Other Author: Alasdair Maher, Trainee Solicitor
As global transactional deal activity flourished throughout 2021, a particular asset class was hitting all the right notes with investors. Music – more specifically, the bundle of intellectual property and related rights underpinning the music – was hot property for investors, including major music recording companies, asset management and private equity firms.
Deal value for publicly announced music catalogue acquisitions reportedly reached $5.3billion in 2021 - a 180% increase on 2020 deal value1 - and the first half of 2022 has shown no signs of slow down when it comes to investor appetite for music-related assets.
But what exactly are the artists and / or record labels selling in these transactions, and why are these transactions not only of increased interest to investors, but also to the artists who are putting their music rights up for sale?
What's for sale?
Typically, investors are seeking to acquire certain rights associated with copyright in the music assets. By acquiring the copyright, investors can yield commercial gain through exploitation of the music - such as through licensing arrangements, or collecting proceeds from streaming revenues.
In the UK, copyright is an unregistered form of intellectual property protection which operates to protect elements of a musical work at a number of different levels. For instance, copyright may operate to protect:
- original song lyrics as a "literary work";
- original tune, melody, harmony of the work itself as a "musical work" – exclusive of the lyrics or any actions to be sung / spoken; and
- a separate copyright which protects the "sound recording", usually in the context of the master sound recording.
Copyright owners can prohibit third parties from taking certain actions with respect to their protected works. This includes a right to pursue actions for copyright infringing acts, which includes where a third party copies a work, undertakes a live performance of the work in public and / or plays sound recordings of the work in public.
Copyright also offers a generous period of protection, with rights in the musical work (i.e. the lyrics and musical composition) typically surviving for 70 years after the author's death. The copyright duration position varies for sound recordings where, depending on the legislation in force when the recording was made, copyright will typically last either 50 years from when the sound recording was created (if the recording remains unpublished), or 70 years from the time when the recording is published, played or communicated to the public.
Given the various copyright protectable elements of a musical work, a key component of any music-related transaction will be establishing exactly what rights are being sold / acquired. For instance, some rights holders have historically sold the copyright in master sound recordings, whereas others may have only sold their publishing rights in their song catalogue – namely, copyright in the music which subsists separate to the master sound recording embodying the music. For the rights holder, it is a matter of establishing what they actually own and how much they are prepared to sell. For the investor, it is a question of establishing what copyright is available and whether those rights sufficiently align with the investor's acquisition objectives.
It is worth noting that the situation may also arise where forms of intellectual property rights other than copyright in the music are particularly valuable to the buyer. For instance, acquiring well-known trade marks and / or associated goodwill associated with an artist's brand can present an attractive proposition given the various revenue generating opportunities, such as merchandising and other licensing possibilities, which come with acquiring well-known brands.
Why music rights?
Whilst revenues from music catalogues of successful artists are already seen as a stable income source for long-term investment, the growth of music streaming and associated steady income generation makes these assets even more attractive for potential investors. Over the course of the last decade, the rapid growth of music streaming has led to the increased value of the recorded music industry at large. It has been reported that in 2021 alone the total revenue of the global recorded music industry amounted to $28.8 billion, with global music streaming revenues reaching $18.5 billion2.
Besides the growth of music streaming, music rights comprise an asset class which is less susceptible to the effect of traditional market fluctuations. The non-correlated nature of the asset class presents opportunity when coupled with industry and social trends. Owners of music rights are being presented with increasing opportunities to commercialise their works, such as through social media platforms and / or other digital media. Besides the initial fees generated through licensing of the works, investors are increasingly aware of the potential indirect revenue presented by additional licensing opportunities and revenue generated through new (or renewed) listener engagement. For instance, it is not uncommon for a modestly popular song from the past forty years to appear in a modern day television series and become a viral sensation on social media and / or online music streaming platforms.
For those selling music rights, the short term immediate cash available for the sale of their rights may be preferred to long term royalty income deriving from exploitation of their works. This may particularly be the case where an artist has amassed a large, valuable catalogue of works which they wish to sell for a vast amount, or where an artist has died and the estate is seeking to realise immediate monetary value in the artist's works. Moreover, given the nature of different rights subsisting in a musical work, sellers may be in a position to sell only part of their rights for a short term capital injection, whilst retaining other rights to generate long term cash flow.
The emergence of music assets, buoyed by factors including the increase of global music streaming activity, multiple potential recurring revenue streams and the detachment of such assets from traditional market fluctuations, presents an attractive proposition for many investors seeking to develop their investment strategies in light of the current global market landscape. As indicated by the recent emergence of music focused funds, including from some of the world's largest asset management firms, investor appetite for music assets is likely to continue and associated high-profile acquisitions become more commonplace.
2 "Recorded music market shares 2021 – Red letter year", MIDiA Research - Recorded music market shares 2021 – Red letter year (midiaresearch.com)