Tuesday, June 5, 2012

A million copyrights! What is it good for?

By Emmanuel Legrand

At the game 'Who wants to be a millionaire in music publishing' there's a new winner on the block and its name is BMG Rights Management.

The Bertelsmann operation, backed by VC group KKR, announced last week that through its aggressive acquisition policy, it has grown in just a few years from zero to over a million copyrights. They are now part of this very exclusive club of millionaires that includes Sony/ATV + EMI Music Publishing, Universal Music Publishing and Warner Chappell.

So champagne for Hartwig Masuch and his team is de rigueur! Or is it?

BMG Rights Management CEO
Hartwig Masuch
On the one hand, Masuch has impeccably rolled out a strategy devised with his German shareholders alongside KKR, and has now earned the right to be taken seriously. Its success challenges the status quo among the majors. Time will tell if they really manage to build a publishing house for the 21st Century.

But it was done at a cost. There's that incredible business philosophy (not sure the two words go together well but that'll do for now) in music publishing that what matters is scale and volume, and that stacking up compositions will provide huge streams of revenues. Under a million copyrights, you're worth nada. In the capitalistic world of music publishing, there's now an obsession with size and scale.

The only reason why size has started to matter in music publishing was due to the newfound interest from Wall Street and the City in what they saw as assets delivering long term steady returns. The belief in financial circles is that is that catalogues are worth a lot of money because of big numbers. The fact that copyright to compositions is awarded in most countries for 75 years post-mortem gives investors a potential large window to recoup their investments.

But is size all that matters? Music publishing is a strange industry. It is a penny business, as the new market leader Marty Bandier likes to say. But it is also a business with multiple facets. Yes, catalogues are worth money because they deliver steady revenues. But the bulk of revenues come from new works, new songs from new or established songwriters.

Publishers never disclose the breakdown in revenues between recent works and heritage works. And also what is the share of their active works. There is much to bet that most of works on the million-plus catalogues are dormant (sources suggest than less than 10% of the big catalogues are active, with 3-5% accounting for the bulk of revenues).

There's many reason to that: a lot of these compositions no longer fit the times, are too old or not relevant any more (although the concept of relevance can vary: who would have thought that mambo had any value until Lou Bega had a worldwide hit with 'Mambo No.5'?). But there is also a very human reason to that: the lifeblood of publishing is with new signings, and teams prefer to spend time and energy on new writers than dig into the vaults. And there is also the limit to the number of compositions and songwriters that teams can work for and with.

It is fascinating to hear stories about how much these big publishing units are unaware of what constitutes their catalogues. A publisher was telling me last week of the case of an American composer whose royalties were sent by the British rights society PRS for Music to... Australia. There was a homonym Australian composer registered to Australian society APRA, but the British publisher (a major company) of the original composer had not even noticed the snafu since it was only a minor stream of revenues, which mattered to the composer, but was not big enough to fly over the radar of the publisher.

Where scale makes a difference is in the capacity to sign new songwriters. Independent publishers are squeezed out of the deals with the hot new composers and lyricists because they cannot compete with the cheque book. And that's why the big publishing houses tend to also be the publishers of the latest hit-makers.

Another publisher – who sold his company to... BMG – recently told me he had no plans to relaunch an independent publishing company and build it through acquisitions. The reason? “Money too expensive and sellers unrealistic.”

The wave of fresh VC money that fell upon music publishing has allowed companies like Imagem or BMG to grow significantly in a just couple of years, but has also created a rise in the value of catalogues and has almost shut the door to other publishers who were not as significantly capitalised (and also created a culture of selling assets since a lot of publishers prefer now to cash in while there is money and sell their assets).

The growth of BMG is certainly commendable if just for financial reasons (as is the acquisition of EMI Music Publishing by Sony/ATV), but it happened at the expense of market diversity. 

This concentration is extremely dangerous for the music industry's eco-system. There is a need for healthy small and mi-size music publishing companies to play the role of incubators of talent. There is a need for multiple sources of A&R development. And there is a need for some kind of level playing field in terms of investments.

[Typed while listening to a selection of Patti Smith's songs. That's one catalogue that is ageing quite nicely.]