The music publishing industry saw a major transformation with the rise of Hipgnosis, a group of companies that has gained attention for its aggressive acquisition of music catalogs. Founded by former artist manager Merck Mercuriadis, Hipgnosis quickly became a dominant force by purchasing the rights to iconic and influential songs, often at prices many industry experts viewed as inflated. As Hipgnosis made waves with its high-profile deals, some industry veterans began to question whether the market was experiencing a “music catalog bubble,” not unlike the housing bubble of 2008. Despite these concerns, Hipgnosis pressed forward with its acquisitions—until this fall, when it began selling off some of its publishing assets.
The Rise of Hipgnosis
Launched in 2018, Hipgnosis Songs built its portfolio by collaborating with investors to create funds for acquiring the catalogs of established songwriters, rather than investing in new artists or purchasing catalogs with its own capital like a traditional publisher or record label. While Hipgnosis gained widespread attention for its headline-grabbing acquisitions, it is not the only company using this approach. Other players such as Reservoir, Primary Wave, and BlackRock have followed similar strategies, buying major catalogs as investment assets. Through this approach, Hipgnosis acquired the rights to catalogs from legendary artists including Neil Young, Bob Dylan, and Justin Bieber.
What is a Catalog Acquisition?
A music catalog acquisition involves the purchase of rights to a collection of musical works, generally focusing on the “publishing rights,” but in some cases, also including master recording rights. Master recording rights refer to ownership of the master recordings of songs, typically held by record labels, as most artists do not own their masters. Publishing rights refer to the copyrights of the underlying musical compositions, separate from the recordings. Copyright owners hold what is known as the Section 106 “bundle of rights,” allowing them to control reproduction, distribution, performance, and licensing of the music. Music publishing income is split between the writer’s share (royalties paid to the songwriter) and the publisher’s share (which controls the copyright to the songs as well as a royalty share paid to the entity owning the publishing rights). Typically, acquirers buy only the publishing rights, which enables them to monetize the songs through channels like streaming, licensing, and other distribution methods. However, Hipgnosis disrupted the traditional model by aiming to acquire “100% of a songwriter’s copyright interest,” which includes the writer’s share, the publisher’s share, and the writer’s share of performance rights (income a songwriter typically receives from a performing rights organization like ASCAP or BMI). A detailed explanation of this investment strategy can be found on Hipgnosis’ website.
Pros and Cons of Investing in Music Catalogs
Music catalogs can offer several advantages to investors, such as stable and predictable revenue from various income streams, portfolio diversification, and the lasting cultural significance of certain iconic songs. Hipgnosis’ success in acquiring and managing these assets spurred a surge of interest in music catalogs as a form of investment. However, savvy investors understand that the profitability of music catalogs depends on whether the returns justify the acquisition costs. Catalog valuation is a complex process, influenced by factors such as a song’s popularity, its historical earnings, and its future potential. Rising interest rates in 2023 increased the cost of debt used to finance catalog acquisitions, leading some to compare music catalogs to government bonds—traditionally safe but low-yield investments. This shift in perception contributed to a drop in Hipgnosis’ stock value, which fell to approximately 50% of its net asset value, signaling that investors may believe the “music catalog bubble” has burst. Additional investor concerns have been raised by a lawsuit from Hipgnosis Music Limited (HML), another fund founded by Mercuriadis that is now winding down, against Mercuriadis and Hipgnosis Songs. HML alleges that Mercuriadis and Hipgnosis Songs diverted business opportunities from HML to the new entity.
Recent Developments: The Blackstone Takeover
In late July 2024, Hipgnosis was acquired by Blackstone for $1.6 billion, concluding a competitive bidding war with Concord. Blackstone’s bid ultimately prevailed due to a higher share price, allowing it to acquire Hipgnosis’s vast catalog. As part of this deal, Hipgnosis founder Mercuriadis stepped down from his role as Chairman. The acquisition underscores the continuing consolidation within the music publishing industry. But while many expected Blackstone to trim down Hipgnosis in the wake of Mercuriadis‘ departure, that’s proving not to be the case: Hipgnosis is reportedly on a hiring spree. Whether this signals the end of the “music catalog bubble” or merely a new phase remains to be seen.
What Lies Ahead for the Music Catalog Market?
The Hipgnosis acquisition has established music catalogs as a viable investment class. Should interest rates continue to fall, we may see renewed competition for catalog purchases, with more companies adopting the Hipgnosis model. However, if rates plateau, investors may turn away from music catalogs and shift their focus to more traditional investment opportunities.
Conclusion
Hipgnosis has had an undeniable impact on the music industry with its catalog acquisitions, prompting competitors to follow suit. While Hipgnosis is currently selling off some of its assets, the future of the music catalog market remains uncertain, with the potential for either a rebound or further market correction in the near future.
