Music royalties are gaining attention as a new income-oriented alternative investment.
While they share many similarities with other popular alternatives, such as non-correlation to the economy and the ability to diversify risk, for most people music royalties are a brand new asset class.
So it’s important to understand exactly how to value music royalties when considering your investment strategy. As with all investments it is important that you as an investor conduct your own research in order to develop an understanding of this potentially lucrative opportunity.
In order to assess a royalty’s ability to achieve your desired return, there are eight key attributes to understand. While not the only attributes to consider, they are essential to analyze in order to gain a broad perspective of a music royalty’s potential performance.
Music royalties may vary in the length of time left in the royalty stream.
Time is the easiest of the eight attributes to assess in evaluating your potential return because it is simple and straightforward: some music royalty streams may be as short as five years while others may extend for the life of the songwriter plus another 70 years. Generally speaking, the longer the duration of the royalty stream, the greater potential return you, the investor, might expect to receive.
Average Yearly Income
As part of your assessment, it is important to understand how much income a royalty stream is producing. What was the total income produced in the last year? In the past three years? Looking at the average yearly income is a good starting point for assessing the potential of a royalty. Seeing a longer trail of historical data is terrific; however typically, the most-recent history is likely a better indicator of near-future results. Past performance is not indication of future performance.
The most-critical attribute for your evaluation is the trend over time of recent historical income. Although most royalty streams fluctuate each quarter, oftentimes due to irregular foreign royalty payments or fluctuations in use, one can look at the overall trend as one would evaluate the graph of a listed stock. Is the trend moving higher or lower? Have there been any abnormal spikes?
How is the Music Used?
Music usage determines the royalties paid. The commercial use data is collected and available for a song, and provides further clues as to the potential performance of the royalty stream.
While this data is not normally available to the public, it is made available to investors in the case where the royalty is being sold. Royalty Exchange provides this usage data as part of the listing for each royalty stream sold at auction.
Here are some examples of usage that one could evaluate as positive indicators when assessing a music royalty stream:
The royalty stream is related to music that is being used in the background of a current popular television show, advertisement or film.
The song is a popular “one hit wonder” from years ago that is now appears in a movie that airs weekly on HBO.
Analyzing how the music is being used can establish perspective on the future income a royalty stream may produce.
You can also derive useful questions from your experience with trends in entertainment and your knowledge as a media consumer of music, television and film. For instance: Is this the type of music that could be used as a television theme song for the next decade? How likely is it that this song or type of music will remain popular or will be reused? What kind of audience does it reach?
Understanding the usage of a piece of music provides useful information to assess the music royalty’s opportunities to maximize future returns on investment.
Where Is the Music Used?
The popularity of a piece of music will vary widely across countries. Royalty statements provide line item data detailing the amount of revenue derived from each country. Music that is popular in the United States may or may not be popular elsewhere, and popularity may peak at different times in different countries. Sometimes these peaks may occur years apart.
For example, while royalties earned in the United States may be plateauing or decreasing on a 10-year-old song, royalties for the same song in Japan, the Netherlands or Sweden could be increasing as the artist tours and becomes popular those countries. Or, royalties earned for a song used in the background of a TV show originally produced in the United States that’s now airing and gaining popularity across Europe may show a decline in royalties in the United States and a simultaneous increase in royalties for Europe. The popular TV show “Dallas” is a perfect example of a show having multiple spikes of popularity, with the first wave in the United States and subsequent waves in Europe.
“Where used” data can show the breadth of success in penetrating the market. When assessing a royalty stream you can gain perspective on its ongoing revenue generating potential by reviewing the usage data from different countries and comparing the number and size of declining markets to the growing markets. If there is overall greater market growth activity then, there is a positive indication that the revenue stream is still quite healthy.
Variety: Royalties From Multiple Songs
Many royalty streams contain several titles. Often a subset of these titles earns the majority of the asset’s total income while some titles may earn nothing at all. There is always a possibility for a revenue upside on any song; for instance, it could be selected as the intro to NFL Sunday or used in a hit movie. To that end, you, as an investor, should also consider the long-term profit potential of lesser-known titles In cases where an artist has longstanding popularity, other musicians may pick up and record the smaller-earning titles causing the royalty stream to increase in production. An example of this is when the popular UK artist Adele recorded Bob Dylan’s song, “Make You Feel My Love.”
Digging into Spikes
When royalty streams show a large spike in earnings, as a potential investor, you should investigate the raw data to uncover the spike’s underlying source by using the “how used” data to explore the origin of the income. In these instances, your independent judgment is critical to assessing the royalty stream. If the spike came from radio play, as in the example illustrated below, it may not be repeatable, as the royalty stream will not remain a radio hit forever. If the spike came from being used in a television show, then the rise in revenue may last if the program renews for additional seasons or becomes syndicated.
How Long Has The Music Been Around?
Although there’s no wrong point in time to purchase, it’s important to understand where a stream is in its lifecycle stage, and how cultural and musical trends might impact its commercial use moving forward. Does the stream present the potential for high risk and high returns or steadier, less volatile returns?
These two royalty stream examples show the variation in revenue of different types of royalty streams over time: 1) a Frank Sinatra song continued to earn flat and predictable income years after its release while 2) the revenue from a three-year-old “pop” hit declined rapidly as its popularity waned. Both of these royalty investments could be profitable if purchased at the correct time. A timeless classic, like a Sinatra song, can be profitable even when purchased late in the royalty stream’s lifecycle. Analysis will help you determine how a royalty stream could perform as part of a diversified portfolio.
Continue Building Your Knowledge about Music Royalties
Music royalties are a new asset for many investors. Even if you are an investor who is new to music royalty investing evaluating the data can help you make the most confident and profitable choices possible like when investing in stocks, bonds or mutual funds. However, unlike traditional investments, when you invest in music royalties you can actually listen to and enjoy the asset you have chosen while potentially earning consistent income, even as the stock market or greater economy drags.