The financial beneficiary of the deal was Round Hill Music, a two-year old music rights-focused private equity firm that owns the copyright to the Lennon-McCartney song. Round Hill recently completed an initial $50 million close with a target size of $200 million. The New York firm has acquired the publishing copyrights of more than 4,000 tunes, including "From Me to You" and five other Beatles standards. Round Hill this month announced the acquisition of three additional catalogues.
For Round Hill and concerns like it, placement of its songs in commercials and other visual media is an important but often-unpredictable aspect of its business called synchronization rights. Simply defined, sync rights license the music you hear in movies, television, commercials, video games and online video and include songs as well as snippets of incidental music. The term itself comes from the days when sound was a distinct track on a film and synchronized by a movie projector, explains lawyer and technologist Bob Kohn, whose book "Kohn on Music Licensing" is the definitive text on the subject.
Some define sync rights solely as a subset of publishing rights, or the copyrights associated with the underlying musical composition itself. However, general usage many times includes both the music and the recording of the song.
In a business wracked by uncertainty and change, sync rights remains something of a beacon. Not that it's easy sailing. The business is complex, fragmented, and an arena of intense deal activity, from startups to rollups to private equity, but it has held its own against technological disruption. It's also become a multibillion-dollar business that attracts well-heeled investors and startups alike. "There's a lot going on in the marketplace," says Bill Gorjance, the chief financial officer of publisher Peer Music.
Sync rights, say advocates, carry one huge advantage over many other aspects of recorded music: "There's not massive pirating," says Mark Frieser, the founder of a sync licensing-related startup called Disconic. "You're not going to have VW ripping off a song."
Sync rights stands in contrast to the larger recorded music industry's decade-long slide into discord and disarray. Last year, global revenue worldwide of recorded music -- both packaged and digital -- totaled $22.28 billion, according to estimates of research firm Strategy Analytics, about a 23% decline from 2007, the earliest year the firm compiled data. Go back to 2000 and the figure topped $37 billion, according to the International Federation of the Phonograph Industry, a worldwide trade association.
Despite a steady rise in paid digital downloads, recorded music remains unable to counter effectively the dominant consumption pattern, where free is the new normal. Even most high-profile digital music subscription services such as Spotify depend on a poorly disguised giveaway, with the awful portmanteau "freemium."
That said, music continues to offer profitable pockets that attract investor interest, including private equity, venture, corporate, even a few pension funds. Buying and selling publishing catalogues is one of the most active of these markets.
"There's music all around us and music publishers reap the benefit," says Josh Gruss, Round Hill's CEO. Whether broadcast on radio, performed in live concerts, blasted in mall lobbies or gently played in restaurants, music garners a small fee for whoever owns the copyright. "It's by far the highest quality part of the music business," he adds.
However, even investors disagree about what role sync rights play in the publishing equation. Historically, says Kohn, "It's been an afterthought." In recent years, he continues, "sync income has been a significant source of revenue for [some] catalogues, as much as half. Plus, it has a positive effect on the performance side."
How much importance to attach to sync rights affects acquisition multiples and prompts spirited debate. "It's gravy. If you get it, great. But you don't want to include it in forecasting," Gruss argues. "There's a lot of opportunity for upside [but] you should never be in the business buying just sync rights."
"They play a very important role in our valuation," counters Drew Tarlow, a partner with Pegasus Capital Advisors LP, a private equity fund that bought independent music publisher Spirit Music Group in 2009 for an undisclosed price. Since then, Spirit has been buying up catalogues, most notably that of The Who's Pete Townshend a year ago.
Even before acquiring a catalogue, says Tarlow, Spirit's marketing team works up a plan that tries to exploit opportunities more aggressively in licensing sync rights. That includes what he calls "non-traditional" usage, "opportunities not focused on 10 years ago."
He is quick to add, however, that this is no easy calculus. "The value can greatly differ based on characteristics of the particular copyright," including the number of owners and who they are.
Part of the trickiness of sync rights also stems from the phenomenon of repeat usage. Sometimes, a song can be used on multiple television shows, a film, as well as a major advertising campaign in the United States and others in European or Latin American countries. Other times, it gets used but once, then sits on the shelf for years. Still, says Tarlow, the use of a song in a television show or commercial can drive greater sales of the recorded music and performances. So a sync license potentially throws off indirect value to an asset.
