The music publishing industry experienced a significant shift with the emergence of the various Hipgnosis funds, a related group of companies that has been making headlines for its ambitious catalog acquisitions. Founded by former artist manager, Merck Mercuriadis, Hipgnosis quickly became a major player in the business by acquiring the rights to some of the most iconic and influential songs, for what many industry insiders viewed as inflated prices. As Hipgnosis made deals acquiring major catalogs, music industry veterans questioned whether there was a “music catalog bubble,” akin to the 2008 housing bubble. Despite this skepticism, Hipgnosis continued to aggressively acquire catalogs. That was until this Fall, when Hipgnosis began unloading some of its publishing assets.
Founded in 2018, Hipgnosis Songs built its portfolio by partnering with investors to create acquisition funds to purchase the catalogs of established songwriters rather than focusing on developing new artists or buying catalogs with its own money, the way a traditional publisher or record company might. Although Hipgnosis has grabbed attention through its high-profile deals, it is not the only company implementing this strategy. Companies such as Reservoir, Primary Wave, and BlackRock have also implemented similar models, purchasing major catalogs as investments. Using this strategy, Hipgnosis secured the rights to an array of catalogs, including those of iconic artists like Neil Young, Bob Dylan and Justin Bieber.
A music catalog acquisition is the purchase of the rights to a collection of musical works, typically comprising the “publishing rights” but which may also include master recording rights in some cases. Master recording rights involve the ownership of the actual recordings of the songs. These rights typically remain with the record label, as most artists do not own their master recordings. Publishing rights are the copyrights to the underlying musical compositions apart from any recordings of them. Copyright owners possess what is colloquially referred to as the section 106 “bundle of rights,” which grant the owner the authority to reproduce, distribute, perform, and license the songs. Music publishing income is divided into two parts: 1) the writer’s share, which goes to the songwriter; and 2) the publisher’s share, which goes to the entity that owns the publishing rights. Typically, the acquiring entity gains control over just the catalog’s publishing rights, allowing them to monetize the songs through various channels like streaming, licensing, and other forms of distribution. However, Hipgnosis disrupted this traditional model by seeking to acquire “100% of a Songwriter’s copyright interest in each song, which would comprise their writer’s share, their publisher’s share, and their performance rights.” A more detailed summary of this investment strategy can be viewed on Hipgnosis’ website, here.
Investors may consider music catalogs a good investment for several reasons, including stable and predictable income through a variety of income streams, portfolio diversification, and some catalogs contain iconic songs with enduring cultural relevance.
Hipgnosis’ prior success in acquiring and managing music catalogs helped fuel a feeding frenzy to acquire music assets as investments. However, to the savvy investor, music catalogs may only be a viable investment if the returns are in proportion to the acquisition costs. The valuation of music catalogs is a complex process influenced by various factors, including the popularity of songs, historical financial performance, and potential earnings. As interest rates rose in 2023, so did the cost of the debt used to leverage acquisition of music catalogs.
This increased cost led some to conclude that investment in music catalogs was akin to government bonds, a traditionally safe but low yield investment. As a result, Hypgnosis’ stock value tumbled to about 50% of their net asset value, showing that investors believe the “music catalog bubble” has burst. Investors may also be concerned by a lawsuit filed by Hipgnosis Music Limited (“HML”), another similar fund also founded by Mercuriadis but which is being wound down, against Mercuriadis’ and his latest iteration of Hipgnosis, Hipgnosis Songs. HML alleges that Mercuriadis and Hipgnosis Songs diverted business opportunities from HML to the new entity.
Despite Hipgnosis’ slowdown in acquiring new catalogs and their offloading of current assets to pay down debt, Hipgnosis has set a new standard for music catalogs as a class of investment. If interest rates go down, we may see companies continue to follow Hipgnosis’ model and another competitive shopping spree may result. However, if Hipgnosis and its kin continue to pay high prices, investors may no longer see music catalogs as a viable investment diverting their funds to more traditional investments.
Hipgnosis has undeniably made a major impact on the music industry through its catalog acquisitions and its competitors have followed suit to varying degrees. Although Hipgnosis has recently begun offloading some of its acquisitions, this trend may turn around or we may see more bubble bursting in the near future.