Osprey Associates

Global Recorded Music Revenues Increase by 8.2%

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• Streaming revenues grow 41.1% to become largest revenue source, driven by 176 million users of paid subscription accounts.

• Third consecutive year of growth following 15 years of revenue decline.

• Drive to achieve full and fair value for music in digital marketplace continues.

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Music is the soundtrack of life, and it can be so much more than that. If you are looking for a way to invest your money, you might want to look into music. It is safe to say that music isn’t going anywhere anytime soon. New artists come out all the time, as well as new genres. And, music that has been around for decades is still being played and bought today. In fact, The Beatles recent discography release on Spotify, Apple Music and several other streaming services very clearly indicates that the popularity of music of bygone years still remains (songs from the Fab Four were added to 637,000 playlists in the 48 hours after they were first released).

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Online streaming services like Spotify and Apple Music have become the recording industry's single biggest revenue source, overtaking physical sales of CDs and digital downloads for the first time. The rapid growth in streaming music services in recent years has led to a recovery in the fortunes of the global recorded music industry, which enjoyed its third year of positive revenue growth, according to a report by industry body IFPI. Figures released in IFPI’s Global Music Report 2018 show total recording music revenues for 2017 rose to $17.3 billion, up 8.1 percent from the previous year.

 

Improving finances have led to a tentative re-evaluation of the music industry by stock market investors, who had shied away from the struggling media category for much of the past decade due to a wave of piracy by users and major technology shifts. Just in the past month, streaming music subscription leader Spotify of Sweden held a record-setting public stock offering. France's Vivendi, the owner of Universal Music Group, the world's biggest music label, said last week it was mulling a stock market listing of its wholly owned music unit.

 

Tencent Music Entertainment (TME), which attracts three-quarters of China's booming music streaming market, has been reported by The Wall Street Journal to be eyeing a listing later in 2018. TME is controlled by internet giant Tencent. Industry leaders say the growing adoption of paid music streaming services is enabling the market to reach new regions of the world while helping weaning a generation of music fans away from free or pirated music. "We estimate that only half the world’s population lives in a thriving music environment and we want to bring the streaming revolution to all of it," Stu Bergen, from Warner Music Group, told reporters in London.

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During the 15 years ending in 2014, music sales plunged by 40 percent to $14.3 billion after music file-sharing services such as Napster ravaged sales of CDs while the rise of download services like Apple iTunes failed to offset those declines. IFPI - The International Federation of the Phonographic Industry - charts the recent recovery to the rise of streaming music. It said there were 176 million users of paid streaming subscription services in 2017. Streaming subscriptions in 2017 accounted for 38 percent of recorded music revenue, up from 29 percent in 2016. The streaming business expanded 41 percent, offsetting a 5 percent decline in physical sales and a 20 percent drop in download revenue. Despite these improving finances, revenues for 2017 are still only 68.4 percent of the market’s peak in 1999, IFPI said.

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Latin America and China saw the biggest market growth, with a rise in overall music revenue of 17.7 percent and 35.3 percent respectively. The United States, Japan, Germany, Britain and France are the world's top five music markets by revenue. Brazil ranked No.9 and China was No.10 in 2017, IFPI said. IFPI renewed calls for governments to tackle the "value gap" between the value created by some digital platforms such as Google's YouTube for their use of music and what they pay those creating and investing in it. Rival Facebook has been gearing to launch its own music video sharing service. "Things are looking good but there’s a structural fault in the system. Until we fix it, it will always be a struggle,” said IFPI Chief Executive Frances Moore.

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Streaming is the fastest growing segment in the global recorded music industry and is forecasted

to grow at a compound annual growth rate (CAGR) of 19% through 2025. This is projected

to propel the industry as a whole to a CAGR of 7% over the same period.

Sources: RIAA, PwC, IFPI, RAB, Morgan Stanley Research.

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MUSIC ROYALTIES AS AN ALTERNATIVE INVESTMENT
 

Royalties are a unique form of investment. Compared to stocks, they provide a stable, fairly low-risk alternative for investors. Instead of owning a share of the company's stock that fluctuates daily, investors are guaranteed a monthly payment based on the company's revenue.

