Three Tips to Investing in a Content Royalty Portfolio
In my previous email, we discussed the background and context of the shift currently happening in the music industry. The rise of internet streaming has effectively nullified the need for broad music piracy, which has helped turn around the music industry. An industry which has been in bear market since 2001.
With the emergence of this new trend, we see a shift towards a bull market and an opportunity to begin making smart and unique investments that will allow you to not just capture this growth, but empower you to pull a profit.
Here's What You Need to Know
A lot of materials have been written about investing in music royalties. However, as investors, we need to be more cognizant of risks first and foremost in order to avoid permanent capital loss. Here are the best written articles about the hidden risks of this unique asset class that every interested investor should know about:
“Investing in Music Royalties as an Asset Class” by Nanalyze
“The hidden risk of Royalty Exchange Music Investing” by the Conservative Income Investor
Here are three factors that I particularly look for in my royalty picks.
The Timeless Factor
The Beatles, The Rolling Stones, Frank Sinatra — these are legends that almost every music listener, even those that are not fans of the genre, would know of due to the sheer magnitude of their fame.
But more importantly, their products have gained a longevity that will generate stable earnings on a perennial basis. A prime example is the Michael Jackson estate, with a portfolio earning approximately $233 million annually after his passing, with the publishing rights from his hit tracks raking in $2.5 million last year.
Sound like a great investment, right?
The downside is that the more obvious cash-cows are not valued at a reasonable price. These iconic albums and songs command exorbitantly high prices, such as the $47.5 million price tag that Michael Jackson paid for the Beatles’ greatest hits in 1985.
And that is assuming that they are even for sale...
But don’t get discouraged by this thought. There are ways to find undervalued investments in this market that still might maintain an aspect of timelessness, you just need to know where, and how, to look.
In investing, it’s common for experienced investors to prefer less-well known (hence undervalued) but well-run companies to invest their money in, such as Warren Buffet’s M&T Bank or the REIT Store Capital.
I like to apply this same principle to the music industry by investing into iconic artists who have either witnessed a temporary fall from favor or have generally been under-appreciated.
A good example is rap legend Tupac Shakur.
According to Spotify, his channel has attracted over 10 million monthly listeners, and the posthumous album 2Pac Greatest Hits has been streamed over 1 billion times.
His accompanying Facebook page boasts over 20 million likes, and at the time of writing, there were over 220,000 mentions of Tupac (including Tupac Shakur and 2 Pac) on Twitter within the past 24 hours alone.
Yet, one of his albums was recently on sale for a P/E ratio of 4x. The music industry average is 5x.
Google Trends reveals that the album’s interest has been on a bear market since 2017.
…. which makes this purchase a good buy because it is “undervalued” relative to the fame of the artist.
Restriction of Supply (Dead > Alive)
Nanalyze does a great job analyzing the volatility of Eminem’s catalog how the unpredictable cash flow can be for this asset class. However, the fact that Eminem is still alive has a major impact on his materials’ value as the artist can make more content thus influencing supply. Additionally, ill-perceived actions by a living artist may devalue his materials in the market.
A better option is to pick an iconic artist who are not alive. Why?
Because a deceased artist can’t make more music, which is an automatic cap on the supply of content. This allows his brand to appreciate over time. The King of Pop has generated half of his thirty-year- career’s revenue after his passing, and in less time.
This is possible thanks to streaming technology and the distribution of music content, as it makes songs less tethered to releases and supply, and therefore far more accessible, affordable, and with a longer lasting tail.
Putting it All Together
Music royalties are a unique investment to add to your portfolio, as it allows diversification due to its standing as a relatively uncorrelated asset class.
On a macro-level, the rise of streaming services has decisively turned around the bear market that the global music industry has been in since 2000. With music streaming continuing to post a double digit growth rate, we are projecting global sales will continue to move towards to its previous peak of $20B, with half of total revenues generated from streaming services such as Spotify.