This piece won the 2022 Hutchinson Prize.
Abstract
Changes in the music industry have long been described in technological terms. Less often is attention paid to the political economy of the industry. This article places the US/UK music industry within current financialization literature and determines the manifestations and mechanisms of financial penetration. Using examples from the 1990s and today, I show that music rights are increasingly leveraged to benefit financial actors. I argue that securitization and assetization of songs prove both the occurrence of financialization and its dependence on the legal environment. In particular, changes in music ownership underscore the role of intellectual property in the process of financialization. In music as well as the broader economy, intellectual property facilitates the extraction of value rather than investment in productive capacity. As a result, the financialization of the music industry is profoundly reconfiguring the musical landscape and our cultural diet.
Introduction
"Every music royalty earner deserves financial freedom and music catalogue liquidity."
- Parviz Omidvar, President of Music Royalty Consulting
“Financial freedom my only hope / Fuck livin' rich and dyin' broke / I bought some artwork for one million / Two years later, that shit worth two million”
– JayZ
If you grew up in the United States, chances are you can immediately recognize the opening chords of “Don’t Stop Believing” by Journey. You’re likely familiar with a few bars of The Sugarhill Gang’s “Rapper’s Delight” or can sing along to “We are Family” by Sister Sledge. But each time you hear one of these iconic songs, who is being compensated? Who owns the rights to these songs, and who receives royalties?
The underlying structure of the music economy in the 21st century is far from intuitive. In each of these cases, neither the musicians nor the recording companies will be paid. These songs are owned by Hipgnosis Songs Fund, a company traded publicly on the London Stock Exchange. Every time someone streams one of the 64,098 songs Hipgnosis owns, the distribution platform (e.g., Spotify) pays out royalties to Hipgnosis, boosting the company’s financials. In this sense, Hipgnosis’ value proposition is simple: it owns the catalogues of many hugely successful musicians.1 Investors, private and public, pour capital into the company in exchange for the expectation of returns generated by the royalty money over time. Hipgnosis is not the only company or fund like this: analysts reckon over $5 billion was spent in music rights acquisition over the course of 2021.2 This is remarkable for a market that did not exist five years ago. Music has become a new asset class and has attracted vast sums of capital. But how did a song like “Rapper’s Delight,” written by a trio in Englewood, NJ in the then up-and-coming genre of hip hop, end up as a tool for pension funds and Robinhood investors to grow their wealth?
This paper examines how financialization has manifested in the music industry. Seismic shifts have wracked the industry’s structure of ownership and compensation. The most salient way financialization is occurring in the music industry is through the use of song copyrights as assets (i.e., objects that can generate future income and thus have investment value). This process started with the securitization of songs in the late 1990s and is now perpetuated and solidified by music funds like Hipgnosis.
This paper situates these developments within broader trends in the history of capitalism. It brings together literature from the fields of history, economics, law, and media studies. In so doing, this paper adds a new dimension to our understanding of how capital flows and accumulates in the 21st century economy. It exposes an understudied aspect of the transformation of the music industry which reflects key features of financial capitalism, particularly the ascendence of assetization and intellectual property (IP). Intellectual property allows financial actors to extract rents from existing industries without adding long-term value. As such, examining the financialization of the music industry illuminates the importance of legal structures to economic history that explains our moment of financial capitalism. The results of this mode of financialization include the rise of publishing in the music industry, the growing cultural dominance of older music, and the underinvestment in new artists. Indeed, a careful look at financialization undermines the notion that access to more finance capital is beneficial for creative processes.
Intervention
In the wake of the 2008 financial crisis, interest in political economy has ballooned as scholars attempt to both characterize and explain the shifts in the global economy and identify the key political and legal institutions that facilitate these transformations.3 Yet there are remarkably few academic studies of the relationship between music and financial capitalism.4 Though we like to think of art as something that may comment on the affairs of the world, less attention is paid to the economic and legal structures that govern the world in which art is produced. Instead, technology is the main prism through which both laypeople and academics have typically viewed various art forms. This may be because changes in artistic technology (e.g., the invention of the camera, radio, television, CDs) are more readily apparent to consumers. Much has been written about how the digitization of music has upended the industry.5 Changes in ownership structures, however, remain opaque to consumers, and outside of trade publications, very little has been said about the impact of financialization. Whereas the impact of financialization on news media, for example, has been well documented, music remains largely outside of the academic purview of most scholars.6 My work fills this gap by bringing an interdisciplinary approach that emphasizes historical and legal analysis of the current economic and cultural moment. My secondary sources are composed of work by legal scholars, economists, historians, and musicologists/media scholars. I supplement these with industry earnings reports, company websites, news articles on deals (between artists and companies and between companies themselves) and existing interviews with music and financial executives as my primary sources.
Structure
Below, I provide a brief summary of the structure and changes to the music industry. Then I recapitulate some of the foundational scholarship of both financialization and music studies. I explore the way financialization manifested at the turn of the millennium and examine the current landscape of music funds. Having described how financialization is occurring, I will then discuss why financialization is able to occur in the first place by dissecting its legal underpinnings. I will conclude with a discussion of the implications of song assetization, both for financialization studies theory and for the music industry’s evolution.
Background on the music industry
The music industry is extraordinarily complex. So is copyright, which structures the industry via the property rights it confers. Since the mid-twentieth century, the typical model for music production has been that an artist signs a deal with a record company for a certain amount of studio time and a set number of albums. The artist receives an advance, and the label fronts the costs of recording and distribution. In theory, the artists playing the songs get a portion of the sound recording copyright (also known as masters), but often the terms of the record contract transfer those rights to the record company.7 Additionally, the songwriters receive publishing rights for the composition of a song. After each stream of a song or sale of a CD, royalties from different copyrights are distributed to rightsholders via various collection societies. Thus, until recently, the industry has sought to maximize the sale of physical products as its end goal, as it has been dominated by a commodity logic.
The recording industry has experienced significant disruption since the 1990s, including to the commodity logic. On the technological side, MP3s and illegal filesharing helped to drastically reduce the cost of music reproduction. Sites like Napster accelerated free song downloads at the end of the millennium. Apple introduced non-transferable downloads in the 2000s through its iTunes platform, and Spotify popularized streaming in the 2010s. Many observers worried that these changes would lead to the end of music as a good that could be monetized, but this has been far from the case. The industry has seen huge growth in the past ten years.8 Though the technology itself plays only a partial role, streaming has enabled investors to think of songs as assets that generate small returns over a long period of time.
