Interview: Springsteen sold his music for $500m. Are music royalties the next big investment?

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Sean Alymer: Welcome to the Fair and Greed Business Interview. I’m Sean Aylmer.

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Sean Alymer: We’ve spoken on a couple of occasions now to Stefan

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Sean Alymer: von Imhof, the co- founder of alternative investing community fund Alts.

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Sean Alymer: co. He’s taken us through a few unusual asset classes,

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Sean Alymer: vinyl records, domain names, even a guide to investing in

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Sean Alymer: art from emerging artists to buying a tiny portion of

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Sean Alymer: a household name. Today, it’s all about investing in music.

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Sean Alymer: Of course, it all goes without saying that this is

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Sean Alymer: general information only. You should always seek professional advice before

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Sean Alymer: making investment decisions. Stefan von Imhof, welcome back to Fear

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Sean Alymer: and Greed.

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Stefan von Imhof: Hey, thank you. It’s great to be here.

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Sean Alymer: Okay. Firstly, how has music streaming changed the industry in

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Sean Alymer: the way artists are paid? A fairly obvious question, but

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Sean Alymer: I’d like your take on it.

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Stefan von Imhof: So, as we know, the vast majority of music today

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Stefan von Imhof: is consumed through streaming services such as Spotify, which is

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Stefan von Imhof: the biggest, and Apple Music, and then some of the

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Stefan von Imhof: less popular platforms, Google Play, Bandcamp and stuff like that.

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Stefan von Imhof: Now, everyone knows, or I should say a lot of

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Stefan von Imhof: people have heard that artists don’t earn much per stream,

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Stefan von Imhof: and that’s true. The artists really don’t earn a lot

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Stefan von Imhof: on a per stream basis. It’s less than one half

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Stefan von Imhof: of one penny per stream. That’s what Spotify plays. However,

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Stefan von Imhof: what streaming has produced is a consistency, a remarkable consistency

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Stefan von Imhof: in the number of streams that are streamed per year.

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Stefan von Imhof: So, what used to happen in the old days is

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Stefan von Imhof: that artists would come out with an album and there

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Stefan von Imhof: would be a huge spike when it was first released,

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Stefan von Imhof: and then it would taper off into nothing over the

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Stefan von Imhof: coming years. With streaming though, what we’re seeing though is

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Stefan von Imhof: it’s just remarkably consistent, it’s stable. And that’s what has

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Stefan von Imhof: gotten people to take notice, that stability can be securitized

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Stefan von Imhof: and turned into an investible asset.

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Sean Alymer: Okay. Are all artists on board? I seem to remember people

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Sean Alymer: like Neil Young, for example, refusing to go on Spotify

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Sean Alymer: at some point. I’m thinking Taylor Swift even might’ve at

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Sean Alymer: one point not wanted to go on Spotify. I could

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Sean Alymer: be 100% wrong there, Stefan. But are most artists on

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Sean Alymer: board with this?

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Stefan von Imhof: Most artists have definitely succumbed to the almighty streaming lords,

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Stefan von Imhof: yes. There are definitely some that don’t and haven’t, but

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Stefan von Imhof: it’s pretty much the vast majority of artists that have, yeah.

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Sean Alymer: Okay. And is it the owner of the rights to

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Sean Alymer: the music, is it the singer, the songwriter? Who else

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Sean Alymer: actually gets some sort of income from this streaming?

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Stefan von Imhof: Okay. So, music rights are extremely complicated. And just want

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Stefan von Imhof: to preface with saying that this is a very complex

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Stefan von Imhof: world. There’s all sorts of different types of rights. The

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Stefan von Imhof: biggest is what’s known as a mechanical license or mechanical

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Stefan von Imhof: rights, and this is the most relevant, the most lucrative.

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Stefan von Imhof: This is any form of reproduction, whether that be CDs,

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Stefan von Imhof: vinyl records like we talked about earlier, or digital, which

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Stefan von Imhof: is iTunes, but of course, streamed through Spotify.
Mechanical royalties

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Stefan von Imhof: are basically where most of the streaming money is made.

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Stefan von Imhof: Now, those royalties can be split in all sorts of

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Stefan von Imhof: different ways. Sometimes the record label gets the lion’s share,

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Stefan von Imhof: sometimes the artist gets all of it. There’s all sorts

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Stefan von Imhof: of different situations, but mechanical rights are the name of

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Stefan von Imhof: the game here.

