🎼The risk associated with music royalty
Valuation Risk: When purchasing a music IP asset, there is always the potential that you could overpay. For example, music royalty income typically declines rapidly in the first several years after release before leveling off in year 10 and beyond. If you paid 8x last year’s cash flow for a song catalog that is on average one year old, that implied 12.5% yield will likely be much lower in year 2 if the cash flows follow a typical decay path. On the other hand, if you paid 8x for a catalog that is 15 years old with a history of consistent income, that 12.5% yield will likely, all else equal, be more stable in the future.
Counterparty Risk: It is important to do the necessary legal diligence to verify the chain of title and confirm the seller owns what they claim. Some special considerations that can add complexity to a transaction include liens on the seller’s asset, bankruptcies, divorces, and estates.
Technology Risk: Napster disrupted music in the 2000s leading to 15 years of recorded music industry declines. The proliferation of smartphones and streaming has reversed this trend and helped the industry return to growth. Technological innovation can have a material impact on music royalties, for better or worse.
Regulatory Risk: Many music royalty rates, especially rates related to the musical composition copyright, are regulated. While most of the recent royalty rate decisions have been positive for music IP rights holders, future changes to rates could have a material impact on music IP cash flows.
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