The Business of Music: How Justin Timberlake Made $100m

Alec: [00:00:03] From Equity Mates Media. This is The Dive. I'm your stand in host Alec Renehan. Sascha is taking a well-deserved break this week and today is actually her birthday. So happy birthday, Sascha. We're doing this story especially for you. We know it's one you'll enjoy today. We're going to unpack the business story behind the biggest entertainment headline of last week. Audio clip: [00:00:27] Hey, this is Justin Timberlake. Alec: [00:00:30] Justin Timberlake's $100 million payday. You may not know it, but chances are whenever you're streaming music on Spotify or Apple Music, the money isn't going to the artists. It's not even going to the record label. These days, it's pretty likely the revenue from that stream is ending up in the pockets of some of the biggest asset managers in the world. Audio clip: [00:00:51] Ladies, if you feel me, I'm saying it out. Alec: [00:00:55] What do Beyonce say? Bruno Mars. Taylor Swift. Lorde. Bob Dylan. Neil Young. Paul Simon. The Weekend. John Legend, Wiz Khalifa and One Republic all have in common sell their music or parts of their music have been sold to private equity. Music copyrights have been one of the hottest asset classes in the investment landscape, and the deals are huge. Pink Floyd are selling their back catalogue for $500 million. Bruce Springsteen sold his catalogue for a reported $550 million. And last week, another big name added their catalogue to the private equity coffers. Justin Timberlake sold his back catalogue for $100 million. But why? What is the investment case for music? It's Wednesday, the 1st of June. And today, I want to know why do investors want to get their hands on music rights? And why are artists willing to sell them? To do this, I'm joined by my fellow co-founder here at Equity Mates, Bryce Leske. Bryce. Welcome. Bryce: [00:02:00] Thank you, Ren. Alec: [00:02:01] Well, Bryce, it's well known for long time listeners of Equity Mates that you know nothing about pop culture. Bryce: [00:02:06] Perfect episode for me to find out. Alec: [00:02:08] So no better expert to come in today. That's it. Now, before we talk about Justin Timberlake, let's talk about Taylor Swift, because I think this is how most people have been introduced to this topic. So remind me of Taylor Swift's story. And is this Justin Timberlake story design? Yes. Bryce: [00:02:24] Well, most people will have read about or listened to Taylor's rerecorded albums. They're the ones with Taylor's version in brackets at the end of the album and song name. This came about because in 2019, Taylor's previous record label, Big Machine Records, was acquired for $300 million. And with that, ownership went ownership of Taylor Swift's Masters. Audio clip: [00:02:47] So why isn't owning your own recordings the norm? Well, when an artist first signs with the record company, often they sign away the rights to all music they record over the duration of the contract. This provision is supposed to account for the risk labels take when they're back abutting artists who may or may not make it big and in most cases don't. Bryce: [00:03:07] So there's a whole other episode in the business story behind Taylor Swift's Masters. But for today's episode, it's important to note it is slightly different to what Justin Timberlake did last week. Taylor had absolutely no control over the sale, whereas J.T. has voluntarily sold his. But where it is similar is the buyer. Why Justin Timberlake's music was worth 100 million or Taylor Swift's was worth 300 million. It's because music rights have become one of the hottest asset classes of the past couple of years. Alec: [00:03:35] Yeah, it's fascinating. I wouldn't have thought of someone else's music as an investable asset class. So let's start with where the value of a song is. How do artists make money? And I guess how to investors make money from a music back catalogue? Bryce: [00:03:50] Great question. And in one word, streaming. So we took a look at Justin Timberlake on Spotify. He does 27 million Spotify streams a month. Alec: [00:04:00] Few less than Equity Mates. A few. Bryce: [00:04:01] Less. Not bad. The value of a Spotify stream is $0.005, or in other words, $5 per 1000 streams. So not a whole lot for J.T. that's worth about $135,000 a month or $1.6 million a year. Now, that's a rough calculation, and it is just on Spotify. So if you add up streams across YouTube, Apple Music and all the other streaming platforms as well as ADD in, every time that JT's music is included in a movie or a TV show or played on Tik Tok, you can start to see that a hit song, some of your favourites Ren can generate consistent income for years and years to come. Alec: [00:04:41] I think we're going to have to land on a naming convention between Justin Timberlake and Joe Shoulder, as well as hopping around a bit. But look, that's the context for the story. You make a hit song and you can make money for years to come with streaming and artists essentially selling that future income