Royalties, Regulation, And Risk: Why Artists Need To Diversify
In the wake of the recent DoJ Decree, this article explores the need for artists to diversify their sources of revenue, expanding beyond just musical opportunities but establishing revenue streams completely outside of music.
Guest Post by Jeff Schneider, President and CFO, Royalty Exchange
The debate currently raging over exactly what impact the recent Department of Justice ruling on both the Consent Decree and “100% licensing” will have on the music industry highlights a less-discussed issue facing songwriters and other artists.
That is… the need for more diversified income streams.
We're not talking about diversifying the revenues artists get from their music activities (songwriting royalties, performance fees, merchandise, etc.)
We're talking about the need to establish income streams not associated with music at all.
The uncertainty and uneasiness caused by the DoJ's ruling illustrates the risk of relying only on royalty payments as a sole source of income. The value of music royalties can change based on any number of factors. Legislative and regulatory oversight is just one. Technology format changes are another. But even changes in music tastes and pop culture trends can impact returns based on the whims of both fans and industry executives alike.
So when people say that you shouldn't put all of your eggs into one basket — musicians and artists should pay attention.
The concept of earning money from sources other than their craft is sometimes a foreign concept to creative types. But it’s an increasing trend. Diversification is widely accepted among investors as a way to ensure that they can earn money from many different industries and businesses instead of relying on one source of income.
There are plenty of examples of superstar strata of artists investing their income into assets that are not affected by these risks as well. Jimmy Buffett has his Margaritaville chain of restaurants and stores. Sammy Hagar has his Cabo Wabo restaurant and tequila brand. Justin Timberlake invests in anything from startups like audio firm AfterMaster, to the Memphis Grizzlies basketball team, to the Southern Hospitality restaurant chain.
These artists are, of course, household names who have earned so much from their music that they can afford these types of expensive ventures. But even rank-and-file artists have started exploring diversification options of their own.
Artist Bruce BecVar, for instance, had long relied on royalties as his primary source of his income. But he was interested in (and showed a talent for) investing in the futures market. Ran Shir, a prolific composer of TV production music, decided to invest in residential real estate ventures in New York and Israel. Songwriter James Thomas wanted to complete his study of sound engineering to expand his career options.
All had one thing in common. They wanted to diversify their income, but needed to raise cash to do so. So they decided to sell a stake of the royalties they owned to private investors.
Now selling royalties can be a tricky subject. For songwriters or non-touring artists, royalties are their main regular paycheck. Traditionally, selling off royalties often meant losing that regular income stream, or worse… control of their copyright.
But royalties are also the only real asset many in the music field have. Investing in other assets or revenue opportunities requires cash, the more the better. Saving up that lump sum can take too long for artists who only have a trickle of royalties as their sole source of income.
Fortunately, there are a large number of investors out there interested in assets that generate consistent revenue, even if it's a relatively small amount. They're attracted to alternative assets such as rental real estate properties, intellectual property royalties, and even music royalties.
Because royalties are not their primary source of income, investors are less concerned with the fluctuations in the landscape that affect their value as much as artists who rely on them as the majority of their income do.
What’s more, these investors don’t need to own an entire royalty stake or catalog like labels and publishers look for. They’re content with simply a percentage of a single track, or a share of just a songwriter's portion of SoundExchange earnings. Artists exploring this option can sell off small stakes in their royalty while retaining full copyright control AND continue earning regularly on the stake they decide to keep. And after raising the cash they need, artists can always create new royalty streams by creating and releasing new music.
This opens up a new world of options for artists, songwriters, and other creative professionals who historically have relied only on the advances granted by their label or publisher. Those advances are becoming fewer and smaller these days as labels and publishers they grow tighter with their pocketbooks.
The digital age has caused a massive decentralization of the music business, with control over distribution and promotion shifting away from a few powerful gatekeepers and into the hands of the artists themselves. The same holds true for access to cash.
With the uncertainties of the music business showing no sign of clearing up anytime soon, there's no better time than now for artists to take advantage of these options to diversify their income and protect their financial future.
Jeff Schneider is President and Chief Financial Officer of Royalty Exchange, an online marketplace for buying and selling royalties. He has an MBA from Purdue University with a focus on finance. He has taught undergraduate and graduate level courses in both accounting and computer science. Jeff left the corporate world to pursue an entrepreneurial career, and has since been a part of four multi-million dollar start ups.
His interest in royalties came after searching for cash assets that aren’t correlated with the stock market. He now draws from his teaching experience to share the most important points of cashflow investing.