Music catalogs have had quite the news cycle over the past few years. Depending on what you read, they're either as solid an investment as real estate or a big bubble about to burst and leave a lot of people high and dry.
This narrative has only exacerbated since news of Hipgnosis Song Fund's recent investor woes. But then there's also the fresh news that Morgan Stanley is investing $700 million to buy song catalogs in a partnership with Kobalt — two years after Kobalt sold its catalogs for more than $1 billion.
So what's going on? Is the sky falling on music catalogs as an investment, or is it as valuable an asset as ever? Let's take a quick look at exactly what's going on.
A Primer On Music Catalogs As An Investment
Just to cover the fundamentals, let's talk about what it means to invest in music in the first place. There are tons of revenue streams for bands and artists, from writing the music itself to performing, royalties on recordings, merch, brand deals, sync licensing deals, and dozens of others. There are also people and companies who "invest" in just about every aspect of these royalty streams.
But when we talk about investing in music catalogs, we're primarily talking about publishing rights. When you write a song, you immediately generate two copyrights: publishing and writing. When that song gets recorded, you've created a third copyright: master recording rights. Both the publishing and the master recording rights can (and frequently do) change hands as a form of currency. The writing royalty essentially always stays with the writer.
So, let's say the No. 1 song of the year generated $1 million for the master recording right, $250,000 for the publishing copyright, and $250,000 for the writer copyright. People investing in music catalogs are typically purchasing the rights to the publishing. So they may pay the person who owns the publishing $2 million dollars now in order to get whatever that song makes in publishing for the rest of its existence (or until they sell it again).
The benefit for the current publishing rights holder is they get a bunch of money up front, and the benefit for the person buying the publishing rights is that they think it will be worth a lot more than $2 million over time. They're willing to hold on to it, sometimes for decades, because they believe it may generate them way more than $2 million over the next few decades.
While music catalog investing has existed essentially as long as recorded music, the rise of music streaming made it way easier (and more profitable) to put a value on a song and predict what it will make in the future. In this way, music catalogs are similar to investing in gold or real estate.
Hipgnosis' Big Splash
While tons of different players hopped on the scene in music catalog investments, none made a bigger splash than the Hipgnosis Song Fund, a British company that hit the London Stock Exchange in 2018 and made headlines for its aggressive, high-dollar deals. Led by former star manager Merck Mercuriadis, the company rapidly raised money from investors while pitching publishing rights ownership as a unique but stable asset class.
The company bought music catalogs from legacy acts and modern legends alike, from Rick James and Barry Manilow to Red Hot Chili Peppers, Justin Bieber, Shakira, and many more. Hipgnosis and a sister fund have spent more than $2 billion buying music catalogs.
But now the company looks to be facing some serious questions, particularly from nervous investors who have seen the company's share price drop 43 percent from its November 2021 high of £129.20 per share. The company also suspended quarterly dividend payments to investors last quarter after news that it would receive less than half of what it expected in retroactive payments. The company is now likely facing some tough decisions, including major shakeup in leadership and even potentially liquidating its assets (though as some note, there's a lot more nuance at play here).
All this coupled with the fact that the company still needs to make payments on those initial loans it used to buy music catalogs, and you can see why people are second-guessing music publishing as an investment. After all, when the loudest company in the space now faces very public problems, it's easy to see the whole foundation as shaky.
The Rest Of The Music Catalog Space
Hipgnosis' woes don't necessarily portend greater doom and gloom in the song catalog world. After all, that's one company that made very aggressive moves and now has to deal with the realities of a downturn, owing on financial obligations, and needing to appease investors. This isn't the case for other companies, like Universal, which purchased Bob Dylan's catalog for likely around $300 million, or Primary Wave, which purchased Stevie Nicks' catalog for $80 million.
The overall outlook for music catalog valuations and growth is still quite rosy, despite an unsavory economic environment worldwide. Music streaming continues to be a boon for the overall industry, and most people recognize this era of consumption is still in a general state of infancy. ASCAP reported double digit growth in 2022. The UK saw recorded music revenue growth for its eighth consecutive year, now at over $1.5 billion annually.
One company's very public struggle certainly doesn't negate an otherwise healthy industry. Which is probably why you see Kobalt getting back into music catalog investment with $700 million worth of help from a major financial institution only two years after selling its catalogs.
Of course, that's not to say everybody, or even most people, should jump at the opportunity to buy (or sell) music catalogs. But it is a good reminder to take a deep breath and not let the very public, rather messy news about one music catalog investment company sour an otherwise promising era for songwriters.