Slicing The Royalty Pie

After learning what music copyrights are, the next crucial step is to understand how the money they generate is divided. In this episode, host Josh Gilliland uses a tangible, real-world analogy to break down the two main "royalty pies"—the Songwriter Pie and the Master Pie.

You will learn:

• How earnings are typically split between publishers, writers, labels, and performers.
• The critical difference in valuation between a "10-Year Term" and a "Life of Rights" deal.
• The most important lesson for a royalty investor: why you must master the art of valuing the "slice," not the whole pie.

Resources Mentioned: Download your free Advanced Investment Calculator: https://www.jgsoundofmoney.com/calculator

Pre-Order the Book! The official companion to this podcast, JG Sound of Money: A Modern Investor's Guide to Unlocking Music Royalty Investing, is now available for pre-order on Amazon. Reserve your copy today: https://a.co/d/7132rZv

Next week on JG Sound of Money: Now that you know what the asset is and how the money is split, where do you actually go to get your slice? We'll explore the three primary paths to investing.

Transcript

Welcome back to the JG Sound of Money. This is your host, Josh Gilland. Last week we learned, the foundational concept of the two copyrights, which is the composition. You can think of that as the blueprint for a song, and then the sound recording, which you can think of that as like the finished building in our analogy from last week.

So now that we know what these two assets are, the next crucial step is to understand. How the money they generate is divided. So we're going to answer the question. If a song is a pie, what piece are you actually getting today? We're slicing the royalty pie. Okay. To really understand how royalties are divided.

We're going to create a fictional hit song to see exactly how the money flows for that [00:01:00] song. So let's imagine, I know last week we did a squeegee, the fat squirrel. So let's keep the absurdity going, and then this week we will focus on a banger of a song called Royalty Pie. Now, ironically, this song.

About the men's meat pies served at Buckingham Palace. Not music royalties, just coincidentally on a music royalty podcast. So to create this hit, there were two separate. By the way, if you don't like dad jokes, you're probably not gonna like this podcast. Anyway, to create this hit, there were two separate groups of creators, which means we have two separate pies of money.

So just picture. In the book, I draw this out when diagrams, but just picture two full pies. We have, one of the pies is the songwriter pie. So this is the pie that is comprised of all of the songwriter [00:02:00] assets that come from the composition. And then we have another pie called the master pie. This comes from the song recording.

Now, again, we touched on all of this last week, so if you ever listen to that episode, definitely go back and give that a listen, and then you'll understand more about what those two are. All right, let's start with the songwriter pie. So we have this songwriter pie in front of us is a full pie. The music and the lyrics for royalty pie were written by two very talented songwriters.

Penny Wrights and Melvin Mel od they work for a company called Syncopate Publishing. All right, so we have two writers and they work for a company. In a typical deal like that, the earnings for the composition are split 50 50 between the publisher and the writers. So in this situation, in this example, hypothetical example, [00:03:00] syncopate Publishing gets 50%.

Of that pie of the songwriter pie, while Penny and Mel each get 25%. So let's say in hypothetically in the last year, the songwriter Pie earned an even thousand dollars easy math. So this means that Syncopate Publishing received $500 worth of royalties from their ownership of the songwriter pie. Penny, right?

She got $250 and then Mel od he also got $250. Simple enough, right? Okay. Now let's take a look at the master pie. So this song, although it was written by Penny and Mel, the song was actually recorded by a popular three piece band called Static Bloom, and they're signed to a record label called Apex [00:04:00] Audio.

So we have a three piece band, static Bloom, who recorded the song and they work for a label Apex Audio. All right, so the earnings for the master recording follow a very similar 50 50 split. So 50% here goes to the label, apex Audio, and then the other 50% goes to the performers. So if the Master Pie has also earned a thousand dollars.

Then Apex Audio gets $500 of that, and then the other $500 is split equally between the three members of Static Bloom. Let's say that their names are Jackson Rider, Ricky Sticks, and Fender Jones. So each one of them in Static Bloom, they get around $167. So hopefully that makes sense. A thousand dollars split in half.

