The Buyers’ Market

Oct 16 2008

If you’ve been watching the stock market plummet in the past week (and who hasn’t?), or better yet, if you’ve noted the recent moves by financial guru Warren Buffett, then you’ll recognize a buyers’ market when you see it. And you’ll probably be seeing one shortly– if not right now. The principle is simple: when everyone is desperate to sell, when prices are dropping, when the sky is falling, that’s the time to go on a buying spree, so long as you’re buying quality assets with long-term value. It’s true in real estate, in stocks, and it’s even true with music publishing catalogs.

I had a recent comment on the blog that asked about how one goes about purchasing a publishing catalog of songs– so I thought now was as good a time as any to take up the subject. Why? Because all indications are that we’re soon entering a period where some very valuable song catalogs are going to be auctioned off by desperate sellers for far less than their purchase price only three or four years ago.

In the past five years, there has been a sudden influx of new publishing companies into the marketplace, many of them backed with money from banks, hedge funds and pension funds. Unlike most traditional music publishing companies, these firms were not interested in discovering the hot new writer, or the next big star. Instead, they were focused on acquiring songs as investments, like a fine painting or precious jewelry. These companies were looking for proven, tested hit songs, that had maintained relatively steady earnings over a 10 or 20 year period.

Needless to say, those types of catalogs are unusual, highly valued, and very expensive. But these companies had money to burn, and were quite aggressive in going after what they wanted– often paying 50% more, or even double what a traditional music publisher might have offered. The theory was that these “classic” copyrights would only become more valuable with the explosion of media outlets for music, the growth of markets like India, China, and Eastern Europe, and a more aggressive approach to film and TV licensing. Can you guess the end of this story?

It’s not too hard to predict how this worked out. Unfortunately, the stock market collapse, the credit freeze and the complete disappearance of many of the most prominent investment banks has put these new publishing ventures on the ropes. Most of them have learned that it’s not so easy to increase earnings on song catalogs, nor does the money come in all that quickly or consistently. Over a ten-year period, most classic song catalogs have a pretty consistent average performance. But within a shorter period of time, say 3-5 years, the earnings can vary wildly, based on collection issues, currency exchanges, copyright disputes, or pure dumb luck. The bottom line is that there are plenty of people looking to sell their publishing catalogs at the moment. This means it’s a buyers’ market for everyone that’s left in the game.

So what goes into a catalog acquisition? First of all, MONEY. You need a lot of money. As in any buyers’ market, the first requirement is cash on hand. On this point, I can’t offer much help. Get some money before you start– preferably cash, rather than credit. Once your wallet is full, here are the four primary steps in purchasing a catalog:

1. Find Something To Buy. This is harder than it sounds. Many of the best catalogs are taken. Often, sellers are hesitant about openly announcing that their catalog or their company is on the market. Ideally, you need a network of industry insiders to keep you on the alert as to what might be available, or who might consider an offer. Most buyers build a team around one or two prominent music business attorneys, some consultants with a long history in the music publishing business, and a large network of contacts, including people at the PRO’s (ASCAP, BMI, SESAC) and the NMPA (National Music Publishers Association).

Beyond that industry insider approach, you can also watch the key trade publications– Billboard often contains public notices of catalogs being auctioned off by writers or publishers in bankruptcy. You can also check tipsheets like New On the Charts and Songlink International, which sometimes list catalogs currently up for sale.

2. Know What You’re Buying. Remember, there are two sides to every song. There is the writer’s share of the copyright (which represents 50% of the total income generated by the song) and the publisher’s share (which represents the other 50% of the income, and the control of the copyright). Theoretically, it’s possible to purchase either share, or both of them together. In practice, most publishing acquisitions involve the purchase of only the publisher’s share. In other words, if you purchase the song, you will control the copyright, collect all the income, pay the writer 50% of that income, and keep the other 50% as your publisher share.

