Let me start this column the way I ended the last one: Private equity isn't killing the music business. But it is worth asking: How? I will is so much outside investment changing the way the music industry works?
Obviously, we'll see more documentaries, Broadway shows, and stage shows, both to make money and promote catalogs. But will this lead to significant changes in the distribution of rights or the balance of power in the industry? And is there even a slight chance of what could be called a subprime bond meltdown?
As Cyndi Lauper once sang, however, money changes everything — and that was before her recent rights sale. So I spoke to half a dozen serious players — private equity-backed music publishers and catalog rights buyers, as well as lawyers and consultants who have been working on these deals since investment started flooding into the music business in the late 2010s; about how these new players are changing the business. Every new investment field will have successes and failures — a new report from Shot Tower Capital says the Hipgnosis Songs Fund overstated its revenue and overpaid for catalogs, though Hipgnosis said it disputes that — but what does it all mean for the music in the long run ?
One of the few points of agreement is that this has been great for creators so far, especially songwriters. These deals involve creators who are already making money, but the ability to sell their catalogs allows them to replace a steady stream of revenue with a one-time influx of cash — “allowing artists the ability to have more liquidity opportunities,” according to one buyer. This is useful if they need cash, want to diversify their assets or need to think about estate planning. The emergence of outside buyers has also pushed traditional music companies to buy more publishing assets, especially where they already own related rights, for reasons that can be either strategic (“we can bundle rights”) or defensive (“we can monetize this without interference”). This competition means prices will rise, which is good for creators.
It also means potential investors will bid on a wider range of catalogs, including newer songs in more genres — which is already happening. So what happens when some of the largest investment entities in the world have so many directories? They will push — using the various tools at their disposal — to increase the value of their assets. They won't do this out of goodwill, of course. they will do it for self-interest. But any move that increases the value of the catalogs they own will also increase the value of the catalogs they don't, and that could be very good for songwriters.
“Investors are now standing in the shoes of the songwriter,” one catalog buyer told me, “and they're going to use their political influence to help make the way a songwriter gets paid fairer.” An executive who works for another catalog-buying company is skeptical of some ventures backed by private equity because “their incentives don't align well with those of the creators.” But that doesn't seem to be the case here. To the extent that some aspects of copyright regulation involve political power, the influence of private equity could offset the influence of large technology companies that generally lobby to undermine copyright. Two executives even suggested that private equity could serve as a driving force for reform to make collective management organizations more transparent. “We've put up with all this,” goes the argument, “but Wall Street won't!”
Right now, some of the catalog takeover businesses are based on the idea that new buyers can do more to promote songs than current owners, especially with film or theater projects. Eventually, though, at least some of that advantage could disappear. Executives can see what works, and some of them will inevitably bring that knowledge to other companies. Additionally, as we reach Peak Rock Doc, catalog owners – traditional publishers and private equity players – could start to see diminishing returns.
What about the cons? The reason private equity has such a bad reputation is that they typically buy highly leveraged assets and hold them for a limited period of time, which can often lead to layoffs in the companies they invest in. While deal structures vary, one source familiar with several deals told me that buyers generally don't borrow more than half the purchase price of the copyright assets, which seems reasonable.
Eventually, of course, some buyers will become sellers, possibly because their funds have run their course or perhaps because they are under pressure. In some cases, operators will be able to attract other investments. In others, “secondary sales will just widen the scope for what's playing,” a publishing executive pointed out. A market to publish assets inevitably means that not everyone will succeed — but it should offer other buyers. Some consolidation may be inevitable, but it may not be so bad. Some writers will worry about how the new owner of their songs will treat them, but realistically—and this may sound cold, but it's also true—this is something creators need to think about before they sell.
Is there a possibility of a broader market failure – a subprime copyright crisis, in a sense? Music royalties generate steady cash like mortgages once did, but while individual investments may go up or down, it's harder to imagine that an economic squeeze would lead to a selling frenzy that would drive prices down. . This is not a massively liquid market like housing is, and there is less leverage and much more due diligence on the assets being purchased. (One lawyer said this market encourages creators and publishers to improve their contracts and record-keeping practices.)
Although it may seem counterintuitive, the market for music copyrights may actually be more stable than that for housing. So far, on-demand streaming has proven resilient to the pandemic and seems resilient to the recession, so the only risk would be the collapse of the copyright system — and it's hard to imagine how that would happen, especially now that the music business has survived illegal file sharing. Outside investment in music rights will change, like everything else in the business, but it looks like we'll see steady, long-term change — most of which creators have good reason to be optimistic about.
