The following MBW op/ed comes from Randall Wixen (pictured), the founder and CEO of Wixen Music Publishing. Family-run Wixen offers publishing administration and royalty services to over 2,000 clients, including stellar songwriters (and/or their estates) such as Tom Petty, Missy Elliott, The Doors and The Black Keys.
I bet you never had a songwriter tell you that selling her songs was the best thing she ever did. It’s pretty much always been a mistake to do so – and it is no different now.
Even writers who sold their songs only five or ten years ago are realizing that they could have done the same today and earned at least twice as much as they did then.
The media is reporting that the multiples being offered for catalogs today are at historic highs. That is definitely true, but it doesn’t mean that these historic highs accurately reflect the true value of these song catalogs.
Just because you pay $10,000 over sticker for a Kia Rio at your local dealer doesn’t mean that’s a fair price for that car. And, unfortunately, there may be some folks who stand to benefit if they can find a way to tempt you into selling your music catalog.
The biggest music catalog sales prices being widely reported today are usually given as anonymous estimates. Exactly who is making up these estimates – and why?
I’ve been privy to a few of these actual marquee sales agreements, and I have to say that all the prices I’ve seen have been a lot smaller than the unattributed estimates making splashy headlines in the financial pages.
So why and how are all these investment vehicles getting into buying catalogs?
Well, companies like JP Morgan, BlackRock and Oaktree Capital are smart investors and they think music catalogs are undervalued. For them, a 20-times multiple paid on a great music catalog represents a safe 5% return on investment.
Additionally, there is likely to be a huge amount of previously earned income to be uncovered by these investors, due to these catalogs’ current owners being held up for various reasons. This will constitute a windfall benefit – one the seller will miss out on – that could pump up that 5% return dramatically.
And the potential windfalls for the buyer – not the seller – don’t stop there:
- We’ve already discovered $424 million in previously unpaid publishing money that the streaming services were unable (how hard did they look?) to give to the correct publishers. This money will now get paid out through a “claiming portal” run by the MLC (Mechanical Licensing Collective). Owners of catalogs will get this money; those who’ve sold will not.
- The Music Modernization Act of 2018 will change how the two main US performing rights organizations – ASCAP and BMI – operate under consent decrees for antitrust purposes. ASCAP and BMI will now have the rates they receive from broadcasters determined by a rotating panel of judges. It is expected that each of their payouts will go up significantly in a less handcuffed, free-market environment.
- At the beginning of 2018, the Copyright Royalty Board rate setting hearing (CRB Phonorecords 3, covering rates from 2018 through 2022) awarded publishers a 44% increase in streaming royalties. Companies like Spotify appealed that increase and the increase is still on remand from the appeal four years later. If some or all of the 44% award is sustained on appeal, there will be a huge retroactive windfall payment to publishers for the differential increase that was not paid while the appeal was pending.
- Further (and ridiculously), the next CRB rate setting tribunal (CRB Phonorecords 4, covering rates from 2023 through 2027) is already under way even though the prior CRB ruling is still on appeal. This tribunal could well result in another improvement in royalty rates paid to publishers and songwriters.
Catalog buyers are aggregating their catalog purchases and counting the minutes until the aforementioned windfalls become real.
They might protest otherwise, but the guys who run these funds don’t really care about your legacy. Almost all of them are handing their purchased catalogs to third party administrators who handle millions of songs and who probably don’t know who you are or what your song is worth.
Most owners of important catalogs have by now heard the same line from five or ten of the same potential buyers: “Let us take a look at your earnings, tell you what we’d pay, you have nothing to lose by just learning what the market will bear.”
Sometimes your own advisors (attorneys, managers, business managers etc.) start pressuring you to sell, because there could be a big payday in it for them as well.
Let’s say, eventually, you get an offer of 20 or even 25 times your average annual earnings for the past three years. It could seem like a lot – until the fine print in the Letter Of Intent comes into play.
First up, you might have to spend $100,000 to a professional who can organize three or five years’ worth of income into spreadsheets that show stuff like domestic vs. foreign income, income earned by type, your top 10 songs, your earnings trends, your biggest sources of revenue, etc.
After you’ve had your business manager prepare this material, your buyer will then want to remove non-repeatable / extraordinary income to knock down the “average annual earnings” that they are paying a 20-times multiple for. One example: they might insist upon removing a huge advertising sync fee because, in their eyes, it was a non-repeatable fluke (even though you get syncs on that same song all the time).
They’ll also remove your share of an important streaming or social media service copyright infringement settlement because that was a one-time event, and why should they pay 20 times that one-time event when it will never happen again?
At the end of this process, the offer on the table might only be 80% the size of the “20-25 times multiple” figure you heard when you first went down the rabbit-hole.
And of course, after any additional fees incurred for your business managers, personal managers, or attorneys, you’ll still have to deal with capital gains taxes.
If you decide to structure your catalog sale as a loan, you may shift the tax burden to your family. And here’s something no-one in the catalog game seems keen to discuss: there are already proposals from the current administration to raise the US capital gains tax retroactively for asset sales after April 1, 2021. The potential increase would move capital gains from the current highest tax rate of 23% or so to 43% or so.
Basically, you might not know what your tax bill for your catalog sale is until after your catalog sale is complete.
So, after your buyer has reduced your average annual earnings, after you’ve paid your advisors, and after you’ve paid your taxes, you’re left selling an asset that might have a cash-in-your-pocket value just 60% its market value.
That’s a heavy transaction cost. And given some of the factors I enumerated above, holding onto that catalog might give you or your heirs something that earns double – and is worth twice as much – in five to seven years’ time.
Finally, let’s look at the present economic climate. We seem to be entering into a period of accelerating inflation. From my years at UCLA (BA Economics 1981), I remember that inflation benefits net economic debtors (you pay back loans with less valuable dollars) but slaughters people with money in the bank (your principle is worth less and the interest you get on bonds and savings rises slower than the costs of goods and services).
Bloomberg reported 7.5% inflation for the US in January of 2022. A lump sum of cash will be hurt by inflation; the value of your owned catalog will appreciate to match inflation.
Plus, the Fed has signaled that it will be raising interest rates.
You know what that means? All the financial players that are currently buying catalogs with money borrowed at almost 0% will no longer get their desired returns. They may even need to flip those assets.
Here’s what I tell songwriters who are mulling a sale:
- Get some good advice from fee-based financial advisors and estate planning folks who don’t stand to make any money off your sale.
- Look at what your catalog earnings have been for the past decade and what the earnings trend has been for you. Is it really better for you or your family to get a lump sum of spendable cash right now, or is it a better financial plan for you to get the milk and keep the cow too?
- Speak to folks about what types of alternative investments you might make with your net proceeds if you did sell, and how they would compare to the value increases and annual income you’ve enjoyed in the past (and can expect in the future) from ownership of your music.
Are you going to be able to tour again and bring in some significant funds to pay your bills? If that’s not certain, should you be liquidating one of your greatest assets? What sort of rates of returns and value risks might you be exposed to in the future?
You just have to ask yourself: why are all these strategic investment banks and hedge funds trying to convince you that you’re getting the deal of your lifetime if you sell right now?Music Business Worldwide