Music is often looked upon purely as a form of entertainment and leisure, especially by the hospitality industry which often uses it as a sensorial added extra. One often forgets that to work successfully in music means becoming familiar with the complex world of the 'music business'. Never more so than today has the relationship between music and money be so intricately interwoven with new markets and platforms giving way to new investment possibilities that both musicians and financiers should be aware of. In fact, making money with music is today more exciting than ever.
Music and money
For many people, music is life. It allows us to feel an unbelievable number of emotions that represent all imaginable life situations. It helps us to pass moments we encounter more easily, be it joy, grief, anger or frustration. For the very best musicians, a single line or an accord is enough to have listeners instantly recognise a song and associate it with a specific feeling they have witnessed in their life.
Another central theme that shapes and affects our lives is money. Whether or not we have it, it is omnipresent and a large matter of debate. Thus, it is natural that over time many songs have been written about money and how it affects our existence. Should we prefer it over love (thanks The Beatles), how to get some when you lack it (thanks ABBA), should we like money or not (thanks Pink Floyd), and how does it affect others around us (thanks Kanye West)?
Throughout history, music and business have always been interlinked. In order to live, musicians and composers need to find ways to make money from their compositions. Hundreds of years ago, classical artists would work under a patronage system with wealthy aristocrats or charge for music pieces commissioned for specific events.
Throughout time this has evolved into a royalties system and incomes through merchandising and stadium concerts. This link between business and music has never been more true than over the past two decades, in many more and different ways than any of us could have imagined.
Streaming and music
One of the major developments in the music (and film) industry over the past three decades is the appearance of streaming services. In the 1990s and the internet's infancy, it started as the illegal up- and download of songs that would hurt artists' income stream. This model changed after a large crack-down on P2P sites and hefty fines or imprisonment for providers of P2P platforms.
Since the 2000s, legal streaming platforms (e.g. Spotify, Soundcloud, YouTube or Apple Music) have appeared and now propose a wide variety of artists, songs, and podcasts to cater to a global clientele. For established artists, this solution provides steady income (an artist receives around 0.003-0.005 USD per stream) without having to sue illegal platforms.
IFPI Global Music Report: Global Recorded Music Revenues Grew 9% In 2022 - PDF
For example, it is estimated that Drake and Ariana Grande have thus far made around 115, respectively 75 million USD, with Spotify streams alone. A classical composer such as Johann Sebastian Bach, were he still alive, would receive around 300,000 $ in annual earnings.
However, for upcoming artists, an ongoing debate exists as it is difficult to make a living via streams alone and thus the new model may hinder the creation of cultural goods in the long run. Overall, in 2021 Spotify paid 7 billion USD to music rights holders. In this, 130 artists received more than 5 million USD and 52,600 artists more than 10,000 USD.
For the platforms, the benefits are clear as they receive cash flows via the individual streams, payments from users with premium accounts and advertisements. As a retail investor, one can also take part in this business model by buying stocks of streaming services such as Spotify.
Music catalogs up for grabs
What do songs such as Bon Jovi's "Livin' On A Prayer", "Back to Black" by Amy Winehouse or Bob Dylan's "Blowin' in the Wind" have in common? Every time you listen to or stream them, you make a financial company slightly richer. A recent trend is for renowned artists to sell their music rights to private equity companies (e.g. KKR, Apollo or Blackstone) or specialist funds (e.g. Hipgnosis).
In 2020, both Taylor Swift and Bob Dylan did so and received $300 million each. In October 2022, Hipgnosis had the rights to 74 out of the 304 songs with more than 1 billion streams on Spotify. The overall spending on music catalogs increased from 1.9 billion to 5.4 billion USD between 2020 and 2021.
So what's in it for the parties involved? For the artist, it allows getting a relatively large lump sum today instead of waiting for revenues emanating from streaming or radio stations using their songs throughout time. This may be especially interesting for older artists for estate planning or for which a second life is given to songs that may become viral through social media.
For the fund, it boils down to a simple diversification story. Music rights provide steady cash flows through time and are uncorrelated with traditional asset classes such as fixed income or equity. Moreover, they may offer the additional advantage of being intellectual property and, thus, intangible assets.
However, the outlook under inflationary times, rising interest rates, and the frenzy in this area with funds potentially overpaying for songs hint at darker times to come. For retail investors it is difficult to participate in this market as private equity funds may not be accessible, and investing in music labels does not yield the same outcomes and investment narrative.
Music and market sentiments
Music may not only be deemed an attractive direct investment, but also indirectly affect us by driving our behaviour on financial markets. Much has been written about the atmospheric effect of music on consumer decisions and satisfaction in, for example, hotel lobbies, bars or restaurants. Behavioural economists have also long advocated the use of psychology and human behaviour to explain the drivers of stock markets and how behavioural biases and emotions affect our decisions on financial markets.
A recent study shows that music sentiment (proxied by the most-played songs on Spotify) is directly related to mood swings of individuals, as it reflects climatic or seasonal emotions. This music sentiment positively affects stock returns (i.e. being in a good mood makes stock prices increase) but only temporarily, as a price reversal is observed when the mood stabilises in the subsequent week.
A related study further indicates that investors contemplating a riskier and more challenging market in the future prefer listening to softer and simpler music. In complicated financial times, people prefer less arousing music, while the opposite appears true when facing stable financial conditions. This musical preference by investors may be due to a counteracting effect when planning complex future decisions. A lab-experiment has shown similar results. In it, participants had to take financial decisions with high- or low-tempo music or with no background music.
Overall, low-tempo music led to riskier investments (more aggressive and less diversified investments) than in the other two cases. Additionally, those participants being more in tune with the music played made riskier decisions.
Takeaway
It has been a long journey since musicians started to write and sing about money (who does not remember the 'ka-shing' of that famous 1970s song by Pink Floyd?). Nowadays, music and financial markets are interlinked in many different ways. Not only has the market strongly evolved for artists on how to best promote their creativity and songs and make a living of it, but the possibilities to invest in music have become more varied as a response to the digitalization of the industry.
Finally, music, as an integral part of our lives, may even allow us to better understand the decisions we make on financial markets and how it impacts our every-day lives while simply queuing in a bank or listening to music while buying stocks online.
Associate Professor of Finance at EHL Lausanne
