Music catalogues, and particularly those with a proven track record and history of generating steady royalty revenue flows, have lately been under the magnifying glass of investors aiming to enrich their portfolio with a diversified alternative asset class. Acquisitions in the music scene have soared over the past years, with deals that range from multiple millions to, in some cases, billions of dollars breaking the news with major headlines. From KKR buying a majority stake in the catalogues of Ryan Tedder, to Bob Dylan, Stevie Nicks, or all the gigantic latest deals of song fund Hipgnosis, lots of rights holders, publishers, record labels and artists, have been seeking to assess the current value of their catalogues; aiming to evaluate whether it would be the right moment to leverage financially their owned rights.
Services like our very own marketplace now also allow rights’ holders to get access to funding, not only while sharing success with their network, investors and music fans, but also while remaining 100% in charge over their rights. As interest keeps spiking from both potential sellers and buyers, coming to fair and transparent market valuations becomes more and more important. But how exactly are these catalogues valued within the music market? Are these prices justified? What are the valuations based on?
Recent shifts in the Music and Financial scenes
With the arrival of the digital and streaming era, there is the need to reevaluate the methods that have been used for valuing music catalogues up until now. Older models have become less relevant as new digital trends and intense competition among the major publishers in the music industry landscape have emerged. The disruptive rise of streaming has had a profound impact on the interaction between music consumers and artists, and simultaneously on the actual cash flow skeleton of music royalty distributions. While, traditionally, artists were generating most of music royalties and cash flows within the first year of an album’s release, streaming services and digital tools have created a more consistent and well-dispersed space of more stable royalty and cash flows spread over multiple years – even in the midst of a global pandemic.
While master recordings drastically declined and depreciated as a result of the ‘CD era’ coming to an end, the constant progress of TV, films, radio and online streaming platforms as YouTube or Netflix favoured the growth and flourish of publishing revenues and resulted in big acquisitions of assets that were previously considered as undervalued.
With these important shifts in mind, many valuators, investors and industry players started to drift apart from the old NPS (Net Publisher’s Share) multiple valuation model, and shifted towards evaluating the asset looking at a multitude of different factors such as Regression, IRR (Internal Rate of Return), Net Cash Flow Value and Current and Future Activity Values, along with a synthesis of all the above.
3 Common practices
To accurately value an artist’s music catalogue in today’s world, there are multiple criteria that need to be taken into consideration. The list of all included songs with their respective publication dates, record contracts, diverse revenue streams and agreements (for example performance, sync or mechanical rights) and, foremost, the overall history of detailed and track-by-track royalty reports over the years. In case that previous royalties have not been registered or tracked correctly, or the metadata has not been associated accurately with the master recordings, a music catalogue risks being undervalued – presenting only half the picture can be misleading.
But, let’s move away from the slippery topic of proper data management: once all data is properly collected and analysed, the assets are going to be evaluated with multiple approaches in order to forecast the catalogue’s future cash flows.The most broadly recognized valuation methods are the three below approaches:
- The Market Multiple Approach: This approach is based on comparisons of ratios of prices over income measures within the industry, developing a specific range of market multiples that can be applied to the expected income of a music catalogue throughout the years. This method calculates multiples over measures of performance ( average historical NPS -Net Publisher’s Share – revenues or income), and compares them with the industry’s averages, based on recent and comparable transactions, hence yielding an implicit relative market value. It is usually more accurate for catalogues with more classic, evergreen hits that have been played and consumed over a period of more than 10-15 years.
The NPS metric is calculated based on the amount of royalties received by a music publisher minus the amount of the royalties that has to be paid to writers, authors and performers for their contributions and other admin fees that need to be deducted. In the last few years, most transactions were closed with an average multiple of 5x to 15x NPS. Evergreen catalogues usually trade between 10x to 15x the NPS, while more fresh and less well-known catalogues trade between 5x and 10x NPS. Multiples can range lower in the case of non-exclusivity rights, or higher in the case of competitive biddings. Once the multiple is set, it is applied to the representative earnings power to arrive at the implied market value for the music catalogue.
However, as music publishing and master recording rights can differ according to the type of rights and opportunities, this analysis provides an informative view but cannot be considered holistic.
- The Income Approach: This approach evaluates a music catalogue based on calculating the future royalty streams that are projected to be generated in the future, in order to set a present value, mostly based on the Discounted Cash Flow models. Since music popularity can be very tough to predict, ideally a 5 to 7 years of historical data is needed to determine the general trend of royalty streams. By applying an appropriate discount rate to determine present value, this model is aiming to estimate the projected future revenue streams of a catalogue, the payback period and life cycle, along with the risks associated with the asset’s ability to generate revenues.
If it is usually believed that this aforementioned popularity of a song or catalogue peaks and reaches its maximum value within the first couple of years, and continuously regresses and flattens out moving forward, the Regression Model could give a very conservative valuation of approximation cash flows. Surely, the regression of a song’s value is taken here as a constant assumption, together with the idea that historic trends act as exact patterns.
- The IRR (Internal Rate of Return) Approach: This approach can be briefly explained as the rate of return that in the end is going to pay for the total cost of the asset, (which is of course influenced directly by the quality of the acquired business or catalogue and its popularity). As an example, if we assume that a catalogue is priced at $1 million and predicted to have an average NPS of $100,000 for the next 10 years, then sold for $1 million, then the percentage return or IRR on this catalogue would be 10% over a 10-year period.
Our due diligence procedure at ANote Music evaluates the catalogues with a mixture of all the above mentioned methods. Additionally our team always sits down with the rights-holders looking to sell, to get a full understanding of their future plans to come up with a fair suggested valuation for each asset. In the end, the final decisions on the auction target price remains in the hands of the seller, but through our marketplace and public offerings, a transparent end-price gets determined by offer and demand.
Do what feels good to you
Of course, there are always certain unpredictable elements that may impact a catalogue’s performance. Although music catalogues are generally less or not impacted by the fluctuations of traditional financial markets, black swan events might appear that shift the trend around. A TV show or movie which picks up an old song, giving it newly found glory with new audiences, a booming artist covering or sampling some of the classics driving income flows back up, a scandal or the death of an artist having a huge jump or hit in consumption of the songs or even new favourable regulatory decisions and new emerging technologies could drastically impact the numbers a music catalogue generates.
With the current and unprecedented trends in the music industry, building a very positive future for music royalties, artists and investors should be wary of all methods and underlying factors that can affect the valuation of their assets. Whether and when an investor or a right holder decides to invest, sell or trade (owned) music rights, there should be a careful consideration behind every aspect of music valuations.