Everyone is looking at more accurate ways to value music publishing catalog assets in the new digital economy. That long list includes publishers, songwriters, banks, lenders, and even investment sources such as angel, institutional and hedge fund investors. The valuators are peering closely at how to evaluate the short and long-term effects of different digital source revenues on music publishing catalogs. Many valuation experts are trashing the old “NPS” or net publisher’s share multiple valuations and moving toward “Regression,” “IRR,” “Net Cashflow Value” and/or “Current and Future Activity Values” and/or combinations of all the above to make their valuation decisions.
Despite what seems to be a clear diminution in world values related to the physical sales of songs on records and a potential flattening of digital download sales now in the UK, Europe and U.S., the bright side is that the world’s catalog of songs is more accessible than ever before via waves of streaming options available to the general public (including XM, Spotify, Pandora, etc.). The fever of music, no matter the genre, may be caught by anyone who wants to expose themselves to it. Music and “songs as brands” is the new norm. It’s much more prevalent to see artists and publishers commercialize their art than before (good or bad). The speed at which record labels and publishers can “break” acts and push huge hits throughout the world’s digital systems is unparalleled and the overhead to create and push content is decreasing exponentially each year. The speed of exposure or exploitation is now virtually as fast as an artist can record it, post it on the web, put up a digital shopping cart, and license it…or not —which is the subject of another article.
With all of these new issues to evaluate, as well as potential changes to the U.S. Copyright Right Act being discussed (again another article), valuators of music catalogs are forced to re-evaluate their methods given the new digital trends and the fierce competition in the publishing marketplace. Here are some of the current models that publishers and valuators are using to price music catalogs.
1. NPS Multiple
This is fairly simple. Add up the publisher’s share of non-performance and public performance income (sometimes minus the admin fees, sometimes not, depending on the situation) then subtract any unique synch licenses or other income anomalies. Divide the total by the number of years of data and that equals the net publisher’s share or “NPS” per year. This approach is usually good for catalogs with “evergreen” hits that have been played over a period of 10 to 20 years or more and can be fairly accurate. Purchasers typically pay a multiple of the NPS average. (Over the 20 years of my practice in this field I have seen multiples range from 3 to 15 or 20. However, in the last few years multiples have hovered in the 3 to 8 range, unless the catalog is extremely special.)
2. Regression and/or Cash Flow
This model is based upon the principal that the first year or two of a hit song’s life is pretty much its maximum value and the song’s income will continue to regress, flatten out or disappear over a longer period of time. The total of this regressing income flow is the approximate value. (Sometimes, conservative valuators tack on a net present value factor to take into consideration the declining time value of money.) An example of how to calculate the potential percentage regression for song income would be as follows. Take a publisher’s share sampling (in the same musical genre) of, say, 10 number one hits, 10 top five hits, and 10 top twenty hits over a period of 10 years or maybe even 3 years to look at current trends. (Ideally the larger the sampling the more accurate the model, but this foundational data is not easy to get unless you work regularly with the PRO’s or with larger catalogs). The peak quarter or semester’s maximum value is the barometer (i.e.100%) and the next period’s decline in value is a lower percentage of the peak and so on. Once you have the regressing percentages in place, you can then plug your songs into the spreadsheet and show an approximation of the amounts to come within the next ten, twenty or thirty years, ideally. The biggest holes in this method are the assumption that all songs regress in value over time, that songs don’t have unique values and that past trends will remain the same in the future. Nonetheless this model is used frequently by conservative valuators, which usually include banks and larger institutional publishers.
3. Internal Rate of Return or “IRR”
This method can become overly complex; however, in its simplest terms, the IRR is the percentage rate of return that will eventually pay for the total cost of the asset. The simplest way to explain this is as follows: Hypothetically, if a catalog is priced at $1 million and predicted to have an average NPS of $100,000 for 10 years, then the percentage return or IRR on this catalog is 10% over a 10 year period. The IRR method can lead to limitation of risk by buyers over time and can also take a buyer out of the market rate for a catalog pretty quickly. Let’s investigate. Say that a large company, like a hedge fund or investment bank, needs an internal rate of return of 25% to justify a capital purchase, but a smaller publisher only needs a 10% rate of return. The hedge fund could only pay a maximum of $400,000 for the same $1 million dollar catalog above because it would need $100,000 (i.e. 25%) per year to pay off the $400,000, while the smaller publisher could pay the $1 million dollar purchase price because it would need only $100,000 (i.e. 10%) per year to reach its internal rate of return on the asset. (The IRR method is usually adjusted for the cost of funds, so if a publisher has to pay more for the money it uses (i.e. interest), the IRR has to go up too.)
4. Current and Future Activity
Due in part to the capital gains treatment of copyright assets sold by songwriters over the years, many publishers are able to purchase fairly new catalogs of songs from songwriters or songwriter publishers and ask for a certain amount of years going forward to be tacked on to the deal. The Current and Future Activity Model values the previous songs using one of the three models mentioned above, then adds a prediction of the future activity of the new or unexploited songs in the catalog. The buyer and seller discuss and/or negotiate what is the best guess of “activity” or cuts within the coming years based upon: a.) Previous trackable income histories; b.) Average cuts or singles of the songwriter/publisher over the years; c.) New production projects that are in the pipeline; and/or d.) Viability of the catalog of old or new songs to be exploited by the new publisher based on the new publisher’s passion or connections which differ from the old publisher.
Almost all current valuation models contain elements of the above four models, but pricing has also been influenced by the recent mergers of major publishers in the last 7 or 8 years. Having fewer major publisher’s in the marketplace which can artificially drive valuations up as fewer publishers jockey for market share. Another factor which can drive prices up is the entrance of the institutional or investment company buyers into the publisher marketplace. These new players have plenty of money to get in the game and sometimes need a high profile catalog to “sell” to their investors.
Derek Crownover is Leader of the Entertainment and Media Law Group for Dickson Wright, PLLC. He is experienced working on funding deals, estate planning, asset allocation, copyright infringement litigation and other issues for artists, publishers and record labels. Selected by Best Lawyers each year since 2011.