The war over music copyrights

Venture capital firms have not been the only ones that raised hundreds of millions of dollars to invest in a booming market. After more than 15 years of being the last industry in which everyone wanted to invest, the music industry is returning, and money is flooding to buy the rights to popular songs.

As paid streaming subscriptions gain widespread adoption, great music Broadcast services, such as Spotify, Apple Music and Tencent Music, but also Pandora, Amazon Music, YouTube Music, Deezer and others, have entered at its best. Now there are more than 51 million subscription accounts paid between music streaming services in the United States. The music industry grew 8% last year around the world to $ 17.3 billion driven by a 41% increase in transmission revenues and 45% in transmission revenues [19659007] paid .

The increase in the transmission of music means an increase in revenue for those who own the copyright of the songs, and the growth of entertainment in emerging markets, the increasing use in digital videos and the potential use of the Music in new content formats such as virtual reality only expand this further. Unsurprisingly, private equity firms, family offices, businesses and pension funds want a share of the action.

There are two general types of copyright for a song : publishing rights and master rights. The musical composition of a song – lyrics, melodies, etc. – comes from composers who have the right to publish (although they usually sign a publishing agreement and their publisher gets ownership of it plus half of the royalties). Meanwhile, the version of a song that is being interpreted comes from the artist who owns the right to master (although they usually sign a recording contract and the record label acquires the ownership of the masters and most of the copyrights).

Popular songs are valuable to own because of all the royalties they raise: each time the song is played on a streaming service, downloaded from iTunes or covered on YouTube (a mechanical license), it is played on the radio or in a grocery store (an interpretation license), it is reproduced as the soundtrack of a movie or TV show (a synchronization license) and for other uses. More royalty income from a song goes to the main owner, since they took on greater financial risk when marketing them, but the publishers collect royalties from some channels that the main owners do not (like the radio, for example).

For a composer behind popular songs, these royalties form a predictable revenue stream that can amount to tens of thousands, hundreds of thousands or even millions of dollars per year. Of course, most of the songs that are written or recorded do not generate any money: creating a song that explodes in a crowded industry is difficult. This shortage (there are only so many thousands of popular musicians and a limited number of legendary artists whose music remains relevant for decades) means that the rights of successful musicians get a prize when they or their publisher decide to sell them.

Investing in streaming economy

In 2017, the revenue from broadcasting services accounted for 38% of the revenues of the global music industry, eventually exceeding revenues from sales of traditional albums and downloads of songs. The services of transmission of subscriptions reached a crucial point to obtain the general adoption, but still they have much to cross. Media analyst at Goldman Sachs Lisa Yang predicted that by 2030, the global music industry will reach $ 41 billion in market size as the global broadcast market multiplies in size to $ 34 billion (almost all paid subscriptions).

Earlier this week, I spoke with Merck Mercuriadis who has run icons like Elton John, Guns N & # 39; Roses and Beyoncé and raised £ 200 million ( $ 260 million) in the London Stock Exchange in June for an investment vehicle (Hipgnosis Songs) to acquire the catalogs of the best composers. His plan is to raise and invest 1,000 million pounds over the next three to five years, arguing that the switch to passive consumers who pay for music will take the industry to levels it has never seen before.

In fact, the transmission of music is a paradigm shift from the past. With all the music of the world available in an interface for free (with ads) or for an affordable subscription (without ads), consumers no longer have to actively choose which specific songs to buy (or even what to download illegally).

With everything in front of them and everything included in the price, people listen to a wider range of music: they are exploring more genres, discovering more musicians who are not stars in traditional radio, and returning to The Music of the Last decades Consumers who previously did not buy much music now subscribe to $ 120 per year and distribute it among more artists.

Retail companies are doing the same thing: through streaming offerings like Soundtrack Your Brand (which arose from Spotify), they are using commercial licenses, which are more expensive, to broadcast a wider range of music in stores in place to put music. The radio or playing the same few CDs.

