“Music is significantly undervalued… people are thinking about it in the wrong way.”
Back when Blackstone’s billions were just a glint in the music industry’s eye, Kobalt founder Willard Ahdritz was forecasting that song rights could be demanding far higher prices in the marketplace.
“You can buy the music [rights] industry today for around $100 billion, maybe a bit higher with Universal’s recent valuations,” Ahdritz told MBW back in 2019.
Yet, he reasoned, when you compared that figure to the value that music drives for Apple, Alphabet, and Tencent – and the cumulative multi-trillion-dollar market cap of these tech giants – that $100 billion figure deserved to be multiples larger.
Since these comments, music’s market value has spiralled, though perhaps still not to the levels of Ahdritz’s hopes: Universal Music Group, now a publicly-traded company in Europe, is currently worth around USD $52 billion; Warner Music Group, trading on the NASDAQ, is worth another $22 billion.
Kobalt itself has cashed in on this dramatic uptick in value: in the past year, the firm has offloaded two portfolios of copyrights – owned by two separate funds, both bearing the Kobalt name – for a combined total of $1.4 billion.
These two funds were previously managed by Kobalt Capital, an in-house investment manager that Kobalt launched in 2010.
In hindsight, Kobalt Capital was rather ahead of its time, raising hundreds of millions of dollars in institutional investor capital to acquire copyrights back when acquisition multiples were significantly smaller than they are in today’s post-Hipgnosis world.
Kobalt’s two funds aren’t the only thing the company has jettisoned from its balance sheet in the past 12 months: In May this year, both Kobalt Neighbouring Rights and AWAL were sold to Sony Music Group in a $430 million deal.
Sony‘s acquisition of AWAL – a distribution and services company for recording artists – is now under investigation by the UK’s Competition and Markets Authority (CMA), though this investigation won’t affect the money Kobalt banked from the sale. (It could, however, feasibly force Sony to sell some or all of AWAL in the UK.)
The sale of AWAL to Sony Music raised eyebrows amongst those who remembered the platform’s acronym-based origin (Artists Without A Label) – as well as those who recalled Ahdritz’s proclamation that AWAL would disrupt the “hunger games” of major record company deals.
Those following the finer details of AWAL’s finances, however, were rather less surprised that – in the end – Kobalt’s investors decreed the time had come to sell it on.
The sale of the two funds, plus AWAL and Kobalt Neighboring Rights, has seen around $1.8 billion in total proceeds headed Kobalt’s way. Although much of that will have gone back out to investors, it means Kobalt is now on a stronger financial footing than it’s ever been before.
Consequent to the sell-offs, Kobalt Music Group is much a slimmer company, with two main components:
- (i) Its global music publishing operation, which administers rights for over 25,000 songwriters ranging from Young Thug to Paul McCartney, Roddy Ricch, Andrew Watt, Phoebe Bridgers, Enrique Iglesias, Max Martin and many more; and
- (ii) AMRA – Kobalt’s very own digital global collection society, which collects and distributes royalties to songwriters and publishers from streaming services including Spotify, YouTube, and Apple Music.
Despite being shorn of AMRA and co, Kobalt – now in its 20th anniversary year – remains a powerful music industry player: MBW estimates that it is generating over $500 million annually just from its music publishing business.
Plus, as Kobalt’s CEO, Laurent Hubert confirms, Kobalt is now a comfortably profitable firm, and has been since Q4 2020.
Following a period of a certain degree of M&A turbulence, then, Kobalt’s strategic focus has returned to where it all began: songwriters.
According to Ahdritz, that’s exactly how things are going to stay. “You will not see any more sales announcements from Kobalt,” he tells us in the below interview. “And I’m very happy about that.”
Meanwhile, Hubert confirms that Kobalt will continue to acquire music copyrights, but – likely using a chunk of that $1.8 billion cash influx – it will be doing so on Kobalt Music Group’s own balance sheet, rather than via externally-raised funds.
“You will not see any more sales announcements from Kobalt.”
One big focus at Kobalt for the next 12 months is super-charging (and super-funding?) AMRA, in a bid to challenge incumbent, territory-specific collection societies around the world.
Those incumbent collection societies, erm, collectively absorb billions of dollars in admin fees each year, ultimately paid for by songwriters and publishers.
Is there a better way forward? Could a single, global collection platform like AMRA unlock those billions of dollars and put them back in the hands of writers?
Ahdritz and Hubert not only believe so – they believe it’s an inevitability.
Here, MBW sits down with the duo to quiz them about ‘Kobalt 3.0’, and what the future holds for a music industry company that is never far from the headlines…
You raised $600 million originally for Kobalt Fund II. You just sold it for $1.1 billion to KKR. That is a handsome return.
