Music catalogs bring huge deals. Are they overrated?
In the 2006 book Northern Songs: The True Story of the Beatles Song Publishing Empire, journalist Brian Southall captured a music industry mantra: “For songwriters and publishers, the most important five words are always the same – ‘Never give up copyright ©. ‘”
For generations of popular musicians who have stuck to this philosophy, this strategy has paid off. Song catalogs from the baby boomer era and beyond are raising huge amounts of money from publishers, private equity firms and others looking to capitalize on the music business recovery.
Bruce Springsteen inked a deal with Sony Music Entertainment in December to sell his masters and songs for $500 million. Warner Chappell Music earlier this month bought David Bowie’s songwriting catalog for $250 million. A host of rights and assets belonging to artists such as ZZ Top, Tina Turner and Paul Simon have all been sold over the past year.
Music Business Worldwide magazine estimated that more than $5 billion changed hands in music rights acquisitions last year, including publishing assets and recordings, with more expected in 2022. Buyers are said to circle Phil Collins.
Music titles are sold at unusually high valuations. Over the past 25 years, songwriting catalogs have generally sold for about eight to twelve times the “publishers’ net share,” or the amount of revenue the songs generated, less royalties paid to the artists and songwriters. Ratings today are 25 to 30 times the publisher’s share, according to industry experts and executives.
That has led some insiders to believe investors are overpaying.
“The average revenue doesn’t increase by a multiple over a five-year period,” said music publishing veteran Matt Pincus. “So if the price is reasonable, they’re great investments because they’re pretty stable.” But there is a price cap.”
The sector attracts some of the biggest financial players. Entertainment investing veteran Sherrese Clarke Soares founded Newark, NJ-based HarbourView Equity Partners in October to buy music rights with $1 billion in backing from Apollo Global Management. This month, “All of Me” singer John Legend sold his songs to private equity giant KKR and music company BMG for an undisclosed sum.
“It was fast and furious, with a lot of money chasing a limited inventory of old catalogs,” said Los Angeles-based music attorney Bill Hochberg, who represents the Curtis Mayfield estate. “And now with John Legend, it’s not just legacies, it’s newer stuff too. There’s a lot of money out there, and it’s an asset class that’s pretty hot with the Wall Street crowd and private equity money.”
The idea of music catalogs as top dollar investments isn’t new. Michael Jackson paid $47.5 million for ATV Music, home of Beatles classics like “Help” and “Yesterday,” in 1985 and later merged it with Sony Music Publishing. Sony Corp. Paid $750 million for Sony/ATV’s share of the Jackson estate in 2016.
Songwriting catalogs are stable assets that generate consistent revenue from radio plays, record sales, streaming, and placement in films, TV shows, and commercials. They’re safe bets for institutional investors like pension funds to invest their money in, especially when interest rates are low and bonds aren’t producing worthwhile yields.
But why are investors willing to spend so much on music rights? The rapid growth of the recorded music business thanks to streaming services such as Spotify and Apple Music has made music catalogs popular objects again. According to an annual industry report by MRC and Billboard, total album consumption in the US grew 11% last year.
Plus, older music is becoming a bigger and bigger part of Americans’ streaming diet. Catalog music accounted for 70% of album consumption in 2021, up from 65% in 2020. Current music consumption fell 4% in 2021, while catalog listening rose 19%. The report credits a surge in nostalgia for old favorites during the COVID-19 pandemic, fueled by the proliferation of music on TikTok and on home fitness platforms like Peloton.
The growth of the market for NFTs and the potential use of music in the metaverse have also fueled investor enthusiasm, said Bill Werde, director of the Bandier Music Business Program at Syracuse University’s Newhouse School of Public Communications.
“You look at the numbers and you see two important data points very quickly,” says Werde, who was previously the editorial director at Billboard. “One of them is that streaming data is going up, up, up. And secondly, as streaming data gets higher and higher and higher, catalogs are becoming a larger and larger percentage of that listening. … It doesn’t take a genius to say, ‘Well, we should probably own the catalogue.’”
