11 December 2019

Singing a different tune

Hit songs could in fact be deemed better than gold and oil as they are uncorrelated

Hit songs could in fact be deemed better than gold and oil as they are uncorrelated. When life is great music is the soundtrack to that celebration. When life is challenged music is the escape. Music is always being consumed on a daily basis.

Unfortunately between 2001 and 2015 much of that consumption was illegal thanks to the technological disruption of illegal downloading. The only good thing that came from that is that it has left these incredible songs available at attractive prices just as the technology has evolved into streaming which has made it more convenient to once again consume music legally. As a result, revenues are growing and are set to grow even more over the next 10 years when it is projected that there will be growth from the 200 million paid subscribers globally today to more than 2 billion. 600 million of those will be a tripling of the world as we know it today and a whopping 1.4 billion are predicted to come from emerging markets that currently do not contribute to the steady state income on which songs are bought. Keep in mind there were only 50 million paid subscribers worldwide only two years ago. Over the same period, and based on the cash flooding through from that growth, Vivendi have increased their valuation of Universal Music Group from $6 billion to over $30 billion thanks to the proposed acquisition by TenCent of 10% (for $3 billion).

Investors could access this anticipated market growth by investing in a vehicle that has bought the catalogues of celebrated artists, such as Eurythmics - 'Sweet Dreams (Are Made Of This)', Chic - 'Le Freak', Journey - 'Don’t Stop Believin', Al Green - 'Let’s Stay Together', Beyonce - 'Single Ladies (Put A Ring On It)', Rihanna - 'Umbrella', Ed Sheeran - 'Castle On The Hill', Luis Fonsi, Daddy Yankee feat Justin Bieber - 'Despacito', Diana Ross - 'I’m Coming Out', Sister Sledge - 'We Are Family' and others.

Hit songs could in fact be deemed better than gold and oil as they are uncorrelated.

In 2019 the UK music industry has contributed a huge £5.2 billion in Gross Value Added (GVA) to the UK economy and the US is on pace to be a $10 billion business again for the  first time since the year 2001. The opportunity is a result of the systemic change in the way that music is now consumed as a result of streaming. Many believe what this means is that the music enthusiast who used to consume vinyl, CDs or downloads is now getting their music via streaming services. That may be true for some but the real systemic change is that the passive consumer, who has never paid for music before, who was happy listening to it on the radio or watching on TV, is now spending £120 per year on music streaming because the combination of access to everything from The Beatles to Beethoven and Chic to Chopin, and the convenience has moved music from a luxury purchase to a utility necessity. Songs can now be considered the currency by which the music industry revolves.

Songs can now be considered the currency by which the music industry revolves.

The investment thesis is that streaming is going to grow revenue, that the songwriters share of the royalties will increase, that we might be able to bring efficiencies to the collection of the income and critically that we would actively manage these precious songs to new levels of success all of which has the aim of adding significant value over and above the predictable and reliable income on which the songs were acquired. It would be remiss to not mention that songs are also protected by rule of law which is 70 years after the death of the last co-composer, so these are long-term income streams with the average length in the catalogue being over 100 years and the average acquisition multiple being 12.6x.

It is my belief that we are on the cusp of proven hit songs not only being truly recognised as an asset class that belongs in everyone’s portfolio but indeed an extraordinary one at that.

Views and opinions have been arrived at by Hipgnosis Songs Fund Limited and should not be considered to be a recommendation or solicitation to buy or sell any products or securities that may be mentioned.

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