Bowie Bonds and the Valuation of Song

“I am not a prophet or a stone aged man, just a mortal with [the] potential of a superman,” –David Bowie


When David Bowie died in 2016, he was affectionately declared the patron saint of gay men, extraterrestrials, and IP royalty securitization. For a man who mutated through dozens of identities, genres, and bodysuits, it’s unsurprising that his legacy touched even the most remote corners of modern finance. In 2002, Bowie foresaw the end of music as we once knew it: “The absolute transformation of everything that we ever thought about music will take place within ten years, and nothing is going to be able to stop it,” said Bowie. “I see absolutely no point in pretending that it’s not going to happen.” By “everything,” Bowie was referring to the diminishment of record labels, the rise of streaming services, and the transformation of artists into touring salesmen. (The only thing he didn’t predict was where, when, and how Justin Bieber became a quarantine fashion icon.) “You’d better be prepared for doing a lot of touring because that’s really the only unique situation that’s going to be left,” said Bowie. “Music itself is going to become like running water or electricity. Take advantage of these last few years because none of this is ever going to happen again.”


The Original Bowie Bonds

Bowie certainly took advantage of music’s financial golden years. In 1997, sensing that his royalties might decline in the Internet age, Bowie temporarily exchanged the rights to his back catalogue for a bundle of cash. Bowie Bonds, as he called them, were the first of their kind. Rather than directly sell off his royalties, he used them as collateral for $55 million in bonds. In exchange, the buyer, Prudential Financial, received a piece of Ziggy Stardust and 7.9% interest over a 10-year maturity.


Why was Bowie drawn to this unknown financing route? Instant liquidity. And, compared to other alternatives, it was cheap. Bowie received a large lump-sum payment which he used to buy out a former manager. He avoided the risk of losing future royalties if consumers stopped buying his music (they did: piracy destroyed album sales and the credit rating on Bowie Bonds fell to just above junk in 2004). Another advantage of securitization is that because it’s treated as a loan, rather than a sale, the cash inflow is not taxable. And ultimately, he got to keep his royalties. The deal created headlines. It also popularized the idea that any intellectual property could be packaged into a security, albeit, one with a proven revenue stream. “Bowie bonds were as groundbreaking as his music,” said Rob Ford, a London-based money manager at TwentyFour Asset Management. “Not only were they followed by a number of other artists, but they set the template for deals backed by a whole range of assets.”

Other esoteric assets include Miramax’s TV library, celebrity brands, and the “Peanuts” comic strip. While a few artists immediately followed Bowie’s lead — Rod Stewart, James Brown, and Iron Maiden quickly arranged their own deals — significant growth was halted by mass piracy and the subprime mortgage spectacle of 2008.


Songs are An Investable Asset Class

Following the music industry’s gradual recovery from the arrival of the Internet, interest was recently revived in songs as an asset class. In 2018, music legend Nile Rodgers — known for his heavy hitters such as “We Are Family,” “Get Lucky,” and “Le Freak” — teamed up with Merck Mercuriadis, Beyoncé’s former manager, to found Hipgnosis Songs Fund, a London-based music IP investment company which has raised over $1bn and is traded on the London Stock Exchange under the ticker SONG.


“Nile and I have always believed that hit songs and music, art, in general, has real value to it,” said Mercuriadis. “What people don’t really recognize is that when a song becomes a proven song, the earnings pattern to it becomes very predictable and reliable, and is therefore investable.” It also helps that fifteen years of illegal downloading has left these assets available at attractive prices.


