Merck Mercuriadis is in control of a lot of money. He doesn’t expect it to last very long.
Last month, Mercuriadis – the manager of Nile Rodgers, and the former manager of Morrissey, Guns & Roses and Elton John – successfully raised £200m ($265m) for an acquisitive, publicly traded new music venture.
Hipgnosis Songs Fund Ltd (HSFL) is now live on the London Stock Exchange – following its IPO last week – and is hungry for blockbuster song catalogs.
The fund has already acquired a majority stake in 302 songs written by The-Dream for a total consideration of $23.25m. There are already another seven more potential buyouts waiting in the wings, while Kobalt has been signed up as HSFL’s global admin partner.
Mercuriadis (pictured with Rodgers) tells MBW that he expects the full £200m to have been spent by next spring, after which HSFL will aim to raise another nine-figure sum.
Within three years, Mercuriadis aims to have raised over a billion pounds ($1.3bn).
The driving force behind Mercuriadis’s plan is, obviously enough, a good return for his investors: the exec sincerely believes that, with the help of HSFL’s own in-house sync team, the value of these song catalogues will spiral upwards in the years ahead.
But there’s also a bigger plot at play.
As Mercuriadis explains in the exclusive interview below, he wants to build HSFL’s global market weight to a truly significant level – and then leverage this influence to improve the payouts (the much-discussed ‘share of the pie’) which songwriters and publishers receive from music streaming services…
You’ve listed on the London Stock Exchange with the LSE’s biggest IPO of the year so far. You must be pleased.
Yes, of course. When we talk about gold, oil or diamonds, we talk about things that the financial world feels are precious and are obviously investible.
My ambition is that, in the future, these people will feel the same way about songs.
Do you think Spotify‘s direct listing on the NYSE in April has brought some confidence to investors about the music industry in general?
One of the questions that gets asked a lot [by the financial community] is: Why isn’t Spotify making any money? There’s a resistance there to fully recognize that Spotify is actually something really special until it becomes profitable.
What I say to them is, look, Spotify has built something that’s really, really great, they have paved the way for people to consume music conveniently and legally, and the industry has gone from 50 million paid subscribers two years ago, to 150 million paid subscribers today.
there’s no question in my mind that Spotify is a great investment.”
Depending on who you believe, whether it’s Morgan Stanley or Goldman Sachs or others, in the next few years there’ll be somewhere between 348m paying subscribers and 950m paying subscribers, and a big chunk of those people will be Spotify subscribers.
I don’t think that the Spotify IPO has done anything but help [the music industry]. There is still some question marks over the company in the city’s mind, but there’s no question in my mind that Spotify is a great investment. The same would be true for Apple but that’s stating the obvious.
Why IPO rather than take on private equity or VC money?
The reason for doing this as a public offering is very, very simple. Obviously my first responsibility is to my shareholders and investors – to ensure that we get them a great return for their money. But I have an ulterior motive: I want to change the position that the songwriter has in our business.
The music business I entered 30-odd years ago was the post-Beatles, artist-first business: 90% of the artists that we would sign back then would write and sing their own songs.
“the song and the songwriter is clearly the most important component of today’s music industry, but they’re not being recognized properly.”
Today, 90% of the artists that are being signed don’t care who’s song they’re singing. Even if you’re Coldplay today, you’re co-writing songs with professional songwriters and producers.
So the song and the songwriter is clearly the most important component of today’s music industry, but they’re not being recognized properly.
At this moment in time, before the [US] Copyright Royalty Board’s 44% increase [in streaming royalties] comes into full effect over the next five years, the songwriters are receiving about 1/13 of the economic model.
Even when that 44% is in full effect, the songwriter will still be on something less than 1/10 of the economic model.
That to me is wrong. The only way I felt that I could have any effect on changing that was that if I had critical mass.
What kind of market power do you believe you can achieve?
When the £200m we’ve raised so far is fully invested, we believe we’ll be at about 4% of the worldwide publishing market.
That will be enough to start to talk about change – a platform to air some views.
