Spending Johnny’s Cash
Each year, at the start of December, we are blessed by the voice of Mariah Carey in every shopping mall, cafe and restaurant. Some love it, some don’t. I imagine many are quite sick of it, me included.
But no matter what you think about the actual song, you have to hand it to her, she has done quite well for herself. Every year she rakes in millions in royalties for doing almost nothing. Some sources suggest she has earned up to $60 million from ‘All I Want For Christmas Is You’ alone. But these days, the money isn’t just lining Mariah’s pockets - it’s filling the income statements of global investment companies as well.
Late last year Mariah Carey sold a 50% stake in ‘All I Want For Christmas Is You’ to Hipgnosis, a music investment trust listed on the London Stock Exchange. She joins a long line of artists to do the same.
Bob Dylan sold his entire songwriting catalogue of 600 songs for upwards of $300 million in 2020. Then, in 2021, he sold his recorded music royalties to Sony for an extra $200 million. Another legend of the past, Bruce Springsteen, sold both his songwriting and recording rights to Sony for a record $550 million last December.
These are some big numbers.
KKR and Blackstone, two of the largest and most successful private equity firms, have each committed vast sums of cash to buying music rights.
So, why now?
Demand is soaring. People are consuming more and more music every year. Goldman Sachs estimates that annual global music revenue will reach $140 billion by 2030, an increase of 84% on 2019 levels. Plus, with the emergence of TikTok, Peloton, the Metaverse and many other digital platforms, there are a growing number of avenues through which artists can earn royalties.
Artists may be a little ‘cash-strapped’. With the cancellation of live shows throughout 2020 and 2021, artists have been left without their main source of income. According to Billboard, the top 50 earning artists all earn more from touring than anything else, including streaming.
Artists are doing an Elon Musk. In 2006, George W. Bush decided the sale of music rights should be taxed as capital gains rather than at much higher income tax rates. However, the Biden administration has indicated it wants to reverse that policy, describing it as a “long-standing loophole”. Musk sold 10% of his Tesla shares this past year to avoid Biden’s proposed tax hikes - artists may be doing a similar thing.
Are music rights a good investment?
From what I can tell, the simple answer is yes. After all, firms like KKR and Blackstone wouldn’t be pouring cash into the area if they didn’t expect a significant return. Royalty percentages are in the order of 12-15% p.a. - quite high, especially in a low interest rate environment.
Because you can decide when and where to use the music, there is tremendous upside in acquiring a controlling stake in an artist’s catalogue. Whilst this may not be a good thing for artists and listeners, it certainly is for the investor.
Merck Mercuriadis, CEO of Hipgnosis, says “music is the most predictable commodity”. Perhaps music’s insensitivity to politics and other market forces is its biggest selling point.
What’s in it for the artists?
The obvious benefit is that they get a sweet sum of cash all at once. These royalty deals can pay up to 30x annual earnings upfront.
However, the reason they’re doing it is more nuanced than that - they want cash for estate planning. Have a look at most of the big artists selling their music: Bob Dylan turns 81 this year, Springsteen is 72 - not exactly fresh out of the womb. Passing down a lump of cash is far easier than sifting through endless streams of royalty incomes and deciding who gets what. Hipgnosis reports that over 60% of its music portfolio is more than 10 years old. For the time being, the vast majority of artists selling their catalogues are well past their prime and just want to cash in before they die.
Is there a catch?
One problem with these deals is that the artist loses control over how their music is distributed. Bob Dylan probably wouldn’t want ‘The Man In Me’ played in an ad for Viagra, would he?
However, there are success stories. Just recently, Neil Young accused Joe Rogan of spreading misinformation about COVID-19 vaccines on his Spotify podcast. After gaining the permission of Hipgnosis and other owners of his music rights, Young decided to pull his music off Spotify in an act of protest, triggering a 60% hit to his streaming revenue. That would’ve been a tough decision for Hipgnosis.
It’s important to realise the music investment business is built upon personal trust. An artist isn’t going to sell their entire catalogue to an investor with a reputation for using music against artists’ wishes. This natural market control has kept this business more or less in line.
Let’s hope it stays that way.
What does the future bring?
In a world of NFTs and cryptocurrencies, it seems there is no end to what can be traded. We’ve been trading visual art for centuries - why can’t we do the same with other art forms? Why can’t we buy shares in an artist’s catalogue and trade them on a live, public exchange?
It also doesn’t have to be limited to music. There is certainly a future in which you can buy a share of ‘Pulp Fiction’ or ‘Lord of the Rings’. I can see smaller movie production companies raising money for a film through an IPO and only disclosing the vague plot, budget, director and cast to investors.
After all, why not?
More from The Curious One:
Don’t hate the player, hate the game