The Royalty Pie!

Updated: Jun 20

When you buy rights to a royalty, what portion of the overall pie are you actually buying? Let me break this down for you.


But first...


As always this blog is meant for entertainment. I'm not a financial advisor in any way, shape or form. Anything I suggest here will need your own due diligence!




Okay, so someone on our Reddit page asked a question about what portion of the overall royalty stream is being purchased. The question centered around if it was just coming out of a slice of the overall pie, or the entire pie itself.


Here's how this breaks down.


Slicing the Pie

First lets take a look at the overall pie of royalties for a song. These royalties are split between songwriter rights, and master rights.


Inside of each of those splits there are multiple owners of those royalties. Generally the songwriter rights get split 50/50 between publisher and writers. Oftentimes there are more than 1 writer so that portion gets split down further. Same goes for the master rights which get split up between musicians, backup singers, recording artist and record label. As you can see the overall royalty pie gets divided into many slices.


Lets build a hypothetical example. For our example we'll make up a song called "Royalty Pie". Ironically this song is about pie served at Buckingham Palace, the Queen is a big fan of Mincemeat I hear.


There are actually 2 Pies here that need to be divided. The first Pie is the Songwriter Pie, the second is the Master Pie.


Here's how both of these pies breakdown.


  • Songwriter Pie: There were 2 writers for "Royalty Pie": Bob & Tom, and they worked with a publisher called Blue Publishing. Generally the publisher gets 50% and the writers split the other 50%.


  • Master Pie: "Royalty Pie" was recorded by a 3 piece band with members Liza Beth, Crazyeye Steve and Simon Sayz. They worked with a record label called Raizen Beats. Let's assume the record label gets 50% and the 3 performers split the other 50%.


Here's how this breaksdown:


Songwriter Pie:

  • Bob: 25%

  • Tom: 25%

  • Blue Publishing: 50%


Master Pie:

  • Liza Beth: 16.7%

  • Crazyeye Steve: 16.7%

  • Simon Sayz: 16.7%

  • Raizen Beats: 50%


Okay, now lets build some hypothetical revenue streams for these royalties. Let's keep it really simple. Let's assume that over the past 12 months the Songwriter Pie has earned $1,000 and the Master Pie has also earned $1,000. So how are these revenues split?


Songwriter Pie: ($1,000)

  • Bob: $250

  • Tom: $250

  • Blue Publishing: $500


Master Pie: ($1,000)

  • Liza Beth: $167

  • Crazyeye Steve: $167

  • Simon Sayz: $167

  • Raizen Beats: $500


Selling Off Slices

Alright, pretty straight forward so far. Now lets say that 5 years after this song was released Bob has gotten himself into some pretty deep gambling debts and needs to pay off his bookie before he gets his kneecaps smashed. He decides to sell off the rights to his royalty ownership for 10 years in order to get cash in hand now to settle his debts.


He offers his ownership for sale on one of the major platforms that exist. Here's what that offering looks like:


  • Song: "Royalty Pie"

  • Royalty Rights: Songwriter Rights

  • Term: 10 years

  • LTM (Last Twelve Months): $250

  • Catalog Age: 5 years


[I'd offer around $1,100 for this catalog if I was investing. 5 years means the revenue streams have most likely stabilized. This puts the multiple at 4.4x which would be tasty!]


So lets assume then that an investor purchases these rights for $1,100 for 10 years. What does the overall pie look like now?


Songwriter Pie:

  • Investor: 25% (100% of the 25% owned by Bob for 10 years)

  • Tom: 25%

  • Blue Publishing: 50%


Master Pie:

  • Liza Beth: 16.7%

  • Crazyeye Steve: 16.7%

  • Simon Sayz: 16.7%

  • Raizen Beats: 50%


Alright, still pretty straight forward. You see that Bob selling the rights to his royalty streams for 10 years didn't impact any of the other royalty owners.


Now lets add a bit more to this. Let's assume that Raizen Beats wants to sell off 40% of their royalties for life of rights as they want to raise money for a new release. What does this look like?


[Okay, so 40% of $500 = $200. For Life of Rights I'd be willing to pay a higher multiple, lets say 7x. So I'd value this catalog at $1,400]


So Raizen Beats sells off 40% of their royalty rights for life, while still maintaining ownership of the remaining 60%. Here's how the overall ownership mix looks after this:


Songwriter Pie:

  • Investor: 25% (100% of the 25% owned by Bob for 10 years)

  • Tom: 25%

  • Blue Publishing: 50%



Master Pie:

  • Liza Beth: 16.7%

  • Crazyeye Steve: 16.7%

  • Simon Sayz: 16.7%

  • Raizen Beats: 30% (60% of the original 50% Raizen Beats ownership)

  • Investor: 20% (40% of the original 50% Raizen Beats ownership)


So you can see that selling off these rights did not impact any of the other slices. It's also important to note that the revenues being offered & advertised for these rights were only the revenues from the portion of the slice being offered, not the overall pie. Frankly as an investor you do not care how much revenue the overall pie is earning, you only care about the revenues for the slice you are looking to purchase.


Hopefully this goofy example helps to show how royalties are subdivided, and how what is being offered in a catalog for investment is determined.


Please comment below if you have any questions, if anything I outlined wasn't clear or if I made a mistake somewhere along the way.


Alight, I'm off to go jam some "Royalty Pie" on my iPhone, that song slaps!


[Be sure to join our Facebook Group, we're just getting the conversation started there!]

 

Wanna support this blog?*


  • Personal Capital: My go to place for tracking all things Net Worth.

  • YNAB: My go to place for managing my spending and budget.

  • Betterment: I use this account for general investment purposes.

  • M1 Finance: I use them for my dividend stock investments.

  • Greenlight: How I manage my kids allowance.

  • ANote Music: One of the ways I invest in Music Royalties.



As always this blog is meant for entertainment. I'm not a financial advisor in any way, shape or form. Anything I suggest here will need your own due diligence.


Follow my other blog dedicated to my journey to FIRE here: 3QFI.com



133 views0 comments

Recent Posts

See All