🎵 The music rights boom, explained


December 9, 2020

PLUS: Abu Dhabi’s $230B man.

December 9, 2020
The Hustle
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The Big Idea
Bob Dylan

The music rights boom, explained

In 1983, during a recording session, Beatles legend Paul McCartney told Michael Jackson that music rights were a great investment.

The King of Pop turned around and purchased 251 songs by The Beatles for $47m — and McCartney has spent the last 30+ years trying to get them back.

Today, musicians are increasingly heeding McCartney’s words of wisdom.

Music catalogs = big $$$

In the last few days, we’ve seen some blockbuster song catalog deals:

  • Bob Dylan sold his catalog of 600+ songs to Universal Music Publishing Group for $300m+
  • Stevie Nicks (Fleetwood Mac) sold an 80% stake in her catalog to the music publisher Primary Wave for ~$100m

According to the Wall Street Journal, music catalogs have exploded in value, largely thanks to the rise of streaming services.

A catalog now fetches 10-20x annual royalties compared to 8-13x just a few years ago.

How music royalties work

According to The Economist, 2 copyrights are created when a song is recorded:

  1. One on the composition of the song
  2. Another on the actual recording

Each of those rights are then split into 3 parts:

  1. Mechanical rights (sold in a physical format or streamed)
  2. Performance rights (played on the radio or live at a concert)
  3. Synchronization rights (appears in film, TV, or games)

Ventures like Royalty Exchange (a marketplace for royalties) and Hipgnosis (a publicly listed song fund that has spent $800m+ to own 13k+ songs) have built businesses making sense of these income streams.

Royalties are attractive to investors…

…because they offer a few solid benefits per The Economist:

  • Steady income in a world of low interest rates
  • Low correlation to other asset classes (will pay out largely independent of the macro environment)
  • Passivity (songs kind of play on their own)

As for McCartney, things are looking up.

After a multiyear legal battle with Sony/ATV, which took over Jackon’s rights, he finally reached a private settlement. By 2026, he should have control of his Beatles songs, which are already worth in excess of $1B.

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Snippets

  • Tesla’s shares are up more than 8x in the past year. The company is turning its shares into cash with a $5B stock issuance.
  • Nielsen’s TV rating system has been a staple of advertisers for decades. Now — after discovering the existence of Netflix — it’s finally updating the ratings to include digital and streaming numbers (by 2024).
  • Futures are looking liquid: You can now bet on (or against) water availability in California, which has a $1.1B spot water market.
  • The F-150 is built so “Ford Tough” that the automaker is releasing a new “Tremor” model that will offer more off-road capabilities. It’ll probably sell well considering it’s been America’s bestselling vehicle since 1981.
  • We’re big believers in the adage to “never say never.” But with news that Salesforce’s former chief scientist is launching a search engine that will use kindness, facts, and AI to create ClickTrust (not ClickBait), we’re saying never.
  • The FCC launched an auction for 5G spectrum and telecoms are expected to drop $38B+ for a piece of the action. For anyone hoping the “we have 5G ads” were gonna end, sorry.
  • Chuck Yeager, the aviation legend who broke the speed of sound, died at the age of 97. RIP.
Book to the Future
book

Barnes & Noble is trying to write its last next chapter

If you’re like us, when you pass a bookstore you probably think, “How on earth is that still around?”

Surprisingly, indie bookshops are thriving, with one prominent trade group — The American Booksellers Association — growing from 1.6k+ stores in 2009 to 2.5k+ stores in 2019.

Now, Barnes and Noble (B&N) CEO James Daunt has a plan to ride this trend and compete with Amazon.

The playbook: Don’t compete with Amazon

Per the Wall Street Journal, after 5 CEOs with big-box retail experience failed to revitalize B&N, activist firm Elliott Management stepped in and hired Daunt — a mastermind British independent bookseller.

Instead of stockpiling books that people need but don’t want (like history textbooks), Daunt is shifting B&N’s focus to curating books with local, thematic value.

Daunt is also the CEO of Waterstones, a 280+ branch bookstore in the UK where his focus turned the company into a profit machine.

Impressively, Waterstones’ return rate (the number of unsold books retailers return to publishers) is 3.5%. Now, Daunt is trying to slim down B&N’s marginally higher rate of 25-50%.

Local managers have full control on book selection and store design

B&N still has issues to contend with, though:

  • COVID-19 (we don’t have to explain this one)
  • The major publishing merger between Simon & Schuster and Penguin Random House, which together account for around 1 in 3 US books sold (price hikes coming?)

There’s also a staffing problem, with one B&N manager noting that it’s hard “having a teenager trying to shelve American History.”

He’s currently on the hunt for vocational booksellers.

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crazy rich
sovereign wealth fund

Abu Dhabi’s $230B sovereign wealth fund has gone all in during the pandemic

Among the world’s largest asset holdings are sovereign wealth funds (SWF); some — like Norway’s Government Pension Fund — crack a $1T.

Often flush from natural resource riches, these pots of money are basically the “Scrooge McDuck swimming in coins” meme come to life.

Tasked with building wealth for its citizens, most of the SWFs took a defensive stance when the pandemic hit.

But Khaldoon al-Mubarak — the 44-year old chief executive of Abu Dhabi’s $230B Mubadala Investment Co. — has had a different approach…

Mubarak has already deployed $11B+ in 2020

That spending is up 46% over the entirety of last year, compared to an average decline across all SWFs of 36% per the Wall Street Journal.

At the start of the pandemic, Mubarak talked to leading investment minds including SoftBank’s Masayoshi Son and BlackRock’s Larry Fink, and medical professionals. The sentiment was that COVID-19 would wreak havoc on assets but present opportunities.

The money was largely invested along with PE partners

Some notable deals include:

  • A $2.25B investment (with Silver Lake) in Alphabet’s self-driving unit, Waymo
  • A $1.2B investment in India’s tech giant, Jio
  • A large stake in Apollo Group’s new $12B lending business
  • A $1B investment (with Oaktree Capital) in Reef Technology, which transforms underutilized urban space

In addition to directing these billions, he also oversees the country’s nuclear program + relationship with China, and chairs Manchester City Football Club.

Dude’s so busy, he probably can’t get the daily swim in.

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Financial Engineering of the day
David Bowie

David Bowie — the super-duper-star singer — was always ahead of the curve. He was one of the first artists to grasp the power of the internet, calling it an “alien life form” in 1999.

In 1997, he also put together a masterpiece of financial engineering.

In partnership with Prudential Insurance, Bowie raised $55m from investors and used the proceeds to buy back a catalog of 25 albums — all recorded prior to 1990 — from his manager.

For their part, the investors received a stream of income based on Bowie’s song royalties. The asset was dubbed “Bowie Bonds.”

That’s some genius-level alien sh*t.

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