Historically, it has been frowned upon for publishers to purchase the writer’s share of the income– as it brings to mind countless episodes in the Fifties, when songwriters down on their luck unknowingly sold off their copyrights (and the right to all future income) only to see their songs emerge as classics a few years later. ASCAP and BMI have always discouraged publishers from purchasing writer share– and most major publishers refused to consider it, even as recently as a decade ago. However, in the past few years, several companies, most notably Primary Wave, have begun doing very high-profile deals with superstar artists or writers (or their heirs) to purchase the writer share of income. Consequently, more and more companies are now open to the prospect. But keep in mind that purchasing the writer share does not give you control of the copyright. That only comes with the publisher share. Whoever controls the copyright has the sole power to decide where and how to license the song, as well as the responsibility to collect the money and pay it out. If you buy writer’s share, you have to know who your business partner, the publisher of the song, will be.

3. Determine the Price. First, get a calculator. Then, get the income records for what you’re looking to buy. Anyone selling a catalog of songs must be prepared to provide income statements, demonstrating what the catalog has earned over the past 3-5 years. This will mean accountings from the current publisher, as well as BMI or ASCAP statements, showing performance income. Once you’ve got all the records, and you’ve checked them VERY carefully, it’s time to be fruitful and multiply.

Song catalogs are purchased for a multiple of their annual earnings. This means that if a song generates $100,000 a year for the publisher’s share (that’s 50% of the total income), then it will likely be valued at somewhere between 8-15 times that annual income. A catalog showing an NPS (net publisher’s share) of $100,000 annually, valued at a 10 multiple, would sell for $1 million dollars. All things remaining equal, the buyer would need 10 years to recoup their investment– after that, they would begin to turn a profit.

Most of the negotiation on catalog acquisitions involves determining the proper multiple. In the past, publishers usually valued catalogs at 8-10 times earnings. But just as in the real estate market, once the investment bankers came to town, the prices soared. Many “classic” catalogs, ones that contain a healthy portion of truly timeless hit songs, have recently sold for multiples from 15-20. And like the real estate market, most of these prices today look highly inflated. If a catalog has one or two “hit” songs, and a few prominent album tracks, it’s probably around an 8 multiple. If it’s a deeper, more valuable catalog, it might be worth 10-12. If it’s Leiber-Stoller or the Motown catalog, you can expect to wait at least two decades before you pay off your investment– and it will be worth every penny.

4. Do Your Due Diligence. This is where the business becomes an art. There are a myriad of things to consider when purchasing a catalog, and there’s not nearly enough space to discuss them here. But you better think about:

Has the catalog’s earnings peaked? Did the last two years of income fall dramatically?

Did the catalog’s earnings recently spike? A key film or ad placement can cause a catalog to suddenly jump in earnings, driving up the 5-year average to a somewhat artificial high. Be aware that you can’t count on those kinds of placements in the future.

What is the long-term creative outlook for these songs? Is the style of music fading in popularity, or experiencing resurgence? Are there new outlets that would be a perfect fit for these particular songs?

How long will the songs last? Generally, publishers purchase songs for the life of copyright– which is 75 years after the death of the last composer. If you’re buying old songs, that date may not be so far off. Once songs go public domain, your earning days are largely over.

As you’ve probably discerned by now, the buying game isn’t for everyone. It’s definitely not for the average individual, the conservative investor, or the weak of heart. But I do think the investment community got this one right. Over time, classic songs have shown that they hold their value as well or better than most other works of art. Certainly, the long-term prospects for increased earnings from music are solid, especially as we start to get the digital realm to produce real income. And if you’re looking for the time to strike, the pendulum is swinging your way. As New York real estate brokers like to say:

Bring your checkbook.

    Interesting stuff Eric. So lets just say I had a boatload of money to blow on a bunch of catalogs, Check! I would think especially in the “Bargain” market if you had enough to spend on some classic song catalog then that would be ideal, recoup would be accelerated tremendously. But, maybe another way would be to buy up a tier down from the classics and go for quantity (assuming at this level there is a certain amount of income being generated). Maybe a song becomes a classic out of one of those catalogs and bam! success! But this is assuming alot of things. I liked the real estate reference, it’s always a good comparison in investment. Keep up the good bloggin!

    -Brandon Keeley
    Download my new song “Without You”
    http://www.brandonkeeley.net/Without_You_Brandon_Keeley.mp3

    Maybe someone should come up with a type of mutual fund that invest in publisher cataloger’s. A group of investors could share the wealth.

    I was thinking the same thing Lewis :) Good stuff

    - Brandon Keeley

Leave a Comment