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Sean Alymer: Okay. Now, before we get into how investors could get

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Sean Alymer: involved, we have to take a little historical lesson involving

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Sean Alymer: David Bowie. And I kind of remember this, but what’s David

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Sean Alymer: Bowie got to do with all this?

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Stefan von Imhof: David Bowie, aside from being a rock god was-

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Sean Alymer: I’m sorry, Stefan, I agree. David Bowie, I think is my all-

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Sean Alymer: time favorite individual artist.

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Stefan von Imhof: Wow, that’s so bold. That’s awesome. God rest his soul.

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Stefan von Imhof: But he was also super innovative when it came to

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Stefan von Imhof: music as an asset class. So, he was the very

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Stefan von Imhof: first artist to actually conceive of selling his catalog and

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Stefan von Imhof: basically securitizing his catalog. And he did this, he teamed

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Stefan von Imhof: up with a gentleman named Pullman, and together they created

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Stefan von Imhof: what are known as Pullman bonds, or more appropriately known

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Stefan von Imhof: as Bowie bonds.
And so, this was basically a fixed

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Stefan von Imhof: income product where you basically, as an investor, you would

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Stefan von Imhof: get, I think it was about a 12% return from

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Stefan von Imhof: investing in David Bowie’s catalog. And that was the first

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Stefan von Imhof: big example of music rights securitization. And it was actually

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Stefan von Imhof: before streaming that this happened too. Now there’s been all

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Stefan von Imhof: sorts of activity in that space since then, but he

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Stefan von Imhof: was the first.

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Sean Alymer: Stay with me, Stefan, we’ll be back in a minute.

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Sean Alymer: My guest this morning is Stefan von Imhof, co- founder

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Sean Alymer: of alternative investing community fund, Alts. co. So, we’ve seen

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Sean Alymer: some big sales in recent years. Justin Bieber apparently sold

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Sean Alymer: his catalog for about $ 200 million. Bob Dylan, about $ 300

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Sean Alymer: million, US, of course, I think Bruce Springsteen was about

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Sean Alymer: half a billion dollars. How does that work?

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Stefan von Imhof: I mean, these are huge, huge sales, and as artists

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Stefan von Imhof: get towards the end of their life, they realize they

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Stefan von Imhof: have an opportunity to cash out at-

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Sean Alymer: Hold on. Hold on. Bob Dylan and Bruce Springsteen, I

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Sean Alymer: get. Justin Bieber, come on. How old is he? He

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Sean Alymer: must be late 20s or something, isn’t he?

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Stefan von Imhof: So, he’s not towards the end of his life, but

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Stefan von Imhof: he’s towards the end of his useful musical life, right?

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Sean Alymer: Right. Right. Yep. Yep.

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Stefan von Imhof: Katy Perry just sold her catalog as well. And so,

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Stefan von Imhof: I think they realize as they’re starting to hang up

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Stefan von Imhof: the boots, it makes more financial sense for them to

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Stefan von Imhof: cash out than to hang on. And so, they’re able

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Stefan von Imhof: to sell. And you might be asking who’s buying?

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Sean Alymer: Yeah, absolutely.

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Stefan von Imhof: I mean, these are huge numbers. So, there’s a lot of

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Stefan von Imhof: private equity involved in this, a couple of hedge funds.

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Stefan von Imhof: But the biggest is a fund called Hipgnosis and Hipgnosis was co-

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Stefan von Imhof: founded by Nile Rodgers from Chic. And so, this is

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Stefan von Imhof: the biggest music rights investment fund in the world. And

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Stefan von Imhof: so, they’ve bought hundreds upon hundreds of artists and thousands

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Stefan von Imhof: of tracks. And they were the first to realize what

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Stefan von Imhof: a lucrative opportunity this can be, and they’re the biggest

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Stefan von Imhof: buyer by far.

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Sean Alymer: So, is that a group that someone can invest in, in

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Sean Alymer: Hipgnosis Songs Fund?

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Stefan von Imhof: Yeah, you can invest in Hipgnosis as a regular everyday

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Stefan von Imhof: investor. Absolutely. I mean, they’ve got Hipgnosis Songs Management. They’ve

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Stefan von Imhof: got Hipgnosis Songs Fund. So, I mean, there’s all sorts of ways

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Stefan von Imhof: you can invest in them. But now what’s happening, which

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Stefan von Imhof: is really interesting, is that there’s all these new platforms

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Stefan von Imhof: coming up, which have taken the securitization a step further.

