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Big Red Hot Chili Peppers deal shows song catalogs as a 'safe asset class'

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·Producer
·4-min read
Big Red Hot Chili Peppers deal shows song catalogs as a 'safe asset class'
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The Red Hot Chili Peppers are said to be selling the rights to its song catalog, which include hits like "Californiacation" and "Scar Tissue," for $140 million — in a deal that may have implications for the music industry.

London-based music investment company Hipgnosis will acquire the catalog, Billboard reported this week. The agreement would add to the firm's already impressive roster of A-list publishing deals, from Neil Young and Shakira to former Fleetwood Mac guitarist Lindsey Buckingham. Hipgnosis did not immediately return Yahoo Finance's request for comment.

To put the deal in perspective, the Red Hot Chili Peppers' catalog currently generates between $5 and $6 million a year for publishers, Billboard reported. It was sold for about 25 times that amount.

Red Hot Chili Peppers to sell song catalog for reported $140 million
Red Hot Chili Peppers to sell song catalog for reported $140 million

The reported Red Hot Chili Peppers deal underscores how song catalogs "have become a really interesting asset class to a lot of investors and hedge funds, and that’s created the space to heat up a bit and for multiples to increase," Visionary Music Group Founder Chris Zarou told Yahoo Finance.

Zarou, who manages multiple artists, including Grammy-nominated singer, songwriter and record producer Logic, explained that securitizing music catalogs is "an amazing way for an artist to monetize their life’s works and to capitalize on beneficial tax incentives," he said. 

Buyouts are often looked at as long-term capital gains in the U.S., whereas continuing royalties are counted as ordinary income, according to the music veteran — and the best of all possible worlds.

"I look at it as a win-win for everyone...it's a cool evolution," Zarou added. 

A 'safe asset'

(Source: NYT, WSJ, Billboard)
(Source: NYT, WSJ, Billboard)

Similar moves have been made by other high-profile bands and singers, and the trend seems to have gained steam throughout the course of the pandemic.

Bob Dylan sold over 600 copyrights to Universal Music Group last year 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.

Music publishing 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.  

"Buyers look at it as a safe asset where you are likely to see annual returns in perpetuity — similar to real estate although this probably has even better returns, especially if you buy the right catalog," Zarou explained.

Live concerts with sold out tours tend to contribute the most amount of money to a performer's wallet; However, with concerts on pause amid the coronavirus, that source of income has momentarily vanished. 

Alternatively, selling song catalogs can be a relatively easy way to make up for any lost pay. 

"I think [the pandemic] played a role for bigger-name artists who would generally be out on the road selling out arenas and stadiums in order to pull some revenue forward," Zarou suggested — although he cautioned against performers making such a move without careful consideration. 

TikTok Phenomenon

The value of a song has sharply risen since the rise of TikTok, with (mostly younger) users exposed to old classics from the past. 

"We're living in an era of the music business when an old record that's 25 years old can pop up on TikTok and then, all of a sudden, the value of that publishing catalog has dramatically changed," Zarou said. 

He cited the surge in popularity of Fleetwood Mac's "Dreams," after the 1977 song went viral on the app last year.

"Now that song is being consumed at a much higher level and, not only that, it's now been introduced to an entire new generation of people who didn't even know it existed," he continued. 

"So the unpredictability of a catalog — fueled by TikTok and social media — is also a big benefit to the buyer," he added. 

Alexandra is a Producer & Entertainment Correspondent at Yahoo Finance. Follow her on Twitter @alliecanal8193

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