“Governing by Rights”: Music Royalties as a form of Alternative Investment
a survey of music finance insights, with Interview: ANote Music CEO Marzio F. Schena
Author: Yudan Zou (yudanwendyzou@gmail.com)
Music Financing: What’s the current practice and why does it matter?
From Maurizio Lazzarato (2015)’s insightful observation to financial capitalism: citizens,
especially students, are enslaved by the systematically rationalized but perpetually unpayable
debts. The same mechanism of “governing by debt” works for the music industry’s traditional
business model:
artists are signed to either Major or Indie; for those who are signed to the Major, they owed the
labels’ initial investment “advance” for production costs before the actual publishing happens, no
actual incomes would arise unless the advance are recouped (Passman, 2015); for those who stay
with the Indie, zero or very meagre advance is the usual case.
And there ain’t no such thing as a free lunch: labels endeavor to make artists less market wise hopeless, and artists don’t own their rights 100%. Decision intervention is reasonable when confronting the most volatile and uncertain market across all industries, no one is confident about
determining actual future market value of any artists. Only artists that are stably proven constant
popularity and profitability be endowed with the holy partial creative autonomy. Therefore, with
the hope of being in the formal competitive market, artists are “in debt” already before making
creative decisions, either in the form of actual financial debt, or in a mental debt caused by
artistic unfulfillment.
In brief, a vicious circle thus becomes inevitable:
artists in need of financing are often short of investment – artists are financed by the labels – the
labels intervene with the decision-making process of production for “marketing purpose” from
subjective valuation of net present value – artists need future royalties to recoup – artists are in
dual way in debt.
Knowing that in the wisest sense Lao Tzu had envisioned, Tao produces one, one produced two, two
produced three then varied and are borne the universe of all things, the reality is harsh: from Tao to one, or say, from 0 to 1, it’s a long way to recoupment accompanied by high interest rates.
Summing up the above, all parties are worse off because of the rigid financing mode of the
advance-recoup linearity, which fails to confront music industry uncertainties and decreases
each parties’ utility:
The labels bare high investment risk and most possibly a sunk cost with album option that might
never execute; the artists could not fulfil creative autonomy; the audience are invisibly suffering
from the opportunity costs in losing potential aesthetic utility of not seeing their musically
preferred artists even appear on market.
Under such unbalanced field of cultural financial capitalism, the essence of musical creation is
further alienated. What can be the solution?
May there be new way for financing your project.
When there’s debt, there’s assets. Copyrights serve as the core intangible asset form in the valuechain of music industry, the source on which the most essential value-creation result depend:
Royalties. Derivatives of this class include mechanical and performance royalties,
synchronization licensing and other merchandising authorizations. The transformation of
copyright management scheme shows that artists are more willing to own their rights with only
administrative rights given away. Rights is where the money comes from, but unfortunately,
from the future: Royalties is the type of ongoing income that extends to the future
duration of a time span. Targeting the traditionally exists dynamics that royalties will be the
payment to compensate for the owed advance, new music finance companies, including ANote
Music, Sound Royalties, Massarsky Consulting, Royalty Exchange, Round Hill
Music are thinking to “turning time around”: possibilities can happen within the time
value of rights exploitation. But what do they have in common to do?
The core business activity that they all participate is participating in privately acquiring
rights, either by the company as an entity itself, or the company provides a platform for other
private investors to purchase rights. After the transfer of rights ownership, the exploiting and
exchanging the time value of rights starts. The interplay between investors and sellers is straight
forward: Investing in x % of royalties of a song (asset) equals to getting x% of exploitational
revenues from the song in the future; investors pay to get part of the licensing rights and receive a
share of the license fee; sellers, mostly composers, or current rights holders, get a upfront
payment from letting certain percentage of rights go.
Consider how they’re determined to do so first. Marching into the streaming age, with the
democratization of sonic production techniques, the improvement of efficiency in online music
distribution, the fusion of music genres and the universality of audience reach, the revenue model
had transferred from CD sales to the algorithm-directed era in streaming that heavily depend on
music marketing.
