Musicians: Touring Cancelled, Stock Market Plummets - But Alternative Income/Capital Sources Exist Right Now

I. BACKGROUND

The Coronavirus has crippled the live music industry. Virtually all concerts, touring and festivals have ground to an immediate, unforeseen halt -- with no way of knowing when things will change. That means that the primary source of income for virtually all musicians has instantly evaporated. Indefinitely. Adding to this cold stark reality, the stock market has tanked. Indefinitely. That means musician "nest eggs" have diminished. For many, significantly. This 1-2 live event/stock market punch is a gut punch for most musicians, and many understandably reel, rather than focus on their music, right now.

These are daunting times for music artists and songwriters (together, "Musicians") -- times when it is important for Musicians and their managers (who safeguard their interests) to fully understand income and financing alternatives to ease the pain. After all, many alternative sources of income and financing exist for artists, songwriters and other music rights holders (together, "Musicians"). But many (if not most) Musicians and managers are blind to them.

My goal here is to change that by illuminating alternative income and capital sources. Specifically, now may be a smart time for Musicians to consider: (1) advances against royalty streams generated by their songs, recordings and other music rights (together, "Songs"); (2) acquisitions of the royalties that flow from those Songs (without any sale of underlying publishing, master and related rights themselves; and/or (3) outright acquisitions (partial or full) of Songs.

II. THE THREE "BUCKETS" OF ALTERNATIVE INCOME & FINANCING SOURCES FOR MUSICIANS

1. BUCKET 1 – Advances Against Royalty Streams (No Acquisition Of Songs Or Royalty Streams)

"Bucket 1" is a scenario in which there is no acquisition of Songs (publishing and master rights) or royalties generated by those Songs. Instead, here, relevant companies advance sums to Musicians based on those royalty streams, and then they either recoup those sums (in effect, loans) passively over time or more actively via their well-resourced efforts.

(A) “Passive” Direct-To-Consumer Models

On the “passive” side of Bucket 1, direct-to-consumer models are fascinating new options for Musicians. Los Angeles-based Vezt is a leader in this space and is supported by music industry heavy-hitters. According to former artist manager CEO Steve Stewart, “Vezt is the first platform to offer fractional royalty participation to regular music fans, enabling them to participate in the royalties of their favorite songs.” The company partners with both indie and major label artists and has completed more than 25,000 transactions over the past 18 months. Musicians choose what fraction of relevant royalties they want to offer -- a number which can be as little as 1% of publishing and/or master royalties.

This is how Vezt works. First, the company uses social media to market what it cleverly calls initial song offerings (ISO’s) to fans of participating Musicians. Next, fans of those Musicians register on its platform to pay as little as $100, for example, to buy a fractional share of royalties expected to be generated by a particular song over time. Musicians can choose three, five or ten year terms for these advances (they decide which period works best for them), after which time those royalty streams fully revert back to the Musician.

Cash today -- instead of waiting for time to pass to collect it -- benefits artists in myriad ways (including in crazy times like these). Most obvious, advances gives Musicians money right now to fund their creativity (not to mention their overall lives). Perhaps even more interesting in the long-term is Vezt’s data. For those super fans who opt in to share their data (emails, etc.) with the Musicians in whom they invest, Vezt shares that data with those Musicians and establishes direct artist-fan relationships. Now Musicians can reach out directly to super fans and offer them direct access and “first look” opportunities. Without that kind of data, those fans are effectively invisible.

Musicians also benefit from the sheer excitement generated by super fans who, for the first time, literally have an opportunity to “invest” in, and actively support, them and their music. In effect, super fans become super advocates, and their excitement translates into enthusiastic social media posts that serve as direct marketing that benefits Musicians in all respects - touring, merchandise, expanded online discovery and engagement (including streaming).

