In our new Money Moves series we speak to the movers and shakers of the music finance industry. Our third interviewee is Barry Massarsky, President of Massarsky Consulting.

Barry Massarsky is a leading expert in catalog valuation, income analysis and litigation economics.

As the former Senior Economist of ASCAP and now the President of Massarsky Consulting, he has pioneered the field of music copyright economics, serving revenue-related interests within the U.S. music industry, facilitating strategic opportunities for advancing royalty income, and inspiring new license regimes.

He and his team are actively engaged in economic and strategic analysis for most of the major stakeholders in the music rights marketplace, conducting the vast majority of valuations for the music acquisition and investment market.

We recently caught up with Barry to discuss the market and its key players, the significance of data in catalog valuations, and where he thinks the market is going and why.

Who are the key players and investors in the music investment space, and how have you seen this change over time?

It’s such a wide range and it’s growing all the time. We started off with traditional music publishers who would create an investment vehicle for this type of asset collection, but because of the long-term viability of music assets, the durability of their revenue streams, the transparency of the data, and the consistently growing returns, they are now an improved commodity class beyond what others have experienced in what we call alternative assets. This has gone to the commercial market, and so we have clients popping up all the time interested in this investment class.

It’s pension funds and college and university endowment funds. It’s senior private equity funds, and we’re talking about private equity at the highest echelon. They are completely sold into this marketplace. We’re talking about state treasuries, insurance funds. The most elaborate, complex, wide variety of investors have flocked into this space. We’re also seeing a securitization of these assets, which is a different class. Even the majors are entering the space. Warner Music Group has an investment portfolio within a group called Tempo Music.

“The most elaborate, complex, wide variety of investors have flocked into this space.”

Tempo was founded by Morgan Stanley and then sold to Providence Equity. There are a lot of investors like BlackRock on the equity side. The way these funds used to operate was that they would secure loans from commercial lenders like banks. They still do that, but the growth in the business has been so spectacular that they’re able to attract private capital on top of that. There are also banks that are very specific in this area like Truist (formerly SunTrust), City National Bank, Regions Bank, and Pinnacle Bank in Nashville. JP Morgan if it’s a really large deal.

This year, my team has reviewed funds that are worth over $4 billion in total. What is most remarkable is how my business partner, Ms. Nari Matsuura, who runs our valuation team, and I have to be comfortable with high level financial terms and expectations while also being experts in the economics of the music industry. It’s a field day for MBAs!

To what degree do you think Hipgnosis has accelerated the market?

Not as much as people think. The various funds all seem to have found their own individual lane. It’s not like they’re all colliding or struggling to keep up with Hipgnosis. Hipgnosis has a certain investment thesis. Primary Wave has a very different one. Round Hill, Reservoir, Downtown, Lyric Financial, all these organizations have slightly different views on what they want to invest in, for the most part.

You do valuations for a number of leading acquirers as well as third parties such as lenders. Is there anything different in the valuation process specific to the client you are doing the valuation for?

When we do valuations for the banks, they have a syndicate. It’s not one bank – there’s a lead bank and then there’ll be subsidiary banks that will fall in line to a major lending situation with a fund. And one of the requirements each year is that a third party values the assets in the fund for risk management purposes. In those cases, the growth rates that we assign are much tighter because you’re managing for risk. You’re not looking at opportunity in the business, you’re looking at cash. You’re using conservative thinking and forecasting and looking at the minimum value rather than the market-based value that they could be acquired at.

When we do work on the private equity side, it’s a loosening up because they’re looking at it from the exit multiple, you know, if we were going to sell this thing, what would be the potential upside value of that? That’s a completely different viewpoint because that’s taking some risk in hand and trying to come up to what the opportunity is for a potential exit. And so there’s a little bit of a dynamic difference there. I’m not saying they’re completely different, but they’re slightly different philosophies of how we would run the valuation process.

Data plays a significant role in determining the value of a catalog. To what extent does the cleanliness of a catalog’s data affect its valuation?

On a scale of one to ten, I would put the significance of data integrity at a ten. Data has to be cleansed. Data has to be right. And it’s not just getting it clean, it’s looking at the patterns. With sync, for example, we’re looking at whether there’s a pattern of growth or just one-offs. Why are we looking at collection activity that is jumping around for particular catalogs? Can we normalize that? Why is there late income coming in? Is that reliable? You have a new license with social media. What’s the license term? How comfortable are we that you’ll have that for three to five years? We have to get underneath the data. And we’re not going to cleanse it, we expect it to come to us ready to go.

“On a scale of one to ten, I would put the significance of data integrity at a ten.”

