Merck Mercuriadis faces the future… and stares down his critics

Merck Mercuriadis

There’s always a danger to putting one’s head above the parapet: you might get shot at.

Since founding Hipgnosis Songs Fund in 2018, Merck Mercuriadis hasn’t just peered over the music industry’s parapet, of course – he’s bounded to his feet, then shimmied and moonwalked across its perimeter, grinning as he goes.

In the final weeks of 2020, Hipgnosis made attention-grabbing news, reaching a £1.3 billion ($1.7bn) market cap, and executing its biggest acquisition yet – a $323 million buy of 33,000 songs previously managed by Kobalt.

2021, though, has seen Hipgnosis headlines coming at a whole new pace.

As well as buying a slew of blockbuster copyrights (50% of Neil Young’s songs; 100% of Lindsey Buckingham’s songs; 100% of Shakira’s songs – and more besides), Mercuriadis has also walloped the wasps’ nest of the UK’s DCMS streaming inquiry, sending British politicians a submission that takes aim at the major music companies. (Writes Hipgnosis: “Given the major record labels own the [major] publishers, it is in the record labels’ interest to push for the income received on the master / sale side to be greater than on the writers/ publishing side.”)

At the same time, Mercuriadis has been building a serious war-chest. Having raised more capital than any other company on the London Stock Exchange in 2020, this year Hipgnosis has already confirmed an extended credit facility of $600m, and earlier this month added $100m more to its spending power via a share issue.

Sure enough, the slings and arrows have followed.

MBW has noticed industry criticisms of Hipgnosis ratcheting up in both frequency and fury of late. A report from investment manager Stifel – since blasted as “naive” by Mercuriadis – last month questioned the way in which the value of Hipgnosis’ acquired assets are written up after periodic NAV (Net Asset Value) re-assessments from independent valuer Massarsky.

Meanwhile, possibly briefed by Hipgnosis competitors, some of the business pages of the UK’s media are becoming increasingly hostile.

The Times’ chief business commentator attacked Hipgnosis last week over a lack of disclosure to investors RE: the amount of money it pays songwriters for their catalogs. (MBW has since pointed out that forcing songwriters to reveal the individual price-tags they accepted for their song rights doesn’t seem to be the cleverest way to win said creators’ trust.)

Mercuriadis concedes that Hipgnosis is “working hard” to offer its shareholders “more granular detail” about its spending, while still refusing to man-handle artists into revealing their sale prices. (Mercuriadis won’t be drawn on it, but MBW understands that Hipgnosis has just poached Round Hill Music co-founder, Richard Rowe, in a senior role – presumably to add fiscally-experienced-yet-musically-sensitive chops to the balancing act of keeping investors and songwriters happy.)

Elsewhere, Mercuriadis was the target of a none-too-oblique reprimand from Warner Music Group boss, Steve Cooper, in the Financial Times the other week. Cooper accused certain big-spenders in the music industry (guess who?) of entering “a world of finance that lacks a certain amount of discipline”.

And in further efforts to undermine Hipgnosis, some have suggested the company’s recent $100m share raise was an anti-climax versus the figure they believe Mercuriadis really wanted. (Mercuriadis says with no hesitation that such talk is ill-informed, and that no target for the raise was ever set.)

This wave of criticism has naturally disappointed Mercuriadis, but he says he’s prepared for these “inevitable” attacks – because he’s not here to make friends with anyone other than songwriters and shareholders.

Mercuriadis partly created Hipgnosis to pull off his “ulterior motive”: building the industry leverage required to disrupt what he calls an “unjust paradigm controlled by the major music companies”.

This “unjust paradigm”, he suggests, drives music biz economics that reward record companies with the lion’s share – while songwriters are left with the scraps. It’s a structure he’s determined to overturn.

Mercuriadis points out that the 130 marquee acquisitions executed by Hipgnosis so far have often come “at the expense” of large-scale music companies. This, he suggests, has caused natural consternation within these companies’ ranks – something the exec suspects is fuelling much of the “disinformation” currently being levelled at Hipgnosis in the marketplace.

