Why Music Royalties Belong In Your Portfolio

  in Investor Guides

Nov 10, 2017

At Royalty Exchange our mission is to make royalty streams on intellectual property—things like music, film and books—easy to invest in.

We’ve built an online marketplace, where we connect buyers and sellers of royalty streams. This creates transparency, liquidity, and price discovery in a market that lacks all three. The exchange is thriving with over 22,000 users, and growing fast.

We also created a subsidiary called Royalty Flow, designed specifically to acquire royalty interests in world-class media assets, which investors can participate in through public shares of the company.

Why Royalties are one of the best alternative assets

You probably know that alternative investments can be an important part of a broader portfolio. Alternative investments offer the promise of low correlation to traditional investments like stocks and bonds. They often have the potential to generate income as well. 

When you add them to a portfolio, you get a significant diversification benefit over time. Often, the result are better risk-adjusted returns.

But, when investors typically seek out alternative investments, they have very few options. Few include what we think is the purest alternative investment available: royalty income derived from intellectual property. 

For now, let’s focus on music royalties, by taking a look at how rights holders get paid.

A rightsholder is a company or individual with a legal claim on income generated from the use of that IP, in this case… music. Rightsholders could be songwriters, recording artist, labels, publishers, producers, and so on. There are a number of different parties that can have that legal claim on future income.

They are paid based on streams, downloads, physical album sales, and other usage depending on exactly which royalty they own. [For a full rundown of the different types of royalty rights, read our Music Royalties Guide].  In essence, consumption of music drives royalty payments. And music consumption doesn’t change when interest rates go up or when stock market sentiment turns bearish. 

In addition, royalties:

  • Can earn consistent cash flow.
  • Are long-term assets (royalties are paid for the life of the artist +70 years!)
  • They have relative price, or NAV (Net Asset Value) stability.
  • They have the potential for capital appreciation - especially now.

Why now is the time to buy music royalties.

Let’s take a closer look at the potential for capital appreciation.

You see, the music industry and related assets are climbing out of a long, brutal bear market. For the last 15 years, the industry has been the victim of:

  • Piracy
  • Disaggregation of music from physical albums to digital singles
  • Mispricing / undervaluation due to lack of transparency

As you see from the chart below, we didn’t see things turn around until 2015. At Royalty Exchange, we’re confident we’ve only seen the start of that recovery. And we’re not the only ones.  

The reason? The rise of digital streaming. Subscriptions to digital streaming services like Spotify, Apple and Pandora have been a game changer for the industry.

Streaming generated approximately $3.9 billion in 2016, according to trade group IFPI. In December 2016, Goldman Sachs projected streaming revenues woulud grow to about $14.1 billion by 2030.  But that prediction was short lived.

See, streaming is growing faster than anyone expected. According to an August 2, 2017 Business Insider analysis, “[Spotify] managed to increase its user growth rate as its subscriber base grew. The music streaming service added 10 million subscriber additions in roughly four months, faster than the approximate six months it took to go from 40 million subscribers to 50 million.” 

With facts like these, just eight months after it estimated streaming would get to $14.1 billion by 2030, Goldman Sachs revised the forecast—in fact, they doubled it—$34 billion.

We believe because of streaming, music is about to enter a decade-long bull market that will cause the tide to rise for rightsholders. There was tremendous growth in the music industry between 2015 and 2016, but it is just the beginning, and here’s why...

  • Every single smartphone owner has a portable music player in their pocket. And streaming is the most convenient and inexpensive way for consumers to get all the music they want. Essentially, for the price of one CD per month, Spotify and Apple Music users can stream millions of different songs. The mere convenience of streaming from your phone makes all the difference.
  • Music industry trade group IFPI reported 112 million paying subscribers to music streaming services at the end of 2016. Sounds like a lot, but that’s only about 3% of the 4 billion smartphones worldwide.
  • Goldman Sachs analyst Lisa Yang predicts 14% of global smartphone users will subscribe to music services by 2030, raising her previous estimate of 9%.

 And the future goes beyond the smartphone.

  • If Goldman Sachs is right, the rise of smart speakers and connected cars could contribute up to $8 billion in additional revenue to the music industry by 2030.
  • Amazon’s Echo speaker line is expected to ship 10 million units in 2017. A similar device from Google called Google Home is growing in popularity, and Apple will release their version, the HomePod, this December.

The combination of the streaming business model and globalization has been, and will continue to be a big win for the music industry.

Streaming is allowing people around the world to discover music from other parts of the globe. As the quality of smartphones and mobile networking increases around the world, usage and revenue to the music industry will increase dramatically.

Previously, record labels were faced with a tough economic decision when considering whether or not they should release albums internationally, especially in the developing world. But with streaming services, the whole cost/benefit analysis has been turned on its head.

International success no longer requires successful manufacturing, distribution and negotiating shelf space. Streaming promises global access to legally licensed music.  That’s great for fans and rightsholders.

Technology is providing data and transparency never previously available in the music business. Collecting, aggregating and analyzing data has become much easier in the digital world, and royalty rightsholders are reaping the benefits. Better data means more accurate royalty collection and distribution, as well as easier analysis of music as an asset for investors.

What’s more, advertising-supported music revenues will increase with better ad targeting:

  • As targeting and advertising technology improves, the effectiveness of ads will grow and the number of advertisers wanting to buy the ads increases as well, driving up the revenue to rightsholders.
  • In fact, Goldman Sachs expects ad-supported revenue to contribute $6.1 billion to the music industry per year by 2030. That’s up over 450% from just $1.1 billion today.

We find ourselves at a pivotal time in investing in media royalties as an asset class. The growing importance of intellectual property in the global economy, the music industry’s recovery, and increasing cash flows that are uncorrelated to stock and bond markets, make media royalties an incredible alternative asset class and one that should be considered for many investment portfolios. 

Investing in music royalties today is the opportunity to invest at the start of a boom and experience massive appreciation, collecting royalty income along the way.

What To Do Next

Now that you understand the opportunity, you should create a free account to view all of the music royalty assets we have up for auction on the site. You can create your free account in less than two minutes by clicking the button below.