Venture capitalists are falling over themselves to cut cheques giving them a stake in the music biz these days, and the sums they are willing to pay are mind blowing.
Forget the adage, 'sold for a song'. Songs are blue chip assets in today's digital economy, and if the trickle-down to the songwriters and the music publishers hasn't already occurred--get ready because a change is gonna come. And when it does, it comes with transparency, micro-payments and enough dough to have the creative class dancing in the street singing "Pennies from Heaven."
The latest deal in the making has NY-based private equity firm Rizvi Traverse Management selling its 75% stake in Nashville-based multi-rights collection org SESAC to Blackstone, itself an even bigger private equity fund investor head-officed on Park Avenue. No figures have been disclosed but the sticker price is probably in the vicinity of US$500M.
The agency has been a perennial third-place runner-up in the performing rights chain, trailing ASCAP and BMI. Originally the Society of European Stage Authors and Composers, SESAC differs from the leading PROs because it is in for a profit; hence the interest in it from private equity.
SESAC currently licenses the public performances of some 400,000 songs from 30,000 affiliated songwriters, composers and music publishers. The list includes Bob Dylan, Neil Diamond, Zac Brown, Mumford & Sons, Lady Antebellum--plus an A-list stable of film and TV composers.
Blackstone joins a growing list of outsiders willing to pony up serious coin to own a piece of IP. Google Venture capital funds pumped $60M into London-based music publisher and platform provider Kobalt Music some years back, bringing Kobalt's outside equity to over $100M. The rights company claims to manage $3.5B in publishing assets and has Paul McCartney, Prince, Bob Marley, Beck, Dave Grohl, and Sam Smith among the 8,000 songwriters on its books.
Former Blackstone investment advisor Howard Lipson and American music entrepreneur James Diener have multi-million-dollar backing from BlackRock Capital for their boutique investment firm, Alignment Artists Capital. AAC structures loans to artists with solid business plans to expand their brand. AAC is expected to spin off a return of between 10-15% for its own investors.
Then, last spring, there was the $750M purchase of the 50% stake in Sony/ATV music publishing that it didn't already own, from the Michael Jackson estate. Four years earlier it acquired EMI Music Publishing for $2.2B using a patchwork of investors that included Blackstone Group. Today, Sony/ATV’s catalogue comprises more than 3 million songs with consolidated annual revenues topping $1B.
For the record, the ATV catalogue was purchased by Michael Jackson in 1985 for $41.5M so Jacko made himself a wise investment there.
And it's not just the Americans who are in on the gold rush to buy up memories and today's top hits. Dutch fund ABP, the world's third-largest state pension fund, bought the Rodgers & Hammerstein catalogue of songs from musicals including "The Sound of Music" and "The King and I" in a deal pegged at around $200M. And that was in 2009.
Around the same time, private equity firm Pegasus Capital paid an estimated $55M for Spirit Music Group, a song publisher with rights to some of the works of artists ranging from Frank Sinatra to Madonna.
In 2011, Josh Gruss, a former hedge fund manager, founded Round Hill Music, a private equity firm exclusively dedicated to investments in revenue generating music copyright assets. Round Hill Music now administers a catalogue of over 20K songs by artists as diverse as The Beatles, Rolling Stones, Frank Sinatra, Billie Holiday, Ella Fitzgerald, Aerosmith, Katy Perry, Bon Jovi and Celine Dion. Their most recent acquisition was the catalogue of Big Loud Shirt Industries, including #1 hits performed by Rascal Flatts, LeAnn Rimes, Carrie Underwood, Kenny Chesney, Jason Aldean, and Blake Shelton. The investment strategy of the company is to acquire time tested copyrights, add value to the portfolio to increase cash flow and later sell its assets to a strategic or financial buyer.
At home we have ole, a global player in the rights management business with a focus in music-publishing services, sub-publishing music copyrights, and a diverse portfolio of administration agreements with publishers, songwriters, and film and television producers. It owns the publisher's share on more than 45,000 songs, 60,000 hours of film and TV music, and 150,000 production music tracks and over the past 10 years it has spent close to US$300M in acquiring a variety of music catalogues. Its backing is private capital and it recently announced it had secured a $500M credit facility from 12 U.S. and Canadian banks to continue its expansion.
The lure of music-publishing and rights-management is stable cash flow. Kobalt’s annual revenue growth has averaged 40% over the past decade.
Robert Ott, COO and co-founder of ole, has sold his vision for global expansion by guaranteeing investors stable returns that beat market rates. The income streams don't wildly fluctuate, but instead provide a comfortable and steady rate of return.
Music publishers make money by exploiting the rights of their song catalogues. They get paid every time a song is played on the radio, in TV shows, in movies, at the theatre, in video games, in streams and in advertisements to name a few outlets.
Song catalogues do not necessarily promise huge returns on investment, but rather regular cash flow from a business with relatively low capital expenditure compared with the more volatile venture capital-like model of record labels, which hope for hit songs to make most of their profits.
The hot trend in catalogue acquisitions don't provide immediate benefit to songwriters and music publishers, but companies such as Kobalt are providing greater transparency on income streams, and in some cases real-time snapshots of what has come in.
Figuring out the value of a song catalogue is specialized work. The math usually trades on a multiple over Net Publisher’s Share (NPS), defined as the amount of royalties received by a music publisher less the amount of the royalties that have to be paid to writers, performers and others who participate in a share of the royalties earned.
Some catalogue valuations are based on an average of the NPS over a 3 to 5 year period, while others prefer to base the asking price on the last twelve month period. Established classic catalogues tend to trade between 10x to 15x NPS, while newer and lesser-known catalogues sell between 5x and 10x NPS.
With the explosion in music streaming and the increasing number of social platforms that allow music embeds, the opportunities for growth are far greater than in an analogue age when radio and TV were the dominant outlets for music publishers, excluding record sales and syncs.
Kobalt founder and CEO Willard Ahdritz tells Quartz magazine that there is huge potential to unlock more value from music. There are 250M consumers in markets like southeast Asia and South America that the music industry has yet to tap into, he explains. He senses opportunity from emerging services like Snapchat (and whatever follows) as more people use the services to share and consume music.
If Ahdritz is to be believed, then we are on the brink of an explosion in music usage. “In this digital world, transparency drives liquidity, and liquidity drives volume,” Ahdritz says. If Kobalt makes it easier for businesses to license music, they’ll license it (and ultimately play it) more often, generating more royalties.
And that presumably appeals to investors like Google Ventures, which also has put money behind Uber, TuneIn Radio, and Nest, the thermostat maker.“The music industry is going through dynamic changes all around the world and Kobalt will be instrumental in shaping its future,” Google Ventures partner Bill Maris said in a press release.
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-- Sources: Music Business International, Quart, Forbes, New York Times, Reuters, Berklee College Music Business Journal.