“Ironically,” says Mercuriadis, “now Hipgnosis has established songs as a valuable investor asset class, our company and the songwriters out there are not the only beneficiaries; Sony, Warner, and Universal – hello IPO! – have all seen the value of their songs skyrocket too.”

Mercuriadis ultimately counters that none of his critics appear to be mentioning the one thing his investors really care about: Hipgnosis’ results.

He says: “We’ve gone from being a normal company on the London Stock Exchange that listed for £200 million in 2018 to now being a £1.3 billion pound market cap company on the FTSE 250, all based on performance and success. We’ve outperformed the FTSE 250 itself by over 20% in the last year and by over 40% over the three years that we’ve been in business. We’ve given our shareholders a total return of almost 40% in 30 months, and only 34 companies on the index are paying a bigger dividend than Hipgnosis. That’s an incredibly powerful statement to make for songs as an asset class and the value of music.”

Hipgnosis’ rapid growth – and Mercuriadis’ determination to use his company to affect revolution for songwriters – are bound to draw yet more criticism, and more behind-the-curtain industry sniping, in the months and years ahead.

So here’s what we did. We collated a bunch of the stuff people have been saying about Mercuriadis – both in financial newspapers and on the cattiest of Zoom calls – and asked the Hipgnosis founder if he’d allow MBW to grill him about each of these potshots, one by one, systematically.

It took him about 0.4 seconds to say yes. No shrinking violet, this one…

Let’s start with your recent raise of $100m on the stock market. Some have said this was a disappointment, and that you were looking for £605 million, a figure mentioned in your recent prospectus.

The idea of characterizing a $100 million raise as a “disappointment” would suggest there are actually some people out there unaware that the world is in a pandemic that has devastated every aspect of society, not least the financial markets.

It’s a misconception to believe we were trying to raise £605 million. We specifically did not have a target for this first raise of the year because we continue to be in a pandemic.

This misconception is a result of certain journalists misunderstanding our newly-published prospectus. The UK’s Financial Conduct Authority requires that each prospectus must disclose: “[The] total amount of the issue/offer, distinguishing the securities offered for sale and those offered for subscription; if the amount is not fixed, an indication of the maximum amount of securities to be offered (if available) and a description of the arrangements and the time period for announcing to the public the definitive amount of the offer.”

“It’s a misconception to believe we were trying to raise £605 million. We specifically did not have a target for this first raise of the year because we continue to be in a pandemic.”

The prospectus that we published in January states the maximum amount of securities to be offered over the course of the next 12 months in accordance with the FCA rules, and that number is £605 million.

No company on the London Stock Market raised more money than Hipgnosis in 2020; we raised £425 million last year. We have now raised more than £500 million in equity in just over six months, and have been joined by a number of new globally recognized investors during this time.

Including leverage, we’ve raised over $1 billion in just over six months. I’m quite sure that is “disappointing” for the companies we are disrupting.

Steve Cooper Warner Music
Warner’s Steve Cooper recently talked about certain parties in music overpaying for rights with a “lack of financial discipline”. He didn’t name anyone specifically, but it seemed obvious he was talking about you.

We make public disclosures to the market, and our investors specifically, on the average multiple [Hipgnosis pays for acquisitions]. That average multiple has crept up as we’ve been buying the finest catalogs in the world. If you’re buying Neil Young or Fleetwood Mac, no one in this business is going to tell you that these songs aren’t going to stand the test of time, along with the Beatles and The Rolling Stones and Bob Dylan and others.

Ultimately I have the greatest respect for Steve Cooper and Warner; we do a lot of business together, they administer a lot of our catalogs. I guess you have to look at it from the perspective of where he’s coming from: he was involved in launching a $650 million fund with Tempo, and yet I’ve never once felt Tempo in literally any of the deals we’ve made; I’m not sure if they’ve ever actually made a deal that Warner did not have a contractual matching right on.