that. Framing income for an upfront cash payment. Makes sense. Yes. So let's turn to the news of the week. Justin Timberlake got $100 million for his back catalogue. Audio clip: [00:05:09] Well, Justin Timberlake is cashing in on his music. Now, The Wall Street Journal reporting that Timberlake sold the rights to his song catalogue to a fund backed by. Alec: [00:05:16] Which insync superfan is dropping that kind of cash. Bryce: [00:05:20] Well, if you think 100 million is big, wait until you hear about Bruce Springsteen's $550 million deal. Timberlake was offered 100 million for the copyright in all of his songs. That's approximately 200 in total that Timberlake wrote or co-wrote, including all of the hits that you've got at the top of your playlists. Sexy Back. Mirrors. Cry Me a River. Audio clip: [00:05:43] There's a big debate started today by Justin Timberlake. People are saying he's either cashing in or selling out. Bryce: [00:05:50] And Ren the buyer of his music hipgnosis. Alec: [00:05:53] With J with. Bryce: [00:05:54] Jay-Z. Alec: [00:05:54] Is up for. Bryce: [00:05:55] Hipgnosis. Hipgnosis is backed by private equity giant Blackstone. It is the third deal hipgnosis songs capital has struck so far this year. In March, it bought Leonard Cohen's share of his songwriting catalogue, and in January, it acquired an 80% stake in the recorded music royalty stream of the country singer songwriter Kenny Chesney. Not an artist I'm familiar with. Alec: [00:06:18] Well, before we go down the Kenny Chesney rabbit hole. Justin Timberlake has sold his back catalogue. Does it also include any new music he makes? Bryce: [00:06:27] No, it doesn't. The agreement only covers his back catalogue. Alec: [00:06:31] Nothing future. Okay. Now, before we get to probably the big question on everyone's mind, why is it worth $100 million? Yes. Let's broaden this conversation out, because J.T. isn't alone here. Selling your back catalogue has become a real trend in the music industry. Bryce: [00:06:47] Big trend. You're right. You listed a number of names in the introduction. Some of the biggest artists in the world are choosing to sell their back catalogue. Audio clip: [00:06:55] Rock and Roll Hall of Famer Bruce Springsteen has sold the rights to his music carry. Young says 50% of his publishing rights to his entire song catalogue hundred. Audio clip: [00:07:03] Songs spanning 60 years. That's what Bob Dylan has sold for. A reported 300. Audio clip: [00:07:08] Sale will give Sony ownership of the rock legends. Entire song World. Bryce: [00:07:12] Music and BMG are competing for Pink Floyd's catalogue, which could potentially reach up to a big amount of. Audio clip: [00:07:18] States after the late rocker David Bowie. So his entire catalogue, it is the. Audio clip: [00:07:22] Most lucrative transaction in history for a single. Audio clip: [00:07:26] R&B crooner. John Legend sold his two investment firm, KKR and Music Company. Bryce: [00:07:31] But then there are others, with Taylor Swift being the most famous example that are saying their record labels sell their music to private equity players. So, Taylor Swift, 300 million. Audio clip: [00:07:42] Taylor Swift is responding to the news that her catalogue of her first six albums have now been sold again. Bryce: [00:07:49] And an artist doesn't even need to be alive for an acquisition to proceed. David Bowie's back catalogue sold for over $200 million, and Leonard Cohen's estate also sold his catalogue of music. Alec: [00:08:01] Okay, so this has been a trend of the past few years. Artists are selling the future income from their music for upfront cash payments. Understand that, and I understand why they're doing it. It risks the future popularity of your music if you're Justin Timberlake and you're like, right now I can get $100 million from my music, or I have to rely on people continuing to stream my music for years to come. I understand why you take 100 million. Now, let's flip the question around. Why wouldn't you take the 100 million? That's a lot of money. Bryce: [00:08:31] That is a lot of money. And it's another great question. There are plenty of reasons, but the big reason is that you lose control. Audio clip: [00:08:38] I've never had an appraisal done. There have been offers for me to sell it, which I haven't accepted. Right now I still have control of how the songs are used. I have a say over how they're licenced. If they want to be used for a commercial for, I don't know, underarm spray or toilet paper, I could say no. Bryce: [00:09:01] If you don't want to see your music end up in places that you're not comfortable with on some random ad on TV or a tik-tok video that you don't want to be associated with. Unfortunately, if you don't have the rights, you don't have control. Alec: [00:09:13] Okay. So you want to keep control of your music. Don't sell the rights. If you want nine figures, sell your rights. Makes sense. Yeah. Now let's flip it around. Who's on the other side of this deal? Who's betting on these artists continuing to be popular? Who's