By Luiz Augusto Buff from Berklee College of Music's Music Business Journal.
After the music industry was shocked in the early 2000s by the growth of piracy and file sharing, many investors were skeptical about the future of music publishing assets, worried that the value of songs would decrease significantly due to consumer’s free access to music. However, the rise of legal alternatives for music consumption offered listeners a way to access music conveniently and affordably, while at the same time compensating publishers and songwriters for the use of their work. Throughout the past decade, the publishing side of the music business ended up suffering a significantly smaller hit than the record labels.
Indeed, royalty revenue in music publishing remained notably stable over the past 15 to 20 years, attracting savvy investors to the field. The music publishing industry generates around $6 billion a year globally. Approximately 40% of that revenue comes from the public performance of compositions, when music is performed publicly through broadcast on television, radio, cable and satellite, live performance at a concert or other performance venues, but songwriters and publishing companies benefit greatly from a multitude of revenue streams. Important sources of income include synchronization licenses of existing works for use in movie, documentary, TV, video games, internet, or commercials; mechanical royalties from the sale of physical and digital products, as well as from streaming services; sheet music sales and lyric display; as well as other streams such as ringtone licensing, commissions for original work, grants and awards, and litigation settlements.
In 2012 Sony/ATV alongside David Geffen, GSO Capital Partners and Michael Jackson’s estate purchased EMI Music Publishing with a catalog of over 1 million songs for $2.2 billion, and even during the recession back in 2009, a Dutch pension fund backed the acquisition of the Rodgers & Hammerstein catalog for Imagem Music Group. This is possible because royalty returns are largely uncorrelated to the performance of the public and private equity markets. Royalty income is basically predictable, and distributed on a semi annual basis generating an annuity-like cash flow for investors.
In addition, there are currently positive factors influencing the dynamics within the music publishing industry that have the potential to generate incremental revenue for music catalogs, thus attracting the interest for investments in music publishing catalog acquisitions. The termination of transfers and licenses provision in the Copyright Act effectively gives authors and writers the chance to reclaim the rights they assigned after 35 years from the execution of the agreement. Songwriters of popular songs written in the late 1970s may now regain rights to their songs and renegotiate their catalogs with interested companies and investors. Furthermore, emerging markets around the globe are adapting their copyright framework, enabling innovative services to access the enormous potential of those markets. With the explosive growth of digital media platforms such as Deezer, Spotify, and YouTube’s Music Key, it is expected that royalty earnings will increase in the years ahead.
NPS Multiples & Acquisitions
Music publishing catalogs are usually traded for a multiple over Net Publisher’s Share (NPS). NPS is defined as the amount of royalties received by a music publisher less the amount of the royalties that have to be paid to writers, performers and others who participate in a share of the royalties earned. Some catalog valuations are based on an average of the NPS over a 3 to 5 year period, while others prefer to base the asking price on the “last twelve month” (LTM) period. Recent acquisition transactions were closed with a multiple of 5x to 15x the NPS. Established classic catalogs tend to trade between 10x to 15x NPS, while newer and lesser-known catalogs are selling between 5x and 10x NPS. In determining the multiple applied to the transaction the parties have to access a number of factors that include the number of past hits or potential future singles in the catalog, the remaining life of protection, current songwriter deals in place, and other determinant factors when acquiring a company. For instance, the acquisition of the Rodgers and Hammerstein catalog previously mentioned had a price tag of $225 million. The NPS at closing was $19 million, returning a multiple of 11.8x NPS.
There are a number of companies that are currently interested in the acquisition of music publishing catalogs. Ole, a Toronto-based music publishing company recently acquired the catalog of the band Rush for an undisclosed amount. The company has recently concluded over $300 million in acquisitions and controls a catalog of over 45,000 songs. In 2011, Josh Gruss, a former hedge fund manager, founded Round Hill Music, a private equity firm exclusively dedicated to investments in revenue generating music copyright assets. Round Hill Music closed on a fund with multiple investors for a total of $201.6 million earlier in July, and has made several acquisitions since. The company now administers a catalog of over 20,000 songs, including songs from The Beatles, Rolling Stones, Frank Sinatra, Billie Holiday, Ella Fitzgerald, Miles Davis, James Brown, Bruno Mars, Aerosmith, Katy Perry, Bon Jovi and Celine Dion. Their most recent acquisition was the catalog of Big Loud Shirt Industries, including #1 hits performed by Rascal Flatts, LeAnn Rimes, George Strait, Faith Hill, Carrie Underwood, Kenny Chesney, Jason Aldean, Blake Shelton, and Toby Keith. The investment strategy of the company is to acquire time tested, iconic copyrights, add value to the portfolio to increase cash flow and later sell its assets to a strategic or financial buyer.
Music publishing royalties have also been the target of new and innovative ways of exploitation, such as crowdfunding. Royalty Exchange, a startup founded in 2011 created a marketplace where royalty revenue streams are auctioned to accredited investors. Artists and songwriters may use the platform to sell part of the royalty income from their writer’s share to raise capital for specific projects. Songwriter and producer Preston Glass who worked with artists such as Natalie Cole, Aretha Franklin and Whitney Houston, recently auctioned 15 of his songs through the Royalty Exchange platform, raising $158,000 from an investor that now receives a cut whenever one of the songs is played on the radio or streamed online. The transaction does not involve transfer of copyright ownership, only encompassing participation on the royalty stream derived from the public performance of the songs. The company takes a 2.5 percent fee from the buyer and anywhere from 5 percent to 12.5 percent from the seller, depending on the size of the deal. It also takes 2.5 percent of future earnings from the buyer, as an administration charge. Royalty Exchange has now sold more than $2 million in royalties on more than 2,000 songs. The company is expecting to expand significantly once the SEC passes final regulations on the JOBS Act’s new general solicitation rules, making it possible for companies like Royalty Exchange to advertise shares of an asset to the general public, not only for accredited investors, as well as creating a form of royalty crowdfunding.
Moreover, one of the most renowned names in the music industry, Irving Azoff, ex-Chairman of Live Nation and a longtime manager and recording industry dealmaker, is now colonizing the publishing space. Last year, alongside former Performing Rights Organization (PRO) executives Randy Grimmett and Sean O’Malley, Azoff founded a company called Global Music Rights (GMR) as part of Azoff MSG Entertainment, a new joint venture with the Madison Square Garden Company. GMR offers licensing, distribution and collection services for the exclusive rights granted to a small number of artists. GMR is not a traditional music publishing company, but rather a new PRO competing with ASCAP, BMI and SESAC. GMR plans to limit their representation to 40-60 writers, including Pharrell Williams, the estates of John Lennon and Ira Gershwin, and One Republic front man Ryan Tedder, who in 2013 had an income of $2.5 million for seven songs that he wrote for One Republic, Beyonce, Ellie Goulding, Maroon 5, Demi Lovato, and The Fray. GMR and SESAC are not bound by the consent decrees with the U.S. Department of Justice that regulate how ASCAP and BMI do business. For that reason, Azoff has promised to negotiate higher royalty rates for its writers with traditional broadcasters and new digital services. In fact, at the end of November, as YouTube announced its upcoming Music Key subscription service, GMR sent a letter requesting removal of its songs for lack of proper licensing clearance. YouTube refused to do so arguing that it had all the necessary rights in its catalog already and that the safe harbor provisions of the DMCA protected it. The dispute is still in its early stages and might be settled before becoming a lawsuit. In the meantime, it allows Azoff to put pressure on new digital services and negotiate better deals for his roster of artists.
By Luiz Augusto Buff