“Warner was involved in launching a $650 million fund with Tempo, and yet I’ve never once felt Tempo in literally any of the deals we’ve made.”

Then you think about those two specific artists that I’ve just mentioned: Neil Young and Fleetwood Mac. Those are two artists that you would expect a company like Warner to have immediate access to [due to their long-running history on the firm’s label roster]. But they were nowhere on both deals. That’s not Steve Cooper’s fault; that’s the fault of the people that he had in place at Tempo.

Who knows? Maybe now that Warner are a public company, [Cooper] was asked by one of his own shareholders, a business journalist or an analyst: “What have you got to show for Tempo?” My response in his position might also be to complain about prices being paid elsewhere.

Then again, he quoted “25 times” multiples; Hipgnosis has publicly disclosed an average multiple of 15 times… so he must have been talking about someone else!

I would hope that [Cooper] and his competitors should be pleased about the fact that – through the power of the financial markets and Hipgnosis’ role in making that a reality – everyone is realizing how valuable music assets are.

Here’s another thing I hear around the industry: You say you’re crusading for the songwriter’s position in the marketplace, and that your “ulterior motive” is to use your market power to improve the balance of the ‘pie’ for composers. But what if KKR or JP Morgan come in tomorrow and say, ‘Okay Merck, well done but game’s up – delist now and will give you $4 billion for all these rights.’

The ulterior motive of wanting to change where the songwriter sits in the economic equation is exactly why I created this fund in the first place. Of course our motive is to make money, we all have to make money: I’ve got to make money for myself, I’ve got to make money for my shareholders, I’ve got to make money for the songwriters I’m in business with. But the ulterior motive here is very real and important to me.

I could have done [Hipgnosis] with KKR and TPG, and I had term sheets from both of them to do it. From a personal [earning] point of view, that route would have been far better for me.

I chose to do this as an investment trust on the London Stock Exchange rather than with private equity money, because there’s a ceiling on [the latter]. Who knows: maybe I could have got someone to bet £500m on me, maybe a billion pounds, but they would never bet the £1.75bn that we’re at at the moment [including credit], and you need to be of that level [of spending power] to be a real catalyst for change.

“My intention has always been to buy and hold these catalogs, that’s how both my shareholders and songwriters win.”

The other part that was very troubling for me with private equity companies is there’s a term on your money – whether that’s a five year term, a seven year term, or a 10 year term. That’s why you see someone like [Primary Wave founder] Larry Mestel selling his catalog – because these people want their money back [Mestel sold Primary Wave’s first batch of rights to BMG in 2013, but has since built up new catalog]. And that’s fair enough: it’s good business for Larry and it’s good business for shareholders, but it’s not for songwriters. My intention has always been to buy and hold these catalogs; that’s how both my shareholders and songwriters win.

At a minimum, I thought that it would take 10 years to reform where the songwriter sits in the economic equation. That’s why I went with an Investment Trust structure and the London Stock Exchange: I didn’t want to be at a point where in the 10th year we were making real headway, and then suddenly the shareholders wanted their money back; where the motive of making money was achieved, but the ulterior motive of changing where the songwriter sits in the economic equation went out the window.

This way, I’ve got effectively ‘permanent capital’ that allows me to fight this battle until it’s won. The serendipitous part of it is that the songwriting community and our investors are in complete alignment: if we get more money for the songwriter, we’ll get more money for our investors as well. What other music company can say that?

So you’re sticking with the stock market?

At this time I see no reason to veer off course. I’m very, loyal to my investors and the stock market: these investors have allowed me to do exactly what I said I was going to do, but I wouldn’t have been able to do it without their backing.

Everything I laid out as the core of our thesis has come true – exactly as predicted – or been exceeded. That’s made it possible for companies like Round Hill to join us on the stock market, and I very much appreciate their public acknowledgement of this fact.

