I am always interested in learning from other investors about new investment strategies. At a recent real estate meet up, I met an investor earning royalties from purchasing the rights to copyrighted music. I did some digging into this asset class and offer the overview below of what I learned.
Intellectual Property and Royalties
Let's start with how intellectual property rights are assets which can lead to earning income for rights holders. When a work of art is created whether it is a book, a photograph, or a song recording, the author holds a copyright for the work. The copyright is the author's intellectual property and it affords the right to be paid a royalty if the work is used by someone else. In the case of music there is a copyright for the songwriters who wrote the lyrics and the melody, this is the composition copyright. There is a second sound recording copyright for the musicians who record the song. The record label that produced the music may also hold some of these rights.
For example, Keith Richards and Mick Jagger of the Rolling Stones wrote the song "Sympathy for the Devil" and hold the composition copyright. The members of the Rolling Stones recorded the song and they have a recording copyright. The band Guns N' Roses also recorded this song in 1994. They would have paid Richards and Jagger for the right to record the song. But, now Guns N' Roses has a recording copyright for their version of the song. One of the unique benefits of intellectual property rights as an asset class is that royalties can be earned for many years for a single creation.
Resurging Popularity and Rising Royalty Earnings
In certain cases songs that fade into history can be revitalized. Kate Bush released the song "Running Up That Hill" in 1985 and it rose to number 30 on the Billboard 100 chart. The song saw a resurgence in 2022 when it was featured in the television show Stranger Things. The song climbed back into the top 10 on the Billboard 100, outperforming its original release, and earning a significant new wave of royalties for the artist.
Three Types of Royalties for Music
Musicians can earn royalties on the physical or digital sale of their music. They also earn royalties from licensing the use of their song. As Kate Bush did by licensing her song to Netflix for use in Stranger Things. In addition, artists earns a public performance royalty if their music is played publicly. This includes another band covering their song at a concert or if the song is played over the radio or on a music streaming service. It is reported that Kate Bush earned more than $2.3 million in 2022 in streaming royalties from the newfound popularity of "Running Up That Hill".
Artists Opening the Door to Investors
Many artists are now selling the royalty payments of their music rights to investors. This allows investors to purchase the right to a portion of the royalties for a song for a set number of years or a portion of the royalties for a portfolio of songs. The first movers in this space were private equity firms like Blackstone, KKR, and Blackrock. But, now there are platforms such as Royalty Exchange, Songvest and Royal that allow individual investors to invest in music royalties.
Some of these assets are sold through an auction process which can bid up the price of these rights. Some platforms will list what the song or songs earned over the past year and/or three years as well as how the royalties payments were broken down such as from radio, streaming, live performances, and use in television or film.
Passive Income with (Maybe) Less Volatility
Investing in music royalties is a way to diversify holdings. The income from royalties can also serve as an investment hedge as they are less likely to follow the same market volatility trends of stocks or real estate. The assets are also passive which is less time intensive than rental properties or investing in small businesses.
Keep in mind that songs will be most popular in the first few months of their release and will then taper off. Investors may benefit from a surge in popularity of the artist or a song which can lead to an appreciation in the value of their rights as well as higher royalties. The investor I spoke with who purchased music royalties saw a spike in popularity of the artist and was offered a 50% premium over the purchase price just a few months later. Similarly, an artist that becomes embroiled in controversy could see the value of their royalties and the value of the rights to their music quickly decline.
Like any investment class, investing in music royalties requires adequate due diligence. Investors need to understand the rights they are acquiring and the potential risks that exist with the individual artist or song. Also ensuring that the rights purchased are insulated from the risk of bankruptcy or divorce by the artist. Learning from a person who has some experience in the music industry would be a wise first step.
As with every investment, past performance is never a guarantee for future performance, but for those who understand the music industry, there could be value in creating a portfolio generating royalties to round out a broader investment portfolio.
