"Thank you for the music"
Investing in music royalties as an asset class
20 September 2021
Recent years have seen a marked increase in music royalties from streaming services. The potentially reliable royalty revenues from a properly managed music portfolio are becoming increasingly attractive for investors. This has resulted in music royalties emerging as a significant asset class with billions of dollars being spent on catalogue acquisitions.
In this article we explore key industry trends, the underlying legal concepts behind music rights and royalties, and some common issues.
Global recorded music revenues grew 7.4% to US$21.6 billion in 2020 according to the IFPI Global Music Report 2021, marking the sixth consecutive year of growth. This has been primarily driven by the growth in subscribers to paid streaming services.
These increasing revenues have led record and publishing companies – as well as funds – to acquire music catalogues and manage them as an asset class like never before. In a crescendo of activity, artists such as Neil Young and Bob Dylan have recently signed lucrative deals for hundreds of millions of dollars (with Hipgnosis Songs and Universal Music, respectively). Record and publishing companies have historically been best known for releasing new music. However, there are increasingly opportunities to make consistent and material revenues from the royalties of classic artists' back catalogues, whose reliable royalties can act like an annuity.
Two of the most prominent music royalty funds, Hipgnosis Songs and Round Hill Music Royalty Fund, both listed in London, in 2018 and 2020, respectively. Other funds and private equity houses have also acquired music catalogues. For example, KKR recently acquired the rights to OneRepublic singer Ryan Tedder's music.
Acquiring a music catalogue, though, is not a guarantee of continued growth or guaranteed passive income. It requires active management and in-depth industry knowledge, particularly in creating and monetising synchronisation "sync" licensing opportunities (explored below).
Music rights and common issues
Music rights and royalties are a complicated area of law. One song can include a bundle of different rights owned by different parties and may be subject to extensive commercial agreements (including assignments and licences) involving different songwriters, lyricists, performers, collecting societies, record companies and publishing companies. In this section we set out some of the key points to note when considering music royalties in the context of a catalogue acquisition from a legal perspective:
Rights in the song vs. rights in the sound recording
Firstly, it is important to separate the copyright in songs (often referred to as "author rights" or "publishing rights") from copyright in the sound recording (often referred to as "phonographic rights" or "master rights"). "Publishing rights" typically comprise the copyright in the musical work itself (the composition) and the copyright in the lyrics. These are two separate rights but are often owned and assigned together.
The rights in sound recordings are typically owned by record companies rather than artists, although in some instances they are licensed to record companies. A highly publicised example is Taylor Swift's recent unsuccessful attempts to buy the rights to her sound recordings and the subsequent re-recording of her back catalogue. Re-recording is a potential risk for owners of rights in sound recordings who do not also own the underlying rights to the songs but may be dealt with via contractual protections. One recent exception where the artist did hold the sound recording rights was the sale by French songwriter, record producer and DJ, David Guetta, of his past and future recording rights to Warner Music in June 2021 (for reportedly over US$100m). The sale followed the expiry of an exclusive term-limited licence deal. If other contemporary artists also hold their sound recording rights and initially license them, this may be an additional area of activity in the coming years.
Performers may also have separate rights subsisting in a recording, part of so-called "neighbouring rights". These are held by the musician(s) who performed on a sound recording. Performers have the right to refuse or consent to various different forms of exploitation of their performances. Performers' rights can be assigned or licensed, however, there are certain rights which generally cannot be assigned in European jurisdictions and the UK, for example, "moral rights" and rights to "equitable remuneration" (see below). As the US is not a signatory to the international performers' rights convention (the Rome Convention), performers' rights and neighbouring rights payments are treated differently in the US.
Synchronisation ("sync") licences are needed to use a specific piece of music in film, adverts, video games or other audio-visual productions. Simply playing a song on a music radio programme, would typically be covered by a blanket licence, but other uses such as in an advert or on a soundtrack would not be. Sync licences can provide significant revenues through royalty fees. Significantly, they can also drive consumer awareness of a particular artist or song, leading, in turn, to additional streaming revenues. Current key drivers include platforms such as TikTok and increased spend at content producers such as Netflix and Amazon Prime. One of the consistent issues in sync licensing is that licences are needed for both the copyright in the songs and in the sound recordings. Understanding the complete picture for the rights of each song is therefore essential.