“Everything I laid out as the core of our thesis has come true exactly as predicted, or been exceeded.”

To tell you the truth, I have $1.5 billion of private money available to me right now, I could sign papers and have access to it in minutes. But I’m not currently taking those offers up. Round Hill runs private money [in separate funds] at the same time as they run their stock market money. I’m not saying that there’s a conflict there, but personally at this moment in time I prefer to only have one master – and that’s SONG [aka Hipgnosis] investors.

I believe in being a FTSE 250 company; I eventually want to be a FTSE 100 company. I believe in the investors, both on a consumer level on an institutional level, that have backed us. And I believe in seeing this through so every one of our goals is achieved and checked off properly.

If we choose to run a private sleeve in the future it would likely be in conjunction with investors in SONG.

How can you really say you’re fighting for the songwriter, when you’re buying their income streams?

Other than the Kobalt deal, which had amazing things in it like Steve Winwood, I have only ever bought direct from the songwriter, the artist, or the producer. And we recognize the value of their incredible work.

One thing that gets lost in these articles [about Hipgnosis] is that as a public company, every one of our acquisitions has to be valued by an independent valuer, and that valuation has to bear out the price that we pay. If the independent valuation comes in and it’s less than what we’re offering, either the price has to change or we have to walk away from the deal.

“Every one of our acquisitions has to be valued by an independent valuer, and that valuation has to bear out the price that we pay.”

So on the one hand I’m recognising the value of the songwriter and their incredible work, but inherent in that is that I’m also de-risking the future of that songwriter. [Following a Hipgnosis acquisition] that songwriter doesn’t have to worry about how they’re going to pay the bills, and they don’t have to worry whether, by sticking up for themselves, they’re going to prejudice a powerful part of this business against them, and affect what their future income might be.

What else gets misconstrued on this subject of Hipgnosis buying out rights?

In our deals we give contingent bonus payments to every songwriter we make a deal with – whether they ask for it or not. Those bonuses are based on revenue growth at the end of year three and at the end of year four [following a deal].

I don’t ever want a songwriter to feel that I was smarter than they were or to have negative emotions about the business we’ve done together. If I’m correct in my thesis, I want them to benefit too.

I’m actually very clear with each songwriter from the get-go: I believe that these songs are going to be worth three times more inside of the next 10 years; I tell everyone that I buy from that’s what I believe. And I let them know, in many cases, that I wouldn’t sell if I was them.

“Artists know that I’m made of the right stuff, whereas most of my competitors are bankers.”

But I’m also very clear that if they’re at that point in their life where if they’re ready to sell the house they’ve built in the form of songs, I’m the best person to sell it to.

The fact is, these are often very emotional transactions. The songwriter is looking for the right amount of money to either de-risk their future or to [manage] their estate planning; but they’re also taking these metaphorical children that they’ve given birth to in the form of songs, and they’re putting them in the hands of surrogate parents. Who those surrogate parents are is going to be as important to them as the check.

I use Neil Young as an example. From the first meeting that I ever took with potential investors straight through to buying [50% of Young’s songs], I said when someone like Neil Young is ready to sell, if they’re ever ready to sell, they’re going to sell to me. Because [artists] know that I’m made of the right stuff, whereas most of my competitors are bankers.

That’s a competitive advantage, but it also gives the songwriter the comfort of knowing their songs are in the hands of someone who will not only enhance their legacy, but protect it as well.

You’re very strongly against the current industry structure of the three major music companies running the world’s three biggest publishing companies. You suggest this is directly affecting the economic standing of songwriters. You’re also buying up catalogs whose ownership is expiring from major music companies – and in many cases actually beating those major music companies to the deals. You can see why someone like Universal Music Group, with its IPO imminent, might not be cheering you from the rafters.

At the end of the day I’m very careful to never say anything that’s not logical. So if I say the songwriter deserves to get paid more money, that’s not something that Lucian Grainge or Steve Cooper can argue against, or indeed anyone in this business can argue against. They all know and recognize that the songwriter is the low man or woman on the totem pole today. It’s not a dramatic statement: it’s a fact.

