Intro to Royalties and Royalty Exchange

  in Investor Guides

May 04, 2020


Hello, and welcome to Royalty Exchange. 

Every month, hundreds of investors join Royalty Exchange looking for an opportunity to invest in music royalties. 

But royalties are a relatively new asset class. So we created this video as a quick introduction to not only how music royalties work, but the ways you can invest in music royalties using our marketplace. 

This video will answer some of the most common questions we receive, such as: 

  • Who is Royalty Exchange

  • What Are Royalties and how do they work

  • How do you value royalties as an investment

  • And finally how to use the RoyX marketplace to start investing

Now before we get started, I need to note that this is an informational video only. We are not investment advisors nor are we giving financial, tax, or legal advice. 

WHO IS ROYALTY EXCHANGE?

So with that, who are we? 

Simply put, Royalty Exchange is an online marketplace for buying and selling royalties. We use the power of markets to unlock the value of ideas for everyone involved. And we do that through a transparent marketplace where everybody operates on the same playing field. 

We’re not the buyer or the seller. We’re simply the marketplace where transactions take place. 

This is a relatively new concept in the music space, where most royalty transactions are limited to just a handful of players and deal terms are kept under wraps. We think that actually restricts value, while a transparent marketplace will instead serve to increase value for both buyers and sellers. 

In the last five years, we’ve facilitated over 875 transactions valued at over $74 million. 

Over 27,000 investors have created an account with us.

And those who have acquired royalties through the marketplace have enjoyed an average ROI of 12.15%.


Now we primarily work with music royalties, but we do also have royalty opportunities in the movie and trademark space as well. 

Content aside, the asset you’re acquiring is the right to receive revenue generated by royalties. You’re not acquiring copyrights or control of the content. It’s a passive, often partial interest in a royalty stream.

Once acquired, you don’t need to “work” the catalog or take any effort for the asset to continue earning royalties. That’s because there are others in the music industry charged with ensuring those royalties keep flowing. You’re simply investing alongside them. 

WHAT ARE ROYALTIES?

So let’s talk about how royalties make money


A Royalty is a payment made to the owner of an asset for the right to use that asset.

In the music business, songs are licensed for various types of use, and those uses generate royalties. 

A royalty interest is the right to collect on a stream of royalty payments. 

In the music business, multiple people who contribute to the creation of a song have a royalty interest in that song and collect those royalties as compensation for their efforts. 

Any time that song is used, all who own royalties attached to it will collect payment. 

From an investment perspective, royalties are a “cut off the top” of revenue generated by music. They are paid out at set, specified intervals. Payment is based on use, not company performance. 

That means the royalty holder earns revenue before stockholders in a company. Royalties are not awarded based on the whim of a corporate board like a dividend. Think of it like earning a penny for every iPhone sold vs a share of Apple stock. 

HOW DO ROYALTIES WORK?

The music business generates multiple types of royalties, and each royalty stream is dependent on the kind of copyright they are associated with. 


Every song has two copyrights

  • One for the song as it is written

  • And one for the song as it is recorded

Take for instance the song “Knocking On Heaven’s Door.” 

The musical composition copyright covers the song as written, and it is held by the songwriter. This is the person who wrote the melody, notes, lyrics, etc. 

Once that song is recorded, another copyright is generated, called the Sound Recording. The person or band who records the song owns the recording copyright. 

In some cases songwriter and the performer are the same person. As in this case.

But often, multiple songwriters may assist in writing the songs, and all have a royalty interest on the use of the composition copyright.

And as in this case, other artists may record the song. They will own and collect royalties on the sound recording copyright for the version they record, but only the songwriter, Dylan, will collect the composition royalties for each version. 

So what types of use pays royalties to these two copyrights? Both Copyrights generate royalties based on how the songs and recordings are used. 

Sound Recording

  • Sync Royalties are when a song has been licensed for a TV show, Film, ad, and so on. It is a one-time payment for the right to use the song, and the prices is negotiated between parties

  • Reproduction royalties are paid when the recording of the song is sold or streamed. The royalty is paid for each use, and it is a negotiated fee

  • Performance Royalties are paid when the song is played on digital or satellite radio stations (but not traditional "terrestrial" radio)

Composition 

  • Sync Royalties, like with the Sound Recording, are when a song has been licensed for a TV show, Film, ad, etc. It is the only source of composition royalties that is negotiated. 

  • Mechanical Royalties are paid when the composition is reproduced into a commercial sale—physical, digital download, or streaming. Mechanical rates are set by a panel of federal judges called the Copyright Royalty Board, which revisits and revises rates every year. Mechanical rates differ by use (i.e.: physical vs digital). 

  • Performance Royalties are a bit more expansive for the composition royalty. It includes traditional "terrestrial" radio, live performances, and music played in public settings like bars and restaurants. 

There’s a lot more to this, including the entities songwriters and recording artists work with to track and collect their royalties. Generally, songwriters sign with publishers or use publishing administration services for their royalties, and artists sign with labels or use distribution services for their royalties. 

