What They'll Never Tell You About the Music Business

by Peter M Thall

  What is driving the revenue? Cover recordings, which may continue ad infinitum, or original recordings, whose earnings life will naturally be limited? Singles, tracks from albums, entire albums? Do the earnings come from “best of” records? The source of the money is very important, as some sources dry up more quickly than others.

  In stock market parlance the term anomaly refers to situations in which the price of a stock seems not to reflect its real value. An example in the music world would be “Tie a Yellow Ribbon,” which always sells well when US troops are in combat overseas, but it would be a mistake to overvalue the catalogue containing that song on the basis of those sales.

  Who’s Buying What? The better the information you, as a potential purchaser, have as to who is going after what, and how much potential buyers might be willing to pay—especially when others are interested in bidding for the catalogue that you are thinking of acquiring—the more power you will have.

  Getting the Most for Your Money: Identifying the Unidentified Astonishingly, many music publishers own songs that they simply cannot identify by melody or by written notation. They exist only as titles. While these may represent only the more minor earners (perhaps generating money only via obscure radio performances) and therefore not be of particular relevance to determining a purchase price, they should not be overlooked.

  Trends in Taste: What’s Hot and What’s Not Here is where the advice of an expert who has a grasp of the current value of different genres such as rock, rap, classical, adult contemporary, reggae, R&B, Latin, EDM, etc., can be useful. There are now as many radio formats as there are genres. If the music in the catalogue is predominantly reggae, does this explain a growth in the catalogue’s income during the first part of the 21st century with such top-selling reggae artists (throwing in a little rap on the side) as Sean Paul and Kevin Lyttle? Is country music on the upswing or the downswing? Boy bands and disco have already seen their finest hours, and the timing of their fall from grace might well have been predicted by a savvy trend watcher.

  Evaluating the Artists When purchasing a catalogue that predominantly comprises songs by a particular artist, it is useful to be able to predict the ongoing viability of that artist—both in the recording and in the performing realm. As we have seen, an increasing number of older artists who seemed to have fallen off the radar screen have had remarkable comebacks. Even Cream, which had not performed together for almost forty years, toured again in the early 2000s. Why? Surely their members—Eric Clapton, Ginger Baker, and Jack Bruce—enjoyed some artistic and personal pleasure, but with ticket prices being what they are these days, it is likely that the most important motivation was money. Some purchasers of catalogues are Wall Street (or even Boston) venture capitalists; a purchaser grounded in the music of an era may well be able to approach an artist or artists and encourage him or her (or them) to revisit their past—not coincidently reviving the music copyrights identified with that artist.

  It is, of course, not possible to make precise, accurate projections of any artist’s long-term viability. But purchasers should evaluate the possibilities as thoroughly as possible, preferably with an expert in the field—for example, a booking agent or a promoter, both of whom know long before anyone else what the real story is.

  SATELLITE RADIO, INTERNET RADIO, MOBILE PHONE STREAMING, AND HD RADIO

  In recent years, satellite radio has increased its subscriber list by as much as 200% per year. In 2005, revenue increased by almost 300% over 2006, and media watchers predicted over 40 million subscribers by 2020. Satellite radio has given listeners an unprecedented choice of both genres and individual tracks, but the returns are not yet in on the extent to which this medium will affect the sale of records—either in physical form or via digital download—or how much it will represent in terms of performance royalties. Nevertheless, new possibilities continue to present themselves. It is only a matter of time before listeners will be able to push a button when they hear a song they like, instantaneously copying it into their iTunes libraries. Another developing trend involves new devices being introduced by SiriusXM satellite radio that will allow users to “record” (the language used by SiriusXM is “retain”) permanent copies of musical works transmitted by satellites. Notably, these copies cannot then be burned onto CDs. Both NMPA (the National Music Publishers Association) and RIAA (the Recording Industry Association of America) are monitoring all trends closely. Some feel that, as a result of these initiatives (with more to come), satellite radio might be a negative, and not a positive, entry into the music distribution wars—at least for record companies and artists.

  But do not despair. Other platforms are exploding, all of which are generating new and undreamed-of income for song and master owners.

  Digital Downloads, Digitally Distributed Video Games, Streams, Apps As we know, digital downloads may have seen their best days. After a period during which digital download sales far exceeded expectations, they are on a descending track just as streaming passes them by. At one time, record “clubs” thought that they could salvage their role in providing consumers direct access to music via the download route. They never developed a model that worked, and the downward trend continues across the board without their involvement. Although the total number of song tracks downloaded is still considerably less than the equivalent number of CD tracks that were sold historically, several billion DPDs have been purchased, putting a crimp into at least some of the illegal peer-to-peer music sharing that still occurs in high numbers. Digitally distributed video games are experiencing a huge growth of over 200% since 2010 alone…and all of these use music, much of which has to be licensed. But it is clear that streaming has become the medium of choice for music consumers. Subscriptions for unlimited streams, via such platforms as Spotify and Internet radio such as Pandora are generating new sources of mechanical and/or performance income never before possible, and accordingly, the value of song catalogues is increasing daily in ways that most often cannot even be predicted or calculated. The jury is in insofar as justifying faith in the future of music, but out insofar as making it possible to predict the monetization of these new sources of exploitation. The introduction of smartphone apps has made it all the easier to capture music from an unlimited array of sources on a moment’s notice. In 2012, Spotify alone was the seventh highest rated app in AppData’s 2012 list of top apps in the world, and it was also the highest rated music app. Not bad for a company that had operated in the world’s biggest market, the USA, for less than two years.

