How to Invest in Music Royalties

how to invest in music royalties

A casual $60 million – that’s how much Mariah Carey earned (so far) from royalties from “All I Want For Christmas Is You” since 1994.

With the market’s gradual appreciation of how music royalty stocks can play a vital role in an income portfolio, we seek to understand how to invest in music royalties and the broader music stock market.

Specifically, the article will focus on Hipgnosis Songs Fund (SONG.L), a pure-play UK listed music intellectual property and song management company founded by Merck Mercuriadis (who previously managed Beyonce, Elton John, Guns N’ Roses etc) and Nile Rodgers, the legendary musician.

Finally, we conclude the article with the our view on investing in music royalties.

Investing in music has never been this interesting!

Let’s start.

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    How to invest in music royalties

    Before we get into the details, let's quickly review the commonly asked questions about investing in music royalties.

    What are music royalties?

    In essence, music royalties are payments to copyright holders. These includes recording artists, composers, songwriters, publishers etc.

    Royalties are usually paid out by companies/institutions that use the music. For example, TV channels, companies using them in adverts, radio stations, event companies etc.

    What are the types of music rights?

    There are two distinct type of music rights – master and composition. Master royalties generally belong to the recording label, often refers to the copyright created when composition is turned into a sound recording. On the other hand, composition royalties refers to the song’s lyrics, harmony and melody.

    A recent example here is Taylor Swift’s ongoing feud with her ex-recording label regarding the master ownership of Taylor’s first six albums.

    What are the types of music royalties?

    To fully understand how to invest in music royalties, it is vital to understand what the different types of music royalties are. As you might have expected, there are many types of music royalties. We highlight the key ones below.

    how to invest in music royalties
    Music royalties' revenue breakdown. Source: cdbaby.
    • Performance royalties: As the name suggest, this is royalties collected on concerts and events performed publicly.
    • Mechanical royalties: These are royalties paid to songwriter whenever a copy of one of their song is made. This can include online downloads.
    • Print royalties: This concerns sale of printer sheet music/notation and lyrics.
    • Digital royalties: Perhaps the most interesting type of royalties given the race for digitalization. These are fees derive from streaming or any digital performances.
    • Sync licensing: These are payments to songwriters/publishers for permission to use a music in “sync” with visual image on screen.
    • Sampling royalties: This is when a song samples a part of another song. For example, Eminem sampled Dido’s Thank You for his hit single Stan.

    How music royalties work?

    Now, we’re in a position to understand how the ecosystem of the music industry works.

    It’s pretty obvious that the lifecycle starts with a song being played via any medium. This is then translates to royalties that being paid from the broadcasting/streaming institutions to recording labels that own the relevant copyrights.

    Subsequently, this trickles down to various copyright holders, including songwriters, composers and recording artists.

    Broadly, this summarizes how the industry derives its revenue stream and how it makes money.

    An introduction to Hipgnosis Songs Fund

    Now, for the interesting part.

    As mentioned earlier in the article, Hipgnosis Songs Fund (SONG.L), a UK listed music intellectual property and song management company, was founded in 2018 by Merck Mercuriadis (who previously managed Beyonce, Elton John, Guns N’ Roses etc) and Nile Rodgers, the legendary musician.

    A constituent of FTSE 250 Index, Hipgnosis is the first and only UK investment company offering investors a pure-play exposure to songs and associated intellectual property rights.

    “Our focus is building a diversified portfolio acquiring catalogues that are built around proven hit songs of cultural importance by some of the most talented and important songwriters globally.” – Annual Report 2020

    By buying catalogues, which entitles the holder to various music royalties, Hipgnosis is able to generate revenue whenever its songs are played via any medium.

    Here are a few highlights of Hipgnosis’s catalogue.

    hipgnosis song fund catalogue
    Hipgnosis Song Fund’s music catalogue. Source: Annual report.

    Most recently, Hipgnosis bought 100% of Shakira’s publishing catalogue spanning 145 songs. This is in addition to its growing catalogue which include songs by artist such as Jimmy Iovine, Fleetwood Mac guitarist Lindsey Buckingham, Neil Young, The Chainsmokers, Timbaland and many more.

    How do Hipgnosis Songs Fund make money

    Most recently, Hipgnosis bought 100% of Shakira’s publishing catalogue spanning 145 songs. This is in addition to its growing catalogue which include songs by artist such as Jimmy Iovine, Fleetwood Mac guitarist Lindsey Buckingham, Neil Young, The Chainsmokers, Timbaland and many more.

    Did you know?

    Hipgnosis Song Fund has >£700 million invested across 54 catalogues that spans 13,291 songs, according to its 2020 Annual Report.

    Hipgnosis song fund business model
    Hipgnosis business model

    The attractiveness of investing in music royalties

    Investing in music royalties can be an attractive alternative investment opportunity, in our view.

    Firstly, listening to music tends to be uncorrelated to the stock market and state of the economy. In general, we listen to music whenever, wherever and increasingly so. Hence, given that the amount of music/songs listened and streamed is the key driver to the Group’s revenue, this provides an uncorrelated source of alpha for investors. This shares some similarities about the article we wrote about investing in corn.

    Secondly, investing in music royalties can help build a stable income generator. For example, Hipgnosis is targeting a stable 5p dividend (with potential upside) paid quarterly.

    Finally and perhaps the most interesting of all – the untapped potential of music streaming. Over the years, technology has changed music consumption. From the days of Napster, to Spotify today, the monetization of music has improved drastically. Not only that, the amount of paid music subscribers has also increased exponentially.

    Finally and perhaps the most interesting of all – the untapped potential of music streaming. Over the years, technology has changed music consumption. From the days of Napster, to Spotify today, the monetization of music has improved drastically. Not only that, the amount of paid music subscribers has also increased exponentially.

    More importantly, the US Copyright Royalty Board has recently passed into law an increase in streaming songwriter royalty rates from 10.5% to 15.1% over the five years to 2022. This will be a boost for companies like Hipgnosis.

    Global paid music subscribers
    Global music subscribers since 2015 in millions. Source: Statista.

    Summary

    Investing in Hipgnosis Songs Fund is a bet on the positive music streaming trend. While the company was only founded in 2018 and has less track record than we would like, the company continues to produce very strong return on equity of ~40%.

    Trading at close to 20x P/E with 4% dividend yield may appeal to investors seeking stable dividend that offers some upside. In our view, this is a stock that we are actively considering adding to our portfolio, given the attractiveness and uncorrelated characteristics.

    We continue to monitor the stock price and look for an attractive entry point. Of course, we will update readers on this in our next newsletter.

    Thank you for reading and hope you find this interesting useful!

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