Why do artists sell their music rights? And what exactly are they selling?
David Guetta is the latest addition to a growing number of artists that sell their music rights. The French superstar allegedly earned around $100 million from the sale to Warner Music.
Why have many artists been selling their rights for such great sums of money recently? And what exactly are they selling?
Who sells, who buys?
Bob Dylan ($300 – 400 million), Neil Young ($ unknown), Stevie Nicks ($100 million), Paul Simon ($250 million), Imagine Dragons (>$100 million), Shakira ($ unknown), Lindsey Buckingham ($ unknown), Calvin Harris ($100 million), Red Hot Chili Peppers ($140 million), and the list goes on. And more deals are to be expected; Noel Gallagher may very well be the next to sell his rights.
In recent years, many famous artists have sold (part of) their rights. Some sold their rights to existing publishers (e.g. Bob Dylan and Paul Simon), while others sold them to investment funds such as Vine Alternative Investments (e.g. Calvin Harris) and Hipgnosis (e.g. RHCP).
Especially the last fund (Hipgnosis) frequently appears in the limelight. If not because of yet another purchase of a rights catalogue of some international music legend, then because of the announcement of new capital injections to be able to acquire even more rights. Since its establishment in 2018, Hipgnosis has spent more than $2 billion on rights catalogues. Allegedly, the fund is already worth more than $2,21 billion.
The market for music rights is also of interest to private equity investors. Earlier this year, one of the largest private equity funds in the world, KKR, announced a collaboration with BMG to make its debut in the world of music rights investments. Both KKR and BMG immediately reserved an investment budget of at least $1 billion.
The trend of music investment funds has also blown over to the Netherlands, where Pythagoras Music Fund (founded by famous composer John Ewbank and others) has been active since the beginning of this year.
What exactly do the artists sell?
The burning question is: what exactly are all these artists selling for these large amounts of money? The media often report that artists have sold their ‘music rights’ or their ‘music catalogue’. Sounds nice, but what does that entail? In practice, that seems to differ from artist to artist to quite some extent.
It seems that, so far, most cases concern the sale of copyright (or at least, the entitlement to profits resulting from the exploitation thereof). In other words: the rights of composers regarding the music composed by them and the right of songwriters concerning lyrics written by them. This, for example, seems to be the case for Bob Dylan, Paul Simon and Shakira.
In other cases, artists are only selling a certain part of their music rights, namely the publishing rights. This means that they remain owner of a part of the copyright, namely their so called writer’s share.
In yet other instances, it’s not about copyright, but about the sale of neighbouring rights, or related rights. These are the rights to a certain performance of the musical work (for performing artists) and the rights to the recording of the musical work (for music producers or record labels). The last rights mentioned are also referred to as the master rights. It seems to be the case that David Guetta has sold his neighbouring rights to Warner Music.
Well-known record producer Jimmy Iovine (producer and engineer of records of artists such as Bruce Springsteen, Tom Petty and U2, plus co-founder of Beats by Dre) sold his rights as record producer (most likely the neighbouring rights that were attributed to him).
Moreover, some artists are not only selling the rights to already existing music, but also the obligation to attribute the rights of future music to the buyer (Lindsey Buckingham will attribute 50% of future copyrights to Hipgnosis and David Guetta and Warner Music have also agreed to certain arrangements for future recordings). Often additional agreements are entered into as well, such as the agreement between Stevie Nicks and Primary Wave on the basis of which they entered into a joint venture to sign new song writing talent. Imagine Dragons sold their writer’s share in their copyrights, but also a part of their publishing rights, while the other part of their publishing rights remains in the possession of Universal Music Publishing.
What often happens, is that the artists do not sell all rights they own. Some artists only sell a part of their catalogue, while other artists only sell a certain percentage of their rights. Neil Young for example only sold 50% of his rights and kept 50% to himself. Stevie Nicks sold 80% and kept 20%.
How is the purchase price established?
