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Wed, May 8, 2024, 08:00
- After a breakneck ascent over the past four years, are music catalogues still a valuable investment?
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Over the past four years, music rights have become an in-demand asset class. Hipgnosis, a London-listed company that's spent around $2 billion on acquiring artist catalogues, is at the forefront of this gold rush. It owns more than 20 percent of Spotify's Billions Club (a playlist of tracks with over a billion streams) and 11 percent of Rolling Stone's 2021 list of Top 500 Songs Of All Time, but the firm's recent financial woes have investors questioning the appeal of music rights.
Founded in 2018 by Chic cofounder Nile Rodgers and Merck Mercuriadis (ex-manager of Beyoncé and Morrissey), Hipgnosis's portfolio includes the Red Hot Chili Peppers, RZA, Timbaland, Blondie, the Eurythmics, Shakira and other major stars whose music Mercuriadis once described as "more valuable than gold or oil." But scepticism arose this March after the company devaluated its music portfolio by 26 percent. Music publisher Concord (a rival of Hipgnosis backed by private equity giant Apollo Global Management) and Blackstone, another private equity behemoth, have since been in a cut-throat bidding war to buy Hipgnosis.
So, what does all this say about catalogues as a valuable investment? Some analysts believe the flood of capital in music rights is due for a sharp correction following a breakneck ascent since 2020. During the pandemic, interest rates hit rock-bottom, making it easier for people to borrow from banks and creating an environment for certain assets to thrive in financial markets. Music royalties were one such asset. Activity sky-rocketed. After mega deals like Sony's $550 million acquisition of Bruce Springsteen's discography in late 2021, catalogue sales were widely considered to be in bubble territory.
Owning an artist's recording and songwriting catalogue generates regular cash flows. There's revenue from synchronisation (when songs are used in films or television), public performances, radio play, release sales, streaming and other licensing opportunities. Companies like ANote Music, Royalty Exchange and Songvest also enable rights owners to sell future royalty payments for upfront cash, adding another layer of market activity. These entities took a page from David Bowie who famously issued "Bowie bonds" in the '90s, which generated $55 million for the artist by promising buyers a slice of his royalties.
All this deal-making has boosted the value of music in the eyes of Big Finance, which has long focused on crowd-pleasing artists with recognisable pop, rock and hip-hop hits. But now that niche, underground genres are accessible via streaming, their income potential is higher—and that draws in investors. Last year, EDM label Armada Music (home to Armin van Buuren) launched a dance music investment entity called BEAT to acquire catalogues, starting out with Detroit legend Kevin Saunderson's master recordings on his KMS label. BEAT plans to spend $100 million in its first two years.
As long as streaming services continue their blockbuster growth, catalogue sales are likely to remain a hot commodity. According to the latest IMS Business Report, revenues from music publishing rose to $11.9 billion in 2023—a ten percent rise from 2022. "Publishing revenue growth slowed marginally compared to 2022 but is still firmly in a long-term solid growth trajectory, with songwriters growing their share of streaming revenue," the report said.
The ability to identify and acquire the right catalogues at the right price will fundamentally shape the sector. For now, Hipgnosis' takeover battle is being closely monitored as it could very well be a model for future deals in this space.
Perspectives on the ground
Speaking to Resident Advisor, industry insiders agreed that the bidding war over Hipgnosis was a positive for the catalogue market.
It "illustrates the ongoing value of music," said Alex Heiche, CEO and founder of Sound Royalties, a ten-year-old music finance firm that provides artists with royalty advances without taking ownership of copyrights. "As the feeding frenzy over Hipgnosis illustrates, there's still plenty of capital being deployed," added Mark Mulligan, managing director and senior music analyst at research firm MIDiA.
"While there's certainly been some slowdown in acquisitions due to the rising cost of debt, there's still a lot of momentum in the market," Mulligan continued, noting that many transactions for smaller catalogues aren't publicly announced.
There remains ample opportunities for growth, echoed Heiche. "Strategic players continue to actively pursue acquisitions, focusing on specialised genres and second-tier deals that offer long-term value. Additionally, the sustained growth of streaming platforms and the overall global recorded music market indicate that music catalogues will likely remain a lucrative investment in the long run."
When asked whether current prices for catalogues were justified, both experts pointed to the state of market conditions. "If music catalogues can continue to see demand outstrip supply, and if industry revenues continue to grow strongly, then prices will hold up," said Mulligan. "Longer-term pricing will be determined more by organic factors and how much of a sustained financial market develops for music rights."
"While low-interest rates may have fuelled the initial boom period, the growth in music consumption through new music platforms (social networking sites, gaming, etc.) has also factored in," said Heiche. "Combining the legitimisation of music consumption with royalties flowing from markets that historically didn't widely pay for their music, works are better able to retain their value. Ultimately, the value of a music catalogue depends on factors such as the diversity of its content, the strength of its copyrights and its potential for future revenue growth."
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