Music royalty funds, innovative venture deals, and media-focused SPAC's set the tone for investment opportunities in the new music business
As I wrote my last blog back in June 2020, I would have never expected to be writing this one under another lockdown over seven months later. This pandemic has forced us all to adapt to this so-called new normal that has paved the way for how we will work and communicate in the post-COVID era. There is not a single sector that has not been materially impacted by the pandemic, and the entertainment business is certainly no exception. Despite the music industry rapidly growing over the past decade with streaming numbers reaching all-time highs, concert venues and commercial studios being closed have drastically impacted the gross revenues generated by both indie and superstar artists alike. Although mass vaccinations seem to be on the horizon, whether we will ever find ourselves standing in a concert mosh-pit again is still up for debate. The cancellation of live events has forced artists and management teams to rethink how they can consistently reach their audience. Influencers across the spectrum have adopted the internet and social media to connect with their fans through Instagram Live, YouTube, and TikTok. Travis Scott’s record-breaking virtual Fortnite concert, and the Verzuz battle between rappers Jeezy and Gucci Mane that reached a live audience of 1.8 million people are both great examples of this. This pandemic has also propelled an increase in the number of content creators and the popularity of audio entertainment apps such as Audible and Clubhouse. Investors have been monitoring these trends throughout the past decade, but the rise in consumer acceptance is pushing them to bet heavy and reposition themselves for the post-COVID entertainment industry.
Since my last blog, there have been several public and private investments in the music, media, and entertainment space. Like the rest of the business world, investors are still learning how to operate and drive revenue in this new normal. So where exactly does the bulk of the revenue come from for artists in the new music business?
Streaming & Radio: the money Drake receives every time you click his song on Spotify or hear it on the radio
Touring: the money Drake receives when you buy a ticket to his concert
Merch: % of the revenue that Drake receives from each item sold at the OVO store or the merch table at his concert
Features: the money Drake receives from other artists to feature on their songs
Licensing, Sponsorships & Endorsements: the money Drake receives from Apple
Although an artist might have created a song or musical composition, it does not mean that they will receive the lion’s share of the financial earnings (or any earnings) from that song being streamed or spun on the radio. In order to exploit a song’s earning potential, one must be a rightsholder of the master recording (official original recording) of a song. You’re probably wondering, isn’t the artist who created the song the rightsholder of their own music? Not necessarily. As I discussed in my previous blog, record labels traditionally were the gatekeepers to the music industry as they controlled the means of distributing music. Labels typically leveraged this advantage and required that artists give up the ownership of their master recordings as a part of the record deal. However, through the prevalence of the streaming era, many distribution companies have emerged that provide artists with direct access to get their music on major streaming platforms such as YouTube and Spotify. Artists that distribute their music without the help of a traditional record label are considered “independent” artists and own the rights to their music catalogue (collection of master recordings).
This leads me to investment trend #1: investors turning to music catalogues and royalty funds in search of yield
Aside from being able to exploit and fully benefit from a song being played today, the music catalogues for legacy artists such as Michael Jackson or Ariana Grande will generate royalties far into the future. With the surge of streaming services and music discovery tools, the number of opportunities available for a rightsholder to exploit a music catalogue is increasing, making the underlying catalogue more valuable. Seen as an asset class that provides consistent returns, a secondary market has emerged over the past few years with investors actively trading music catalogues. For rightsholders including artists and labels, an active secondary market provides them with a potential liquidity event in return for their share of music rights. However, some artists like Taylor Swift are fighting for more autonomy over their creative work, questioning the ethics behind the buying and selling of catalogues.
Within this secondary market, many new “music royalty” funds have emerged. Such funds are buying the rights to music catalogues and are generating royalty payments for investors each time one of the songs are purchased, streamed, or performed. The partners of these funds actively manage the underlying assets by seeking sync and licensing deals to exploit the songs beyond streaming and radio. For example, if I owned Post Malone’s entire music catalogue, and an agent from Bud Light wanted to license a song for a new beer commercial, they would have to strike a deal directly with me, the rightsholder, basing the deal value on the commercial's anticipated viewership.
