New York, March 31, 2022: Respada, an invitation-only niche platform providing private market opportunities to the ultra-affluent, hosted a panel on ‘Investing in Music Assets’ on 31 March, comprising an exclusive delegation of senior executives, from market makers and fintech entrepreneurs to investors from the music industry. Panelists included Greg Leekley, Founder of HALO Studios, Mark Mulligan, Managing Director, MIDiA Research, John C. Barker, Founder, President, and CFO of ClearBox Rights, and Eric L. Oliver, President of SoftVest Advisors. Panel members shared insights into the current and future state of music as an asset class.
“Nothing starts in the music business without a great song, so the primary focus must be on having a great music composition. It is one of the reasons catalogs are becoming so valuable,” Greg Leekley said, kickstarting the discussion by giving an overview of the music landscape. Leekley went on to explain that a major part of the music business is administrative blocking and tackling. “When you look at how many bites of the apple are taken outside the creative realm, it comes up to more than 50% which is going to people along the value chain, from composition, recording, and distribution, to the recovery of the royalties globally. That needs to change,” Leekley said. He further stressed the need to make the process more efficient on behalf of the rights owners, “that would include you, if you ever invest in these rights,” Leekley added. He looked forward to fintech entering the market, as a possible solution to lowering the cost of goods. On that note, he was optimistic about the increase in acquisition activity around the music ecosystem, citing Concord’s acquisition of Downtown Music’s publishing catalog. Further, Leekley cautioned potential investors in music assets to “not enter the race of big catalogs going up against established firms such as The Blackstone Group and KKR & Co”. “Instead, you have the amazing long tail in the music industry as a result of streaming, fractionalization of the music economy, and the creator economy,” Leekley suggested. “A creator has endless opportunities to distribute their music to various niches around the world. The same thing has been happening in the boutique industry on the publisher’s side. You have the major publishers, the second tiers and then you have thousands of players globally that are meaningful. There is an interesting opportunity to play below the surface of the big players and it is a big market,” he advised.
We are at a point of increased sophistication, complexity, nuance, and diversity in the music business that is unprecedented
Leekley added that “As a general rule of thumb, the record makes 80% of the money and the publishing side makes 20%. However, one of the interesting nuances of the industry is that there is never a time when the publisher who is representing the writer gets paid when the writer does not.” Having said that, Leekley pointed out that there is a continuation of a distinct difference in multiples between the writer’s share and the publisher’s share. Finally, he encouraged the audience to “invest in music catalogs that you are interested in or artists that you are fans of, and there are chances to approach the writer’s share and get more attractive deals on an investment basis”.
Having over 20 years of experience as a music media and tech analyst, Mark Mulligan joined the discussion by talking about the attention economy. “During the lockdown, consumers had 12% extra attention time in a week as a result of working from home. So, for 1.5 years, every app grew, and then as we returned to normalcy, we started to see the first-ever recession in the attention economy.” Mulligan predicted that this downward trend is going to continue since the competition for attention is going to intensify and not lessen as a result of changes in life practices during the pandemic. He then spoke about the current state of the music industry, the consumer, the creator, and investment trends, and why the intersection of all these factors is important now more than ever. “We are at a point of increased sophistication, complexity, nuance, and diversity in the music business that is unprecedented. The recorded music market grew at an unprecedented rate in 2021 which was the most revenue ever within the recorded music business,” Mulligan observed.