You can visit the Royalties Guide section of our site to dig down further if you like. But this is the basic overview of the different types of royalties music generates, which you as an investor can buy a share of on our marketplace. 

HOW DO YOU VALUE ROYALTIES?

Now one of the most common questions we have from investors is how they should determine the value royalty streams. After all, these are not like typical stocks or bonds. But they are an investment, and properly putting a value on an asset is a critical part of making smart investments. 

So there are two terms you need to get familiar with to help you determine the value of royalties in our marketplace. 


The first is LTM Multiple. This refers to the price you’re willing to pay for the royalty. The sales price is measured as a multiple of the asset’s last 12 months of earnings. So if an asset earned $10,000 last year and you pay $50,000 for it, you would have paid a 5x multiple. 

When you determine how much you want to spend on an asset, we feel it’s helpful to determine at what multiple you’re comfortable spending rather than just the dollar amount. Higher quality assets often justify paying higher multiples. 

But how do you determine higher quality assets? That’s where the Dollar Age metric comes in. This is a proprietary metric we created to help investors evaluate catalogs. We’re not in the music business, and can’t tell just by listening to music whether it’s got a good chance of earning royalties into the future. So we do what all investors do, we examine previous earnings. 

Dollar Age is the length of time that royalties generated in the last year have been earning royalties overall. 

The longer a song has earned royalties, the greater the likelihood that it will continue to earn royalties into the future. For instance, suppose you were evaluating two songs, and both earned $5,000 in the last 12 months. But one has been earning royalties for 10 years, while the other for only two years. The first would have a Dollar Age of 10, and the second a Dollar Age of 2. 

The one that has been earning royalties for 10 years is a safer bet than the one that’s only been earning royalties for 2 years, and therefore could justify paying a higher multiple to acquire. 

Now those are just two metrics we start with. They’re a good guide, but don’t tell the full story. You also want to consider the sources of royalty income and their stability, particularly with formats like streaming. Also, the fluctuation of royalties over time is important to examine. I’ll show you where to find this information in a moment. 

The point is not let biases like familiarity or social proof cloud your decisions. A catalog of music by an artist you never heard of that has a high Dollar Age is likely a better bet than a collection of brand new music by an artist you’re familiar with.  

HOW CAN I INVEST IN ROYALTIES?

So how do you get started evaluating and buying music catalogs? 

After all, music royalties are not as widespread or common as stocks and bonds. 

As mentioned earlier, access to royalty transactions were limited to just a small group of industry insiders. 

We created the Royalty Exchange marketplace to provide access to royalty deals to investors like you. 

Not just access to the deals themselves, but access to the information you need to make a confident investing decision. 

The Royalty Exchange Marketplace consists of two main areas

  • The Auction House

  • The Secondary Market

The Auction House is the original, flagship component of the marketplace, while the Secondary Market was added late 2019. 

Let’s start with the Auction House. 

This is where we list assets with a starting price set by the seller. Once a listing gets a bid, the auction begins, and typically lasts for about three business days. 

Any registered investor can see the same details for each listing. But you need to be a verified investor to place a bid. Verification is a one-time process you can complete at any time. Once verified you can bid away.

Once the auction ends, the highest bidder wins the auction. 

Here’s an example of a listing and the details we provide. You’ll see the current price, the time left on the auction and the number of total bids. 

To the right you’ll see the standard information presented in each listing. This includes the starting price, Dollar Age, Investment Term, distributor information. And of course the rights included. 

On the financials tab, you can dig into more details, such as year over year earnings history, and royalties by song and source. 


The Secondary Market is newer. Here, we list any asset acquired on the Royalty Exchange marketplace. So these are mostly assets acquired in previous auctions. 

Here, you can make an offer directly to the asset owner, usually another investor just like you. They can accept or reject (or ignore) these offers as they like. 

Asset owners can also set an asking price for the catalogs they own, which if met initiates a sale. 

There’s typically well over a hundred listings to review in the Secondary Market on any given week, compared to a weekly average of 3 - 5 on the Auction House. 

Again, each listing contains detailed information about sources of earnings and earnings history. 

But the Secondary Market also contains information like the number and size of bids made since listed and earnings since initial purchase. 

You’ll notice the Analyst Recommendation price, which is an algorithmically derived benchmark we include to provide guidance on what we think might be a fair price guidance based on the catalog performance. 

That benchmark is only available to All Access investor members. 

All Access is our premium investor membership tier. It’s a yearly subscription, for which members receive 

  • monthly Insights about the state of the marketplace and the broader royalty market

  • the ability to access the analyst benchmarks or ask our financial analysts questions about specific catalogs

  • Significant discounts on marketplace fees

  • And access to our Standing Orders automated investing feature

More details on the All Access membership page on the website.

Still Have Questions? 

Register to attend one of our monthly Investor Office Hours sessions—an open Q&A where our staff answer all your questions. You can submit a question in advance, or ask one live. 

Register Here