Acquisitions in the music publishing space skyrocketed last year, with figures reaching hundreds of millions and even billions for the most high profile deals. But how are these catalogues actually valued by prospective buyers?
Eamonn Forde speaks to several different players in the sector, including Synchtank client Primary Wave‘s CEO Larry Mestel (pictured above), about the key value drivers and factors that guide such valuations.
Music publishing catalogues have long been highly prized but 2018 saw something of an acquisition frenzy around catalogues as both old-timers (bulking up their market shares) and new entrants (keen to put their stakes in the ground) went on a high-level shopping spree.
The headline purchase was, of course, Sony/ATV finally taking full control of EMI Music Publishing in a $2.3bn deal. Other notable deals included peermusic buying up Accorder Music, Shamrock Capital acquiring the publishing catalogue of hit machine Stargate and Reservoir Media scooping up the Isley Brothers’ works. Making an enormous splash last year was the arrival of Hipgnosis Music putting its $262m funding round to work by buying up songs by writers/teams like The-Dream, Poo Bear and TMS as well as taking a 37.5% stake in the catalogue of the late Bernard Edwards, co-founder of Chic.
Sony/ATV boss Martin Bandier is stepping down in March but gave an interview earlier this month with the Financial Times saying that the buying craze last year will continue this year and beyond. “There’s opportunity here for consolidation,” he said. In the same interview, Bandier also threw some shade Kobalt’s way, describing its purchase of Songs Music Publishing for a rumoured $150m at the end 2017 as “totally baffling”.
He may have been thumbing his nose at a rival, but in a time of accelerated acquisitions, it does raise wider questions about just how publishing catalogues are valued. How is due diligence done? And do bidding wars dangerously inflate the value of the market?
To get a richer sense of how prices are attached to catalogues and what buyers are looking for, we spoke to different players in the sector, all coming at it from slightly different angles, to understand what they are looking for and how they decide how much they are willing to pay. Here are some of the rules that guide their decisions.
Information on earning histories is all
It is an obvious point, but a crucial one: you need to see what a catalogue has earned over a long period of time to determine how that earning trajectory could continue.
“You clearly want as much history as possible,” says Alun Simpson of Eleven Advisory, an offshoot of legal firm Lewis Silkin. “If there are just two or three years, that is not great but you can work with it. But if there are eight or ten years, that gives you a decently long history. If there is more than that then even better. Looking at it from that perspective, the longer the better.”
Larry Mestel, CEO of Primary Wave, is no stranger to such deals, having bought a stake in the Bob Marley catalogue as well as those of Count Basie and Sly & Robbie (and a passive interest in the writer income stream of Sly & The Family Stone) – all in the past year.
“We are looking at four-to-five years of historical earnings,” he explains. “We are looking for the breakdown between mechanicals, performance, synchronisation use, streaming and so on. We are doing analysis on where we think we can bring the catalogue through aggressive marketing.”
Simpson adds that a long history of the overall earning power of a catalogue is one thing, but getting precise information on where exactly it is earning its money is paramount.
“What you are looking for is a decently long history of the catalogue firstly,” he says. “Secondly, you want as much granularity and detail as you can get on what is in that catalogue – ideally down to a track-by-track level where you can actually analyse what has happened to the individual songs over a period of time. It’s also clarity on the different revenue streams. At a basic level it is performance rights that will be the biggest single part, then there would be synchronisations and mechanicals. It is about having a detailed history of the catalogue.”
Within this is a warts and all account of the catalogue’s earning history, understanding what parts have not worked, what parts look like they have run out of steam and what parts earn sporadically rather than consistently. From this, ideas about how to work the catalogue better can arise, but equally they can stand as warnings about its future health.
The old is often more valuable than the new
Some catalogues may run out of gas as their cultural power diminishes over time and it might seem logical to presume that newer songs are more attractive as they have decades of earning potential ahead of them.
For someone like Mestel, the box fresh is fundamentally not a good investment. “We are in the icon and legend business,” is his very simple business strategy. “They are the types of artists that we want to partner with, buy and so on. We are in the business of Bob Marley. We are in the business of Smokey Robinson. Of Alice Cooper. Of Kenny Loggins. Of Sly Stone. Of Glenn Gould. Of Def Leppard. The reason why we are in the icon and legend business and not the lesser-quality business is because these icons and legends [have] very predictable historical income streams and numerous ways to market their music and brands.”
He feels that the quick turnover nature of some contemporary hits should be a turn off for investors. Perhaps the earning period is an intense one but it can often be a short one, with few songs being able to last the distance and still get played or used decades down the line.
“I kind of chuckle when I see all of these competitors going and buying catalogues of relatively new music, where the only way for the income stream to go is down,” is his blunt assessment. “That is not our business. We stay away from those types of catalogues.”
De-emphasise sync income
Certain revenue sources – radio play, live, streaming – can be a steady and reasonably predictable stream of income, but buyers need to be attuned to those big earners that can swing in, bump up earnings dramatically in a certain period, and swing back out just as quickly. Key here is synchronisation income.
“What we look for are the recurring revenue streams,” says Antony Bruno of Royalty Exchange, the online marketplace and auction platform where investors can take a partial and passive interest in certain rights. “We actually de-emphasise synchronisation because those are one-time payments that you cannot predict as repeatable. But what we do look at is the reoccurring stuff. So with more sources of streaming comes more sources of streaming revenue.”
As with record labels boosting their value in a year by pumping out greatest hits albums from their star signings (often a sign their career is in decline), buyers of publishing catalogues need to check the sync history of key songs to ensure they have not been squeezed of value and had their power blunted by over-familiarity.
