With the music retail business in flux, it is timely to consider how investors, if they are so minded, might be able to tap into the returns of the music business. This article explores the potential from the investor's standpoint.

Editor's note: The news this week that UK-based retailer HMV has gone into administration gave investors a sharp reminder of how the world of selling music is changing. Digital downloading, bringing with it challenges to traditional business models and forms of intellectual property, has been a force sweeping through the industry in recent years. 

It is, therefore, timely to consider how investors, if they are so minded, might be able to tap into the returns of the music business through royalty payments on IP-protected works. Johan Ahlstrom, chief executive of Kobalt Capital, part of the Kobalt Music Group, gives his views on music royalties as a possible asset class.

The article below is also another opportunity to consider how intellectual property in its various forms – patents, copyrights, trade secrets, trademarks and now “image rights” – are assets that remain in a constant state of development. IP can also be controversial, as some academics, campaigners and policymakers think they are not "real" property at all, or ought to be significantly reformed. (To see a recent article about intellectual property, click here.)

This publication is pleased to make Ahlstrom’s views available. As ever, this website does not, however, necessary share the opinions in this article. Do email with any feedback to tom.burroughes@wealthbriefing.com

In today’s volatile and difficult investment environment, investors looking for steady yield and for opportunities that add true diversification to their portfolios are in for a challenge. Many alternative investments, such as hedge funds and private equity, have correlated more to general equity market performance than anticipated and they are not providing steady annual yields for those investors that need it.

There are, however, some investments that can provide steady yields and are inherently disconnected from the general bond and equity markets. One example is investments in royalties. Investors familiar with this type of asset would, in the first instance, most likely think of healthcare and drug royalties or oil and gas royalties.  But there is another type of royalty investment that is somewhat unrecognised: royalties from music copyrights.

Kobalt Capital [the author’s firm] is planning to invest $100 million in music copyrights over the next 12 months by leveraging the strong global industry network afforded to it as a subsidiary of the Kobalt Music Group to source transactions. The team at KCL has extensive experience in evaluating music copyright deals, having assessed over 500 potential deals in the last five years, and we expect a healthy return.

Some numbers

Royalties from music copyrights have grown by an average five per cent per annum between 1995 and 2010 and a closer look shows that investing in royalties from music copyrights is probably among the less risky investment options currently available. Moreover, these investments offer potential for ongoing yield payments, behaving more like bonds than equities. 

Misconceptions around the effect of falling CD sales and the growth of online piracy have prevailed when, in reality, music copyright royalty income has been compensated by increases in digital, performance and synch income, as well as the growth of the developing market. Typically, royalties from CD sales now represent only 15-25 per cent of total royalties, depending on the catalogues and deal structure.

A copyright to a song gives the owner the right to earn a licence fee whenever that piece of music is commercially used. This includes a vast number of revenue streams including CD sales, downloads, streaming, radio stations, television, movie theatres, bars, hotels, shopping malls, advertisements and computer games amongst other things. Multiply these vast sources across different countries and you could easily have a big song exposed to around 20,000 different income streams worldwide. 

Moreover, in most jurisdictions, copyright lasts for 70 years following the death of the writer, so investments are protected over a long period. Investors are also able to provide royalty advances to songwriters supported by a catalogue of existing songs as well as future creations, which combined with the acquisition of music catalogues outright, offers attractive benefits in terms of cashflows and diversification.

So, while they may not be front of mind for many, music royalties should certainly not be overlooked. Music royalties offer a highly diversified investment option, uncorrelated to other forms of investment and they provide a robust income opportunity. All this makes investment in music copyrights a worthwhile consideration for those looking to diversify portfolios away from bonds, equities and other alternatives that don’t offer the same ongoing yield payments.