Much of the growth of the music industry market is happening in China, India, Latin America and emerging markets such as Nigeria, where subscription applications are replacing piracy or non-consumption of music. Tencent Music Entertainment, whose three online broadcast services have approximately 75% of the market in China (a music market that expanded by 34% last year), is preparing for an IPO that could give you approximately the same valuation of $ 29 billion Spotify received on its IPO in April. Meanwhile, Latin America's music industry revenues grew 18% last year.

Western music is infused into pop culture around the world, so, as these countries enter the era of broadcasting, they are monetizing hundreds of millions of additional listeners, through revenue from advertising at least, but also increasingly through paid subscriptions.

In the talent management, publishing and production company Primary Wave, founder Larry Mestel is seeing how emerging markets generate more revenue for their clients (such as Smokey Robinson, Alice Cooper, Melissa Etheridge and Bob Marley's estate) as new fans The bases are committed to your music online. It raised a new fund of $ 300 million (backed by Blackrock and other institutions) in 2016 to acquire rights in music catalogs in the middle of a market that says it has improved substantially due to the growth opportunities derived from the transmission model.

It is not just a transmission [19659007] music platforms that are driving growth. Video streaming has exploded, either by short YouTube videos or by the growing number of programs on platforms such as Hulu and Amazon Prime Video, and with that comes the increase in song synchronization licenses for their soundtracks; Revenues for global synchronization licenses were 10% year after year in 2017 only. During the past year, Facebook signed licenses with all major publishers to cover the use of song clips by their users on Instagram Stories and also on Facebook videos.

Ratings of song catalogs

Catalogs are commonly valued according to the publisher's net share, "which is the average amount of annual royalties left after paying the percentages owed to others (such as a participation partial in the royalties still held by the artist.)

When Round Hill Music acquired Carlin for $ 245 million in January to obtain ownership of the catalogs of Elvis Presley, James Brown, AC / DC and others, it paid a multiple 16 times greater in the publisher's net share, which is high but not uncommon in the current market when catalogs of legendary artists are negotiated Just three years ago, the multiples anchored in the 10-12 range (or less for newer or more artists) small ones whose music has not yet shown the same longevity.)

Kobalt, which raised $ 205 million from venture capital firms such as GV and Balderton Capital to become a publishing house focused on technology and label services, has also become an active player in the space. Apart from its main operating business (where it stands out from the traditional publishers and labels for not taking control of the clients' copyrights), it has raised two funds ($ 600M for the most recent) to help institutional investors such as Railpen's pension fund in the United Kingdom earns exposure to music copyright as an asset class. In December, his fund acquired SONGS Music Publishing's catalog for reported $ 160M in a sale process against 13 other bidders looking to buy ownership of songs by Lorde, The Weeknd and other young pop and hip-artists.

Price too high?

The natural question to ask when there is a rapid increase in money (and a corresponding increase in prices) in an asset class is if there is a bubble. After all, last year's industry revenues were still only 68% of those in 1999 and the growth rate will inevitably be reduced once the transmission has captured the early majority of consumers .

But the fundamentals that drive this capital are in line with a secular change: it is clear that the transmission of music still has a lot of space to grow in a few years, especially because a large part of the human population is online (and he does it by phone). In addition, as new content formats, such as augmented and virtual reality, materialize, the new categories of music synchronization licenses will inevitably accompany them in their soundtracks.

Of course, each catalog is its own case. As the managing director of Shamrock Capital, Jason Sklar, emphasized to me, the rising tide is not lifting all the boats equally. The streaming revolution seems to be disproportionately benefiting hip-hop, rap and pop, given the youthful bias of streaming service users and the commitment of native digital social networks of artists in those genres.

Beyond the purchase price, the critical variable for evaluating an agreement in this market is also the operational value that a potential buyer can provide to the catalog: its ability to actively promote past songs by launching them into new television programs, campaigns advertising and any number of other projects that will keep the culturally relevant. This is where strategic investors have an advantage over purely financial investors in publishing rights, especially when it comes to the longer queue of mid-level artists whose music does not naturally capture the incoming demand of the Beatles or Prince catalogs. .

Thanks to strong long-term market growth and a wide range of possible niches and strategies, music copyright is a class of assets where we will see how a series of important new players develop.