Literature review
“Once upon a time, rock stars weren’t rated by Moody’s. They were moody.”
- Mark Steyn, journalist
History of capitalism
The theory of financialization arose in the 1990s to describe a novel phenomenon occurring in the economy. From the 1940s through the late 1960s, the American economy was dictated by three sectors: a strong federal government (with a regulatory and developmental arm), an industrial private sector, and a set of large-scale philanthropic organizations. Fordism, the system of standardized mass production, dominated the economy, and industrial managers exercised outsized influence on production and daily life.9 The shift away from the Fordism of the mid-century indicated the start of a new era of capitalism. Historians and economists point to a number of factors that precipitated the shift, including flagging industrial profitability, globalization, oil shocks, the end of the gold standard, as well as subsequent deregulation.
Financialization Studies constitutes a rich field of research that draws on the work of economists, economic sociologists, and scholars of political economy of various stripes. This essay will focus on the work that understands financialization as a historically specific process that accelerated in the 1980s.10 Scholars have noted that the rise of high-leverage finance and the proliferation of money managers are definitive of the current era.11 Some, like Arrighi or Duménil and Lévy, argue that finance has emerged as the new driver of accumulation, both for nations and individuals, replacing the old Fordist regime of accumulation.12 What this regime implies is decreased profitability for manufacturing and a sharp increase of financial activities undertaken by non-financial companies. Furthermore, many accumulation-minded authors argue that financialization has led to financial instability or fragility.13 This paper refrains from making claims as broad as these, but notes distinct parallels within the music industry. There has been a decline in centralized manufacturing of recorded music in the US, and heightened instability for average musicians.
Other scholars use the corporation as their analytical starting point to understand financialization. These scholars, like Fligstein, Börsch, and Lazonick, use the salience of shareholder value, to them an ideological construct, as the indicator for financialization. This approach argues that capitalism underwent a crucial shift when industrial managers became beholden to investors. Financial firms began to exercise substantial power over non-financial firms, and the resulting changes include widespread corporate restructuring, the coupling of executive pay and stock options, and the outsourcing of certain aspects of productive activities.14 The corresponding focus on “core competencies” has generated short term financial gains that have then been extracted at the top by shareholders (via dividends and share buybacks), rather than being reinvested in productive activities as they might have been in the 1950s and 60s.15 Some also note the corresponding decrease in wages and the bifurcation of the labor market.16 These approaches factor greatly into my own definition of financialization.
There is an additional school of thought that approaches financialization as a phenomenon of the everyday. Instead of centering vast corporate structures and the way executives and institutional investors act, it looks at the way finance has encroached into daily life. With the so-called democratization of finance and the widespread availability of financial instruments to the general public, these scholars argue a logic of finance has entered the quotidian.17 As Max Haiven notes, people in the U.S. and other financialized economies have begun to see themselves as active agents of investment, requiring they insure themselves against risk via participation in financial markets.18 Though this essay will not focus on these sociological aspects, the notion of a financial logic does help inform our understanding of how artists view themselves and act within the changing industry.
The study of the expansion of what constitutes an asset is also important in informing our understanding of financialization. Katharina Pistor’s Code of Capital illustrates the way in which private law allows people to create assets that have wealth-generating qualities.19 Objects become assets that yield financial returns because of the legal rights (like durability and transferability) they possess. Paul Langley has argued recently that financialization must also be looked at on a more granular level than most current studies. He writes that the traditional financialization narrative centers the credit-debt relationship and thereby underplays the roles of assets in this new period of capitalism.20 Assets are important in their ability to generate future revenues and be leveraged not just for exchange and speculation, but also for asset price inflation and their investable qualities. Others have noted how in the post-2008 economy, asset management has grown drastically, as large amounts of capital have sought novel outlets.21 This new literature on assetization is crucial to this paper’s examination of royalties as rents that can be acquired and securitized.
Clearly, there is no one comprehensive definition of financialization. Drawing from the approaches outlined above, I define it as: the process whereby (a) the financial sector grows in importance relative to the overall economy and (b) the financial sector becomes heavily involved in the non-financial realm. What this looks like in practice is an increase in the volume of financial transactions that occur, the ascendance of shareholder value, and a shift in management practices towards those that privilege financial gains (often to the tune of short-term profits) over longer term investment. Securitization, i.e., the pooling of income streams of an asset into a tradeable security, is also an element of financialization, as is the underlying concept of assetization. Certain scholars have suggested that financialization implies a hollowing out of the economy, where profits accumulate at the top and wage laborers see their income eroded.22 I will keep this in mind as a potential outcome but not an inherent aspect of the phenomenon.
Media studies
In addition to engaging with the literature on financial capitalism, I will examine texts written by media scholars. Timothy Taylor provides one of the few accounts dedicated to the study of capitalism and music, drawing on Theodor Adorno as his only real intellectual predecessor.23 He examines theories of value and argues that capitalism rearranges people’s relationships both to each other and to music.24 Though Taylor makes a nod towards financialization, he spends no time interrogating it, instead focusing on neoliberalism as an ideological movement with cultural ramifications. Taylor’s investigation of capitalism reads more like a sociological text; his interviews with people affected by the closing of studio music departments make explicit the effects of globalization on the music industry, but do not unpack the larger institutions that have created incentives to globalize.
Other scholars do not engage directly with notions of capitalism, but discuss music from a business and copyright history perspective. For example, Austrian economist Peter Tschmuck’s The Economics of Music is an invaluable handbook to the industry, though it is largely lacking in theoretical engagement. Tschmuck walks through the microeconomics of album and record sales, provides a helpful account of the structure of copyright and royalties, and discusses the industry and labor market structure. He divides the history of the industry into five sections: the era of patronage that lasted until the 18th century; the era of publishing that lasted until the 1920s; the era of broadcasting that occurred between 1920s and 1950s; the era of recorded music industry that lasted until 2000; and the current era of a digital music economy.25 I argue that we have entered a new era in the late 2010s, in which the power of financial deregulation and strong intellectual property rights have created a new set of industry dynamics and incentives, distinct from those of the earlier periods.
