Spotify, Joe Rogan and Neil Young
Most of us will be up to date with this but for those who are not. Joe Rogan is the big name signing for Spotify’s (NYSE: SPOT) podcasting section. Certain guests have been saying things others do not like, so they in turn are asking that their music be taken off Spotify. Leave aside all of the cultural details of this, even the story itself, for that’s the business structure here.
Neil Young led the charge, Graham Nash has followed, CSNY music is coming off I believe, Barbra Streisand is threatening, there’s a campaign to get Taylor Swift to do so. OK, all very fun and of course those musicians do their own work and they get to do as they wish with it.
Except, of course, those musicians do not all own their own work. Not all of them, all of it. Which is what the little investing problem we have here is about. For it’s also not obvious that those we thought did own that work do either. Which changes a sensible valuation of what has been bought.
Please note that I’m restricting myself here to songwriter rights. Mechanical royalties get even more complex with splits and timespans of validities, so this is just about songwriter copyrights which last 70 years after composer’s death. This is a good enough example to explain the point at least.
So, there are song funds out there. I’m using Hipgnosis [LON: SONG] (OTCPK: HPGSF) and Round Hill [LON: RHM] (OTCPK: RHILF) as my examples simply because they’re listed. There are places where it is possible to buy parts of the rights to a specific song, still private funds and so on as well. I’ve said before here that I do not quite buy the Hipgnosis economic story and this could be seen as just increasing that unease. Depending upon how seriously we take this current story, it might also overturn the investment case for such funds. Or at least change it radically.
The basic idea behind a song fund is that those rights last 70 years after death. That gives a long income tail which is not worth much to the artist who, after all, will have been dead for 70 years when it finally ends. It’s also true that there are people out there looking for long tails of income in return for a capital payment now. Sure, very few indeed are going to be interested in a 70-year annuity (although there will be a few, those disabled at birth and requiring damages to be invested for life sorta thing, happens but of course it’s rare) but there are institutions who would be interested. Especially if that long-term income were roughly inflation protected.
So, there’s a swap to be done. Those with capital now looking for future income, those with future income who’d like to be able to spend now. Such cash flow swaps are not uncommon; indeed, by some measurements, the swaps market is the largest outstanding market in the world.
There’s nothing at all wrong with the basic idea that is.
Song fund valuations
How to value such long tail incomes though? In one manner, this is not really equity. It’s more like an inflation protected bond. We would expect whatever price Spotify charges (or radio play royalties, CD prices and all the rest) to go up with inflation. So, we’d expect the revenue stream to, roughly enough, keep pace with inflation. Assuming that the fund was holding a spread of assets of course and wasn’t just invested in one or the other musician or type of music that might go in or out of fashion.
Or perhaps we might think of it as being like a preference share. For it is, structurally, equity, meaning that it is the tail end claim on the stream of income.
But then there’s one more point which does make it like equity. Which is that the management of the song funds says that they will manage the music. Promote it, get it onto movie soundtracks, get re-releases done and so on. So there’s then also that equity performance to consider; how well will the portfolio be managed?
What changes those valuations?
Being an inflation related bond or preference share is obviously good if we’re in for a bout of inflation. For many other assets are not in fact inflation related nor protected – so relative valuations should change. We are currently having inflation, and I’m definitely among those who insist that this is not transitory; there’s going to be a lot of pain in unwinding quantitative easing.
However, there’s the flip side to that as well. Song funds are inflation protected, to some extent, but they’re still bond-like. And the way to beat inflation – or the way that will be used – is to increase interest rates. Higher interest rates means a lower capital value for any fixed income instrument. This part of the calculation works against that inflation protected rise.
Then, for the equity component, there’s how good is that management at promoting the use of the music.
This is the real selling point of the song funds. Or perhaps the selling point of the management of the funds. Sure, so we have an uncorrelated asset with some inflation protection and an interest rate problem. OK. But what’s the management in there doing? The argument is that they can increase the placement of the songs, increase the revenue from them over time. That’s what they’re there for. This is more than just coupon clipping; there’s some active management involved. Which is where my problem is as I’ve said elsewhere about Hipgnosis, but this becomes more general about song funds.
The Neil Young problem
OK, so we all know that Neil Young does not like Joe Rogan, that Young’s music comes off Spotify. Some to many are following that course of action and so on.
But hang on, Hipgnosis owns 50% of Young’s catalog. So, who really owns that catalog?
Obviously, I’m not suggesting that contractual terms do not exist, or that Hipgnosis does not gain 50% of the revenue from the catalog or anything. But this is – well it is to me at least – a change from what I thought were the advertised terms.
So, that brings up the question, does Hipgnosis really own those songs? And how much is this true of other catalogs? Because ownership means that you can dispose of something as you wish. Sell it on. Or, in the case of rights like this, license them on. But if the originator still holds those ownership rights, then, well, you’re not really owning them yourself, are you?
The thing is there’s nothing wrong with merely being a residual rights holder. A collector of whatever portion of the income stream. There’s also nothing wrong with being an active manager of an asset. But they are two different things with different valuations. For in that second case, it is possible to increase the income over time; in the first, that’s not something you control, is it?
I think this row over Spotify is a storm in a teacup myself. The actual numbers stemming from this sort of streaming are pretty small. So I’d not change my valuations of song funds purely on that basis. But it does seem to me to have changed how we should be valuing those income streams.
If the song fund does not actually control the disposition of the songs, then it’s not in fact an active manager, is it? It’s a passive collector of residual revenues?
The investor view
It’s possible that I’m making too much of this but it does seem to me to change what the view of valuation should be. Assuming that this contract basis is common, that the originators can determine placement, then this to me makes song funds, well, just inflation protected bonds to be honest. Without their having full control of the rights, I do not see that there is actually an equity element here at all.
The net effect of this is that I think they’ll suffer as interest rates rise even if they might be able to keep up with the inflation part of the future.