hit songs are in an asset class all their own
Jun 14, 2022
Last month Justin Timberlake sold his song catalog to Hipgnosis Songs Fund, a Blackstone-backed company investing in music intellectual property, in a deal reportedly worth more than $100 million. Timberlake joins a growing number of artists, including Bob Dylan, Bruce Springsteen and Shakira, who’ve sold the rights to their music during a time when revenue from live shows dried up because of the pandemic.
Hipgnosis, founded in 2018 by industry veteran Merck Mercuriadis — who’s managed artists like Elton John and Guns N’ Roses — helped ignite the recent buying craze.
Unlike the traditional music publishing business model, in which the publishing company might take a fixed percentage of a song’s proceeds every time it’s played on a streaming site or used in a commercial, Hipgnosis pays the artist a flat fee in exchange for the rights to 100% of the song’s future proceeds.
Mercuriadis said the success of Hipgnosis — now a FTSE 250 company on the London Stock Exchange — is predicated on the idea that beloved songs are an asset class, just like oil or gold.
“They become a part of the fabric of our lives and the fabric of our society. And the end result of that is very predictable and reliable income” in the form of streaming revenue and licensing by video games and exercise classes, he said in an interview with Marketplace’s David Brancaccio.
Mercuriadis said songs are an even safer investment than assets like oil and gold because they’re less sensitive to market conditions.
“If there’s political upheaval, or indeed, if there’s a war the way that there is now, the price of gold, the price of oil will be affected, whereas great songs are always being consumed,” he said. “If people are living their best lives, they’re doing it to a soundtrack of great songs. And equally, if they’re looking for escape or comfort from whatever challenges life is bringing them, then again they’re doing it to a soundtrack of great songs.”
Mercuriadis spoke with Marketplace about how Hipgnosis is rethinking “song management” to boost profits for investors and why he’s advocating for songwriters to get a larger share of the revenue stream. The following is an edited transcript of the interview.
David Brancaccio: You view songs as an asset class — like, I’m going to have me some bonds, I’m going to mix in some real estate, some gold, some crypto — and songs?
Merck Mercuriadis: Absolutely. These great songs, when they hit, they become a part of the fabric of our society. So I’m going to use the Eurythmics as an example because they’re being inducted into the Songwriters Hall of Fame, and they’ll be inducted into the Rock and Roll Hall of Fame in a few months’ time, in November. But if you were a 14- or 15-year-old boy or girl in , and you were listening to “Sweet Dreams (Are Made of This)” while you are having your first crush, that song has been with you for the last 40 years. It’s been a part of the good times in your life; it’s been a part of the lows in your life. We use these great songs as a part of our emotional barometer, and as a result, they become a part of the fabric of our lives and the fabric of our society. And the end result of that is very predictable and reliable income. And that predictable, reliable income is why we have asset classes like gold or oil. But I like to say that songs are even better because the revenue from songs is not correlated to what’s happening in the world or the market at any minute in time. If there’s political upheaval, or indeed, if there’s a war the way that there is now, the price of gold, the price of oil will be affected, whereas great songs are always being consumed. If people are living their best lives, they’re doing it to a soundtrack of great songs. And equally, if they’re looking for escape or comfort from whatever challenges life is bringing them, then again, they’re doing it to a soundtrack of great songs.
Brancaccio: So you think of managing artists, but the way you do it is management of the songs. What’s that like? If you manage an artist, “OK, I’m going to try to get her on Saturday Night Live.” If you manage the song, you think about, “I’m going to get that song into the end credits of some big new dinosaur movie.”
Mercuriadis: Correct. There’s everything from putting the songs in movies, to putting them in TV commercials, to putting them in video games, to having new artists cover them or new songwriters interpolate them. Making sure that on Spotify or on Apple, that they’re on all of the correct playlists so that people are discovering them. Making sure that they’re being at the heart of TikTok videos so that a new generation of consumers and music fans is being exposed to them. It could be Peloton and exercise classes. One of the beautiful things about establishing songs as an asset class — and now, at this point, Hipgnosis is a FTSE 250 company on the London Stock Market that’s given its shareholders more than 46% return on investment over the last four years. But one of the keys to that success is that with streaming, we have a pie that is constantly growing. So we’ve gone from 30 million paid subscribers around the world when we started to now having 587 million paid subscribers. By the time we get to the end of the decade, we’ll be well over a billion. By the time we get into the next decade, we’ll be close to 2 billion, depending on whose research you’re looking at. And when you look at the TikToks and the Pelotons, whether it’s lifestyle, whether it’s video games, Roblox, etc., almost all consumption of music is now paid-for consumption of music. Whereas previously, and the data on which we buy these catalogs, is data that reflects a period of time when almost all consumption of music was not being paid for. So the music business has really had transformation over these last five or six years. It’s gone from 16 years of technological disruption, where almost everything was being illegally used thanks to illegal downloading, to now streaming having made it more convenient for people to consume music legally again. And this is genuine, systemic change. Almost all consumption of music today is now paid-for consumption.