Taking note of the frenzy around music catalogues, global private equity firms and strategic investors have recently delved into this space. Namely, here are some of the major catalogue acquisitions just within the past few months:
01/13/2021 – Hipgnosis’ acquisition of 100% of Shakira’s publishing catalogue: Shakira’s entire catalogue was comprised of 145 songs that have made Shakira one of the best-selling artists of all-time. With over 80 million records sold, three Grammy awards, and 32 million monthly listeners on Spotify, Shakira’s catalogue speaks for itself. Hipgnosis Songs Fund is a publicly-traded fund that was founded by Merck Mercuriadis (former artist manager of Beyoncé, Elton John, Guns N’ Roses, and Mary J. Blige, among others) and has raised over $1.5 billion since inception.
01/11/2021 – KKR’s acquisition of the majority rights to One Republic's lead singer and three-time Grammy winner Ryan Tedder’s music catalogue: According to Reuters, this deal is reportedly being valued at nearly $200 million and the catalogue will include tracks that Ryan Tedder has written with Beyoncé, Adele, Ed Sheeran, Lady Gaga, and Cardi B. Tedder is pleased with the outcome and KKR’s go-forward strategy as he suggests that “streaming and all forms of digital content are not only providing new avenues for how we consume music, but also for how artists can reach new audiences in a much more immersive way. KKR really stood out to us from every metric that mattered and it truly impressed upon me and my team their commitment to music as a true focus and passion moving forward.”
11/16/2020 – Shamrock Capital’s $300 million acquisition of Taylor Swift’s catalogue from Scooter Braun’s Ithaca Holdings (backed by The Carlyle Group): This marquee deal reportedly included the master recording rights to Swift’s first six studio albums and was one of the most conversational music business news in the past year.
There are many other public and private funds that are competing for skin in the game, including Providence Equity Partners’ Tempo Investments (~$1 billion AUM), Primary Wave Publishing (~$800 million AUM), and Round Hill Capital (~$375 million AUM).
What are some of the key valuation fundamentals that investors look for when analyzing music catalogue deals?
Given that the music catalogue market is a relatively new, private market with a handful of buyers and sellers, the lack of deal precedents and comparables may result in fluctuations in implied fair value. Although hype and emotional reactions are critical in determining whether a song becomes a hit, assessing a song or catalogue as a long-term, value-driven investment requires a different set of considerations.
In order to determine some of these fundamental considerations, Royalty Exchange, an online platform that facilitates investments in music publishing royalties, analyzed over 200 sales it brokered since 2018. Here are three of the key fundamental factors when assessing a music catalogue investment:
Longevity: The longer that a catalogue has been consistently earning royalties, the more investors are inclined to believe that it will continue to do so. No investor will question whether Michael Jackson’s 1982 Thriller album will ever cease to earn royalties. Hence, the average age of songs in a catalogue is a key factor in assessing its potential for future cash flows
Source of Royalties: Investors look for catalogues that generate their plays from more sustainable and long-term sources such as streaming. Streaming is a more reliable source than radio airplay and physical sales. Licensing and sync royalties are lucrative as well, however, past deals cannot be used to make future forecasts as they are one-time events
Familiarity: Investors typically value a catalogue using a multiple of its LTM net publisher’s share (i.e. proportion of gross profit attributable to the rightsholder), and research shows that investors are willing to pay a higher multiple for catalogues where the artist or song is well-known
In the future, I anticipate that the active buying and selling of intellectual property rights such as music catalogues will span beyond music. This is already being witnessed with Netflix buying the rights to television series, and with Spotify purchasing exclusive streaming rights of podcasts as well.
