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When you listen to your favorite music on Spotify or YouTube, it’s not just music streaming sites that are making money or even musicians. Big financial institutions like Blackstone and BlackRock are investing in catalogs of songs by famous artists, from Neil Young and Pink Floyd to the Red Hot Chili Peppers, and more.
With the rise in popularity of music streaming sites like Spotify, the market for music royalties has grown. Every time a song is played on a streaming service, the owner of that song’s copyright earns a few pennies. And while it’s not a lot per song, for big hits it can add up quickly. Neil Diamond, for example, made an estimate $300,000 to $500,000 per year solo of his hit song “Sweet Caroline” before selling the rights to Universal Music Group.
Music is big business and some investors are betting on this alternative asset class. But how does investing in music royalties really work? And does it make sense to add them to your investment portfolio?
the short version
- A music royalty is when the owner is paid when a song is played, streamed, downloaded or performed.
- Investors are increasingly buying music royalties as they provide a steady flow of cash and are not correlated to the stock market.
- However, investing in music royalties can be tricky and requires a lot of knowledge, research, and cash.
What are music royalties?
When you hear your favorite song on the radio, the owner of that song receives a few cents, also known as music royalties. A music royalty is what is paid to the owner for the right to use that music. That includes streaming services, advertisements, use in movies, radio, and even physical items like CDs.
There are different types of music royalties depending on the type of copyright. For example, there is the copyright of the composition, which covers the song written. Then there is the sound recording, which is what people listen to. A song can have multiple songwriters, which means they all get royalties from the song.
Depending on the use of the composition or recording, there are different royalties. Sales and streaming result in a royalty each time the song is sold or streamed, while a song played in public results in a public performance royalty. And licensing for placement in commercials, shows, and video games also produces its own royalties.
Why Investors Turn to Music
While it can be difficult to make it in the world of music, a hit song can net the owner hundreds of thousands of dollars or more a year. While a song may only be popular for a few years, the increased use of streaming platforms means there’s a bit more stability, and there’s more potential for an older song to keep making money for longer (although most songs peak after five years). .
According to the International Federation of the Phonographic Industry (IFPI) 65% of global music in 2021 came from streaming services, or approximately $16.9 billion. If you look at the graph below from IFPI’s World Music Report, you’ll see that the share of streaming revenue has risen steadily since 2012, slowly surpassing physical album sales.
Font: International Federation of the Phonographic Industry (IFPI)
This stability is perhaps one reason financial giants like BlackRock are investing in song portfolios. As music streaming increases, some classic hits have the potential to generate recurring revenue. Another reason for the increased interest from investors? The music industry is uncorrelated with the stock market and has little correlation with the general state of the economy.
How to invest in music royalties
If you want to start investing in music royalties, there are generally three main ways to do it:
Buy shares of record labels and publishers
One way to invest in royalties is to get exposure to companies that make their money from royalties, like record labels and publishers. However, it can be difficult to get direct exposure as companies like Sony and Universal are big conglomerates with exposure to other entertainment sectors, but there are some record labels going public, like Warner Music Group and Universal Music Group.
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Invest in music royalty funds
There are some music royalty funds that are open to investors. For example, Hypgnosis Songs Background Y Mills Music Trust are two publicly traded funds that own song royalties and distribute dividends to shareholders. There are other private music royalty funds, such as Shamrock Capital, but these funds are generally geared towards intuitive, high net worth investors.
Buy music rights
You can also buy rights to songs directly and get royalties as a result. Song rights are sold on the private market. You can search for songs on online markets like royalty exchange where you can buy the rights to songs, movies and trademarks. song vest is another marketplace that allows you to invest in fractional shares of songs, similar to how other platforms make it easy for investors to buy fractional shares of stocks.
Things to Consider When Investing in Music Royalties
Before you go out and start shopping for your favorite artist’s records, there are a few things to keep in mind. There is a bit of risk with any investment and investing in music royalties is no different.
First, not all songs will last. Meaning, if you buy the copyright to a song that’s a hit for one year, it could easily fade from memory a year later. Take Rebecca Black’s hit song Friday. It was a huge hit when it launched in 2011, but today it’s considered a 2000s YouTube fad.
There is also the possibility that you overpay for music royalties and not earn the amount you expected. A song’s value is likely to decline over time unless it’s a huge hit like Mariah Carey’s All I Want For Christmas Is You (which according to The Economist Carey earns about $2.5 million per year).
The amount of money earned from royalties can also vary depending on the popularity of the artist. An unknown artist may be able to attract attention if her song is used in a Netflix show or commercial.
For example, Kat Bush’s 37-year-old song, Running Up That Hill (A Deal With God), regained popularity after being featured on season 4 of Stranger Things, earning Bush an estimated $2.3 million. But that kind of phenomenon is a bit unpredictable.
The other thing to consider is what type of music royalties you are investing in. As we mentioned earlier, there are different types of royalties and copyrights. Make sure you buy the one you want, as different royalties for the same song can generate different streams of income.
Is it a good idea to invest in music royalties?
With music revenues expected to jump to $131 billion by 2030, it’s no wonder investors are rapidly pouring into the music scene. Because music royalties have a predictable cash flow and have no correlation to the stock market, they can be attractive to investors.
However, investing in music royalties can also be a bit tricky. Like any type of investment, it carries a bit of risk. You need to do a lot of research beforehand to get an idea of what will work well and what won’t. And as a retail investor, it can be expensive to buy royalties.
Buying the copyright to your favorite childhood song may sound like fun, but it may not be the best thing to invest solely in your personal musical taste. If you’re a huge music fan and interested in investing in music royalty, be sure to do enough research to make sure it makes sense for your investment portfolio. For the rest of us, it might make more sense to keep our musical talents for the shower.
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