In 2016, BlackRock, the world’s largest global investment fund, sank $300 million into Primary Wave, a Los Angeles-based talent and management firm with a then-unusual remit: acquiring and managing song catalogs. It was an area of the music business that hadn’t attracted much outside interest or investment because piracy, illegal streaming, and the rocky transition to digital had nearly destroyed the industry, with revenue dropping some 40 percent since 2000. But Larry Mestel, Primary Wave’s founder and the former CEO of Virgin Records, pitched opportunity. “I saw the same thing in 2016 I see today: significant marketing opportunity, streaming growth, and music-tech growth.”
The next year, 2017, was also the year that streaming income overtook physical and digital sales to become the industry’s top source of revenue—the emergence of what USC Marshall School professor Joseph Nunes calls the musical “rental economy.” Projections for growth stretched to the near horizon. The music business could finally see a way forward with the revenue from subscription streaming services like Spotify and Apple Music. And with a plausible business model finally in place, the untapped value of the vast song catalogs of legacy artists and those who were thriving in the new environment began attracting a new sort of entrepreneur. Mestel and Primary Wave were followed into the market by the London-based former artist manager Merck Mercuriadis and his Hipgnosis Songs Fund, which raised £200 million on the London Stock Exchange in 2018 to focus exclusively on acquiring song copyrights.
What came next is a boom far greater than Mestel could have imagined. Legends like Neil Young, Bob Dylan, and Paul Simon as well as younger artists like Shakira and Ryan Tedder sold their song copyrights (and sometimes other intellectual property) for jaw-dropping prices, with each week seeming to bring yet another huge deal. The combination of artists, especially older ones, seeking the financial security of a big payday after watching live-touring revenue vanish in the pandemic, and investors re-evaluating song publishing as an undervalued asset, has produced a tidal wave of sales. “COVID really heated up the market,” says Mestel, “and now that some big artists like Bob Dylan have sold, others are following.”
Hipgnosis and Primary Wave have emerged as the two biggest players (though hardly the only) in the boom, and express its two main strategies. Mercuriadis’s mantra to investors is that “the song, even more so than the artist, is the most important component of a hit,” and he promises industry-leading returns with this song-first strategy. Mestel’s Primary Wave buys into a broader range of intellectual property than song copyrights, often in partnership with the artist. “You can’t separate who the artist is and the songs they’ve created,” he says.
When Primary Wave and Hipgnosis made their first big purchases in 2018, the New York Times was already describing the market as “frothy.” Mestel’s company dropped $50 million for 80 percent of Chris Blackwell’s stake in Bob Marley’s catalog and in Blue Mountain Music (Marianne Faithfull’s songs and Free’s “All Right Now”). The price represented an 18- to 20-times multiple of the catalogs’ annual revenues at a time when song catalogs mainly traded in the 10- to 14-times range. The same year Hipgnosis picked up a 75 percent interest in the catalog of songwriter The-Dream (Rihanna’s “Umbrella,” Beyonce’s “Single Ladies”) for $23 million. Over the next 18 months, it added the catalogs of Timbaland (108 songs), producer/songwriter/drummer Al Jackson (songs for Al Green and Booker T. & the MGs), and the 1,000-song catalog of the Eurythmics’ Dave Stewart to its portfolio. Meanwhile, Primary Wave added a 50 percent share of Whitney Houston’s catalog and a majority stake in Ray Charles’s pre-1964 catalog.
Last year alone, Hipgnosis acquired Richie Sambora’s 200-song catalog (Bon Jovi, plus three solo albums and songs for Cher and LeAnn Rimes), the catalog of Blondie’s Debbie Harry and Chris Stein, and Barry Manilow’s 917-song catalog, among other deals. Primary Wave paid $100 million to Stevie Nicks for 80 percent of her songs and bought stakes in the catalogs of Olivia Newton-John, hard rocker Disturbed, and New Wave legend Devo. The frenzy attracted new players: Vine Alternative Investments bought the catalog of songwriter Calvin Harris (Rihanna, Mary J. Blige); Eldridge Capital, former owner of The Hollywood Reporter and Dick Clark Productions, bought alt-rockers the Killers’ catalog. Iconic Music, newly founded by industry legend Irving Azoff, nabbed David Crosby, Linda Ronstadt, and a controlling interest in the Beach Boys. Wall Street investment firm KKR scooped up songwriter Tedder (Adele, Beyonce) for a reported $200 million.
And in just the first five months of 2021, Primary Wave invested in Mark Morrison and songwriter Patrick Leonard (Madonna and others) and bought 6,000 master recordings from Sun Records, including hits by Johnny Cash, Roy Orbison, and Jerry Lee Lewis, for $30 million. Hipgnosis added songs by Fleetwood Mac’s Lindsay Buckingham, producer Jimmy Iovine’s 259-song catalog (including work from Bruce Springsteen, Eminem, and Tom Petty), and a 50-percent stake in Neil Young’s 1,100-song catalog for a reported $150 million. In May, it paid the Red Hot Chili Peppers $140 million for their songs at a 23- to 28-times multiple, an indication of how much the value of catalogs has jumped recently.
The flood of outside investors picking off the crown jewels of traditional music publishers did not sit well with legacy titans like Sony Music and Universal Music Group. In what were widely viewed as preemptive strikes, Universal paid Bob Dylan more than $300 million to keep the copyrights to his 600-song catalog. Sony paid Paul Simon an estimated $250 million for his, equaling a hefty multiple of nearly 30 times annual revenue. The overflow of capital sloshing around the financial system fueled by historic low interest rates has led to investment funds bursting with money—and making attractive once-arcane instruments like song funds. “I think people have discovered what we’ve been saying for 15 years, which is music copyrights are a great alternative investment,” says Mestel.
