📈 When it comes to investments, understanding how to value an asset is key. Most industries use some form of metric to report on deals, whether it is music rights, real estate, or oil & gas.
🎶 In music a multiple of revenue is often used to report on a catalogs price. Using a multiple in music is similar to talking about a "cap rate" in real estate or "$/boe" in the oil & gas industry.
🏗 In Real Estate, the location, type of property, quality of tenants and numerous other factors are considered when coming up with a “cap rate” for a property.
⛽ Oil & gas companies consider things like the API of the oil, operating costs, and development potential when evaluating an acquisition. The cost/flowing or $/boe are however the most common methods for reporting on assets.
So how do you evaluate a music catalog?
🎵 In music, the release date (age of song), genre, artist and total streams are all important factors when analyzing and understanding the value of a music catalog. The historical financial information will reveal a trend for how the song is performing and can indicate the trajectory of future earnings. Breaking down revenue by radio, physical sales, streaming, downloads and sync is important as each will decay/grow at a different rate when it comes to future earnings. Within streaming, understanding that video streaming from YouTube performs differently than streaming revenue from Spotify can also impact the forecast. Companies like TikTok have been catching up on payments so normalizing those lump sums will impact how to forecast future earnings. Other factors to consider are if the artist is touring, releasing future albums, the artist’s age, how many playlists a song is on, the ranking on each playlist, and the number of followers on each playlist need to be considered to identify risk and potential.
Forecasting the future earnings of a song takes a deep understanding of the music industry, macro-economics, and an understanding of how multiple variables connect to each other. The ICM Crescendo Music Royalty Fund, takes all these factors and others into consideration when analyzing a catalog for acquisition. So even though transactions are often reported on as multiple of revenue, there is a lot more that goes into evaluating a catalog.