Music royalties are very important to the music business because they help musicians earn and give investors a chance to make passive income from acquiring music catalogs.
In the past few years, they've become a lot more critical as streaming and publishing revenue have increased globally. IFPI says that worldwide sales of recorded music rose by 10.2% in 2023, mostly due to more people signing up for paid streaming services.
Despite their importance, understanding music royalties can take time and effort. Complex licensing deals and rapidly changing market trends make it difficult to determine the true value of music rights.
This article examines how economics affects music royalties, pricing, and value. We'll explain what influences royalty rates, how to determine their worth, and what's shaping the future of music as an investment.
If you make music and want to earn more, or if you want to invest in something new, knowing these basics will help you better manage music royalties. Before we get started, check out Royalty Exchange after reading this article to sign up as an investor and search through the thousands of music catalogs that are available today featuring songs from the biggest artists in the world such as Jay-Z, Beyonce, Jimi Hendrix, and more.
Economic Principles
The economics of music royalties are based on a few key concepts that shape how this one-of-a-kind market works.
Let's look at these ideas in more detail to get a better idea of how they affect the price and worth of music payments.
Supply and Demand in the Music Royalty Market
Like any market, the music royalty space is heavily influenced by supply and demand. Here's how it works:
Supply Side
The supply of music royalties comes from songwriters, composers, and rights holders who are willing to sell their royalty streams. Among these are:
- Well-known singers who want to sell their back catalogs
- Upcoming musicians who need money right away
- Estates of singers who have died are in charge of their musical legacies.
Demand Side
The demand side comes from investors and businesses that want to buy these royalty lines. Among these are:
- Individual investors looking for distinct offerings
- Companies that produce music adding to their libraries
- Royalty-focused investment firms and funds
When more people want to buy certain music albums or songs, they become more valuable. For example, if a movie makes a famous rock song popular all of a sudden, investors may rush to buy its royalties, which could drive up the price.
Scarcity and Exclusivity of Popular Music Catalogs
Some music catalogs are more valuable than others. This is primarily due to their scarcity and exclusivity. Here's why:
Not Many Hit Songs Available
There are only a certain number of songs that become hugely famous and stay that way. Think of songs like "Bohemian Rhapsody" or "Billie Jean" that will always be popular. These standout songs are rare, which makes them highly valuable. Since they're not easy to come by, their worth increases over time.
The Exclusion of Rights
Being the owner of the rights to a hit song means you can make money all the time. This gives you full power over the song, which raises its value. Your rights become more valuable as a song stays popular for longer.
Meaning in Culture
Some songs are special in our culture, making them even more valuable. Holiday tunes or songs tied to big historical moments carry a unique importance. Their deep connection with culture adds an extra layer of scarcity and value.
Value of Intellectual Property Rights in the Long Run
Music royalties, a type of intellectual property, can be valuable for many years, even decades.
One reason is that in many countries, copyright protection lasts for the life of the artist plus 70 years. This means hit songs can keep making money for over 100 years.
Unlike physical things that lose value over time, music keeps earning money from streaming, radio, or commercials. As streaming services grow worldwide, a song might become popular again, bringing in even more income.
Because of this lasting value, investing in music royalties can be a smart move for people looking for long-term gains.
Diversification Benefits for Investors
Music royalties are different from stocks or real estate because they don’t follow the ups and downs of the broader market. This makes them a good way to protect your investments during uncertain times.
Adding music royalties to your portfolio offers unique benefits:
- Low Correlation with Markets: Music royalties don’t usually rise or fall with stock markets or real estate, helping protect against market swings.
- Steady Cash Flow: Regular royalty payments provide a reliable income, which can help balance out more unpredictable investments.
- Cultural Resilience: People listen to music even in tough times, making royalties a stable investment.
- Global Exposure: Hit songs earn money worldwide, letting investors benefit from global revenue streams.
Pricing Factors
A lot of things need to be thought about in order to figure out how much music earnings are worth. Let's break these things down.
How Streaming Platforms Pay Out
One of the biggest things affecting music royalties today is how much streaming platforms pay.
When you listen to a song on a streaming service, the artist doesn't get paid a set amount.
Instead, it works like this:
- The streaming service takes all the money it makes from subscriptions and ads.
- They keep some of this money for themselves.
- The rest is divided based on how often each song is played.
In other words, a song makes more money when more people listen to it. It's not that easy, though. Streaming sites pay for things in different ways.
Streaming rates can also change over time. They sometimes go up, which is good for musicians, and they sometimes go down, which means they make less money.
These changes can happen because:
- The streaming service changes how you can pay.
- As more people use the service, more money comes in to share.
- New laws or rules about how streaming should work
When you're thinking about buying or selling music royalties, it's essential to keep an eye on these streaming rates. They can make a big difference in how much money a song will make.
Performance in the Past and Potential for the Future
When setting music fees, it is also very important to consider how well the music has performed in the past and how well it might perform in the future.
At times, investors look at how well a song or album did in the past. They think about things like:
- How many times it's been downloaded or played
- How often it's been played on the radio
- If it's been used in TV shows, movies, or ads,
- How many actual copies (CDs or records) have been sold
A song that's been popular for a long time is often seen as less risky. It is more likely to be valuable if it has a track record of making money.
