Last month, Sony Music Publishing agreed to buy a collection of songs from Blackstone reported to be worth up to $4 billion. They included catalogs by Neil Young, the Red Hot Chili Peppers, Shakira, Leonard Cohen, and Nile Rodgers.
This was the same portfolio of songs that Merck Mercuriadis assembled for around $3 billion ($2.2 billion in Hipgnosis Songs Fund; $700M+ in Hipgnosis Songs Capital) – and for which he was, for a while, near-universally flamed for “overpaying” to obtain.
Now, the scoreboard is reset – and unambiguous. Blackstone stands to make up to a billion dollars in profit. Mercuriadis was right.
Last Friday afternoon (June 5), Mercuriadis gave his first public interview since the Sony deal was announced – to me, onstage (and further elaborated offstage) at SXSW London in Shoreditch’s Town Hall.
The whole room was expecting a victory lap. Mercuriadis declined to take one.
Here, in an abridged version of Friday’s Q&A – plus some comments he made backstage – Mercuriadis talks about who actually profited from Hipgnosis, why that catalog was only the first of two highly significant “value shifts”, and what it actually feels like to be vindicated by a company he no longer owns….
YOU SPENT AROUND $2.2 BILLION BUYING THIS CATALOG AT HIPGNOSIS SONGS FUND, THEN HELPED BLACKSTONE ACQUIRE THE PUBLIC COMPANY AND EXITED. YOU’VE JUST WATCHED THE FULL HIPGNOSIS CATALOG SELL TO SONY FOR WHAT IS REPORTED TO BE AROUND $4 BILLION (INCLUDING A $200M PART-BUY BEFORE THE FULLER TRANSACTION). MOST PEOPLE WOULD CALL THAT VINDICATION.
People are now looking at it and saying, “Merck was right.” But that’s not the story. The story is that we’ve proven what the work of great songwriters is worth – a new benchmark. The work of every great songwriter is worth more today than it was when we started.
The worst-paid people in the music industry were songwriters, producers, artists, and managers. There’s no logic to that. Why should the people who make these great songs be the least-paid in the room rather than the best-paid?
I can’t play the guitar, I can’t sing, I can’t write a song – and yet music has saved my life. The only thing I can do that gives me a seat at the table with these great songwriters and artists is to advocate on their behalf.
The purpose of Hipgnosis was to demonstrate the real value of songs, not as judged by the music industry but as underwritten by the investment community.
HOW DO YOU LOOK BACK ON YOUR DECISION TO TURN TO THE PUBLIC MARKETS TO LAUNCH HIPGNOSIS SONGS FUND?
You’ve got to remember that we had shareholders ranging from big institutional investors like Aviva to the Church of England. That lends a certain gravitas to songs as an asset class.
People thought I was being bullish, or crazy, or dramatic when I’d compare songs to gold and oil. But I compared them to gold and oil specifically, because gold and oil are about reliable income.
Don’t Stop Believin’ is predictable and reliable. Under the Bridge is predictable and reliable.
Whether it’s Leonard Cohen or Nile Rodgers, these people wrote incredible songs that stood the test of time and threw off very predictable, reliable income. That makes them investable.
From that point of view, going public was very successful. For three and a half years, Hipgnosis was a FTSE 250 company.
And for our first three and a half years, we outperformed the majority of the market – particularly during Covid. When everything else crashed, we traded at a premium.
SO HOW DOES A FTSE 250 DARLING END UP LOSING A SUBSTANTIAL CHUNK OF VALUE, BEFORE BEING SOLD TO BLACKSTONE?
A few things created it. You start with a run of geopolitical shocks – war in Ukraine, interest rates rising – and that knocked the share price. Another knock comes when MBW itself interviewed the [HSF] catalog’s independent valuer – a firm that also worked with Universal, Warner, Sony, Kobalt, Round Hill – and asked them about the discount rate they used to value catalogs.
Their response led some analysts to seriously question their methodology. All of that negatively affected the share price, which allowed activists to get onto the share register.
Activists – as Lucian [Grainge] has been finding out over the past year or so – are no fun to have on your register, because they’re focused on one thing: they know the assets are worth far more than the share price reflects. They want to take as much of that value for themselves at the expense of long-term shareholders, and in the case of Hipgnosis, that’s exactly what they did.
The [activists] worked hard to convince our shareholders that the assets were overvalued; they blamed the board, and myself. They threw as much mud at the company, and at me, as possible, to drive the share price down.
As it fell, long-term institutional investors sold their shares at a discount, and the activists bought them. They [the activists] put their own people on the board, who followed their game plan, made announcements that did not need to be made, cut the dividend, and the share price ended up at about a third of what it had been for the first three and a half years.
The institutional shareholders placed some trust in the activists and the new board, and unfortunately, they were taken advantage of. Sadly, it’s not the first time or the last time that this has happened in the public markets.
“Long-term institutional investors sold their shares at a discount, and the activists bought them.”
You end up in a situation where the public markets were looking at discount rates and valuations, while private capital is focused on the real value of the assets. From that, the public markets’ loss was Blackstone’s gain.
