kravis Roberts & Co (KKR). With fresh capital, numerous music publishers and labels were bought up in the following years, making BMG Rights Management one of the largest independent music rights exploiters. Primary Wave (part 3) and Reservoir Media Management (part 6), underwent a similar transformation from a music publisher to a music rights exploiter, buying up not only publishing catalogues but also labels.
Reservoir was able to afford the investments not least because of its IPO in 2021, which was made possible by a special purpose acquisition company (SPAC). SPACs are a new form of public companies that are founded for the sole purpose of buying up other companies or taking them public. In recent years, SPACs have experienced a boom and have also found their way into the music industry. However, the SPACs boom just seems to be coming to an end, due to regulatory and tax requirements, but also due to a poor stock market environment caused by inflation.
The high interest rates caused by inflation are also a problem for the mostly leveraged music investment funds. The financing costs of the Hipgnosis Songs Fund, for example, account for around 10 per cent of total costs, which has already led to a debt restructuring to reduce credit rates. In addition, no new music catalogues have been acquired in 2022 (part 5). Round Hill is also struggling with rising financing costs and used the IPO of the Round Hill Music Royalty Fund to pay out investors in the Music Royalty Fund I (part 4).
This reveals another aspect of the new music investment vehicles. Three of the companies highlighted have recently gone public – Hipgnosis Songs Fund, Round Hill Music Royalty Fund and Reservoir Media Management. This suggests that there are enough investors who see music rights as a lucrative investment. However, there are differences, which can be illustrated in the following typology (fig. 1).
Figure 1: Typology of music rights exploiters
Especially for those companies that have been active in the music industry for decades, which primarily include the music majors but also BMG Rights Management, the label and publishing work is in the foreground. This means that they sign new performers for their labels and composers and songwriters for their publishers. In return, the artists get advances and royalty shares to participate in the success of the exploitation of their music. New players such as Primary Wave and Reservoir also operate this traditional business model and sign new artists despite massive catalogue purchases. Both companies, however, have transformed into music rights exploiters through their aggressive expansion policies.
A more detailed analysis highlights that, unlike traditional music publishers, Primary Wave and Reservoir view music rights as an asset and as an investment. Primary Wave is collaborating with the investment company Oaktree Capital Management as well as Brookfield Asset Management, which provide the necessary funding for the acquisition of the music catalogues (part 3). Reservoir has raised capital on the stock market to grow further and merged with a Special Purpose Acquisition Company (SPAC) to go public.
This contrasts with the Hipgnosis Songs Fund and Round Hill, which have clearly positioned themselves as investment funds for music rights and only marginally, if at all, do label and publishing work. They see their main task in exploiting the acquired music catalogues commercially. Music thus becomes an investment and speculative commodity that is supposed to yield corresponding returns for investors.
The role of investment companies in the music rights business
It is therefore anything but surprising that the world’s largest investment companies are involved in the music rights market because they can provide the necessary funds. The investment giant BlackRock, which manages assets worth around US $10 trillion,[3] is supporting Warner Music Group to buy lucrative music catalogues with the help of its music and media platform Influence Media Partners.[4] BMG Rights Management owes its foundation in 2009 in part to the investment company Kohlberg Kravis & Roberts (KKR),[5] which has since dissolved its partnership with BMG but has now re-entered as a cooperation partner with fresh capital. Hipgnosis also receives support from an investment company. US investment house Blackstone bought a stake in Hipgnosis Song Management Ltd (HSM), which acts as an investment advisory board for the listed Hipgnosis Songs Fund. For this purpose, the private Hipgnosis Songs Capital (HSC) fund was established, into which Blackstone has contributed around US $1 billion to buy up song rights. Finally, there is Oaktree Capital Management[6] and Brookfield Asset Management[7], who are funding Primary Wave to acquire music rights.
The involvement of the world’s leading investment companies in the music rights market provides a first explanation of why the music rights business is currently booming. The music investment companies all emerged in times of low interest rates and cheap money was flowing into less risky investments with above-average returns. Investing in music rights seems to meet these requirements. Especially hit songs that have been known and loved for years and decades can be licensed in many ways for use in movies, TV, advertising and games. Radio airplay and other forms of music use ensure that additional income streams are generated by collecting societies. The music streaming economy also plays an important role to improve the income situation of rights holders. Popular and frequently requested songs therefore ensure relatively constant income streams and thus fulfil investors’ return expectations.
This has led to a run on particularly attractive music catalogues in recent years, for which new players such as Hipgnosis, Round Hill and Reservoir compete with the music majors. The latter have greatly benefited from the music streaming boom and can now throw themselves into the takeover battles with vast amounts of money, which has once again driven up the prices for the music catalogues. Of course, the artists who sell their rights also play a role. Especially the superstars had to accept massive income losses due to the COVID-19-related restrictions in the live music business. They recall other assets of their musical career, which they now use to maintain their luxurious standard of living: The rights to their musical works and their recordings. The motives for selling music rights may vary from artist to artist, but what they all have in common is that they recognise the value of the music rights and consequently transform them into money.