The ambition then is that, within three years, we’ll be at a billion pounds ($1.3bn) raised, and that [will enable HSFL to acquire] 18% or 19% of the worldwide publishing market. Then we will really be able to effect some change in conjunction with our strategic relationships.
“The ambition is that, within three years, we’ll be at a billion pounds raised, and that [will enable HSFL to acquire] 18% or 19% of the worldwide publishing market.”
The stock market versus private equity allows us to build to that critical mass. With private equity you might be able to get £400m, £500m, maybe even £600m, and that’s not enough for the change I want to be able to effect. Those [investors] would also want to be in and out within four or five years, and my strategy is long term and we are going to need every day of that time.
Taking the company public allows us to get people the promised return on their investment, and to keep growing.
What future growth do you envisage for these catalogs?
I believe that these assets will triple what they’re worth today inside of seven years. And, by the way, I tell the [songwriters] I’m buying from that fact; I don’t want people to ever be able to turn around and go, ‘Dude if you knew this was going to happen why didn’t you tell us?’
These [writers] have lived through 15 very dark years, caused by technological disruption that allowed people to consume music for free.
Many of these writers are at that point where, despite the fact that they may be earning $2 million – $3 million per year they are ready to take a significant payment. if you can give them a check for $30m, it can make a major difference to their lives.
What sort of multiples are you expecting to pay for these rights? Music publishing M+A is a hotly-contested area with the likes of Primary Wave, Round Hill, Concord, BMG, Kobalt Capital etc.
Our pipeline of deals is largely private and off-market – these are writers, artists and producers that I’ve developed relationships with over the last 35 years.
So, to that extent, I’m not really competing with Round Hill or with anyone else. I don’t like to talk about multiples because I don’t think it’s necessarily the right way to look at these catalogs.
One thing that should be said about multiples, though, is that when you look at these big recent deals – whether it’s Carlin, Sony‘s acquisitions of the balance of EMI, or SONGS – there’s a ‘portfolio effect’ going on.
“Sony’s acquisition of the balance of EMI [for $2.3bn] is one of the greatest acquisitions of all time, as far as I’m concerned.”
Buying a publishing company, as opposed to a writers’ catalog, are two very different things. With the former you’re paying a premium for the fact that someone has assembled all of this under one roof.
Sony’s acquisition of the balance of EMI [for $2.3bn] is one of the greatest acquisitions of all time, as far as I’m concerned. But it’s very, very easy to misinterpret these numbers because you’re looking at enterprise value. [HSFL] never has to think about things like enterprise value or buying debt.
I’m just buying from a private individual or a private individual’s estate each time; I’m paying a number based on proven, predictable, reliable income streams.
A lot of this rides on your personal connections and your network. Can that take you to 18% or 19% market share?
I can do things that my competitors can’t do. I can make the right people, like The-Dream, that I’m buying from members of my advisory board [which also includes the likes of Nile Rodgers, manager Ian Montone, executive Jason Flom and others]. I can give writers participation in something bigger, because I have flexibility in constructing deals.
There’s also the discussion about the bigger picture. For me, this is about recognition of the songwriter as the person delivering the most important component in a hit record today. I want to buy from people who understand that mission.
BMG boss Hartwig Masuch has recently thrown a bit of uncertainty on the future growth of publishing rights, suggesting that factors like the reduction in TV/broadcast revenues might have an unforeseen negative effect on some of the assets changing hands for big money. What’s your view?
Well, I think that Hartwig is just really speaking from the perspective of where BMG are at in their evolution. Hartwig, both when he had Laurent Hubert with him and post-Laurent Hubert, has made tremendous acquisitions.
Right now BMG’s strategy seems to be consolidating what they’ve bought [in publishing], and actively managing it to greater heights of success which is the right move for them.
“The most important thing right now is that conversation about when we’re going to get to 350m, 450m or 550m paid subscribers.”
The most important thing right now is that conversation about when we’re going to get to 350m, 450m or 550m paid subscribers to music streaming services worldwide. Because we’re going to start seeing more money in this business then we’ve ever seen before and the value of all of our assets is going to increase accordingly.
