by : Featured Articles, Business, December 2017

Investing in Individuality

Investing in Individuality

New investment opportunities are arising in the contemporary marketplace for music fans and investors. Enabled by the positive market turnaround streaming has brought upon the industry, artists are selling shares in their own businesses via royalties. As streaming revenue in 2016 grew a positive 60.4% and digital income now constitutes roughly 50% of global music revenue, 1 artist royalty guarantees appear to be the most stable they have been since the Napster-era, and are growing rapidly. While such an augmentation provides new venture opportunities for individuals seeking to capitalize on future artist earnings, 2 the state of the music industry might not be as optimistic as it sounds when examined more closely.

Start-up Royalty Flow Inc. is endeavoring to exploit royalty opportunities by providing a marketplace where individuals can buy shares in artists, or more specifically, invest in future artist royalties. Royalty Flow recently purchased a portion of American rapper Eminem’s future royalty stream to offer as shares through their site. The company, incorporated in May 2017, made their initial IPO in September via Regulation A+, a title under the Obama-era JumpStart Our Business Start-up (JOBS) Act. Investors can buy shares at $7.50 each with a 300 per share minimum, a $2,250 dollar investment. 3 The company issued 6,666,666 shares in full, bringing their total offering to $50,000,000. 4 Once the company hits their equity goal of $11 million, they will list on NASDAQ to be publicly traded, and dependent on this crowdsourced funding will purchase either 15% or 25% of Eminem’s catalog.

Eminem is the first commercial artist the company will offer, though they are seeking to purchase more brand name catalogs. The Bass Brothers, the producers who first signed Eminem and sold Royalty Flow the rapper’s royalties, made $5.1 million dollars last year alone from their controlled Eminem copyrights, 5 making the rapper’s catalog a robust asset as the company enters into the market. The brothers sold their future earnings in Eminem’s rights to Royalty Flow for $18.75 million. 6

Eminem attracts 18 million listeners a month on Spotify, and his career catalog has sold 172 million copies worldwide. The monies sold to Royalty Flow are derived from the rapper’s side projects as well as studio albums released between 1999 and 2013. This includes songs from top-selling records such as The Marshall Mathers LP and The Eminem Show. 7

However, according the rapper’s label, Interscope Records, Eminem was not consulted in the selling of his royalties and has no connection to Royalty Flow; the Bass Brothers are the sole instigators of such negotiations, as they hold the rights to his early sound recordings.

With music sales on the rise and streaming dominating music consumption, global music revenue is predicted to rise to $41 billion by 2030, a large increase from $16 billion in 2016. 8 Music publishing catalogs are thus accumulating mass amounts of capital. Not only are songwriter shares being assessed at seven to twelve times their royalty gross, but also brand name catalogs are being sold at colossal prices.

Round Hill Music is in the midst of purchasing Carlin Music, which holds the rights to music from artists like Elvis, David Bowie, and others. Additionally, Pink Floyd’s publisher, Imagen, was sold earlier this year for $600 million. 9

Though investment in prosperous music royalties may appear to be a novel idea, David Bowie pioneered such a practice back in the late 1990s, when the artist issued the first ever celebrity bonds, called “Bowie Bonds.” These, valued at $55 million and backed by Bowie’s future royalty income, were bought by Prudential Insurance. 10 The bonds paid a 7.9% interest rate over 10 years; a high investment-grade rating when first issued, considering the U.S. Treasury bond returned 6.4% at that time.

Though innovative, the bond tanked to junk status as Internet piracy wreaked havoc on the music industry and revenues in the early 2000s. Now, facing its first positive economic recovery since illegal downloads, the music business is multiplying with new investment endeavors, but it is not the first industry to invest in celebrities.

Fantex, Inc., an athlete stock exchange platform founded in 2012, works in a similar way. Fantex pays their signed athletes an upfront sum of money in return for a percentage of their future earnings in perpetuity. 11 When an athlete is signed, the company must fund the upfront money through their IPO, and if the requirement is not met, then the offer is void. To evade risk, the company has stake in multiple athlete’s earnings, and when an investor buys a share, they are actually purchasing stock in Fantex themselves, instead of one individual athlete.

Having stake in multiple individuals dilutes the risk of calamity for both the purchaser and the company, especially when venturing on high-stress activities such as professional athletics. For example, Fantex’s debut athlete was supposed to be Arian Foster, the former running back for the Houston Texans; however, he was injured right before his IPO, and the company backed out of the offer. 12 This shows the unpredictable, high-risk business of investing in individuals and demonstrates why it is safer to invest in a company representing multiple entities.

Similar to athletes, artists face the same unpredictability due to subjectivity. Due to political or social issues, many artists have lost substantial followings as a result of publicity incidents. For example, in 2003, Grammy award-winning band the Dixie Chicks spoke out against former republican president George W. Bush at a concert, and their fan base sanctioned their career. 13 Due to this incident, the band lost countless record sales, had a diminishing album tour, and was even boycotted from country radio stations. Had the band issued shares on their future royalty earnings, the stock would have tanked all due to one incident, again showing the delicacy and high risk involved in capitalizing on individuals.

While Fantex offered multiple celebrities to invest in, Royalty Flow on the other hand, has yet to provide another artist to balance out the risky investment. Though Eminem has had a lucrative career, today’s technology is constantly changing, and recent court cases leave the music industry on the cusp of change.