Laurent Hubert: Kobalt did a great job monetizing and managing those catalogs. It’s also undeniable that the value of catalog has gone up, especially in the past five years, because the industry has structurally changed.
There is almost an excess of liquidity in the market today, combined with low interest rates; all of that is obviously fuelling the value of catalog. But that growth [in value] would not happen if you didn’t have a company like Kobalt managing those assets and optimizing their value.
“There is almost an excess of liquidity in the market today, combined with low interest rates; all of that is obviously fuelling the value of catalog.”
Willard Ahdritz: We had these incoming calls, because we had great catalogs and great music we had acquired over the years. Our existing investors wanted to entertain and listen to those [offers].
When they saw the response from the value we had created for the assets, they took the decision to exit. We delivered strong results for our investors, but we are even more pleased that Kobalt will continue to administer these rights.
In the future, You’re aiming to buy your own copyrights with your own capital as Kobalt Music Group, rather than raising another fund. Why take that approach?
Hubert: Obviously the funds have been good for Kobalt. They enabled us to expand our reach in the market and grow as a company. The flip side of that is the funds, rather than Kobalt, were capturing the majority of theeconomics.
“It’s a fundamental shift in the way we’re able to grow our gross margin, and grow a business.”
Going forward, by deploying our own capital on our own balance sheet, we will be the sole owner of those economics – whether it’s a [songwriter] signing or an acquisition. It’s a fundamental shift in the way we’re able to grow our gross margin, and grow a business.
Blackstone, KKR, Apollo and other financial giants are pumping billions into music rights. Could the amount of capital now flowing into the market accelerate a change of power in the business?
Ahdritz: Whether it’s Hipgnosis or the new capital coming in you mention, it’s all emphasizing the value of music and pushing that value up.
There has always been a concern that the major record labels are controlling the major publishers, and don’t really want to see a rebalancing [between the revenue paid to the recorded and publishing sides of the business], as we think is correct in a digital environment. It will be interesting going forward to have different parties standing up for the songwriters.
“These are not purely industry players; they are also financial players, and they will have their say in a number of conversations.”
Hubert: The companies you mention are not purely industry players; they are also financial players, and they will have their say in a number of conversations, be it the Copyright Royalty Board [setting royalty rates in the US], or Article 17 in Europe, etc.
I think [the arrival of Blackstone et al in music] is an opportunity, frankly, for the industry to be stronger on defense of copyrights – especially in some cases when we have confrontations with the DSPs – and also to make sure that creators are paid what they deserve. Merck and Hipgnosis are making a good point: the song is the most important currency in the business today, and we need to make sure our writers are being paid fairly.
You’ve sold the two funds, AWAL, and Kobalt Neighbouring Rights. For the record, are you done being a selling company?
Ahdritz: As Chairman of the board, I’m pleased to say we are united going forward, focusing on our publishing and AMRA businesses, and continuing to innovate.
The last two years have been exciting in many ways; we have worked closely with our investors, and now we are excited to take the next step. So, yes: you will not see any more sales announcements from Kobalt. And I’m very happy about that.
One obvious area of Kobalt’s business for supercharged growth in the years ahead would be AMRA.
Ahdritz: Running a global digital music business from a society point of view is transformative – to be able to capture the growth, to attract the growth, to license the growth in this fast-paced environment. And that [speed] isn’t slowing down when we talk about VR, NFTs, or the metaverse.
We launched AMRA in 2015; it is complex, and at times it is difficult. But we are five or six years ahead of anyone else with what we have built. AMRA was our biggest brave move – we swung that bat. Now we’re going to take it on and drive.
“We think that many collection societies in the world today are ill-equipped to bear that challenge, and that some of those collection societies – including some of the large collection societies – may not meet that challenge.”
Hubert: You have an explosion of income sources today, alongside an explosion of consumption. If as [a collection society] you don’t have the ability to harness the cost of collecting in this complex [market] effectively, you will quickly drown.
We think that many collection societies in the world today are ill-equipped to bear that challenge, and that some of those collection societies – including some of the large collection societies – may not meet that challenge. We see AMRA as a natural vehicle to provide the ability to collect globally through a single license.
Working in AMRA’s favor is the natural erosion of ‘analog’ income vs. digital income at publishers and therefore collection societies.
Hubert: Let me give you some quick numbers: in the past eight quarters, the share of digital revenue in Kobalt’s publishing business went from being in the mid 30s, percentage wise, to two thirds in the last quarter. We expect that to be very quickly 80%-plus.
