The Pandemic Changed How Musicians and Investors See Royalties

Steve Jordan, a drummer, began working as a studio musician while he was still in high school in the 1970s. By age 19, he was performing with the “Saturday Night Live” band and touring with the Blues Brothers.

But he said he had quickly realized that if he wanted to be financially successful, he’d have to do more than make music. He’d have to have control over that music.

“I knew early on that I couldn’t have all my eggs in one basket and be a successful musician,” said Mr. Jordan, now 64. “You have all these musicians out there who are not paid what they should be. If they’re just hired to play on a song, they don’t get royalties. They’re not the composers, and they don’t get royalties even though what they played are the hallmarks of the song.”

He struck a copublishing agreement in 1989 with Warner Chappell Music, a music publishing company. “That enabled me to get a better royalty stream,” he said.

So when the pandemic shut down live performance and most in-person collaboration among musicians, Mr. Jordan had an asset — his publishing rights and other royalty payments — that he could borrow against, allowing him to continue to invest in his own music production company.

Royalty payments have long been an issue in the music world. Record labels usually took the lion’s share. The move to streaming, which broadened audiences but sharply curtailed revenues, cut further into many musicians’ earnings.

The pandemic shook things up further. Without live performances, artists were forced to rethink how they were managing their finances. That led some of them to come up with new strategies to take control of their royalties. And investors have also moved in, seeing royalties as a new kind of asset. They have been buying out the rights of artists who’d rather leave the world of streaming royalties to someone else.

“We have clients who have been looking at their royalties in different ways,” said Mona Manahi, managing director and head of the chief financial officer services practice at Geller Advisors. “We have artists who are looking to purchase back their masters to retain rights that have been previously owned by the record labels and publishers. We also have some clients looking to sell their music rights.”

On the investor side, there are large funds, like Hipgnosis, that are pooling capital to buy entire music catalogs. And companies like Lyric Financial are advancing artists cash for a few years’ worth of their royalties, but allowing the artists to retain ownership.

“The industry has changed in the last 24 months because of one company, Hipgnosis,” said Mathew Knowles, a music executive and father of the music stars Beyoncé and Solange Knowles. “That’s the company that changed the whole industry on selling your royalty rights.”

Hipgnosis had money available to invest before the pandemic, giving it flexibility to buy rights to songs from musicians who suddenly weren’t making any money from performances.

“For artists, touring is their No. 1 income,” Mr. Knowles said. “No one knew an end to performing was coming, and they certainly didn’t know it was going to be 18 months to two years before it returned. Even A-list artists and some of the big acts that have enormous overhead are struggling.”

The amount paid for royalties depends, of course, on the artist. But it’s also related to the type of royalties. Selling the master recordings could fetch 10 to 14 times the annual royalty stream, but publishing rights can be closer to 18 to 22 times, Mr. Knowles said. An advance that will be paid back is usually two times the royalties.

Yet, he said, the genre of music also matters, with rock artists fetching more than hip-hop and R&B artists, because of the size of the audience for their music.

Figuring out what to do if you’re an artist — or someone who is trying to value the royalties of an artist — can be complicated. Streaming has fundamentally altered the economics of music royalties.

Eli Ball, chief executive of Lyric Financial and a music producer in the 1990s, said that when artists used to sell records they would receive $1 to $1.50 per record. Streams pay a tiny fraction of that. Or to put it another way, an album that sold one million copies paid an artist $1 million to $1.5 million in royalties, but one million streams of songs from that album pay the artist about $3,500.

Publishing royalties — which are paid to the people who own the copyright for the composition of the music itself — can be more valuable since they are paid directly to the owner of the copyright. But whatever the stream of income, Mr. Ball said, there is a significant lag between when a royalty payment is set off and when it is paid. His company exists to bridge that gap for musicians.

“It’s simply a sale of the future royalties they’re collecting and not a sale of their catalog,” he said, noting that there could be over a year lag between when a royalty was generated abroad and a check is received.

For musicians trying to manage their finances, such middlemen have been helpful during the downturn. Mr. Jordan said he used Lyric’s factoring because “when you’re good for X amount of money and you know the money is coming in but you need X amount of money now to secure a mortgage or continue a start-up or sign a person to your label, this was something to keep the ball moving down the field.”

He added: “It’s been a real godsend. It’s allowed artists to retain the rights to their work. You’ve got options.”

That has not always been the case. Ron Miller, a hit songwriter for Stevie Wonder (he co-wrote “For Once in My Life”) and other Motown musicians in the 1960s and 1970s, died in 2007 with little control over his royalties and his finances in disarray. His daughter Lisa Dawn Miller, a former vice president at Morgan Stanley and now a performer, has been seeking since his death to reclaim royalties he let go.

It took her eight years in court to get back the royalties for performances of the songs he wrote — over 600.

“People he assigned the rights to got rich,” she said. “Maybe he got $2,000 for selling 10 percent of his royalties in perpetuity for a catalog that’s generating tens of millions of dollars. I want people to know who my father was.”

Of course, some artists want to sell their rights and receive an immediate lump-sum payment. That is where outside investors come in. The multiples that entire catalogs are being purchased for are high by any measure of an investment’s future value. That’s good for the artist. But it’s uncertain what it may mean for the investor.

Mr. Ball, who competes with the funds that are buying entire catalogs, does not dismiss their strategy.

“Their goal is to grow their portfolio as large and as fast as they can, and when they get above a certain level, that value of all those catalogs is much greater than the sum of the parts,” he said.

But he said he had more confidence in the funds run by people with music industry experience than those run by private equity managers. “They’re really smart people, but they don’t understand the nuances,” he said.

Mr. Knowles said he considered it good to give the older artist the option of getting a lump-sum payment and be done with trying to manage different royalty streams. He also said he was confident that the music business would continue to perform in a way that justified the amounts being paid.

“The growth in streaming has increased,” Mr. Knowles said. “It’s changed the dynamics of the music industry. It’s also reduced our overhead. We’re in a very good place in music.”