Tschmuck brings a transatlantic perspective in examining copyright law. He notes that in Europe, copyright appears to rest on moral terms that emphasize paternity, whereas in the US, the ideological basis of intellectual property is more economic—without IP, the argument goes, there would be an undersupply of music.26 Tschmuck takes some issue with the large extensions granted to duration of copyrights. These copyright extensions often accompany the alienation of rights from creators, since as Martin Kretschmer notes, it tends to be corporate bodies having amassed copyright that lobby in favor of such copyright extensions.27 Kretschmer shows that the history of copyright is a continual shift in favor of those who own and invest in copyright.28 Furthermore, few creators make enough money from copyright to sustain themselves, meaning the current intellectual property regime is not necessarily a great mechanism to reward actual creators.29 However, neither of these authors make the leap to understand this increase in duration of copyright as something that enables financialization, as I will argue.
The only academic who has specifically studied whether and how the music industry has financialized is media scholar Andrew deWaard. In his doctoral dissertation, he argues that financialization has occurred as evidenced by the amount of private equity activity and the entrenchment of venture capital and institutional investors in the music industry. He further coins the concept of “derivative media”: that output from the cultural industries has become increasingly reliant on past content (in the music context, think sampling)—and hence derivative.30 His concept also plays into the other meaning of derivative, though: that of financial instruments and financial engineering.31 DeWaard claims that cultural texts (he writes about both film and music) employ “intertextuality as a financial strategy, not just to sell products through brand integrations, but to maintain domination over the cultural sector through an interconnected referential economy.”32 These insights are valuable culturally but do not go far enough in looking at how financial actors leverage songs.
In his forthcoming book, Content Wars: Tech Empires vs. Media Empires, deWaard marks the start of the wave of financialization in music and television as 2004.33 While I concede this is the date after which the volume of PE deals accelerated, I will argue that financialization had already begun to occur in meaningful ways in the decade prior. DeWaard’s research misses this because he fails to examine the way music rights have been very explicitly leveraged as assets. Part of this absence might be attributable to timing. He wrote his dissertation in 2017, before the buzz about catalogue sales had ballooned. However, it is striking that he does not mention Bowie bonds anywhere given that they are the first example of financial engineering to use music as the underlying asset. As I will discuss, Bowie bonds are essential to narrating the rise of financialization of the music industry, and are a prime example of the ways intangible assets have become more important to the overall economy and to generating wealth.
Songs as financial instruments: evidence
“The income from these songs is very predictable and very reliable and those are the same reasons why you invest in things like gold and oil.”
- Merck Mercuriadis
“My Mount Rushmore is me with four different expressions / Who's givin' out this much return on investment?”
- Drake
Bowie Bonds
Financialization in the corporate sense—of financial managers sweeping in and changing practices, of strategic and widespread M&A, of private equity infiltrating industry—has been prevalent since the 1980s, though it kicked into high gear closer to the early 2000s.34 Financialization in the sense of using music explicitly as a financial instrument has a more exact start date. In 1997, David Bowie, with the help of banker David Pullman, issued $55M worth of securities backed by the royalties from his 25 albums recorded before 1990 in order to raise enough capital to buy back certain music rights from a manager.35 These so-called “Bowie bonds” are the first examples of songs being harnessed as assets rather than commodities. They introduced the notion of IP-based investing for music. Through the bonds, Bowie realized a new possibility for financing, outside of the traditional record company structures. It allowed Bowie to retain full ownership of rights while still receiving a sizeable amount of upfront cash. There were also certain tax benefits that a sale of assets would not have provided.
Asset-backed securities had already become popular in the 1990s, growing in volume to over $200B in 1996. Most asset-backed securities were backed by bundled mortgages or rental car leases, however; only $1.6B of those were backed by intellectual property.36 Originating the Bowie Bonds was a somewhat complicated venture. David Bowie transferred the rights to his future royalties into a special purpose vehicle (SPV). The money accumulated there would be used to pay out the security’s interest rate (which was set at 7.9%) as well as the principal. To provide additional assurance that the bonds would be repaid, Bowie and Pullman used an external credit enhancement. EMI, a music conglomerate at the time, guaranteed to pay the bonds if royalties were not performing as expected. In exchange, the company received a fifteen year licensing deal for Bowie’s back catalogue.37 David Bowie, in turn, got what was essentially a $55M nontaxable loan.
Bowie bonds immediately captured the attention of the business and music press. Other musicians took inspiration from Bowie bonds and attempted to securitize their own catalogues. In 1998, Motown songwriting team Edward Holland, Brian Holland and Lamont Dozier issued a $30M bond deal. Rod Stewart received a loan from Nomura Capital, backed by his catalogue, but never did a full bond issuance. In 1999, Ashford and Simpson (of “Ain’t No Mountain High Enough” fame) used their copyrights from 247 songs to issue $25M worth of bonds. James Brown held a similar deal for $30M, as did Iron Maiden. Many other superstars were rumored to be engaging with such ventures, though most did not materialize.38
Both financial and legal circles were excited about the potential of Bowie bonds. Nicole Chu, for example, cited the possibilities of “high-tech and bio-tech” applications for IP-backed securities.39 Numerous law review articles parroted the same textbook excerpt touting the benefits of securitization to “virtually every participant in the capital markets,” including banks, bankers, investors, and borrowers.40 This excitement for securitization more broadly construed lasted well into the 2000s, after which it quickly dissipated and was replaced by finger-wagging due to the blame placed on mortgage-backed securities as one of the chief progenitors of the 2008 financial crisis. Scholars writing after the Great Recession have been more skeptical of engineered debt instruments.
When Prudential Insurance Group bought Bowie bonds via a private offering, it became the first financial group to embrace music as an asset class. However, music as an asset class did not gain much momentum after the initial experiments due to the onset of instability in the industry that frightened investors. At the time of issuance, Moody’s deemed the revenue streams of Bowie bonds to be AAA grade, the top rating a security can receive, given Bowie’s consistent popularity and the fact that he controlled much more of the rights to his own songs than other musicians. Strong copyright law also ensured Bowie would retain royalty privileges long into the future. By 2004, though, Moody’s had downgraded Bowie bonds to the tier above junk bond status.41 This was due to the havoc peer-to-peer file sharing was wreaking on the entire music industry, whose revenues dropped by 25% between 1998 and 2005.42 As a credit rating agency, Moody’s could no longer affirm that Bowie would receive the expected amount of royalties that the CD-era had afforded him. To Bowie himself, the credit rating downgrade was of little importance. His royalties were enough to pay off the principal, and Prudential, having never traded the securities, was not affected by the changes in investor sentiment.