Vezt’s new fan-centric direct-to-consumer model is fascinating to be sure. It’s part of a new wave of tech-driven fractional ownership models that perhaps are best suited for this music context where a special emotional bond exists between Musicians and their fans. For many fans who make an investment in a particular song, the primary force driving their decision is not return on investment at all. It is the direct support they give their favorite Musicians -

(B) “Activist” Models

Some indie labels take a more activist approach as they play in Bucket 1. Like Vezt, they advance Musicians funds today based on expected royalties generated in the future. One indie label typically licenses songs over several decades. Because of that longer recoupment period, the company gives Musicians a multiple based on royalties expected to be generated in the IP’s early years. And then, after it recoups its advance, the company splits all profits 50/50 with those Musicians. Throughout the licensed term, its team of brand builders, data analytics specialists, marketers, and social media experts seek new opportunities globally for masters to generate increasing revenues.

The label’s President tells me that its approach “offers artist clients true partner economics in our deals.” He further tells me, “In turn, we leverage our global infrastructure to allow the artist the freedom to focus on their creative output while our teams dig into building the communities, influencers and markets that can accelerate their career.”

A very different “active” Bucket 1 approach comes from a Swedish startup backed by several respected players in both music and finance. This new company focuses on smaller indie artists who find it difficult to attract advances from the majors. It essentially operates two businesses - one “passive” and the other “active.” On the passive side, the company uses machine learning and data analytics to predict how much artists will generate in royalties over the next six months. It then pays artists based on those future royalties to help them fund their careers. And, because it links directly to tech-driven Swedish compatriot Spotify and other music platforms, it gives artists direct distribution, valuable data analytics, and instant gratification - i.e., no months of delayed royalty payments and no recoupment of advances here.

On its more activist side, this startup functions as a label and offers A&R services. In fact, it considers itself to be more of a music label than a service.

2. BUCKET 2 – Acquisition Of Royalty Streams (But No Acquisition Of Underlying Songs)

Bucket 2 focuses on acquisition (partial or full) of royalty streams generated by Songs, but no acquisition of Songs' underlying publishing and master rights. It is an excellent alternative for those Musicians who, for their own personal reasons, have no interest in selling any of their publishing, master and/or related rights. They retain complete control over the destiny of their Songs. Virtually all of these Bucket 2 opportunities are financially-driven and, therefore, largely “passive” in nature.

One new Bucket 2 company is backed by private equity (in other words, big financial institutions) and works across all music genres and eras (from current to classic). It offers a new financing alternative for successful Musicians and indie labels/catalogs. According to its COO, “The company makes money by smartly forecasting a reasonable return for their investors, while granting the maximum possible payout to the sellers.” Because no sale of music publishing and masters is involved, Musicians retain ownership and control of their Songs.

3. BUCKET 3 – Acquisition Of Publishing, Masters And/Or Related Rights

And then there's Bucket 3 – acquisition (partial or full) of Songs themselves (publishing, masters and/or other music-related rights). These need not be “all or nothing” propositions. Most buyers are happy to simply buy a share. Nor must all Songs be involved in a deal. Musicians are in control. They choose what to sell, on what terms, and to whom – including what kind of buyer (active, passive, or a combination of the two).

(A) “Passive” Buyers/Partners

The three major music labels, of course, are buyers through their respective publishing houses -- Universal Music Publishing Group, Sony/ATV, and Warner Chappell. They certainly have the deep pockets to make deals happen. But Musicians frequently get lost in the bureaucratic noise of these behemoths that control millions of songs. It’s difficult for these giants to focus on any single Musician and actively expand their opportunities - even major artists who are not today’s mega stars – when they are inundated by a tidal wave of songs. For this reason, these large publishing houses -- and even mini-majors like Kobalt Music and Anthem Entertainment (formerly ole) -- are more “passive” than “active” in their approach (at least from the Musician’s perspective).

Major private equity companies also play heavily, and mostly "passively," in the Song acquisition game. They provide financing to get deals done, but generally work with others to administer their rights (rather than build their own teams and infrastructure). For them, it is purely a financial play. 

(B) “Active” Buyers/Partners

Other major players focus on the more “activist” side of Bucket 3.

(1) Private, Non Publicly-Traded Buyers

One private company (i.e., doesn't trade in the public stock market) with whom I have facilitated several major deals (including rock legends Boston, Grammy award-winning duo Air Supply, and jazz great Count Basie) focuses on iconic artists and catalogs frequently lost in the “big label” shuffle. It boasts a team of about 70 specialists -- marketing, branding, social media, digital (in addition to more traditional syncs) - -who are always on the hunt for new opportunities. Its CEO says, “Unlike the majors, we consider ourselves to be primarily a marketing and branding company rather than a music publishing house.”