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Stefan von Imhof: And so, these platforms are now allowing basically anybody, not

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Stefan von Imhof: just accredited investors or not just sophisticated investors, but anybody

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Stefan von Imhof: with 100 bucks to invest in songs that they like,

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Stefan von Imhof: which is a really cool and fairly recent development.

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Sean Alymer: Okay. So, just before we leave Hipgnosis, so the idea

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Sean Alymer: is that they’ve got the rights to thousands of songs.

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Sean Alymer: They’re confident that people will keep using Spotify or whatever

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Sean Alymer: and there’ll be a stream of money there. So, I

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Sean Alymer: invest in Hipgnosis knowing that they own the song and they’ll get

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Sean Alymer: half a penny every time it’s played. So, there’s your

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Sean Alymer: income. So, that’s right, what I’m saying there?

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Stefan von Imhof: That’s basically right, but then you’re also betting on your

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Stefan von Imhof: ability to resell that securitized asset in the future.

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Sean Alymer: Ah, yeah, yeah, yeah.

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Stefan von Imhof: So, you’re basically betting on an artist, right? You’re betting that

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Stefan von Imhof: this person is not just relevant today, but they will

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Stefan von Imhof: stand the test of time. Now that’s a lot easier

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Stefan von Imhof: to do with bands like Springsteen for example, or Pink

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Stefan von Imhof: Floyd’s trying to sell their catalog right now. And I

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Stefan von Imhof: don’t want to be biased, but I believe that Pink

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Stefan von Imhof: Floyd will continue to be relevant 28 years from now. Right?

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Sean Alymer: What about Justin Bieber? Come on, Stefan.

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Stefan von Imhof: Well, so I don’t know. It’s a good question. If you want to make

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Stefan von Imhof: that bet, go for it.

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Sean Alymer: Right. Okay. So, tell me about the $ 100 idea though. The

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Sean Alymer: idea that I’ve got $ 100 and so this is the

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Sean Alymer: next step in securitization. I don’t totally understand that part.

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Stefan von Imhof: So, what a lot of companies have started to do,

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Stefan von Imhof: I shouldn’t say a lot, there’s been a handful of

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Stefan von Imhof: companies that have started to use something called Regulation A

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Stefan von Imhof: in the US, which was a law passed about seven

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Stefan von Imhof: or eight years ago. It made it easier to securitize

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Stefan von Imhof: all sorts of different assets and let anyone invest in

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Stefan von Imhof: those assets. And so, this Reg A has been used

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Stefan von Imhof: to securitize everything from collectibles to real estate to all

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Stefan von Imhof: sorts of different things.
Now, music is a perfect fit

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Stefan von Imhof: for this because music’s so emotional and personal and people

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Stefan von Imhof: really … They love Beyonce, but they have literally no ability,

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Stefan von Imhof: until these platforms that come along, they have had literally no

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Stefan von Imhof: ability to invest and own a slice of Beyonce’s songs. Well,

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Stefan von Imhof: now they can. And all in the past couple of

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Stefan von Imhof: years, some big names have come together in the music

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Stefan von Imhof: industry to launch a number of different platforms that allow

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Stefan von Imhof: basically anyone to invest in songs that they love. And

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Stefan von Imhof: they have some good ones on there too, which is

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Stefan von Imhof: really, really cool.

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Sean Alymer: Okay. So, let’s bring this back to investing, particularly around

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Sean Alymer: the risks here. So, it’s all fun and it sounds

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Sean Alymer: great to do it individually or through a fund, but

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Sean Alymer: of course, having the right artist selection and quality must

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Sean Alymer: be a big part of this.

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Stefan von Imhof: Selection’s huge. And I think that was the challenge that

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Stefan von Imhof: a lot of these platforms faced is how do you

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Stefan von Imhof: get the good stuff? Right? How do you avoid getting

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Stefan von Imhof: the stuff that Hipgnosis didn’t want or the big funds didn’t

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Stefan von Imhof: want? Right? And so, it just took time. And so, I

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Stefan von Imhof: think the platforms have largely solved the selection problem. Now,

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Stefan von Imhof: there’s some really great investible songs out there, stuff that

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Stefan von Imhof: we would all recognize.
I think the bigger risk is

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Stefan von Imhof: not that any of this stuff is going to lose

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Stefan von Imhof: popularity. Streaming isn’t going anywhere. It’s that an individual artist

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Stefan von Imhof: may not be as desirable in the future or may

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Stefan von Imhof: not be as loved in the future. I don’t have

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Stefan von Imhof: a crystal ball. I think there’s only so much research

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Stefan von Imhof: you can do on that. Ultimately, it’s a belief. Right?

