With interest rates continuing to hover around historic lows, investors need to be more creative in finding opportunities that can help meet their yield objectives. Alternative investments are one place to hunt. One area within the alternative universe gaining increased investor interest is entertainment intellectual property (IP) royalties. These include cash flows from rights related to music publishing and recording catalogues, as well as television and movie productions. Investors can benefit from the growth in entertainment consumption driven by the ability of consumers to enjoy content anywhere. The emergence of streaming over-the-top platforms (Netflix, Hulu, Disney+), which deliver film and TV content via the internet without requiring users to subscribe to a traditional cable or satellite pay-TV service, and music services (Pandora, Spotify, Apple Music) have added new ways for content owners to monetize their assets.
In this week’s chart, you can see the importance of streaming to the music industry, as it has exhibited significant growth from 13% to 56% of total industry revenue in just five years. The coronavirus pandemic has accelerated this trend, as live performances have been canceled and virtual concerts and other events have been conducted online.
A 2020 Nielsen study found that staying at home can lead to an almost 60% increase in the amount of content watched in the U.S., and potentially more depending on the reasons. Additionally, listeners streamed enough music between January and the beginning of July — the equivalent of 361.2 million albums — that total audio consumption (of which streaming represents 85%) was up nearly 10 points over 2019 for the year so far.
While consumption has seemed to grow throughout the pandemic, musical demands have exhibited change. Gym and dance club closures, less commuting and children being at home have been some of the drivers of these changes. Numbers from Alpha Data (the analytics company that powers the Rolling Stone Charts) and data from streaming services show that listeners in America and abroad are tuning into more mood-oriented music. Notably, children’s music has seen the biggest spike in streaming.
Every time a song, television show or movie is played on these streaming platforms, a royalty payment is made. These payments can be sold to other investors. Several specialist managers have emerged to acquire these royalty rights. Active management of these royalties can help increase usage of the catalogues and drive increasing yields. Examples include songs being integrated into gaming platforms and collecting royalties every time the song is played. These cross-platform opportunities (known as synchronization) represent a small portion of overall royalty payments, but are seen as a growing opportunity set. As long as entertainment is being consumed, royalty payments should continue to be made and could offer an attractive yield. While not immune from macro forces that impact traditional equity and fixed income markets, these royalty income streams are less correlated and offer both yield and diversification.
The ownership of entertainment IP royalties is still very fragmented. Producers, estates, families, artists, directors, studios and many other stakeholders own these royalty streams. Such fragmented ownership allows investors to acquire and aggregate these claims to create a diversified pool of income streams. This larger pool can be leveraged to enhance returns and is also attractive to a variety of yield-hungry investors. Additionally, it can often command a higher valuation given the diversification and predictability of the underlying cash flows. The return profile is often correlated with how seasoned the royalties are. Newer content has more risk as demand patterns are not as established and are harder to forecast, but have the potential to offer increased returns. While demand for seasoned royalty catalogues are easier to forecast, they generally offer lower and more predictable rates of return.
Favorable industry dynamics, uncorrelated returns, availability to leverage and fragmented ownership make entertainment IP royalties an attractive asset class, especially for investors looking for yield. Selecting managers with proven ability to source quality assets, underwrite content demand curves and effectively service these assets may help add income to many portfolios that are in need of it.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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