Because the company manages thousands of songs -- rather than millions like the majors -- it can give more attention to Musicians and their overall legacies. At the same time, it too has deep pockets that enable it to pay up and compete with the majors. Because of its unique activist, artist-friendly and “less is more” highly curated approach, this company has built up an impressive and eclectic roster of legends and is a leading player.

(2) Publicly-Traded Buyers/Partners

A very different kind of Bucket 3 player is an investment company that publicly trades on the London Stock Exchange. Founded by a music industry veteran who has managed the likes of Beyonce and Elton John, the company has raised over $1 billion to date to fund its acquisitions. Like the company above, it too rejects comparisons to the “Big 3” labels. “I hate the word ‘publishing,’” its CEO tells me. “I believe in song management.” By his math, major label publishing houses assign 20,000 songs to each relevant executive, whereas his team of 21 each actively manages only 1,200. While this company also acquires catalog Songs from iconic Musicians and indie labels, it also focuses on songs of today. “We’re not afraid to buy new songs,” says its CEO. “But we only buy proven songs.”

The company's CEO considers its portfolio of Songs as being “a new asset class to be taken as seriously as gold and oil.” But he tells me, “Better than gold and oil, because music is personal and always being consumed, and is not correlated with the rest of the marketplace.”

I agree. Songs are fundamentally different than stocks and other assets. After all, we listen to music in good times and in bad (including in today's coronavirus age). Perhaps even more so. Music uniquely takes us away to different emotional places, even if only for a few precious minutes.

Another buyer is similar in its publicly-traded DNA. The company boasts an impressive roster of mega artists and includes financial interests in, and royalties generated by, Songs from The Rolling Stones, The Who, Dire Straits and Eminem. It intends to trade its diverse portfolio as a fund on a Canadian stock exchange before uplisting onto a U.S. exchange. When it does, it will be more open to the general retail market than to the other’s larger institutional investors. According to the company’s CEO, “For the first time ever, artists and fans can participate together in a diversified portfolio of global brands – that is, songs that everybody knows.”

This company, like all others above, pays generous financial multiples (i.e., payouts based on royalty history and forecasts, which I explain in much deeper detail below) to Musicians and offers them the opportunity to take their payout in cash, equity in the fund itself, or some combination of the two. That gives Musicians a compelling new investment vehicle that the company expects to rise in value over time just like any other stock, especially as the fund’s Song portfolio deepens and diversifies. The company’s CEO tells me, “At a time when real yields and returns are actually negative after inflation, music royalties provide a higher yield and potential capital appreciation due to the tremendous growth in streaming and paid subscriptions, an alternative investment not directly tied to the economy.”

Note the similarities of the investment theses of both publicly-traded companies above -- comments that are particularly poignant during our current highly unstable financial market times.

Within these three major buckets of opportunity, many different "flavors" exist. Advances or acquisitions may be full or partial. It's up to the Musician to determine what flavor and approach are right for them. After all, Musicians must feel comfortable when they entrust their Songs, reputations and legacies to anyone. The “fit” must be right. One size certainly does not fit all.

III. MUSICIANS: WHY PARTNERSHIPS NOW MAY MAKE SENSE

As discussed above, today's crazy financial times in the music world should motivate both Musicians and their managers to at least consider these new sources of income and financing. But it's not just a financial equation. After all, Musicians' Songs are their “babies” -- deeply personal and dear to them. And, many Musicians have worked hard to get their Songs back following earlier business deals that didn’t treat them fairly or via U.S. copyright law’s 35-year reversion period for works post 1978.

Several other significant and smart reasons support actively exploring advances against Song royalty streams and/or potential sales (partial or full) of Songs right now. But first, let's talk about the money, because that likely is first and foremost in Musician minds right now.

