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Investing in Music Royalties

What are music royalties?
Music royalties are payments that are made to recording artists, songwriters, composers, publishers, and other copyright holders for the right to use their intellectual property. Song copyrights typically last for 70 years after the death of the last remaining songwriter.

Who collects the royalties and ensures copyright holders are paid?
Royalties are tracked and collected by what are known as PRO’s (Performance Rights Organizations). Every developed country in the world has a PRO, which are not-for-profit organizations that track and collect royalties from radio stations and bars to stadiums and streaming services.

Why do musicians and songwriters sell their copyrights?
With copyrights lasting 70 years after the death of the last songwriter, song catalogs have a monetary value that long outlasts the writer. By selling the copyright during their lifetime, the writer can monetise the future value of those revenues. Artists, writers, and producers are regular people and may need immediate liquidity for life events ranging from a big purchase (house, estate, recording studio, boat) to bankruptcy or divorce.

What is the industry outlook?

$40B

$30B

$20B

$10B

$0B

Total Global Recorded Music Revenue

2012

2013

2014

2015

2016

2017

2018E

2019E 2020E 2021E 2022E 2023E 2024E 2025E

Physical Recorded Music

Satellite Radio Subscription

Digital Music Downloads

Music Streaming

The global music industry is in its fifth year of a major growth cycle after 15 years of contraction due to piracy. Paid subscriptions to streaming services are driving growth in all markets globally and owners of music royalties are ultimately proving to be the biggest beneficiaries.

How do streaming services pay copyright holders?
Streaming services are required to pay a fixed percentage of their revenue to the owners of the copyrights. For Spotify Technology SA (NYSE: SPOT), it is approximately 75%, and it is paid out as a percentage of market share. For example, if a song received 10% of the total listens on Spotify, the owner of the copyrights would be owed 10% of Spotify’s payout which would equal 7.5% of Spotify’s revenue. This payment model leads to fixed margins for streaming platforms. This is one reason Spotify’s has struggled to hit financial targets since its IPO 16 months ago.

How have music royalties been impacted by Covid-19?
Global streaming volume for the week ending March 26 2020, was up three percent from the week prior. This increase in consumption can likely be attributed to more time being spent indoors. Hipgnosis Songs Fund Ltd. (LON: SONG), a London based firm with $500M invested in music royalties, has seen its shares appreciate 10% between March 16 and 30 2020, amidst a broader market sell-off. This crisis has demonstrated that music copyrights are a powerful source of portfolio diversification with limited equity market correlation.