How To Invest In Music Royalties

Music royalties offer an exciting investment opportunity for diversifying their portfolios. They provide a unique way to earn revenue from copyrighted music. Investing in music royalties can be lucrative, whether earning royalties through sales, performances, radio play, streaming, or other means.

According to investment bank Goldman Sachs, music will rake in an estimated $41 billion by 2030, and over 80 percent of that growth will come from streaming sites like Spotify. 

Somebody gets paid royalties every time a song is sold, performed, played on the radio, streamed, or enjoyed in other means.

For example, when someone streams Eminem’s “Lose Yourself,” somebody’s collecting what are known as performance royalties. Eminem himself makes money, and another production company called FBT Productions is also cashing in since it owns rights to a substantial chunk of Eminem’s song catalog.

There are hundreds of thousands of these rights holders out there who aren’t necessarily the artists themselves.

Why would artists sell the rights to their music?

Peter Thall, a music attorney, said musicians often have difficulty borrowing from a bank. Selling off performance royalty income to investors can help a musician raise money.

Artists looking to raise some quick cash can sell their future royalties. Investors can then get paid every time a particular song or portfolio of songs is played on the radio, streamed, or heard on TV.

Musicians can sell their royalty streams to fund a new album, tour, or other projects. They can also use it to fund their retirement income, buy a house or vehicle, fund a family emergency, support a side project or charitable cause, diversify away from music as their sole source of income, fund their investments, and pay off debt.

Why Invest In Music Royalties?

Imagine owning a piece of a popular song or album and receiving income every time it’s bought, streamed, or played. This recurring revenue stream can provide a steady flow of income, mainly when you invest in classics that continue to be famous for years or even decades.

Music royalties can add a new tune to your investment portfolio, offering a form of diversification. They act as a hedge against more volatile markets, providing a source of income that dances to its beat, unaffected by the stock market or other traditional investments.

Managing music royalties is relatively hands-off after the initial purchase, making it a source of passive income. Once you’ve invested, you can sit back and enjoy the music metaphorically as you earn income passively.

The potential for high returns attracts investors to this asset class and niche. If you have the foresight or luck to invest in a song that becomes a hit or an artist that gains significant popularity, the returns can be very high.

Let’s remember the emotional appeal of music. Investing in music royalties is like owning a piece of art. Many people feel a deep connection to the music industry, and owning a piece of your favorite song or artist can resonate beyond financial returns.

The Music Royalty Ecosystem

The music ecosystem comprises various key players, including artists, songwriters, music publishers, record labels, rights management and collection organizations, investors, and legal professionals. Artists and songwriters create the content, with the option to sell or lease their rights for a lump sum or retain them and earn royalties over time.

Music publishers manage and promote songwriters and their compositions while collecting and distributing royalties on their behalf. Record labels sign artists, fund the recording process, and handle the distribution and promotion of recordings.

Rights management and collection organizations, such as BMI, ASCAP, and SESAC, oversee the licensing of songs and handle the collection and distribution of royalties. Investors, from individual private investors to institutional ones, purchase royalties seeking diversified income, potential growth, or a combination of both.

Lastly, legal professionals specializing in music and intellectual property ensure the industry’s transactions are legitimate and that rights are unambiguous, navigating the intricate web of contracts and rights. 

How To Generate Income

Music royalties present a unique opportunity in the investment landscape. By securing rights to music compositions, recordings, or both, investors can reap returns generated from the usage and consumption of these assets. But how does this work exactly?

Music royalties are as multifaceted as the music industry itself. Consider mechanical royalties – these are generated every time a song is reproduced, for instance, in CD manufacturing or digital downloads. Then, there are performance royalties, which accrue when a song is performed publicly on radio stations, concert venues, or streaming services.

Synchronization royalties come into play when music is coupled with visual media such as films, TV shows, commercials, or video games. Print royalties, meanwhile, originate from the sale of printed music like sheet music and songbooks. And finally, Digital performance royalties are harvested when a recording is streamed or played on digital platforms, separate from the performance royalties for the composition.

Now, let’s examine the various avenues through which an investor can earn music royalties. 

One approach is direct ownership, where you purchase the rights to a song or an entire music catalog. This grants you a share of the royalties generated by the music.

Alternatively, you could channel your investments into loyalty trusts or funds. These are pooled investments that own music royalties, distributing a portion of the income to investors. If you’re inclined towards auctions and exchanges, some platforms offer a marketplace for investors to bid on royalties. Successful bidders then stand to receive future royalty payments tied to the auctioned assets.

