Investing in Music Royalties (How It Works & Alternatives)
Music is a powerful and universal form of expression that provides income for countless artists and songwriters. This income comes in the form of music royalties — payouts made to creators and owners of musical works when their music is used.
Recently, music royalties have become more popular as a new investment opportunity, presenting investors with an opportunity to own a share of the music industry.
What Are Music Royalties?
Music royalties are payments made to artists and songwriters for the use of their intellectual property — their music. This includes income from the sale of physical recordings, digital downloads and streams on platforms like Spotify, Apple Music and YouTube.
The music business generates multiple types of royalties including the sound recording (“the masters”) and the composition (“publishing rights”). Royalty streams are dependent on the kind of copyright it’s associated with.
Types of Royalty Streams
Royalties stemming from the composition copyright and the sound recording copyright can come in multiple forms:
- Sales/Streaming: These are referred to as “reproduction” royalties for sound recordings, and “mechanical” royalties for the composition. Whenever a song is sold in any form or streamed, a royalty payment is owed.
- Public Performances: A royalty payment is owed whenever music is publicly played, including over the radio, in commercial settings such as shops or bars, and during live shows.
- Licensing: Music is frequently licensed for use in television programs, movies, advertisements, video games and in-app playlists. These licenses result in synchronization royalties and involve a one-time payment agreed upon by the copyright owner and the licensing company.
Music royalties are generated and collected by various organizations, including performing rights organizations (PROs) like ASCAP, BMI and SESAC, and mechanical rights organizations (MROs) like Harry Fox Agency and Music Reports, Inc. These organizations track the use of music and ensure that the appropriate royalties are paid to the rightful owners.
The Music Royalty Market
In 1997, David Bowie made headlines when he utilized the revenue generated from his music royalties to secure $55 million in funding through a 7.9% annualized return. These “Bowie Bonds” attracted investors with the prospect of passive income from his musical works, bringing the concept of investing in music royalties into the public consciousness for the first time.
As the potential for earning passive income from music royalties became increasingly apparent, more people began to recognize it as an investment opportunity. With a large number of individuals holding income-generating rights to music copyrights that could be bought and sold, the market for music royalties continued to grow.
In recent years, major private equity firms such as BlackRock, Blackstone and KKR have established partnerships to invest in music royalties. Meanwhile, famous musicians like Bob Dylan, Neil Young, Fleetwood Mac and others have started to sell their music catalogs for estate planning purposes.
In 2021, a significant amount of capital was invested in music rights acquisitions, with an estimated $5 billion spent. Additionally, Spotify reported that it paid out $7 billion in royalties to rights holders during the same year, further demonstrating the growing importance of the music royalty market.
Despite massive challenges caused by the COVID-19 pandemic, digital streaming services have driven growth in global recorded music revenues.
Advantages of Investing in Music Royalties
Investing in music royalties offers several potential advantages over traditional asset classes, including:
- Long-term residual income stream: Music royalties can provide a steady stream of cash flow that can last for many years, even after a song has been recorded. This is because songs can continue to generate revenue through various channels, such as radio play, streaming and licensing.
- Long-term growth: Since 2014, music streaming revenue has grown at an average rate of 43.9% according to Business of Apps. According to Goldman Sachs, the increasing prevalence of smartphones, smart speakers and connected vehicles is projected to drive streaming revenue to as much as $37 billion by 2030, which is a rise of over 76% from the current level.
- Diversification of investment portfolio: Investing in music royalties provides the opportunity to diversify your portfolio, reducing the risk associated with investing in a single asset class or market.
- Low correlation to traditional markets: Historically, both recorded music and music publishing data have not seen a clear correlation with broader spending activity. This makes sense, as music tends to not be impacted by economic crises — people will always turn on the radio or open Spotify, regardless of the price of eggs.
- Relatively low risk compared to other investments: Music royalties are generally considered to be a low-risk investment, as the demand for music is relatively stable and there is a long history of artists and songwriters generating income from their works.
- Inflation hedge: Song royalties are not directly tied to the stock market or the economy, making them a good hedge against inflation.
Risks and Challenges of Investing in Music Royalties
Investing in music royalties is not without its risks and challenges, including:
- Uncertainty of future revenue streams: The music industry is constantly evolving, and changes in technology and consumer behavior can impact the future revenue streams associated with music royalties. For example, the decline in physical music sales and the rise of streaming has changed the way that music royalties are generated and collected.
- Complex and evolving legal landscape: The music industry is governed by a complex and evolving legal landscape, including copyright and licensing laws. Changes in these laws, as well as disputes over ownership and licensing, can impact the value and revenue streams associated with music royalties.
