In our new Money Moves series we speak to the movers and shakers of the music finance industry. In our latest instalment we speak to Hipgnosis Songs Fund CEO and Founder Merck Mercuriadis.
Merck Mercuriadis is a man who knows what he wants. A self-confessed “obsessive compulsive” vinyl collector, high on his wishlist when we speak is a sold out reissue of John Coltrane’s Lush Life. “Normally I don’t have any difficulty accessing these things. It’s driving my anxiety through the roof,” he tells us from Los Angeles.
On the business front he is very vocal about what he wants to achieve with Hipgnosis, from abolishing the term music publishing, to owning the world’s best songs and changing where the songwriter sits in the economic equation. All while maintaining returns for his shareholders, of course.
In the following conversation, Merck discusses his future plans for Hipgnosis, addresses the recent criticism he’s received from the investment and finance community, and explains why the phone hasn’t stopped ringing since he bought 50% of Neil Young’s song catalog.
Let’s kick off with your goal of raising £605 million and the £1 billion of deals that you have in the pipeline. What can you tell us about that?
The first thing to say is that this has been reported erroneously, by The Times most significantly. The point of a prospectus is that it’s a 12 month document so when we highlight £605 million, it’s not because we think we’re going to go out and raise that this week. It’s because we think that we’re going to raise £605 million during the course of the year. It’s important to temper people’s expectations. We didn’t put a target on our raise because the market is still very much in the middle of COVID. And while no company on the London Stock Exchange raised more money than we did last year, it would almost be crass to come out and say we think we can raise that same amount of money again. I’ve got no doubt that we’ll raise £605 million or something close to it this year.
“If you look at Neil Young, Shakira, Lindsey Buckingham, Mark Ronson, Richie Sambora, Debbie Harry and Chris Stein from Blondie, and all the amazing acquisitions that we made last year, the catalogs that you will see us announce this year will impress you just as much as they did.”
In terms of the pipeline, what I would tell you is if you look at Neil Young, Shakira, Lindsey Buckingham, Mark Ronson, Richie Sambora, Debbie Harry and Chris Stein from Blondie, and all the amazing acquisitions that we made last year, the catalogs that you will see us announce this year will impress you just as much as they did. We’ve set a very high bar with our criteria that we intend to adhere to – one, it’s proven and extraordinarily successful, and two, it’s of cultural importance. These are very special creators that are responsible for the music that makes the world go round. When we look at the acquisitions that our competitors make, the vast majority are not catalogs that we would be buying. There are a few people out there that are not a part of Hipgnosis yet that I think will become a part of Hipgnosis.
How much did your acquisition of 50% of Neil Young’s song catalog change the game for Hipgnosis?
It has actually changed things for one reason. Neil is seen as somebody that is very careful in the way that he conducts himself. He does his due diligence. When you look at the value of Neil’s songs, on the one hand, they are valuable because they are incredible songs, but on the other hand, inherent in the value of those songs is the way that he’s conducted himself and his integrity. People say to me, does this mean that you’re going to be putting Neil Young songs in TV commercials and stuff? And I say, no, of course not. If you suddenly take a song like “Ohio”, which is anti-authority, anti-war, and commemorates the deaths of innocent students, and put it in a movie that has gratuitous violence or the wrong message, it will affect the value of that song.
So, of course, we’re going to put time and effort into ensuring that the songs are exposed in a way that’s appropriate for who Neil is. The fact that Neil sold to Hipgnosis and effectively allowed me to become the custodian of his catalog is based on the fact that he knows that I know the ethos on which he’s built his career. He knows that while I’ll do everything in my power to add value and enhance the songs, I’m going to be just as focused on protecting his legacy. The due diligence that he’s done has ticked that box for a number of other creators, and of course that’s invaluable. The phone has been ringing with some of the most amazing creators that want to make deals.
“The due diligence that he’s done has ticked that box for a number of other creators, and of course that’s invaluable. The phone has been ringing with some of the most amazing creators that want to make deals.”
One of the things that’s allowed us to succeed is the fact that I’m an artist manager first and foremost and I’ve maximized commerce for my artists while at the same time protecting their art. In some ways, the most important thing that we know and understand is that these are very emotional transactions. On the one hand, it’s about the check, but on the other hand, it’s about taking these metaphorical children that you as a songwriter have given birth to and putting them in the hands of surrogate parents. Songwriters like Richie Sambora and RZA are on the record as saying they’ve sold to us for less than what they were offered by other companies because they could trust us. And obviously I think a big advantage for us is the fact that the vast majority of our competitors are bankers.