Half goes to Apex [00:05:00] Audio. So they get 500. The other 500 or the other half gets divided three ways for the three members of the three Ps band called Static Blue who recorded the song. Okay, so everyone is getting their fair slice. But here's where it gets interesting for us as investors. So creators and companies, they can sell their slice of future income and get a whoop sum of cash.

Now, so let's say the song's released Royalty Pie is out there. Five years go by and Penny Wright, who was one of the performers, I'm sorry, one of the writers on the song, she decides to sell. The rights to her royalty stream for the next 10 years. So remember, she owns 25% of the songwriter pie, which was earning $250 a year.[00:06:00] 

So as an investor, and let's say she's going to, she's going to sell the rights for this for the next 10 years. So as an investor, looking at this 10 year term deal. I know this asset will expire and be worth nothing in 10 years. 'cause I'm only purchasing the rights to the royalty streams for 10 years. So my purchase price has to be low enough to ensure I get all of my money back plus a profit within that window.

I might only be willing to pay. 4.4 XA 4.4 x multiple on its earnings or around, let's say, $1,100 for that slice. But now let's look at a different deal. The record label, apex Audio, they decide to sell 40% of their share. For the [00:07:00] Life of Rights. So they're trying to raise capital for their next big hit.

So they need, an infusion of cash now. So they sell off 40% of their share of Royalty Pie for the life. For the life of rights. Their total share was earning $500 a year. So the slice for sale is earning $200 per year, so they're selling off 40% of their share. So 40% of 500 is $200. So for Life of Rights asset, I'm as an investor, I'm willing to pay a much higher multiple because the income stream doesn't expire.

It's a piece of property that I can sell in the future. , And for this slice, I'm may, hypothetically, I may pay seven X multiple or around $1,400. You'll typically see life of Rights deals trade for a [00:08:00] much higher multiple than one with a defined term of 10 years per se. So with this, you, maybe you see those for life of rights in, the eight, eight x to up to 15 x range.

While a 10 year deal is gonna trade much lower in like that, three x to six x range. So this brings us to the most important lesson of this episode. Your task as an investor is to master the art of valuing the slice, not the whole pie. The financial data you see in a listing is only for the specific share being sold.

You do not care about the entire royalty pie. That song earned $2,000. You don't care about that. You only care about the earnings and the stability of the specific [00:09:00] slice you are looking to purchase. So to make this crystal clear, imagine you could buy. 0.01% of a global superstar's brand new hit that tiny slice might earn you an impressive a hundred dollars in its first year.

But because it's a new hit, it'll hit a steep decay curve and that income might plummet to just $50 in the next year. Now, imagine you could instead buy 50% of a stable older catalog from a niche jazz artist as an example. The entire catalog only earns $4,000 a year. So it's not the massive hit that you're buying a tiny slice of, but this is a catalog that the entire catalog's earning $4,000 a year, meaning that your slice is much greater because you own 50% of it.

So you're earning $2,000 a year because it's stable. It's, [00:10:00] it, its earnings might only decay 5% in the second year. Providing you with still substantial $1,900. So the superstar investment seems glamorous. I wanna own 0.1% of from the blank with mega superstars catalog. But the niche asset provides a much larger, more stable and more predictable income stream.

So as you're doing your analysis, as you find catalogs that you are interested in purchasing. I can't encourage you enough to never be blinded by big names. Focus on the quality of the data and the size of your slice, not the brand name of the artist behind it. So hopefully this helps. Again, all of this is outlined with visuals in, in my book, the Sound of Money.

So please check that out. The key [00:11:00] takeaway is to always focus on the earnings and the stability of the specific slice you are looking to purchase, not the glamor of the song's. Total earnings. Now that you understand what royalties are and how they are divided, you're ready to find them. Next week, we will explore the three primary paths.

You can take to start investing in music royalties. Don't forget to download the free Advance investment calculator at JG sound of money.com/calculator. Again, JG sound of money.com/calculator. Thank you for tuning in to the JG Sound of Money. Please subscribe and leave a review if you're finding this valuable, and we'll see you next week.