In the pursuit of yield, music royalties are primed for mainstream investment – Guest contribution for NASDAQ

As published in NASDAQ.com on July 14th, 2020 at 3:32 EDT.

Alternative assets and product diversification can offer investors an opportunity to spread risk, enhance returns and capture ‘new’ investment markets. Despite the demand for diversification, Wall Street and portfolio managers have surprisingly stuck to a relatively narrow band of assets. Music royalties could yet be the asset that breaks the mold, offering a host of opportunities for not only the traditional investor, but for global audiences and retail investors alike. The universal appeal of music, combined with its global reach, and a strong revenue outlook fits all the characteristics of a promising, and appealing alternative asset class that is ripe for adoption, writes Marzio Schena, CEO and Co-Founder of ANote Music.

Universality of Music Solidifies Investment Appeal

The ongoing COVID-19 pandemic has sent economic shockwaves throughout the global economy. Although the music and entertainment industry has not been immune from the COVID-19 lockdown restrictions, a global listenership base, coupled with healthy revenues of online music streaming services has helped cushion the blow for the music industry against an otherwise murky economic backdrop. In this new and somewhat unpredictable market environment, alternative investments have come to the forefront of investors’ consideration as a way to shield against volatility, while also offering diversified returns elsewhere.

Alternative assets take many different forms, depending on an investor’s risk profile, capital base, and emotive connection. Due to the specialized nature of alternative investments, the asset class was predominantly restricted to just institutional and accredited investors, with a minimum capital base. New trading platforms, and financial products, however, are slowly opening up retail investors to such alternative asset classes. These investors can seek out assets that may not be widely followed by Wall Street, creating opportunities for significant growth and returns. such as in vintage wine, fine art, or even music royalties. Other investors seek alternatives that reflect their own interests and passions, providing them with the industry insight and know-how to invest successfully.

The universal appeal of music, combined with a strong growth and revenue outlook for the industry, fits all the characteristics of a promising, and appealing alternative asset class that is globally accessible to a wide range of music fans and retail investors alike. New technological trends, coupled with fast-growing global audiences on platforms like Spotify and Apple Music is testament to the universality of music. Although music has been overlooked as an investable asset class, the universal appeal, predictable revenue streams and the wide-scale global reach of the music industry is increasingly attracting investor interest to explore opportunities in this well known and loved industry.

Indeed, the extreme market volatility brought about by COVID-19, that has sent bond yields to rock-bottom and equity markets to questionable new highs, has prompted many investors to turn to alternative assets in a vital need to diversify. According to a survey from Connection Capital, this is a major factor contributing to the growing popularity of alternative investments. The present market backdrop has left 80% of respondents to this Connection Capital survey considering new alternative investments, with 40% prepared to commit immediately. 

In a space ripe for viable substitutes for traditional investment methods, music entertainment royalties present an innovative new investment structure within a manageable risk profile, as sought by most retail investors. Importantly, this provides a basis for music artists to better manage and take ownership of their income and revenue streams. 

Music Royalties as a Feasible Alternative

Interestingly, respondents to the aforementioned survey seem more interested in fair value, rather than purely chasing risky returns. In a market that values stability and consistency, music royalties present a viable alternative for prospective investors. Instead of grappling with the daily fluctuations of company stocks, investors can gain exposure to stable  revenue streams from music artists, while providing liquidity for the music artists.

Income from music royalties may rise or fall based on the revenue of the royalty owner, but it does so in accordance with a predictable shelf life and an identifiable track record associated with the music artist. Most Investors can rely on periodic payments in the form of royalty cheques, typically distributed quarterly. This level of consistency in returns, typically unheard of in traditional markets, is a practical solution to  investors’ diversification requirements.  guaranteeing a worthwhile, secure, and reliable investment.

Demonstrating the viability of entertainment royalties as alternative investments, financial firm AGI Partners established a fund to invest in emerging artists. And elsewhere, the Hipgnosis Songs Fund, established to offer investors a pure-play exposure to songs and associated musical intellectual property rights. Last year, Hipgnosis released its entire issued share capital on the London Stock Exchange – testament to the growing recognition of music’s potential among the eyes of the financial community.

Even at declining rates, the disruption to music streaming services has yet to cause concern for senior executives, given that revenue no longer relies wholly on physical sales. This development can be attributed mostly to the availability of music through smartphones, which now predictably exceeds revenues from CD and Vinyl. One could expect this growth to rebound when people return to their routine listening.

Current Funding Model for Artists

The music industry has been totally reshaped with the advent of smartphones, resulting in a dramatic turnaround from the early days of illegal downloading and file sharing. We are still in the infancy of this paradigm shift, with trends now strongly favoring democratization and distribution of music, leading to the dominance in services like Spotify, Apple Music, Soundcloud, among others.

Although streaming is on the rise, with Goldman Sachs predicting total streaming revenues to reach approximately $37.2bn by 2030 from 1.15bn paying users, the big issue lies in deferred payments that hinders artists’ ability to make a living. In 2018, just 56.4% of revenues generated from subscription streaming services in the UK were paid to artists and record labels, down 2.5%  when compared with  2016. Similarly, in 2018, artists and record labels in the U.S. were paid 1.1% less of the total money paid to music “retailers” – a sector dominated by streaming services.

Adding to the challenges already faced by musicians, the persisting restrictions on travel and large crowds in the current market backdrop have forced several artists to postpone upcoming gigs and albums: a lucrative source of income. While this will have less of an impact on the top tier artists, the 1% who gross about 60% of live music revenue, the next generation of musicians and newer artists will certainly need to turn to a more rewarding method of funding — for example by selling shares in music royalties for future earnings.

Offering up music royalties to investment audiences provides significant benefits to music artists in diversifying as well as managing their revenue and income streams. Rather than relying on the royalties from one song or catalogue to live on, the money earned from selling a share of those royalties can open up new control in revenue streams for the artist. These might come from a new album that will generate new royalties without any claim from others on those future earnings, from investing in revenue opportunities not contingent on music royalties, such as in a side business, and from paying off liabilities and loans.

For investors, the risk-reward is correlated to artists’ future earning potential and revenue streams; and on this basis the global outlook paints a very positive picture. According to Goldman Sachs, revenues in the global music industry are expected to more than double to about $131 billion by 2030, from the $62bn reported in 2017.  On this basis, music royalties provide investors with access to a fast-growth industry that is unrestricted by geographical boundaries. Furthermore, music royalties are largely shielded from macroeconomic and geo-political events that typically rock traditional markets.

Music Royalties: Unlocking Diversification Investment Strategies

The full economic fall out of COVID-19 and its impact on the entertainment industry is yet to be fully understood. Against this unprecedented economic and market backdrop, the resilience, and universal appeal of music among global audiences is attracting a new band of investors – emerging from a connection both to the industry and as a need to diversify assets. Music royalties are a long overdue investable asset class and should be considered an area primed for further investment opportunities.

There is also a distinct appeal to this asset class: hearing your favorite song on the radio could be made all the more rewarding if you knew you owned even a small fraction of the royalties from that song. The music industry could flourish within this context over the coming years. The time has come for music fans to support their favorite artists through this innovative new investment solution. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.