And yet songwriters are delivering the most important component to a record company – hits. Look at Monte Lipman and Republic, John Janick and Interscope, Aaron Bay-Schuck and Tom Corson at Warner Records, Ron Perry at Columbia, Craig and Julie at Atlantic, or Pete Edge at RCA. These are great, great record companies. But if you’re running those record companies today, having a relationship with songwriters such as Andrew Watt, Stefan Johnson, Benny Blanco, Ali Tamposi, Ryan Tedder or Mark Ronson becomes more important to you than your relationship with any artist on your roster.

“Songwriters are delivering the most important component to a record company – hits.”

Equally, no one can argue that the economics of music today reflect the songwriter’s role fairly and equitably. Look at how $1 worth of Spotify or Apple income is split up. You take 30 cents off the top for Apple or Spotify etc. Can an argument be made that this 30 cents could become 25 cents, or 27 cents, or 29 cents? Of course; that argument should be made, but that’s not really what the material point is here. The material point is: what happens to the other 70 cents? Using rough numbers, you’ve got 58.5 cents going to the recording. Most artists are being paid on a sale, rather than on a license, so they’re getting about 9 cents out of that 58.5; yet the record companies are clearing 50 cents.

Then, on the other side, you’ve got 11.5 cents left for maybe four songwriters on a song and their publishers to split up. That’s ridiculous! How have we got to a point where anyone believes that it’s fair and equitable that the record company is getting 50 cents, the artist is getting 9 cents, and songwriters are getting one-and-a-half cents to two cents each?

“In my view, Universal, Warner, and Sony are the three biggest culprits of this situation.”

This construct only exists because the three biggest song companies in the world can’t fight for songwriters the way that they would like to, because they’re controlled by the three biggest recorded music companies. On the recorded music side, [labels] get an 80% gross margin, a 40% net margin, and in general you own those assets in perpetuity. But on the song side of the business [as a publisher] you get a fifth of the margin, a fifth of the revenue and most of the time the rights land back in the hands of the people that created them.

That’s why, in my view, Universal, Warner, and Sony are the three biggest culprits of this situation. I’m certain that [major pubco bosses] Jody Gerson, Guy Moot, and Big Jon [Platt] would love to be able to scream and shout and advocate for songwriters, and shift more of the economics of this of our business towards their divisions; because, let’s face it, they’re actually the ones out there developing the next Tayla Parx, the next Andrew Watt, the next great songwriters writing tomorrow’s hits.

Yet the massive majority of the revenue is going towards recorded music, and that’s deliberate: the [majors] push all of the revenue towards recorded music at the expense of the songwriter.

“I’m sure Universal does see us as disruptors, but I’m very careful to never ever say anything that isn’t logical, and that isn’t fact.”

In answer to your question, I’m sure Universal does see us as disruptors, but as I mentioned I’m very careful to never ever say anything that isn’t logical, and that isn’t fact. I’m critical of Universal, Warner, and Sony because of this construct and because of the detrimental effect it’s had on the earnings of the songwriting community.

I’m not critical of the people that work in these companies, many of whom are people that are as passionate about music as I am, and that do very good work. But ultimately they work within a paradigm that is costing the songwriter their rightful place in the economic equation.

What about this issue over disclosure to investors? You were criticized last week by both Investec and then in The Times for not giving more information away about each artist asset sale. (A view MBW pointed out has its own flaws.) Both compared you to Round Hill’s public fund.

We’re working hard to give the market more disclosure. But ultimately MBW’s commentary said it all: if you buy something direct from the songwriting community, and then if [the newspapers] publish exactly what Neil Young got paid, or Dave Stewart got paid, or Timberland got paid, the entire world knows that money is going to those individuals. It’s different when you’re buying from a company like Kobalt.