Trend #2: M&A and VC investment in music, media, and entertainment technologies
One of the biggest impacts of consistent lockdowns throughout this pandemic are the changes in how we communicate. Audio and video platforms including TikTok, Triller, and Clubhouse have redefined how people connect, discover music, and share information. In addition to capital being poured into music catalogue acquisitions, venture investors across the world are waging bets on what they believe is the next big thing to impact music and culture. Here are some of the notable investments within the past year that are poised to revolutionize the music, media, and entertainment industry:
02/01/2021 – Sony’s $430 million acquisition of AWAL: With the emergence of direct music distribution companies that allow artists to get their music on streaming services, the major labels are looking to diversify their revenue to account for the growing independent artist market. Sony’s acquisition of AWAL, a popular music distribution service in the UK, suggests further potential for consolidation within the industry
01/24/2021 – Andreessen Horowitz’ $100 million venture investment in Clubhouse’s Series B: Clubhouse is changing the game for live audio conference conversations by allowing users to join open virtual rooms and listen to others have free-flowing conversations. The app began gaining traction late last year after being popularized by many public figures, including rappers Meek Mill and 21 Savage
01/21/2021 – Francisco Partners' acquisition of Native Instruments: With over 1.5 million monthly active users, Native Instruments is one of the world’s most prominent manufacturers of audio production software. The CEO of Native Instruments, Constantin Koehncke, suggests that “there’s never been a more exciting time in music, with more creators producing more high-quality music all around the world”
10/08/2020 – Triller’s $100 million early-stage financing led by UBS: Seen as a potential successor of TikTok, Triller is becoming the go-to video sharing platform and many rumours are suggesting a potential IPO through a SPAC by the end of this year. Interestingly, Triller’s minority investors include artist managers Wassim Slaiby, Troy Carter, Moe Shalizi, and Gee Roberson, among several superstar artists such as The Weeknd and Kendrick Lamar
06/29/2020 – KKR’s $48 million investment into Artlist: Artlist is a royalty-free music and sound effects company that licenses content to creators on YouTube and other platforms. Through its Next Generation Technology Growth Fund II, KKR is looking to take advantage of the growing video editing market, as the average person is estimated to watch nearly 100 minutes of online video content per day in countries including Canada, the US, and the UK
Trend #3: Public market investments in music – stocks, IPOs, and of course, SPAC’s
Publicly traded music royalty funds are not the only place in public markets where the music industry is shaking things up. Historically the music industry was privately held by a handful of investors, but many companies including media conglomerates and record labels have gone public or are seeking out a potential IPO going forward. In the past year, one of the three major record labels, Warner Music (NASDAQ: WMG), raised $1.9 billion in an IPO led by Morgan Stanley and Goldman Sachs and has since seen shares soar past 50%. This has set the tone for Universal Music Group’s IPO currently planned for “early 2022 at the latest”, especially with the company being most recently valued at over $35 billion enterprise value.
Other music and media stocks that have outperformed within the past year include Tencent Music (NYSE: TME), Spotify (NYSE: SPOT), and Live Nation (NYSE: LYV).
Any conversation about public markets in the past year would be left unfinished without the mention of SPAC’s. Not surprisingly, SPAC’s focused on acquiring music, media, and entertainment assets have made their way into the space with big dollars backing them.
One of the biggest music and media SPAC’s is Liberty Media Acquisition Corporation (NASDAQ: LMACU), which raised $575 million last month during its initial offering on the Nasdaq. Liberty Media is a majority shareholder of Sirius XM and Pandora, and a minority shareholder in Live Nation. Liberty Media is seeking to grow its already significant footprint in the space as it “intends to search for a target in the media, digital media, music, entertainment, communications, telecommunications and technology industries”.
The former head of Geffen Records, Neil Jacobson, also recently announced a $200 million SPAC which is set to close this week on the New York Stock Exchange. The SPAC, trading under the ticker $TMAC-UN, is seeking acquisitions in music rights and technology. In their S-1 filing, they highlighted four separate target areas on which they will focus, including (1) audio content, (2) music technology, (3) social media platforms such as Triller, and (4) consumer-focused brands tied to music such as Beats by Dre and Peloton.
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