Turn up the volume on your investment portfolio with music royalties, the hidden gem asset class that offers the potential for steady, passive income and diversification
What are Music Royalties?
Music royalties are a type of alternative investment where payments are made to music creators and rights holders for their music. They are a form of compensation for using intellectual property, in this case, the music itself.
There are several types of music royalties, including mechanical, performance, synchronization, and print royalties.
Mechanical Royalties
Mechanical royalties are paid to songwriters and publishers for using their music on physical or digital recordings, such as C.D.s, downloads, or streaming services. The rate for mechanical royalties is usually set by law, and in the United States, it is currently set at 9.1 cents per song per copy sold.
Performance Royalties
Performance royalties are paid to songwriters and publishers for using their music in public performances, such as radio and T.V. broadcasts, live performances, and streaming services. These royalties are collected by performance rights organizations (PROs) such as ASCAP, BMI, and SESAC. They are distributed to the rights holders based on the number of performances of their music.
Synchronization Royalties
Synchronization royalties are paid to songwriters and publishers for using their music in movies, T.V. shows, commercials, and other visual media. These royalties can vary widely depending on the type of usage, the song’s popularity, and the parties’ bargaining power.
Print Royalties
Print royalties are paid to songwriters and publishers for using their music in printed sheet music or songbooks.
What Type Of Returns Can you Expect?
Music royalties can provide a reliable and steady income stream for investors, with returns ranging from a few percentage points to double-digit returns.
The returns from investing in music royalties can vary widely and depend on several factors, including:
- Popularity of the music
- Type of royalty
- Length of the royalty agreement
For example, mechanical royalties from physical and digital music sales may offer a fixed rate of return of around 9.1 cents per song per copy sold. In contrast, performance royalties may offer a variable rate based on the number of plays or performances.
In some cases, investors may be able to negotiate a higher rate of return by acquiring a music catalog or song that is particularly popular or has a proven track record of generating royalties.
How You Can Invest In Music Royalties
Investing in music royalties can be a unique and potentially lucrative investment opportunity, but it requires a good understanding of the music industry and the legal framework around royalties.
Here are some ways to invest in music royalties:
Royalty Exchange
Royalty Exchange is an online marketplace where investors can buy and sell music royalties. The platform offers a variety of royalty types, including mechanical royalties, performance royalties, and streaming royalties.
Music Royalty Funds
Some investment firms and hedge funds offer music royalty funds that allow investors to pool their money and invest in a diversified portfolio of music royalties.
Direct Licensing
You can also directly license music from independent artists or labels and negotiate a percentage of the royalties generated by the music.
Music Catalog Acquisitions
Investors can also acquire music catalogs from artists, songwriters, or publishers. This requires significant capital but can provide long-term returns as the record generates royalty payments over time.
It’s important to do your research and work with experienced professionals in the music industry and legal field when investing in music royalties.
As with any investment, there are risks involved, and it’s important to weigh the potential returns against the potential risks.
Invest in Music Stocks
Investing in music publishers, streaming services, record labels, and concert promoters can be an easy way to gain exposure to the potential returns of the music industry.
Investing in music stocks can offer an opportunity to profit from the music industry’s growth, which has seen a resurgence in recent years due to the popularity of music streaming services.
- Spotify Technology S.A. (SPOT): Spotify is a music streaming service offering free and premium subscription-based services.
- Universal Music Group (UMG): Universal Music Group is one of the world’s largest music companies, owning labels such as Interscope, Def Jam, and Island Records.
- Live Nation Entertainment, Inc. (LYV): Live Nation is the world’s largest live entertainment company, owning venues, promoting concerts, and producing music festivals.
- Warner Music Group Corp. (WMG): Warner Music Group is one of the world’s largest music companies, owning labels such as Atlantic Records, Warner Records, and Elektra Records.
Advantages of Investing In Music Royalties
Investing in music royalties can offer several advantages, including:
Steady Income Stream
Music royalties can provide a steady income stream as long as the music continues to be used and generate revenue. This makes them an attractive investment for investors seeking consistent returns.
Low Correlation with Other Asset Classes
Music royalties have a low correlation with traditional asset classes such as stocks and bonds, making them a valuable diversification tool for an investor’s portfolio.
Potential for Long-Term Returns
Music royalties have the potential to generate long-term returns as royalties can continue to be generated for decades or even centuries after a song is created.
Tangible Asset
Music royalties represent a tangible asset that can be bought and sold, like wine or real estate.
Predictable Income
Royalties from well-known songs with a proven track record of revenue generation can provide predictable income and a measure of security for investors.
Global Market
Music is a global industry, which means royalties can come from various sources worldwide, increasing the potential revenue stream for investors.
It’s important to note that investing in music royalties carries risks, including the potential for decreased revenue due to changes in the music industry or changes in consumer preferences. Investors should thoroughly research and understand the risks involved before investing in music royalties.
Risks of Investing In Music Royalties
Investing in music royalties also carries several risks, including:
Volatility of the Music Industry
The music industry can be unpredictable, and a song’s popularity can change rapidly, affecting the revenue generated from music royalties.
Changes in Consumer Preferences
Consumer preferences can shift, leading to changes in popular music types, ultimately, affecting the revenue generated from music royalties.
Legal Risks
Legal issues such as copyright infringement, licensing disputes, or changes in royalty rates can negatively affect the value of music royalties.
Lack of Transparency
The music industry can lack transparency, making it difficult for investors to determine the value of music royalties.
Difficulty in Valuing Music Royalties
Music royalties have no standardized valuation methods unlike other assets, such as stocks or real estate. This can make determining their value for capital gains or tax purposes difficult.
Concentration Risk
Investing in a single song or music catalog can lead to concentration risk, meaning the investor’s returns are tied to the success of one or a few songs. This increases the risk of a total loss if the music doesn’t perform as expected.
Investors should carefully consider these risks before investing in music royalties and seek the advice of experienced professionals in the music industry and legal field. A diversified portfolio of music royalties can help mitigate some of these risks.
The Bottom Line
Music royalties can be a unique and potentially lucrative investment opportunity for investors seeking alternative assets. However, it’s important to carefully consider the risks involved before making any investments.
The advantages of investing in music royalties include a steady income stream, low correlation with traditional asset classes, the potential for long-term returns, a tangible asset, predictable income, and a global market.
However, music royalties also carry risks, such as volatility of the music industry, changes in consumer preferences, legal risks, lack of transparency, difficulty in valuing music royalties, and concentration risk.
Investors should thoroughly research the music industry, understand the risks involved, and seek the advice of experienced professionals in the music and legal fields before investing in music royalties. A diversified portfolio of music royalties can help mitigate some of these risks.
