Music Royalty Investing Update
Some time ago I wrote about investing in music royalties on the Royalty Exchange site. I thought now would be a good time to review how the returns have been on my investments in music royalties and also look at some of the new features on Royalty Exchange that they have implemented recently.
I originally invested a total of $38,400 in three royalty streams almost exactly one year ago. Two of the streams were 10-year duration and one was "life of rights," meaning you continue to receive royalties for the entire legal term (life of author plus 70 years). Over the past year, I have collected a total of $2,850 on these royalties and (based on last quarter's payment), I'm anticipating the current September quarter payment will be about $520, bringing the total payments for the year to $3,370. While that seems okay, unless the payments increase over time, I'm unlikely to recover my entire investment over a 10 year period at the rate I'm going, incurring a loss of about $4,700 if everything stays the same. Of course, quarterly royalty payments vary significantly and mine are no exception, from a high of $1,144 to a low of $429. International payments lag by a few months versus domestic, so that can also play a factor in the volatility. It's very difficult to extrapolate future royalty payments, especially if the songs are newer. Songs that have been out for a while are much easier to predict since they have a longer royalty history.
As you can see, the difficult thing to predict is how songs will perform in the future when investing in music royalties. For example, if one of the songs you own the rights to is used in a television show / series or movie, that will perhaps significantly increase the payment stream (and value) of the royalty. Also, if the artist wins a grammy or produces a new album, that frequently increases interest in the "back catalog" of older songs that you may own the rights to. Similarly, if you have some royalties that are relatively new songs that are played a lot on radio, as those songs transition to streaming, the payments can increase over time depending on their popularity. Production of music videos and remixes of songs can also increase the popularity of songs and the royalty payments over time. Also, growth in international demand is a factor that can increase the value over time, especially with R&B and hip hop music which has a lot of international popularity. Of course, as mentioned earlier, those payments lag, so the increasing popularity may not show up right away in the dollars you receive. These are all the unknowns of investing in music royalties. As a general rule, most royalty streams that I have looked at show a slowly decaying rate of payment over a long period of time, unless something occurs to increase the artist's popularity or there is some other activity like tv / movie use. That's also why people like investing in "name brand" grammy-winning artists such as Drake, where you can be fairly confident that the songs will get plenty of plays over time. As such, even though music royalties are uncorrelated to stock and bond markets, there is still a fair degree of risk that you could be overpaying for the royalty asset, depending on what happens over time to the popularity of the artist and songs that you own the rights to.
Royalty Exchange has always held auctions for music catalogs and that feature continues to work the same way as it has in the past, with bidders entering the auction and bidding up the value of the royalty until the end of the auction. The winner pays a $500 fee to the exchange plus the final sale price of the royalty stream, signs some forms and starts collecting the royalties. Royalty Exchange handles the administration of the royalty payments and they have an online portal to monitor your activity.
A new feature recently launched is a separate catalog of select older auctions that have been relisted for sale, with the owner's permission. This allows the owner to set a "buy it now price" and also allows interested investors to submit offers. One of my royalties was included on this and I have already received two "low ball" offers. This seems like a good opportunity to find some values depending on how motivated the seller is to exit the investment. Even if you are able to get a lower price than what the original buyer paid for the stream, the volatility and general declining nature of the payment stream may still pose some risk, so you have to do your research in looking at the payment history critically and also evaluating the popularity of the artist and songs in the catalog.
Investing in music royalties is still an interesting alternative investment strategy for those looking to diversify away from stocks and bonds, but is not without risk and potential investors should definitely do their homework before buying these. Having said that, there is certainly the opportunity to make good steady cash flow from these investments over time, especially with a "life of rights" royalty.
I hope you find this post useful as you chart your investing course and Build a Financial Fortress this year.
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