He cites a deal Spirit fashioned with the Fox Network to feature Who songs for each game of the World Series. "The fee is great," he says, while declining to say just how great. "It's also audience building, which is really valuable for the catalogue."
Even more problematic is the fact that sync rights have no codified or even standardized rates. In the recorded music industry, laws mandate certain copyright rates. For example, "mechanical" rights refer to a song licensed for use on a recording, whether CD or digital download. For a recorded song of five minutes or less, the owner of the publishing copyright receives 9.1 cents per CD or paid digital download in the U.S. "Unlike audio-only recordings, where music publishing is subject to compulsory licenses, sync rights are fully negotiated," says Kohn. "It's whatever you can get."
True, there are some conventions. In the use of recorded music, fees are generally split 50-50 between those who wrote the song and those who recorded it. (In the trade, Kohn says, there's what is termed "most favored nation" treatment, where a publisher demands a share no smaller than the holder of the master recording and vice-versa.)
Given those complexities and wide ownership, sync licensing is a completely fragmented, disparate business. "No one has even 1% of the market," says John Williamson, co-founder and COO of the Chicago-based sync-rights shop Music Dealers.
That makes it a magnet for those who believe they have the smarts or the wherewithal to grab a bigger share. Or as Williamson says, "There's an opportunity to become the player."
Just how big that market is prompts spirited debate. Williamson maintains sync licensing in all its permutations totals between $7 billion and $8 billion worldwide. Frieser believes it's more like $2.5 billion to $3 billion.
Others maintain that it's impossible to gauge size. "It's very big. Whether it's two-and-a-half or 8 billion, I wouldn't have a clue," says Philip Moross, the CEO of the Cutting Edge Group, on the phone from London. Cutting Edge's divisions work various niches within film-related music and resultant sync-licensing. That includes film score financing, production studios, music supervision, a record label and publishing.
Because the sync universe has so many elements and no standardization, there's no real revenue model to extrapolate from. "We are working with two of the largest ad agencies in the world. They don't know how much they spend on music," Moross says. "It's totally ill-defined [although] it's becoming much more sophisticated." He emphasizes that the lack of definition propels various rollup efforts: "There's enough in it to create a very large business."
Competitors range from giants of the industry, like Universal Music Publishing, Sony/ATV Music Publishing and Warner/Chappell Music Inc., to small independent labels and independent music publishers. In addition, there are hundreds of specialty shops or music libraries with their own stables of songs and music. More are being added all the time.
"It's an extremely fractured business," says Dave Jordan, the head of music supervision and production house Format Entertainment. Los Angeles-based Jordan is best known for supervising the music for Marvel movie blockbusters including the Iron Man and Transformers franchises. "Just in terms of new libraries trying to introduce themselves to myself and my music supervisors, there are at least 10 a week. It's really extreme and it's very hard for upstarts."
That doesn't keep more from trying. "This marketplace is grossly inefficient," says Frieser, whose service aims, in his words, to "provide a better filtering and recommendation system" for independent music, their creators and those looking to license. Disconic will launch a beta version of its search engine by the end of the second quarter of this year, at which time it will begin seeking venture capital.
Frieser isn't alone. Other operations also boast search engines that filter requests and suggest mood-appropriate selections. It's a technology-heavy approach that can elicit skepticism from some in the industry. "Many have come and many have failed," notes Jordan.
The foundation of any sync rights operation is the control of the copyright. The acquisition of music publishers and the copyrights they hold has prompted major private equity investments, including the funds that created Round Hill and underwrote Spirit. The attraction, says Gruss, is that these assets throw off "very predictable, annuity-like returns."
The biggest play yet is the creation of BMG Rights Management, a 2009 joint venture between Kohlberg Kravis Roberts & Co. and German media giant Bertelsmann AG. BMG has since invested hundreds of millions of dollars into the acquisition of music publishing assets. That includes a total of more than $500 million for Bug Music, Chrysalis plc, and a part of the EMI catalogue that Sony/ATV acquired, but had to divest for antitrust considerations. BMG is now the fourth-largest music publisher in the world.