David Bowie recognized that 1997 was an optimal time to take advantage of royalty-backed securities. In an interview from 2002, he stated presciently, “Music itself is going to become like running water or electricity.”43 Bowie’s propensity for the avant-garde was not limited to his musical style. He was an early adopter of digital music distribution, having released a song in 1996 that was online release only.44 His experience with launching an early internet website led him to claim, “The absolute transformation of everything that we ever thought about music will take place within 10 years, and nothing is going to be able to stop it. I see absolutely no point in pretending that it's not going to happen. I'm fully confident that copyright, for instance, will no longer exist in 10 years, and authorship and intellectual property is in for such a bashing.”45 Though a bit of an extreme position and disproven in the long-run— intellectual property is more important than ever—Bowie’s recognition of the changing dynamics of the music industry and his advice to “take advantage of these last few years because none of this is ever going to happen again” were wise. The last securitization in the manner of Bowie Bonds had already taken place by the time that interview was released. The CD industry was in free-fall, and industry players were busy impressing upon the public and the government the dangers of piracy.
Bowie bonds are key to the evolution of financialization in the music industry. Their adoption demonstrates not only the financial logic with which artists began to view their creations, but also how the financial industry began to envelop the music industry: catalogue by catalogue, song by song. These bond issuances were an excellent way for Pullman and other bankers and lawyers to levy fees. But the profitability was also its weakness: issuances were too expensive for most artists, even successful ones, to undertake. Thus, individual artists’ early experiments in financial engineering were too narrowly constructed to be applicable to a broad range of musicians. Combined with the technological changes that disrupted investor confidence, the securitization of songs ultimately never achieved widespread adoption. The seeds of such thinking were planted, though. Bowie bonds were the first chapter in an ongoing saga of financialization.
Music acquisition funds
After Bowie bonds, a steady influx of private equity money and M&A activity poured in the music industry, as detailed by deWaard.46 However, financialization hit its apotheosis in the past five years with the rise of music funds—companies whose revenues are fueled almost exclusively by royalties stemming from copyrights they own. These funds represent a continuation of the Bowie bond in that they are harnessing intellectual property as a financial asset. Besides the new music funds, the major labels, which each have publishing subsidiaries, have also begun to buy music rights in recognition of the strategic value of acquiring music catalogues. Thus, the song-as-asset form of financialization is enacted by traditional music industry players and musicians too, but is buoyed by an immense influx of cash from asset managers and institutional investors.
Previously, the types of people who would own copyrights were limited. The copyright ownership and licensing structure was such that artists and songwriters would receive a portion of a song’s copyright royalties (depending on the type of deals they struck with their record company), record companies would own a large share of the sound recording copyrights, and publishing companies would often get a smaller stake in the songwriting copyright royalties. These rights could, in theory, be traded around, but in practice this did not occur with much regularity. Most common was for successful artists to seek to buy back their rights from labels (this continues today, with heightened visibility; see the Taylor Swift-Big Machine dispute), or else for a few, high net worth catalogs to float around between speculative owners, though this was not common, except on the break-up of a publishing house.47
The rise of music funds has been so rapid and at such scale that their ascent has broken into mainstream news coverage. Indeed, each month, major news outlets report the eye-watering sums for which superstar artists have been selling their back catalogue to both new funds and established publishers. Bob Dylan kicked off the mainstream news hype in December 2020 with a catalogue sale of upwards of $300 million to Universal. The following month, Neil Young sold a 50% stake in his catalogue to Hipgnosis for $150 million.48 The deals have been happening with increasing regularity, and though the prices are rarely disclosed, it is clear vast amounts of money are trading hands. Financial institutions and investors are eager to park their money in what has been deemed a new and exciting asset class. But how did we get here, who are the main actors, and what does the ascent of music funds say about financialization as a whole?
Hipgnosis as primary example of music fund
Today, various music funds offer public and private investors access to song royalties as return-generating assets. The company that has garnered the most attention in this regard, especially in mainstream press, is Hipgnosis Songs Fund, led by Merck Mercuriadis (the former manager of Iron Maiden and Beyoncé) and Nile Rodgers (of the band Chic). Hipgnosis buys the catalogs of artists and songwriters, focusing on the publishing rights but occasionally picking up sound recording rights as well. These acquisitions do not always represent 100% of the stake, but Hipgnosis consistently offers artists upfront payments that often run in the tens of millions of dollars. The copyrights the company holds then are supposed to generate revenues for the company over time (until the copyrights expire). This is different from the Bowie model, in which the revenue-generating assets were held as a quasi-bond and were returned at the end of the contract.
Why would an artist hand over their hard-won intellectual property to an upstart investment vehicle? For one, the music industry has always been fickle. At the present, business is booming, but there is no guarantee the technological, financial, and legal conditions will remain so positive in the future. When confronted with these large offers of money, it is not surprising many artists respond favorably. Because many financial prognosticators seem rosy about music’s future, Hipgnosis is offering artists multiples of around 15.9 times yearly royalty revenue for their rights. This scale initially shocked the industry but appears to have become the accepted markup for assets that advertise themselves as cash cows into perpetuity. This works out well for mature artists looking to get their estate planning in order and would rather an upfront payment than to wait for royalties to slowly trickle in.