Timing is also a factor. Some of the artists who are now selling their catalogs were part of the songwriter-musician generation that began touting their own song copyrights. This pop and rock revolution came after the days of Manhattan’s Tin Pan Alley and the Brill Building songwriting machine, when artists were less likely to write and own their material. Now creeping into the 70’s and 80’s, these songwriter artists are looking for new custodians for their work. In a high-profile example, Bob Dylan, 80, inked a deal in December 2020 to sell his 600-track catalog to Universal Music Publishing Group for an estimated $300 million.
The burgeoning price tags reflect a trend across the entertainment industry, including in Hollywood, where production companies founded by Reese Witherspoon, LeBron James, Will Smith and the Russo brothers are striking astronomical deals. Media companies have signed nine-figure production deals for creatives like Shonda Rhimes, Ryan Murphy and JJ Abrams to further their streaming video ambitions.
While some deals’ prices have shocked analysts, they may be more rational than those happening in music, according to Pincus, who sold his Songs Music Publishing to Kobalt Capital in 2017. At least the TV showrunners can gain value by creating new hits.
“On a catalog of previously released songs, you already know what the hits are,” said Pincus, who now runs an investment vehicle called Music. “The only thing moving revenue is the broader industry economics. It may be wiser to invest in people who are making hits than to buy hits that already exist for very large multiples of their historical earnings.”
Copyright owners can add value to music tracks by creating derivative works such as Broadway musicals, illustrated books, biopics, and documentaries, which have proven popular on streaming video services like Netflix. Universal Music, Warner Music and BMG, for example, have all been active in the production of music-related films.
Stephane Hubert, who is responsible for mergers and acquisitions at BMG in Los Angeles, argues that there are ways to introduce such vintage artists to younger listeners and people outside the US and UK. Country music and American rock artists have plenty of room to cross paths internationally, he said.
BMG and KKR acquired ZZ Top’s music interests last month after BMG recently struck deals to buy a bundle of rights from Tina Turner and Mötley Crüe recordings. Asset manager Pimco has teamed up with Bertelsmann-owned BMG to join the catalog frenzy, according to people familiar with the deal.
“When we acquire ZZ Top, we’re not just acquiring a treasure trove that brings us a return every year,” Hubert said. “We’re looking at a catalog that we can continue to work on together with the management of ZZ Top to bring it into the future, to introduce it to new demographics and new formats.”
But there are limits to how much copyright owners can increase revenue from older music, Pincus said. Mechanical royalties, one of the most important sources of revenue for publishers, are set by the US government through a compulsory license. ASCAP and BMI, the largest US performing rights organizations (which collect publishing royalties from radio and other sources), are subject to consent regulations.
“The problem is that in music publishing, songwriting copyrights are basically 66% settled almost everywhere in the world, which means the economics are basically fixed,” Pincus said. “So your ability to affect the economics of returns from the assets you buy is limited.”
Prices for placement in films, TV shows and commercials can be negotiated. A viral social media video — think of the man who filmed himself on TikTok to Fleetwood Mac’s “Dreams” skateboarding and drinking cranberry juice — can create a boom in audiences.
But few artists have a repertoire capable of supporting a successful stage musical, and the rights are often shared between multiple parties, making it difficult to get everyone to agree and limiting potential benefits for investors.
Nonetheless, Hubert said such deals have become more interesting as legacy acts and current artists are evolving into brands.
“If you had asked me five years ago, I would have said that buying music equipment, which is a passive source of income, is not very interesting from an investment perspective,” said Hubert. “If you, as a buyer, can work with the artist, you can always add value.”
Whether the mega deals pay off depends on how fast the music industry expands.
Goldman Sachs last year forecast that the number of streaming music subscribers worldwide will reach 1.28 billion by 2030, up from 443 million in 2020. That will depend on the growth of streaming in Africa, the Middle East and other emerging countries, if the US tires.
But while the music industry is in overdrive right now, Werde said it’s not a bubble.
“If there’s one thing I can count on when I look at the history of the music business, it’s that you can always count on people saying people are paying too much to release assets,” Werde said. “And generally they are not.”