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If you have a basic understanding of music royalties, you might think buying shares of royalties as an investor sounds counter-intuitive. Aren’t royalties just for artists, songwriters and other copyright holders?

Well, sort of. It’s true that royalties are traditionally a source of income for those who actually create music. But artists can choose to sell off their rights – and that makes royalties fair game for investors. In recent years, stars as famous as Skrillex and Bob Dylan have sold their rights.

The music industry went through a rough patch when piracy and digital media started eating into profits. But with the rise of streaming music platforms like Spotify and Apple Music, the industry is flourishing – and people aren’t going to stop listening to music any time soon.

Read on to learn the ins and outs of music royalty investing to find out how people are using it to diversify portfolios – and how it could affect your future as a musician.

What is a music royalty?

Before you decide whether to sell off or invest in music royalties, you need to have a solid understanding of what they are.When you hold copyright for a song, you get a royalty payment any time someone else uses your song. But the end user doesn’t pay the rights holder directly. Instead, royalties get filtered through third parties like publishers, distribution platforms and performing rights organizations (PROs) before landing in your bank account. There’s a lot more to the process, but that’s the gist you need to know to understand music royalty investments – when someone performs, reproduces or sells a piece of music, anyone who holds the copyright (usually performing artists and record labels) gets their cut.

How do music royalty investments work?

Before we get into the inner workings of royalty investments, let’s look at how these assets get on the market in the first place.

It all comes down to an artist’s desire for fast cash. Since payments have to get filtered through third parties, you can see why a recording artist, even one who’s as famous as Bob Dylan, might not want to wait for royalties to roll in. So to speed things up, they can sell their work to companies like the Hipgnosis Songs Fund and Primary Wave, which will then offer royalties to investors.

Why invest in music royalties?

Music royalties’ stability is one of the key reasons investors consider music royalties as an asset class worth considering. Because they’re not very dependent on other markets, music royalties aren’t easily nudged by the volatility you might see in other industries.

They also have recurring revenue potential. Music copyrights have a long shelf life, so royalties can provide an income stream that keeps on giving.

The qualities of music royalties as investments

So how do you figure out whether you want to get involved in this market? Here are three factors to consider when deciding whether to invest in a song or an album:

• Staying power: Big hits make a splash at first, but look for songs with staying power so you can reap the royalties for years to come.

• How the royalty functions: Learn how and when your royalties will pay out on different media and platforms (like streaming services, discs, digital downloads and the radio).

• Pricing and valuation: Set aside your personal music taste and look at the cold, hard facts. Read up on royalty income returns and follow the money.

Other ways to invest in music

Royalties aren’t the only shares for sale in the music business. You can also explore these options if you plan to invest in this market:

• Invest in public record labels and publishers: Record companies are going public, so jumping on IPOs may be a worthwhile investment strategy.

• Purchase music intellectual property (IP): Wondering how to buy a music catalog? You can purchase intellectual property directly from online marketplaces like Royalty Exchange.

FAQs

How do I get royalties for a song?

If you’re a recording artist wondering how to get royalties, the answer will depend on how you plan to distribute your music. If you want to get your tracks on streaming platforms, sign up to work with a distribution service, and they’ll collect royalties on your behalf. If you want to earn royalties off reproductions of your copyrighted work, register with a performing rights organization, and they’ll collect your royalties. You can also work with a music publishing company or record label – they’ll take a bigger role in managing your overall career, which includes making sure you get your cut of royalties.

How long do you earn royalties for a song?

If you’re an original copyright holder in the U.S., you’re entitled to royalties for the rest of your life (and your estate will keep getting your cut for 70 years after your death). The answer isn’t as cut and dry for investors, but working with a platform like the Royalty Exchange, for example, will allow you to earn for 35+ years. You could make royalties for much longer if the original copyright holder doesn’t reclaim their rights.

How do investors value music royalties?

Investors use a price/earnings ratio (also known as a “multiple”) to value music royalties, so get ready to do a bit of math. Take the current value of a royalty listed for auction and divide it by how much the song earned over the last year. The resulting figure is your multiple. Low multiples attract investors, and you’ll often see the final price increase when more investors participate in an auction.