Retail investors can now bet on music royalties: 'We want people to have access'

There's a new way to make money in the music industry — and it involves betting on your favorite songs.

Earlier this month, investing platform Public offered retail investors the opportunity to own a piece of the rights to the "Shrek" soundtrack for the same price as an expensive cup of coffee.

The company purchased the 768-track catalog outright, put it into an LLC, and then had that LLC go public so investors could buy shares for as little as $10 — something that's become known as "fractionalized royalty investing."

Investors can trade shares with other users on the Public platform, but the company said it's likely, given the cash-flowing nature of the royalty asset, that buyers will be long-term investors.

"It really starts with this approach of being retail first and you're seeing a big change in the industry," Keith Marshall, general manager of alternatives at Public, told Yahoo Finance.

Public co-CEO and co-founder Leif Abraham added: "We want people to have access to multiple sets of asset classes."

Royalty investing has existed before — but it was largely reserved for wealthier institutional investors like hedge funds who could afford to shell out six figures or more on song catalogs.

"If we can bring liquidity to royalties broadly then we can make songwriters, artists, producers richer and expand the possibilities of what they could do with their career and their art," said Gary Young, CEO of Royalty Exchange, a marketplace that connects those who want to sell their intellectual property (IP) with buyers.

Artists flooded the platform in 2020 to seek out potential investors as an alternative way to make money through the sale of song royalties, which are income generators paid in return for IP or simply the use of that IP.

For an artist, their songs are their IP and royalties are payments made to that artist whenever their song is played on the radio or streamed on music streaming services like Spotify (SPOT) or Apple Music (AAPL).

"Most people have some general idea that a royalty is part of copyright law. It's something for creators to get paid based on things that they've created," Marshall said. "But at the end of the day, it just ends up being a payment — that's the simplest way to look at it. It's a means that someone has a legal right to receive payment for content being consumed."

'The next big thing'

Song royalties can come in two different forms — master recordings, or the recordings of an actual song, and music publishing, which encompasses the copyrights for songwriting and composition, such as lyrics and melodies.

Although publishing rights are often not worth as much as actual recordings, they can still lead to a significant amount of revenue over time with radio play, advertising, movie licensing, and more.

Public said the "Shrek" royalties, which fluctuate depending on play frequency, generated an annualized dividend yield above 8% in both 2021 and 2022. To compare, the current yield on the 10-year Treasury note generates about a 5% return.

"It's all about building this idea of a balanced, modern portfolio and that comes back to diversification," Marshall said. "You’re really trying to build a portfolio with the least correlation between your different asset classes. That's where music comes in. It’s driven by content consumption that has nothing to do with the Fed’s moves on interest rates."

That means investors can earn passive income independent from traditional markets.

"It'll be interesting to see how these 'fractionalizations' go," Royalty Exchange's Gary Young said. "That's probably the next big thing. It's already starting to happen, but the question in my mind is, 'What's the scale? And can people bring a lot of these songs or catalogs of songs to market in an affordable way?'"

'The perfect storm'

Affordability of more well-known catalogs will be the biggest hurdle, especially as more artists have sold the rights to their music catalogs for hundreds of millions over the past several years.

The dominance of streaming services has been a major factor in increasing the value of those music rights with experts saying streaming has provided greater stability within the industry as consumers can more easily access songs — leading to more returns for artists.

"The key is that the business has become predictable," said Guillermo Page, a former record label executive who worked for Sony and Universal. "[Investors] can trust in the future of the business because it's growing. When you eliminate the uncertainty, it opens up a new door for investors to come in and snap those assets."

Page, who now teaches in the music program at the University of Miami, added catalog sales are also a huge benefit to artists, especially older ones.

In December 2021, Bruce Springsteen sold both his master recordings and publishing rights to Sony Music in a deal worth north of $500 million, according to multiple outlets. The Red Hot Chili Peppers sold the rights to its song catalog for a reported $150 million that same year.

In 2020, Bob Dylan sold over 600 copyrights to Universal Music Group in a deal reportedly valued at over $300 million. Prior to that, Stevie Nicks sold a majority stake in her songwriting for a reported $100 million.

"The older a song is, generally, the more consistent the income stream," Young noted.

But even younger artists are cashing in on the trend. Most recently, Katy Perry sold the rights to her song catalog for $225 million in September while Justin Bieber sold his entire music catalog for over $200 million earlier this year.

"It's the perfect storm for artists who can now maximize their return on the sale of those assets," Page said.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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