The Changing Landscape of Music Publishing
Can new money coming into the industry via Private Equity Funds genuinely impact the Major Publishers?
Blackstone has made a series of significant strategic moves in the music industry in recent years
2015 - SESAC acquired HFA from NMPA
2017 - SESAC and SUISA launch MINT
2019 - HFA awarded the MLC gig
Over the past 6 years Blackstone has acquired and partnered itself into a unique position of strength in the Music Publishing industry. As of now it has influence over:
US Performing rights (SESAC)
US Mechanicals (MLC/HFA)
EU+ Multi-territory licensing (MINT)
The deal with Hipgnosis signals a new strategy. Previously, Blackstone has worked to tie together different centres of administration that make up the back-end of the music publishing industry, across the US and Europe. Now that is in place, it is moving into the increasingly active world of rights acquisition.
Does Blackstone's position in the US and EU licensing and administration markets actively advantage it with respect to rights acquisition?
Probably not, directly, at least in the short term. There is a world where Hipgnosis/Blackstone acquired rights are licensed and processed through SESAC/MINT, which could disturb the balance of power in the US PRO market and the European Multi-Territory market. However, this would take a number of years for the full impact to come through.
Moving rights from one PRO to another is possible, though PROs have a defence in the time and effort it requires. It must be executed on a writer-by-writer basis, is at the mercy of the speed that the PRO will move at, the rights must go to another place within the PRO network to ensure that royalties continue to flow, and the change in PRO must be accurately documented within every single PRO's systems.
The SESAC acquisition gives Hipgnosis/Blackstone a vehicle to place their rights into, but it'll take time. Furthermore, the speed of money through the PRO network suppresses any immediate effect. It can still take 24 months for all money to come through from a play.
SESAC/HFA/MINT provides Hipgnosis/Blackstone a narrative and direction of travel, but the stability of the system ensures that is unlikely to be a shock reaction.
Are Blackstone or Hipgnosis on track to control catalogue that will rival the Major Publishers in value?
The Hipgnosis/Blackstone fund is to be worth $1bn+. Assuming a similar acquisition to historic annual royalties multiple that Hipgnosis has paid in the past (18-20x), it is reasonable to expect this fund to bring in around $50-55m of annual royalties a year, which would put it at the low end of Indie Publishers, and significantly below "market setting"* Major size. For context, Warner Chappell, the smallest Major Publisher, has annual royalty rates of $600m.
*Market setting being defined as where a single entity can successfully represent itself in licensing deals rather than being required to aggregate into Licensing vehicles.
Hipgnosis has separately invested $2bn in catalogue to date through the Hipgnosis Song Fund, currently delivering $134m in annual revenues. Even combining Hipgnosis Songs Fund and the potential value gained through deploying the capital committed to the Blackstone/Hipgnosis joint venture, the value of catalogue remains firmly in the Indie Publisher region.
That said, it is a shift in momentum. If the Major Publishers get pulled into a capital acquisition arms race by incoming funds they will be fighting at a different level to what they have been used to in the past.
When comparing the $1bn acquisition budget that Hipgnosis/Blackstone has, to that spent by Major Publishers we see a slightly different picture. From the Warner public financial results in 2020 it is reported that the company spent $40m (2020), $41m (2019), and $14m (2018) on music publishing content acquisitions.
It remains to be seen how much appetite there is to fight. Traditionally the multiple paid for publishing catalogue was (anecdotally) in the 10-12x range. Over the past couple of years Hipgnosis has already almost doubled this.
However, based on the Warner financial results, Publishing is a far more profitable business than Recording (OIBDA / revenue margin: Recording = 9.2%, Publishing = 23.9%). This may be something they are willing to fight out.
So what would it take for a fund to buy itself into Major Publisher status?
Using the 18-20x rule, to buy-in a catalogue at the level of Warner Chappell, a fund would need to spend in the region of $12bn on acquisitions. Four times what has been committed by a combination of Hipgnosis and Blackstone so far. Significant, though not outside of the realms of possibility.
The types of rights that are a target for acquisition by Funds are almost exclusively Heritage Pop & Rock rights. There is a high ceiling on potential acquisition targets, but it is reasonable to expect that the multiple premium will follow demand. Likewise, there is a focus on "hits", which naturally creates a limited pool of targets.
There is also a timing element at play. Catalogue acquisition activity is certainly picking up, but the transfer of rights that would be required for a new Major Publisher to emerge out of these funds would be unprecedented.
Will these trends put pressure on the Majors? Yes, certainly.
Will it spark market restructure? Maybe, if this continues.
The Funds will weaken the Major Publishers, but it will take the form in death by a thousand cuts rather than one swift blow.
I would expect that the breaking point will be where Major group profitability is impacted significantly enough to force a decision around business unit divestment, assuming the PE funds can afford to continue the strategy they are putting in place. And at that point there’s a question around whether there is a buyer willing to put up the cash that would be required.
I am also conscious that I have focussed on the shift in market share with respect to value in this writing, whereas there are other factors that complicate things, such as administration rights, industry governance, competition issues, etc. There will probably be more on these in a later piece.
Can the Major Publishers fight this?
Short of being drawn into a capital race, there are defensive moves that Publishers can, and have hinted privately that they will, take. Specifically in blocking the onward routing of money from PROs to Funds that acquire rights.
However, on this, Blackstone seems well positioned through its industry backend acquisitions. It can move its rights away from PROs that would usually enforce the "exclusive assignment" and head off any legal challenges to the flow of royalties.
How much of this has been planned from the beginning vs. a chain of opportunistic acquisitions is unclear, but retrospectively the narrative is building to be quite powerful.
So, what does this mean?
Major Publishers are going to be dragged further into an escalating rights acquisition race, raising the premium.
There is a world where the Majors cede the ground to Funds on Publishing and exit over time through content divestment, once Group profitability becomes significantly impacted. The knock-on effect on share price of the Majors that have gone public will be interesting to watch.
Major Publishers control and maintain a position of strength and it will take a significant level of investment to un-seat that position.
Key to this emerging trend is that Publishing rights being bought and sold through buy-outs are likely to become increasingly common, with positive and negative outcomes for Songwriters (money upfront vs. confidence around money over time).
We’re talking about Publishing in the main in this piece, but it is clear sign of the continued division of old and new, and how rightsholders are being made to react.
A&R going forwards is probably look very different for the next generation of creators. It’s likely that there will be less opportunity for funding and development from the rightsholders that they would have traditionally targeted for help.
If this plays out as expected then it will leave a significant void for new creators and presents a growing opportunity for investment in, and development of, new "frontline" repertoire.