James Carthew: Music rights shakeup could seriously turn up the revenues for SONG

After the growth of streaming has powered a stellar year for Hipgnosis Songs Fund, UK government ideas to reform music rights could lead to another jump in revenues.

The managers of Hipgnosis Songs Fund (SONG ) seem to be in an upbeat mood and no wonder. The £150m fundraise earlier this month was oversubscribed, and the fund now has a market capitalisation of about £1.5bn and a portfolio worth almost $2.5bn (£1.8bn).

The company’s results for the 12 months ended 31 March 2021 were strong, with an 11.3% uplift to the dollar net asset value (NAV),  a total return of 15.7% and a 5% increase announced for the dividend. Sterling strength has been holding back returns to UK-based shareholders this year, but this now seems to be easing.

Now, to cap it all, the UK government is making encouraging noises about reforming the way streaming revenues are divvied up and SONG could be a major beneficiary of this.

The music industry went through a difficult patch in the 2000s as physical sales of CDs started to fall away and piracy was rife, led by sites like Napster. The big music publishing companies worked hard to stamp this out, but the real change came with the success of sites such as Spotify and Tencent Music.

I have talked before about the tailwind that this gives to SONG’s revenues. Spotify subscriptions surged last year, building on what were already strong growth numbers since the service was launched. To give you an idea, when I first wrote about SONG in 2019, Spotify had only broken through 100m premium users in the first quarter of that year. By Q1 2020 the figure was 130m and in Q1 2021 it was 158m.

In addition, the number of platforms that have agreed to pay streaming revenue is expanding. Sites such as Peloton and Roblox are now paying for music.

However, inefficient accounting in the industry means that these revenues take some time to flow through the system. Revenue growth is built-in for a while yet.

SONG is all about the songwriter. Songwriters have been getting a rough deal for a long time now and their share of this streaming bounty is surprisingly small.

The UK is a major market for streaming – the largest in Europe worth about $1bn in 2020 – and so what happens here has a big influence on songwriters’ and SONG’s revenues.

The House of Commons’ Digital, Culture, Media and Sport (DCMS) Committee launched an inquiry into the industry in October 2020. SONG made a submission, as did a number of songwriters and composers.

After VAT is deducted, roughly 30% of the money paid to music streaming subscription services such as Spotify is retained by the platform. SONG thinks that this is about right. Where it has a problem is with what happens to the other 70%.

The committee found that, typically, 55% of the income is going to owners of the recording/master rights and just 15% is going to holders of the song rights.

The 55% of gross revenue attributable to holders of the recording master rights is split between the record company (38.5% of the gross revenue) and the recording artist (16.5% of gross revenue).

The song rights income is split 50:50 between mechanical rights and performance rights. After the publishing companies have had their cut (about 4.5% of gross revenue), the share to the songwriter/composer is 10.5%.

SONG thinks a conflict that has arisen because the major record companies (Universal Music, Warner Music and Sony) own the three major music publishing companies. It feels that the publishing companies are constrained from fighting for the rights of songwriters.

Nile Rodgers (of Chic), who sits on SONG’s advisory board, highlighted the lack of information available to the creatives, who are unable to tell how raw a deal they are getting largely because of non-disclosure agreements between record labels and platforms.

A number of writers of hit songs claimed that they were struggling to make a living. Many of the submissions made to the inquiry were made anonymously as artists said that they feared being penalised by their record labels.

The DCMS committee has made five recommendations: legislation to establish a right to equitable remuneration (splitting income 50:50 between artists/songwriters and music labels); revenue parity for songwriters and composers; a Competition and Markets Authority investigation into the music industry; fair and transparent algorithms, so that curators of playlists disclose when they have been paid to promote a particular song or artist; and protections for rightsholders in the UK market that are at least as strong as those in other jurisdictions. The government has two months to respond.

How this works out in practice remains to be seen. However, if the 70% were split 35%:35% rather than 55%:15%, songwriters could end up with over 2.3x their current income in some cases.

The losers in this scenario would be the record companies. The investment company that might be hardest hit by this is Pershing Square Holdings (PSH ). Manager Bill Ackman’s special-purpose acquisition company (Spac) had agreed to buy 10% of Universal Music from Vivendi. Although, today it has been reported that the Spac will not go ahead with the transaction due to regulatory constraints. The share purchase agreement will be assigned to PSH and affiliates instead, possibly at a reduced scale.

The compensatory factor for Pershing Square is the underlying growth of streaming revenue globally.

SONG has played a big role in helping raise awareness of the plight of songwriters and is fighting their corner. This is part of its compact with the artists that sell the fund their song rights. I am a happy shareholder.

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