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Kamran Khan, CFA

In September 2020, Nathan Apodaca (known as @420doggface208 on TikTok) was commuting to work in Idaho Falls when his vehicle broke down on the highway a few miles from his destination. Rather than wait for help, he decided to grab a skateboard and a bottle of juice from his truck and head to work. After filming himself cruising down the highway sipping Ocean Spray cranberry juice and lip-syncing to a Fleetwood Mac song, Apodaca went viral on TikTok and quickly became a cultural sensation.

The video re-ignited the popularity of the classic Fleetwood Mac hit, “Dreams.” In about eight weeks, “Dreams” generated 2.8 billion views on TikTok, was streamed 182 million times, and helped sell 86,000 Fleetwood Mac albums in the US, according to music company BMG, which acquired the rights to most of Fleetwood Mac’s music after the song went viral on social media. 1

While this TikTok video may be an extraordinary example, the growing consumption of music through social media apps and streaming services has led to resurgent growth in the music industry and increased demand for popular songs.

How Music Royalties Work

Among the beneficiaries of this trend are the artists and songwriters who receive music royalty payments for use of their intellectual property (IP). Typical music copyright royalty payment terms last for 70 years after the death of the last remaining songwriter, presenting attractive long-term yield potential for creators and investors in popular and timeless songs.

Royalty payments are typically a percentage of the revenue generated from the asset and vary based on the popularity of the music and artist. Royalty payments are generated when songs are bought, streamed, played on the radio, used in film and TV shows, performed live, or even used in Peloton fitness classes.

Historically, music royalty payments were made primarily to recording artists, songwriters, composers, publishers, and other copyright holders for the right to use their intellectual property. Recently, there has been growing interest from institutional firms and investment funds to acquire ownership stakes in music catalogues that can generate royalty payments for their investors.

New Crescendo in the Music Industry?

Interest in royalties has grown as the music industry has seen a resurgence after piracy and declining album sales drove fifteen years of revenue decline. Music streaming services, such as Spotify and Apple Music, have helped stabilize music royalty cash flows. Business data platform Statista expects revenue in the music streaming segment to reach US$26.6 billion in 2022, with an expected annual growth rate of 8.1 percent (compound annual growth rate, 2022 to 2026). 2

In addition to streaming, growth is also driven by social media platforms, such as YouTube, Instagram, TikTok, and Snapchat, which are using licensing deals to allow users to embed songs in their posts. These new music consumption channels are additional to existing sources and support growth in overall music royalty revenue.

Attractive Investment Attributes

Investors are attracted to music royalties as an asset class because they offer stability, recurring income, attractive relative yields, and low correlation to broader economic fluctuations.

Music royalties exhibit stable and less cyclical demand and present the potential for cash flow for over a century. As a passive investment requiring little effort, recurring royalty payments are desirable to investors looking for predictable income.

Merck Mercuriadis is a British Canadian music industry executive and the founder of Hipgnosis Songs Fund, a publicly traded music IP investment company. In an interview with Thought Economics published in 2019, Mercuriadis said, “What people don’t really recognize is that when a song becomes a proven song, the earnings pattern to it becomes very predictable and reliable, and it is therefore investable.”3

For many new songs, music royalty income is typically greatest in the first three to twelve months after release and then declines over the next five to ten years. After that, the remaining “tail” of income may vary from year to year but remains relatively stable.

Source: Barometer Capital. The Barometer Global Music Royalty Fund L.P. [presentation]. Accessed April 13, 2022. 

New Players in the Industry

The attractive investment attributes offered by music royalties have generated interest from large investors such as Blackstone, Apollo, KKR, and Ontario Teachers’ Pension Plan Board.

In many cases, financial investors will partner with an entertainment-focused company that can help them navigate the music industry and manage attractive acquisition targets.

In 2021, Ontario Teachers’ Pension Plan Board raised its equity stake in Toronto-based Anthem Entertainment, a leading independent music and entertainment content and services company.

Toronto-based Barometer Capital Management teamed up with Kilometre Music Group to manage the Barometer Global Music Royalty Fund LP, launched in 2021. Kilometre Music Group is a music creation and rights management company co-founded by Canadian music industry veterans Michael McCarty and Rodney Murphy.

Active Music Rights Management

While active management is typically associated with stocks and bonds, it can also extend to music rights. Music industry specialists often employ several value-enhancing strategies to further exploit a song catalogue and provide additional upside.

Barometer Capital Management highlights three ways music fund managers can create further value:

  • Playlisting: Managers can work with curators of influential playlists to market their songs and increase streaming volumes. Often, managers will employ individuals who have strong relationships with curators at Spotify and Apple Music.
  • Synchronization: A “sync” is a one-time license fee that can be generated by working with music supervisors and marketers to place songs within movies, TV shows, advertisements, video games, amusement park rides, and more. One-time fees can be $10,000 to $250,000.
  • Re-recording: If the copyright of the publishing (the lyrics and melody) is owned, the manager receives royalties from covers and remixes of the song. Publishing strategies can be employed to have other bands and artists release new covers of the song to modernize the music and generate more listening.

Final Notes

With all the positives music royalties offer, why would an owner want to sell? An artist’s motivation to sell varies. They may be going through a divorce, looking to finance another vacation property, or seeking to offset lower touring income caused by the pandemic. For others, it’s driven by business and estate planning needs.

Music royalties aren’t without risk. It’s difficult to forecast music tastes and pop culture trends, and there’s potential for future reputational risks with individual artists that could impact future value. R. Kelly is a good example of how controversy around an artist can decrease the value of their music. In addition, many music royalty rates are subject to regulation, which presents the risk that future rate changes could materially impact cash flows. Another potential risk is rising interest rates, as music royalties often compete with other higher-yielding alternatives for investors’ capital.

Increasing smartphone use and growth in music streaming have helped reverse the long-term trend of declining industry revenues caused by piracy. Future technological innovation may have new impacts on music royalties, which could be positive or negative for the asset class.

As with any other investment opportunity, these risks must be balanced against the many positive attributes of this niche asset class. CFA_Toronto_RGB Milly

1 Nicola, Stefan. “BMG Buys Fleetwood Mac Rights After 1970s Song Is TikTok Hit.” Bloomberg, January 14, 2021.

2 Statista. Music Streaming [data set]. Accessed April 13, 2022.

3 Shah, Vikas. “A Conversation with Nile Rodgers and Merck Mercuriadis.” Thought Economics, February 27, 2019.

Kamran Khan, CFA, has over twenty years of experience in investment management with over ten years managing US and global equities. He is currently Managing Director of Khan Financial, which offers financial advisory and consulting services. 

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