It's been often said that music never dies. Now investors are taking notice of one other fact: Music revenues also last a darn long time.
Although still a niche market, investments in music royalties are growing, helped along by online marketplace Royalty Exchange of Denver. The company, which acts as the middleman for buyers and sellers of royalties, has raised close to $50 million in investment capital through mostly music royalties since 2016, including a $3.4 million sale of private syndicate shares last month that gave investors royalty rights to the catalog of British rock group Dire Straits.
Most bidders are individual investors who bid anywhere from a few thousand dollars to hundreds of thousands of dollars for rights to the royalty streams attached to the works of various artists, including big names such as Justin Bieber, Jay-Z and Alicia Keys. Winning bidders typically get royalty payments on a quarterly basis, with a rate of return Royalty Exchange says is often in the double digits. The longevity of the royalty rights varies. Some royalty rights are limited to 10 years, while some offers include copyright ownership, which means the payments can last for decades.
"One of the investors I talked to once told me, 'It's the only asset I can think of that has zero chance of completely going away,'" said Antony Bruno, Royalty Exchange's director of communications. "If you invest in a company, it can go bankrupt and the assets will disappear."
The buying and selling of music royalty rights isn't new. But up until recently, it was strictly a closed market, with a few dominant players. Royalty Exchange, founded in 2011 and sold to its present owners in 2015, says its mission is to open up the market to all investors.
“The demand for the Dire Straits catalog illustrates just how well music royalties satisfy investors’ appetite for a meaningful return in today’s investing landscape.” https://t.co/smfa7M9B52
— Royalty Exchange (@royaltyexchange) October 15, 2018
"Royalty Exchange offers a stark alternative to the shady, bullying and predatory practices that have defined the royalty business to date," the company says on its website. "Most companies offering to buy royalties are trying to get the best deal possible by paying as little as they can."
Royalty Exchange launches about three to five new auctions every week. It has more than 23,000 investors registered on its platform, with about 500 added each month, Bruno said, adding that many times the sellers of royalties are the artists themselves.
Songwriters have a tax incentive for selling. Under the Songwriter's Capital Gains Equity Act of 2006, the money songwriters make from selling all or parts of their catalogs is treated as capital gains. Royalty revenues, meanwhile, are treated as ordinary income.
"There are people whose only real assets are their royalties," he said. "Their financial security is based around how they leverage those things."
In one of the live auctions this week, for example, an owner is selling the royalty rights to a collection of songs including Grammy-winning "Empire State of Mind" by Jay-Z, a version of the song by Alicia Keys and songs by various other artists, including American Idol alum Fantasia Barrino. The listing notes that the track of "Empire State of Mind" up for auction has been used in dozens of TV series, movies and in Major League Baseball, National Football League and National Basketball Association telecasts. "Each time a past (or future) series or film airs on TV with 'Empire State of Mind,' a public performance royalty is generated," the auction listing says. "As the winner of this auction, you'll collect these public performance royalties for the song."
The auction opened with a starting bid of $110,000. The high bid stood at $148,500 on Wednesday, with the auction scheduled to end on Thursday. The winner will get rights to the royalty stream for 10 years, with a rate of return that Royalty Exchange estimated to be about 16.25 percent based on the age of the songs included, their royalty histories and other factors. Royalties for the collected songs amounted to $32,733 over the past year, the listing notes. Auction winners also pay a one-time $500 administrative fee to Royalty Exchange.
Other auctions, which generally run about three days, have been won with bids of a few thousand dollars, while others have exceeded half a million. Among Royalty Exchange's most successful auctions happened a year ago, when the estate of songwriter Tony Geiss, who wrote many of the songs on the TV show Sesame Street, sold off the royalties tied to his works on the platform, yielding a winning bid of $580,000. As was specified in Geiss's will, the proceeds from the auction went to 10 charities, including the New York Public Library, Doctors Without Borders and the Wildlife Conservation Society.
Bruno noted that because Royalty Exchange chiefly deals with music, people sometimes get the impression that the auctions are "novelty investments" and not something for serious investors. He acknowledged that people sometimes do invest based on their emotional ties to certain songs. He related the tale of a father who invested in the royalty of a song loved by his daughter, whom he gave it to as a wedding present. But Bruno also said the music investments are not frivolous.
Investing in music royalties is more akin to investing in a REIT or even an annuity in terms of the yield and income derived, he said.
"The investment is completely sound," he said. "Our investors are wealthy individuals who are looking for an alternative investment uncorrelated to the stock market or even the bond market. … This is an income-producing asset, delivering income regularly over its lifetime."
The growth of the music streaming industry, with platforms such as Spotify, Apple Music, Amazon Music Unlimited and Google Play, is one trend that could enhance the value of music royalties, according to industry analysts. Goldman Sachs, for example, issued a report last year that predicted the global music market would grow from $56 billion in 2016 to about $119 billion in 2030. In the same report, the firm's analysts predicted 14 percent of the world's smartphone users will be streaming music in 2030, compared with 9 percent today.
Royalty Exchange has also been broadening its reach, introducing private syndicate sales this past summer that facilitate the auctioning off of large music collections to accredited and institutional investors. The first sale was for the catalog of Grammy-winning alternative rock band Cage the Elephant, followed by the sale of the Dire Straits catalog last month. Under the private syndicate program, holding companies are created to buy music catalogs and investors then buy shares of those entities, which grant them a proportional share of the royalty income they generate, according to Royalty Exchange.
The online platform expects investor interest to continue to grow because of the uncorrelated cash flow and high yields they provide, Bruno said.
"Royalties are a cut off the top—you get paid first. It's not like a dividend, where it depends on the vote of a board of directors," Bruno said, adding, "What would you rather have, shares of Apple or a penny for every iPhone sold? That's what makes this an interesting investment."
