Imagine you own a small but very popular bridge. Every time a car crosses it, the driver pays you a small toll. It doesn't matter if the economy is booming or in a recession, if it's sunny or raining—as long as people need to get to the other side, you collect a toll. The traffic might fluctuate, but over time, it generates a steady, predictable stream of cash. Music royalties are the financial equivalent of that tollbooth. Instead of a physical bridge, the asset is a piece of intellectual property: a song. Every time that song is “used”—streamed on Spotify, played on the radio, featured in a Netflix show, performed live in a concert, or used in a TikTok video—it generates a small payment. That payment is a royalty. As an investor, you can buy the rights to collect those future payments. You aren't buying a stock that represents a piece of a company; you are buying the direct economic output of the creative work itself. There are several “lanes” on this musical highway, each generating a different type of royalty:
For an investor, the most important thing to understand is that all these small streams of income from different sources combine to create a single river of cash flowing from a song or a catalog of songs.
“An investment in knowledge pays the best interest.” - Benjamin Graham. While he was talking about financial education, the principle applies perfectly to the due diligence required for an unconventional asset like music royalties.
To a value investor, who prizes stability, predictability, and long-term value over short-term market fads, music royalties are not just an “alternative” asset; they represent a near-perfect embodiment of several core investment principles. 1. The Ultimate Economic_Moat: Copyright Warren Buffett famously seeks businesses with a durable “economic moat” to protect them from competition. The economic moat for a song is government-enforced copyright law. For the life of the author plus 70 years 1), no one else can legally use that creation without paying the owner. A timeless song like “Yesterday” by The Beatles has an impenetrable competitive advantage that will last for decades. This legal protection ensures the longevity and durability of the cash flows. 2. Annuity-Like, Predictable Cash Flows Value investors love businesses that gush cash. A catalog of established, evergreen songs behaves much like a high-quality bond or an annuity. People don't stop listening to their favorite songs because the Federal Reserve raised interest rates or corporate earnings were disappointing. This creates a revenue stream that is remarkably resilient to economic cycles. This stability makes it far easier to project future earnings and calculate an asset's intrinsic_value—a cornerstone of value investing. 3. A Natural Hedge Against Inflation Unlike a traditional bond that pays a fixed coupon, music royalty streams have built-in inflation protection. The rates paid by streaming services, for example, can be renegotiated and tend to rise over time. As the overall price of goods and services (and entertainment) increases, the revenue generated by music often increases alongside it. This preserves the purchasing power of your investment returns. 4. True Diversification Most investors believe they are diversified because they own stocks from different sectors. But when a major market downturn occurs, most stocks fall together. The performance of a song catalog, however, depends on cultural trends and listening habits, not corporate profit margins or GDP growth. The income from a Frank Sinatra Christmas album is completely uncorrelated to the performance of the S&P 500 in December. This non-correlation makes royalties an exceptionally powerful tool for building a genuinely resilient portfolio. 5. Focus on Tangible Value, Not Market Sentiment The stock market is often a “voting machine” in the short term, driven by fear and greed. Music royalties are a “weighing machine.” Their value is not based on market sentiment but on a sober calculation of their future earning power using a discounted_cash_flow analysis. This appeals directly to the value investor's mindset of ignoring market noise and focusing solely on the underlying value of the asset.
You can't buy music royalties on the New York Stock Exchange next to shares of Coca-Cola. Investing requires a more specialized approach, either through publicly traded funds (like Hipgnosis Songs Fund or Round Hill Music Royalty Fund 2)), private funds, or online marketplaces that fractionalize ownership. Regardless of the vehicle, the analytical process remains the same.
Valuing a music catalog is a classic discounted_cash_flow exercise. The goal is to determine what all the future cash flows are worth in today's money.
In the industry, catalogs are often discussed in terms of a “multiple” of their recent earnings. For example, a catalog might be sold for “15x” its last twelve months' (LTM) earnings. This multiple is simply a shorthand way of talking about yield.
A multiple is the inverse of the initial rate of return (or yield).
Yield = 1 / Multiple
So, a catalog bought at a 15x multiple has an initial undiscounted yield of 1 / 15 = 6.7%. A catalog bought at a 10x multiple has an initial yield of 1 / 10 = 10%. A common mistake is to assume a lower multiple is always a better deal. A value investor knows this is untrue. The quality and durability of the earnings are far more important than the initial price tag. A high multiple for a stable, low-decay catalog can be a much better value than a low multiple for a volatile, high-decay catalog. The multiple is just the starting point for a deeper analysis of value.
Let's compare two hypothetical investment opportunities.
| Metric | Catalog A: “The Timeless Classics” | Catalog B: “The Streaming Sensations” |
|---|---|---|
| Description | A portfolio of 1970s and 80s rock and soul hits with enduring radio and film presence. | A portfolio of recent pop and hip-hop hits that went viral on streaming platforms. |
| Last Year's Earnings (NRI) | $100,000 | $100,000 |
| Earnings Trend | Stable, very predictable. | Peaked last year, now declining. |
| Estimated Annual Decay Rate | 2% per year. | 30% per year. |
| Asking Price | $1,800,000 | $900,000 |
| Asking Multiple | 18x ($1.8M / $100k) | 9x ($900k / $100k) |
| Initial Yield | 5.6% (1 / 18) | 11.1% (1 / 9) |
A novice investor, focused only on price, would be immediately drawn to Catalog B. A 9x multiple and an 11% initial yield look far more attractive than an 18x multiple and a 5.6% yield. A value investor, however, digs deeper.
The conclusion for a value investor is clear: Catalog A, despite its higher multiple, offers a much greater margin_of_safety. The risk of permanent capital loss is far lower because the cash flows are durable. Catalog B is a depreciating asset masquerading as a high-yield investment. This example perfectly illustrates the value investing principle of choosing a “wonderful business at a fair price over a fair business at a wonderful price.”