To illustrate the general picture, DistroKid allows DIY musicians to distribute music at all major
available platforms and start receiving royalties based on numbers of stream with all rights owned
by creators; with 199 dollars paid to Apple’s app store, you get the full studio-level professional
production environment; the invention of granular synthesis techniques and other digital novel
sound designing skills reduces the need for labor division, songwriter-producer are the
mainstream role. As a conclusion, musicians are not as in need of label’s help as before because
the distribution cost is basically zero. Royalties accounting process is transformed, but the
challenge of capturing value from copyright assets stays the same. Streaming techniques allow
equal entries of musicians and expands the overall market size, but entries do not ensure greater
audience reach for everyone. Music marketing is highly algorithm dependent and the black box
of recommending uncertainties – probability of being heard stays unknown to musicians.
Concerns were thus given that Streaming neither change the superstars-skewed value distribution
nor offering more invaluable licensing opportunities (Eriksson et al., 2019), uncertainties never
disappear. The weaken of label’s role and the growing streaming market uncertainty induces new
way to finance music and benefit from it: music royalty investment secretly transformed the
structure of advance-recoup equation, allowing musicians at one time, get a well-priced guiltyfree upfront cash plus future dividend in licensing placement (if they choose to do so), by selling
part of the right, with external private investors pay with the confidence to share their “clout”.
Everything looks safe so far.
But why uncertainties matter for royalty investment in the current streaming-based era? What is
the difference between the traditional financial market uncertainties and that is for the royalty
investment? When all activities on the value-chain, from the music marketing, publishing and
distribution, copyright exploitation and even composition-production itself, had been
fundamentally changed by technology, how much worth does the asset have?
Questions to answer in Music Royalty Finance
How to gain a grand picture and understand the detailed dynamics around activities of the
aspiring music royalty investment? Several steps are needed for actualizing a plan.
• To identify the factors contributing to financial uncertainties, type of risks, return rates,
market efficiency for royalty investment in the streaming-based music industry
• To investigate the holistic transactional ecosystem, participators, relative financial
regulation laws in the countries where royalty business model exists.
• To examine the investors’ behaviors, the psychological factors affecting abnormal
behaviors and decision making.
• To empirically explore a royalty pricing model (auction price determination, volatility of
price, buy-out price) under streaming-based music industry, stating hypothesis assisted by
computational music analysis and music data mining skills (for example, to find a
regression model with genres), with data retrieved from private and open music database.
• To theoretically determine how royalty investment under the streaming-based music
industry will fundamentally reshape the economics of music.
• To briefly explore future possibilities of royalty investment business model in the global
market, especially China, on how it can contribute to a cultural narrative equality.
An Alternative Asset
Investigated in the market nature that music royalty baths itself in, the next step is to
understand the intrinsic quality of music royalty as a class of financial asset. Obviously take,
it’s a niche class with small group of investors and informed percipients, which makes it
eligible as alternative asset. I lay out several questions concerning music royalty investment.
Email me if you have the answer.
- What is the intrinsic economic intuition observed from the market, behind music royalty
investment during the phase streaming transformation? Is the royalty investment market
efficient (does the price/income reflect all information)? What is the “price” when trading
a royalty asset? - Factors that influence the royalty investment income. What are the risks in this alternative
investment? What is the return rate for different artists and genres? How are the return
rates differed from fine arts, wine, classic violin investment? - How are the investing behaviors differed from traditional investment? How are investors
irrational for emotional reasons? Possible type of agents of royalty investment market and
their behavioral incentives and bias? (arbitrageur, speculator, hedgers)? - What is the model for the time value of rights in a royalty stock market or buy-out scheme
under the streaming-based accounting? (streaming makes the income continuous, will
investigate non-discrete modelling) - For profit-seeking investors, what genres pay the most for quarter-based America West
Coast market? For rights owners, how to make an asset be most rewarded assisted by
computational music/data mining (emotional classification) and data science techniques? - If being extended to the cross-cultural market, will music narrative equality of different
countries be promoted?
An Emotional Assets: Analysis from a Behavioral Finance Perspective
This article will be the very first article taking an academic standpoint on Music Royalty Finance.