Mulligan further noted that “there is a growing diversity of consumption, remuneration, and monetization”. Yet, he cautioned that it is important to be cognizant of the tensions between remuneration and monetization. “Streaming does an amazing job of monetizing music for music rights holders. However, unless you are one of the superstar performers or songwriters, streaming does not monetize well in the long term even though it is the ideal model for exposing the longtail to global audiences,” Mulligan argued. Mulligan then illustrated the meta trends to look out for in 2022. “Firstly, 2022 will be the year of the creator. There has been a huge amount of venture money poured into the creator economy over the last 18 months.” Secondly, Mulligan spoke about the remuneration revolution. He shared that “established digital entertainment business models were effective at rightsholder monetization and less so at creator remuneration”. As a result, Mulligan observed that creators are increasingly looking at new and alternative places where they can have a closer connection with their audience. Speaking about why such a connection is unattainable via digital streaming platforms, Mulligan said, “This is because the record labels prevent streaming services from giving the artist direct access to the data about end-users. This makes it harder for a creator or a writer to know their audience”. The third trend Mulligan spoke about was the popularity of the lean-through method wherein consumers take the content and make it their own, thereby becoming creators in their own right, for instance through TikTok musicals and Discord servers. Lastly, Mulligan mentioned that NFTs have a huge amount of industry hype at the moment. However, he explained that any new technology is the right technology only if it meets user needs. “The user need in the music industry is for people to be able to identify themselves with their favorite artists. NFTs may or may not be the long-term solution but in the near time, other forms of digital collectibles are available that enable the artist to capitalize on this user need.” Mulligan expressed.
Moreover, Mulligan cautioned that one needs to consider factors such as cash flows, industry forecasts, cultural trends, and technology shifts when making a catalog acquisition. As a final thought, Mulligan said, “Music publishing has been growing at a steady rate whereas record labels are growing at a faster rate as a result of a large share of streaming. As these new technologies evolve, it may well be a tipping point for the amount and value of the future industry that flows into music catalogs.”
Moving on, John C. Barker spoke about how the nature of his job has transformed from sitting back and waiting for people to request a license, to using a song to proactively identify users of the song. However, he expressed that most of the software today is built as a top-down version, and how artists are paid for the songs comes last. “My job is to start from the bottom which is the song and determine what is being used and how to collect that. There is not enough software available today to do that.” The biggest issue, Barker says, is latency in payments from performance rights organizations and foreign and mechanical license collectives. “Our goal is to collect 100% of the uses that are out there, immediately, with no fee. Since it is hard to achieve that, we want to collect 100% of the uses with as little fee as possible and as quickly as possible. But there is no technology today to do that.” Barker explained that ClearBox has designed three different programs for this purpose and the latest one is the best-designed program yet. Quoting Einstein, Barker said he aims to find simplicity out of complexity. “We as an industry are eager for an inside-out technology to deal with this and that is what I hope ClearBox can help us with,” he affirmed.
As part of audience interaction, Tom Willson asked the panel, “How much control do artists or creators retain while selling the rights?” Barker responded, “It entirely depends on what the artists own. They could own their publishing rights and the right to receive 50% of the writer’s rights. Alternatively, they could sell publishing rights but retain the ability to collect 50% of everything that is earned. Otherwise, as it is commonly happening today, many writers are selling their writer-only shares. So, they may sell 50% of it and retain the rest, or sell 100% where they would get nothing in the future even as earnings are collected.”
Bringing a unique perspective to the table as an early investor in catalogs, Eric Oliver shared that as technology keeps evolving, we are seeing more uses for music. “Today, people have the opportunity to own a sliver of a song purely out of emotion and not so much economics,” he said. Oliver showed that instead of an emotion-led investment if one can buy catalogs on a purely economic basis and later move into the emotional side of it, there is a tremendous margin to gain. Oliver endorsed music catalogs as a way to have a long-duration cash flow, especially given that long-duration assets are hard to come by. Speaking about his investment strategy, Oliver said, “We predominantly focus on the writer’s share because it is an interest that survives in perpetuity. Whereas, publishers have the right for a defined amount of time, after which writers can reclaim the rights.” “We tend to stay below the radar and most of our catalog acquisition sizes are around a million dollars,” he added.
Oliver concluded by talking about the Songwriter Equity Act that was enacted in 2015 that “lets the seller of the catalog get capital gains treatment, whereas before the act it was ordinary income”. “The impact of the Act is that as an investor, we get to amortize these catalogs over 5 years. Hence, buying the catalogs on a 10-year payout and not throwing off any taxable income for 5 years allows us to continue to reinvest the cash flows, which has been the secret to our success,” Oliver revealed.
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