Comparing these deals is not apples to apples because not everyone is buying or selling the same thing. Hipgnosis’s “pure play” strategy is focused solely on copyrights—that is, the actual musical composition and lyrics as opposed to the performance rights—who sings it—or the sound recording (the actual master recording of that performance, usually owned by the music label). Song copyrights earn six cents out of every dollar of streaming service revenue. Performance nets another six cents. Sound-recording owners get about 58 cents, and the streaming services collect 29 cents. Copyright owners get a fee whenever someone plays the song, so covers, sampling, and commercial use all generate revenue. Primary Wave’s broader strategy often involves partnering with artists on name and brand as well. Through its deal with Whitney Houston’s estate, it is developing a biographical movie and a Las Vegas stage show. Similarly, the Iconic Artist Group’s Beach Boys deal was done with an eye to developing everything from restaurants to Broadway shows.
For legacy artists, the decision to sell turns on a combination of financial need, tax considerations, and estate planning, exacerbated by the pandemic, which has exposed the fragile state of their finances absent live-touring income. David Crosby explained his thinking to the New York Times on the eve of his April catalog sale: “I don’t have savings. I don’t have any retirement program. But I did have my publishing. It’s the only option that’s open to me to take care of myself and my family.”
Longtime music-business manager Tina Fasbender says, “I was one of those business managers cautioning my clients to never let go of their copyrights because it was a life annuity.” But as the market changed, so has her advice. “I think some older writers, who have been through the ringer from watching a music industry change, are just looking at securing their financial future.”
Regardless, a sale can mean not only a big lump-sum payment but also a smaller tax bill. Royalties are taxed as income, currently topping out at 37 percent for the feds, plus any state taxes and a 3.8 percent net investment income tax. A catalog sale, on the other hand, would be taxed at the capital gains rate of just 20 percent. President Biden’s proposal to raise the capital gains tax to as high as 39.6 percent is undoubtedly driving part of the rush to cash in—an eight- or nine-figure catalog sale before the higher rate goes into effect could save millions. A one-time sale also avoids the prospect of a dispute with the IRS over the value of the catalog as an inheritable asset and getting socked with penalties. Prince’s estate was hit with a $6.4 million “accuracy-related penalty” in January for lowballing the value of his catalog by about 70 percent, according to the IRS.
Selling a catalog also greatly simplifies estate planning; dividing $100 million is easier than divvying up the rights to 100 songs. Consider Dylan, who turned 80 in May and has six children from two marriages to divide his estate among. Or the fight between the late Tom Petty’s second wife and his two children over how to execute Petty’s long-held wish to release the original double-album version of his classic Wildflowers. Many heirs would rather take the money as well. Some don’t want the hassle of administering rights or have their life defined primarily as the caretaker of a parent’s work rather than their own. Songwriter Patrick Leonard, who sold a stake in his catalog to Primary Wave in April, understands the impulse. “Some of the deals, the hundreds of millions of dollars, I think, like, what’s there to talk about?” he says.
Investors, meanwhile, are being lured with the promise of not just predictable returns but also even greater growth. Goldman Sachs predicts that the worldwide streaming user base will grow from 341 million in 2019 to 1.2 billion by the end of this decade and calculates that global revenue will double to more than $140 billion in the same period. Paid subscribers to streaming services in the U.S. alone jumped 15 million from 2019 to 2020. Licensing a catalog’s “synch” rights to film, TV, video games—even to TikTok and exercise services like Peloton—is expected to increase substantially.
Mestel, for one, is skeptical of the smaller players and late entrants chasing a fast buck. “I think what people are promising—most of them are full of shit.” He believes that many are instead looking to flip their purchases for a quick profit.
“Where is the ceiling?” wonders veteran music executive Olivier Chastan, who has participated in numerous catalog sales, adding that “it is hard to tell” if prices have peaked. For him, future increases hinge on two factors: how optimistic investors remain about the growth of streaming and whether the cost of capital remains cheap. Chastan sees potential for some artists who have kept their material out of the synch market—Neil Young, for example—to see quick gains, but in general he thinks it will be more about rearranging the pie slices than growing a much bigger pie. “You are really going to double that? It’s totally fallacy,” he says.
Mestel remains optimistic because the number of major catalogs that could still be acquired is huge. For every Diane Warren, who said on a Rolling Stone podcast that selling her catalog “would be like selling my soul, and that’s not for sale,” there’s a Dolly Parton who freely admitted in December, “I’ve often thought about [selling] for business reasons, estate planning, and family things.”
Pressure from tech conglomerates like Apple and Google, whose size and power dwarf even the biggest music label, is another hurdle. “One of the things that’s going to become a potential issue is what if they decide to bundle?” Chasten says, about a potential disruption that could diminish a pricy catalog’s value overnight. “What if Amazon decided that everything’s going to be $19.99 a month for video, Prime shipping, music, and Twitch gaming?”
USC’s Nunes wonders whether Hipgnosis, even having grown to more than 60,000 songs at the end of 2020 and with more acquisitions coming every month, will ever be large enough to stand on its own. The size of the major labels, with catalogs in the millions, have the reach to weather shifting musical tastes of the market. He speculates that the new entrants will get just big enough to become an attractive takeover target. Fasbender agrees. “I believe that there are players out there whose eye has always been toward not staying in, but ‘I’m going to acquire the biggest, fattest, most sexy set of catalogs I can, and then I’m going to roll them up and sell them.’ ”
Chastan is already looking to the next big tech innovations that could upend the market. Imagine putting on a VR headset to attend the Beatles’ 1965 Shea Stadium concert or Woodstock re-created in a way that makes you feel like you are actually there.
“Nobody,” he says, “has a methodology for pricing that.”
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