If collaboration is your style, forming partnerships with artists or labels is an intriguing option. In this arrangement, investors fund music production and, in return, receive a share of future royalties. 

Lastly, there’s the opportunity to invest in music royalty stocks and ETFs. These public companies or ETFs specialize in music royalties, deriving their income and dividends paid to investors from the royalties they collect.

As an investor, I prefer the direct ownership model.

How To Lose Money

Investing in music royalties can be a rewarding venture, but it’s crucial to acknowledge the risks that come with these potential rewards. The music industry is as unpredictable as it is dynamic, with trends and famous artists constantly changing. Today’s hit song might be forgotten tomorrow, affecting your royalty income.

When purchasing a music catalog, avoiding overpaying based on inflated expectations of its earning potential is vital. A high initial investment can lead to disappointing returns if the catalog does not perform as expected. Moreover, in an industry teeming with new releases, even quality music may need help to capture enough attention to generate substantial royalties.

The music industry continually evolves, driven by technological advancements and shifting consumer preferences. If listeners gravitate towards less profitable formats, your royalty income could take a hit. Additionally, piracy and illegal downloading can significantly impact royalty earnings.

Legal issues, such as copyright disputes, can complicate matters further. These disputes can be costly and delay your royalty payments until resolved. Proper rights and royalties management are crucial to take advantage of potential earnings.

Contracts within this industry are often complex, and unfavorable terms could result in lower earnings. Economic factors can also influence your income from music royalties. During economic downturns, consumers may reduce their spending on music, affecting the entire industry.

Relying too heavily on agencies or third parties to collect your royalties can lead to missed payments or errors. It’s important to remember that your royalty income is taxable, so you will only get to keep some of it.

Inflation is another factor to consider. If your royalty payments keep pace with inflation, their real value will remain unchanged. Finally, changes in copyright laws can affect the duration and amount of your royalty payments.

Positives & Negatives Of Music Royalties

Positives:

Passive Income: When you invest, music royalties can bring in steady money with little active management. This happens mainly if the song or catalog stays popular and gets airplay, streaming, or licensing.

Diversification: By investing in music royalties, you can diversify your portfolio beyond the usual assets like stocks, bonds, or real estate.

Potential for High Returns: Some songs can make big money if they become hits or stay popular for a long time. This means there’s a chance for substantial profits.

Inflation Hedge: Royalties often have clauses that allow for rate adjustments. This can help offset inflation and protect your investment.

Tangible Connection: For some investors, there’s a real emotional connection to owning a piece of a song or catalog, especially if it’s music they enjoy.

Lack of Correlation with Traditional Markets: Music royalties sometimes go up and down in sync with the stock or bond markets. This can make them less likely to be affected by economic downturns.

Licensing Opportunities: Songs can be licensed for various uses, like commercials, movies, or TV shows. This can create extra revenue streams.

Negatives:

Unpredictability: It’s hard to tell which songs will become popular or stay that way in the long run.

Decreasing Royalty Rates: As streaming platforms gain popularity, the amount of money artists earn per play has decreased. This can affect how much investors can make from their investments.

Upfront Costs: Investing in well-known songs or catalogs often requires a significant initial investment.

Lack of Liquidity: Unlike stocks or bonds, selling or trading music royalties is problematic. This makes them a less flexible investment.

Changing Consumption Habits: The way people listen to music is constantly evolving. The shift from physical sales to streaming has already impacted how much artists earn, and future changes could affect earnings, too.

Contractual and Legal Complexities: Ensuring you have the right to the royalties you’re buying and understanding music licensing and copyright laws can be complicated.

Management and Collection: Some platforms handle collecting and distributing royalties, but if you’re buying royalties directly, you may need to manage collections or work with an agency, which can come with fees.

Saturation: As more people become interested in music royalties, prices, and potential returns could decrease.

Investment Opportunity Filter™

The Investment Opportunity Filter™ evaluates an investment opportunity based on cashflow, tax benefits, appreciation, and the leverage it provides.

Music Royalties scores a 3/4 with The Investment Opportunity Filter™.

Music Royalties can produce significant cashflow, have limited tax benefits, and appreciate and increase the value with the option to be sold at a profit. It also allows leveraging others’ skill sets, capabilities, networks, and capital.

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