But past performance isn't everything. People who put money into songs also try to guess how well they will do in the future. They could think about:
- Does the singer still tour and make new music?
- Could the movie or TV show bring the song back into style?
- Do people like this style of music more or less?
Sometimes, a newer song might be worth more than an older one if people think it has a better chance of becoming a big hit in the future.
Genre Popularity and Listener Demographics
The type of music and who listens to it can impact how much money is made from royalties.
Some genres, like pop, hip-hop, and country, tend to bring in more money because they have large or loyal fan bases. Pop gets lots of radio play, hip-hop is popular on streaming services, and country fans often buy a lot of music.
But trends can change, and what’s popular today might not be as popular in a few years. The age of listeners also matters—young people stream more, while older listeners might buy physical albums or downloads.
Some age groups and even geographical locations may watch more music videos, which affects YouTube royalties. Investors often seek music that appeals to many people or has loyal fans.
Sync Licensing Opportunities
Sync licensing is when music is used in TV shows, movies, commercials, or video games. This can be a big source of money for some songs.
There are different ways music can be used:
- Background music in TV shows or movies
- Theme songs for TV shows
- Music in commercials
- Songs in video games
Each of these uses can pay different amounts. A song used in a big movie might earn more than one used in a small TV show.
Several factors can make a song more likely to land sync deals. The mood is essential—happy songs might be great for upbeat ads. Well-known songs can make scenes more memorable. Lyrics also matter, especially if they match what's happening on screen.
Songs already used in sync deals are often seen as more valuable because they have shown that they work well with visuals.
Valuation Considerations
When it comes to figuring out how much a music catalog is worth, there's a lot to think about. It's not as simple as just looking at how much money the songs have made in the past. Let's break down the main things to consider when valuing music royalties.
Methods for Valuing Music Royalties
There are a few ways to determine how much music royalties are worth. These are the three main methods:
Income Approach
This method looks at how much money the music is likely to make in the future. Here's how it works:
- Estimate how much money the music will make each year for several years.
- Figure out how much that future money is worth today.
- Add up all those present values to get an overall value.
This method is popular because it focuses on the money the music is expected to make. However, it can be tricky because it's hard to predict the future, especially in the ever-changing music industry.
Market Approach
This method looks at how much similar music catalogs have sold for recently. For music royalties, you might look at:
- Recent sales of similar musicians' catalogs
- How much investors are paying for royalties on music investment platforms
- Industry reports on music catalog sales
The market approach can give a good real-world view of what people are willing to pay. However it can be hard to find truly comparable sales, especially for unique or very valuable catalogs.
Cost Approach
This method is less often used for music royalties, but it's worth mentioning. It considers how much it would cost to recreate the music catalog from scratch.
This might include:
- Recording costs
- Marketing expenses
- Time and effort of the musicians and songwriters
While this method can be helpful in some assets, it could be better for music royalties. Why? Because it doesn't account for the potential future earnings or the intangible value of hit songs.
Factors Affecting Catalog Value
Many things can make a music catalog more or less valuable.
For example, how often people listen to the music is a big deal. More streams usually mean more money. According to a recent report by the RIAA, streaming now accounts for 84% of recorded music revenue in the US, showing just how important this factor has become.
Another is that older catalogs that have lasted the test of time are often seen as more valuable because they've shown that they can continue to make money year after year.
However, newer music can be valuable, too, if it's trendy.
Risk Assessment in Royalty Investments
Investing in music royalties can be exciting, but some risks must be considered.
Listener habits change, and streaming might only sometimes be as popular. If a new way of listening to music emerges, it could pay musicians differently.
Some music catalogs rely on one or two big hits, and if those songs lose popularity, the value of the whole catalog could drop. Legal issues over who owns the song rights can also be costly and affect the catalog’s worth.
Prices may rise as more people invest in music royalties, making it harder to get a good return. Lastly, big economic changes could impact how much people spend on music, affecting royalty income.
Conclusion
Music royalties are complicated, yet musicians, investors, and industry professionals must grasp them. As already talked about, the economics of music fees are based on supply and demand, scarcity, long-term value, and the benefits of variety.
Key pricing factors show how a song or catalog's value is affected. Valuation considerations emphasize the need for extensive investigation to value music royalties appropriately.
Looking ahead, music royalties are becoming a feasible investment. The global recorded music market is growing, making music royalties a viable asset class.
If you're curious about this unique market, platforms like Royalty Exchange are making it easier to get involved. They connect musicians who want to sell their royalties with investors looking to diversify their investments, allowing more people to participate in the music industry. On Royalty Exchange you can sign up as an investor and search through thousands of music catalog listings that include producer and songwriter royalties to some of the biggest songs of the past few decades. Discover why song royalties are one of the best investments to grow your wealth in 2024 and download the free Ultimate Guide To Music Royalties to learn everything you need to know about investing in royalties. Invest in music today and reap the benefits of earning passive income from music rights whose value is independent of macroeconomic markets.
Whether you're an artist wanting to understand the value of your music or an investor thinking about adding music royalties to your portfolio, it's essential to understand these basic ideas. Although the music royalty market can be complicated, it offers exciting chances for those willing to dive in and explore.
