Music Investment Marketplaces – Part 5: The Economic Potential of MIMs

In the previous four parts (part 1, part 2, part 3 and part 4) of the series on music investment marketplaces, we analysed many different business models, including those that have failed. In this fifth and final part of the blog series, we will summarise the findings from parts 1-4 and assess the economic potential of the individual models. In particular, we will refer to the different copyright frameworks in the United States compared to other countries, especially in Europe, to answer the question of what is needed to create a well-functioning and transparent music investment market.

Music Investment Marketplaces – Part 5: The Economic Potential of MIMs

Different Business Models of MIMs

Music investment marketplaces aim to monetise music rights for investors and create a marketplace for them. However, analysis of music investment marketplaces shows that there are currently many different models vying for the favour of investors. Typically, MIMs target small investors and music fans who can buy shares in song rights for a few Dollars or Euros. There are also offerings such as Royalty Exchange, sliceNote and JKBX, which are aimed more at wealthy investors or high net worth individuals who can afford to invest larger amounts per share. In most cases, however, investors cannot buy music rights directly, but only participation rights in royalty streams. Due to copyright laws in most of the European countries, it is not possible to purchase music rights. Rights can only be licensed for use. As a result, European marketplaces only offer indirect ways for buyers to make money from music rights. Different strategies are used. The Austrian MIM Global Rockstar offers “opportunities” via a crowdfunding platform to small investors who can acquire participation rights in the revenue streams of artists. As Global Rockstar also operates a label and a music publishing company, artists can either license their rights directly to Global Rockstar or offer them for sale directly on the platform in the form of participation rights. In both cases, investors do not receive any rights to the underlying publishing and master rights.

Other platforms also offer rights to royalty streams, marketed under names such as “SongShares” from the French company Bolero or “Initial Music Offerings” (IMOs) from the Swedish MasterExchange. The US-based JKBX also does not sell shares in music rights or songs directly, but participatory rights in the form of “Royalty Shares”. Only the US platforms slice Note and Royalty Exchange offer shares in music rights for direct purchase, primarily to wealthy investors willing to pay US $10,000 per share.

Shares are sold either at prices set in advance by the platforms or the rights owners, or through auctions, as in the case of SongVest, Musicow and ANote Music. Musicow and ANote Music allow purchased shares to be resold on secondary trading platforms after the initial purchase, although the administration fee per transaction is usually higher on the secondary market. The European MIMs Tangy Market and Bolero follow a similar model, but without a prior auction. Resale platforms are also planned for Global Rockstar and JKBX. However, JKBX explicitly states that the Royalty Shares can only be traded on the company’s own secondary sales platform and not on an external stock exchange.

Some platforms are trying to solve the repurchase of music rights shares through tokenisation, selling the participation rights in the form of non-fungible tokens (NFTs) on the blockchain. Swedish platforms MasterExchange and Anotherblock and Turkish platform Parça sell music rights NFTs on the Ethereum and Polygon blockchains respectively. The Austrian platform Global Rockstar also allows the purchase of NFTs in addition to the classic analogue sale of “opportunities”.

The Conditions for a Functioning Music Investment Market

The different models show that it is difficult to make music rights a tradable commodity that can be bought and sold by small investors. Especially outside the US, copyright laws make it difficult to make music rights tradable as financial products. In addition, many artists do not control their publishing and mastering rights and can only “sell” their income streams from collecting societies in the form of participation rights. It is easier for music publishers and labels to monetise their music catalogues on MIMs, as the example of JKBX shows.

The US therefore has an advantage over the EU because of its copyright framework. It is not only the possibility to sell copyright and related rights that makes the US a thriving music rights market, but also the possibility of reversion rights, which are mainly used by superstars to regain control over their music catalogues. However, the high fragmentation of rights in the EU is also an obstacle to the development of a well-functioning music rights market. If, as in the US, it is possible to acquire not only the publishing and master rights of an artist, but also the NIL (name, image and likeness) rights, then this bundle of rights has a higher economic value. On the other hand, transaction costs increase when different rights are distributed among different actors. If, moreover, music rights cannot be sold but only licensed for use, as is the case in the EU, then, as the music investment marketplaces show, complicated workarounds such as rights to royalty streams have to be used. Ultimately, however, it is a political decision whether the legal framework should encourage the creation of music markets at the expense of the legal protection of creators.

For music investment marketplaces to work well, they need also valuable music catalogues that generate a regular revenue stream. That’s why MIMs work better in markets where such music catalogues are more readily available – such as the US, South Korea (thanks to K-Pop) and Sweden (thanks to many internationally successful songwriters) – than in markets where these conditions are not met. The failure of Estonia’s Fanvestory is a good example of how a provider needs the backing of a strong market to operate its business model in a sustainable way. This business model is primarily based on taking administration fees, which range from 1 to 8 per cent per transaction for the various providers. However, it makes sense to have a second financial mainstay, such as Global Rockstar, which is also a music publisher and label. Another important success factor is that the MIMs have sufficient liquidity, i.e. investor capital. A lack of liquidity has proved fatal for Fanvestory, Vezt and Royal.io, which have already ceased trading due to a lack of investor capital.

This is also due to the fact that returns do not always meet expectations. An analysis of the returns on Royalty Exchange and JKBX shows that the values are highly dependent on the catalogue and the performance of individual songs, which is also highly volatile over time. In addition, most platforms offer relatively few investment opportunities, usually well under a hundred. Only Royalty Exchange and Musicow have more than thousand investment opportunities on their webpages. Global Rockstar, Tangy Market, SongVest, Bolero and JKBX are in the middle of the range with at least a hundred opportunities.

Basically, it is a risky investment that is not recommended for small investors without prior knowledge of how the music rights business works. As a result, South Korea’s Financial Services Commission took action to investigate Musicow’s business model more closely and only gave the company the green light to continue operating after the Korean platform improved investor protection.

On the other hand, music investment marketplaces allow artists to monetise their music rights and fans to invest, at least indirectly, in their favourite music. Either way, there is potential for the creation of an innovative marketplace for music rights, although there needs to be regulatory protection for both the rights holders who offer their royalty shares for sale and the small-scale investors who buy financial products backed by music rights.