Hipgnosis been very active in its acquisitions: it boasts 138 catalogues and 64,098 songs under management. The fund currently owns 51 of Rolling Stone’s 500 Greatest Songs of All Time, and 4 of the Top 5 Billboard Songs of the Decade, as the company’s website proudly announces. The fund indexes heavily in pop and rock, and focuses particularly on mature songs with more proven track records as hits (60% of the songs were released more then 10 years ago).49 Despite the extremely high sums of money Hipgnosis is paying out to musicians and songwriters (the company has pledged not to purchase rights from record labels, wishing to “support artists”)50, investors appear very pleased with the prospect of buying into music royalties. In 2018, the year it was founded, Hipgnosis Songs Fund went public on the London Stock Exchange in an oversubscribed initial offering.51 Raising £1.05 billion at its IPO with the ticker SONG originally, the fund is currently valued at over £2.55 billion and has been integrated into the FTSE 250, a sign of how it has legitimized investing in songs.52 The company has seen high growth in valuation over the past three years.53 Part of the value proposition Hipgnosis poses to investors is the idea that music is “uncorrelated to global capital markets,” meaning its value will likely not fall if the rest of the economy takes a hit. The company also touts its exposure to the “penetration of technology into everyday life” as well as “the growing value of entertainment markets” and “the recognition of the real asset value of intellectual property rights.”54 Put simply: investors are cognizant of asset price inflation and the centrality of IP to the current era of financial capitalism.
The biggest players in the asset management space are providing the capital to invest in the new asset class. Blackstone, a global investment management giant (with $731 billion under management), has pledged $1 billion to a newly created private fund with Hipgnosis (“Hipgnosis Songs Capital”), with additional promises to keep the funding coming.55 Hipgnosis Songs Fund’s top public shareholders are each investment or wealth managers. In short, major players on Wall Street and the City of London are pumping money into a firm that is paid each time a song it has purchased is played. When you hear the lyrics “We’ve got to hold on to what we got / it doesn’t make a difference if we make it or not” (Bon Jovi) or “Go shorty / it’s your birthday” (50 Cent), pension funds are benefiting.
Hipgnosis’s publicly stated goals reinforce this essay’s identification of financialization: the company claims it wants to “establish songs as an asset class.”56 One might quibble as to whether Hipgnosis has invented songs as an asset class: we’ve seen evidence that Bowie bonds and earlier publishers made inroads here. But it is equally clear that Hipgnosis is making waves across the music industry. Hipgnosis has popularized and brought into the mainstream music as an asset class. The amount the company is paying artists has sparked what can only be interpreted as a series of bidding wars for artists’ catalogues across the industry. And given its status as a public company/fund, it has made the assetization of music more widely accessible.
Hipgnosis also claims it will “replace the broken traditional publishing model with Song Management and add value,” which is somewhat perplexing.57 It is not immediately clear what Hipgnosis brings to the table that the publishing industry does not already do. How does one add value to an already popular cultural work that is defined by specific, unalterable parameters (the composition and the literal sound recording), especially if not involved in distribution? One answer might be that funds like Hipgnosis don’t add value to publishing; instead, such a goal is mere posturing. The implications of this are dire in an economic era that has reinforced financial operations as constitutive of growth. Investment in assets in the financial era is not about investing in long term capabilities that enable growth, but rather about reaping financial returns from preexisting sources of revenue. This appears also to be true in the sphere of music.
Financial capitalism has raised questions around the division between management and ownership, blurring the lines between the two and empowering decisions that benefit owners; this is true in the music industry as well. In an interview, Mercuriadis stated, “People look at songs as being inanimate objects; I don’t…I think that they deserve to be managed with the same level of responsibility that human beings do.”58 In this he demonstrates that a financial vehicle now considers its duty to “manage” songs—i.e., intellectual property. But what management means in this context helps illustrate the fundamental switch in orientation of the post-industrial economy. For, Hipgnosis’s real goal is to extract revenue from a static piece of IP, which translates to finding the equivalent of product placements: getting songs into movies, getting them sampled and covered, licensing the rights to high traffic venues, etc. None of this is particularly productive, but rather is a way for old holders of IP to exert power and extract a sort of rent (via royalties) on the public, to the benefit of shareholders.
Despite these extractive tendencies, Hipgnosis has presented itself quite effectively to artists. The company’s value proposition is framed around active legacy management. Mercuriadis is known to quip that “We won’t waste our time going after McDonald’s,” a nod to Neil Young’s spurning of a large deal that wanted to use the song “Heart of Gold” for a radio advertisement.59 Indeed, not just Hipgnosis but most music funds bill themselves as a form of legacy management. They tout themselves as artist friendly, protective and collaborative. They reinforce the notion that they are a repository of honor and recognition (something like “this enduring body of work joins a collection of other important songs” is repeated ad nauseum in the press releases after each sale of catalogue).60 Perhaps what these funds really offer to musicians is a clean break from the traditional publishers that historically have been viewed negatively. On the investor side, they offer a new outlet for capital to gain access to “pure play exposure” to song royalties, more isolated from administration that traditional players are encumbered by.61
The vast array of other music funds
Though Hipgnosis maintains the highest media profile, it is only one of many new funds that treat songs as fungible, tradeable assets worth accumulating; companies that use buying and trading catalogue as their primary source of revenue are now utterly pervasive. Round Hill, often mentioned in the same breath as Hipgnosis, was founded in 2012 and bills itself as an independent music publisher, though it is essentially a diversified private equity group. The company started off by managing a private fund of $200 million and investing in catalogs. Its investors were a mix of private and institutional; BusinessWire counted “two university endowments, two large hospital pension plans, a NYSE-listed insurance company, smaller endowments and foundations and several family offices” back in 2014.62 Round Hill raised two more private funds, and then in November 2020 went public in London as Round Hill Music Royalty Fund Ltd, raising a separate pool of money from the first three funds in an attempt to buyout its early investors. The company has also bought Zync Music, which is a specialist company for synchronizations (the licensing of music for films, games, advertisements, etc.).63 This acquisition helps us understand what is meant when firms boast about adding value: as hypothesized earlier, it is mostly about trying to keep songs relevant and licensed, something of debatable intrinsic value.64
The handful of other firms that have sprung up in the industry follow a similar mold and are similarly well-capitalized. Tempo Music advertises itself explicitly as a pure investment platform in music rights, and is a portfolio company of Providence Equity Partners, a large asset manager. Though a competitor to Hipgnosis Songs Fund in terms of scale (they launched with $650 million and now have over $1 billion in investible capital), Tempo has made fewer high-profile acquisitions.65 Another well-funded newcomer to the space is HarbourView Equity Partners, founded by Sherrese Soares, a former managing director at Morgan Stanley. The fledgling company also already has $1 billion in backing from Apollo Global Management’s credit arm, showing just how much money is flowing in from institutional investors.66
Publishing’s reaction to music funds
In addition to novel investment structures, traditional music industry publishers are embracing the financialization of music. Despite belittling funds for their lack of experience in rights management, they have bought into the notion of songs assets and have partnered with financial institutions to purchase even more artist catalogues than they already own. This shows that insiders as well as outsiders are contributing to the assetization of the industry and that asset management is becoming more intimately conjoined with the industry.
