Music royalties – a siren song for niche investors seeking higher yield

By Bruce Berman

A small but growing number of investors are buying the rights to musician’s future earnings, hoping to beat the fixed income returns and other markets.

According to an article in the Wall Street Journal, “Music Royalties Strike a Chord,” these fixed income investors are lured by future returns of 8%-12% annually, when junk bonds are still hovering around 6%.

Private equity funds have raise or begun to raise $1 billion since 2013 when this sector appeared to be an alternative to low yields on fixed income.

There are a several types of royalties that can be sold, either for a specified period of time or until they expire. (For works created on or after January 1, 1978, it is life plus 70 years or 95 or 120 years, depending on the nature of authorship.)

David Bowie infamously sold his future copyright earnings for $55 million (“Bowie” Bonds), only to have new technology like Napster devalue them. [See, “The Bonds that Fell to Earth,” in the January 15, 2016 IP CloseUp.) The financing did wonders for Bowie balance sheet, although not all investors made out so well.

High Yield

Bowie Bonds paid 7.9% for ten years, at which time, I believe, they reverted back to the mercurial artist. He never lost ownership of all of his songs; he merely licensed the future earnings to some of them for a period of time.

Songs can also earn money when they are performed live, played in a restaurant or film, or streamed through a service like Spotify. They still do not make money from radio airplay (a legacy from old tech, when it was about selling records). Songwriters, music publishers, artists and labels own various rights, including performance rights.

WSJ reports that in the 2Q Denver-based website Royalty Exchange held music rights auctions valued at $2.5M, more than double the total from the 4Q 2016.  Royalty Exchange publishes a guide to music royalties, here.  It is a transaction site, so it is best to speak to a lawyer or experienced IP broker before buying.

Risk to music royalty streams includes timing, trends and technological threats. A song that generates a steady stream of income today is not necessarily going to in five or fifteen years. On the other hand, a small handful could actually generate more revenue than expected. Receivables, or royalty stream financing, takes place in many industries, including energy, real estate and sports.

Streaming Rises

The renewed interest in music royalties may due in part to increased royalty payments by services like Spotify, Pandora and Apple, which, similar to YouTube, have been notoriously reluctant to pay creatives fairly for content. But increases have been negligible for most performers and song writers, and top recording artists with leverage tend to cut their own distribution deals.

With disdain for IP rights on the rise, it is somewhat encouraging that niche investors still believe in the integrity of copyrights and the reliability of their income stream. For them to succeed they will need cooperation from streaming services, as well as songwriters and performers.

[This post originally appeared at IPCloseUp.]