In an era where the music industry is continuing to struggle with declining CD sales and other problems due to the movement into the digital age, music publishing, on the other hand, is prospering more than ever.
Investors, such as pension funds and equity firms, are increasingly being drawn to purchasing publishing catalogs, especially of seasoned musicians with proven longevity, which they consider to be promising assets due to the recurring and stable cash flow they provide from the royalties due every time songs are played on the radio, on television, in movies, in video games, in advertising, and online.
With the digital age, the entities that rely on forms of distribution for profit, i.e. labels, are being forced to consider other ways of doing business or risk failure. The internet has largely erased the need for physical copies of prerecorded songs and piracy continues to burden the distribution of music digitally. Publishers, on the other hand, are not reliant on income from distribution of prerecorded music. Rather, publishers collect revenue every time any one of the "sticks" in the "bundle of rights" included in copyright ownership of a particular song is exploited, be it public performance, synchronization of the song with audiovisual content, or print rights. Due to the diverse sources from which royalties are incurred, investment in music publishing is increasingly being considered a stable investment. Investors are attracted to the catalogs because their value does not monetize quickly, like with traditional assets, but rather revenue is constantly and steadily generated over a long period of time as songs are exploited. Moreover, due to the characteristics of the music industry, royalties are generated, most often, on an international basis.
Most recently, First State Media Group acquired Sheryl Crow's publishing catalog for $10 million, including 153 of her songs released from 1993 to 2008, and also rights to her next two albums. First State Media also acquired the DreamWorks Music Publishing catalog back in 2007. Its Media Works Fund I has made over $150 million music-copyright investments since its launch in October 2008, and includes the catalogs of The Carpenters, John Denver, Evanescence, George Benson and Creed.
Other examples include Pegasus Capital, which purchased song publisher Spirit Music Group for an estimated $55 million for its rights to works from artists such as Madonna and Frank Sinatra. Dutch Fund ABP, the world's third largest pension fund, purchased the Rodgers & Hammerstein catalog, containing songs from "The Sound of Music," among others, for an estimated $200 million, and in the biggest deal to date, Vivendi's Universal Music Group purchased Bertelsmann BMG's catalog in 2006 for $2.1 billion in order to repay debt from share repurchases. The catalog includes songs from Coldplay and Barry Manilow.
Further, EMI Group Limited recently considered securitizing its music catalog to refinance its corporate debt, before it decided to use corporate debt financing instead, and the recent death of Michael Jackson has led many to wondering whether the Beatles music catalog will be the next to be collateralized.
Ownership of songs by investors is a twenty-four-hour job. The songs must be constantly promoted and exploited for the revenue to be generated, meaning they need management teams with know-how. Currently, investors are competing with publishing divisions of music companies for ownership of these rights. It does not matter whether the catalog is owned by an investor or publisher, so long as the investor maintains an experienced management team to oversee exploitation of the songs.
For an artist, the upside is having access to a whole management team whose job is to constantly find avenues for exploiting the artist's music. For example, under Crow's deal with First State Media, Crow will work with the management team to promote the use of her songs in television and movies, and, she will also work with First State's existing songwriting teams to co-write bespoke songs for film productions. She retains her songwriter's share of copyright, meaning she will partake in any upside profit generated by First State's management team.
The idea of collateralizing publishing catalogs originated in 1997 with David Pullman's "Bowie Bonds." Pullman, founder and chief executive of Los Angeles-based Pullman Group LLC, issued $55 million worth of 10-year asset-backed bonds to insurer Prudential Insurance Co. on behalf of rock star David Bowie, based on future royalties from 25 of Bowie's albums recorded before 1990. The deal became perhaps the most famous IP securitization of all time, with the securities yielding 7.9%. The bonds were praised for their long life and international and steady income streams. The securitization of the collections of other artists, such as James Brown, Ashford & Simpson and the Isley Brothers, later followed.
It appears Pullman's idea has expanded into a trend, further shaking up the ever-changing music industry. While some fear that the increased interest in publishing catalogs will ultimately drive prices up, for now, more and more songwriters are placing their catalogs on the market and more and more investors are eager to buy. At a time when many asset classes are performing poorly, well-constructed portfolios for institutional investors are increasingly including investments in intellectual property rights.
Vol. 53, June 2010