Our Purpose and Business Model
Hipgnosis was created to give the investment community access to extraordinarily successful hit Songs by culturally important artists and to establish Songs as an uncorrelated asset class with attractive returns.
Our ulterior motive is to use the importance of our unparalleled Catalogue and our financial clout as influence to improve the Songwriter’s position in the economic equation.
Our Business Model
The key characteristics of the Hipgnosis business model are:
- Sustainable earnings, uncorrelated to global capital markets, with sources of income from across the spectrum of music consumption patterns made up of millions of microtransactions such as streaming, physical purchase, downloading, synchronisation, performance, licensing and merchandising.
- A durable and diversified portfolio of high-quality assets founded on the copyright security – 70 years after the death of the last co-composer – of works across a broad range of genres, vintages and geographies of consumer markets. On average our Songs have more than 100 years of copyright protected revenue.
- The benefits of scale on diversification; giving smoother income the larger the fund gets; and the opportunity to drive incremental equity yield over the contracted period through active management and appropriate outsourcing of administration.
- Exposure to structural growth themes in relation to:i) the penetration of technology into everyday life;ii) the growing value of entertainment markets; and iii) the recognition of the real asset value of intellectual property rights.
For our principal risks and uncertainties see our latest Annual Report in Results Centre.
The Income Stream for Copyright Owners
Every Song has two copyrights: Composition (lyrics & melody), held by the Songwriter and Sound Recording (the sound heard), held by those involved in the recording of the Song. Royalties stemming from the Composition Copyright are referred to as Publishing Rights (aka Songwriter Rights). Hipgnosis Songs Fund focuses primarily on acquiring these, but owns selective Sound Recording Rights as well.
The diagram shows the flows to Hipgnosis Songs Fund from its ownership of its Copyrights.
These are rights in a musical composition (lyrics and/or music) and generate Mechanical and Performance Royalties. In the UK, “blanket licences” are issued to organisations including radio and TV.
These are triggered when a copy of a Song is made, whether physical (e.g. CDs, DVDs) or digital (e.g. permanent downloads, streaming, webcast). The Streaming of a Song is a hybrid: a temporary copy is made, so it generates a Mechanical Royalty, but it is also treated as a public performance of that Song, generating a Performance Royalty.
These royalties largely come from live performances and licences taken out by shops, restaurants, clubs and bars etc to publicly perform or broadcast a Song.
Sound Recording Rights
Master (Recording) Royalties
These (aka Recording Royalties) are generated on behalf of a sound/master recording. This is the most basic royalty performing artists and labels earn when their master recording is downloaded, physically bought, or streamed.
These (aka Related Rights) are public performance royalties due to the sound recording copyright holder. One has to distinguish between terrestrial broadcast platforms (like radio, TV, and venues) and digital platforms (like Internet and satellite radio) because not every country, notably the US, recognises or pays terrestrial neighbouring rights.
These are generated when a visual image (e.g. TV, film, advertising or video games) is matched to a Song.
There are multiple channels through which royalties are collected. These are depicted by the arrows in the diagram above.
Our sources of advantage
Our Purpose is to achieve great risk-adjusted returns for Shareholders as well as to use your Company’s influence (and the countless great Songs owned) to achieve an ulterior motive: improve the Songwriter’s undervalued position in the economic equation of the music industry.
1. Access and Culture of our Investment Adviser
- Our Investment Adviser has the relationships, reputation and expertise in the industry to be an advocate and catalyst for improving the Songwriters’ share of income and where they sit in the economic equation.
- This also enables our team to overcome the high barriers to entry in relation to the acquisition and active management of Catalogues.
- We are Song Managers; when compared to the major publishing houses, we are viewed as a safer alternative custodian who can protect the meaning and secure the financial future of the creator’s Songs, and address the structural imbalance between payments on recorded music and payments to the Songwriters.
- We have created an Advisory Board, assembled from leading music industry figures, who we believe are well placed to advise on any given Song’s potential market, reach and popularity.
- Our team’s extensive experience across a broad spectrum of music genres, together with its relationships with Songwriters and recording artists in the music industry, means it is well-positioned to continue to source opportunities for us to invest in a diverse range of attractive Catalogues and then assist us in maximising earnings from them.
- We are positioned as an attractive potential purchaser of Catalogues from Songwriters and other owners of music intellectual property rights who are protective of their legacy and selective about whom they are willing to sell to. We have made our reputation by working with Songwriters, artists and producers, not at their expense.
- Our culture is focused on long lasting relationships, excellence delivered with integrity and world-class leadership backed by extensive industry knowledge that will help create a Songwriter community rapport and a diverse, innovative, multi-cultured portfolio of song assets, with a strong emphasis on the great works of the African-American Songwriting Community.
- Technology has changed music consumption.
- The monetisation of music has improved.
- The revenue pie has grown dramatically – the IFPI reports that there were 589 million global users of subscription Streaming services at the end of 2022, compared to 68 million global subscribers in 2015.
- Music is now a utility purchase rather than discretionary or a luxury spend in many established global economies.
- High exposure to Streaming and low exposure to live music, allowing us to tailor our portfolio to fit the new requirements of popular culture and media, including playlists, social and virtual reality platforms.
3. Active Management
- Our Investment Adviser has an extensive network of relationships with broadcasting networks, TV studios and advertising agencies to create Synchronisation opportunities for the Company and enable it to increase its income. Having a diversified Portfolio of Songs enables the Company to capitalise on multiple Synch opportunities.
- Our Investment Adviser’s expertise results in us being well-positioned to manage the Songs we own successfully, increasing royalty collection, improving the speed and accuracy of collection of royalty income, and improving Synch placement of the Songs.
- Our Investment Adviser’s team is specifically structured to have the bandwidth that allows us to Song Manage in order to extract incremental revenue with a focus on a smaller number of
songs per Executive than the publishing majors.
4. Efficiencies In collection
- We work to bring efficiencies via faster and more transparent collection of micro-payments via our preferred administrators.
- A key part of our strategy is to reduce and eliminate administration costs and ensure that payments due are received as quickly as possible.
- The Company continues to revert and renegotiate administration rates on Catalogues to our preferred administrators at the earliest possible opportunity (unless there are compelling reasons to partner with existing administrators) and continually looks for the best solution.
- The Company continues to move the administration for the US component of our Catalogues to HSG.
- The Investment Adviser and the Directors acknowldge that HSG can provide US administration cheaper than a third-party administrator, generating administration cost savings of approximately 1.0-1.5% of royalty income administered.
- Likewise, outside the US, we proactively manage our options to ensure the administration of our Catalogues is carried out as efficiently and cost-effectively as possible.
- The Company has also entered into a direct licensing and administration partnership with Sacem, a world-leading Collective Management Organisation (CMO), to collect digital rights for the Writers’ Share and the Company’s own Publisher Share, primarily in the UK and the European Union, as well as entering into a sub-publishing partnership with peermusic to collect publishing rights and other royalties in the rest of the world, excluding the US.