The sums some investors are willing to pay for the rights catalogues are enormous. The purchase price is often calculated by using a so called multiple, or in other words: X times the (average) yearly income that the exploitation of the relevant rights generates. Regarding Bob Dylan, Neil Young, Stevie Nicks and RHCP, the multiple is allegedly 25 to 28 times the yearly income. In case of Paul Simon the multiple is even said to be 30. Presumably, the multiples are calculated over the average income of several years (probably the last few years); in the end the validation is based on a combination of results from the past and expected success in the future. Before the purchase price is established, artists will therefore have to give insight into their administration and profits over the last few years. The buyer will have to conduct a due diligence investigation in order to be able to establish how much income certain songs have generated in the past.
Why are all these artists suddenly selling their rights?
The sale of rights catalogues has become booming business over the last few years. This has several reasons, of which I will name a few:
- Instant income: the first reason is the most obvious. The sale of (a part of) your rights, means instant cash in the bank for the artist. This means you do not have to await fluctuating profits year after year. You receive one large lump sum payment, which provides you with certainty in the short term. You will never know beforehand if you would have received the same amount of money when keeping ownership of the rights (the market might crash, your music could become less popular, etc.). The downside to this is of course that, after the sale, you are not able to profit from any potential rise in popularity or income. That is, if you have not kept a share of the rights to yourself, of course. An artist might now gain millions of dollars in one instance, while it remains unsure for him/her if he/she might achieve the same over a longer period of time. Besides, age might be a factor for some artists; perhaps you would rather gain a quick $100 million while you are eighty years old than wait for a large portion of the profit to arrive while you are already dead.
- Prevent battles over legacy: a second reason is that artists want to prevent that their heirs will argue over the exploitation of the rights. By selling their catalogue before their death, the potential conflict is limited to the distribution of money. That may be easier to resolve in a will, than an abundance of rights scattered all over the place. Besides, the artist is then able to decide for itself what exactly happens to his/her rights. For example, Noel Gallagher has jokingly said the following about the negotiations with Hipgnosis about selling his rights: “My fear is leaving it to my kids and they’ll swap it for a choc ice or Playstation.”
- Profits from the exploitation of music rights are rising: a third reason is that profits from music rights have increased rapidly over the last few years, especially since the introduction of streaming. After the revolution in (illegal) downloading and the slow death of CDs, a part of the music industry was declared dead. However, the revival has been so strong, that the profits from recorded music are now higher than ever. The Covid-19 pandemic has contributed to this, as has been demonstrated by the most recent substantive rise in streaming (and vinyl sales) in the US. Higher profits mean more interest from investors, who see music rights as a relatively safe long-term investment.
- Tax benefits: a fourth – and not unimportant – reason seems to be that the sale of music rights (at least in the US) could amount to tax benefits. Apparently, the sale of rights is considered to be a source of long-term financial profit in the US, which is taxed significantly lower than profit generated by royalties, which are considered to be ‘regular’ profit. Also, Joe Biden has proposed changes to the tax legislation, which could lead to higher taxes for artists. By selling their music catalogue now, artists can prevent that their incomes become subject to these higher tax rates.
- Money issues: a fifth reason is related to the first: it could be that some artists are experiencing trouble with their cash flow, possibly related to the Covid-19 pandemic and/or spending habits, etc. After all, the profit generated by live performances has seized to exist almost completely and for many artists, that was precisely the biggest source of income. In such circumstances, an artist might be compelled to sell his/her rights at once to establish financial security.
Many artists will follow
For now, no end to these developments is in sight. Presumably, even more artists will sell (a part of) their rights to investors in the coming years. I also expect the first public announcement of the sale of a rights catalogue in the Netherlands any time soon.
Noel Gallagher already knows what to do with the profit of a potential sale, when it does happen:
“What do you do? Leave it to your kids? They don’t value music. Or do you take the £200million and buy the superyacht and the Learjet and go, ‘F***ing have it, come on! I think the latter. I’m getting a superyacht, I’m gonna call it ‘Mega Mega White Thing’. I’m gonna spend a year at sea. People can come and visit. I’ll be flying out my hairdresser, Neil, and paying £40,000 for a haircut. I’ll have a chef.”
Want to know more? Contact Syb Terpstra, senior associate IP & Entertainment at bureau Brandeis, Amsterdam.