Clean metadata has never been more important
The rise of streaming has seen mechanical income start to return to health and all forecasts are that growth here is not slowing down any time soon. Add into that things like income from UGC (user-generated content) not just on YouTube (let’s skip over the value gap debate for now) but also from Facebook/Instagram due to recent licensing deals as well as whole new social platforms like TikTok.
Within this, checking the metadata around music rights is watertight has never been more important to ensure payments from all these new use contexts make their way back to the publisher and writer.
“[It is about] making sure that the metadata is properly associated with the master recordings,” says Mestel. “That is certainly important. With the older catalogues, you want to make sure that they are available on DSPs and that all the copyright information is accurate. The most important thing is that the copyright information is accurate.”
Simpson suggests the importance of this part – where metadata is as clean as possible – cannot be underestimated and will only grow in importance as new ways to digitally work catalogues start to emerge.
“Without being glib about it, that would be my advice to anyone anywhere,” he says about the importance of running a metadata health check on acquisition targets. “Data in the current market is vital for everything […] Anyone who is advising a buyer absolutely should be putting that [metadata health] as a key priority.”
Dollar age and trend rates: understanding the new metrics of worth
While some of this is specific to the business model of Royalty Exchange, there are important approaches the company is taking that others in this space can learn from.
“We have a metric that we call ‘dollar age’,” Antony Bruno says of how his company gives would-be investors a guide on what prices they could expect to pay for their share of future income from a particular set of rights. “We take a catalogue and we look at its earnings across the history of all the different songs in it. That catalogue might have songs from 10 years ago and it might have songs from two years ago – but they all made a certain amount of money last year. So we look at the earnings of the last year and then we weight it based on how old that song is. So a song that earned $1,000 in royalties last year and was released 10 years ago is going to be given a higher value than a song that earned $1,000 last year and that was released two years ago. So a catalogue will have one dollar age metric that applies as the average across all the songs […] The higher the dollar age, the more valuable the catalogue will be.”
The other key metric they deploy here is what they term the “trend rate”.
“Is it going up or is it going down?” he says of how it works. “But more particularly, if it is going up, is it increasing at an increasing rate or is it increasing at a decreasing rate? It is still growing every year but the rate at which it is growing is either slowly declining or it is increasing. The time frame that is most interesting for us is the last three years. The reason being is that the economics of the music business over the last three years are significantly different to prior to the last three years.”
This is a key point to remember – streaming income is growing but its impact is still relatively new so one must tread gingerly here when filtering long-term earnings through the lens of recent developments.
Breathing new life into the unloved or ignored
Catalogues are bought because they have a proven commercial worth – but they are also bought because the new owners believe they have spotted areas where they could be worked better and worked smarter. This could be in targeting new revenue opportunities for them or finding symbiosis with their existing catalogues.
This is absolutely core to the Primary Wave model.
“The reason why we are in the icon and legend business and not the lesser-quality business is because, with these icons and legends, these are very predictable historical income streams, but most of these artists have been under-exploited and under-marketed,” says Mestel. “That is what is attractive to us because we have a very significant and a very large marketing and creative team.”
Asked to give examples of where catalogues are worked in new ways by his company, Mestel pointed to two very distinct case studies.
“Look at Glenn Gould, for instance,” he said of how they are reinvigorating the works of the classical pianist. “We are creating a hologram tour [for him]. With Smokey Robinson, our marketing team created a holiday for him – Father-Daughter Day with ‘My Girl’ being the lead song. There are a lot of marketing opportunities for iconic music. That is why we go after iconic music.”
Of course, only a handful of acts have the pulling power to making a hologram tour work. Roy Orbison and Maria Callas are the two recent marquee examples here, with an Amy Winehouse hologram tour in the works. Equally, only the most elite acts could have an actual holiday built around their music and cultural impact. But these are two signs of where new ideas – in part aided by new technologies as in the case of the hologram tours – can be put into action and where the most ambitious and proactive buyers will be seeing their future.
If an auction has started, you are probably too late
As with A&R, if you arrive in the middle of a bidding war, chances are the sale price of a catalogue will be inflated beyond all reason, making profitability a harder thing to achieve. An auction is clearly a sign that others see great worth in the catalogue; but as the price rises due to competing bids, so the percentage ROI will decline.
Mestel says Primary Wave’s policy is not to enter public auctions and instead to seek out those who not just want to sell but also want to partner with his company and buy into their ideas for where the catalogue can be taken next.
“We don’t like to participate in auction processes. The artist and/or team need to believe in our ability to partner with them and increase their value,” he says. “We normally like to partner. We don’t want to buy 100% as we like to keep the relationship because it is easier to market with their involvement. That is very important to us. The marketing and creative aspect is very important. They have to be able to understand that we can deliver that for them.”
The buying spree will continue – albeit on a smaller scale
The frenzied activity in 2018 and the sums of money changing hands is unlikely to be repeated this year – simply because there will not be deals on the scale of the Sony/ATV and EMI deal due to regulatory issues around major consolidation in the market. But deal-making is the lifeblood of the music industry and other deals will be done – it is just that they will be smaller ones.
Simpson believes that “the big three-digit-million-pound deals” will have to slow down simply because of the sheer volume of them. He adds there are not that many catalogues of that size that are available to buy. This will, he feels, “settle down to single- or double-digit-million-pound deals”.
For Mestel, however, it is business as usual in finding those “icon and legend” catalogues that Primary Wave can steadily add to its books.
“We have an enormous amount of capital that we are putting to use and putting to work,” he says of his plans for 2019. “We are going to be making quite a few announcements in the coming weeks. That’s our business.”