Alternative Investments — Music Royalties and the Search for Yield (Part II)
In the first part of this series, I explored the market opportunity defined by the democratization of access to royalty investments in the music industry — providing an overview of considerations to account for when assessing their sustainability as an alternative investment.
After a 15-year decline, digital distribution models (i.e. streaming) have re-sparked five years of consecutive growth within the music industry — expected to generate $57.5 billion in 2020 (-$17.5 billion YOY, due to COVID-19), with Goldman Sachs projecting sales to almost triple to $140 billion by 2030.
It must be said that, while the streaming era has presented multiple revenue channels for artists and songwriters, poor payout rates and long payout cycles create new financial challenges — encouraging artists and songwriters to sell their catalogues and use this money to generate alpha by investing in other asset classes.
Contextualizing the table above, the average musician would need to generate between 100,000 and 3,000,000 monthly streams to earn the national US minimum wage of $1,256.70. Combine this with the fact that 99 percent of all Spotify plays go to the top 10 percent of songs and 90 percent of artists capture little to nothing. Hence, approximately 60 percent of musicians in the Music Industry Research Association’s (MIRA) survey said their music income is not enough to meet their cost of living.
To complicate matters further, typically, songwriters are underpaid in comparison to artists. Songwriters continue to be locked in a legal battle led by Amazon and Spotify over how much they get paid in the US. YouTube and Pandora have also joined the party, seeking to quash a ruling from the US Copyright Royalty Board to raise mechanical streaming royalties for songwriters by 44 percent — noticeably, Apple Music has stayed out of it. Clearly, this is a contentious issue for demand-side platforms (DSPs) as they double-down their efforts to optimize operating margins and prove their model’s commercial viability.
Show Me The Money
“These young artists — you don’t even understand the gory details of the music industry or how the dollars flow. You’re really not going to make that much money. There’s an unbelievable amount of leakage through the whole business.” — Jason Bazinet (Managing Director, Citigroup)
Of the $10 you pay for your Spotify account, artists ($1.7) and songwriters ($0.6) earn the least, while labels ($3.80) and DSPs ($3.30) continue to take the lion’s share. Add the challenge of faulty metadata or errors in royalty accounting and cue the rising levels of royalty disputes, contributing to the $2.5 billion+ ‘black box’ of royalties. One could argue that the likes of touring and self-releasing music have increased a musician’s economic footprint within the ecosystem but ‘value leakage’ continues to bleed revenues.
If you look at B2B revenues within the industry (licensing and publishing) from the pre-internet era through to today’s post-smartphone era, surprisingly, growth has stayed relatively flat. Instead, industry changes have led to a rampant increase in intermediary players. But this is not exactly new — the industry has always revolved around intermediaries. In fact, artists of the early 2000s were lucky to earn roughly 7 percent of industry revenues.The difference being that the album construct ensured that artists of the CD era could ‘get away’ with two strong tracks and a couple of fillers. Throw a $10 price tag on it and, inevitably, consumers were paying a large premium for music they technically didn’t want. A stark contrast to today’s single-driven environment.
“Now more than ever, in the face of growing complexity and fragmentation, it’s incumbent upon artists to wrap their arms around the river of nickels. Connecting the dots between the multitude of royalty streams is crucial to mitigating leakage and maximizing one’s earning potential.” — Damian Manning (Founder & CEO, HIFI)
With artists compromised financially, this leaves a gap in viable working capital solutions, which royalty sales can most certainly support. Whether it be a song, album or catalogue, the holistic democratization of music royalty investments is evident across the market. However, with content creation becoming both democratized and decentralized, nearly everyone is a participant in the new ‘creative class’ — music catalogues will continue to grow exponentially. Not only does this potentially jeopardize an artist’s ability to maintain and grow a committed fanbase, it also brings the notion of ‘quantity over quality’ front-of-mind — this impacts royalty outcomes directly in today’s market environment and, in my view, accelerates the cannibalization of royalties at a much faster rate than before.
These factors make royalty investments much harder to assess in terms of ROI, as labels no longer control the narrative and market trends evolve constantly. All things considered, it is easy to get lured in by the attractiveness of investing in music but we want to steer away from the notion of a vanity investment. As with any investment, it is not about bragging rights to impress your friends but, rather, what the importance of this investment can do for your financial wellness over the long run.
Happy listening!
If you or your network is passionate about the space and would like to connect, please feel free to reach out.
E: Dario@Anthemis.com