Cutting Edge is an investment pool centered on film music and related sync rights. In January, the London-based group announced it has raised a total of $100 million. Wood Creek Capital Management, Aberdeen Asset Management and Octopus Investments Ltd. provided the funding, which began in 2009 as an approximately $15 million fund called Resonant. Moross says there's even more money available if necessary. "If I go out to look to buy a much bigger business, I have investors to come in alongside me and co-invest," he says.
Most of what Cutting Edge does is underwrite film soundtracks, with the prospect of revenue generation after the movie has been released. Cutting Edge has so far helped finance the music in over 250 films. The company has penned ongoing million-dollar deals with individual studios and producers to finance soundtracks, although amounts invested in each soundtrack vary widely.
As Moross explains, Cutting Edge makes no money on an American release, but does get a share of the box office in the rest of the world. When movies come to television or DVD, the soundtracks get money as well. All that comes under what is termed performance royalties. "Our entire model is based on what we could earn on performance royalty. The synchronization, or secondary use, is pure cream," he says.
Moross talks up the advantages his company has in sync licensing. That includes placing music from Cutting Edge's music library in a new film. "You're working with the director and the producers from the very get-go," he says. That gives you unparalleled leverage, because you become part of the process right at the beginning."
Last month Cutting Edge announced its most prominent acquisition so far, the film score-related record label, Varése Sarabande, though no financial terms were disclosed.
Buying and selling labels is old hat. What differentiates the Varése Sarabande deal is how Cutting Edge hopes to exploit its new assets, in effect repurposing them through synchronization licensing. Moross calls this "secondary usage."
Take one Varése Sarabande album, the soundtrack from the award-winning movie, "The King's Speech." A snippet from that soundtrack was just sold for use in an American healthcare advertisement, Moross says.
While investors may debate the wisdom of basing revenue projections on sync rights, their prominence in music publishing is hard to argue. According to Gorjance, the relative strength of the sync rights market has become far more important for publishers over the past decade. Peer Music, which has been in business since 1928, is one of the world's largest truly independent music publishers. Its catalogue totals over 250,000 titles and includes everything from Buddy Holly to Bill Monroe, Charles Ives to Sindicato Argentino del Hip Hop.
While he wouldn't address his company's own catalogue, Gorjance says that sync rights now account for anywhere from 20% to 35% of total revenue, a figure other publishing executives agree is an accurate range.
However, Gorjance says, pricing pressures have forced down the price of a standard title used in sync licensing by 25% to 40% over the last two to three years. He attributes this decline to a combination of the lingering effects of the recession, a generational change in listening habits that doesn't put as much value on the soundtrack as well as various new vehicles that have sprung up and offer cheaper alternatives to established catalogues, often the music of unsigned bands who cede all control to the aggregators. "There's been tremendous pricing pressure," he says.
An emphasis on unknown music propels shops like Music Dealers. Its Chicago digs broadcast a barebones, almost performance-space vibe. Seemingly haphazard offices are strewn around an industrial, raw-concrete expanse and fronted by the type of raised bandstand you'd see in a country-and-western bar rather than a corporate headquarters.
The atmosphere is appropriate. The four-year-old company doesn't depend on tracks from major bands and songwriters, but on the product of large numbers of unsigned, independent musicians from around the world.
"We're injecting three to five thousand new songs a month," says Jonathan Shein-kop, a former portfolio manager who co-founded Music Dealers along with brother Eric and John Williamson. Music Dealers has attracted a total of $7.2 million in angel venture funding. Jonathan Sheinkop rattles off statistics: 20,000 artists and counting, 75 different countries, 12,000 placements in 2012.
He projects revenue this year of $7 million to $10 million, based on a 50% split with the artist and composer. He cites marquee successes like the use of Music Dealers talent Grayson Sanders in last year's Coca-Cola holiday campaign, the result of a partnership the company formed with The Coca-Cola Co. in 2011.
However, Music Dealers is far more dependent on less expensive, more modest projects.
"One of the best things that has happened in this industry is that budgets went down," says Eric Sheinkop.
Negotiations determine how much an individual song makes through sync licensing. Kohn, who now heads RoyaltyShare Inc., a provider of enterprise software and technology to the music industry, believes there's even less standardization than in years past.