My observation took junction of several areas to extend the creative industries studies: financial
investment theory, intangible assets valuation, computational music analysis and behavioral
economics. I have given an overview of the very current ecosystem of the streaming-based music
industry by categorizing the risks and uncertainty that music industry practitioners are facing in
the above sections, for future entrepreneurs to explore strategies in other markets. Here, I will
conduct an analysis from the behavioral finance perspective.
With its full creative strength to construct and influence culture, unlike the fine arts market, the
Music Industry has been long an overshadowed area in academia: it was seldom discussed in the
frame of its subjectivity. Unilateral standpoints adopted from different disciplines investigating
details along the music industry value-chain had created a scattered jigsaw puzzle. Conclusions
were reached for each disciplines’ greater picture, for example, Tobias Regner (2014)’s paper on
voluntary payment for non-fixed priced online music extended the consumer behavior theory
regarding the findings in social-image concerns and pro-social intents; Papies & van Heerde
(2017)’s research on the dynamic cross-format demand elasticity between the recorded music and
concert tickets had contributed to the understanding of the economic nature of multiformat
goods under technological change; unauthorized sharing (piracy), a most discussed topic, had not
only triggered the investigation in peer-influence of young music fans (Yang et al, 2014), but also
induced the studies in copyrights, about which Glynn Lunney (2018) had proven from a
microeconomics perspectives, to the greatest social welfare be protected. To understand royalty
investment behavior, it’s necessary to go through studies covering consumer analysis of
traditional music purchasing behavior.
Few studied the music industry from the source, which means, from its nature, its inner interactive
rules as well as its holistic value-chain. Among the precious few, Donald Passman (2015)’s
continuously upgrading of All You Need to Know serves as a descriptive information guide; as for the perspectives of economics, Peter Tschmuck (2017) had explained music industry’s income
streams and nature of sound recording products from classic economics concept; Connolly and
Krueger (2005) had investigated the significant industry-specific phenomenon, including concert
ticketing, superstar effects and rankings with evidence from mathematical modelling.
One excuse for the lack of subject-based research is that music industry embraces real-time
transformation nourished by the technological progress, policies change and industrial
professionals’ personal input all the time. What works before are usually useless in the future. For
example, research regarding CD purchasing behavior might no longer be too relevant. However,
this very fact surprisingly provides a unique chronicle value of music industry research: studying
how it progresses with time, on the other way around, proves the importance of renewing and
revaluing the previously determined concepts. Therefore, looking into the entrepreneurial
business that represents the goal of near future, will be an inherent need for music industry as
“creative industries”.
Without determining the unique subjectivity of the current music industry, it will be impossible to
understand the underlying structural power that constantly shape and reshape the refreshing
popular culture. Therefore, my research seeks to first, investigate current streaming-based
music industry’s unique economic nature: the uncertainties in the market relative
to investment decision-making.
The role of alternative investment in asset allocation had been prevailed as the common sense of
“diversifying the asset class to neutralize risks or gain alpha returns” (Cumming et al., 2013),
studies on arts-related alternative investment had been long focused on the fine arts market. Back
to the pure definition of alternative investment, Sokolowska (2016)’s book is a general
introduction to the classification, strategies, type of risks and market characteristics of traditional
categories of alternative investments, like hedge fund, funds of fund…etc., among which art is
described as a significant form of emotional investments. Rachel A. J. Pownall (2009) had
investigated the economic benefits that comes with the emotional inherence of arts products
when being well managed. Uncertainty also stands as an essential topic in arts investment, Anna
M. Dempster (2014) summarized different economical perspectives towards risks in creative
industries; Tom Christopherson (2014) pointed out the three major systematic risks faced by the
art investors and the importance of response speed and adaptation to new information.
My article also endeavors to further explore the characteristics between that music shares with
fine arts in alternative investment: emotional assets and uncertainty in market but focus
on the uniqueness of the music industry.