buying these back catalogues? Bryce: [00:09:29] Well, might be. You and I ran at the end of this episode, but at the moment, it is private equity, it's hedge funds, it's massive music labels and specialised vehicles such as Hipgnosis and Roundhill. They have become one of the hottest alternative asset classes for some of the biggest asset managers in the world besides Blackstone, who is involved in the J.T. deal. You've got massive players such as KKR and CO, BlackRock, Apollo Global Management, Providence Equity Partners and Eldridge Industries. Alec: [00:09:59] Yeah. Okay. So those names I recognise, they're asset managers with huge amounts of money. Blackstone has 900 billion in assets under management. KKR and Apollo have almost 500 billion each. These guys can buy whatever they want. What's the attraction of music? Bryce: [00:10:16] Who doesn't want to own a bit of JT? These are basically annuities. In other words, they're paying royalties year after year as people continue streaming and downloading their music. And these funds are hunting for steady, predictable income paying investments when interest rates are low and bonds aren't paying a lot. They're having to look beyond the traditional income. Paying assets and songs become a way for Wall Street to diversify because they generate consistent cash flows and are relatively uncorrelated to the global economy. Alec: [00:10:47] Okay, that makes sense. If I spend $1,000,000 on a song and it generates $50,000 in revenue from streams on Apple Music and Spotify. That's a 5% return. Yeah. And that's a lot better than the 2 to 3% that investors might get on a U.S. government bond at the moment. And it's a hell of a lot better than the 0.05% I'm getting on my savings account at the moment. Bryce: [00:11:09] Tell me about. Alec: [00:11:09] It. So Bryce all make sense. Now I'm really fascinated to know where the industry is going and whether I can get in on it. But first, a quick break to hear from our sponsors. Audio clip: [00:11:21] And as long as I get my suit back, I will leave it on the floor tonight. Alec: [00:11:27] Welcome back to the dive today where the intersection of entertainment and business after Justin Timberlake sold the rights to his music back catalogue for $100 million. Massive. Bryce, before the break, you're explaining why some of the biggest asset managers are looking at music as a way to generate consistent income. Based on the examples we touched on so far for Bruce Springsteen, Bob Dylan and Justin Timberlake. I'm guessing this is a pretty hot asset class. Bryce: [00:11:54] You're right, Ryan. It is hot stuff. It's become one of the hot asset classes in demand. In the past couple of years, Hipgnosis has gone from paying 13 times the revenue in 2019 to 24.5 times two years later. Alec: [00:12:11] So just to be clear, if my song is earning $1,000 a year in Spotify revenue. Yeah, they were paying $13,000 for it. Yeah. Now they're paying over $20,000. Bryce: [00:12:21] That's it. That's it. So the value is increasing. And there are two reasons for this. The first, in a low interest rate environment, which has certainly been in the last decade or so, these annuity style assets have become more valuable. We're not going to go deep on how these funds calculate the value of future cash flows. But more simply, the 5% return from music investments is more attractive than the alternatives. Think about what you're getting in your bank savings account, but low interest rates are only part of the story here. The second reason music streaming is growing and with it the income from these songs. In 2021, total streaming revenues rose by just under 25% to reach $16.9 billion. Analysts from Goldman Sachs expect the music industry revenue will double by 2030. So we are long past the dark days of Napster and live wire decimating the music industry. Alec: [00:13:12] Yeah, we certainly are Bryce. But I guess we're talking about interest rates and a big story for 2022 has been inflation and interest rates going up. So have fears about rising interest rates change the music market at all? Is anyone trying to sell the music back catalogues they bought? Bryce: [00:13:30] Well, we are starting to see the start, but I would caveat that it is only the very start. Providence Equity is trying to sell its $600 million song catalogue, which includes songs from Wiz Khalifa and Florida Georgia Line. Alec: [00:13:46] Can I just ask, do you know either of them. Bryce: [00:13:47] Is never heard of Florida Georgia. Alec: [00:13:49] Line? I actually have. Bryce: [00:13:51] Not. So I'm not surprised if they can find a buyer. It would be the first major private equity exit from the red hot music copyrights market. A $600 million price tag would be about a 20 times annual income. Or if I were to flip it around about a 5% yield. Alec: [00:14:06] Right. Okay. So they're still selling for about 5% return. $600 million price tag. 5% of that. Can you do the maths quickly? Well, you're earning about $30 million a year. Yeah. Okay. Not bad. Not bad. I'll take