Streaming service Spotify (SPOT) revealed that its top song last year was listened to 1.6 billion times, while Bob Dylan sold his entire back catalogue for $300 million in December 2020. Is music the next big thing for investors? We look at whether you should tune into this latest hot asset class.
Lucrative concert performances ground to a halt during the Covid-19 pandemic putting the focus for the industry on music royalties and back catalogues of classic albums and artists. You might not realise this is a sector investors can easily tap into, but several investment trusts have launched in recent years, whose investment strategy is to buy up the back catalogues of music from successful artists and make money from the royalties. Every time a song is played on the radio or streamed through an app, royalties are paid, and these soon add up when you own thousands of popular songs.
Music Royalties Investment Trusts
Perhaps the best-known investment trust in this space, Hipgnosis Songs Fund (SONG) launched in 2018 and has almost £1.5 billion of assets under management. It bought 84 catalogues from the likes of Neil Young, Fleetwood Mac and Blondie in the last year alone for just over $1 billion, taking its total collection to 138 catalogues.
Rival trust Round Hill Music Royalty (RMH) floated in late 2020 and has a similar business model. What’s the attraction? These investment companies buy the rights to songs from particular artists, collect the royalties and, crucially, pay shareholders the income: Hipgnosis currently yields 4.36% and Round Hill 4.21%. Performance rights can be particularly lucrative, because they pay out when a song is played at a concert, on TV, or when a piece of music is used in an advert or video game.
New streaming opportunities are also being opened up by technology: whenever you listen to a song on TikTok or even Peloton, the copyright owner gets a cut. Streaming made up the largest share of Hipgnosis’s revenue at 32%. The company estimates that by 2030 there could be 2 billion people worldwide paying for streaming services, up from 450 million today. The internet “has turned music from being a discretionary or luxury purchase to very much being a utility as a result of the convenience and access afforded by streaming”, it says.
But, as with any hot asset class, there are pros and cons to investing into the music royalty boom:
Reasons to Tune In
- Companies are making serious money from the streaming boom
- Music royalties are uncorrelated with equities
- High yield and potential capital growth
- Music lovers can “buy what they know”
- More back catalogues are available to buy as artists see opportunities
Reasons to Tune Out
- As lockdown ends, people may lose interest in their playlists
- Music industry trends shift quickly. Eg. Vinyl was dead, but is now cool again
- Royalties and copyright are more complicated than people think
- Artists may demand a “new deal” from the streaming sites. One stream generates less than 1p for an artist. Higher royalties will change the economics of the industry
- The track record for the asset class is short
Apart from trusts, would-be music investors have a small selection of stocks to choose from in this space. Spotify shares are up 75% since it floated in New York in 2018, for example. However, Morningstar analyst Ali Mogharabi says the world’s leading streaming service faces intense competition from rivals. Its fair value was upgraded to $207 after the latest results, but this is still below its current share price of around $260. “While Spotify continues to execute well on all fronts, the stock remains overvalued, in our view,” says Mogharabi.
Mogharabi notes that in a world where content is king, the big three record companies still hold much of the power, but getting access to these is not so easy: Universal Music Group is unlisted while Sony Music is part of the wider Sony group. Warner Music Group (WMG), however, has just returned to the stock market and has a 3 star Morningstar rating as well as a narrow economic moat. Analyst Neil Macker thinks the record label will continue to do well out of streaming, but expects sales of digital downloads and physical album sales will carry on declining. While music is now in vogue, Ben Yearsley of Shore Financial Planning says new investors should press pause before jumping in. “Streaming is currently the in thing, but who knows how we will consume music in 10 years’ time,” he says. “I always think a healthy degree of scepticism is good when it comes to newer investment areas.”