Most funds strike primarily at standards but, according to your last interim report, just over half of your catalog is ten years old or less. How do you determine the value of more recent hits and ensure this maturity mix won’t struggle to generate returns in the long run?
At the latest writing we’re at somewhere between 55 and 60% older than ten years, about 3% younger than four years, and about 37% between four and ten years old. The context for the investments is obviously the growth of streaming. When we started three years ago, there were barely 30 million paid music streaming subscribers around the world. Today, there are 450 million and as we get towards the end of the decade it will be as many as 2 billion. At that point streaming will be about a hundred times bigger than it was when we started. When you’re looking at acquisitions, you have to understand the makeup of streaming consumption.
65 to 70% of streaming consumption is catalog and we are incredibly well-represented, whether it’s “Don’t Stop Believin’”, which is the most streamed song of the 20th century, or “Sweet Dreams (Are Made of This)”, which is the most streamed song released in 1982. When you look at the other 30 to 35%, it’s people that are consuming the same 300 or 400 hits of the last four or five years over and over again. We do unbelievably well in this area as well. We have “Shape of You”, which I think is the most streamed song ever. We own 11 of Spotify’s 30 most streamed songs and four of the five top Billboard songs of the last decade. You can’t go to investors and say that the context for your endeavor is the growth of streaming and not have a balanced portfolio that reflects both sides.
“You can’t go to investors and say that the context for your endeavor is the growth of streaming and not have a balanced portfolio that reflects both sides.”
Now, of course, the model on which you buy new songs is entirely different to the model on which you buy older songs. When you’re buying Neil Young, there is no decay. When you’re buying “Shape of You”, there’s going to be a massive decay and you pay a lower multiple. And then you have other added benefits as well, whether it’s a right to income that might come with the deal, or whether it’s much fatter than baseline income that’s going to come for the next three or four years because of the lag time and the way that the big administrators collect monies. Someone told me that Round Hill don’t buy songs that are less than 10 years old. That’s because they don’t have access. If you don’t know Benny Blanco or Andrew Watt or Starrah, you’re not going to be able to buy those songs.
In terms of the types of the rights that you’re acquiring, is it a case of getting as much as you can?
We characterize it as buying 100% of a songwriter’s interest in the catalog that they’ve created. If that songwriter has their publisher’s share, their writer’s share, their neighboring rights, their SoundExchange, their master recording royalties or the actual master rights, then we’ll buy it. If in some cases if they’re extraordinary assets and they only have the writer’s share available, then we’re very happy to buy only the writer’s share. In other cases, they may have just the publisher’s share available, or they may only be willing at that time to sell their publisher’s share. And we’ll make a deal where we buy the publisher’s share but then get a first and matching right on the other income streams.
What can you tell us about the formation of Hipgnosis Songs and your concept of song management?
The one thing that I’m very proud to say is that we’re not a publishing company, we’re a song management company. When you look at the Universals, the Warners, and the Sonys, they have these incredible catalogs, but they have 20,000 songs per person. On the one hand, they don’t have the ability to actively manage them. On the other hand, it’s also not their business model. Their model is to create new IP, and they use the passive income of their great song catalogs to underwrite that business. To me, that’s wrong. At Hipgnosis we have 500 to 1,000 songs per person, and we have the bandwidth to be able to look at each song as a business of its own and say, is this song performing optimally? If not, let’s bring it back to life and let’s create some results.
“We have the bandwidth to be able to look at each song as a business of its own and say, is this song performing optimally? If not, let’s bring it back to life.”
We bought the Al Jackson catalog which includes Al Green’s biggest songs including “Let’s Stay Together”, “I’m Still in Love with You” and “Call Me”, and “Green Onions”, maybe the most famous instrumental of all time. The catalog was earning $400,000 a year but 82% of it came from “Let’s Stay Together”. Those other songs had been allowed to languish. We got to work and a year later the catalog is earning $600,000 a year. The multiple that we paid has come down by a third and “Let’s Stay Together” now accounts for less than 50% of the earnings. Now you’ve got five or six songs that the other 50% of concentration is on. That to me is song management. And at the same time you’re creating an incredible return on investment for your shareholders.