Brancaccio: Yeah, it is such a transformation from that moment when all that value seemed to evaporate, when everybody was exchanging this stuff for free. Now, if you are the artist, if you’re Olivia Rodrigo or something, what do you do — in exchange for handing the songs to you to manage in perpetuity, you get money up front. That’s the equation?
Mercuriadis: So when you look at our catalogue — which now has 150 different deals in it that include everyone from Neil Young, to Dave Stewart from the Eurythmics, to Nile Rodgers, to Justin Timberlake, to Chrissie Hynde from The Pretenders, to Lindsey Buckingham and Christine McVie from Fleetwood Mac; I could go on about our catalog all day — but effectively, we buy either 100% of the songwriters’ interest in their songs, or 50%, 75% sometimes. And we then go to work to manage those songs better and to add value for our shareholders. There are contingent bonuses in our deals so that if we grow the revenues the way that we think that they’re going to grow, then the songwriter will participate in those bonuses as well. But effectively, they are taking their real estate, you know, the metaphorical house — the song is the currency of our business — they’re taking their house and they’re choosing to sell it for a price that works for them and that works for us. And then we go to work managing their legacy and ensuring that their great songs have a very bright future.
Brancaccio: Help me understand this, though: Big record companies are often music publishers, and it would be in the publisher’s interest to also make those songs as profitable as they can be. So you enter into it because you think you can do a better job at managing the song?
Mercuriadis: Correct. And to be honest with you, it’s not that we’re better, it’s that we’re structured to be able to have the bandwidth to manage the songs properly. These big publishing houses, which have great people in them that with great intentions, but they have over 20,000 songs for every person that works for them. We have 500 songs for every person. So [we] have the bandwidth to be able to go to work on managing the songs with responsibility. It’s why I refuse for our company to be called the publishing company — we are a song management company. And our job is to manage these great songs with the same responsibility that you would expect me to manage great artists with. And if you look at our results compared to the big publishers — I won’t name names, but if you if you go through our last, you know, fiscal year’s results, we did 19% of one of the big three’s overall revenues, and we did that 19% of overall revenue based on less than 1% of the amount of the assets. They did it with millions of songs, we did it with 65,000 songs — because we have a very small catalog, but with a very high degree of success within it. And we’ve got the structure that allows us to be able to manage those songs with responsibility, and add value — not only for our shareholders, but also to the legacy of these great people that have allowed us to be the custodians of their songs.
Brancaccio: I see, like if you were an actor and looking for an agent, would you want one that has 1,000 clients or one that has 20 good ones? They can pay attention to you, they’ll take your call.
Mercuriadis: And in truth, 20 great ones. And that’s part of our currency as well. I was speaking at a conference in Canada the other day, and we made a little sizzle reel of our songs, and we used eight seconds of each song, just a part of the chorus, and the sizzle reel was three hours long without having anything other than a top 10 single in it. So it’s just incredible songs — from “Go Your Own Way” by Fleetwood Mac to Ed Sheeran’s “Shape of You” to “Le Freak,”‘ which is the biggest-selling single in the history of Atlantic Records by Chic. Just an incredible set of songs. And we’ve just added Leonard Cohen, and we’ve just added Justin Timberlake, and we’ve just added Kenny Chesney, so it’s just an incomparable set of songwriters and artists that we are, as I say, privileged to be the custodians of their incredible work.
Brancaccio: More generally, I understand it’s your view that songwriters get the short end of the stick in the music industry. That surprises me, but help me understand that.