“The share of digital revenue in Kobalt’s publishing business went from being in the mid 30s, percentage wise, to two thirds in the last quarter. We expect that to be very quickly 80%-plus.”
With that in mind, you can completely rethink the framework of collection, because you’re not as dependent on terrestrial radio, or on TV. There is an obvious opportunity for AMRA to be the solution on the digital side but even beyond that, we can also provide, eventually, a solution on the linear side [TV, radio etc.] because it will be a much smaller business, covered by an all-in solution.
There is a lot of talk about the balance of streaming revenues that get paid to labels vs. publishers and songwriters, and how that might change. Less is said about another potential rich source of future income for songwriters: recapturing the billions of dollars that territorial collection societies take in admin fees annually – Not to mention things like ‘cultural deductions’ in some markets that see societies slap additional charges onto what songwriters pay them. it will be hard to change that whole system: it will need strong lobbying, strong diplomacy, strong investment, and very possibly strong legal representation. Are you up for this fight?
Hubert: You bet we are. At AMRA today, on the digital side, we have no leakage [of money], because we don’t go through those collection societies. So when one of these societies applies a cultural or pension deduction – on top of their headline rate – we’re not subject to that in any way, and neither are our clients. That part is something we have already achieved, ex-US.
Ahdritz: The car industry [wouldn’t have] changed if Tesla had not come in. We are putting some electric shocks into the system with AMRA – and the Frankenstein’s monster needs to react.
I believe that when writers start to understand what they are paying societies – the headline rate, the cultural deduction, the classical multiplier, all these things; when they start to see they’re charged 60% [in some cases], I wonder if they’re going to be quite so excited about their societies.
Some of the biggest DSPs were a little reluctant of AMRA in the beginning. But it took five phone calls to our five biggest clients who said: ‘Willard, we trust you, go for it.’ The creators should have and will have more power and more say in this process when certain gatekeepers and structures are long gone.
“I believe that when writers start to understand what they are paying societies – the headline rate, the cultural deduction, the classical multiplier, all these things; when they start to see they’re charged 60% [in some cases], I wonder if they’re going to be quite so excited about their societies.”
Hubert: When it comes to the question of parity between labels, and writers and publishers, there’s been tremendous progress. If you look at what we define as the emerging digital formats – whether it’s TikTok, Peloton, Roblox – in many of those deals, even though I obviously cannot disclose the terms, we demand [50/50] parity in the royalty pool between labels and writers.
I can tell you we’ve already set a number of precedents in those deals – especially anything related to fitness, for instance – where we have parity. We are aligned with other parties on this; Hipgnosis is one, but soon others will join, because many people will be buying writer’s share interest. So over time, we think we can actually change our ecosystem for songwriters – and we think AMRA will be a critical vehicle to achieve that goal faster and more effectively.
Since we last spoke, certainly on the record, there’s been two major music companies going public: Warner Music Group in the US, and then Universal Music Group in Amsterdam. How do you think this is going to affect the industry?
Hubert: It provides a level of transparency that we’ve not otherwise seen in those large majors, and there’s a benefit to that. However, the music business is not a linear business, it’s not a quarterly-managed-earnings business. Investing in talent takes time; it takes different turns you don’t expect. Will those companies look at risk differently than they did in the past now they are public? Question mark – time will tell. Overall, I see them going public as a positive in the industry.
Ahdritz: The music industry is changing, and for the first time actually becoming a real asset class – not a fringe alternative investment, as it was when we started Kobalt’s Fund One in 2010. Now big Wall Street banks are coming in, with [music-affiliated] securitized, graded bonds coming to market.
The music industry has grown up; it is not a college rock band anymore! Will we see volatility because of that, or changes in how [the majors] are going to invest their capital? Suddenly it will not be an A&R guy deciding on how to invest, it will be: ‘How does this affect our quarterly numbers?’
I said to MBW two years ago that within three or four years, I expected the music majors, with their multi-billion dollar [annual] costs, to be restructuring. Two years left on that [prediction], I believe.
Willard, you were personally a great evangelist for AWAL; it was passion project of yours. Were you personally torn on selling it to Sony?
Ahdritz: That [deal] is under competitive review, so I think it’s best I offer my personal feelings and stories [about AWAL] until after March [when the UK CMA investigation is due to be completed]. If we go out and say something as the seller, it could be interpreted [incorrectly] and I think that would be unnecessary.
I can say I am pleased that we can focus on publishing and AMRA. It’s like Gillette: they focus on one thing, and built a $54 billion company doing it. There’s something to be said for focusing, and for delivering the best.Music Business Worldwide