Music investing during inflation


## **Introduction**

In today's market landscape characterized by low yields and interest rates, music royalties have emerged as an attractive asset class. Their unique qualities, such as low correlation with macroeconomic performance and high income potential, have captured the attention of investors looking for alternative investment opportunities. In this article, we will delve deeper into why music royalties are considered an appealing asset class, how investors can enhance the value of their music intellectual property (IP), and the key factors to consider when considering such investments.

### **Stability of streaming**

The advent of digital streaming has brought about greater stability in music royalty cash flows. After a prolonged period of decline caused by piracy and the decline of physical album sales, the music industry has experienced a revival due to the growth of streaming platforms. This has instilled confidence in owning music IP assets and the consistent royalty income derived from them. While income from a song typically peaks 3-12 months after release and gradually declines over time, the remaining income stream remains relatively stable, especially with the growing influence of streaming.

### **Recurring revenue potential**

Music royalties provide a source of recurring income, making them appealing to investors seeking a predictable cash flow stream. Various distributors collect music royalty income, which is then periodically paid to the rights holders of the music IP. This recurring nature of payments is akin to the stable income streams often found in traditional asset classes like real estate.

![Chart showing the music industry value chain](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/Music%20investing%20during%20inflation/music-industry-value-chain-record-labels-capture-most-of-the-value-in-recorded-music-whilst-artists-capture-most-of-the-value-in-live-music-min-1-.webp)

### **Yield in a low-interest environment**

In a market environment where interest rates are low, music royalties offer attractive yields. Compared to the meager yields offered by traditional investment options, music royalties can provide relatively higher returns. For instance, data from Royalty Exchange reveals that the average annualized return on investment for catalogs sold on its platform exceeded 12% during a specific period. Additionally, publicly traded companies in the music royalties space, such as Hipgnosis Songs Fund and Mills Music Trust, offer dividend yields ranging from 4.3% to 9.6%. These higher yields make music royalties an appealing alternative for investors seeking income generation.

### **Low correlation to economic activity**

One of the notable advantages of investing in music royalties is their historically low correlation with broader economic fluctuations. The music industry, including recorded music and music publishing, has displayed resilience during economic downturns, as evidenced by its performance during the COVID-19 pandemic. Music spending has often shown little correlation with overall consumer expenditures. This low correlation, demonstrated by industry trends and data, makes music royalties an attractive asset class that can provide stability even during uncertain economic times.

### **Leveraging active investment strategies**

Investors in music IP can actively work to increase the value of their investments. This can be achieved through three main strategies:

- **Developing performing artists and songwriters:** Traditional record labels and music publishers play a vital role in identifying and nurturing talented individuals, helping them create and market new music IP.
- **Exploring creative licensing opportunities:** Labels, publishers, and royalty funds actively seek new licensing opportunities for existing music IP, such as placements in films, TV shows, advertising campaigns, cover songs, and video games.
- **Streamlining royalty collections:** The complex flow of funds from end consumers to rights holders involves various intermediaries, resulting in delays in royalty payments. Active investors aim to minimize costs and reduce the time lag between payments, maximizing cash flow available to shareholders.

## **Positive outlook for the global music industry amid macro downturn**

Despite the challenges posed by the macroeconomic environment, the global music industry remains resilient and is poised for growth. The recently published 2021 recorded music market figures from the International Federation of the Phonographic Industry (IFPI) have prompted an upward revision of revenue forecasts, indicating a positive view on pricing and emerging platforms. In this blog, we will highlight the key findings and address commonly asked questions, shedding light on the future of music streaming penetration, the impact of a macro downturn on music spend, the monetization potential of emerging platforms, and the outlook for catalogue spend.

![Streaming drives global music industry resurgence chart](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/Music%20investing%20during%20inflation/streaming-drives-global-music-industry-resurgence-min.webp)

### **Raising revenue forecasts**

Based on the latest data and market trends, we have revised our global music industry revenue forecasts upwards. For 2022 and 2023, we anticipate growth rates of 24% and 8% respectively, driven by higher streaming Average Revenue Per User (ARPU), revenues from emerging platforms, and physical sales. Looking ahead to 2030, our forecasts indicate a 10% increase. While the near-term impact of a weaker macro environment and Russia has slightly lowered our growth expectations for 2022 and 2023, the overall Compound Annual Growth Rate (CAGR) from 2022 to 2030 remains unchanged at 9%.

### **Resilience of music streaming**

Contrary to concerns, music streaming is expected to demonstrate resilience even in an economic downturn, outperforming other forms of digital content consumption such as Subscription Video On Demand (SVOD). With a projected Compound Annual Growth Rate (CAGR) of 12% from 2021 to 2030, driven by factors like volume, pricing, and emerging platforms, music streaming continues to hold significant potential for growth.

### **Competitive digital distribution landscape**

The digital distribution landscape remains competitive, characterized by "no winner takes all" dynamics. While Spotify continues to lead the market, it is losing share to platforms such as YouTube Music and Tencent Music, which are experiencing significant gains. This competitive environment ensures a healthy ecosystem with multiple players vying for consumer attention and driving innovation.

![Chart displaying the low correlation between record music spend and personal consumer expenditures (PCE) from 1994 to 2019](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/Music%20investing%20during%20inflation/low-correlation-of-record-music-spend-with-personal-consumer-expenditures-pce-_-1994-2019-min.webp)

## **Importance of scale and catalogue monetization**

The major record companies have strengthened their positions in 2021, emphasizing the growing importance of scale in the digital era. However, the rise of the long tail of artists and the revenue mix shift towards emerging markets may lead to modest dilution of their market share in the future. Additionally, as the industry faces a rising rate environment, the pace of catalogue acquisition spend is expected to slow down. The majors, with their extensive catalogues, have a significant competitive advantage in monetizing their assets, as exemplified by recent success stories like Queen.


Music royalties have become an attractive asset class for investors due to their stability, recurring revenue potential, higher yields in a low-interest environment, and low correlation with economic activity. This article explores the benefits of investing in music royalties and how investors can enhance the value of their music intellectual property (IP). It also highlights the positive outlook for the global music industry amid macroeconomic downturns, with raised revenue forecasts and the resilience of music streaming. The competitive digital distribution landscape and the importance of scale and catalogue monetization in the industry are also discussed. Overall, music royalties offer an appealing alternative for investors seeking stable income and diversification in their portfolios.

Music investing during inflation

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