One of the promises of digital technology was that it would not only speed up the consumption of music, it would also speed up royalty payments back to creators.

The first part has very much happened; the second part – as income gets scattered across billions of micropayments – arguably less so.

One of the companies trying to address this, as well as the complications of cash flow, is Sound Royalties. It has just announced that it has $100m to collateralise against future royalties for artists caught up in income complications. This, after a $10m trial last year.

Alex Heiche, co-founder and CEO of Sound Royalties, started off as a musician but moved into software and latterly real estate investment.

“Slowly I found my way back to – as a passion project – funding the entertainment community,” he says. “As I funded these projects, I started to see what was going on in the sense that there was a traditional bank that would help songwriters and artists – if they had excellent credit. Which is tough to have when your income goes up and down like a sine wave.”

An issue that Heiche found was that musicians, for a variety of reasons, were being strong-armed into selling off copyrights and royalty stems in perpetuity and at knock-down prices as a short-term fix to get them out of a financial bind.

The system, he felt, was stacked against the artist and was being exacerbated by a logjam in payments. He felt there was a solution where royalty forecasts could be used as collateral against loans, but in a way whereby the artists were not signing away their rights.

We will look at three years of royalty streams – whatever they want to collateralise against – be it their SoundExchange, YouTube or PRO income,” Heiche says of the business model and how artists can tap into cash when they need it.

“We look at the previous three years of earnings and develop a forecast. Based on the forecast, we develop models based on what we feel we can advance them that they will feel comfortable in recouping without absorbing 100% of their income streams.”

Heiche felt that the old model of advances from labels or publishers worked well in the initial stages of a career in music but meant that payments worked in peaks and troughs, with artists at the mercy of the vagaries of an earning period and how that income was eventually reported.

“When you took a publishing advance, a label advance or a PRO advance, you didn’t see a penny until you recouped,” he suggests.

“Each songwriter or artist, when they write a song and that is hitting right now on the charts, it can be a year before they see that money. With us, we like to see overflow income flowing through to the artist so we don’t choke out 100% of the income stream. We typically charge a transaction fee to do it and then a small advance rate – and then it reverts back to them once it recouped.”

With advances declining and with labels looking for a share of earnings across multiple rights (and not just sound recordings), Heiche feels artists are more at the risk of unpredictable income than they ever have been and the changing nature of payments is seriously impacting here.

“They are still collecting their publishing income as a songwriter through their PRO – and that can take a year to come through,” he says.

“It depends on what stream you are talking about. The newer streams – like YouTube – while that pays on a monthly basis and it may be quicker than a PRO income stream, it is: a) not as predictable; and b) it is much smaller than some of the other streams that they are used to getting.”

As with everything in the music industry, the odds are inherently stacked against success for the majority. Careers can explode overnight, but equally they can dry up quickly too.

While Sound Royalties may be offering artists a financial lifeline, it is effectively making a bet on future royalties. How does the company mitigate the risk that an artist’s career ends tomorrow and, with it, goes their chance of repaying the loan from their royalties?

“There are a couple of scenarios,” he explains. “Say we enter into someone on a seven-year deal and we give them $100 and after the seventh year they are short $4, we can restructure a new deal. Many don’t make it through the entire seven years before they come back and want to restructure – so we can refinance, like you would on a house.”

“But if that income stream falls off the face of the earth and there is no more incoming coming in from it, we get caught holding the bag as we only use that as collateral and that is the only collateral we use. We don’t go against them personally or any other [income] streams. When we do our deal up front, it’s what they are going to collateralise against and that is what we are using for forecasting our models.”

Isn’t this all enormously high risk? VCs are increasingly not touching investments involving music rights as they are too protracted to clear and, even when cleared, too volatile.

“There are two sides to that and it depends on what streams we are looking at,” Heiche counters. “If we are looking at someone’s PRO income versus their YouTube streams, a YouTube view can fall off the face of the earth or it can trend and go viral and then disappear much quicker than a classic rock song from 20 years ago that has been paying for the past 20 years. We look at genre, we look at the age and how seasoned the music is and the likelihood that it will continue.”

He continues, “We look at the stream we are collateralising against as we can collateralise against different streams in different ways and that protects us against bankruptcy or the IRS and so on. All of those factors go into the risk – and we do from low risk up to high risk. Sometimes we will go out one year and sometimes we will go out seven years.”

For acts with significant catalogues, forecasting earnings is more straightforward, but that does not preclude newer acts from being eligible for loans.

“We had an artist recently with a brand new song and who never had any music before that,” explains Heiche. “But it is charting and it is going to generate revenue over the next year. So we could predict what was coming over the next year and say to them that we felt comfortable doing a one-year deal with them and advance that money against that. There are ways to mitigate the risk.”

With $10m to play with last year, the Sound Royalties pilot programme was about ironing out kinks and also proving proof of concept.

“Our pilot programme enabled us to understand what the demand would be and how much we wanted to put out,” he says. “Going back to 2000, we had had experience in tapping the securities markets. With the pilot programme, we can go and tap the securities markets and say what we are going to fund and get the commitments we need to fund that.”

What form did the deals in the pilot scheme take?

“Some of those deals were for seven-plus years,” Heiche says. “Some have repaid; some will be repaying over time; some have already come back and restructured; and some have already paid [it back]. Zero have defaulted and it is moving forward nicely.”

From the pilot, where were they seeing the main payment hold ups for artists today?

“We see everything from a band where one member is struggling with some financial concerns and we are able to help that one individual rather than tie everybody else upside-down,” he says.

“A lot of it is that they want to fund their own projects – be it the recording of it, the release of it or the marketing of it. There can also be personal and professional needs. New studio equipment. Improved studios. Those types of things.”

There will be those who look at a model like Sound Royalties – arguing it will never take ownership of royalties as it is inherently anti-artist – and see it all as bluster or too good to be true. What’s the catch?

“I will give you an extreme case,” he says. “I had an artist who was just going to cut off his SoundExchange income. His SoundExchange income – and this is a top-tier artist – was $3m a year. He found a group on the West Coast that was willing to pay a $15m price [for his SoundExchange income]. That is a great number when you think about the multiples for SoundExchange only.”

“I asked him what he thought that income stream was going to do over the next 20 years and he said it was either going to stay the same or grow as it was a good catalogue of music. So I said to him, ‘OK, you want to trade $60m over 20 years for $15m? Let me give you our option and what the catch is. Our option is one where we can give you, for the next three years, about $7m and then you are going to collect over the next 20 years close to $58m. What do you want?’ The rub was he needed $15m [immediately].”

He adds, “For each stream we work with, we may raise less, but it’s not a sale in perpetuity. And that’s the key. I said to him, ‘You are not cutting us off because you believe it’s going to disappear? You truly intend to pay it back? If so, show me other assets to collateralise against and I will get you the money you need.’”

“If someone is truly trying to finance something that they intend to pay back, we are the right model. The catch is that for each individual stream they show us, we are going to get them less than a sale in perpetuity; but, in the long term, they are going to see so much more. So rather than see $60m, they will see $58m – but they can come back to the table time and time again and do this over and over again [if they want].”

With artist income increasingly a moving target, Heiche says adapting the deal model in line with changing revenue streams for creators is essential.

“Initially, a few years ago we started with just PRO income, then we worked with the major publishers, then we started working with smaller publishers and labels and then we started working with Spotify and YouTube and MCN revenue,” he says.

As new income streams develop, we analyse them, dip our toes in the water with small plays and then grow from there. We are constantly adapting as the market changes. And it is heading towards a streaming world.”

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