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Rare guitars tug at the wallet strings, and iconic, stage-worn items take centerstage at auction, but the most valuable relic a fan can own from musical artists is no piece of memorabilia. It's the rights to their song catalogs.
The immense value of intellectual property was on display once again this week, as Sony Music has reportedly agreed to buy a stake in Michael Jackson's catalog for "at least" $600 million. Reports suggest the company's stake amounts to half of the interests, valuing the entirety at a staggering $1.2 billion, though there are additional whispers it could be as much as $1.5 billion. It's believed to be the most expensive valuation for a musician's assets, and it's the largest transaction ever for the work of a single musician.
The remaining stake is owned primarily by the Jackson Estate, which - according to estimates from Billboard - generates $75 million in revenue annually from Jackson's masters and publishing rights, the publishing catalogs of other artists (reportedly included in the deal), and merchandise and royalties revenue from theatrical shows (not included).
The King of Pop himself understood the value of catalogs very well, shrewdly acquiring and divesting stakes in other artists' work beginning in the early 1980s with the purchase of the entire Sly and the Family Stone catalog. It was Paul McCartney who first introduced Jackson to the concept of investing in royalties, and ironically, in 1985, Jackson completed the $47.5 million acquisition of the Beatles' entire publishing catalog via ATV Music. Sony bought half of that catalog in 1991 for $100 million and the remaining half in 2016 for $750 million.You could argue, then, that the $47.5 million purchase price was a steal, making Jackson a Smooth Criminal. Forgive us, we couldn't resist.
The popularity of streaming has invited greater investment interest in the music royalty space, boasting resilient income streams less vulnerable to economic weakness. Good economy or bad economy, we listen to music. It's not just the Sonys of the world bolstering their libraries. Blackstone and KKR have begun investing in the space, and other vehicles have become available for public investment. But those vehicles also highlight the perils of the space and the sometimes imperfect ways in which the public obtains access.
Perhaps the most well known publicly-traded fund, Hipgnosis Songs Fund, boasts a catalog that includes artists like the Red Hot Chili Peppers and Shakira. However, despite all the excitement around royalties, the fund's share price has nearly halved since the start of 2022. The downturn, though, is mainly a case of poor financial management.
Mounting debt servicing costs have forced the fund to suspend its dividend after projections of retroactive revenue realizations were revised downward. As income is - you know - kind of the whole point, shareholders did not take kindly to the news. Shareholders also quashed a proposed sale of catalogs to Blackstone, taking issue with the valuation. Adding to the mess, the fund developed grievances with its independent valuation firm, which has since resigned.
Yikes.
Investors aren't confined to the fund structure, though. Platforms like Royalty Exchange and Songvest allow users to pick and choose their royalty rights across genres and artists. At Public, which acquired fractional platform Otis, collectibles have taken a backseat in a changing economic environment. The platform did, however, purchase and offer fractional shares in a 25% stake in the Shrek composer's composition rights. The $889k offering debuted with an 8.5% dividend yield based on 2022 royalties. Thus far, it's been a hit, rising to a $1.5 million market cap, though that rise dilutes the trailing twelve month yield to 5.6%.
The challenge with those à la carte offerings is the immense complexity in understanding the mechanics of the royalty landscape. Consider the Hipgnosis example: an inaccurate projection of royalty revenues missed the mark by more than $10 million, leading to the dividend suspension. If a professional fund encounters such pitfalls, then it's difficult to expect an individual to confidently navigate the category, the structure of which some describe as byzantine.
Much like collectibles, royalties can serve as a financial play on cultural relevance, and unlike collectibles, regular cash flow is a central part of the thesis. The generation of those cash flows is complex to understand, though. How and when are royalties generated, what are the underlying trends in music consumption, and what are the risks to those trends? Do the trends differ between master and composition? Between streaming, sync, performance, and mechanical?
An asset class previously available only to those deeply engrained in the music industry has arrived to a broader audience, but until the space matures further, the titans of the music industry and the titans of private equity investing will generate the strongest outcomes. Those are the buyers with the funding to spend $600 million on the King of Pop and the expertise to maximize return on those assets.
The true spoils, though, belong to the true icons of music, who are cashing out to the tune of nine-figure sums. Next up is Queen, and the band's reported asking price pushes that nine to a ten. The $1.2 billion ask makes the $41 million in proceeds from the Freddie Mercury Estate's memorabilia look like a "poor boy from a poor family" by comparison
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