Due to the current state of the economy, many people are looking for new ways to invest their money that are not bound to unpredictable stock market fluctuations. This has led to a rise in the popularity of alternatives to stocks, like royalties. According to the International Confederation of Societies of Authors and Composers, royalty revenues have continued to grow over the past few years in spite of the unstable global economy. In fact, during the crash in 2008 more than 7 billion euros in royalties were collected worldwide by the 2.5 million artists represented by the group.

 

A royalty is a monetary compensation paid to the owner of an asset (often an intellectual property). The owner may license the asset to be used by another party, and will be paid a percentage of the net revenues of the asset based on its usage. Royalties can also be used to allow investors in a company to have a percentage ownership of future production or revenues that will be paid at specified intervals like annually, quarterly or monthly.

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As paid streaming subscriptions continue to drive aggregate growth in recorded music revenues, industry insiders are cashing in specifically on performance royalties, which are paid to songwriters and composers every time their work is “broadcast” in public (including on streaming services). Within the music industry, publishers like Concord Music Group and Round Hill Music are acquiring legacy catalogs for unprecedented, multimillion-dollar prices. According to Billboard, a songwriter’s catalog typically sells for 10 times its net publishing share (NPS), but that multiple has increased to 12x or even 16x in recent years amidst a seller’s market.

 

In venture financing, lenders invest in a business in exchange for part ownership of the company, which provides the business owners with funding to further grow their business. In addition, in venture financing the investor normally only makes their money back if the business is acquired or has an initial public offering. However, with royalty-based financing the business owner does not have to share ownership of the company with the investors. Investors instead receive a monthly payout based on the revenue of the company. Royalty-based financing is a hybrid small business loan that combines assets from venture-capital funding and bank loans. The royalty-based financing model has become common among several New England-based investment firms like Royalty Capital Management, BDC Capital and Rockwater Capital.

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Owning a natural gas or oil royalty trust is similar to having part-ownership of a natural gas or oil well. Aside from operational costs like staff, management and overhead, most of the profits go to shareholders. In this scenario, the cash flow is tied to the commodities produced by the trust. Because of this, the assets of the business, like large oil reserves, become more valuable in an inflationary environment. Additionally, company's cash flows are protected from inflation. Several natural gas equipment companies offer this investment option like the Natural Gas Services Group, which manufactures natural gas compressors, a necessary piece of equipment for obtaining gas.

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This model can also be applied to entertainment royalties, which include royalty streams of music, movie, television, book publishing, etc. Royalties are paid to songwriters, artists, screenwriters and producers by organizations like BMI and ASCAP for music and the Screen Writers Guild for screenplays. Currently, liquidity for the royalty owner is available only by selling their complete works or locking up all future income using the royalties to collateralize a loan. However, the owner may sell any percentage of their royalty income at auction to buyers who are looking for a stable income stream. The owner sets the minimum price they will take (the reserve price), so there is no cost or risk for them as the seller. Royalties are paid by the different organizations, like BMI and SWG, into a secure escrow account either quarterly or biannually and then distributed to the buyers where they can track their purchases and revenue through an eTrade like dashboard.

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Yes, royalties are a unique form of investment, compared to stocks, as they provide a stable, fairly low-risk alternative for investors. Instead of owning a share of the company's stock that fluctuates daily, investors are guaranteed a monthly payment based on the company's revenue. Business owners also do not have the burden of sharing ownership of the company with their investors. These benefits have made royalties common investments in venture financing, natural gas/oil and entertainment, and could potentially spread to other industries in the future.

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Independence from economic cycles makes music royalties a unique investment.

Source: Enders Music Analysis.

Thomson Reuters.

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The Benefits of Music Royalties as an Investment

 

• The music industry is on a growth cycle, largely driven by the popularity of streaming services.

• There is a lack of market correlation.

• Cash flows are inflation protected.

• Stable cash flows support quarterly distributions.

• There is great potential for fund management to drive value-add initiative that can provide further upside in revenue generation.

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What does this mean to you... someone who is looking to invest money?

It means that music can actually be a very profitable investment.

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