To Forecast Future Royalty Earnings, Focus On the Past

  in Investor Guides

Mar 08, 2019


When it comes to buying music royalties, the biggest question investors ask is “how long are these royalties likely continue in the future?”

That can be difficult to answer. After all, each song, each catalog, each artist is uniquely different. Musical tastes change.

But you don’t need in-depth knowledge of music history or have a finger on the pulse of music industry trends to make smart royalty investing decisions.

You just need to know how to count.

That’s why we’ve introduced a new metric to all Royalty Exchange listings—Dollar Age.

Dollar Age is a time-weighted measurement of a catalog’s likely stability of earnings based on the revenue produced in the last year factored against the age of the songs included. We feel is an important indicator for understanding how likely a catalog’s earnings will continue in the future.

Most investors look at the last 12 months earnings (LTM) of a given asset and determine what multiple of that they’re willing to pay based on their assessment of its risk. The instinct with music catalogs is to base this risk assessment on things like popularity or musical preference—catalogs containing songs or artists investors recognize, or that have won Grammy awards and Billboard chart positions, are considered less risky.

But doing so focuses on the qualitative differences between catalogs, rather than their measurable similarities. Dollar Age, meanwhile, is a measurable, standard data point all catalogs share, regardless of genre or popularity. It allows investors to better assess the potential risk of unfamiliar catalogs but that may still hold value (or to expose the hidden risk of catalogs they recognize).

[Related Post: Separating the Signal From the Noise In Royalty Investing Decisions]

So if the LTM earnings are an indicator of the quantity of earnings, Dollar Age is the indicator of the quality of those earnings.

Here’s how we calculate Dollar Age, and how it can be applied to royalty investments.

  • ∑ = Sum of

  • n = Each track

  • Age of Track = Today’s date – date of track release (expressed in years)*

  • LTM = Last twelve months earnings

  • TLTM = Sum of LTM for all tracks

As complicated as this may look to someone not familiar with mathematical formulas, it’s actually very simple.

So here’s an example to illustrate the formula more clearly.

(*Age of track means the number of years a track as collected royalties, not necessarily when it was first released. If the date of first payment is unavailable, we use the original release data to approximate age of earnings.)

As you can see, this catalog has five songs, each of which earned a different amount in the last 12 months (LTM), and each has earned for a different period of time.

To calculate the Dollar Age for the entire catalog, simply multiply the LTM of each song by the number of years that song has earned, to generate the weighted total. As you can see, this makes a song that earned $1,000 last year which has earned for six years equal in weighted total value to a song that earned $2,000 last year but has only earned for three years.

The combined weighted total ($24,000), is then divided by the total LTM earnings of the entire catalog ($5,700), and the result is the Dollar Age: 4.21.

This formula, and resulting Dollar Age metric, can be applied to any catalog regardless of genre or award accolades.

So let’s say you were evaluating two different listings for catalogs that both earned $50,000 in the last twelve months. One catalog is comprised of songs that have earned royalties for over 10 years. The other is comprised of songs that have earned for only 3 years. Even though both earned the same amount last year, the catalog with songs earning for more than 10 years would be considered the less risky investment.

Why is the number of years a song has earned important? To explain further, let’s first examine a concept called The Lindy Effect.

The Lindy Effect is defined as:

The future life expectancy of some non-perishable things—like technology, or an idea—is proportional to their current age. Every additional period of survival implies a longer remaining life expectancy.

In other words, the longer something has been around, the longer it is likely to continue to stay around.

This is particularly true with music.

The typical “retail window” of newly released music is 18 months. That means a newly released song is likely to generate the bulk of its earnings in the first 18 months after release: sales, streaming, radio play etc. Earnings then typically fall after those first 18 months. But some fall only to a certain level, and then remain there. Catalogs that stand the test of time will likely continue to generate stable income.

That’s why it’s difficult to evaluate the risk profile for a catalog's potential longevity with less than three years worth of earnings to examine. It’s simply too close to the initial 18-month retail window to forecast how likely those earnings might continue into the future. It may still prove a worthwhile investment, but the risk profile is much different than a song that’s generated royalties for more than three years.


So to review:

  1. Recognizability creates false confidence by focusing on qualitative differences instead of quantitative similarities.

  2. Dollar Age determines quality of earnings, while LTM determines quantity of earnings.

  3. The higher the Dollar Age, the lower the risk profile, regardless of the artist, genre, or familiarity of the song.

You can now apply this concept to any catalog listed on the Royalty Exchange marketplace, and make more confident bids.

Take a look at the listings live today.