What did the Big Deal Music Group acquisition bring from a strategic point of view?
The Big Deal acquisition was also about control. We now have our own administrator in the US and that gives us the ability to negotiate our own deals with Spotify, Apple, Peloton, TikTok and the settlements that come with those things. So in the US, which is obviously the biggest revenue of any market in the world, you can administer yourself very cost efficiently, saving further money and having that necessary control over your own destiny. In the rest of the world we continue to be administered by Kobalt for the most part, but we also have catalogs with Universal, Warner, and Sony. And we’ve got great relationships with the administration arms of those companies.
With Hipgnosis Songs Group we have a total of about 78 people worldwide. Amy Thomson is the Chief Catalog Officer, Ted Cockle is the President, Tom Stingemore has just joined us as Head of Sync. Nick Jarjour is the Global Head of Song Management. And besides adding incredible people like Kenny MacPherson, Casey Robison, Jamie Cerreta, Pete Robinson and Dave Ayers, the Big Deal acquisition means a small part of our business, about two and a half percent, is song creation where we’re creating catalogs of the future. It gives us access to the most important young songwriters who then also have access to our catalog in terms of interpolations and covers, and other things that will add value.
You’re no stranger to people trying to discredit you. What is your response to the recent criticism you’ve received from the finance and investment community?
We’ve gone from being a normal listing on the London stock market to being a premier listing a year later, to being a FTSE 250 company a year after that, to now being one of the biggest yielders on the FTSE 250. You can’t have a £1.25 billion market cap and be one of the biggest success stories, having created a brand new asset class, without also attracting speculation and criticism. What none of that criticism mentions is that the actual performance of the company is stellar. One of the things we talk about is how the revenues from music are uncorrelated. I’ll have to find a different analogy now, but we used to say if Donald Trump wakes up and does something stupid, which he did most days, then the price of gold and oil is affected, whereas the price of songs is not affected.
“You can’t have a £1.25 billion market cap and be one of the biggest success stories, having created a brand new asset class, without also attracting speculation and criticism.”
We wouldn’t have wished for a pandemic to prove that thesis correct, but before the pandemic started we became a FTSE 250 company, and then three months in, the pandemic hits and we become the number 23 biggest yielder on the FTSE 250. And we’ve been somewhere between number 23 and number 37 on the dividend chart constantly. This is an index that’s filled with nothing but blue chip companies that have predictable, reliable income, but as a result of the pandemic, they’ve had to cut their dividends or not pay them at all. At a point in time when the total return on the FTSE 250 is minus 2.5, we’ve given a total return of 41%. So we’re outperforming the FTSE 250 by 40%. Those facts speak for themselves.
When you look at Stifel’s criticisms of Massarsky Consulting in terms of marking up catalogs, we took many hours with them on Zoom and email making sure they had the resources available to them, and they still took the same position. They didn’t believe that having the right pedigree and an offering that would matter to songwriters meant that you could buy something undervalue. And my view on it was simple. They wanted to take an exciting story and present a contrary view to it because they know that as a small brokerage house, there’s no chance of them ever becoming our brokers. So if you can’t become our brokers, then you give people a reason to buy your research.
Being a public company, we have to adhere to a greater standard of governance. The criticism is, is Barry Massarsky actually independent? Is he being incentivized to mark up catalogs? And, of course, they don’t mention that he also works for Round Hill, our fellows on the stock market. We do independent valuations with as many as 10 different valuators at the time of acquisition. And then we use Massarsky only for the NAV exercise that’s done twice a year because we effectively want him to do the work from scratch to ensure that if there are any surprises, we’re going to find out. And of course, when you see our NAV going up very handsomely, that’s across the portfolio overall. It doesn’t mean that there aren’t catalogs that have also gone down in value.
What about the criticism that you get for inflating multiples?
We’ve announced to the market that we’ve bought at a blended multiple of 15 times, so those arguments of course go out the window. A lot of people use the excuse of, oh, they’re paying more as a way of explaining why we are able to make deals so quickly and invest without any cash drags. It’s just an excuse to give to their bosses about why they’re not making investments while we are. The reason we’re able to make the investments is because of our strategy, our pedigree, and particularly our ulterior motive of changing where the songwriter sits in the economic equation through the leverage of our fund. That is what has made us the favourite buyer of the songwriting community.