At this point it must be made clear that it is only possible to sell music rights under the US Digital Copyright Millennium Act. In Continental Europe, the direct sale of music rights is not allowed, but it is possible to license the rights exclusively. When we talk about selling and buying music rights, we refer primarily to the USA.
Which rights are purchased?
What rights are being purchased? Basically, a distinction must be made between publishing rights and master rights. The traditional way to gain control over these rights was to buy up music publishers and labels. This approach can also be found in the current wave of rights acquisitions such as Reservoir’s purchase of Chrysalis Records or the acquisition of Carlin America by Round Hill. In this way, a large number of music rights can be acquired alt at once, although, and this is the disadvantage, the purchase price can be very high. In addition, the investor takes over the activities of the acquired company and acts like a classical music publisher or music label.
Therefore, the new players in the music rights market have switched to acquiring the rights directly from the artists. This presupposes that the songwriters, producers and performers control their rights by themselves and have not exclusively licensed them to publishers or labels. In this case, authors and composers can freely dispose of their rights and even sell them in the USA. There are no limits to the imagination. A songwriter can license or sell 100 per cent of her copyrights or only a certain share and in extreme cases even only one song. Since copyright consists of a bundle of rights, third parties can also exploit individual rights selectively if artists sell only the mechanical rights to a musical work or only the synchronisation rights to a song or recording.
However, songwriters are usually to a music publisher for the exploitation of their musical works and performers are usually exclusively bound to a phonographic company by means of a label contract. In return, they receive royalties from the exploitation. Nevertheless, they still control the author’s share, which is monetised via collecting societies. However, artists are free to sell this share as well. The music publisher Primary Wave was the first to exploit this market segment and expanded it to include also artists’ shares in master rights. Finally, it is still possible for artists to sell other rights beyond copyright such as merchandising rights, branding rights, photo rights, likeness etc.
The dark side of the music rights’ sales boom
As highlighted above, there are numerous ways to monetise music rights, leading to the fragmentation or dilution of copyrights. Especially the transaction costs will be further rising for licensees if the already fragmented music rights market is further complicated. It is still exhausting to clarify who are the rights holders of a specific song. The fact that songs and music recordings represent a monopoly in terms of commercial exploitation means that there is a danger that the licence fees for the use of the synchronisation rights for particularly well-known titles could rise sharply, because the income from a comparatively small number of popular songs is supposed to make the investment in the less popular songs that were also bought worthwhile. Since songs and music recordings represent a monopoly it is very likely that the licence fees especially for the synchronisation rights of hits and chart toppers could rise sharply, because the revenue from a comparatively small number of popular songs has to collateralise the investment in the less popular songs, which are bundled with the hits. As a result, hits from the back catalogue (titles that are older than 18 month after the release) are much more popular than new, innovative songs that are still vying for the audience’s favour. Especially those players who no longer see themselves as classical music publishers or labels and consider music as an investment or speculative good have virtually no interest in investing in the creation of new music. Especially those players who no longer see themselves as traditional music publishers or labels and consider music as an investment and speculative commodity have virtually no interest in investing in the creation of new music. They merely want to exploit the already well-known and successful repertoire, which they have acquired for a lot of money, in order to achieve the promised returns for the investors. In an interview by Round Hill founder and former investment banker Josh Gruss to Music Business Worldwide, he responded to Tim Ingham’s question about what are the ingredients that make the investment in copyrights attractive: “We’ve tried to focus on songs that are iconic. And a song can be iconic because it was a hit or because it’s wound its way into lots of different movies or TV shows – and what’s really great is when it’s a combination of the two. We own both Beatles songs and songs from the Motown era. These are hit songs that we all know and love but when you look at the royalty statements, especially the Motown ones, maybe only 20% of performing royalties come from radio – the rest comes from the fact that those songs are embedded in hundreds of movies and TV shows.”[8] Two things become apparent in these statements, namely that “iconic” songs are the basis of Round Hill’s business model and that the exploitation of the synchronisation rights in movies, TV and advertising is an important source of income.
The Hipgnosis Songs Fund’s business reports also support this observation. In September 2022, the share of repertoire (based on fair value) older than 10 years was more than 50 percent.[9] If we add those songs that were between 3 and 10 years old, then we come to more than 90 percent. Conversely, this means that new repertoire less than 3 years old is extremely underrepresented – not to mention current songs that are not yet part of the back catalogue (titles older than 18 months). The situation is similar for the Round Hill Music Royalty Fund. Songs released in the 2020s account for only 2 per cent of revenue. On the other hand, repertoire from the 1960s accounts for 24 per cent of revenue and, overall, songs created before 2000 are responsible for 69 per cent of rights revenue.
