Earning money on royalties can be a tough way to make a living. Songs come and go in popularity and as streaming becomes the norm, those payouts are only diminishing compared to traditional digital or physical sales. Royalty Exchange is looking to create another avenue for songwriters and creators to get paid for their work. Using open auctions, songwriters and other rights holders can sell either a portion of their stake or all of it to make money all at once.
The idea is that the buyer would then be purchasing something that is stable and provides income over a long period of time for a lump sum at the start. We spoke to Antony Bruno at Royalty Exchange to find out a bit more about the service and how it can help artists make money now.
Where did the idea come from to buy and sell royalties?
Music royalties are the largest asset class without an established public market. They are typically bought/sold in private, backroom deals. As a result, there’s no transparency into what these assets are worth. Artists have no idea if they’re getting a good deal or not. And investors can’t participate unless they have some kind of inside line or connection in the music business.
Our president and CFO Jeff Schneider was looking for a way to buy royalties as an investor. He’s fascinated with learning how money flows through different industries (starting with vending machines when he was a kid). He found Royalty Exchange during his research, and along with our CEO Matthew Smith acquired the company from the original founders in late 2015.
They relaunched it last year with a goal to solve this problem for both buyers and sellers. For investors (buyers), Royalty Exchange provides access to deals they otherwise would be cut out of, and a liquid market where they can buy and sell as they like. Artists (sellers) benefit from competition and transparency. Investors compete over their catalog, which typically results in better prices and piece of mind that they sold their royalties for the best price the market could support. Public markets increase the value of the assets they contain, and for us that means music royalties.
How do you vet buyers and sellers?
For sellers, we conduct a rather exhaustive due diligence process where we confirm the seller in fact owns the royalties they plan to sell, that there are no encumbrances on the royalty income (tax liens, etc.), and that the royalty stream is distributed by an entity that can easily redirect payment to a new owner.
For buyers, any first-time bidder must be verified before their bid becomes valid. We ensure they have the funds necessary to cover the sale that they understand their bid and what they’re buying, etc.
Who are the biggest clients that you guys have worked with?
We work with both artists and songwriters across all genres: rock, dance/electronic, hip-hop, country, R&B, and more.
From the dance/electronic world, we’ve worked with the late Robert Miles. He conducted two auctions with us around different rights to his first two albums, Dreamland and 23am, including the classic “Children.” He sold the sound recording and neighboring rights royalties (separately).
We also worked with Nick Terranova (Starkillers). We even worked with Doug Finley (aka Doug Lazy) who sold a portion of a song sampled in Fatboy Slim’s “Ya Mama.”
Outside of the dance/electronic world, we sold the rights to a wide selection of Sesame Street theme songs for the estate of the late songwriter, who wanted to donate his royalties to charity. Another big one was for the song “Love” by Matt White, which has been used in many different movies and ads.
Typically, we work with the songwriter, who is less well known than the artist they write for. So I can say we’ve worked with songwriters who’s songs have been performed by the likes of Dre, JayZ, Kanye, etc. but not with Dre and those others directly.
How do you weed out potential sales that are from predatory arrangements where a manager, business manager or somebody else, is taking advantage of an artist?
We only work with the person holding the rights directly. Any number of people might own a portion of the royalties to a song. So long as we can prove they own it, we can help them sell it.
Every deal involves multiple conversations via both phone and email with the seller. Through that process, we develop a real relationship with the artists involved. In fact, over half of them either come back for a second deal, or they refer a friend.
We’ve not encountered a situation that we know of where we felt someone was being manipulated into working with us. If anything, working with us has helped artists get out of predatory advances and loans with others.
Who are the majority of the people who buy these royalty claims because they aren’t cheap?
They are high net worth private investors. 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 a while, 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. (ie: if the stock market crashes, royalty rates don’t change).
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).
Why are rich artists like Dr. Dre, JAY-Z and Beyoncé selling their royalties?
To be clear, we’ve not worked with Dre, JAY-Z or Beyonce. We’ve worked with songwriters who wrote part of the songs those artists performed. We do also sometimes work with artists who are also the performing artist, though.
Why would any of them sell? Typically, they come to us to raise money for new projects (sell part of an old album to raise money to fund a new album/tour, etc rather than taking an advance). Many raise money to invest in their career, like building a studio or taking music production classes. Some just like to have the financial security they need to have complete artistic freedom but don’t want to sign a one-sided publishing deal. One even sold 25% of his stake in a song to buy an annuity so he could diversify his retirement income.
Basically, selling a part of a royalty stream lets artists share the risk with investors while raising money to invest in their careers today. Buyers pay a multiple of what your royalties made in the last 12 months. That’s how they value the royalty. So selling for, 8-times what it made in the last 12 months protects you against the risk that those royalties might decline in the years to come. It’s just like how public companies sell a share of their business to shareholders. Same idea.
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 percent of your royalties to raise a meaningful lump sum of cash, and still retain copyright control and earn royalties from what you sell. That’s VERY unique.
How do you see blockchain technology impacting your business?
Anything that can make the collection and distribution of royalties easier and more efficient only helps everyone involved. Our goal is to increase the value of music royalties, which we think have been undervalued. We’re addressing the lack of transparency, competition, and liquidity in royalty transactions. Blockchain is addressing the inefficiencies of royalty identification and distribution. We’re just attacking the problem from different angles.
What percentage do you guys take from each sale?
Depends on the size of the deal, and other factors, but typically between 10-15%.
Where do you see this company in 5 years?
Our goal is to create a platform where a billon dollars worth of capital can be deployed into intellectual property assets. Today, we’re focusing on auctions. We’ve just completed two consecutive months where we closed over $1 million in auctions each. But we plan to expand into other types of formats where artists with larger catalogs, and investors with larger pocketbooks, can participate. I expect we’ll announce more details on that in the coming months.