Tips Considerations Those who want to get the music royalty trend | SehndeWeb

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We’ve all seen the recent headlines of one mega-catalog sale after the next. Without wasting any time, the pace of investment in music royalties has continued to accelerate in 2022. Big-name stars and iconic artists, from Sting and John Legend to Neil Diamond and Alice in Chains, are taking advantage of the terms of favorable market to cash in.

Why are music royalties so popular?

According to Music Business Worldwide, around $5 billion was spent acquiring music rights in 2021, and 2022 is expected to be even bigger. Just as we’ve seen in classic cars, trading cards, street art, and NFTs, investors are increasingly turning to assets that are uncorrelated to the stock market.

So what drives catalog sales? The impact of streaming on the value of recent acquisitions has been exponential. In concert with harmonious market factors, such as low interest rates and favorable tax and estate planning environments, the availability of streaming data and social information has made future earnings projections much more transparent and more easy to analyze. These factors have skyrocketed the popularity of music as an asset class and created a buzz among investors.

So you want to get into the royalties game?

Captains of Industry have catapulted new and innovative ideas to the forefront of today’s economy, catching the attention of investors and entrepreneurs looking to capitalize on the hottest trends. FOMO is real: crypto, NFTs, cannabis, and royalties all affect not just investors, but the general public. But what if you don’t have a billion-dollar private equity fund or a large family office? Can music fans and entrepreneurs without a big stack get a share of the action?

To earn copyrights from big names in music, you don’t have to be a major catalog buyer like Hipgnosis, Primary Wave, Tempo, Reservoir or my company, Vintage Amp. Getting into the royalty game is more accessible than ever. Here are some tips and considerations to help break down the barriers to entry into music royalties.

So what are music royalties?

Before diving in headfirst, what do you need to know in advance? Learning the intricacies of royalties can be overwhelming, so let’s break it down into sound bites.

Copyright, also known as Intellectual Property (IP), is the most fundamental element of every song and is broken down into two distinct parts:

• Sound recordings (masters) are copyrights attached to the original recording of the song.

• Composition (editing) are copyrights related to the written lyrics or melody of a song.

Simply put, royalties are copyright-derived payments made to rights holders for the ability to use their intellectual property.

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For masters, the rights are divided into reproduction, execution and synchronization. This means that whenever a song is reproduced or distributed (streaming, downloads, physical sales), publicly performed or displayed (digital or satellite radio), or there is a creation of a derivative work (placement of a song in a movie, TV show, or commercial), stakeholders get paid.

Publishing copyrights are similar with slight nuances. Rights are divided into mechanical rights (streaming, downloads, physical sales), performance (radio, bar, restaurant, or live performance), and synchronization (a song played in a movie, TV show, or commercial).

Pretty easy, right? Not exactly. Royalties are more shared than a Thanksgiving turkey, but now you have a basic understanding of how royalties are paid out to rightsholders.

How to analyze a catalog?

So ready to take the leap? The next step is to understand how to analyze a catalog and determine its value. Here are some basic concepts you should familiarize yourself with:

LTM: Represents the last twelve months of revenue generated by a catalog. A multiple is applied to this number to determine its value.

The age of the dollar: This is the length of time a portfolio has generated income. The longer a catalog has produced consistent returns, the more valuable it is to buyers.

• Duration: The duration of ownership has a considerable impact on the determination of the price – 10 years, 30 years and lifetime of rights (LOR). For copyrights created after 1977, LOR is the life of the artist plus 70 years and provides the most significant benefit for earned income and resale value.

Trend rate: A visual representation of trend lines (up, down or sideways) provides valuable information for assessing future value and growth potential.

One of the biggest pitfalls new investors face when buying royalties is misinterpreting the analysis. Do not mistakenly assume the pursuit of certain sources of income. A tip to mitigate this potential downside is to always consider non-repeatable anomalies, such as one-time sync licenses, settlements, and catch-up payments. The buy price is determined by placing a multiple on LTM, so removing those numbers will give you a more factual basis.

Streaming your favorite song and getting a split payout of those royalties is a lot sexier than a top-notch stock dividend. Still, music royalties aren’t for everyone. Understanding your risk tolerance, time horizon, liquidity needs, and overall financial goals is key to determining if royalties are right for your portfolio. Potential illiquidity, loss of revenue and erosion of value can be significant risk factors and a huge turn off.

Connecting the dots between financial markets and the music industry has become increasingly accessible. Companies like Royalty Exchange, SongVest, and ANote Music provide user-friendly platforms and streamline the process for investors looking to get involved in the royalty space.

Will rising interest rates and inflation cause the catalog bubble to burst?

Interest in royalty-based investing appears to be continuing, but will the Fed and inflation dampen the good vibes? Even in a rising interest rate environment, catalog sales will continue to climb in 2022. While I don’t have a crystal ball, I don’t expect royalty markets to show any signs weakening. In my opinion and in the words of Christopher Wallace, “Sky’s the limit”.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.

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