Valuation of Music Catalogs
What's the connection between music and finance?
Nowadays, when new music is released, streaming revenues look small relative to what the sale of CDs used to generate. This has had a profound impact on the timing and magnitude of musicians’ revenues.
From a practical perspective, musicians may want to sell their rights to receive payments upfront, based on the revenue they are expected to generate over a future time period. The money raised this way can provide a lump sum to fund music production, marketing and help artists diversify their assets.
The cashflows earned in the early years after a song is released are helpful in predicting the long term streaming revenues.
This has opened the possibility for financial instruments that provide artists with advances, while investors participate in the future cashflows of music.
This activity has grown to an estimated US$5bn in music rights transactions in 2021.
Ivan Kosyuk and Sasha Stoikov wrote a short paper about the valuation of music from a financial engineering perspective to justify the multipliers quoted on a music rights trading platform called Royalty Exchange. We find that ask prices areclose to the multipliers justified by median song cashflows. The best bids are near the multipliers justified by the bottom decile of song cashflows.
We show that a discounted cashflow model estimated on historical revenue data on Royalty Exchange fit the market data quite well.
Moreover, we find that the ask multipliers are near the value justified by median song cashflows, while the bid multipliers are close to the bottom decile.
This market outcome resembles the work of which examines how the quality of goods traded in a market can degrade in the presence of information asymmetry between buyers and sellers.
In particular, the seller of music rights may have information that is not available to the buyer, such as the costs associated with the success of songs in a catalog. The mixture of assets that have had organic growth and those that have had significant marketing budgets may make buyers reluctant to buy music rights at their median value.