Structuring Music IP as an Asset Class

Music IP Monetisation

At the pinnacle of the music industry's hierarchical structure lie Right Owners, the esteemed holders of intellectual property rights. This diverse group includes not only creative talents like artists and labels but also entities that acquire IP, such as labels and music investment funds.

These Right Owners monetise their IP by granting usage licenses, paving the way for the creation and subsequent market entry of musical products. However, the intricate web of licensing and content distribution dynamics varies greatly depending on the distribution channel. For the purpose of this document, we will delve deeper into monetization channels rather than distribution channels.

Generally, there are several avenues for monetising IP:

  1. Streaming

  2. Downloading

  3. Physical distribution

  4. Merchandising

  5. Sync licensing

  6. Live events

Each monetisation channel possesses distinct characteristics that can be categorized based on two primary variables:

  • Concentration: This refers to the degree of revenue reliance on specific events, leading to their concentration over time around such events. For instance, revenue generated from album sales tends to be highly concentrated around the release date or the release of various editions.

  • Dependence: This variable underscores how revenue is influenced by the actions of the rights owner. Moral hazard arises from the risk that the rights owner's actions may adversely affect revenue potential. As an example, revenue from sync licensing hinges on the rights owner's efforts in securing deals, with moral hazard coming into play if their actions negatively impact these opportunities.

Applying this logic, streaming emerges as the most compelling monetisation channel due to its ability to generate more stable returns over time. Its reliance on mass behaviours, such as music listening, renders it less susceptible to the discretionary actions of the rights owner.

Consequently, financial products built on streaming exhibit lower moral hazard risks compared to other monetisation channels that are more heavily dependent on active management or promotion. In these latter channels, factors such as poor decision-making, inadequate promotion, or detrimental personal behavior on the part of the rights owner can significantly impact returns.

Structuring Music IP as an Asset Class

By delving into concentration and dependence, we gain insights into music industry dynamics, particularly royalties, distribution channels, and cash flows.

Music revenue streams include streaming, album sales, sync licensing, merchandising, and live events. Streaming, with its steady revenue generation, forms a solid base for financial products, while album sales have peaks around new releases. Sync licensing, due to its high dependence and need for proactive activities, carries a greater risk of moral hazard from the rights owner.

For financial products backed by music revenue, dependence is crucial. A higher level of dependence, as seen in sync licensing, amplifies the potential risk of rights holders' actions impacting the income flow. To mitigate this risk, the issuer must retain a substantial stake in the underlying asset, thereby aligning their interests with those of the investors. Moreover, when the issuer holds the majority control over the revenue stream, the likelihood of value creation for the underlying asset increases markedly.

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