Investing in Music Royalties: What You Need to Consider

As a music lover, the idea of investing in the very songs and artists that have brought joy to my life is certainly an appealing one. But it’s not just my personal bias – music royalties are quickly becoming a sought-after investment choice for both retail and institutional investors alike. 

With their predictable cash flow and lack of correlation to traditional markets, it’s no wonder that musicians such as Bob Dylan, Bruce Springsteen, and Justin Timberlake are cashing in on their catalogs for big bucks. 

However, as with any investment, there are risks and complexities to navigate. 

In this article, we’ll explore the world of music royalties and provide tips on how to get started with this unique and potentially lucrative investment opportunity.

What Are Music Royalties?

Have you ever wondered how your favorite artists make money from their music? Well, every time you stream a song, the owner gets a few cents in what’s known as music royalties. These royalties are a way for the owner to get paid for the right to use their music.

But music royalties don’t just come from streaming services like Spotify and Apple Music. They also come from ads, use in films, radio, and even physical items like CDs. That means every time you rock out to your favorite tune, the owner is getting paid!

Now, there are different types of music royalties depending on the type of copyright. For example, there’s the composition copyright, which covers the written song. And then there’s the sound recording, which is what people hear. So, one song might have multiple songwriters, which means they all get royalties from the song.

But that’s not all! Depending on how the composition or recording is used, there are different types of royalties. Sales and streaming result in a royalty any time the song is sold or streamed. Meanwhile, a song being played in public results in a public performance royalty. And licensing for placement in commercials, shows, and video games also produces its own royalties.

What Makes Music a Popular Investment

In a world where creating a hit song can feel like trying to find a needle in a haystack, the rewards for success can be staggering. Imagine earning hundreds of thousands of dollars every year from a single song. Sounds too good to be true? It’s not! Music royalties have become a popular investment choice for those looking to diversify their portfolios.

Thanks to the rise of streaming platforms, there is now more stability in the music industry than ever before. While a song might only be a chart-topper for a few years, it has the potential to keep generating revenue long after its peak. In fact, the International Federation of the Phonographic Industry (IFPI) reported that 65% of global music revenue in 2021 came from streaming services, amounting to approximately $16.9 billion.

If you take a look at the IFPI Global Music Report, you’ll see that the share of revenue generated by streaming has steadily increased since 2012, surpassing physical album sales. With this growing trend, it’s no wonder that financial giants such as BlackRock are investing in song portfolios.

Investing in music royalties can be a smart choice for those looking to diversify their portfolio. Unlike the stock market, the music industry is not correlated to the overall state of the economy. As a result, it can provide a stable source of income for investors, especially during times of economic uncertainty.

How to Invest in Music Royalties

Music royalties can be an intriguing alternative investment that allows you to potentially profit from the success of hit songs and artists. Here are some ways for you to invest in music royalties:

1. Invest in Companies with Royalty Exposure

One avenue to consider when investing in music royalties is to buy shares of companies that generate income from royalties, such as record labels and publishers. 

While it can be challenging to gain direct exposure to royalties through conglomerates like Sony and Universal, which have interests in other entertainment sectors, some music-focused companies have gone public. 

Warner Music Group and Universal Music Group are two examples of such labels that offer investors the opportunity to tap into the royalty market indirectly.

2. Explore Music Royalty Funds

Music royalty funds represent another option for investors looking to diversify their portfolios. These funds own song royalties and distribute dividends to their shareholders. Hipgnosis Songs Fund and Mills Music Trust are two publicly traded funds that focus on this type of investment.

In addition to publicly traded funds, there are private music royalty funds, such as Shamrock Capital. However, these funds are typically geared towards institutional and high-net-worth investors, which may limit their accessibility to the general public.

3. Purchase Song Rights Directly

For those interested in a more direct approach, purchasing the rights to songs can provide a potentially lucrative investment opportunity. Song rights can be bought and sold on the private market, allowing investors to receive royalties based on the performance of the songs they own.

Online marketplaces like Royalty Exchange provide a platform for investors to browse and purchase rights to songs, movies, and trademarks. 

Another option is SongVest, a marketplace that enables investors to buy fractional shares of songs, similar to how other platforms facilitate the purchase of fractional shares of stocks. This approach makes it more accessible for individual investors to get involved in the music royalty market.

Risks to Consider

While investing in music royalties can offer promising returns, it is not without risks. Therefore, it is important to keep the following things in mind:

1. Complexity of Music Royalties

To confidently invest in music royalties, you need to have a good grasp of the various types of royalties, ownership lengths, cash flow structures, and any buy-back rights that may be included in individual royalty deals. However, that’s not all; legal expertise is often necessary to navigate this market effectively, adding to the challenge.

Now, let’s talk about transparency. Gaining complete transparency regarding market activity, deal valuations, or the long-term income generation potential of individual royalties is no easy feat. 

In fact, some experts suggest that recent high-profile acquisitions of famous artists’ catalogs might be more about publicity than solid investments. It’s a rollercoaster, and you need to be prepared for it.

Furthermore, royalty streams depend on an artist’s popularity, which can be influenced by one-time events or short-lived trends. This unpredictability can lead to significant income fluctuations that may not be sustainable over time. 

As an investor, it’s crucial to carefully assess whether the income stream you’re buying will maintain its performance or decline in the future.

2. Potential Overpricing of Music Royalties

These days, it seems like everyone is clamoring to invest in the sweet sound of royalties. But, as with any popular item, there’s always a risk of overpricing. The more attention and hype something receives, the more likely it is to become unfairly expensive.

And let’s not forget the rise of alternative investments, which are gaining popularity over traditional stock market options. This trend is causing a ripple effect in the pricing of music royalty investments. Typically, these investments are priced based on a multiple of their last 12 months’ earnings (LTM). 

As of 2021, top artists were raking in more than 25x their annual income, yielding a modest 4%. Meanwhile, other firms offered around 15x LTM, yielding a more generous 7%. So, it’s essential to keep an eye on these pricing trends if you’re looking to invest in the music industry.

3. Potential Impact of Interest Rates

Music royalty has been compared to rock-solid bonds or real estate investment trusts that bring in rental income. In fact, the big shots over at KKR have even created an asset-backed security using the sweet sounds of music royalty income.

But here’s the deal, my friend. The value of any income-generating investment relies partly on interest rates and the added kick, or “spread,” that can be generated with each unit of risk. 

So, if interest rates start to boogie on up and folks can score higher yields from safer investments, the spread earned on music royalties might take a hit. And if demand for music royalties slows down, it could be time to turn down the volume on this investment option.

Should You Invest in Music Royalties?

With the music industry poised to generate a whopping $131 billion by 2030, more and more investors are looking to get in on the action.

Investing in music royalties can be an enticing opportunity for several reasons. For one, music royalties offer predictable cash flow that is not correlated with the stock market. This can provide a sense of security to investors looking for diversity in their portfolio.

However, investing in music royalties is not all rainbows and unicorns. As with any investment, there are risks involved. It’s essential to do your research before diving in headfirst. Getting a sense of what music will and won’t perform well can take time and effort. Plus, purchasing royalties as a retail investor can be a costly affair.

While it might be tempting to buy the rights to your favorite childhood tune, it’s not always the best investment move. Don’t let your personal music taste cloud your judgment. If you’re serious about investing in music royalties, be sure to analyze the market and make an informed decision that aligns with your investment goals.

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