You may enjoy music but did you know you can also invest in it? Music royalties are a niche form of alternative investment asset class. In this guide, we explain what they are, how they work and how you can get started investing in it if that's something for you.
Music royalties are how people in the music business get paid. A royalty is a payment to the person or group that owns the copyright to a piece of music. For each of your favorite tunes, there are two main types of music copyrights:
These two copyrights together produce the below royalties:
Sometimes the same person writes and records a song, but often there are multiple writers, musicians, and performers involved. And then you have to factor in the record labels, publishers and other industry folk that play a part.
For a single song to get made, it takes lots of people’s effort – and they all want a share of the royalties. So who gets what?
A song only exists once it’s been written, so songwriters and publishers naturally get the lion’s share of the publishing rights and royalties from streaming, performance, and licensing.
Master rights get split between the performers, their record labels and distributors. How the rights get divided depends on the musician’s record deal agreement. Not all the artists are equal: named artists usually get higher royalties than back-up singers or session musicians. The bulk of their royalties will come from streaming, performance, and licensing.The distributor’s main role is to get the song on as many platforms as possible and their biggest share comes from streaming royalties.
Songs don’t all sound the same, and they don’t all generate the same royalties. There are a few things that make a difference. Firstly, the music format matters: digital music makes more than physical music – when’s the last time you bought a CD? Secondly, songs on major platforms with a wide reach usually make more royalties. Thirdly, the music genre and the artist also play a part. The more popular a tune and the more it gets played, the more royalties – especially if it’s used in an advert or movie.
Lucrative alternative assets were once the reserve of the ultra-wealthy and major businesses
But no longer: you can reap the benefits of twelve alternative asset classes by investing in just one Hedonova fund – and you can get started with just $5,000.
Investing in music royalties can be a smart move because people’s income doesn't usually have a strong impact on their music spend. This means that music royalties as an investment asset have very little in common with the broader economy, so it’s a good way to diversify your investments.
Digital streaming has taken off in the past decade, and made music much more lucrative again. Similar to bonds or property investments, income from music royalties is relatively stable and predictable with low operating costs.
Imagine you decide to invest in a new song. The first year after the song’s release is when you’ll see the most income, as that’s when it’s most popular. It will taper off over the next 5-10 years – depending on how catchy the song is – and then eventually settle at a lower level that stays pretty stable over time.
So if you want to start investing in music, how can you do it? One option would be to invest in a music royalty fund: these are funds specifically dedicated to investing in music copyright assets. They’re usually private and require a high level of investment.
If a fund doesn’t suit you, you could buy shares in record labels and publishers. But this could be tricky: most traditional record labels are privately owned or part of an umbrella company, so your choices are limited.
If you have a great ear for a tune and want to be very hands-on, you can even buy music rights in the private market. But this could make it hard to diversify your investments, and potentially create a lot more work for you to value the rights yourself. An easier way of doing this is to invest in alternative asset funds. These larger funds invest directly in music royalty funds or they might have in-house music experts who create a diverse collection of music rights.
As with any investment, there are risks to be aware of. Music and technology are tightly linked, so any change that impacts how we listen to music could impact your investment. Government regulations around music rights could also make a difference. Finally, if royalty rates don’t factor in inflation, this could make a dent in your income.
You can really get inventive when you invest in a creative industry. Hedonova’s been buying just the tunes and rhythms of songs, instead of the full song. That way, the alternative investment fund can buy 30 or 60-second rights to a song and resell them to platforms like Instagram, Snapchat, and TikTok. Those platforms pay royalties depending on the number of times the song clip was streamed, and they’ll usually hand out around one dollar per 1,000 views.
This guide was produced by Finimize in partnership with Hedonova.