Happy Together

Sep 28 2011

During the travails of the past decade, when record label turned against downloader and publisher turned against record label and streaming service turned against publisher, the sage music industry commentators have been crying in the wilderness:

“Hold up guys! Remember: we’re all in this together”.

Yea. Right.

I think I might have even said it once or twice myself. But now, it turns out to be true—truer than any of us imagined at the time. As the giant merger wheel gains speed and grinds over anything and everything in its path, it seems we truly are in it together, all destined to be owned by the same uber-corporation, tools of an anonymous international venture capital fund. In a world where everyone is “strategically linked” (i.e. owned), every deal is a 360. Welcome to the new model music industry.

It’s not even the end of September, and already we’ve seen BMG Rights, the giant German elephant in the room, purchase Bug Music—rumors are that EMI will be the next to fall to Hartwig and his gang. Within days, Billboard blared the news of the recently struck “strategic alliance” (it would take a UN sub-committee to define what that actually entails) between Universal Music Group (the world’s largest record label) and Live Nation (the world’s largest concert promoter, artist management firm and ticketing company, albeit with the world’s smallest chairman). Then we also had the unveiling of the most unfortunately named venture of the year, Primary Violator, a merger of Primary Wave Music’s management company and Chris Lighty’s powerhouse Violator Management. If Violator had merged with Universal, would it be a Universal Violator?  I thought the guys at Primary Wave were supposed to be marketers. Name-check, please.

While the relative merits of each deal can and will be chewed over for weeks at Brooklyn Diner, the motivations are relatively clear. BMG is on a buying spree, and they’re doing what any savvy new player with several billion dollars to burn would do—they’re buying up classic catalog as fast as someone will sell it. Contemporary hits come and go, but when you’re investing money, there’s nothing like classic, proven songs to provide a steady cash flow and the musical depth you need for the big ticket sync placements. In that respect, Cherry Lane (Elvis, John Denver) was good, Bug (Johnny Cash, Duane Allman) is better, and EMI (Motown, “Somewhere Over the Rainbow”) is the Holy Grail. It’s a hard strategy to argue with, at least until everyone gets their accounting statements and we see if these guys had any clue whatsoever as to how they’re going to integrate all these separate companies.

The Universal-Live Nation deal was in some ways the most impressive. Lucian Grainge seems to be alone among the major label chiefs in being serious about constructing a comprehensive music company.  The Universal labels are so far out in front of their competitors in this respect that they seem almost to be engaged in a different business altogether. On the other hand, it doesn’t appear that EMI (which will be sold by the time I blog again) ,Warner (which still can’t seem to figure out who bought it and why), and Sony (overburdened with the usual 550 corporate bloodletting and X-Factor auditions) are engaged in much at all. Interestingly, the alliance with Live Nation seemed to implicitly acknowledge that the 360 model had not yet become effective for Uni, and that a fierce, fire-breathing dragon might be necessary to bring Universal’s artist management companies, Trinifold, Twenty First Artists, 5B, and Sanctuary into some kind of orderly place within the larger organization.

With Live Nation heading up the management side, Universal has the leadership it needs. At the same time, it’s an impressive land-grab for Irving, without much firm commitment from him for any real cooperation. (As is his custom). Front Line invests nothing, gets a 50% stake in UMG’s management companies, and agrees to discuss bringing the Madonna album to Universal, but only if Guy and Madonna want to.  Next time, can we please send Irving Azoff in to negotiate the federal budget with the House Republicans ?

By comparison, the Primary Violator deal is a genuine merger, or maybe even a “buy-out”, depending on who you talk with. As such, it may reflect a timely move by Chris Lighty to cash in on an aging artist roster. After all, it’s been awhile since Mariah, P Diddy, and LL Cool J were at the top of the game. It could also reflect that a management roster consisting only of Cee Lo Green and Eric Benet wasn’t exactly the A-list that Larry Mestel had in mind. But most importantly, it is a bold statement by a music publishing company of what a lot of music publishers are starting to see, especially as the real payments from streaming services like Spotify start to come in and they’re missing at least three zeroes on the checks:

Music publishing is not going to be enough anymore.

