Yahoo Finance Song rights pioneer Hipgnosis faces uphill battle to keep the music playing
As the live music industry began piecing together its pandemic recovery, Nile Rodgers extended a special invitation to MPs.
The frontman of soul supergroup Chic invited the culture committee to his Hampton Court Palace gig in August, where renditions of Le Freak and Everybody Dance played out among the grounds of Henry the VIII’s former home.
For Rogers, it marked a reunion with the group spearheaded by chairman Julian Knight having appeared in front of them last December to express his concerns about the “unfair system” existing between musicians and streaming services.
Among those mingling with the politicians during the performance was Merck Mercuriadis - the former manager of Morrissey, Beyoncé and Elton John turned music investment deal-maker who has helped orchestrate an industry revolution.
Since listing in London three years ago, Rodgers and Mercuriadis’ song management company Hipgnosis has spent around £1.5bn on the song books of rock and pop legends eager to cash in on the enduring value of their hits amid a sharp growth in music streaming.
Mercuriadis’ Rolodex of artists and music executives has paved the way for deals with the Red Hot Chili Peppers, Neil Young, Shakira, Bon Jovi and Lindsey Buckingham of Fleetwood Mac, handing the business a valuation of £1.6bn and him accreditation as the frontman of a music investment boom that prompted legends to part with their back catalogues.
Investors hungry for returns amid low-interest rates have encouraged him to keep the music playing by sending shares up to a record 130.4p last month - a 25pc rise on its market debut in 2018.
Yet, concerns are mounting that Mercuriadis’ allegiances will increasingly lie elsewhere as rivals amass warchests to try and beat him at his own game.
With Hipgnosis having reached its deal limit, the former boss of Sanctuary Records teamed up with Blackstone in October to spend $1bn on music rights.
It saw Blackstone take a stake in Hipgnosis Song Management, which advises the Hipgnosis Songs Fund. The private equity colossus with around $650bn of assets under management will also co-invest with Hipgnosis future music rights deals.
The tie-up has caused some analysts to sound the alarm.
Investec analyst Ben Newell questioned in a note whether investors are getting “the thin end of the wedge” considering any joint deal will be split 20/80 in Blackstone’s favour.
He believes the agreement should be 50/50 “at the very least” given that Mercuriadis has only been able to join forces with the investment giant because of his success with Hipgnosis.
Yet, there are deeper concerns reserved for why Hipgnosis had decided not to raise any more deal money for at least a year when competitors are aggressively pursuing deals.
BMG, the record label behind Nirvana and Kylie Minogue, teamed up with the buy-out fund KKR in March to a spending spree on song rights.
After securing Tina Turner’s back catalogue in October, last Tuesday it announced a reported $150m deal for the song rights to the heavy metal band Motley Crue.
Meanwhile Bob Dylan has sold his catalogue to Universal Music, while Warner Music is in talks with David Bowie’s estate over a $200m deal for the Thin White Duke’s library of songs.
By the time Hipgnosis starts investing again in the second half of next year, there is a chance “yields may have compressed and returns may be materially lower given the weight of capital chasing assets”, according to Newell.
“In the meantime, Hipgnosis will also miss out on participating in the deals which will be fully allocated to the Blackstone fund.”
It is not the first time that Mercuriadis has faced the heat of analyst scrutiny.
American broker Stifel drew a terse response from the 58-year-old last January when it questioned why Hipgnosis’ song books secured “bumps” in net asset value shortly after being bought, which allowed Hipgnosis to “perpetuate a cycle of raising capital aggressively”.
Stifel’s analysts claimed the company had been revaluing catalogues after purchase to meet the fair value provided by Massarsky, one of its independent valuation agents.
Massarsky responded by accusing Stifel of making “a number of mistaken claims regarding the methodology” and said there was no intention to “bump” value.
Mercuriadis told The Telegraph at the time that Stifel had been “naive and obtuse” in their analysis and were trying to get “a spotlight put on themselves” by downgrading the firm.
Despite the unease, investors remain enamoured by the potential of the music streaming story and Hipgnosis’ position within the market.
With music being increasingly bought through subscription services like Spotify and Apple Music, the royalties are becoming more predictable. And there is no clear sign of that momentum slowing as TikTok, the video-sharing app with millions of UK users, relies on music clips to help drive its growth.
The service has been pinpointed a way younger users are increasingly discovering music. Dreams by Fleetwood Mac rocketed up Spotify’s charts last September when a video of a skateboarder riding along to the song while sipping cranberry juice went viral.
JP Morgan’s Christopher Brown, however, says headwinds are building as Spotify struggles to maintain growth in American and European markets, while podcasts compete for audience’s attention.
He also points to the nascent music live streaming market, which has the potential to attract new audiences and increase payments for publishers.
A more worrying problem for Mercuriadis may come from a souring regulatory environment for music streaming on either side of the Atlantic.
Last Friday Kevin Brennan, the Labour MP and culture committee member, brought a private member’s bill to Parliament in an attempt to rebalance the riches of music streaming towards artists.
The move comes after the committee heard complaints from songwriters and musicians, who have struggled to live off the fraction of a penny they earn from each stream of their work on Spotify, Apple Music and YouTube.
Concerns of the group of MPs prompted the UK competition regulator to take the first steps towards regulator action by launching a market study into the dominance of major record labels.
Yet not everyone in the music industry agrees with the sentiment. The record label association BPI said The Brennan Bill would bind the British music industry in red tape and curb label’s innovation and investment.
“It completely misunderstands today’s music business, and the value that labels provide in finding and nurturing talent,” the industry body added.
“Labels are committed to ensuring artists are rewarded in line with their success from streaming, but just as British music is finally climbing out of its long downturn, this misguided, outdated regulation would be a damaging step backwards, eroding the foundations of the UK’s extraordinary global success in music.”
For Mercuriadis, the question is whether he can keep up the momentum regardless of the competition and regulatory pressures coming his way.
Investors name him as one of the key reasons why Hipgnosis has built a strong position and remains a draw for artists, producers and songwriters looking to sell.
He has proven he can catch the streaming wave with the heady rise of the Hipgnosis song fund. Now he must prove he can keep riding while feeding the appetite of a global investment giant.