  Digital Jukeboxes The “digital jukebox,” like satellite radio, is a relatively new medium. Digital jukeboxes offer hundreds, and even thousands, of tunes direct from central servers to your table at your favorite diner. Different companies have different technologies for delivering these recorded works, but once again, the wider choice simply expands the reach of all music in ways never dreamed of before. Still, they do not present a real challenge to personal and industry-created playlists.

  Sources of Income

  Cover Possibilities Obviously, some songs are more coverable than others. We have yet to find out if rap songs will have the second (or third) life that has historically followed Gershwin, Porter, and even Holland–Dozier–Holland songs (for example, the Supremes’ hit “Can’t Hurry Love” found a new audience after the release of a cover by Phil Collins that became hugely successful). Cover possibilities vary depending on the nature of music (and radio) at the time the valuation is taking place. During the boy-band era, these artists recorded mostly new songs, even though the genre was predominantly middle-of-the-road and presumably ’NSYNC and the Backstreet Boys could have recorded “standards”; however, the beginning of the 21st century has seen such phenomena as Peter Cincotti, Michael Buble, and so many others (not to mention Bob Dylan, Barry Manilow, and Rod Stewart!) rediscovering (and more importantly reminding us of) some of the greatest “chestnuts” of the last century—for example, “Sway,” “Stardust,” and, yes, “Moments to Remember.” S
ometimes, an unrecorded song will have excellent cover potential, but only an expert in the particular genre or genres represented by the catalogue is qualified to assess whether the unrecorded songs in a catalogue are in shape enough to be able to be evaluated for purpose of cover recordings. No accountant, lawyer, or financial investor will have a clue. If a catalogue consists of various genres of music, then hire various experts. A worthwhile investment.

  Print Rights Print rights have not meant very much in relation to other forms of income for more than seventy-five years. But with the advent of digital sheet music, and the intricate cross-promotions made possible by the Internet, the good days are back. If you believe that the music in a catalogue is likely to be of interest to specific classes of purchasers (students, churchgoers, fans of an artist, attendees at weddings, other celebrations, or funerals, etc.), by all means ask the expert you have selected to evaluate that catalogue to consider these possibilities.

  Song-Specific Exploitations It has often surprised me—perhaps “shocked” would be a better word—that many music publishing companies have evidently given little or no thought to the potential of using specific songs in ways that will generate revenue. One use that springs to mind is commercials. Hiring a consultant from a marketing company or an advertising agency could easily come up with ideas to exploit titles of lyrical portions of songs for this purpose. A potential purchaser could engage such a person for a brief amount of time to give an opinion as to the viability of such an option.

  Another possible song-specific exploitation is use of a song that has particular resonance in terms of a widely celebrated holiday. For example, a dynamic, though small, publishing company owns a song called “Oh My Mama.” When was the last time it was used for Mother’s Day in any creative way? Certainly 1-800-Flowers would know what to do with it on the biggest day of the year for flower sales. But what about digital sheet music or downloads offered on the Internet? Radio play? Products identified with the title or lyric? Greeting cards? If this song—or songs like it—is in a catalogue, the fact that its earnings may be moribund should not necessarily discourage a purchaser from assessing its potential value.

  When stock prices go down, new management often switches gears, thinks out of the box, and tries innovations that cause the stock prices to rise. The same is true with a music catalogue that has been gathering dust for fifty years. The numbers don’t tell it all.

  Added Value You, as a buyer, may determine that a given catalogue may be of more value to you than it might be to other potential buyers. For example, when a client of mine decided to sell half of the Buddy Holly catalogue, several players were interested, but the one who should have bought it, and did, was the new company which Paul McCartney had just formed. This was his first catalogue, and soon Linda Ronstadt had recorded two of the catalogue’s biggest hits, and had hits with them; the film The Buddy Holly Story was released; and the musical Buddy was on the boards. MPL Music Publishing (McCartney, Paul and Linda) was on its way. It is fair to say that few, if any, other publishers could have lit a match under this catalogue as MPL did. Whether it was the work of one or many people is not relevant; both the purchaser and the seller (Buddy’s producer who was also one of his cowriters, Norman Petty) benefited. Now that’s synergy.

