Why are major music companies using other people’s money to buy copyrights?

Warner and BlackRock's new fund has already acquired stakes in copyrights created by the likes of songwriter/producer Tainy (pictured)

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Welcome to the latest episode of Talking Trends, the weekly podcast from Music Business Worldwide (MBW) – where we go behind the headlines of news stories affecting the entertainment industry. Talking Trends is supported by Voly Music.

This week on Talking Trends, MBW founder, Tim Ingham, responds to the news that Warner Music Group is co-investing in a new music acquisition fund with investment giant BlackRock.

Ingham notes that this is Warner‘s second co-investment fund in recent years – following its Tempo Music vehicle with Providence – but also points out that Sony Music Group welcomed additional outside capital from Eldridge Industries last year in its $550 million acquisition of the Bruce Springsteen catalog.

Why are these major music companies not entirely using their own funds to make these acquisitions?

Ingham suggests that it could be because they’re hedging their bets against threats to the potential future growth of the music industry.

“Demand in the music marketplace today, largely driven by Wall Street investment banks, means that multiples being paid for music rights have gone wild,” notes Ingham.

“This comes with risks. If the music market changes, or is hit by some kind of slowdown in growth, the prospect of getting a return on these investments could suddenly disintegrate.”

Ingham highlights three key areas where the majors may believe the future value growth of music rights could be hit by a slowdown:

1) “A fear the the growth in music subscription streaming in the future might not be as sunny as some analysts estimate.”

Goldman Sachs is currently predicting that over 1.2 billion people will be paying for music streaming by 2030 – an optimistic forecast that, from a lot of angles, makes sense.

Yet Ingham notes: “In 2021, Spotify saw slower global streaming subscription growth – in terms of volume – than it did in 2020 [+25m in 2021 versus +31m in 2020].

“So what happens if [overall] streaming subscription growth now doesn’t meet the bright hope analysts have at Goldman Sachs and elsewhere? What if these numbers start to get downgraded as the years tick on? What happens if Gen Z, who are currently obsessed with TikTok, don’t value an all-you-can-eat streaming service menu like Spotify’s?”

2) Says Ingham: “When you look at the [banner copyright] investments being made in the business today, there’s definitely a question mark over whether these artists are going to be long-term mainstream propositions in non-Anglo-American markets.”

He adds: “Look at what’s happening to the charts in local markets globally: They’ve never been domestic in their tastes. MBW reported earlier this year that Italy’s entire Top 20 album and Top 10 singles in 2021 were from domestic artists. Where do Bruce Springsteen or Wiz Khalifa fit in that?”

3) Economic uncertainty on a macro level – and shooting interest rates in the months ahead. “Consumer prices are said to be rising by 5%, 7%, even 9% this year, while energy prices also shoot up making spending on so-called luxury goods or services like a streaming music subscription harder to justify for many people,” notes Ingham.

He adds: “Rising interest rates threaten to throw much of the borrowing and investment currently going on in music into a tailspin. Also, we don’t yet know the effect that Russia’s invasion of Ukraine is going to have on the fragility of this economic equation – but it’s hardly likely to be good news.”

MBW’s podcasts are supported by Voly Music. Voly’s platform enables music industry professionals from all sectors to manage a tour’s budgets, forecasts, track expenses, approve invoices and make payments 24/7, 365 days a year. For more information and to sign up to a free trial of the platform, visit VolyMusic.com.