There are three major income sources that we trail: performance income, mechanical, and synchronization. We’ll study the behavior of that income in the most recent year and the prior three years because we’re looking for the growth rate. Then we’ll look at the term of copyright and decay curves. Newer music will decay to what we call steady state, whereas standards have already established a steady state relationship. The data is critical. Nobody’s doing this ad hoc. The funds have some of the best financial minds working for them. They spend a lot of time getting data ready for evaluations – it’s a really important responsibility for them.

How does the process differ when dealing with masters?

We look at what we call net label share (NLS), which is a different commodity than net publisher’s share (NPS). For the most part, on the label side, we’re looking at it from streaming growth, physical to the extent that there is, and download. So we’re dealing with different dimensions of data. What’s really interesting is there is such an enormous appeal for streaming, which frankly has shocked me. I didn’t think this could happen so quickly.

Masters used to be a stepchild to publishing. For many years, banks and others wouldn’t invest in masters. Everyone was a little nervous because of the lack of transparency. But streaming changed everything. It became clear how successful it was. So what’s happening is that the multiple of NLS is almost, not quite, but almost equal to what we see for publishing. You would never have seen that two or three years ago. That’s the impact streaming has had.

With the evolution of the market and competitors who have access to cheaper capital is the discount rate trending down? What impact is this having?

This is an important pause point in our discussion because sometimes you have to pull away from the data and the models and look at it from a broader perspective. The discount rate is really the internal rate of return. So the question is what should that rate be? We’re not the federal reserve of the music industry, we’re just third-party valuers, but because we run most of the funds, we’ve become a de facto standard and we have to take that responsibility seriously. When we started out eight or nine years ago, up until recent times, the prevailing notion was that the discount rate should be about 10%.

We’re now at 9% because the cost of capital is near zero in the US and we think it’s going to stay there throughout the Biden administration. Now, when you lower the expected rate, it inflates the multiple value by definition. That’s why we’re seeing, in part, things that we’ve never seen before. For standards today we’re seeing an average multiple for publishing at 17 to 18 times. That’s up from 15 to 17 in 2019 and 13 to 14 in 2018. That’s significant growth. Part of that is the discount factor, but a lot of it is because standards have weathered time so well. Radio has a greater reliance on standards, and the fastest growing trend in streaming is the older demographic migrating over. Standards are also very well received for sync.

“For standards today we’re seeing an average multiple for publishing at 17 to 18 times. That’s up from 15 to 17 in 2019 and 13 to 14 in 2018.”

But what about current music? It will trend below standards because of the risk curves, but that area is growing as well. Our 2020 data shows that we’re seeing an average multiple of 13 to 15 times for newer songs. That’s up from 12 to 14 in 2019, and 11 to 12 in 2018. So that’s how the market’s moving between those two categories of interest. There are, however, reasons why multiples are not quite the arbiter of value people think they are, and you have to be careful to use multiples for anything but a trending value. Each catalog has a different collection of music and a different capability of capitalizing on that music.

In terms of the catalogs themselves, there’s a wide spectrum in terms of the legal rights, genre, age and utility. How does appetite vary among purchasers?

Most of the funds like to strike at the standards. One of the reasons why standards are so opportunistic is radio. Across terrestrial radio in the US two phenomena are taking place. One is that 20% of the revenue generated by commercial radio stations and paid to ASCAP and BMI is attributable to standards. Secondly, standards make up over 56% of the inventory of what gets played on these radio stations. Radio has retained and grown an older demographic that wants to listen to familiar sounding songs. So with radio being an important source of opportunity, with streaming growth and with syncs, standards are doing quite well.

Country is a very different market. If you look at popular new releases in country in 2018, 2020, over 82% of the NPS comes from radio. Why is that? The way this works is that ASCAP and BMI have bonus programs from the income generated from general licensing, which amounts to $350 to $400 million a year. The money that comes in has no relationship to what was actually played in the bars, restaurants, and what have you, so it goes over to radio and is paid out based on contemporary hit songs. It’s based on the threshold of volume, and we measure this every day. Our data allows us to know what the bonus rate is on any one song at any one time. 75% of the earning power of a hit song in the US comes from these bonuses.

“75% of the earning power of a hit song in the US comes from these [radio] bonuses.”

The same is also true that as these songs start to decline in the charts and airplay, the bonuses get ripped off from them. That’s the curve that people fear. But you’re going to bet on that because you’ll get a lower multiple and more economic choice, and you’re betting that you can monetize through sync. For me, the marketplace for country is like the July 4th fireworks. The songs go up really high and just as they’re starting to fall down, another one replaces them. A hit song will last about two quarters at most, so what it really comes down to is the writer and their capacity to continue to write these songs and to get these bonuses.