Mercuriadis: Well, it’s shocking that the people that deliver the most important component are the poorest paid. So the entire currency of the music business is the song. You know, if you are pushing play on Spotify or on Apple, it’s because you love the songs. If you’re going to see an artist play live, it’s because you love their songs. If you’re buying the T-shirt, it’s because you love the songs. You see where I’m going with it. It all begins with the song. So the recorded music companies owning and controlling the publishing companies has created a structure where the songwriter’s role isn’t being recognized properly. Because on the recorded music side of the business, these companies are making four-fifths of the revenue, they’re getting an 80% gross margin, a 40% net margin, and in general they own those assets, those recorded music assets, in perpetuity. Conversely, on the publishing side of the business, it’s a fifth of the revenue, it’s a fifth of the margin. And quite rightly, whether it’s because of good management, or lawyering, or reversions, or renegotiations, the songs end up back in the hands of the people that co-created them. So if you’re at Universal, Warner or Sony, you are using your ownership and control of recorded music owning and controlling and publishing to stop the publisher from advocating on behalf of songwriters — because you want to push as much of the economics towards recorded music, where the lion’s share is yours, at the expense of the songwriter. And I recognized this as an artist manager. I’ve been very privileged to manage the careers of everyone from Elton John to Nile Rodgers and Chic and Guns N’ Roses and overseeing Beyoncé’s management, etc. And I recognize that this was why this was happening — was that recorded music was not honoring the role of the songwriter and not acknowledging the role of the songwriter in giving them a fair and equitable split. So I created Hipgnosis to have a motive — which was obviously to make money for my shareholders on, as I say, the predictable, reliable income of these great songs and the pie growing as a result of streaming and other new platforms for music to be consumed through. But equally well, every one of my shareholders — whether it’s on the public side, the Church of England, Investec, Aviva, Axa, or on the private side, my partner is Blackstone — everyone is fully cognizant of the fact that we have an ulterior motive. And that ulterior motive is to change where the songwriter sits in the economic equation, and to acknowledge the role of the songwriter by changing the splits, and by, also, honoring the songwriter. So you may have seen just the other day that the Grammys have added the songwriter of the year category, after we’ve been advocating for a number of years for that. More importantly, we’ve been advocating in U.K. Parliament with the Department for Digital, Culture, Media and Sport to change where the songwriter sits in the economic equation. We’ve given in-person evidence, we’ve given written evidence, we’ve helped the government make recommendations to the Competition and Markets Authority to really look seriously on how to change how a songwriter is paid. In the United States, the copyright board — we’re waiting for copyright board three to be settled and copyright board four to start, which is hopefully going to result in an increase in payments to songwriters as well. So we’re using the platform of our success to advocate on behalf of the songwriting community and to fight on behalf of the songwriting community. And ultimately, that’s why we’ve become — that, along with my pedigree of having made my reputation and success with artists and songwriters and producers, as opposed to at their expense, and acknowledging their legacies — all of that combined has made us the preferred buyer of the songwriting community.
Brancaccio: From the outside looking into your industry, I thought, like when you read the history of Elvis, that he would try to get songwriting credit for things because that’s where the money is, when you could claim to be the songwriter. That isn’t really what the reality was all along, is what you’re telling me?
Mercuriadis: Well, if you’re Elvis — or any other artist, for that matter — that attempts to get a piece of the income on a song, all you’re doing is creating an additional income stream for yourself. But that doesn’t necessarily mean that that was an income stream that acknowledged the role that was being played. When you look at a dollar of streaming income, you have 30% of it that is going to Spotify or Apple as the DSP, the digital service provider. Now, you can make an argument that that 30% should become 26% or 25%, 24%, whatever it might be, and I think it will, in due course, but that’s not really the material point. The material point is what happens to the other 70% or 70 cents. And currently, 58 1/2 of that 70 cents is going to the recorded music company. That recorded music company is paying the artist on a sale rather than a license. If they were paying them on a license, they would be given them 50% of that money, but they’re paying them on a sale so they’re giving them maybe 10 cents out of that 58 1/2 cents. So they’re clearing almost 50 cents out of every dollar for themselves — leaving 11 cents or 11 1/2 cents for the songwriters. And there are numerous songwriters on every song, there are numerous publishers — so you can be writing the biggest song in the world, and you’re getting fractions of a penny on every dollar for the publishing. It’s just not a fair and equitable split. And it’s certainly not a split that acknowledges that nothing happens until there’s a song that everyone loves.