Investor Resources

•

Investor Guides

Intro to Royalties and Royalty Exchange

An introduction to investing in music royalties and the Royalty Exchange Marketplace. What Are Royalties? How Do They Work? How To Evaluate Royalties? How To Invest In Royalties.

Written by

May 4, 2020

•

5 min

read

Hello, and welcome to Royalty Exchange.

Every month, over a thousand investors join Royalty Exchange looking for an opportunity to invest in music royalties.

While music royalties are an exciting asset class with great potential, they are rather new, so you likely have some questions about how they work and generate income. You probably have many questions about the marketplace as well.

So we’ve created this welcome packet for you as a place to start.

Please take a moment to review the information listed here, as well as the guide articles linked below for an introduction to the main concepts and guides to using the Royalty Exchange Marketplace.

Note: the following information for general educational purposes only. We are not investment advisors nor are we giving financial, tax, or legal advice.

WHAT IS ROYALTY EXCHANGE?

Simply put, Royalty Exchange is an online marketplace for buying and selling royalties. We use the power of markets to unlock the value of ideas for everyone involved. And we do that through a transparent marketplace where everybody operates on the same playing field.

We’re not the buyer or the seller. We’re simply the marketplace where transactions take place.

This is a relatively new concept in the music space, where most royalty transactions are limited to just a handful of players and deal terms are kept under wraps. We think that actually restricts value, while a transparent marketplace will instead serve to increase value for both buyers and sellers.

In the last five years, we’ve facilitated over 1,000 transactions valued at over $87 million. Over 27,000 investors have created an account with us. And those who have acquired royalties through the marketplace have enjoyed an average ROI of over 10% on average.

We primarily work with music royalties, but we do also have royalty opportunities in the movie and trademark space as well.

Content aside, the asset you’re acquiring is the right to receive revenue generated by royalties. You’re not acquiring copyrights or control of the content. It’s a passive, often partial interest in a royalty stream.

Once acquired, you don’t need to “work” the catalog or take any effort for the asset to continue earning royalties. That’s because there are others in the music industry charged with ensuring those royalties keep flowing. You’re simply investing alongside them.

WHAT ARE ROYALTIES?

So let’s talk about how royalties make money.

A Royalty is a payment made to the owner of an asset for the right to use that asset.

In the music business, songs are licensed for various types of use, and those uses generate royalties.

A royalty interest is the right to collect on a stream of royalty payments.

In the music business, multiple people who contribute to the creation of a song have a royalty interest in that song and collect those royalties as compensation for their efforts. Any time that song is used, all who own royalties attached to it will collect payment.

From an investment perspective, royalties are a “cut off the top” of revenue generated by music. They are paid out at set, specified intervals. Payment is based on use, not company performance.

That means the royalty holder earns revenue before stockholders in a company. Royalties are not awarded based on the whim of a corporate board like a dividend. Think of it like earning a penny for every iPhone sold vs a share of Apple stock.

MUSIC ROYALTIES

The music business generates multiple types of royalties, and each royalty stream is dependent on the kind of copyright they are associated with. We’ll give you a brief overview here, and point you to additional articles for greater detail on each.

Every song has two copyrights

One copyright for the song as it is written. This is called the Composition copyright, and the royalties it generates are called “Publishing Royalties”
Another copyright is for the song as it is recorded. This is called the Recording (or sometimes “Master”) copyright, and the royalties it generates are called “Recording Royalties.”

Both copyrights generate royalties based on different uses of the composition or recording. These uses include:

Sales/Streaming: These are called “reproduction” royalties for sound recording, and “mechanical” royalties for the composition. In either case, any time a song is sold in any format, or streamed, a royalty is due.
Public Performances: Whenever music is played publicly, someone is likely paying a performance royalty. This includes over the radio, in restaurants/bars, live performances, and even through streaming services like Spotify. Recording and Publishing royalties work slightly differently with this use, which we’ll get into more later.
Licensing: Music is often licensed for placement in TV shows, films, ads, videogames, and so on. These licenses generate Synchronization (or “synch”) royalties, and are a one-time payment negotiated between the copyright holder and the company licensing the music.

