“The future for me,” Bob Dylan sang in 2001, “is… a thing of the past.”
Premonitoryly, it turns out that the future – for all of us, not just Dylan – will largely consist of hearing the songs of Dylan’s past. The same goes for Shakira, Neil Young, Barry Manilow and all the other musicians who have sold their old catalogs at high prices in recent years.
In the continued rush of funds, investors, and businesses to purchase these catalogs, Dylan’s was the predominant purchase. Universal Music bought his songs for a rumored $300-400 million. But that’s just the crest of a tide of money rolling over the industry, acquiring old songs. The bet is that by squeezing these songs to generate streaming audio revenue and also selling these songs in soundtracks on video platforms, the catalogs will earn consistently high returns.
Hipgnosis Songs Fund, perhaps the best known of the companies set up expressly to buy catalogs, spent $1.66 billion to buy at least 61,000 songs. Recently, he raised another $100 million and wants to raise more than $2 billion during the year through a stock offering. Other companies, such as Round Hill and Primary Wave, are also increasing catalogs. “At this point,” said Alec Peters, a longtime music promoter and founder of Jupiter Media, a platform for emerging artists, “everyone is knocking on the door saying, ‘I want to be in the cut. “”
These songs are considered financial assets like any other, and as Hipgnosis’ stock price shows, investors are more optimistic about catalog returns than the S&P 500. “Better than gold or oil,” Merck Mercuriadis, founder of Hipgnosis, said last year about songs as assets. “The volatility of this music is low and it’s been generating revenue for decades, so we can predict future cash flow quite accurately,” said Larry Miller, who directs the Music Activity Program at NYU Steinhardt. Interest rates are low right now, which makes it cheap to borrow money to finance acquisitions.
Yet the buying prices are so high that some people wonder how the money will ever be recovered, and if the back catalog game is simply being flooded with the kind of cash surplus that seeks high returns and forms bubbles elsewhere in the economy. Steve Cooper, managing director of Warner Music, compared the buying spree to the Yukon Gold Rush. “I praise people who can figure out how to make money when they pay 25 times [a song’s historic annual royalties]. God bless you,” Cooper told the Financial Times, indirectly referring to Hipgnosis, which pays some of the highest multiples in the industry. Eventually, all of these songs will need to be worked hard to recoup their investment. That’s why, fears Peters, we’re going to hear songs from those expensive catalogs in every cubic inch of media space around us: muzak, jingles, movie soundtracks, background music, video game scores, documentaries – a soundscape of old hits struggling to pay for itself.
Why are music catalogs so popular?
It’s not easy to rate a song. This is why Barry Massarsky had to develop complicated mathematical models to achieve this.
He runs Massarsky Consulting, a company that determines catalog valuations for Hipgnosis, Round Hill and other clients. A catalog owner is likely to make money from three types of rights, Massarsky said; he called them performance, mechanics and synchronization.
Performance rights earn money when a song is played in a public place, such as a bar or a shopping mall. Streaming royalties from Spotify or Apple Music accrue as part of the mechanical rights. Synchronization rights come into play if a song is used in the opening credits of a TV show or in the soundtrack of a movie.
Over the past decade, mechanical and timing rights have become goldmines. In 2019, streaming accounted for $11.2 billion of the music industry’s $20 billion revenue. And to match the explosion of music streaming services, there’s a glut of video content – movies, shows, short videos and commercials made for platforms like Netflix and Amazon Prime, or for YouTube and TikTok, or for channels traditional cable channels like HBO and NBC, all of which need musical accompaniment. A sync license for a big-budget movie could hit six figures, Massarsky said. “And in 2020, to boot, there were no live concerts because of Covid-19, so streaming became even more important,” he said. “The supply and demand market has never looked so good.”
That’s a far cry from a decade ago, Miller said, when the industry had yet to recover from the file-sharing disruptions. Users paid to download songs from iTunes, but the volumes did not match those of streaming, a sector at its peak still in the future. “Very few investors were buying music rights at the time,” Miller said. Multiples — the value of a catalog, tied to its revenue — were at an all-time low, around 9. “That meant if a catalog made $1 million, it was worth $9 million,” Miller said. .
Last year, the boom in music and video streaming had more than doubled those multiples; Hipgnosis has shelled out multiples as high as 22 for some catalogs. Massarsky’s model and others expect catalogs to pay for themselves in 10 to 15 years; beyond 20 years, it is difficult to predict the viability of a song’s earning power.
In the six months ending September 2020, Hipgnosis generated nearly $70 million in revenue and $14 million in net profit. Its assets have returned 11.6% this semester, Mercuriadis said in an interview, adding, “Everything we bought will triple in value by the end of the decade.”
What is this flood of money doing to the industry?
With a song, however, it is impossible to be sure of its durability, even over a period of 15 years. Tastes change and artists lose and lose popularity. Steve Cooper, CEO of Warner Music, cautioned against treating music like a fixed income investment. Even a predictable revenue stream may never recoup the outsized sums paid to acquire catalogs, other industry executives have said.
On the one hand, Peters pointed out, if several companies are desperate to recoup their investment in songs, it could reduce their earning abilities. “Now you’ll have 50 people knocking on the doors of production companies, trying to sell sync rights,” he said. “So a movie director will say, ‘I’m in the catbird seat here, I’ll choose what I like, on the terms I like. Would these public companies be able to accept a half-rate deal if it undermined their investment? When it comes to making tough deals, Peters said, “our brothers in the film industry are twice as wild.”
Massarsky thinks companies like Hipgnosis match the money to the product. “Older songwriters like Dylan are considering estate planning and retirement, so they’re eager to enter the market,” he said. “On the other hand, because bonds pay low yields and the stock market seems erratic, pension funds and wealthy investors want to direct their money here.”
But the flow of funds to older, established stars, some fear, will prevent investment in discovering new artists – artists with potential who are already struggling to get discovered and paid on streaming platforms. “It would be living, breathing musicians making music right now, as opposed to just a piece of nostalgia,” Peters said.
And those venerable catalogs themselves could be marketed in ways that musicians never anticipated. “You’re going to hear a lot more about Neil Young because Hipgnosis will have to go out there and sell him,” Massarsky said. “Neil Young never liked licensing his music for commercials, but Hipgnosis has the right to trivialize that now.” Hence the future ubiquity of all this music, predicts Peters: the greatest songs of the past century inserted into as many commercials and films as possible. “You will see this. And you’re going to say, ‘Oh. Oh my God. Well, that’s how the world changes.