With the attempt of doing a Case Study on the music royalty investment companies including
ANote Music, Sound Royalties, Massrsky Consulting, Royalty Exchange, Round Hill Music, to
examine their effort to fundamentally revolutionizing the financing mechanism and interplay
between audiences, publishers, songwriters and labels, literature on intellectual property
management should be dived deep into. Regarding the copyright revenue model, even though as
Towse (2017) mentioned, music publishing business model was the entrepreneurial response to
exogenous technological innovation in the reproduction of music, the actual monetization
sources remain the same. Papers studying Bowie Bond not only reveals the process for discussing
intangible assets securitization, but also provides a clear source of monetization streams, one
article clarifies the sub-categorization of the specific assets type under the name “royalty”: actual
copyright of musical works, agreement between writers and publishers regarding writer’s share of
publishing writes, the publishing writes itself, recording masters, etc. (Kerr, 2000), which serves as
an analytical foundation for specifying income types. Another Bowie securitization research
specifies a music publisher’s rights, which includes licensing the performance of composition,
dramatization, synchronization licenses, licensing the title for dramatic work, sheet music and
compact disc, and exercising any use of the composition in the existing or future technology
(Sylva, 1999). Above studies serves as a remainder when looking into the new music finance
company, as the source of monetization does not change with the business model.
Methodology Applied in Understanding and Reinventing the Aspiring Field of
Music Financing
Here I will introduce the primary school of thoughts and techniques which will be helpful for
understanding the aspiring field.
4.1 Case Study: front-end inquiries (in-depth interview) with representative from the Company
To understand more about the investors’ behavior, a case study will be necessary. ANote Music
is a Luxembourg based music royalty stock trading, whose CEO Marzio F. Schena is a LinkedIn
connection of mine, with whom I have been talking to and scheduled interview with. I had asked
questions about how he thinks about investor-behavior, price volatility and an inquiry into their
auction pricing model, all the answers contributed to the article. Of course, you can always
interview other music investors and finance professionals for more information to compare.
4.2 Behavioral Economics and Finance theory
To understand a market, one must understand the behavior of investors. Raymond ST Lee
(2020) proposed a quantum finance based financial dynamics model where all motions and
activities includes in the secondary market: Market Maker (MM), Arbitrageurs (Ars),
Speculators(SPs), Hedgers (HGs), and Investors (IVs). The market for royalty investment is a
simplified version of his general dynamics model. Summing up the investors’ dynamics and my
interview results, from the micro- and macro-economic prospective in behavioral finance
introduced by Michelle Baddeley (2013), dive deep into the motivation, incentives, heuristics and
bias, policy and social idea influences of investment behaviors is necessary, for the goal to build a
decision model for music investors.
4.3 Music Data Mining and Computational Music Analysis
Music data contains multidimensionality and the abundance of sonic properties, it can be
represented by more than a wav-form file. Other than time-frequency level and microsound
details, computational music analysis transferred score or audio information to a content-based
symbolic language where internal timbral, pitch, rhythmic and structural-level information are
specified mathematically (Meredith, 2009). Music data mining deals with data with larger size
and complex dimensionality, the skills include visualization, association, clustering, classification,
and music data management (Li& Tzanetakis, G. 2012). Music information retrieval, emotional
searching and indexing can be achieved by above techniques, this provides a unique opportunity
to study musical works, one derivative of the copyright asset, and its stream of royalty trajectory.
For future strategic purpose, it’s valuable to understand, for a content-providers’ perspective,
what is the audio feature that in an asset that generate high return. To build a regression model
of the key characteristic of genre and peak return dates, methods from music sequencing,
clustering and association will be employed.
4.4 Intangible Asset Pricing for Music Copyright: Continuous Stochastic Model in Royalty
Trading
Continuous-time finance theory will be employed to study this market where traders have
heterogeneous beliefs. Also, continuous-time version of stochastic process, which describes the
behaviors in the music royalty investment uncertainties (Duma and Luciano, 2017), will be used
to demonstrate a probability space. The reason for using a continuous model (at least for artist
with popularity) is that the sequence of time and the actual flow of income happens in a
continuous manner in streaming with countless stochastic process (Jarrow, 2019). The time value
of copyright evolves continuously with time and investors want to maximize their return, which
makes it difficult to price the asset from a discrete time setting. Perspectives provided by Cohen
(2005) in intangible asset provides an analytical structure: income approach, cost approach,
market approach. Combining the three perspectives and the continuous-time model, I endeavor
to explore the time-varying value of a royalty asset.
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Yudan Zou 