When it was clear the catalog would be sold, I wanted Blackstone to have it, because they were my partners and clients, and it meant both the public and private Hipgnosis would be united as one.
It also meant the team I’d assembled could keep managing the songs with the same ethos and honor the songwriters the way I would. I did everything in my power to make that happen, including stepping away to ensure the activists approved the deal. It also meant there was a chance it might create an opportunity for me to buy it back one day.
That’s not going to happen now, of course – Sony has come in with a bid that shows exactly how extraordinary this catalog really is. When you put together a balanced catalog of iconic songs that includes almost 25% of the Spotify Billions Club, people notice. Especially when Ben [Katovsky] and his team did such a great job managing the assets.
This acquisition more or less ensures Sony is the [world’s] number one publisher for years to come. It’s the tipping point between fighting to be number one and simply being number one.
YOU SAY THE HIPGNOSIS STORY WAS THE FIRST “VALUE SHIFT” – AND THAT THE SECOND IS HAPPENING RIGHT NOW. WHAT DO YOU MEAN?
It’s the recognition that, in today’s world, there are billions of dollars of asset value shifting away from record companies – and I don’t just mean the majors, I mean all of them – down to the level of the manager and the artist.
In the past, the record company owned everything, because the risk was enormous, and it all sat with them. You had to spend money on recording, on photographs, on videos, on artwork, on promotion, on marketing, then manufacture physical product and put it on trucks.
Today, there are no distribution costs – distribution is the push of a button. And there are no development costs, because if you don’t already have 200,000 Instagram followers, or 10, 20, 30 million streams, you’re not getting signed in the first place. But if you’ve built yourself up on your own back, with your manager, the value you’ve created should stay with you.
“There has never been a better time to be an artist, and there has never been a better time to be a manager.”
That doesn’t mean the labels don’t continue to play an important role – they are terrific at pouring gasoline on the fire, but they don’t start the fire. You will lease their services because they have incredible infrastructure and good people worldwide. But the manager and artist will be the owners; the smart people at the top of [the majors] are already positioning themselves as revenue-plus-market-share plays to public markets.
They know they are no longer in the asset creation business. They’ll continue to own their historic catalogs, and they’ll buy catalogs as Sony has, but they won’t be creating new assets – artists and managers will be the owners, and that’s a value shift to the creator that is very significant.
As a result, there has never been a better time to be an artist, and there has never been a better time to be a manager. The key is that managers and artists should be in partnership. The artist should be the majority shareholder, the manager the minority shareholder. What has always been a service relationship between an artist and a manager should become a partnership.
That’s the purpose of Hipgnosis Artist Partnerships: to bring together a group of managers, some of the best managers in the world, 150 odd people across a number of management companies, to be the infrastructure that partners with artists, to make sure those artists have the funding they need, the expertise and the priority required to be successful. And that they end up owning the majority of their assets and making the majority of the money off them.
Hipgnosis proved, the first time around, that these are real assets. Hipgnosis, the second time around, is about keeping that value where it belongs: with the artist, songwriter, producer, and the manager.
YOU WERE PUBLICLY ACCUSED OF “OVERPAYING FOR THE MAJORITY” OF HIPGNOSIS’ ASSETS. IT MUST HAVE HURT. WHAT DID YOU ACTUALLY FEEL WHEN THE SONY NEWS CAME IN?
Someone handed me a shirt when I got here today that said: “I was right.” It made me laugh – and yes, I did feel that way when the Sony news was announced.
I had calls from my friend Jon Platt and the people at Sony, from Qasim and everyone at Blackstone, from all the songwriters – some saying thank you, some saying you were right, some saying it’s amazing you put up with all the nonsense.
Blackstone is the most rigorous of any investors I have worked with to date, and they did months of due diligence before they became my clients and partners. That simply would never have happened if I had “overpaid”.
Of course, there’s a part of you that’s ego-driven – you can’t take all those stones being thrown at you without that. But the truth is that anyone could do this. You just have to understand your purpose, believe in it, and be determined to execute it positively.
“It’s exposed a few people.”
My purpose, the purpose of Hipgnosis, is to always shift the value to artists, songwriters, producers, and managers. The fact that I did that and made a lot of money not just for the songwriters and artists, but also for my investors and partners, has exposed a few people.
When I’m in London, I take the Tube in the morning, and you see people with their headphones on. The misconception is that those people are being entertained while traveling from A to B. They’re not. They’re getting the sustenance they need to face whatever life is going to throw at them that day. As human beings, we need air, we need food, we need water, we need love – and we need music.
Music isn’t just entertainment. A part of it is entertainment, yes, but music is a central force in our lives.
Long before I’d ever taken a drug, I was listening to The Needle and the Damage Done. Long before I’d ever experienced real love, I was listening to Tiny Dancer. I heard In the Ghetto by Elvis Presley, written by the great Mac Davis, at five or six years old, and suddenly understood that not everyone had it as nice as I did. The first signs of empathy; it all came from music.
When you feel that, and you can’t contribute to it directly as a musician, making life better for the people who can becomes your purpose.Music Business Worldwide