The point missed in these articles is that most of [the desired level of] investor disclosure is actually already in our prospectus. But most people can’t get through a 200-odd page document to get that information, so we’ll make it more explicit in future.

“We can’t disclose the price that’s being paid for catalogs because of NDAs… [but] we will be working hard to give the market as much information as possible.”

Comparing our disclosure to Round Hill’s, however, is apples and oranges.

We’ve bought everything but our Kobalt acquisition directly from songwriters, artists or producers. Round Hill have bought 100% of their public acquisitions from their own private fund. They haven’t disclosed what they paid for those catalogs originally [though we know Round Hill’s $202m ‘Fund One’ was used to buy them]. And they haven’t disclosed how much profit [‘Fund One] has made on their sale. They’ve simply disclosed the premium price the market paid for these assets [in 2021] and the financial information on earnings they have from the 10 years they’ve owned those catalogs.

Comparable to Hipgnosis, they haven’t disclosed what they’ve paid for individual artist/writer catalogs like Collective Soul, The Cult, or Jim Vallance [acquired via Round Hill’s other private funds] as I’m sure they are restricted by the same sort of non-disclosure agreements we have to enter when buying from an individual.

At the end of the day, we can’t disclose the price that’s being paid for catalogs because of NDAs. However, we will break out the information already in our prospectus and we will be working harder still to give the market as much information as possible on what the earnings are for our catalogs in our portfolio, even outside of the normal reporting periods, so that investors can see a greater level of granular detail.

The Times article last week also picked up on a common criticism of Hipgnosis in the financial press of late – that you over-use MASSARSKY CONSULTING to value your deals.

I’m very glad you asked this. For Hipgnosis, Massarsky is the independent valuer for our NAV [net asset value] only.

The Times columnist even put quotation marks around the word ‘independent’ [when referencing Massarsky] to try and suggest they’re somehow not independent. To be clear Massarsky are completely independent; we have no influence over them and they receive a professional fee only. Interestingly, Massarsky is also the valuer for Round Hill and works with many others including Universal, Primary Wave, Sony et al.

To protect our shareholders we have an independent valuation done at the time of every acquisition. We have a pool of 10 different independent valuers doing those – but we specifically exclude Massarsky from that process. That independent valuation might be done by Gelfand, MGR, Skeet Kaye, M-Theory, Prager Metis or anyone of the independent valuers we use. And, again, their valuation has to support or exceed the price we are paying.

“we have an independent valuation done at the time of every acquisition per our prospectus. We have a pool of 10 different independent valuers doing those – but we exclude Massarsky from that process.”

Then we have an entirely separate independent valuation done semi-annually for our company NAV, per our prospectus, and that’s what Massarsky does. We’re not required by our prospectus to keep these processes [individual acquisition valuations and NAV valuations] separate, but I realized very early on that by doing so, Massarsky would effectively have to start from scratch on every independent [NAV] valuation.

Therefore, if someone ever did make a mistake [in an individual acquisition] it’s going to get caught and protect shareholders further.

The recent note from Stifel, picked up in the Financial Times, suggested that the way your music catalogs are re-valued soon after you’ve acquired them is a cause for concern.

Stifel challenged whether you can buy well, and therefore whether a catalog can increase in value quickly. But what they omitted is that the NAV exercise they mention [i.e. the periodic re-valuing by Massarsky] covers a portfolio of 130 catalogs. There are going to be some catalogs that go down in value in each period, and there are going to be some catalogs that go up in value.

This is an entirely independent exercise that we have no influence over. Massarsky decides and receives a professional fee for their services; they do not get paid more if [Hipgnosis’ NAV] is worth more.

“Massarsky’s NAV valuations [of Hipgnosis] are an extremely conservative exercise.”

What our investors want to know, ultimately, is the overall value of our portfolio. As long as the value of the portfolio keeps going up, they’re happy; if the value of the portfolio goes down, I wouldn’t be happy and they wouldn’t be happy.