Indie publishers
Primary Wave is perhaps the most active music publisher in terms of acquisitions. Founded in 2006, the company competes for similar deals as music funds, and has amassed a collection of superstar copyrights from the likes of Bing Crosby and Whitney Houston.67 Backed by institutional investors like BlackRock and Oaktree Capital, Primary Wave claims $1 billion in buying power. When asked in interview whether he would consider taking Primary Wave public, CEO Larry Mestel replied “We are considering many opportunities. The key is to maximize the value of our music.”68 Again: here is this language around “value” beloved by the financial elite. Taking aim at more traditionally-oriented publishers, Mestel argued, “Those companies are primarily very good administrators who don’t focus are marketing and growing revenue. We have a different strategy which is based around a very long-term growth model of adding value to our artists’ income streams.” But how? By “producing biographical films, Broadway shows, destination events, podcasts, brand partnerships, and NFTs,” Mestel proposed.69 This is striking. For one, it shows how each of these funds and publishers have the same game plan: make old songs stay popular to produce royalties. Two, this is a CEO proving publicly that the new bent of the music industry is centered on quasi rent-seeking behavior. Though he frames his company’s activities (which are essentially aggressive marketing) as the productive alternative to that of traditional publishers (which is administration), it is clear that while more money is flowing in and out of these companies, the quality and infrastructure of music production and consumption is not increasing.
Spirit Music Group’s evolution is another demonstration of the way financial players have become deeply enmeshed in the music industry. Founded as an independent publisher in 1995, it has since become a vehicle for investors to extract value from existing copyrights. Spirit owns and manages 100,000 songs and actively promotes them for synch rights besides administering royalties. In 2019, Spirit was bought by Lyric Capital Group, a private equity firm focused on music copyrights. Previously, Spirit’s majority owner was Pegasus Capital Advisors, an alternative asset management firm. Now, Northleaf Capital Partners has been brought in as a source of funding and has led a $500 million investment in the firm. “Our collaboration represents a compelling opportunity in the music royalty space alongside a best-in-class operator. This is a rapidly growing and uncorrelated asset class that provides our investors with predictable and growing cash flows” said Northleaf Managing Director in the press release of the deal, echoing the sentiments of so many in the financial community.70
The Majors
Even the major labels are adapting to pressures of financialization. Each of the major labels has picked up large, costly catalogues in the past 24 months. These acquisitions show that the effect of music funds on the industry is substantial. The Big Three (Universal, Warner, Sony) each have their own publishing arm which together dominate the publishing landscape. These publishers have always benefitted from being able to license and administer the artists that their labels had signed, and have had deep distributional capacity in all markets, something independent publishers struggle with. As such, the majors have been happy to collect the publisher’s share of royalties and enjoy the huge amount of IP they have accumulated semi organically over the years. For a while, they put out statements bashing the notion of buying rights at inflated prices. But there has been a fundamental shift in the way rights are conceptualized, and the Big Three are no longer content to stand by as (predominately) private equity money buys them up.
In December 2021, Sony purchased Bruce Springsteen’s music catalogue, both recording and publishing, for around $550 million.71 This deal is particularly noteworthy given that on the publishing side, Sony partnered with Eldridge Industries to secure funding. Eldridge, a Greenwich-based private investment firm, had already bought The Killers’ publishing catalogue in 2020. Its partnership with Sony shows that investment firms are working at many levels to gain exposure to royalties from songs. Universal has spent equally huge sums of money to buy the catalogs of Bob Dylan, Sting, and Neil Diamond.72 And in early January 2022, Warner Chappell, Warner Music’s publishing division, bought David Bowie’s entire songwriting catalogue for around $250 million.73 Warner also set up a new music-buying fund with the support of the world’s largest asset manager, BlackRock.74
While the Big Three and their predecessors have always sought to retain as much of the sound recording rights of early-stage artists as possible, buying both publishing and sound recording rights at the end of an artist’s career shows the way the entire industry is expecting prices to rise as music funds exert speculative pressure. Thus, all sorts of companies in the music industry have begun to think of songs not just as commodities, but as strategic, revenue generating assets.
Trading songs: a new platform for smaller investors
New platforms provide avenues for songs to be leveraged as revenue-generating assets on an even more individualized basis. Royalty Exchange, for example, occupies an intermediate position in the world of financialized music; it is not an investment fund, but it possesses similar qualities. As a public marketplace, Royalty Exchange allows musicians and various producers to list their piece of a song, along with its historical royalty data. Musicians can license out their royalties for a set period of time for an upfront payment from an investor. Musicians retain long term control of their rights in most instances. Since the spring of 2021, the company also offers an alternative auction method, in which artists request an advance and state the amount they will repay in the future. Investors can then bid up the advance amount, thereby narrowing the spread between asking price and repayment. The artist repays the advance via the royalties, and once the repayment is complete, reverts to collecting the entirety of the royalties. Thus, the platform provides greater liquidity to songs than normal music funds.
Such a process is reminiscent of Bowie bonds: these transactions are more artist-driven and are less permanent than those of music funds. The main difference is that the sums that are changing hands on this platform are much smaller than the amount Bowie received, in part because Royalty Exchange allows catalogues to be completely chopped up before they are listed. The investors and musicians on the platform are also smaller. Royalty Exchange is directed towards retail investors more so than institutional investors, though there are Private Syndicates for accredited investors to bid on more elite catalogues.75 Royalty Exchange shows yet another way in which financialization is occurring at all levels of artist popularity. Financialization of the quotidian is in full effect for small artists. The firm also shows that deals like the ones David Pullman orchestrated are being supplanted by companies that capitalize on repeatable processes and broad interest in music as an asset class.
Fund conclusion
What’s clear in all of this is that music funds and adjacent operations have emerged not to innovate in music, but to empower the investing class. The innovation is financial, and though technology-enabled (future royalties can be calculated to a greater degree of accuracy with the rise of streaming analytics), music funds do not represent any great addition to the so-called real economy. We can expect to see an increased number of songs owned by the more active funds being pushed into movies and advertisements for the lucrative synch licenses they generate, but no long-term investment in the overall health of music creation or distribution.
