In a recent interview with the BBC, Dolly Parton said that she is considering selling her publishing catalogue, stating that she would simply launch a new publishing company and start all over again. On the one hand, this is not the first time she has publicly pondered the move (the first time was in December 2020), and is thus probably aimed at pushing up buyer demand and creating a bidding war. But on the other, it is an interesting illustration of the mindset of older artists who look to sell – they feel confident enough in their careers to simply be able to look at like an author who is selling the rights of their latest novel and moving onto the next one. But even more importantly, while cashing in might seem like a safe bet, there is risk for both sides, not just risk of whether valuations are too high, but also that they may not be high enough.
Catalogue investment is booming
The rate of music catalogue M+A acquisitions is accelerating, with announced transactions exceeding 12 billion in 2021, more than doubling since 2020*. Though those figures are boosted by some big institutional plays, such as UMG divesting some of its business ahead of its IPO, there is a rapid acceleration in the number of artists and songwriters who are selling. The market looks set to continue to be buoyant. On the buy side, there is a growing number of new investment vehicles and institutions entering the space, and thus driving up demand in a market of finite supply. On the sell side, though many big names have already sold, these are a minority of the big names of recorded music. This misalignment of supply and demand is helping push prices up, consequently accelerating the market even further.
Old, white, English-speaking males dominate
An interesting characteristic of today’s music catalogue M+A market is its bias towards old, white, male, Anglo repertoire. This reflects the investment thesis of many acquirers, which are building investment cases on valuation methodologies that revolve around historical cash flows. Put crudely, this means investments are being shaped on yesterday’s performance as an indication of tomorrow’s success. In most asset class markets, this is a very sensible approach, and in music it is a crucial component – but it is not enough alone. This is because streaming (e.g., Spotify) and social video (e.g., TikTok) are transforming how music is being consumed. Fandom is fragmenting and listening is splintering, meaning that the big hits of yesteryear are unlikely to perform the same way on streaming tomorrow as they do on radio today. At the very least, this introduces a significant degree of volatility into any outlook an investor may have. It should be of little surprise that this is where MIDiA spends a lot of its time in the consulting and advisory work we do for music investment funds.
The next music business is building
This is where the artist and songwriter’s appetite for risk comes in. For an older songwriter or artist, selling up represents an opportunity to bank previous success, to capitalise on the unprecedentedly buoyant music market. But the market has a lot of growth left in it yet. In fact, the best days are likely still ahead of us. 2021 was the biggest growth in the recorded music market in modern times (watch out for MIDiA’s official figures, which are coming very soon)! Even if the digital service provider (DSP) streaming market, epitomised by Spotify, may be maturing, non-DSP streaming (TikTok, Meta, Twitch, etc.) is only just getting going and contributed significantly to 2021 growth. On top of this, new horizons are being set in the shape of the Metaverse, NFTs, Blockchain, and decentralized autonomous organisations (DAOs). Web 3.0 is riddled with risk and inflated expectations, but, as with all cases of looking at future tech, it is easy to overestimate the near-term impact and underestimate the long-term effect. Meanwhile, there are moves across the globe to increase the amount of streaming money that flows to the creators themselves. Add in the growth of emerging markets; growing rights transparency; and the booming music creator and creator tools economies and you have the foundations of an entirely new chapter for the music business.
Which brings us back to Dolly Parton. In many ways, she is like the gambler sat at the poker table with a pile of chips in front of her. If she walks away now, she banks a fortune, but what of she plays for just a little longer. Except that, in the case of the music business, the odds are not even. Unless Russia dives the global economy into a disastrous drop – which, of course, is no small possibility – things are only going to get better for the music business. But, just like on the poker table, an artists or songwriter does not need to go all in. A growing number of investors are becoming more sophisticated with how they work with creators. For example, allowing them to retain certain rights, or a portion of overall rights. This means that the creator gets to benefit from the future upside while also benefiting from the up-front cash. It also means that the creator remains vested, with an incentive to help keep those old songs alive (and, as a result, increasing their value for all parties) rather than simply moving onto the next chapter.
There is no doubt that the music catalogue sector has boomed, and there is also an argument that prices are inflated, at least in comparison to yesterday and today’s business. But for creators and investors who are prepared to take a long-term view, things might only just be starting.