But because of our thesis – including the perfect buying conditions, the continuing growth in streaming, and our ability to actively manage songs better [than their prior owners] – these catalogs are going up in value.

Having said that, Massarsky’s NAV [valuations] are still an extremely conservative exercise. Right now the only thing that Massarsky gives Hipgnosis credit for [when assessing] our NAV value is revenue growth; as our revenue grows, the value of our catalogs grows. But the truth is there are many other factors that Massarsky could and arguably should also consider in this exercise, that would make our catalogs even more valuable.

One of those factors is comps in the marketplace. For example, we buy Lindsey Buckingham at the same time as Primary Wave buys Stevie Nicks. But if Primary Wave paid more money for Stevie Nicks than we paid for Lindsey Buckingham, that should mean that our Lindsey Buckingham catalogue is consequently worth more than we paid for it.

Equally, we don’t get any credit from Massarsky for what I call the ‘portfolio effect’. We’ve declared that we’ve paid an average 15 times for the catalogs in our portfolio, but having assembled this unbelievable array of songs all under one roof, if we were to sell the whole portfolio tomorrow – which we are not! – we’d be selling it for 23 or 24 times [its cumulative value].

“While I’m not happy with comments by Stifel or in the Times or FT I completely understand that this is a new asset class and we will have to work with them to ensure they know and fully understand it.”

The third thing that doesn’t go into the valuation of our catalogs is that when we started doing this, almost three years ago Vivendi had just revalued Universal from €6 billion to €20 billion. Today with their stake sale to Tencent they’re a €30 billion-plus company, and with the impending UMG IPO I think they’ll hit $50 billion. We’re still being valued using the same metrics that Universal were when they were worth €20 billion.

All of this information is available publicly for everyone, including these journalists and analysts, to review. While I’m not happy with comments by Stifel or in The Times or The FT I completely understand that this is a new asset class and we will have to work with them to ensure they know and fully understand it.

When we were a £500 million pound company we were not so much on [analysts and the media’s] radar, but at £1.3 billion we have to accept that they get paid to ask questions and make commentary that’s not always friendly or accurate. In the end I’m certain that we will invest sufficient time with them that not only will they understand songs as an asset class but also champion them.

I’ve heard some whispers about how you get paid yourself, and how it relates To Hipgnosis Spending big sums on copyrights.

Yes, I’m aware of this line of criticism – that we’re investing more money in these assets because I get higher management fees each time we raise more money. Well, that’s true. But what [critics] are not pointing out is that by raising money as much money as we have [via the share issues] I’m actually reducing the performance fee I’m due to get including this year at the end of March.

Obviously every time you raise money, it has a detrimental effect on share price because you’re issuing shares at a lower strike rate. This has constantly affected my performance fees and takes money out of my pocket.

“My responsibility to my shareholders, songwriters, and thesis goes way over and above how much money goes into my pocket.”

If it was just about [personal income], I wouldn’t be raising money right now; I’d be focused on getting the share price up as high as possible so that my performance fee could be as high as possible. But responsibility to my shareholders, songwriters, and thesis goes way over and above how much money goes into my pocket.

There’s a window of opportunity here to buy these great songs. That window is going to disappear in two years’ time, so in the best interest of the shareholders we keep raising money. I’ve therefore got a mandate from my shareholders to act as fast and responsibly as possible during this sweet spot. They know what I’m buying, they know the fast pace and multiple that I’m buying it at, and they understand what the disclosure issues are when buying from a private songwriter, producer, or artist.

My shareholders want me to take advantage of this window of opportunity. Doing so is in my best interest, their best interest, and in the best interest of the songwriting community.

What do you mean: ‘Window of opportunity?’ And how big does Hipgnosis need to get, and how soon, in order to achieve its aims?

In two years’ time you’re going to have a lot of people wanting access to this space, and there’s not going to be a lot of access left. So they’re going to pay for access, and they’re going to drive the multiples up. I think we will see 40-times multiples in this business before the next five years are over, as the true value of streaming starts to be baked into the value of songs.

