Amid the COVID-19 Crisis, Artists Should Think Twice Before Selling Catalogs

The music industry continues to reel from the ongoing impact of tour and performance cancellations due to the pandemic. As a result, many artists are considering selling their song catalogs to compensate for the loss of revenue. This may seem like a good idea, given that prior to the COVID-19 outbreak, artists were seeing catalog sale prices reaching record-high multiples (multiple = current trended annual royalty revenue multiplied by x years). However, as market conditions are rapidly evolving, these multiples are not necessarily what they seem.

The sale and distribution of music has changed dramatically over the past 20 years, with a sharp decrease in the physical sale of music (albums and CDs) and a steadily growing increase in the use of digital streaming services (Spotify, Apple Music, Amazon, Pandora, etc.). According to the Recording Industry Association of America (RIAA), digital streaming now accounts for 80 percent of the U.S. music market, compared with seven percent just 10 years ago, with streaming subscriptions soaring from approximately 1.5 million to roughly 61 million between 2010 and 2019. Globally, streaming and digital downloads constitute more than half of all music revenues (chart below).

Figure 1: IFPI GLOBAL MUSIC REPORT 2019

This massive shift has resulted in complicated legal disputes over streaming royalty rates and the distribution of those royalties to artists, and many have voiced concern that streaming is negatively impacting their livelihoods. However, legislation is finally catching up to the streaming revolution. In 2018, the Music Modernization Act (MMA) was passed, creating the Mechanical Licensing Collective (MLC), which will be responsible for the collection, documentation and distribution of streaming royalties. Additionally, the MLC is in the process of creating a publicly accessible database of musical works, contributors, and the identities and locations of copyright owners of such works in order to simplify the process of royalty distribution. The MLC is slated to begin distribution of uncollected royalties on January 1, 2021.

In addition, last year’s ruling by the Copyright Royalty Board is slated to raise streaming royalty rates by at least 44%. With this increase, combined with the projected growth of music streaming globally, the expected revenue to be generated by streaming services (from $8.8 billion in 2019 to $27.5 billion in 2030), and the new MMA legislation, artists’ annual royalty revenues are expected to skyrocket over the next 10 years.

Along with these forecasted trends, there are other unpredictable factors that can come into play. For instance, due to the worldwide shutdowns in live performances amid the pandemic, older music catalogs are seeing a boost in their streaming royalties. Why? Because music consumers are turning to classic, nostalgic tunes for comfort and familiarity – including songs by artists whose works have been otherwise unavailable until the advent of digital streaming. Voice-activated household streaming devices make it easy to seek out music on demand, no matter how obscure, giving older catalogs new life. Other genres like children’s music have also seen an uptick in streams because with many schools closed, more children are at home. There are certain events in life and in the music industry that can’t be predicted – events that can potentially send future royalties higher – making it even more important for creatives to carefully assess the long-term value of their copyrights. There are artists who have made a living from a single hit. Selling a catalogue means relinquishing the lifetime income that a song or catalog can generate.

With the projected increases in streaming revenue, musicians need to fully understand the true worth of their creative works and be thoughtful when it comes to the idea of selling, and potentially undervaluing, their catalog. For example, if an artist is offered $1.5 million on a catalog that has been providing a $100,000 annual revenue stream, they might jump at the offer as they are being offered 15x their current annual revenue on the catalog. However, as the artist begins to receive previously uncollected royalties as a result of the MMA and more streams of their music than ever before, the catalog may begin to generate $300,000 in annual revenue compared to the $100,000 it was receiving before. If the same $1.5 million deal was made at this time, the catalog’s sale price would actually represent a 5 multiple rather than a 15 multiple. A true 15 multiple would bring $4.5 million.

It is critically important that music creators and copyright owners understand these trends and know their options. Rather than selling their catalogs outright, artists have a unique opportunity to take control of their earnings and obtain a royalty advance via specialty finance firms. Instead of giving up future earnings on their catalogs, artists can continue leveraging their existing royalties without sacrificing the long-term ownership value and income from their creative works.

“The royalty thing is so important – it only takes one hit song, and you can be living off that forever. I know someone who is still living off one song from 1980, and that’s when I realized that keeping ownership of your copyrights is so important,” said Bobby Messano, legendary guitarist and contemporary blues songwriter. “You want to keep that royalty income flowing to you forever, you want to keep ownership. A royalty advance enables that.”

The bottom line is that artists should take into account that the multiples they see today may not reflect the income of times to come, and that although market conditions are unpredictable, there are low-risk alternatives for financing that do not require giving up ownership rights – and royalty revenue – in perpetuity.

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This content is offered for publication by Sound Royalties. It may be attributed to Sound Royalties or to Sound Royalties founder and CEO Alex Heiche who authored the text.