Inside the Finances of a Hit Pop Song: Gold Records and Bowie Bonds

In 1993, Nick Lowe was a journeyman musician whose shot at fortune and fame was well behind him. A seminal figure during the British punk and new wave movement of the late '70s, Lowe had a string of moderately successful hits in his native England but never achieved the worldwide success needed to ensure a financially secure future in the music business. Unbeknownst to him, that was all about to change.

More than 3,000 miles away, famed producer Clive Davis was putting the final touches on an album for his label, Arista Records. However, Davis felt it wasn't long enough and wanted to add one more song, ultimately settling on a cover version of "(What's So Funny 'Bout) Peace, Love, and Understanding" performed by Curtis Stigers. Lowe was the composer of that song. And the album Davis added it to? The soundtrack for the movie "The Bodyguard," starring Whitney Houston.

That album went on to become the highest-selling soundtrack of all time, from which Lowe receives six cents for each copy sold -- his royalty fee for the inclusion of his song. With worldwide sales to date of 42 million, that translates into roughly $2.52 million into Lowe's pocket.

As impressive as that number may be, it took more than 20 years to achieve. Today, songwriters receive a higher royalty fee of 9.1 cents per sale and in a time when technology allows anyone with an Internet connection to purchase music with the click of a button, a hit song can make the author a lot of money.

How much money? Here are the songwriting royalties generated by some recent hits, courtesy of Rolling Stone:

Adele's "Someone Like You" – sales 9.7 million, royalties $882,700

Eminem's "Love the Way You Lie" – sales 9.5 million, royalties $864,500

Lady Gaga's "Poker Face" – sales 8.0 million, royalties $728,000

Katy Perry's "California Gurls" – sales 7.1 million, royalties $646,100

Rhianna's "Umbrella" – sales 6.72 million, royalties $611,520

Taylor Swift's "Speak Now" – sales 4.4 million, royalties $399,035

With the exception of "Poker Face," none of the songs listed above are more than 5 years old, but the earnings pattern of hit songs like these is so consistent and so stable that Wall Street has even created investments based on their revenue streams.

Back in the '90s, an enterprising investment banker named David Pullman theorized that you could create a bond offering secured by the future publishing royalties of an artist's back catalog of songs in much the same way you could create a municipal bond backed by future tax revenues or a corporate bond backed by anticipated earnings. That bond could then be sold to investors, with the proceeds going to the holder of the publishing rights.

%VIRTUAL-article-sponsoredlinks%The first of these bonds was offered in 1997 and was backed by the future royalty monies from 287 songs recorded by David Bowie before 1990. The entire offering was bought for $55 million by Prudential Insurance Company of America; they're now known as "Bowie Bonds."

That success was followed in 1998 by a $30 million bond offering based on the royalties of the Motown songwriting team Holland-Dozier-Holland whose hits included "Stop! In The Name of Love" and "You Can't Hurry Love."

Since then, such financial powerhouses as SunTrust Bank, Japanese investment bank Nomura Capital, and The Royal Bank of Scotland have created royalty-based financial products for such diverse artists as Rod Stewart, Joan Jett, and Tupac Shakur.

The benefit of these arrangements for the songwriter or musician is that they can take home a lump sum of money immediately, based upon what they'd earn over the long term, giving them a monetary cushion that will enable them to focus on their art, free from financial pressures.

In Lowe's case, the windfall from "The Bodyguard" soundtrack gave him creative freedom in his later career, allowing him to pick and choose which projects he wanted to be involved in. However, in a bit of irony, Lowe has been quoted admitting he's never seen the movie whose success changed his life. Said Lowe: "It seems terribly cheerless to say it, but I don't think it's the sort of thing I'd like very much."

No man is an island, or even a peninsula, so I encourage your feedback in the comments below. And don't forget to pick up my book, "Trading: The Best of the Best -- Top Trading Tips for Our Time."