For more information about these and other types of music royalties, how they generate earnings, and who collects and distributes them, see the articles below:

Music Royalties 101—Intro to Music Royalties

HOW DO YOU VALUE ROYALTIES?

One of the most common questions we have from investors is how to determine the value of royalty streams. After all, these are not like typical stocks or bonds. But they are an investment, and properly putting a value on an asset is a critical part of making smart investments.

You don’t need to be a music industry expert to properly value royalties. In fact, you don’t have to know anything about music at all. We’ve identified several metrics that all music catalogs have in common, which will allow you to compare one over the other in a measurable, quantifiable way, regardless of music genre, taste, or popularity.

This allows investors to better assess the potential risk of unfamiliar catalogs that may still hold value (or to expose the hidden risk of catalogs they recognize).

These metrics include:

Last 12 Months Earnings (LTM): This is how much the asset made in the last 12 months. Sales on Royalty Exchange are measured by the multiple over the LTM investors will pay to acquire the royalty available. When you determine how much you want to spend on an asset, we feel it’s helpful to determine at what multiple you’re comfortable spending rather than just the dollar amount. Higher quality assets often justify paying higher multiples.
Dollar Age: Dollar Age is a time-weighted measurement of a catalog’s likely stability of earnings based on the revenue produced in the last year, factored against the age of the songs included. The longer a song has earned royalties, the greater the likelihood that it will continue to earn royalties into the future.
Source of Earnings: Songs earn royalties from multiple sources. Some are more stable and have greater likely longevity than others. So when evaluating a catalog, it’s important to look not only at the total royalties it generates (the LTM), but also the source of those earnings.
Trend Rate: Royalties on average tend to decline over time. The rate of that decline is worth following. Is that rate decreasing or increasing? Catalogs that are still increasing in earnings are particularly worth examining (especially if they are older).

The takeaway here is not to let biases like familiarity or social proof cloud your decisions. A catalog of music by an artist you never heard of that has a high Dollar Age is likely a better bet than a collection of brand new music by an artist you’re familiar with.

You can read more about how to value royalties in our the Guide below:

Buying Music Royalties 101

HOW CAN I INVEST IN ROYALTIES?

As mentioned earlier, access to royalty transactions was limited to just a small group of industry insiders. We created the Royalty Exchange marketplace to provide access to royalty deals to investors like you.

Auction House

The Auction House is the original, flagship component of the marketplace. This is where we list assets with a starting price set by the seller. Once a listing gets a bid, the auction begins, and typically lasts for about three business days.

Any registered investor can see the same details for each listing. But you need to be a verified investor to place a bid. Verification is a one-time process you can complete at any time. Once verified you can bid away.

Once the auction ends, the highest bidder wins the auction.

The eXchange

The eXchange is a public listing of music catalogs that you can make offers on at any time. There’s no auction… just a List Price set by the seller that you can either meet or counteroffer to see if they’ll accept.

The listings in the eXchange come from multiple sources. Some are catalogs listed by artists themselves. These are called Direct Listings. Others are assets previously acquired on the Royalty Exchange marketplace by other investors. These are called eXchange Listings.

In either case, you can either accept the List Price to automatically initiate the sale, or make an offer below the List Price to see if the owner will accept.

There are typically well over a hundred listings to review in the eXchange on any given week, while auctions are less frequent (around one or two a week).

For more information about the features of the marketplace, read the Guide below:

Introduction To The Royalty Exchange Marketplace

LEARN MORE

That concludes our overview of royalties and Royalty Exchange. But this is just the beginning.

Below is a full index of the in-depth guides we recommend you review to get started. There’s also plenty of other useful articles on investing news, updates, and insights available on our investor blog.

Finally, we hold a monthly Investor Office Hours live Q&A webinar where you can ask any question you have directly to our staff.