Pop has a similar capacity. Two thirds of the NPS of a hit pop song for performance is also coming from these radio bonuses. They’re the most substantial part of the equation. The bonuses on streaming are a lot lighter, but it will continue its curve. What really works well for pop and streaming is the market is growing and pushing up value. There’s an increasing appetite for the song. It’s like riding a wave that never seems to come to shore. Country’s kind of a late adopter so it’s not getting quite the lift from streaming that other formats are.

How has the earnings life cycle of a ‘hit song’ changed over the last ten years with the shift from sales to streaming, but also the continued resilience of commercial radio?

The initial years of the streaming life cycle are not all that different from radio in that it peaks. That’s followed by steep declines that lessen until hitting steady state. There are a few differences though – radio declines are a little steeper since they initially had the benefit of the bonuses, but streaming cycles, upon hitting steady state, are quickly followed by growth since the streaming market is evidenced by rapid growth unlike radio. There’s also another phenomenon for streaming that radio doesn’t experience. It’s what we call the international hit, and it gives this next level of increase. So we see new strength in the numbers from that portfolio more so than we did from radio, but the decline is similarly suited.

Generally, the growth in recorded music income and subsequent value in catalogs is driven by ‘streaming.’ But underlying these growth presumptions is a number of positive legal developments (the MMA, the CRB rate review, etc.). What impact will these have?

The really key one is the copyright royalty board and the lift of mechanical rates. The rate increase is significant and has changed a lot. It hasn’t yet been adapted, but we do put in growth rates that accommodate lift there in our future growth curves. We’ve been a big part of every copyright royalty board experience since its founding, so we’re grounded in this. The appeal was not against the rate, but against the narrative supporting the rate increase. We are highly motivated to think that the publishers will retain the same value that they sought and succeeded in the original case, and next year we’re starting a whole new CRB sequence.

“We are highly motivated to think that the publishers will retain the same value that they sought and succeeded in the original case.”

I believe in those rate increases. I believe they adapt to a future thinking model. Performance income is roughly 50% of all earnings for publishing – in 2019, 48% of NPS was performance earned, with 24% coming from mechanical and 25% from sync. Assuming those retention rates for publishers, we think the performance number is going to shrink a bit next year and mechanical is going to start becoming a much more important source of income. And because mechanical gets a bigger share of the performance pie, we’re going to see a complete change of appetite between the two income groups. We think sync is also very healthy.

Before you started consulting you worked at ASCAP as their Senior Economist. The potential reform of the ASCAP / BMI consent decrees is seen as a large potential win for the industry. What would be the likely benefit of such reform and is it needed?

I think it’s a very misunderstood issue… ASCAP has complained that the consent decree has suffocated license fee expansion in their market because the rate court is very expensive, and the broadcasters have a certain leverage against them in a fair negotiation. That could be true. The fact is ASCAP always negotiates its radio deals. They rarely question or push back from radio to get the high increases that I think publishers and writers covet. The rate court creates much of this imbalance because licensees are indemnified by the consent decree process. So I think that ASCAP, frustrated with consent decree mandated rate court, has resulted in the rate court obstructing license fee growth. Certain benefits for the PROs flowed from the MMA but not enough to re-balance this issue.

“The greatest input for radio is microscopically expensed on their balance sheets. To me, that’s obscene. How on earth do we let that occur?”

If you look at radio in the US, which is still a significant individual income source for publishers, and you look at two pie charts, this is what you’d see: one shows the percentage of each hour that is occupied by the playing of a sound recording on a radio station, which is 67%. The second shows the percentage of a radio station’s operating cost dedicated to the rights to play that music, which is 4%. So the greatest input for radio is microscopically expensed on their balance sheets. To me, that’s obscene. How on earth do we let that occur? Now, was that a consent decree that caused this inequilibrium? I think so.

Secondly, where do we come out of the reform of the consent decree? The biggest opportunity for publishers would be to get selective withdrawal so that they could license directly for users such as digital and fall back to the benefits of the collective for things like general licensing, and even radio. So you’d pick and choose where the collective is most suitable in today’s environment. Why isn’t that the most efficient model possible? Why are we holding hostage certain license types? I can’t understand the reluctance to do this, but I think this notion of giving publishers freedom of choice is paramount to the growth of the business.

Enjoyed this interview? Why not check out:

• Money Moves – Primary Wave’s David Weitzman Talks Acquiring Iconic Catalogs & Unique Marketing-Driven Approach
• Money Moves – Round Hill CEO Josh Gruss Talks Doubling Down on Country and Rock, and the Growing Music Royalties Investment Market
• New Funds, Evolving Deals, and a Pandemic-Resilient Catalog Market are Cause for Optimism at the Music Finance Forum