Causes of financialization: legal factors
“Securitisation is the crack cocaine of the financial services industry"
- Guy Hand, former owner of EMI
“You wanna own me like copyright / But shootin' stars so hard to hold down”
- Vic Mensa
Law as institutional necessity
It is clear financialization has become dominant in both the broader economy and the music economy. Musicians themselves have begun to feel the effects and are reacting to new circumstances. The question then is, what are the factors that have enabled the financial sector to become so active? To answer this, we must look to the role of law in precipitating financialization. Establishing causation is always a complicated task, and particularly in music, there is never a single precipitant. The economic environment (like interest rates, globalization, oil shocks, etc.) certainly fed financialization, as did technological changes that helped improve trading and communications.76 However, financialization could not have happened in the way it did without favorable law. Analysis of the music industry shows how strong legal protections and constructed economic incentives, particularly in the realm of intellectual property, have combined to sweep financialization into the music industry in a way that mirrors, and perhaps exceeds. the rest of the economy.
Legal scholar Katharina Pistor has constructed a clarifying framework for the way the law empowers capital and wealth accumulation. She argues that it is legal devices (property rights and contract, collateral, trust, corporate, bankruptcy law) that imbue objects with certain qualities (priority, durability, universality, convertibility) that then turn them into capital.77 One example of this is how debt receives preferential treatment via bankruptcy law. Legally acknowledged assets receive benefits: assets like property, for example, are not just sources of income but also of “expense reduction,” i.e., of tax benefits, demonstrating the power of assetization.78 Thus, the coding of objects with legal qualities has facilitated wealth generation for those with recourse to the law, and financial actors are chief among the beneficiaries in recent history.79
Regulatory changes have played a role in the growth of the financial sector, too. The 1970s-1990s experienced deregulation in both banking and securities.80 The gradual chipping away at the Glass-Steagall Act of 1933, which had separated commercial and investment banking, helped make securitization of mortgages and other assets viable and popular.81 People who had previously been simple borrowers were now regularly exposed to broader markets, serving to impress the dynamics of financial systems into the populace. Income from interest has also become more attractive than income from profits on a tax basis. Thus, a mix of private and public law allowed the financial sector to gain momentum, and has dictated the dynamics of modern capitalism. But what was the role of law in facilitating financialization of music industry specifically?
Music law
A constellation of types of law have facilitated the entrance of financial forces into music. On the most basic level, law has created the marketplace for musical works. For financial actors to be interested in an industry, there must be a way to extract a profit, something possible only if a revenue-generating good or service changes hands, i.e., if there is some form of market. But in the case of music more so than other parts of the economy, it is virtually impossible for an individual to sell music in a lawless ecosystem. Music regulatory law addresses this need by creating the marketplace in which recording artists can exist. The US government has, for example, set up blanket licensing organizations and determines royalty rates in order to facilitate the exchange of recorded music. Recent laws have created an environment attractive to investors, such as the Music Modernization Act of 2018, which updated royalty rates and dealt with some issues arising from the digitization of the industry.82 Importantly, the MMA created a blanket license for mechanical rights/royalties for digital services like Spotify, which was beneficial to the overall functioning of music distribution channels. Thus, regulatory law like this has helped the industry adjust to new circumstances, albeit in contested, slow-moving ways.
Tax law has also played a role in incentivizing the financialization of the music industry, as with the general economy. Some have pointed out there is “favorable tax treatment” for buying song catalogues given that price of songs can be amortized for ten years, meaning the purchaser pays very few taxes as long as they hold on to catalogue.83 For artists, royalties are taxed as income, whereas the sale of catalogue can be treated as capital gains, which are taxed at a lower rate, typically.84 (For Bowie bonds, there were also benefits to structuring the deal in something more akin to a loan rather than a sale.85)
But even more fundamental than creating a marketplace and incentivizing financial transactions are the set of laws that govern intellectual property. Copyright law is a set of monopoly rights bestowed by the government onto the holder of a copyright. These include exclusive rights to reproduction, distribution, adaptation, public performance, and public display of a given work. Much of the 20th century’s IP regime was dictated by the 1909 Copyright Act which granted copyright protections for a maximum of 56 years in the name of public welfare and progress. 86
In the broader economy, the connection between financialization and intellectual property protections has been examined. This paper’s analysis of music funds reveals that the same connections appear in the music industry. French researchers Fabienne Orsi and Benjamin Coriat claim that with regards to the biotechnology and internet technology sectors, there was institutional complementarity wherein the law made it easier to invest in intangible assets at the same time that copyright protections increased across the board. Thus, investors became accustomed to seeking high returns via intangible-heavy firms.87 These favorable conditions engendered a sophisticated and large investor class. The concentration and centrality of treating intellectual property as an asset to global business practices has been dubbed “intellectual monopoly capitalism.”88 The same situation is apparent in the music industry. The songs-as-asset is possible only through the extensive rights granted via legal monopoly, as well as a panoply of other forms of law that encourage a robust music marketplace.
Since the 1970s, there have been changes to IP law that have expanded its scope and coopted its purpose from helping motivate production of IP to protecting owners of copyright across industries but particularly in music. Audio bootlegging had become commonplace in the 1960s and 70s, depressing rightsholders’ profits, though benefiting consumers.89 The Sound Recording Act of 1971 helped remedy the fact that there was no federal copyright law for sound recordings, only for publishing rights, and marked the start of additional protections for the recording companies and performing artists. Law professor Glynn Lunney reckons that between 1972 and 2007, the bestowal of this right sparked the transfer of $117 billion from those who consumed music to those who held copyrights (in 2013 dollars).90 Next, the Copyright Act of 1976 extended rights to be life of author plus 50 years, or 75 years for corporate authorship.91 In 1998, the period of protection was extended again, up to life of the author plus 70 years, or 95 years after publication in what was termed the “Mickey Mouse Protection Act.”92 The Digital Millennium Copyright Act of 1998 helped protect rightsholders in the new digital era by criminalizing and punishing copyright infringement to greater levels.93 Through these changes, the government created an environment in which music was continuously upheld as durable property, allowing for secure investment over time.