At the top end, advertisers such as Mercedes Benz and watchmaker Omega have paid the Rolling Stones anywhere from $300,000 to $500,000 for "Sympathy for the Devil" and "Start Me Up," those in the industry estimate.
Yet for every Mick Jagger and Keith Richards, there are thousands of struggling songwriters willing to sign for just about anything so they can be heard. They may make deals that bring a few hundred dollars to their barren bank accounts.
Even big-budget movies don't necessarily license with abandon. "If there's a juke box playing in the background, do you want to spend $300,000 for a Rolling Stones song or $2,500 on something that gives you the impression it's the Rolling Stones?" asks Jordan. The answer, he says, is obvious.
Film, television, movie trailers, video games all rely not only on tunes but on snippets of production music. These musical moments go by another anachronistic term, "needle drops," from the days when tracks were compiled on vinyl. Depending on usage, these tracks are licensed for a few hundred dollars each. Some studios and networks have licensing deals with certain production houses that allow blanket use.
During the past decade, a huge consolidation wave swept through the industry. Big music production houses, usually owned by major publishers, began rolling up smaller ones. In the past five years, Warner/Chappell acquired first Non Stop Music, then 615 Music, Groove Addicts Production Music Library and Carlin Recorded Music Library.
That kind of consolidation will continue, believes Ron Mendelsohn, the CEO and president of music production house Megatrax. "We're one of the few still-standing independents."
Then there's Rumblefish Inc., which calls itself the "iTunes for soundtracks." While the company licenses music for advertising and television, its model is geared toward low-budget, Web applications like putting music on a YouTube video. Rumblefish's own maw of a catalogue now contains more than a million precleared musical tracks and is adding tens of thousands more each week, says Paul Anthony, the company's CEO and founder.
Based in Portland, Oregon, Rumblefish licenses a whopping 20,000 tracks a day, but the typical transaction is a piece of background music that costs $1.99 to license on a do-it-yourself video. "This is a very nascent market," says Anthony. "We're building the infrastructure."
Anthony is a film composer and musician himself who says that during one period in his life he was fired from straight jobs because he would drop everything to play a gig. He founded Rumblefish in 2002. It took years to gain traction, with a licensing store launched in 2006 and a licensing deal with YouTube two years later. "My vision of what is happening now was way too early," he says.
Operations like Rumblefish and Music Dealers have no trouble signing up musicians and songwriters, even those with visions of million-dollar paychecks dancing in their in the heads. Legendary stories abound of sudden fame and major recording contracts sprouting on the back of the closing credits of "Gossip Girl" or "Grey's Anatomy," known for their edgy soundtracks.
Occasionally, a song hits the jackpot. Since its 2010 release, The Black Keys' "Tighten Up," for example, has been used in a Subaru commercial, the soundtrack to the movie "I Am Number Four," the trailer to the film "Bad Teacher," an episode of "Gossip Girl" and a soccer video game.
But like everything else in media, the odds of wild success are monumentally large. Those in the business caution against basing a business model on the possibility of a song being picked up by a television show or movie. "You've vying against a thousand competitors. Everyone thinks they have the perfect song for 'Grey's Anatomy,' I mean everybody," says Jordan, whose shop has worked on music for numerous television shows. "It's like saying you're an actor so you should be on 'Breaking Bad.' That just isn't how it happens."
Finally, who owns -- or claims to own -- the rights to a particular song is far and away the most vexing issue in the field. "The universe of sync rights is everyone and no one," notes Frieser.
The lyricist of a particular song may have a deal with one publishing company, the composer of the music with another. Both may have sold most of the copyright, but held onto a small piece. At the same time, the guitar player may be claiming partial ownership based on a riff he played in the bridge. Or, a defunct group may have originally held the copyright as a band and members have spent the last 20 years fighting over who really created its only hit.
"You can pick the perfect song, but if you can't clear it, you'll never get hired again," says Jordan. "Probably 30% of the work I do every year is from people who were fired and I was hired to clean it up."
John E. Sorkin joined Ropes & Gray LLP's mergers and acquisitions practice as a partner in New York. For other updates launch today's Movers & shakers slideshow.
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