  EVALUATING DATA

  Before discussing the pitfalls in evaluating data, let’s first agree on what data we are going to evaluate. Most buyers will require at least the following as part of their due diligence. Copies of all relevant royalty statements received from any source within the prior five years, including but not limited to the following:

  1. Music publishers through the world broken down per territory

  2. Copyright administrators

  3. Mechanical rights licensing organizations and agents

  4. Performance rights societies/organizations

  5. Copublishing administrators

  6. Subpublishers

  7. Any statements from any source directly licensed by the owner

  8. Copies of all of the relevant agreements and copyright registrations, notices of use, renewal certificates where relevant, all applicable assignments including US Copyright office recordings of such assignments, mortgages, etc., and pertaining to any of the entities detailed above, including a schedule for each agreement detailing:

  a. Titles subject to such agreement

  b. The author(s) of each title and each author’s authorship share in percentage terms

  c. The publisher(s) of each title, and each publisher’s percentage share

  d. The date of creation for each title

  e. The date of copyright registration for each title

  f. The date of assignment for each title

  Finally, if possible, the potential buyer will want to audit/review the books and records of the seller to make sure all songwriters and others due royalties pursuant to the agreements mentioned above we’re in fact paid their due.

  On their own, of course, the buyer will want to do copyright searches on its own, as well as credit and UCC and state record searches to make sure no liens exist on the copyrights or assets generally of the corporation.

  When all is said and done, the seller may wish to not depend solely on a nondisclosure agreement with potential buyers as they might not even want the potential buyers to know certain confidential facts about the company in the event the sale does not eventually occur. Nowadays this will entail filing the data in the cloud and providing potential buyers with various codes and keys to access ever-widening amounts of information.

  Now, let’s discuss how the data is evaluated.

  Third-Party Data

  What happens when the income on the seller’s records do not match the data from SoundScan or other third-party data sources, the “across the counter” data that keeps track of record sales in most traditional record stores. At least a question can be raised and an answer evaluated. But unless the data is questioned, a significant deviation from accuracy might slip through. Of course, neither SoundScan nor the other data sources are precise. SoundScan is merely an extrapolation that provides the appearance of scientific accuracy and may or may not be statistically accurate. But it is not a one-for-one count. Financial records, therefore, should be read only in part in light of third-party data sources. Other data are necessary to obtain a full picture.

  Net Publisher’s Share

  Often, publishers are paid on one-third of a song when they actually own one-quarter (or vice versa). These are 5% to 10% errors (in this case 8%), but they add up, and on an important earner, they can mean a big difference, especially when multiplied by 15, or whatever the multiple is that the parties are using to arrive at the net publisher’s share (NPS) for an eventual sale of one’s ownership interest.

  Quality of Documentation

  By “quality of documentation,” I mean the quality of record keeping insofar as contracts with writers—or the absence of such contracts—are concerned. Obviously, some catalogue files will be in better shape than others. The absence of precise information on the chain of ownership of the titles in a catalogue can devalue a catalogue just as it would in a real estate transaction. The reality is that some catalogues are simply in a mess. This puts the seller at some risk because the asking price will be subject to attack—and reduction; it puts the purchaser at risk because he or she may be buying a pig in a poke. A costly Copyright Office search may be the most effective way to trace a song’s title, but the absence of songwriter agreements can put in jeopardy a company’s right to the composition in the first place. A long history of paying royalties to authors is always a good sign, but there are risks, and purchasers will have to depend on attorneys to evaluate just how serious these risks are.

  Contracts with Writers

  Sometimes the person who takes over administration of a catalogue is so respected and so comfortable in dealing with writers that he or she is able to forestall adversarial responses to the sale on the part of the catalogue’s writers. Anot
her person might not be as good at easing writers’ before-sale concerns. Yet not dealing with such concerns can affect the price a purchaser is prepared to pay for a catalogue. When I represent an artist-owned and artist-created catalogue, I invariably find myself in the annoying role of insisting that where there are cowriters, they all (and all of their music publishing administrators) enter into a cowriter agreement establishing exactly who owns what and who controls what. This can become very important when one writer—usually the artist—does not want to permit certain uses of his cowritten songs. Absent such a document, cowriters are equally authorized to do essentially whatever they wish to do with the song—provided they ensure that all cowriters receive their fair share. But this may not be good enough for an artist-cowriter, and his or her cowriter agreements may well place restrictions on the others. Purchasers who are acquiring the “others’” interest will want to know whether there are such restrictions on the titles being purchased. Similarly, the absence of such an agreement might cause one to question the accuracy of the splits among the cowriters. More risk!

  Sufficiency of Accountings to Writers

  The purchaser’s accountant—who, hopefully, is expert in valuing and evaluating music catalogues—will be able to advise the purchaser as to whether the writers of the catalogue’s compositions (or their heirs or assignees) have been properly paid on time or not. While in most states, there is a six-year statute of limitations on claims for royalties, some states provide for the statutory term to be extended when fraud is present, and purchasers should make sure to have a pretty good picture of where things stand in this area in order to avoid surprises later on. As noted earlier, some writers and their heirs avoid controversy with the original owner for reasons of fear or otherwise, but have no such hesitation once the catalogue ends up in the hands of a good-faith purchaser—particularly one with deep pockets.