1. Reason 1 – It’s Still A Seller’s Market & Buyers Pay Top Dollar Right Now

Because “content is king” now more than ever in every aspect of the entertainment business, all three buckets of players are willing to pay top dollar in the marketplace right now -- even in these crazy coronavirus times (although, to be clear, downward pressures in overall financial markets will impact the market for Songs as well if they continue for an extended period of time -- yet another reason to actively explore all three scenarios right now). So-called financial “multiples” on royalties and revenue streams in the music business have never been higher. Those multiples are highest in sale scenarios, of course. Multiples typically range from 10X to 15X for publishing -- and can go significantly higher -- depending on the particular Musician and their stature. There also may be some important long-term capital gains tax benefits that should be explored with accountants (to be clear, I am not a CPA and am not offering advice or conclusions here).

2. Reason 2 -- But It’s Much More Than “Just The Money” – In Fact, Other Benefits May Be Even More Valuable

Critically important to understand, the benefit to Musicians is not “just the money.” After all, even today, some mega-Musicians do not “need” the money (although, even for them, top dollar is always nice). Rather, “active” buyers devote substantial marketing, branding, social media and other resources to seek out and drive new opportunities that would otherwise not exist. Those active efforts increase the value of Songs retained by Musicians, expand the audience for their Songs, and drive their legacies into new generations.

These teams of experts who actively “work” their songs and recordings are resources that Musicians simply can’t match, no matter what their stature. Without active “care and feeding,” audiences and legacies generally decline over time with new generations of music fans who consume their music very differently than they did in the past.

Even in more passive and purely financially motivated contexts (Buckets 1 and 2), the halo effect of partnerships goes well beyond the money. In fact, in many cases, Musicians get priceless data about their super fans (emails, etc.), so that they can reach out to them directly, engage and monetize. Without such data, Musicians generally have no visibility into their fans who otherwise remain anonymous.

3. Reason 3 – Musicians Retain Control – They Define The Deal & Its Terms

As discussed, Musicians have control in these deals. They decide which of the three "buckets" works for them. They may simply wish to take an advance to fund immediate cash needs, rather than wait for those royalties to flow over time. Or, they may be interested in selling either royalties generated by those Songs (with no sale of music publishing and master rights) or the publishing and master rights themselves.

Musicians can also dictate “rules of the game." For example, some Musicians may not want their Songs to be associated with guns, alcohol, certain political parties, and hygiene products. In Song sale scenarios (Bucket 3), true “partnerships” exist when rights or streams are jointly held by Musicians and buyers (50/50 or some other kind of partial situation). These maximize artist control, because communications amongst partners are ongoing and incentives are aligned. If Musicians aren’t happy, they most certainly will let their partners know about it.

4. Reason 4 - These Deals Give Musicians Control To Decide Who Will Care For & Nurture Their Songs, Recordings & Legacies In The Future 

Many Musicians see tremendous benefit in making their own personal decisions about -- and establishing plans for -- their songs, recordings and legacies today. The alternative is to leave it to others (including family members) to attempt to divine and carry out the Musician’s wishes when they are no longer able to do so. We have seen stories of epic and ugly family battles over the past few years when no plan was in place. The focus should always be on Musicians, their Songs and their overall place in music’s great pantheon. For many Musicians -- particularly older ones -- it’s better to plan now.

IV. CONCLUSION

Thanks to transformational technology -- not to mention transformed sources and modes of capital and financing -- Musicians and other music rights owners benefit from never before seen lucrative and valuable business deals and opportunities. These come in various flavors across a spectrum that carries benefits unique to each of theme. All should be considered, because all can be transformational to Musicians in their own way, particularly in this age of "Black Swans" (like the coronavirus).

Yet few Musicians are even aware of these alternative sources of income and financing. This is due to their perceived complexity, music rights overall complexity, general invisibility of compelling new opportunities in our tech-transformed times, and manager stubbornness or outright ignorance (or some combination of the above).

Knowledge is power, of course. And there is no downside in understanding what the market has to offer. And what it will bear. Especially now ....

[Peter Csathy is Chairman of CREATV Media, a media, entertainment and tech-focused business M&A and advisory firm. Csathy works with both buyers and sellers of music publishing, masters and related royalty streams -- including in all three buckets discussed in this article -- and has facilitated deals for a diverse group of legendary artists that include classic rock’s Boston, Grammy-winning duo Air Supply, and jazz great Count Basie.]