While listeners’ emotional reactions play a large role in whether songs become hits, a much different — and objective — set of considerations can determine whether a song or song catalog represents a sound investment.
In order to uncover some of those factors, Royalty Exchange — an online platform that facilitates investments in music publishing royalties (in addition to other media) and, according to its website, has generated over $84 million in sales — examined 239 sales that it has facilitated since 2018. The Denver-based company shared its analysis with Billboard of the key elements that affected the closing prices, relative to the profit they generated for their publishers. It also provided data that shows how royalties from different formats — streaming, radio and synchs — trend as songs age. (See charts.)
Royalty Exchange says it has conducted over 1,000 transactions (although not all are music-related) and claims an average 10% return on investment. Royalty Exchange auctions tend to result in investments that total tens of thousands of dollars as opposed to tens of millions and often include temporary sales — investments that carry a time limit. These allow artists and songwriters to raise cash on a song or album without giving up ownership.
“We serve the 99%,” says executive vp and partner Gary Young. “Hipgnosis has done maybe 60 very targeted deals. We’ve done more than a thousand with a far greater range of catalogs.” Recent offerings have included a 10-year investment in U.S. and Canada publishing royalties for 24 Doobie Brothers songs, including the 1974 hit “Black Water,” which closed at $160,000; a 30-year term investment in sound recording royalties for Evanescence’s multiplatinum album Fallen, which closed at $705,500. A life of rights auction for producer royalties for Youngboy Never Broke Again’s platinum single “Valuable Pain” brought a high bid of $79,950.
Investments are passive — auction winners are not able to market a song or catalog or increase its value through synchs, for example — and can also be blind, based solely on performance criteria or data provided by Royalty Exchange.
The 239 sales that Royalty Exchange analyzed — looking at both average and media data — were all music-related and excluded private syndicate transactions and 10-year temporary sales. The company also broke out all sales with closing multiples of 10 times net publisher’s share or more.
Royalty Exchange identified five key factors that investors look for when considering whether to invest in a song or catalog.
The longer a catalog has been earning royalties, the longer investors feel comfortable that it will continue to earn royalties. “It’s known in investing circles as ‘The Lindy Effect,’” says Young, a reference to Lindy’s Deli, which catered to show business veterans from 1921 to 2017 in New York’s Times Square. “If a song has been earning for 10 years, it probably will continue earning for another 10 years.”
It’s not surprising, then, that the average age of songs included in a catalog is one of the most important determining factors behind how much investors are willing to pay:
- Looking at all sales, Royalty Exchange found that catalogs older than five years attracted a closing multiple about 20% higher than the median.
- Looking at the catalogs that sold at a multiple of 10 times or more, the average age was 13 years, with the median age being 10 years.
SOURCE OF ROYALTIES
Because longevity is important, investors look for catalogs that generate royalties from sources they feel will continue. Top among these is streaming-based royalties. Streaming royalties are considered more sustainable than radio airplay or digital/physical sales. (See chart.) Synch royalties can be lucrative, but Young says that past synch performance does not predict future royalties — especially if investors are not able to work a song or catalog. “If Sony/ATV has been successful getting synchs for a song on its roster, then that definitely factors in,” says Young. But, he adds, “if a song gets synched a bunch early in its life, that could be a contraindication of its long-term synchability.”
Royalty Exchange’s analysis shows that among the catalogs that sold for a multiple of 10 times or more, streaming generated on average 62% of their royalties, with the median being 64%. For those that sold for less than 10 times net publisher’s share, streaming generated only 44% of the earnings on average and a median of 42%.
Royalty Exchange says it has demonstrated that blind investments in catalogs that meet certain financial criteria, without examining the details of the music, songs or artist, earn higher returns on average. But its analysis indicates that when investors can review song and artist details, the closing multiples are 20% higher. “It has been replicated too many times to be luck: For assets where the artist or song is well known,” says Young, “the more you pay, the more your return is going to be.”
He adds that “anecdotally, we’ve seen catalogs for superstar artists close at far higher multiples, which indicates that investors are willing to pay more for bragging rights to a certain song or catalog, or that they feel that superstar artists are a safer investment.”
While investors typically value a catalog in terms of its last 12 months of net publisher’s share (essentially gross profit) — and determine how many multiples of that figure they are willing to spend to acquire it — the absolute cost of the catalog is also a factor, according to Royalty Exchange. Its analysis shows that investors have indicated a willingness to pay a higher multiple for a lower-cost catalog.
Of the catalogs that sold for a multiple of 10 or higher, the average transaction was $56,800, with the median being $28,000.
Young says that according to the analysis there was no discernible preference for one genre over another. The list of catalogs that sold for multiples of 10 times or higher range from hip-hop to country to R&B to rock to electronic. “So long as the average age of the catalog is 10 years or more and still generating streaming activity,” he says, “investors are willing to acquire the royalties.”