it. But, Bryce, when we were researching this episode, we came across a story that showed it wasn't just about music itself. Musicians and artists can sell a lot more than that, can't that? Bryce: [00:14:32] They can rent. And look, Tina Turner sold her name, her image and her likeness to BMG last year, which does open up a whole metaverse. Alec: [00:14:43] Okay, we're not going to go into the metaverse story. Well, we could, but I. I would probably be open to selling my name, image and likeness for $100. But, I mean, it is a fascinating idea of, you know, what concerts in the metaverse could look like if a private equity player buys your image financially for. Bryce: [00:15:05] You to think about. Alec: [00:15:06] So, look, this is an asset class that I didn't know much about, but I'm realising that it is hot and that people are making a lot of money and that music streaming is a pretty consistent revenue source. If you buy the right song, you know what? It would be a great song if I could buy one song. Mariah Carey's Christmas song because that is just guaranteed. Bryce: [00:15:27] Or Michael Bublé. Alec: [00:15:28] Yeah, just this Christmas. You just re ringing that cash you stuff. Bryce: [00:15:33] Very seasonal. Very seasonal. Alec: [00:15:35] Yeah, but that's all right over the year, you know. But look, that that leads me to where I want to end this episode, which is how do we access it? You know, you and I, we don't have the $900 billion that Blackstone do. Can we access this industry or is it just too hard for us? Bryce: [00:15:51] Well, this is what I love about the world of business in finding new things all the time. And you can access music, right? So there are some listed funds that invest directly in music rights that you can become an investor in. The first is Hipgnosis, listed on the London Stock Exchange Song's The Ticker. They own rights to Bruno Mars and Beyoncé and have a market valuation of £1.3 billion. Then there's Mills Music Trust Unit. Over-the-counter markets is where you can. Access them. They have a catalogue of about 25,000 songs. Then we've mentioned the big companies, the big private equity companies that are listed. You can get into Blackstone, Apollo and KKR through public markets, and you can also invest in the big music labels such as Sony, Universal and Warner through public markets as well. Alec: [00:16:40] But with those ones, this music royalty business would be a very small percentage of their overall business. That's it. Okay, so there are a few funds that give people like you and I access directly to songs. Yeah. The key caveat there being not every song does well and you need to be very deliberate and do your research about what songs they are in. Yes. Then there are the big funds that back these these big deals. Yeah. And then there's a third category. Bryce: [00:17:09] That's right. And there are now specialist exchanges online. For example, Royalty Exchange sold a partial interest in Jay-Z's Grammy winning Empire State of Mind for $190,500. Song Vest is another one. It sold a catalogue of Asha and Chris Brown songs for $440,000. And when you drag me out of the metaverse put out Royal allows you to tokenise the ownership through nfts of songs and rapper NAS. He sold his new song, Rare. He offered 50% of the song in total and raised $369,000. Now, how he did that, he offered three sort of tiers. You could buy 0.0113% of the song for $99. You could buy 0.0658% of the song for 499 as well as get some exclusive merch. Or you could buy 1.5789% of the song for just shy of $10,000 and get a VIP concert ticket and some signed vinyl and merch as well. So pretty fascinating. Alec: [00:18:12] Stuff. That is a fascinating use case of NFT. So, you know, you spend $99 and you get 0.0113% of the royalties that come from Apple Music and Spotify. Yeah. So then you'd just be sitting in your bedroom playing it. Bryce: [00:18:26] Over. Alec: [00:18:27] And over again. Well, look, Price, that is a fascinating way to end the episode. Music royalties. Who would have known that were investable? But what's more, who would have known? There are a number of platforms out there that allow us to buy it. Yeah. I'm going to go and do some due diligence and say if Mariah Carey's Christmas catalogue is on there because I am going to buy it. Audio clip: [00:18:48] Nice. Alec: [00:18:49] But that brings us to the end of today's addition of the dive. Thanks for joining us. If there's a story you want us to talk about, contact us at the dive at Equity Mates dot com and remember to follow us on all the social media channels. Those details are in the show notes. Finally, remember to write and review us. It really does help. And with Sasha away this week in your review. Tell Sasha you miss her and wish her a happy birthday. Finally, you can also subscribe wherever you are listening right now. So you have every episode delivered to you the moment it drops. Bryce Thanks for joining us. Bryce: [00:19:22] Thank you very much, Ren. Alec: [00:19:23] And we'll see you again on Friday.