We began investing in the music royalties space in 2021. Our expertise in understanding cash flow timing, amounts, and probabilities is particularly suited to this asset class. Many see music royalties as “sexy” … but we’ve found a certain segment of the market that is quite predictable and boring. Our favorite! In future newsletters we’ll likely dive into a more nuanced discussion, but I thought we would start off with Music Royalties 101 today: 1) Royalty Type, 2) Length of Rights, and 3) Track Age.
Royalty Type: You can buy these right types individually for a certain song, album, or catalog, but often certain types are grouped and sold together.
- Streaming Royalties: Royalties earned from music streaming platforms such as Spotify, Apple Music, YouTube, and others. These can include both mechanical and performance royalties.
- Mechanical Royalties: Royalties paid to songwriters and publishers for the reproduction and distribution of music in physical or digital formats (e.g., CDs, digital downloads, streaming).
- Performance Royalties: These royalties are paid to songwriters, composers, and publishers when their music is performed or broadcast publicly. This includes performances on radio, TV, streaming platforms, and live concerts.
- Synchronization Royalties: These royalties are paid for the use of music in synchronization with visual media, such as movies, TV shows, commercials, video games, and online videos.
- Print Music Royalties: These royalties are generated from the sale and use of printed sheet music, typically paid to composers and publishers.
- Public Performance Royalties: Managed by Performance Rights Organizations like ASCAP, BMI, and SESAC, these royalties are collected from venues like bars & concert venues where music is performed publicly. PROs distribute these royalties to songwriters, composers, and publishers.
- Others
Length of rights: How long do you own these cash flows? Typically, rights are typically purchased for either 10 years, 20 years, or life of rights. Artists usually demand a premium for longer duration, requiring careful pricing scrutiny.
- Term-Based Royalties: These are royalties that are purchased for a specific period of time. After that time, the rights revert back to the prior owner.
- Life of Rights Royalties: The maximum life that royalties are paid are generally 70 years past the death of the last artist/composer/songwriter. After that, the rights pass into the public domain. Purchasing life of rights means the investor would receive royalties for as long as the creator of the music continues to earn royalties from their works.
Track age: How long ago was the track released?
- Futures: Music can actually be purchased before it is released. For example, a music label may own the rights to the artists next 10 tracks that are released. These are very speculative investments.
- Fresh: Some music royalties investors prefer to buy fresh tracks. These are generally tracks released within the last 12-18 months. Investors may think they can pick the best emerging artists. Or that they can make the artist popular through certain actions. This requires a lot of operational work and music industry expertise. There is greater upside and correspondingly, greater risk of capital loss. You can make huge returns if you back the right horse. You can also lose a lot of principal.
- Seasoned: We prefer to acquire seasoned streaming royalties. With the exception of tracks that hit later-stage viral popularity, streaming revenue typically drops sharply in the first year after a song is released, stabilizing thereafter. Acquiring "less trendy" seasoned portfolios post-drop-off provides more predictable cash flow. We evaluate portfolios based on proven revenue rather than betting on individual artists' success. We price portfolios anticipating steady listener decline, known as "degradation." This modeling approach reduces risks associated with trying to identify artists before they become popular. Our investment curve exhibits minimal standard deviation between expected and actual performance, resulting in modest yield adjustments. If the track outperforms our expectations, our yield may only rise by a few percentage points. If the track underperforms materially, our yield may only decline by a few percentage points. For a recent catalog we purchased, our modeled expected outcomes at the 1% and 99% error bars were 10.0% to 27.7% net annual yields respectively.
- Jillian
I was sad to hear Peter Renton and his team's announcement that Fintech Nexus is shutting down.
When I first discovered Lending Club and Prosper back in late 2011, I also discovered Peter Renton's blog called Lend Academy. Peter's blog covered his personal investments in loans from those platforms, plus some interviews, news, and industry commentary. It was at a time where consumer lending became accessible to the public as an easily investable asset class for the very first time. The opportunity for short duration, diversified, and predictable yield drew me in instantly. I could feel an affinity with Peter and others on that blog, which we knew others would pick up on soon.
In short order, Peter announced the first LendIt conference, beginning the expansion of a variety of businesses that grew out of his initial blog. He brought on great business partners, created an online chat board, launched an investment advisor, and ran an interview-style podcast. I attended that first LendIt conference (and all subsequent ones) with amazement and enjoyment. Eventually becoming Fintech Nexus, the conference drew thousands of people and sponsors as it grew over the years.
To say I soaked in a wealth of knowledge and relationships from his platform is an understatement. I know I am not alone in this appreciation. The sale of the events business and shuttering of the remaining media business is truly the end of an era. I hope their team stays involved in the asset class as they are great people. The brand and businesses will be missed.
- Conor
