Catalogue Rules Everything Around Me: The Five Questions You Forgot To Ask When Valuing Music Royalties

Music copyright acquisitions are a hot topic following Bob Dylan’s sale to Universal Music Publishing Group. Investors who once discussed the impact of interest rates on oil prices are now just as likely to muse on the potential of country music in emerging streaming markets - unthinkable just a few years ago.

For those who wish to join the conversation, below are five variables investment funds are considering when choosing to invest in a musician’s catalogue:

1.  Will We Own What We Think We Will Own?

Catalogue buyers must be aware of how long they have the right to monetise the catalogue before:

A) Songs go into the public domain (70 years after the death of the author)

B) Artists have a one-off opportunity to reclaim their copyright under the 1976 Copyright revision act (Known as ‘Termination Rights’). This right grants artists the ability to terminate their grant with a rightsholder within a 5-year period beginning 35 years after the original agreement.

Buyers should additionally consider whether they are simply purchasing a company versus an asset, whereby a company purchase may come with a myriad of unexpected obligations including key member clauses, lines of credit and employee contracts – all of which may impact the overall profitability of the purchase. During legal due diligence, it is imperative that the buyer understand what they are purchasing and how long they will be able to receive royalties for. Any additional and costly financial analysis will go to waste should this not occur.

2.  Have There Been Any Notable One Off-Payments?

Buyers must always ask how consistent the cash flow from the catalogue is. This is because certain lump-sums of income can distort the overall picture of a catalogue’s potential. For example, has a recent major sync placement distorted the catalogue’s income? Has the catalogue been the subject of legal action and recently received back-dated revenue from many years of income? Anything outside of the consistent income from sources such as streaming risks overvaluation.

3.  Is the Catalogue Income Tied to Touring Schedules?

Once a post-Covid touring schedule resumes, it will be important to consider if the artists are still touring and thus able to garner performance royalties. An artist going back into a release cycle may also generate additional interest in their back catalogue. In the case of Bob Dylan, the myriad of cover versions across the Universal Music Group portfolio means the company has greater diversification of revenue sources that will benefit from the catalogue acquisition if the song is used elsewhere.

4.  Is the Catalogue Vulnerable to Currency Fluctuations and the Timing of Collection?

Buyers must consider the distribution of the revenues in the catalogue by territory. If a considerable amount of these royalties are collected from outside of the more established recorded music markets, they may be subject to greater currency fluctuations and variability in the timing of collection. For certain artists, this may be presently a small part of the overall income, but if they are trending upwards, the buyer may soon find a greater percentage of the catalogue is subject to currency fluctuations in the collection of royalties. This will naturally impact the payback period of the catalogue if these returns are likely to be less consistent. Sub-publishing arrangements must therefore be finely interrogated to build an overall picture of how vulnerable the catalogue is to currency fluctuations.

5.  Are the Revenues from the Catalogue Affected by Seasonality?

Seasonal popularity of music has always existed to a degree. The 1963 compilation album A Christmas Gift For You, featuring The Ronettes, The Crystals and Darlene Love, to this day accounts for many of the songs you still hear while in Coffee shops or Retail outlets from November onwards. This naturally gives a boost to their rightsholders during this time of the year.

In the contemporary context of streaming, buyers can ask now with the data provided from streaming what are other undiscovered seasonal trends for particular songs – are certain artists more popular in January than July? Additionally, if a catalogue is generating more money from ad-supported sources, then revenues will be higher in Q4 as this is when digital advertising budgets are at their highest. The buyer should consider if their marketing team is strong enough to maximise revenues given this seasonality (do their sync teams have a strong track record in certain areas around tentpole events such as sports tournaments or during the Xmas season?).

The Rub: With more entrants in the market, the energy and enthusiasm within the space can very quickly lead to analytical principles being abandoned. Music royalties is an exciting space, but ignoring certain warning signs may lead to disappointed investors. As usual, I will leave the last word with a musician:

‘Guess you lose some and win some, long as the outcome is income’