Spotify’s recent lawsuit concerning the distribution of mechanical royalties poses an imperative challenge to songwriters and the issue of today’s technology in regards to composition data.

In March 2016, the National Music Publishers Association (NMPA) sued Spotify for failing to pay mechanical royalty fees. 14 This resulted in a $30 million settlement for the NMPA and its members, but other songwriters sought further impartiality.

Individuals seeking to launch a class action lawsuit sued Spotify individually for the same transgression: Spotify contracted Harry Fox Agency to locate and match streamed sound recordings to their affiliated composition copyrights, and Harry Fox failed to do so, resulting in no compensation for songwriters or publishers. By law, if the affiliated composition owner cannot be located, a Notice of Intent must be filed. Harry Fox also failed to warrant such notices. 15

Spotify settled for approximately $43 million to be paid out to composition rights holders, but this case provokes the question: is today’s music technology accurately structured to administer high influxes of data? And if not, is the industry ready for new investment ventures? Given this instance, the technology appears to be lacking.

There is no transparent way to link a sound recording to its allied composition owner, and with today’s monumental streaming activity, is it even possible to regulate such information? Without a proper system setup to synchronize copyright data, and with the largest streaming service patently infringing upon the rights of composition owners, the status of the music industry is dictated by the very technology setup to exploit it.

Although streaming is today’s main thoroughfare for music consumption, without the sovereignty of substantial technology, there is no certainty for accurate compensation for artists. Prima facie the music industry is rejuvenating, but when examined more closely, it is far from transparent. In such a business, royalty investment is precarious, especially when it is highly subjective.

As new music investment opportunities surface, it is imperative to be cognizant of the technology guiding artists’ success. There are many musicians whose careers have been stable and lucrative, but individuality combined with a paradoxical industry could lead to risky investment.

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Footnotes

 

1 IFPI. “Global Music Report 2017.” Global Music Report 2017, 25 Apr. 2017,   www.ifpi.org/downloads/GMR2017.pdf.

2 Nicolaou, Anna. “Subscribe to the FT to Read.” Financial Times, Financial Times, 25 Sept.     2017, www.ft.com/content/a9419e1e-a20e-11e7-9e4f-7f5e6a7c98a2.

3 Christman, Ed. “Eminem Fans Will Soon Be Able to Invest in Royalties From His       Catalog.” Billboard, Billboard, 25 Sept. 2017,             www.billboard.com/articles/business/7973935/fans-invest-royalties-eminem-       catalog-royalty-exchange.

4 Billboard Staff. “Royalty Flow Launches IPO, Offering Fans a Slice of Eminem            Royalties.” Billboard, Billboard, 27 Nov. 2017,             www.billboard.com/articles/business/8046992/royalty-flow-ipo-eminem-   royalties-nasdaq.

5 Nicolaou, Anna. “Subscribe to the FT to Read.” Financial Times, Financial Times, 25 Sept.     2017, www.ft.com/content/a9419e1e-a20e-11e7-9e4f-7f5e6a7c98a2.

Christman, Ed. “Eminem Fans Will Soon Be Able to Invest in Royalties From His       Catalog.” Billboard, Billboard, 25 Sept. 2017.

7 Christman, Ed. “Eminem Fans Will Soon Be Able to Invest in Royalties From His       Catalog.” Billboard, Billboard, 25 Sept. 2017.

8 Nicolaou, Anna. “Subscribe to the FT to Read.” Financial Times, Financial Times, 25 Sept.     2017, www.ft.com/content/a9419e1e-a20e-11e7-9e4f-7f5e6a7c98a2.

9 Nicolaou, Anna. “Subscribe to the FT to Read.” Financial Times, Financial Times, 25 Sept.     2017, www.ft.com/content/a9419e1e-a20e-11e7-9e4f-7f5e6a7c98a2.

10 Mohdin, Aamna. “David Bowie Was as Innovative a Financier as He Was a    Musician.” Quartz, Quartz, 11 Jan. 2016, qz.com/590977/david-bowie-was-as-      innovative-a-financier-as-he-was-a-musician/.

11 Roberts, Daniel. “Here’s Why Fantex, the Athlete Stock Exchange, Is Working.” Fortune,     Fortune, 31 Mar. 2015, fortune.com/2015/03/31/athlete-stock-exchange-fantex/.

12 Roberts, Daniel. “Here’s Why Fantex, the Athlete Stock Exchange, Is Working.” Fortune,     Fortune, 31 Mar. 2015, fortune.com/2015/03/31/athlete-stock-exchange-fantex/.

13 Thompson, Gayle. “Natalie Maines Makes Controversial Comments About Pres.       Bush.” The Boot, The Boot, 10 Mar. 2016, theboot.com/natalie-maines-dixie-chicks- controversy/.

14 Rosenblatt, Bill. “Spotify Lawsuit Settlement Aims At Solving Music Industry Data   Problems.”Forbes, Forbes, 3 June 2017,             www.forbes.com/sites/billrosenblatt/2017/06/03/spotify-lawsuit-settlement-       aims-at-solving-music-industry-data-problems/#6459969c204a.

15 Rosenblatt, Bill. “Spotify Lawsuit Settlement Aims At Solving Music Industry Data   Problems.”Forbes, Forbes, 3 June 2017,             www.forbes.com/sites/billrosenblatt/2017/06/03/spotify-lawsuit-settlement-       aims-at-solving-music-industry-data-problems/#6459969c204a.

 

By Ashley Cook

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