“The future for me,” Bob Dylan sang in 2001, “is…a thing of the past.”
Presciently, it turns out, because the future—for all of us, not just Dylan—will consist significantly of hearing the songs of Dylan’s past. The same goes for Shakira, Neil Young, Barry Manilow, and all the other musicians who have sold their back catalogs for hefty fees over the past few years.
In the ongoing scramble by funds, investors, and companies to buy up these catalogs, Dylan’s has been the pre-eminent purchase. Universal Music bought his songs for a rumored $300-$400 million. But that is only the crest of a tide of money washing through the industry, acquiring old songs. The bet is that, by squeezing these songs for streaming audio revenue and also selling these songs into soundtracks across video platforms, the catalogs will earn consistently high returns.
Hipgnosis Songs Fund, perhaps the best-known of the companies set up expressly to buy catalogs, has spent $1.66 billion to snap up at least 61,000 songs. Recently, it raised another $100 million and wants to raise more than $2 billion over the course of the year through a share issue. Other companies, such as Round Hill and Primary Wave, are also scarfing up catalogs. “At this point,” said Alec Peters, a longtime music promoter and the founder of Jupiter Media, a platform for emerging artists, “everyone is banging on the door, saying: ‘I want to be in on this.'”
These songs are being cast as financial assets like any other, and—as Hipgnosis’ stock price shows—investors are more optimistic about returns from catalogs than from the S&P 500. “Better than gold or oil,” Merck Mercuriadis, Hipgnosis’ founder, said last year about songs as assets. “The volatility of this music is low, and it’s been generating income for decades, so we can pretty accurately forecast cash flow in the future,” said Larry Miller, who directs the music business program at NYU Steinhardt. Interest rates are low at the moment, making it cheap to borrow money to fund acquisitions.
Still, the purchase prices are so high that some people wonder how the money will ever be made back, and if the back-catalog game is merely awash in the kind of excess cash that is seeking high returns and forming bubbles elsewhere in the economy. Steve Cooper, the chief executive of Warner Music, compared the buying spree to the Yukon gold rush. “I praise the people that can figure out how to make money when they pay 25 times [a song’s historic annual royalties]. God bless,” Cooper told the Financial Times, referring indirectly to Hipgnosis, which pays some of the highest multiples in the business. Eventually all these songs will have to be worked hard to make back their investments. Which is why, Peters fears, we’re going to hear songs from these high-priced catalogs in every cubic inch of media real estate around us: muzak, jingles, film soundtracks, mood music, video-game scores, documentaries—a soundscape of old hits laboring to pay for themselves.
Why are music catalogs being valued so highly?
It isn’t easy to value a song. Which is why Barry Massarsky has had to develop complicated mathematical models to do it.
He runs Massarsky Consulting, a company that determines valuations of catalogs for Hipgnosis, Round Hill, and other clients. The owner of a catalog stands to make money from three kinds of rights, Massarsky said; he called them performance, mechanical, and synch.
Performance rights earn money when a song is played in a public place—a bar, for instance, or a shopping mall. Streaming royalties from Spotify or Apple Music accrue under mechanical rights. Synch rights kick in if a song is used in the opening credits of a television show or in a movie soundtrack.
Over the past decade or so, mechanical and synch rights have become goldmines. In 2019, streaming made up $11.2 billion out of the music industry’s $20 billion in revenue. And to match the explosion in music-streaming services, there is a glut of video content—movies, shows, short videos, and commercials made for platforms like Netflix and Amazon Prime, or for YouTube and TikTok, or for traditional cable channels like HBO and NBC, all in need of musical accompaniment. A synch license for a big-budget movie might run into six figures, Massarsky said. “And in 2020, to boot, there were no live concerts because of Covid-19, so streaming became even more important,” he said. “The supply and demand marketplace has never been so appetizing.”
It’s a far cry from even ten years ago, Miller said, when the industry hadn’t yet recovered from the disruptions of file-sharing. Users were paying to download songs off iTunes, but the volumes wouldn’t touch those of streaming, a sector with its heyday still in the future. “Very few investors were buying music rights back then,” Miller said. The multiples—the worth of a catalog, pegged to its revenue—were at a historic low, around 9. “That meant that if a catalog generated $1 million, it was worth $9 million,” Miller said.
By last year, the boom in music and video streaming had more than doubled those multiples; Hipgnosis has shelled out multiples as high as 22 for some catalogs. Massarsky’s model and others expect catalogs to pay for themselves within 10-15 years; beyond 20 years, it’s difficult to predict the viability of a song’s earning capacity.
In the six months ending in September 2020, Hipgnosis generated nearly $70 million in revenue and $14 million in net profit. Its assets returned 11.6% in that half-year, Mercuriadis said in an interview, adding: “Everything we’ve bought will triple in value by the end of the decade.”
What is this flood of money doing to the industry?
With a song, though, it’s impossible to be sure of its continued viability, even over a 15-year period. Tastes change, and artists drop in and out of popularity. Steve Cooper, Warner Music’s CEO, has warned against treating music as a fixed-income investment. Even a predictable stream of income may never earn back the outsized amounts being paid out to acquire catalogs, other industry executives have said.
For one thing, Peters pointed out, if multiple companies are desperate to make back their investments on songs, that may drive down their earning capacities. “Now you’ll have 50 people banging on the doors of production companies, trying to sell synch rights,” he said. “So a movie director will say: ‘I’m in the catbird seat here, I’ll pick what I like, on whatever terms I like.’ Would these public companies be able to accept a half-rate deal if it undercuts their investment?” When it comes to striking hard deals, Peters said, “our brothers in the film business are twice as savage.”
Massarsky believes that companies like Hipgnosis are matching money to product. “Older songwriters like Dylan are looking at estate planning and retirement, so they’re eager to get into the market,” he said. “On the other hand, because bonds are yielding low returns and the stock market feels erratic, pension funds and high-net worth investors want to direct their money here.”
But the flow of funds to older, established stars, some fear, will preclude investment in the discovery of new artists—artists with potential who already struggle to get discovered and paid on streaming platforms. “These would be living, breathing musicians making music right now, as opposed to just a nostalgia play,” Peters said.
And these venerable catalogs themselves might be commercialized in ways that musicians never intended. “You’ll be hearing a lot more of Neil Young, because Hipgnosis will have to go out there and sell him,” Massarsky said. “Neil Young never liked to license his music for commercials, but Hipgnosis has the right to commoditize that now.” Hence the forthcoming ubiquity of all this music, Peters predicts: the greatest songs of the past century stuffed into as many advertising spots and movies as possible. “You’re going to see that. And you’re going to say: ‘Oh. Oh my gosh. Well, that’s just how the world changes.'”