(Bloomberg Opinion) -- Not a week seems to go by without some musician selling their songwriting catalog for big bucks. Although a handful of companies are buying them up, the driving force behind this trend is Merck Mercuriadis.
After decades overseeing the management of artists like Elton John and Beyonce, he founded Hipgnosis Songs Fund in 2018 to capitalize on the surge in streaming and turn music into an asset class with predictable returns. I talked to him about the business model, investor skepticism and his dream acquisitions. Our conversation has been condensed and edited for clarity.
Alex Webb: I would like to hear about the genesis of Hipgnosis. Where did you get the idea that you could turn music into an asset class?
Merck Mercuriadis: It started with a perspective that the songwriter was not being paid properly. The disparity that exists between what the record company gets for recorded music and what the publishing company gets for the song is huge. The reason why it exists is that the three biggest song companies in the world — Universal, Warner and Sony — are owned by the three biggest recorded music companies in the world — Universal, Warner and Sony — and they don’t advocate for songwriters. They use their leverage to push the economics in our industry toward recorded music, where they’re getting a lion’s share. So I created the fund with the additional motive of changing where the songwriter sits in the economic equation.
AW: If you’re buying the catalogue, the songwriters get that money up front — but aren’t they then cut out of the subsequent value creation? If they no longer own the publishing rights of their songs?
MM: They still have contingent bonuses on growth. Those would be 10% of the overall deal, and one would be paid at the end of year three and the end of year four.
AW: What’s the pitch to investors?
MM: The core thesis is that this is predictable, reliable income. The context is the growth of streaming, and that streaming has made it more convenient for people to consume music legally again. We had 16 years of technological disruption with illegal downloading that meant that people like you or I could consume music for free. Only one good thing came out of it, which was that it left these songs at attractive prices.
AW: How much money have you raised since you started in 2018, and how much have you spent so far?
MM: We’ve raised about 1.1 billion pounds and we’ve spent something short of 1.5 billion pounds, because we’ve got 30% leverage on our fund as well.
AW: Broadly speaking, how much revenue comes from streaming the songs you own, and how much from radio play, TV licensing and other forms of licensing?
MM: About 50% comes from digital, which includes streaming, and of the other 50%, 25% comes from other types of licensing and 25% comes from sync, which is taking music and marrying it to a moving picture. With streaming and licensing, those are fixed royalties that you’re being paid, whereas on sync it’s something that you negotiate the price of with each use. The margin is much more massive on sync.
AW: Do you project streaming will become a bigger percentage of overall revenue?
MM: Yes. When we started, there were 30 million paid subscribers to music streaming services worldwide. Today, there are 450 million paid subscribers. And streaming is growing. If you look at the research from Goldman Sachs or Morgan Stanley or JP Morgan, they’re predicting as many as two billion paid subscribers by the end of the decade.
AW: How do you identify whose catalogue you need to acquire?
MM: There are two criteria important to me. They have to be proven, so there has to be a predictable reliable income stream, and they have to be culturally important. If you want to take advantage of the fact that these assets have 70 years of copyright protection, then it had better be a song that’s going to survive for 70 years.
AW: Do you have a systematic approach where you go, “We don't have enough country and western, or we don’t have enough of something else”?
MM: Not at all. It’s literally going after the people that have made the greatest music, whether that’s Neil Young, Nile Rodgers and Chic, Dave Stewart and Eurythmics, or Chrissie Hynde and the Pretenders.
AW: When you sit down with musicians, what’s your pitch? You don’t just show dollar signs, presumably.
MM: I explain to them why I’m buying, and I explain to them why, if I was in their shoes, I might not sell. I want to be very clear with songwriters that I believe these songs are going to triple in value in the next decade. But if they’re at that point in their life where they want to de-risk their future or manage their legacies or their estate planning, I’m the right person to sell to because of my pedigree and because I care about the music.
AW: Someone like Jack Antonoff is in his mid-thirties. Why do you think young artists like him are cashing in and selling their song rights? I can understand why Bob Dylan might, for example. He’s not going to get another 75 years of royalties.
MM: Dylan probably sold for the same reason Neil Young sold to me. He’s at that stage in his life. For someone like Jack Antonoff, his future is now completely de-risked. He can focus on the projects that he knows and loves. Instead of being in 20 different songwriting rooms, he’s totally focused on Taylor Swift, he’s totally focused on the Bleachers.
AW: What generally are the sort of multiples you’re paying artists?
MM: The average is 15 times cash flow. There are catalogs we’ve paid a lot more for and some we’ve paid a lot less for. 70% of our transactions are private, off-market transactions between myself, the songwriter, the artist and the producer. If that person has incredible assets and they don’t need money, then you have to be as aggressive as you can possibly be, because what you don’t want is for those assets to become a part of a public option auction.
AW: Analysts at Stifel recently downgraded Hipgnosis to neutral, citing skepticism about the way net asset values have been marked up so soon after catalogs were acquired. Can you talk me through why that happens?
MM: From Stifel’s perspective, the idea of being able to buy something at a discount is not possible, and of course that’s a ridiculous notion. We have many songwriters, people like Richie Sambora from Bon Jovi or the RZA from the Wu-Tang Clan, who are on record saying that they’ve sold to us for less than they’ve been offered by other people, because they understand that we understand the music and that we’re going to be protective of their legacies while at the same time trying to maximize the opportunities.
AW: You reacted pretty strongly to the note, calling them “naïve and obtuse” in an interview with the Daily Telegraph. I’ve heard investors say that such an aggressive reaction actually makes them think twice about investing, because they think maybe you have something to hide.
MM: The reason why I took that position with the Daily Telegraph was really simple: Do I want them to write about the Stifel note or do I want them to write about my reaction to the Stifel note? I’d rather they write about my reaction.
AW: Why should someone invest in you rather than, say, a real estate investment trust?
MM: Because of all the levers that are improving the value of these assets and the revenue of these assets. We’ve got hundreds of millions of people buying into streaming services. And there’s our ability to active manage the songs, because we only have less than 1,000 songs per person. We have more ability to put songs in movies, TV commercials, video games…
AW: You mean in terms of songs per employee? How big of a portfolio each person has to manage?
MM: Precisely. Royal Bank of Canada put out a note last year in July when we announced our fiscal year end for March 31. When Warners IPO’d, it showed that Warner Chappell, Warner’s song company, earned $640 million in the fiscal year. We had earned $85 million in the fiscal year. They did it on 1.4 million songs, we did it on what was then 13,000 songs — so we did 12% percent of the revenue on less than 1% of the assets.
Not because we’re smarter or better, but because we’re structured to have the bandwidth to put more into these songs in order to get more out of them. We’re not creating new IP, we’re only focused on managing songs and managing them more effectively.
AW: What three artists would you love to have in your catalogue?
MM: Dolly Parton, Brian Wilson and of course John and Paul. Actually I won’t even go to John and Paul. Joe Strummer.
AW: Are there genres where you don’t feel you have the same depth of expertise?
MM: Yeah, look at the opportunities that exist in domestic markets. When you go into those markets, and I’d like to go into many of them, you’ve got to make sure that you’ve got the local expertise.
We’re in the middle of doing a deal with Tencent to allow them to be able to interpolate our songs into new IPs specifically for the Chinese market. They obviously control the two biggest DSPs [digital service providers] in China, they have the biggest publishing companies, the biggest record companies, so they’ve got the ability to be able to take our IP and turn it into new hits for the local market. We’ll own half of the IP of the new versions, they’ll own half the IP.
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Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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