“I think we will see 40-times multiples in this business before the next five years are over.”

Now, if something like Pink Floyd, or Led Zeppelin, or John, Paul, George, and Ringo – all the dream stuff – becomes available [at that point], you buy because those songs are always going to be great acquisitions from the point of view of quality and income. But today I’m looking for triple net asset value [NAV] growth [for Hipgnosis] and our shareholders.

Both for my investors, and to change where the songwriter sits in the economic equation, that triple NAV growth is not going to be there if you are buying after two years from now.

So what happens at Hipgnosis during and after this window of opportunity?

We will continue buying at the rate that we’re currently buying for the next two years. At that point in time we will end up being somewhere around a £3 billion, getting close to £4 billion, company.

At the end of that period we will own 120,000 to 150,000 songs, and at that point, the buying is going to start being far less of what we do. We are concurrently building our ‘Song Management’ business into a juggernaut under the direction of Ted [Cockle] and Amy [Thomson] – and after two years, ‘Song Management’ [rather than acquisition] is going to become 90% of our focus.

Right now we’re at 60,000 songs. That’s a very small catalog in relative terms, with probably the highest ratio of success within it of any catalog in the music business. The makeup of [that catalog] is 4,000 number one songs, and 12,000 Top 10 songs.

“We will continue buying at the rate that we’re currently buying for the next two years.”

We’d like to get to 120,000 to 150,000 songs in total, and the makeup when we’re at 120,000 songs will be very similar: we’ll have 8,000 to 10,000 number one songs, and maybe 30,000 Top 10 songs.

That figure [120,000 – 150,000] is really the maximum number of songs that can be actively managed with a team of, say, 200 people. And to me, 200 is probably the maximum number of people that you can effectively manage and inspire to do great work.

Why do you think Hipgnosis’ ‘song management’ approach can somehow squeeze more value out of these assets than their previous publishers did?

Because the way that they’re currently being managed is 20,000 songs per employee. [By Mercuriadis’ math, Hipgnosis at 200 people in the future will have around 600-750 songs managed per employee.]

This is why I believe that the current music publishing model is broken, and that we can actually manage these songs with responsibility, get more out of them, and protect as well as enhance the legacy of the songwriters who created them.

The primary objective of the major music publishers today is to create new songs.

They go out, sign10 songwriters. Then they put them in the right rooms with other songwriters and producers; they hope that work turns into placements on records; and then they hope those placements turn into hits. Ultimately, they hope one of those 10 songwriters will become wildly successful enough to pay for the nine that failed – giving that publisher the ROI they’re looking for.

“The paradigm is already shifting and it scares some people.”

Those same publishers then use the passive income of great [catalog] songs they own to underwrite the business I’m describing. Because that’s all you can do when you’ve got 20,000 songs per person… work passively.

To me, that’s a broken model. I’m not saying don’t create new songs – please do – but don’t do it at the expense of managing the great songs that are in your catalog that the world already loves yet are being allowed to languish.

Ten years from now, I want every artist, songwriter and producer to have a ‘Song Manager’ to add value to the great works they’ve created, just like we are doing now at Hipgnosis.

My objectives are very simple: (1) Solidify songs as an asset class and give my shareholders a great return on their investment; (2) Empower songwriters and take them to the top of the economic equation; (3) Replace the broken concept of publishing with ‘Song Management’.

I appreciate that achieving those goals mean that I become a target for many in this business as they try to grasp the final straws of a paradigm that has never served the songwriter or recognized their true value. But remember that Universal’s biggest album [in the UK] last year was Lewis Capaldi, Warner had Dua Lipa and Sony Harry Styles. Every song on those records is a co-write!

Songwriters know what’s up and so do I. And Hipgnosis has the serendipity of what’s in the best interest of songwriters also being what’s in the best interest of our shareholders.

The paradigm is already shifting and it scares some people. I don’t see that as a problem.Music Business Worldwide