- Difficulty in valuing and monetizing music rights: Music rights can be difficult to value, as they are based on subjective factors such as the popularity and longevity of a song or artist. Additionally, monetizing music rights can be challenging, as it requires a thorough understanding of the music industry and the various revenue streams associated with music royalties.
- Limited liquidity: Investing in music royalties can be a long-term commitment, as the underlying assets can be difficult to sell or monetize in the short term. This lack of liquidity can make it difficult for investors to access their capital or respond to changes in the market.
Ways to Invest in Music Royalties
There are several ways for retail investors to invest in music royalties. Remember, it’s important to thoroughly research and understand your potential investments. It’s also recommended to seek professional advice from a financial advisor or specialist in the music industry to ensure a well-informed investment decision.
Direct Investment in Music Royalties
A direct investment in music royalties involves buying a stake in an individual song or a catalog of songs. This can be done through a private transaction or a public offering, and typically requires a significant upfront investment.
Buying a stake in music royalties directly can provide exposure to a specific song or artist, but it also involves a higher level of risk, as the success of a particular song or artist is dependent on several factors, such as popularity, longevity, and changes in technology and consumer behavior.
Marketplaces such as Royalty Exchange and Songvest allow individuals to buy fractionalized shares of music copyrights.
Music Royalty Funds or Trusts
Royalty funds are investment vehicles that allow investors to pool their money and invest in a diversified portfolio of music royalties. Hipgnosis Songs Fund and Mills Music Trust are two examples of publicly traded companies that own interests in royalties and distribute available cash flow to shareholders in the form of dividends.
Music-Focused Exchange-Traded Funds (ETFs)
Music-focused ETFs invest in a basket of stocks of companies involved in the music industry, including music streaming platforms, record labels and music technology companies. These ETFs offer a more passive and convenient way to invest in the music industry, but they typically provide a lower level of exposure to music royalties.
Recently, musicians, record labels and publishers have begun to issue NFTs of songs and music catalogs that automatically allocate royalty earnings to token holders. This offers a range of advantages, including eliminating the requirement for intermediaries such as performing rights organizations (PROs).
Furthermore, as some music NFTs are programmable, they can be coded to pay a portion of any future resales to the original copyright owner.
Music Streaming Platforms
Investing in music streaming platforms, such as Spotify or Apple Music, can provide exposure to the music industry and the growth of music streaming. However, it’s important to consider that these platforms typically generate revenue from a range of sources, including advertising and subscription fees, and not solely from music royalties.
How Do Music Royalties & Contemporary Art Compare?
Contemporary Art and music royalties are both alternative investment options that offer the potential for capital appreciation, as well as both being passion investments that can allow investors to earn returns for investing in something they love.
However, there are several key differences between these two types of investments:
- Market dynamics: The Contemporary Art market is often driven by the perceived value and prestige of individual artists, galleries, and auction houses. Similarly, the music royalty market is primarily driven by the popularity and longevity of individual songs and artists, as well as changes in technology and consumer behavior.
- Valuation and monetization: The value of Contemporary Art is often subjective and can be difficult to determine, as it is based on factors such as the artist’s reputation, historical significance and market demand. Music royalties, on the other hand, can be more easily valued and monetized, as they are based on a specific revenue stream, such as album sales or streaming royalties.
- Passive Income vs Long-Term Capital Appreciation: Investing in a hit song can produce consistent dividends, whereas Contemporary Art is typically held as a long-term asset that provides capital appreciation but does not provide cash flow. Contemporary Art has a longer staying power than most music catalogs, especially as the streaming industry has quickened the pace of music output.
Investors searching for diversification with alternative investments in a market environment of low yields and interest rate hikes may be interested in both music royalties and Contemporary Art.
Invest in Contemporary Art with Masterworks
Masterworks is an investment platform that allows you to invest in fractional shares of iconic artworks. The site lets you invest in the works of renowned blue-chip artists like Keith Haring, Jean-Michel Basquiat and others.
Similar to music royalties, Contemporary Art is considered an asset with near-zero correlation because returns are not linked to overall market dynamics. A 2022 CitiBank report indicated that the correlations between blue chip art and any other asset class are weakly positive or close to zero.
- Read More: Is An Investment in Art an Inflation Hedge?
Masterworks allows retail investors to purchase shares of some of the most iconic pieces of Contemporary Art, broadening who has access to this historic safe haven asset.
Visit the Masterworks website today to see how you can start investing in shares of the most sought-after pieces in the art world.
The information in this article is provided for educational purposes only. This information should not form the basis of an investment decision or be construed as investment advice. See important Reg A disclosures: Masterworks.com/cd