No register of copyright works
In most countries, there are no registers of copyright works which can be consulted to try to determine ownership. The US does, however, operate a registration system, albeit it cannot require registration as a precondition of protection for foreign works.
Following the sale of his catalogue to Universal Music, Bob Dylan was sued by the co-writer of his 1976 album Desire, Jacques Levy, who claimed joint ownership in the songs. Dylan was successful in defending the claim following a US judge's review of the 1975 agreement between the parties. Trying to determine whether joint ownership arises at law can be complicated and may require extensive legal and musicological analysis. It is therefore essential that any third-party rights are understood and properly documented before a catalogue acquisition to prevent any unwanted claims.
For discussion of a recent case which helped clarify the legal test for joint ownership under English law see: Talking Tech - Florence Foster Jenkins Screenplay Battle Back in Court.
Moral rights arise naturally under the laws of certain jurisdictions and may be held by songwriters and performers. Under English law, for example, moral rights provide the right to object to derogatory treatment and the right to be identified as author. Broadly, laws regarding moral rights are stronger in Western European jurisdictions than in the US, with the UK somewhere in between. For example, in France moral rights cannot be waived or assigned, under English law they may be waived but not assigned and in the US there are only limited instances in which moral rights arise). As such, it is important to consider whether any moral rights subsist, whether they have been waived and, if so, whether such waiver was valid, to ensure they are properly understood and respected.
Equitable remuneration refers to the statutory right of performers on a sound recording to receive a certain percentage of revenue (typically 50% in the UK) regardless of who owns the copyright in the recording. The right overrides any contractual waivers. These revenues are then split between the principal artist(s) and the session musicians. Equitable remuneration arises when a sound recording is played in public or is communicated to the public. This includes on radio and TV as well as recorded music played in public places, such as restaurants, bars and shops.
Under English law this right does not currently arise when a sound recording is streamed. However, the report from the Digital, Culture, Media and Sport Committee's Economics of Music Streaming inquiry on 15 July 2021 recommended that this be investigated and potentially altered. There is a Private Members' Bill – The Copyright (Rights And Remuneration Of Musicians etc) Bill – due for a second reading on 3 December 2021 – which may contain such a provision. Such a change in law could significantly alter the streaming revenues received by the owners of sound recordings, as a statutory equitable remuneration right could override agreements signed between copyright owners and the original artists and performers. Watch this space for further updates.
Right to recapture
In the US, artists have the right after 35 years to terminate transfers or licences of copyright under some circumstances (US Copyright Act 1976 (s. 203)). If sound recordings are not considered a "work made for hire", artists may be able to recapture rights, share in profits and limit exploitation of recordings. This right is particular to the US, but a similar 20-year right was suggested by the DCMS committee in the report on the Economics of Music Streaming mentioned above.
Other forms of investment
Alternative investments in music royalties are not new. David Bowie famously sold asset-backed securities in 1997 based on royalties from his back catalogue – so-called "Bowie Bonds". Whilst music royalties are still not widely securitised there has been a rapid growth in innovative business models based on music royalties, for example:
- some platforms have allowed investors to invest in a small percentage of a music royalties catalogue
- various companies are exploring how blockchain and non-fungible tokens (NFTs) can be used to buy and sell music copyright
- crowd-funding platforms allow investors and fans to invest in artists for merchandise, for equity or simply as a donation to enable an artist to record an album.
We expect that both established players within the music industry and funds will continue to invest in music royalties as an asset class and innovative business models will continue to be explored by stakeholders. Amid the crescendo, it is important to remember that any investment is fundamentally based on a complex harmony of legal rights. Properly understanding these rights and royalties is essential to prevent unwanted discord.