WSJ: Music Investors Don’t Stop Believin’ in Streaming
Spotify, Tencent and others benefit as listener totals and song-catalog values climb during pandemic
The Rolling Stones performed in Canada last year. Music streamers have turned to the comfort of older, more familiar songs during the pandemic.
PHOTO: FRED THORNHILL/THE CANADIAN PRESS/ASSOCIATED PRESS
Nov. 1, 2020 1:59 pm ET
Investors backing musical heavy hitters such as Adele, Bon Jovi and Journey are profiting this year as homebound listeners tune in to music-streaming services, boosting the value of song catalogs and the royalty payments they generate.
Streaming figures have bounced back after a pandemic-induced blip earlier in the year. Third-quarter results from music-streaming market bellwether Spotify Technology SA SPOT 2.87% showed the company added more users than expected and users spent more time listening. Shares of Spotify are up 60% this year, and have more than doubled since the start of 2019. New York-listed shares of Chinese streaming company Tencent Music Entertainment Group TME 0.58% have risen more than 26% this year.
The resilience of recorded-music revenue has benefited rights holders who earn money when songs are streamed, bought or performed. Now one New-York based publisher is pursuing an initial public offering in a bid to cash in on the market’s strength.
Round Hill Music, a New York-based publishing company, said in October that it would list shares of a music-royalties fund on the London Stock Exchange. The company says it is looking to raise $375 million to invest in the rights to more than 120,000 songs, including tracks by Elvis Presley and the Rolling Stones.
The Round Hill Music Royalty Fund’s float follows the 2018 debut of the Hipgnosis Songs Fund Ltd. , which holds rights to more than 24,000 songs, including Adele’s “Set Fire to the Rain,” Bon Jovi’s “Livin’ on a Prayer,” and “Don’t Stop Believin’ ” by Journey.
Shares of that fund have risen 6.4% this year, according to FactSet. Its peers in the FTSE 250 index have fallen roughly 21% in that time.
Round Hill’s fund will look to invest in well-known hits with a proven record of earning income. Songs of that type have been a relative bright spot this year as streamers turned to the comfort of older, more familiar tracks.
Music royalties have grown more popular with investors as the growth of streaming services has helped reinvigorate the market for recorded music.
Streaming revenue rose to $11.4 billion last year from $9.2 billion in 2018, according to the International Federation of the Phonographic Industry, accounting for more than half of global recorded-music revenue for the first time. Recorded-music revenue topped $20 billion in 2019 for the first time since 2004. Goldman Sachs estimates the market could hit $45 billion by 2030.
“There’s a clear structural growth trend underway,” said Solomon Nevins, portfolio manager for alternatives at CCLA Investment Management, which holds a position in the Hipgnosis Songs Fund worth about £51 million, equivalent to roughly $66 million.
Spotify said it added about six million premium subscribers in the three months to September, bringing its total to 144 million, and expects to end the year with as many as 154 million.
News Corp’s Dow Jones & Co., publisher of The Wall Street Journal, has a content partnership with Spotify’s Gimlet Media unit.
Music royalties are particularly appealing with bonds offering such low yields, Mr. Nevins said. A need for diversification and income motivated the investment in Hipgnosis.
“One of the big advantages Round Hill will find is Hipgnosis has already done a lot of the education work with investors,” Mr. Nevins said.
Investors tend to be attracted to music royalties because they offer relatively stable income uncorrelated to other asset classes. Royalties have proven resilient in part because those investors often have long investment horizons and are less likely to be deterred by short-term fluctuations, said Nari Matsuura, a partner at Massarsky Consulting, a financial consultancy specializing in the music and movie industries.
“When you’re talking about the pandemic, you’re talking about essentially a two-year hit in a perpetuity model,” she said. “You are talking about an asset with a very, very long life.”
The collapse of live-music revenue has pushed some songwriters to sell the rights to their catalogs, but investor demand has kept pace with a surge in supply, said Ms. Matsuura. Her firm performs catalog valuations for music publishers and record labels, and acts as outside valuation consultant for Round Hill Music and Hipgnosis. That demand has meant net publisher’s share multiples—a measure of how much investors pay relative to a song’s trailing annual earnings—have stayed high, she said.