How do music royalties work?
A recording contract between a record label and a music artist sets out the royalty percentage that the artist will receive whenever their music is used. Recording artists, songwriters, producers, backup singers and cowriters typically get a percentage of royalties.
When a song is recorded, copyrights are created for:
- the composition of the song
- the recording itself
Then, within each of those two copyrights, there are:
- mechanical rights, which generate revenue whenever a song is streamed, or a copy is physically sold as a CD, cassette, vinyl, etc.
- performance rights, which create revenue whenever the music is played on the radio or in concert
- synchronisation rights, which generate revenue if the song if used in a movie, TV show, or video game.
How does Royalty Exchange work?
Music artists earning royalties can sell them to investors like you during online auctions or at a fixed price at the newly-launched eXchange.
Before a sale or auction, Royalty Exchange evaluates the music artist’s asset and figures out the potential value. Then, a guarantor sets a minimum price and irons out the details with the rights holder.
Royalty Exchange users sign into a free account. First-time bidders are verified by phone. This asset class has no accredited investor requirement. It also offers tax incentives for investors, who can write off the purchase price over a period of years.
Not all music artists auction off the full rights to their piece of music. Royalty Exchange offers the option to sell rights for a set term instead of the life of the copyright.
Some artists sell the royalties and residuals earned within a set period before the rights revert to them.
After the sale, the rights holder creates a letter of direction, which redirects his payments from a guild or publishing house to the new rights owner.
Royalty Exchange takes 15% from the seller on a typical sale plus a one-time $500 fee at the end of each auction to cover future royalty administration.
“When you buy one of our NFTs, you’re actually going to get paid just by holding it,” Martini told Music Business World Wide. “That’s how we’re doing it a little differently than what people would normally think of as an NFT. We’re just applying blockchain technology to something that we’ve already been doing, which is catalogue sales.”
Are music royalties a good investment?
Buoyed by the mass adoption of streaming, recorded music grew by USD 1.5 billion in 2020 to $23.1 billion in revenue, up 7% from 2019, according to estimates from Midia Research. And consumption is immune to economic cycles.
Streaming has made rights more valuable because music is no longer purchased once, for example, a CD purchase. In the age of streaming, every time a song is streamed, there’s a new payment.
According to the Wall Street Journal, low interest rates, combined with an asset that produces yields largely untethered from the broader economy, make music royalties an attractive investment.
“Music royalties earn money, year in and year out, in a fashion that doesn’t appear to be dependent on equity markets or inflation or interest rates,” says Caroline Bienstock, chief of music publisher Carlin America, told Forbes. “Once an asset has found its baseline level of earnings, it doesn’t tend to deviate that much.”
“If you buy sensibly, it’s a fantastic area to participate in with a stable and growing return,” investor Charles D’Atri, a former music catalogue head at the Walt Disney Co., told the LA Times. “If I’m a huge ‘Star Trek’ fan, any return is enjoyable if I can say I’m a participant in the success of ‘Star Trek.'” (Royalty Exchange recently expanded into dealing in film and television royalties, including four “Star Trek” movies.)
As a Trekkie, D’Atri is going where no fan has gone before, but where many will follow. Owning a piece of the music you stan for? Whether it’s NFT or tangible, the experience is priceless.
