For the average early 20-something-year-old, financial investment opportunities are probably the last part of our finances that gets any sort of thought placed into it. The rising cost of tuition to college, the low pay of entry level jobs, and so many other factors make it impossible to think about long-term growth in the early stages of independence.
With that being said, there will come a time where young adults need to start thinking about different options for their future, and knowing how and where to place investments is a topic that many will find complicated when confronted. There are the typical places to invest- stocks, bonds, real estate- but there are a whole world of various other options available, including music royalties.
Royalty Exchange is a company that is revolutionizing the way music royalties are purchased and sold. Bringing transparency and an open market to a practice that was largely done behind closed doors, they're bringing a whole new market and investment opportunity for those that see profit in music.
We sat down with the RE team to learn more about what they do and how it works.
What got the founders into honing on this part of music deals?
The current owners acquired the company from the original founders in late 2015. So while I can’t speak for the original founders, I’m happy to outline what motivated the new owners (CEO Matt Smith and President Jeff Schneider) to buy the company.
Jeff discovered Royalty Exchange as a customer. As he was evaluating the opportunities to buy royalties on the platform, he learned that the company was for sale, and partnered with Matt to acquire it. They saw an opportunity to solve a problem for both investors and rightsholders. I’ll outline the opportunities to investors in your next question, and focus for now on the opportunity for royalty owners.
Our Guide to Music Financing for Artists goes into this in greater detail, but basically artists have long struggled to raise money. Traditionally, their only option was to turn to labels/publishers for either recoupable royalty advances or sell royalties in private take-it-or-leave-it deals. There was no record of these transactions, so artists without big/powerful managers had no idea if the price they were being offered was a fair one.
But just as artists now no longer need solely rely on labels to distribute or promote music, they also have other options for financing as well—crowdfunding, exclusives with digital music services, etc. Adding access to private investors is the next stage of this.
Both Jeff and Matt are free market advocates. They believe that introducing competition to the sale of any asset ultimately results in higher prices. For example, we worked with an artist who was selling a share of his royalties to a song that was generating about $175k a year in earnings. One of the largest private equity managers in the world offered him $500k for it. The moment he told them that he was going to put it up for auction on Royalty Exchange, the offer immediately went up to $900k.
That's the opportunity that open, transparent competition provides artists. Without transparency, the market for music royalties will remain a niche and small one where only a few connected buyers control the deal flow and keep prices low.
What would be the motivation for someone (with money they're looking to invest) to look into buying royalty rights over other forms of investments?
Most investors already have money invested in the stock market, bonds, savings, real estate, etc. So those wanting to diversify look for opportunities that offer something different from these existing investments. Generally, that means something more stable and consistent than the stock market, but offering better returns than bonds or savings accounts, and less expensive than real estate. So royalties are something new that checks off all their boxes:
Royalties, particularly for music that’s been around for awhile, are pretty stable. They don’t typically see wild spikes in returns either up or down. And their value is not tied to stock market performance.
Royalties are consistent, meaning as an investor, you know that you’ll get a check every quarter (or whatever the timeframe). With stocks, meanwhile, you never know when you might get a dividend, and bonds you have to hold onto for years before you realize a return.
I should note that royalty investors are not looking to “buy low, sell high.” They’re not betting that the royalties they buy will increase in value. They’re simply interested in regular, stable cash flow over time (even if they decline slightly year over year).
And on the other side of that, what motivates songwriters to sell their royalty rights for money upfront?
Generally it’s either to meet a short term need, or pay for a long-term plan. Royalties can take time to accumulate into meaningful amounts, particularly for music past their retail prime. If you have a need for immediate capital, it’s quicker to sell royalties to raise upfront capital with no strings attached.
Short term needs have included emergency medical costs, a balloon payment on a house, the need to pay for a relocation, child support, and so on.
More often we see artists selling their older royalties (which aren’t doing much for them anymore) to pay for a new album, tour, or other venture that will generate more meaningful revenue for them without giving up control of (or profits from) that future work. Kind of like trading in the value of your old car to offset the cost of a new one.
Other long-term plans have included investing in real estate, building a recording studio, paying for higher education, funding a documentary, or launching new lines of business. Robert Miles, for instance, came to us to raise money for his OpenLab.fm service.
What many have said they like about Royalty Exchange is the flexibility we offer. Selling to labels/publishers are typically all-or-nothing deals. With us, you can sell just a % of your royalties to raise a meaningful lump sum of cash, and still retain copyright control. That’s VERY unique.
What have been the biggest challenges since starting the company? (and on the flip side, biggest successes).
The biggest challenge is the lack of awareness that this is even an option. While selling royalties is nothing new, selling them to private investors with the kind of flexibility we allow is not something most artists know is even possible. It sometimes takes people a while to wrap their head around it.
In terms of successes, one of the stats we’re most proud of is that over half of the people who have sold royalties on our platform either return for a second auction or refer a friend (sometimes several) to do the same. I think that illustrates that we’re providing real value.
How does a songwriter get involved with selling through Royalty Exchange?
Simply go to our site and fill out the form to request a consultation. We work with you to determine what your needs are, evaluate the potential of your royalty assets to meet those needs, and then create the right plan for you.
We act as a sort of real estate agent, guiding you through the process of listing your royalties, presenting them to investors in the best possible way, and managing all the necessary paperwork involved in transferring ownership and payment.
There are no upfront costs. You don’t pay anything to have your royalties appraised or listed. We only get paid upon the successful closing and settlement of a sale.
For more information about the company, check out their homepage here.