Mar 10
30
Building Robust Valuations of Music Assets In A Digital World
Historically, music publishing catalogues are valued at a
multiple of the NPS (Net Publisher Share) with the multiple increasing or
decreasing according to the perception of the future earnings potential.
The NPS is the gross margin the publisher keeps after the
songwriter has been paid and is made up of a basket of Performing Rights
income, Mechanicals, Synch and Print.
Back when I was involved in music publishing in the 80’s and
early 90’s from within the music business rather than in a business advisory
role, I would regularly be asked to do analyses of likely gross revenues going
forward. This was generally because an emotional decision had been made to make
the deal, but a rationale needed to be built to meet the internal management
metrics set out by the corporation to minimise risk.
That meant looking at sales history, territories where sales
had taken place and potential for growth in the future.
I would do the research, submit the numbers and generally
would be told that the numbers weren’t quite what they were looking for and
consequently I had to look for additional revenue sources that could help bump
up the perceived value to get a deal over the line.
In every case that I can remember, even with incredibly bullish
future revenue predictions and with quite substantial multiples driving very
optimistic valuations, the acquisitions recouped their investments in shorter
periods than anyone anticipated and went on to be hugely valuable.
That wasn’t because I was a genius. It was because the
songwriters were artists who had enormous talent. As they built their fan
bases, the back catalogue that had been purchased kept on increasing in sales
even though some of the albums were years old – a lifetime in pop music.
I suppose it was thought that I had some talent in figuring
out business models and how to extract revenues because while at MCA I
recommended a strategy that was implemented and which drove a massive increase
in the gross revenues of the publishing company. This was achieved by simply
acknowledging reality. Artists that wrote their own songs, but not necessarily
the lead airplay single, were more valuable to acquire in short term cash flow
terms than song writers who wrote the hits.
This was because sales ensuing from the exercise of
distribution clout by a major record company would sell through in enormous
numbers, which would in turn deliver very high mechanical income. Those were
the days when album sales were booming.
The hit song would generate considerable income from
performances and would typically receive one tenth of the mechanical income
from being a track on the album. Not too shabby, but controlling nine tenths of
the mechanical income on an album that sold 5 million copies was pretty serious
income.
In such a scenario, the valuation of the underlying
catalogue was then about having an understanding of the granular detail of the
make up of the revenue. Now it is even more critical to understand the drivers
for the revenue and what the active momentum is that supports the revenue of a
catalogue. Songs that were airplay hits then had a life beyond the charts and
have a continuing value for a rights owner. Songs that derived their value
predominantly from mechanical sales need to be valued much more carefully and
with greater consideration.
Now there are a vastly increased number of variables
inherent in the way that music is consumed that make it much more difficult to
build out a robust valuation of a music catalogue. (I don’t regard piracy of
copyrights as having any bearing on establishing true value as it represents
revenue that is foregone in any event).
One quite critical change to the market that is both good
and bad is that as a result of iTunes consumers don’t have to buy albums to get
a song. They can easily browse all the songs that an artist has released and
purchase only that which they particularly like. That means that there are
hidden gems that may have a new life even though they are obscure and were not
truly valued by the record company. But it means that those songs that were
album fillers in times gone by have a substantially lower potential to yield
income than they did before, because of the nature of uncoupling.
We appear now to be moving to a period similar to the early
days of music publishing where the true value of a song writer was established
purely by the hits.
In trying to develop a robust valuation model now what seems
to be apparent is that quite forgettable pop songs of the past have potential
in the future in movies and TV shows, as themes for advertising jingles and as
novelty downloads or ringtones.
Being able to look for the gems in a catalogue and to then
extract value from the song, and bearing in mind that the song will continue to
generate money for its creators and their heirs and its publisher for possibly
70 years or more from now means that the art of publishing is returning.
Instead of it being a pure numbers game, which some people in the industry like
quite a lot, it is going to be about what it was in the past – identification
of songs that resonate emotionally with the masses on a timeless basis. One of
my friends and mentors in the music industry for years, Wally Brady, put it
aptly, “A hit song is being able to say “I love you” in a new and unique way”.
There is science in good valuation, and there is art in identifying what will touch the human soul. Putting them together enables acquisitions of catalogues to work for both the songwriters and the new owners of the catalogue.