The numbers are getting smaller and smaller, and even as uses of music climb, the payments are not sufficient to cover the tidal wave of paperwork that goes into collecting and accounting for them. In some ways, it was better when people were stealing. At least we didn’t have to keep track of it. Music publishers are going to have to diversify into other areas, and kudos to Primary Wave for making a bold move in that direction.

Of course, what makes sense for Universal Music, Live Nation, BMG Rights, and the afore mentioned Primary Violator (I love writing that) does not necessarily make cents for artists and songwriters. Not much surprise there.  It’s easy to see the upside for most of the parties involved in the past week’s festivities.  But the creative community would be wise to approach their new adopted family with the wariness of an orphan. Grab the bread if you’re hungry and someone’s offering, but keep one eye on the giver, and make sure there’s an exit nearby. And don’t get attached. Most of these families won’t be together very long.

For songwriters, artists, and independent publishers trying to make sense of it all, here are four quick things to keep in mind:

Music companies are becoming entertainment companies.  This is an inevitable thing.

Lucian Grainge and Larry Mestel are right—no one thing is enough anymore. As I’ve been preaching in this space for several years: publishers, record labels, managers, and booking agents have to see themselves not as part of the music industry, but rather as part of show business.   Not only is the value of music falling, but the intertwining of music with all other entertainment forms, from theater to video games to sports to television talent shows is increasing tenfold. In this sense, music creators are going to have to take some cues from the corporate decision-makers and begin building a network that includes not simply other musicians or songwriters, but game designers, film directors, music supervisors and visual artists. Diversification is not so much a business strategy as a survival mechanism.

Not all companies from one sector of music are competent in other sectors of music. Some are not competent in any facet of the music industry. This is an inescapable thing.

Here’s where creators are going to have to turn up the noise filter to “high” in the next few years. The fact that a company is a proven, known entity in one field, like music publishing, does not mean that they have a transferable expertise in the management business. Simply controlling the best record label does not guarantee having the best management company. If it did, Universal wouldn’t have sought out Live Nation at all.  The merger of two giant messes (Warner & EMI) guarantees very little except one really big mess.

When I was at a major publisher, I heard a similar argument made to songwriters every day—extolling the virtues of a worldwide publishing behemoth with offices in every territory, a film division, a record label, and an electronics arm. It was all true. But it didn’t mention that the UK office hated the New York office, and the country division wouldn’t speak to the Christian division, and no one had any contacts with the film company, and the electronics arm (I kid you not) didn’t even know they had an associated publishing company.  Bigger just means bigger.

The interests of all parties in the music equation do not necessarily align simply because they are all part of the same corporation. This is a proven thing.

Of course, this is the inherent problem within the 360 structure.  A manager is not always an ally of the record label—sometimes he or she is the person to put the screws to the company, albeit with the best of intentions.  A record label may not wish to pay the tour support that a manager demands or that a concert promoter would like. A publisher may not wish to send their artist to their affiliated record division(ask EMI), and a label A&R person is definitely not going to cut every song the publishing division sends over (ask any songwriter).  We are not in fact one big happy family.  We’re in it together, but not in it for each other.

The only person who will take care of you is you. This is a historical fact.

In light of the above, don’t take any advice from a manager, publisher, lawyer or record exec about where to sign, or who to engage until you consider: what’s in it for them?  Are they sending you to their business partner because it’s a perfect fit for you, or for them?

This is not to say that there are not real advantages that can be realized by keeping things “in house”.  I used to work at Zomba Music and Jive Records, the music industry’s best example of that particular approach over the last two decades.  But not all of these new alliances are going to work out. You can’t afford to let your career be the experiment in which two new corporate partners learn, or don’t learn to work together. Lots of people who believe in public schools as a concept send their kids to private ones—because you only get one chance.

Be assured that in a year from now, when your trusted manager tells you that he’s leaving that joint venture that he assured you would be “an incredible opportunity for all of us”, he will regale you with tales of how his new partners “just never got it”.  He’ll be gone, but you’ll still be in that publishing deal for the next three years.

Not only are we not really family, often we’re not even friends.  Whatever anyone tells you, it’s never all for one (except when it comes to BMG’s acquisition strategy). It’s one on one, everyone for him or herself.  Choose your partners carefully, each on their own merits. Not every match is made in heaven.

 

 

 

 

 

 

 

 

 

 

 

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.

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.