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Stefan von Imhof: We don’t really know what the future’s going to hold

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Stefan von Imhof: 30 years from now. Right? But-

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Sean Alymer: David Bowie will always be loved, Stefan. You know that.

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Stefan von Imhof: I think so. So, that’s why you want to stick to

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Stefan von Imhof: the blue chip stuff if you can. Right? So, I

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Stefan von Imhof: think personally, Beyonce, I think she’s pretty timeless. Right?

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Sean Alymer: Yeah. Yeah. Yeah.

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Stefan von Imhof: So, you want to stick to the big names.

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Sean Alymer: Okay. Liquidity, can you get it in and out easily?

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Stefan von Imhof: Okay. So, as of today, that’s a little less easy

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Stefan von Imhof: than it could be and should be, but I know

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Stefan von Imhof: these platforms are working very hard to increase that liquidity

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Stefan von Imhof: and to basically bring market makers into the scene, which

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Stefan von Imhof: will guarantee a buyer for every seller.
Now, this isn’t

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Stefan von Imhof: live yet. These haven’t happened yet, but I know for

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Stefan von Imhof: a fact that these platforms are working very hard to

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Stefan von Imhof: do exactly that. And once they do, that will give

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Stefan von Imhof: these marketplaces, these platforms that much needed liquidity, so you

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Stefan von Imhof: know you can sell at basically anytime. That doesn’t really

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Stefan von Imhof: exist today, but it certainly will and can in the future.

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Sean Alymer: What about regulation? Is there enough? Is there too much?

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Sean Alymer: Is there fit for purpose regulation in this stuff?

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Stefan von Imhof: So again, the Regulation A, the Reg A as it’s

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Stefan von Imhof: called, or Reg A- plus as it’s known, that basically

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Stefan von Imhof: created the framework for all of this, and that’s been

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Stefan von Imhof: in place now for a little under a decade. So,

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Stefan von Imhof: we’re well- established there. Yeah.

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Sean Alymer: Okay, Stefan, before we go, we’ve talked previously about tequila,

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Sean Alymer: nothing to do with music. Well, maybe they go well together.

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Stefan von Imhof: A little bit. Yeah.

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Sean Alymer: Yeah. You’ve recently made some moves in this space, is

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Sean Alymer: that right?

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Stefan von Imhof: Yeah. Tequila is North America’s fastest- growing spirit, and it

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Stefan von Imhof: has so many of the same properties as wine and

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Stefan von Imhof: whiskey, but you don’t have to wait as long for

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Stefan von Imhof: the maturity. You’re talking about three to four years for

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Stefan von Imhof: tequila to become anejo or extra anejo. As opposed to

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Stefan von Imhof: wine, 10 years. Whiskey it can be up to 40,

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Stefan von Imhof: right?
So, we’re big fans of tequila as an alternative

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Stefan von Imhof: investment. And so, as the world continues to develop a

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Stefan von Imhof: taste for it, and as people realize how delicious it

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Stefan von Imhof: can be, not just the really bad Cuervo stuff we

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Stefan von Imhof: all had in uni, but it can be really, really

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Stefan von Imhof: nice on the high end again.

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Sean Alymer: Some of it still has that stuff, right?

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Stefan von Imhof: It can be quite enjoyable on the high end. It took

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Stefan von Imhof: me a while to realize that. But yeah, I think

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Stefan von Imhof: the numbers don’t lie. This is a great spirit to consider

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Stefan von Imhof: investing in, and our fund has invested in a couple

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Stefan von Imhof: of barrels in Tequila, Mexico, the city of Tequila, Mexico.

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Sean Alymer: Fantastic. Stefan, thank you for talking to Fear and Greed.

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Stefan von Imhof: Always great to be here. Thank you.

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Sean Alymer: That was Stefan von Imhof, co- founder of alternative investing

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Sean Alymer: community fund Alts. co. That’s A- L- T- S. co, C-

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Sean Alymer: O.
This is the Fear and Greed Business Interview. Remember,

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Sean Alymer: this information is general in nature, and you should seek

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Sean Alymer: professional advice before making any investment decisions. Join us every

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Sean Alymer: morning for the full episode of Fear and Greed, Australia’s

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Sean Alymer: best business podcast. I’m Sean Aylmer. Have a great day.