In a world where Donald Trump might offset the market from his toilet seat, non-correlated assets are more sought after than ever before. Songs seem to be just that. Their performance is theoretically distinct from the NASDAQ, the pandemic, and President Trump’s tweeting patterns, etc. “The beautiful thing about music,” said Mercuriadis, “is when things are going fabulous, music is the soundtrack to celebrate, and when things are challenged, music is the soundtrack for escape.” But how to tell if a song is investable or not? Mercuriadis lets the data choose for him. “The data in music, I’m happy to say, is very, very granular. The success of these songs is based on billions of microtransactions. When we’re buying songs, we look at the last three to five years of verified data. A six-month statement on a successful songwriter might be 10,000 pages with billions of transactions on them. We look at those statements and remove any lumpiness: for example, if there’s a license that’s been made for a movie and we don’t think it’s repeatable, we remove that from the income statement.”


A Difficult Period for Songwriters

Rodgers and Mercuriadis were inspired to start Hipgnosis to improve the songwriter’s position in the music economy. They believe that songwriters — who arguably provide the most important component in an artist’s success — are the lowest on the totem pole in the industry. Songwriters had a difficult road to climb. When mass piracy first swept the marketplace in the early 2000s, annual collections of royalties from recording sales fell by 22 percent. Music Row in Nashville, the country’s music publishing mecca, was dubbed “The Titanic” because so many hit songwriters were now working a second job at Dillard’s makeup counter. Things aren’t very different today. While record labels are seeing double-digit revenue increases thanks to streaming services, songwriters received the short end of the agreement. Spotify, for example, pays record labels 52% of their revenue share. Publishers and songwriters claim a mere 10%-15%. In fact, the only time songwriters seem to make much money is when record labels are excluded from the transaction. For artists, this usually means the live concert business, which helped increase their revenue share from 7% in 2000 to 12% of music revenue in 2017. Of course, not all songwriters are artists, leaving non-performing writers with even fewer opportunities to negotiate fair terms. Hipgnosis offers another route by buying royalties straight from the songwriter. Songwriters are also disadvantaged in that they are the only profession whose income stream is largely determined by the federal government. Because of antiquated legislation meant to protect piano-player rolls, the federal government regulates about 75% of songwriters’ income by setting the rates for mechanical and performance royalties. The original mechanical royalty was set at 2 cents in 1909. It didn’t get a rate increase until 1976 and currently stands at 9.1 cents.


A New Era for Songwriters?

In 2018, President Trump signed the most dramatic piece of legislation the music industry had seen since World War II: The Music Modernization Act. It was a historic moment for copyright reform that updated music copyright law for a digital and streaming age. It also streamlined how royalties are collected and sought to pay songwriters more fairly for streaming. And in November 2018, the government-mandated Copyright Royalty Board issued a 1% annual increase in mechanical royalty rates for five years, raising them up to 15.1% in 2022. Spotify and Amazon instantly appealed on the basis that higher royalties would slow streaming growth. David Israelite, CEO and president of the National Music Publishers’ Association, was quick to condemn them. “What Spotify has done here is so offensive, it will never be forgotten,” said Israelite. “For writers, you need to know who your friends are. Any token gestures that Spotify and Amazon use to try to suggest that they are friendly to the industry … [are] massively outweighed by them trying to cut what they pay [songwriters] by one third.” Earlier in August, the Court of Appeals asked the CRB to provide further justification for its rate increases, but the industry remains hopeful for its passage.


Meanwhile, Merck Mercuriadis has nothing but optimism for the future. Once known as the man who could get you Nile Rodgers’ tickets, he is now known as Moneybags Mercuriadis, “the man who keeps buying bloody everything in sight.” In less than two years, he spent over a billion dollars on 12,000 songs and 60 deals, including back catalogues from Rihanna, The Chainsmokers, and Ed Sheeran. And, after a smashing year despite the pandemic, he plans to do it all over again. But his ultimate vision is a songwriters’ guild. He plans to use half a billion dollars’ worth of assets to create a writers’ collective that can advocate for fairer pay. “I can’t own all the songs in the world, but I can play a part in making sure all the songwriters in the world benefit,” said Mercuriadis. “And that’s where this Songwriters Guild, with real teeth, will come into play.”


About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at inquiries@colbeck.com.


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