We are deliberately buying music assets, which will be needed at every stage of the music industry’s growth. The form in which these assets reach the consumer in the future – whether that’s via broadcasting, CD, download, Apple Music or Spotify – is not a big concern. My only concern is having songs that people want and need in their lives. They’ll consume in the way that they prefer.
Is there a financial reason why you’re focusing on songwriters and publishing as opposed to recording music rights?
Yes. Really because of the fact that obviously from a songwriters perspective there are more songwriters and artist that own their publishing rights then there are ones that own their recorded music rights.
The vast majority of [commercially viable] recorded music is owned by the majors – maybe 70%, with 30% is in the hands of the indies, and within all that maybe 5%-10% is owned by artists licensing to labels. There’s much more opportunity to acquire from [creators] in publishing.
Just a word on Kobalt: why pick them as admin partner?
The main thing we’re looking for from an admin partner is money collection, and Kobalt have total transparency in their collection mechanism. I think they collect more [than competitors], I think they collect it faster, and they pay it through faster.
The fact that we get to work with like-minded people like Willard Ahdritz, Sas Metcalfe and Laurent Hubert who have are also committed to change should not be discounted.
Kobalt won’t [get] everything; when we buy catalogs that are already in admin deals with time to run on them, or that have been at Warner or Sony or Universal for a long time, we are going to work with those companies to add value.
For example, The-Dream catalog is with Big Jon at Warner/Chappell and we are excited to work with Jon and his team.
Of the £200m you raised, around 10% has gone on The-dream deal. When do you expect to have exhausted the full pot of money?
The extra 10 months we took to raise this money allowed us to really develop a pipeline of deals and get all of our due diligence done at advanced stages.
So I expect that that, of the £200m, £150m will be gone within six months and the balance of it will be gone within nine months. We will have paid our maiden dividends by that point and we’ll be back out in the market looking for additional support.
Let’s say all of your ambitions are fulfilled: you raise the billion pounds and you claim 19% of the global publishing market in the next few years. How can you change the economic situation for writers?
Up to this point, we’ve experienced a situation where the three biggest recorded music companies own the three biggest publishing companies – and they have been able to use their leverage for them but also on them.
Jon [Platt at Warner/Chappell] and Jody Gerson [at UMPG] are part of a structure that reports to the person who is also in charge of recorded music [a structure many people believe will also be the ultimate destiny of Sony ATV and Sony Music].
Within that structure, you’ve got four fifths of the income going to recorded music with a net margin of 30% or so. And then you’ve got one fifth of the money going to publishing with a net margin of probably 10% or 12%. So it’s a pretty hard thing for [UMPG or Warner/Chappell] to argue too heavily with [Universal Music Group boss] Lucian Grainge or [Warner Music Group boss] Steve Cooper about how much of the pie the songwriter is getting.
“everyone’s on that precipice waiting to jump into this new world.”
If I can get to a place where I’m 18% or 19% of the worldwide publishing market, then I can bring along Kobalt – who I think will be in a similar place by that point – and some other strategic allies, and we’ll be in a good position to redress the balance a little bit.
I think we’re at that place where everyone wants to do the right thing. I think Lucian wants to do the right thing, I think Rob Stringer wants to do the right thing, Guy Moot is working very hard at it already, I think Max Lousada, Big Jon and everyone at Warner wants to do the right thing.
We’ve got a great set of executives out there at the major companies and we have Willard, Sas and Laurent at Kobalt that are pushing the envelope on everyone’s behalf. Nile Rodgers is going to do the same both as a member of our Advisory Board and as the new Chairman of The Songwriters Hall Of Fame.
For possibly the first time ever, we have people at the helm across the board who are either creators or made their reputations being aligned with creators. That alignment will bring change.
It’s like everyone’s on that precipice waiting to jump into this new world. Someone just needs to be the catalyst that pushes everyone over the edge into action and I aim to play a role in that. The songwriting community deserves it.Music Business Worldwide