Can you tell us more about your plans to push forward the agenda of the songwriter?
The songwriter is the low man or woman on the totem pole in the economic equation because the three biggest song companies in the world, Universal, Warner, and Sony, don’t advocate for songwriters because they’re silenced by their parent companies who want all of the economics to roll through recorded music. On the recorded music side they’re getting four-fifths of the money, an 80% gross margin, a 40% net margin, and in general they own those recorded music assets in perpetuity. Conversely, on the song side of the business, you’ve got a fifth of the revenue, you’ve got a fifth of the margin, and whether it’s through good lawyering and management or through reversions or renegotiations, the songs end up back in the hands of the people that created them.
“The songwriter is delivering the most important component in the music business. . . . Everyone is relying on outside songwriters and they have to be remunerated properly.”
The songwriter is delivering the most important component in the music business. We haven’t had a Billboard top 100 album of the year since 2014 that doesn’t involve an outside songwriter. Everyone is relying on outside songwriters and they have to be remunerated properly. I want to change the system. Ultimately that doesn’t make me very popular with the major companies, who will die kicking and screaming to keep that system in place. But it’s the same attitude that almost destroyed the music business when Napster came along. And what’s key to point out is that my criticism is not of the people that work in these companies, because there are a lot of wonderful people there, many of whom are friends, many of whom we do great business with. The criticism is of the paradigm.
Other than the Kobalt deal, every acquisition that we make is directly from the artist, the songwriter, or the producer. If I’m going to do my best for songwriters, which I’m intent on doing, I have to make deals that are in the best interest of our shareholders as well as in the best interest of songwriters, because you can’t be helpful to songwriters if you don’t have a healthy business that is succeeding the way that our business is. 70% of our acquisitions are off market but, even in the deals where we’re competing, because of our strategy and our ulterior motive we’ll get catalogs for less than what the market will pay. We have to be very disciplined about the deals that we’re making.
When I walk away from a Bob Dylan or a Stevie Nicks it’s because despite the fact that I would love to own those catalogs, if I can’t make a deal that’s in the best interest of both the songwriter and my shareholders, I’m going to walk away from it. We’ve now made 130 deals with the most important songwriters in the world, and we’ve completely de-risked their future. They form the basis for what will be a songwriter’s guild that we’re going to fund and create. It’ll be owned by the songwriters and we will have real advocacy. The most important part of the recommendations we submitted to the DCMS is that the songwriter needs to have a seat at the table and represent themselves.
Speaking of the importance of songs, what’s the last song you listened to today, and what do you consider to be your favourite song?
The last song I listened to was “Doo Doo Doo Doo Doo (Heartbreaker)” by The Rolling Stones from the album Goats Head Soup on vinyl. Naming my favourite album is easy, which is Pink Floyd’s Wish You Were Here. I never waiver from that. My favourite artists are Pink Floyd, Patti Smith, Neil Young, Fleetwood Mac, The Clash, Nile Rodgers and Chic of course, Kraftwerk, Led Zeppelin, The Beatles, The Stones, Elvis. I could go on and on all day. My favourite song is something that is impacted all the time but it’s the same group of songs. It could be “A Day in the Life” by the Beatles. It could be “Papa Was a Rollin’ Stone” by The Temptations. At this moment in time, I will say “Safe European Home” by The Clash.
At this point you must be rifling through your record collection saying, I own that, I own that.
I was on a holiday with my family last summer that only lasted about 24 hours because of the pandemic. But we were poolside and they were playing music and literally every second song was a song that we owned. That’s always fun. One of my daughters made me a black bead bracelet that has white beads that spell out “I own that song.” That’s my favourite piece of jewellery.
Enjoyed this article? Why not check out:
- Money Moves – Barry Massarsky on Data-Driven Catalog Valuations and Drivers of Growth in the Music Investment Market
- Money Moves – Primary Wave’s David Weitzman Talks Acquiring Iconic Catalogs & Unique Marketing-Driven Approach
- New Funds, Evolving Deals, and a Pandemic-Resilient Catalog Market are Cause for Optimism at the Music Finance Forum