So if the business model of the new music rights exploiters is based on older repertoire, there is a great danger of an overall underinvestment in the creation of new, innovative songs, which could ultimately lead to a creativity crisis in the music industry. The music streaming boom in particular has made the back catalogue more valuable. Whereas before current hits drove sales, now older songs are the cash cows, such as the Christmas classic ‘All I Want For Christmas Is You’ by Mariah Carey from 1994, which has topped the Billboard Hot 100 charts in December and January for years.[10]
Another effect of rights acquisitions is that royalty income no longer benefits the artists, but the rights exploitation companies, which, as we have seen, acquire not only the master and publishing rights, but often also the authors’ share in publishing rights and the performers’ share in performance rights. The revenue from the exploitation of rights is then used exclusively to generate profits for investment funds in order to distribute a corresponding return to the investors. Therefore, copyrights no longer protect the economic interests of artists because participation in the income streams from the exploitation of rights is given up by artists for a one-off payment. It is then only a question of how much an artist can demand for her rights and do the rights earn the desired return? Although any moral rights remain unaffected by such a deal, the authors lose their property rights. For young musicians in particular, selling rights could lead to an income loss in the long term because they often misjudge the value of their rights. If the sales price for the rights is too low, others then profit from an increase in value and potentially new exploitation opportunities.
Conclusion
The current rights acquisitions boom could only be an intermediate step towards making music rights a tradable commodity and speculative object. This seems to be a revival of the Bowie bonds that the artist launched in the US in 1997. These were bonds in which the rights to Bowie’s songs were bundled, guaranteeing investors a fixed interest rate of 7.9 per cent per annum over a ten-year period. Although the buyers got their money back plus the agreed interest rate, the rating agencies had to downgrade the Bowie bond from an initial triple-A rating to Baa3, just above junk level, when the recession severely hit the recording music industry.[11] The following global financial and economic crisis made an end to this and similar experiments.
At the end of 2021, the Bowie Bonds had a celebrated come-back. The Canadian private equity company Northleaf Capital Partners announced to issue asset backed securities worth of US $303.8 million. The securities comprise of a mix of publishing and master rights of 52,729 songs from the Spirit Music Group’s music catalogue, including songs written and recorded by the Country and Western star Tim McGraw and The Who band member Pete Townshend.[12] Access to the music rights was secured as part of a strategic alliance with Spirit Music Group owner, Lyric Capital Group, in October 2021, worth US $500 million.[13]
A similar deal followed in February 2022, when private equity firm Kravis Kohlberg Roberts & Co (KKR) acquired a 65,000-song music catalogue from Swedish music publisher Kobalt for US $1.1 billion through its subsidiary Chord Music. The catalogue is now brought to market in the form of receivables-based securities.[14]
So it is only a matter of time when other investment funds that have invested a lot of money into music rights use entire catalogues or just parts of them to issue bonds or similar investment products with binding interest rate commitments. This makes music rights an easily tradable commodity. There is room for creativity: song catalogues of individual artists or even individual particularly popular songs could be designed as financial products and offered for sale. It is even possible that a stock exchange for music rights will be established on which catalogues and songs are traded like shares. Then you can invest your hard-earned money, for example, in the indestructible hit ‘Yesterday’ by the Beatles, hoping for price increases, and remember on how it was yesterday when music was not an investment and speculative commodity.
Other blog posts on “Music as an Investment”
Part 7: An Explanation
Endnotes
[1] Music Business Worldwide, “Primary Wave buys music rights of Robby Krieger and Ray Manzarek of the Doors, in ‘monumental’ deal“, January 23, 2023, accessed 27.01.2023.
[2] Music Business Worldwide, “Done deal: Justin Bieber sells catalog to Hipgnosis’ Blackstone fund“, January 24, 2023, accessed 27.01.2023. Im Artikel wird auch ausgeführt, dass die Masterrechte weiter der Universal Music Group verbleiben und die Universal Music Publishing weiterhin auch die Verlagsrechte administriert.
[3] https://www.blackrock.com/uk (accessed: 2024-01-17)
[4] https://www.influencemedia.com/ (accessed: 2024-01-17).
[5] https://www.kkr.com/en (accessed: 2024-01-17).
[6] https://www.oaktreecapital.com/ (accessed: 2024-01-17).
[7] https://www.brookfield.com/ (accessed: 2024-01-17).
[8] Music Business Worldwide, “After spending nearly $250m on Carlin, Round Hill Music is hungry for more“, March 21, 2018, accessed: accessed: 2024-01-17.
[9] Hipgnosis Songs Fund Ltd. Interim Report for the period ended 30 September 2022, p 10.
[10] Wikipedia, “All I Want For Christmas Is You“, n.d., accessed: 2024-01-17.
[11] Music Business Worldwide, “The name’s bonds. Music bonds“, October 19, 2021, accessed: 2024-01-17.
[12] Music Business Worldwide, “‘Bowie bonds’ are back: Northleaf uses Spirit Music Group assets to raise $303.8m offering” December 20, 2021, accessed: 2024-01-17.
[13] Northleaf Capital Press release, “Lyric Capital Group and Northleaf announce $500 million strategic alliance“, October 14, 2021, accessed: 2024-01-17..
[14] Music Business Worldwide, “KKR bought a music catalog from Kobalt for $1.1bn. Now it’s turning it into bonds“, February 7, 2023, accessed: 2024-01-17.
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