At the end of the 20th century, the music industry witnessed an intensification of assertions of ownership and extraction of royalties, driven in part by corporate consolidation and technological upheaval, which laid the groundwork for financial actors to enter the space. As noted in the introduction, Kretschmer shows that many of the changes in IP rights came about by concerted lobbying on behalf of institutional rightsholders (e.g., record companies).94 It is not surprising, then, that those who benefit most from the current regime also are those who actively promote favorable copyright laws. Kretschmer’s criticisms of the structure of copyright exposes the way in which its legal monopoly has been a force for financialization. Kretschmer argues that the fundamental problem with the copyright system is that “it tries to balance the interests of creators, investors and users, and regulate the cultural industries all in one conceptual and legislative effort.”95 Once we recognize this, it becomes clear that contemporary law has been coopted for financial purposes more so than for the benefit of creators or users of musical works.
Legal factors conclusion
Financialization, though perhaps a socio-economic phenomenon, is grounded in the legal environment. Pistor shows us that the financial ecosystem has been built up both through regulatory statutes and by private law. Without protections granted by the law, there would be no marketplace for financial transactions, and there would be much less accumulated wealth which today seeks returns through PE, mutual funds, etc. As the economy shifts towards financial activity over so-called productive activity, and from corporate ownership to financial ownership, the importance of intellectual property only increases. IP has helped spur systems of financialization: it has become a core part of business rather than a defensive move in part because of its attractiveness as an investment opportunity. But examining the music industry itself shows that there have been important legal shifts that undergird the harnessing of songs as assets. These include the strengthening and extension of copyright law and regulations that allow for broad-scale licensing of songs. This section does not aim to show that legal changes play the only causal role in the evolution of capitalism and its manifestation in the music industry; there is a rich literature of structuralist and constructivist accounts of the modern economy to the contrary.96 Rather, this paper highlights how law both underpins and encourages financial capitalism in general and in the music industry in particular.
Financialization: theoretical and musical implications
“What will become of human beings and their capacity for aesthetic perception when they are fully exposed to the conditions of monopoly capitalism?”
- Theodor Adorno
This newfound understanding of how songs function in the current economy highlights broader trends within financialization. Financialization has moved from a novel concept in heterodox economics to a mature topic within broader capitalism studies; with that comes a need for a more finely-grained approach and recognition that the phenomenon may be manifesting in new ways. To this end, the story of song funds illustrates the importance of assetization in the post-2008 economy. It confirms that there is a great reliance on both asset price inflation and the rents generated from investments in assets. This analysis reinforces existing claims of the extractive tendencies of financial ownership.97
From the 1980s onwards, private equity has been vastly profitable due to its strategy of buying firms with leverage and stripping them down to their core assets. With the rise of an intangible-focused economy, such tactics have become even easier to implement. One needs simply to acquire assets that have recurring revenue streams and little overhead to bring in income. IP is a salient aspect of financialization because it allows for different forms of licensing, which is attractive to financial actors since it requires little labor but provides a consistent source of revenue. The rise of music funds confirms that IP is complementary to financialization, as has been suggested in other industries. Additionally, music funds highlight the paradoxical role of IP, since copyrights are meant to encourage new production, but in reality, they have led to greater alienation of works from creators and the preservation of the old rather than incentivizing the new.
This form of financialization is having profound effects on the structure and content of the music industry. A change in who owns songs will also change how songs are played. As an asset rather than commodity, songs make publishing companies relatively more important in the industry. Furthermore, synch licenses are a growing source of revenue as financial owners seek to squeeze every drop of revenue out of their newly acquired assets.98 One industry insider noted in 2016 that the fastest growing part of record labels is their legal divisions as they seek to maximize their existing copyright returns.99
The common narrative that robust financial marketplaces breed dynamism is unsubstantiated in the music sector, where financial innovation has categorically not promoted cultural innovation or creativity. Thinking of songs as assets gives successful artists more options in terms of how they want to make money from their art. These musicians are able to leverage the financial environment to get large upfront payments in exchange for their music rights (or they may be able to work out other financially engineered deals). However, smaller artists, who are the overwhelming majority, will not see any real benefits. Indeed, they may be disadvantaged through these new relations. There is some evidence that record companies have been investing fewer resources into new acts, instead waiting for small artists to prove themselves commercially and avail themselves of the now more accessible home recording, distribution, and marketing platforms.100 As more money is poured into collecting existing hits, the owners of old hits will put more effort into placing the acquired songs on playlists and other promotional vehicles. Already in the past year there has been a shift among listeners in the direction of older songs.101 This means new songs will be competing for listening time in a battle bankrolled by financial behemoths.
Final conclusion
The cultural industries have never been shielded from the dominating logic of the time, despite efforts to maintain the façade of separation. Rather than being immune to the marketplace, musical output is a contested object. Not only do songs access emotional needs, engage with the cultural environment, and provide record companies and artists with sales, they now also provide a vehicle through which investors can generate returns. Though music has long been commodified, it is now financialized, which fundamentally changes the way diverse actors interact with it. Such a shift has ripple effects within the music industry, precipitating changes to production. These are new dynamics that have arisen not because of changes in technology, but because of changes in the political economy.
This paper has shown that financialization is occurring extensively in the music industry as is manifest not only through financially-motivated corporate activity but through the use of songs as investment vehicles. Songs are now viewed as assets, rather than commodities, which has repercussions for the entire industry. Changes in law were crucial to facilitating financial dominance in both the broader economy and in music. The evidence reinforces our understanding of the centrality of IP rights and rent-seeking behaviors in the growth of financialization, and highlights the extractive nature of financialization. The rush towards IP monopolism is a growing facet of financialization. The result of financialization in the music industry is that there is now a heavier reliance on previously generated cultural forms, and an underinvestment in new artists, as financial actors extract rents from copyrights. It remains to be seen how much the industry will mutate in the coming years. What is certain is that critical consideration of the industry can help expose the unique and puzzling aspects of 21st century financial capitalism.
Acknowledgements
My thanks to Evelyn Atkinson and Jonathan Levy who were both a fantastic help and pushed my thinking for this paper. I would also like to thank Tom Drake who helped me understand how to use primary sources and Herrn DeGroot who instilled in me an interest in music history. Much gratitude to my roommates and my family, who remain so incredibly kind and supportive.