With PJ Miklus, VP Investor Relations at Royalty Exchange
Steve speaks with PJ Miklus, Vice President Investor Relations at Royalty Exchange.
Royalty Exchange specializes in royalties, a new type of alternative investment that’s different from the stocks and bonds that most of us are familiar with. The return on this investment comes from royalties that artists, such as musicians, receive from their endeavors. So, if you love music or are an artist yourself, this is for you.
Royalties are basically cash flows from the consumption of works you create, such as through song sales, streaming, digital downloads, and licensing. Every time a song is played on the radio or at a grocery store, its royalty rights holders get a small payment, and the more it’s played, the more it earns.
Rights holders could include recording artists, the music composer, the recording studio, the music label, the manager of the band, backup singers, etc.
Rebound In The Music Industry
Over the years, the music business has evolved from platinum-selling records and CDs to a phase from 1999–2014 when services such as Napster and iTunes and online piracy led to a 40% slump in music industry profits.
Later, in 2015, the industry rebounded with the growth of streaming and digital downloads as music enthusiasts flocked to sites like Spotify and paid $10 to $15 per month for membership.
Early indications suggest this growth will continue, with streaming subscriptions on smartphones projected to grow well beyond their current market share of 3% of all global smartphones in the world today. So, investing in music royalties now could give an investor access in the early stages of a bull market in paid music consumption.
Royalty Rights For Average Investors
Royalty Exchange offers two avenues for investing in royalties. The first is through direct ownership of a royalty through an auction bidding process on the company’s online exchange. For instance, a Busta Rhymes and Mariah Carey song, “I Know What You Want”, just sold for $36,500 on Royalty Exchange, 8 times its current annual royalty.
The other avenue is to buy shares in Royalty Flow, which in turn acquires and holds premium royalty assets. With this avenue, investors can size and time their entry and exit and have greater liquidity than if they owned the royalty outright.
Valuing A Royalty Investment
While buying into royalties could be a way to diversify your portfolio, it’s important to know how to value the royalty stream that you’re buying into. Much like a stock, the value of a royalty stream depends on future cash flows, which could rise nicely or fall to zero. And much like investments in an oil well, your early royalty cash flows represent a return of invested capital.
Once you get your capital back, your real returns kick in. So, if you’re investing in a particular artist, you need to assess how long and to what extent people would play/download/stream the song—with royalties paid for the life of the last surviving artist that created the song plus 70 years.
If you have a good ear for music or other creative royalty streams and have insights into its longevity, consider investing in royalty rights. But bear in mind that audience tastes are fickle and could turn on a dime or on negative news of the artist (such as Bill Crosby), therefore potentially putting a halt to your royalty stream. Royalty rights are a new and unproven asset class. They are not for everyone and involve a high degree of risk. If you do venture into this new alternative asset, proceed with caution, and invest no more than about 5% of your portfolio until you have a better handle on how this works.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: So, there is a new type investment available to all, and it’s of a type which we in the investment business call alternative assets. These are investments that are different from stocks and bonds that most of us are used to dealing in. The added feature of what we’re going to talk about is that the return on this investment comes from the royalties musicians receive from their artistic endeavors. So, if you love music or are an artist yourself, listen up. This stuff is important to know, and I think you’ll enjoy hearing about it. Just a caveat before we get started, and before I introduce my guest. With any investment that we discuss, understand that I’m presenting the material to you without recommendation. I don’t have an opinion on the merits of the investment we’re about to discuss. So, use your better judgment, do your own homework before committing any amount of money. With that said, let me introduce PJ Miklus, who leads the investor relations effort at Royalty Exchange. Welcome to the show, PJ.
PJ Miklus: Thanks so much, Steve. Pleasure to be here.
Steve Pomeranz: What is Royalty Exchange?
PJ Miklus: It’s an online marketplace for buying and selling royalties. Our mission is basically to make quality, intellectual property in the media based arena investible. We’ve, of course, focused on music royalties to start, but we’ve certainly had transactions on the exchange in publishing, video, a number of different arenas. It can certainly be applied, the model that we have can be applied to television, movies. It’s just a matter of, I guess, getting into those arenas as well.
Steve Pomeranz: Yeah. So, intellectual property, per se.
PJ Miklus: Yes.
Steve Pomeranz: Okay. IP, intellectual property. So, when you talk about royalties … yeah, so I think we all kind of know that if you’re with The Eagles or something like that, that you’d get money every time a song was played. Maybe if you’re a writer, you’d get another kind of money, if you’re a producer, and so on and so forth. That money that they would receive, those are what are called royalties. Am I correct?
PJ Miklus: Yeah. That’s exactly right. Royalties are basically how the money flows in the music industry. So, artists and rights holders, they don’t really get salaries associated with the music that they produce. It’s more based on the consumption, whether it be through sales, streaming, digital downloads, licensing. Royalties are basically a cut off the top. So, it brings, if you’re an investor or a rights holder, for example, it brings them to the top of the value chain, so where they get a payment based on whether it be every use or a percentage of every use. It’s really interesting on the investing side.
Steve Pomeranz: Yeah. I saw an interview you did with CNBC, and they played … I guess they played some music prior to the interview, and you mentioned, or the person who was interviewed mentioned, well, they were asked, “Are you going to get paid by us playing this song at the beginning of the show?” And the guy goes, “Yeah, right. So, play it again at the end please.”
PJ Miklus: Yeah. That’s exactly right. I mean, whether it be from sales or streaming, even use in restaurants, bars, concert venues, rights holders are paid on all of those types of plays in some way.
Steve Pomeranz: Yeah. I guess if you think about walking through a supermarket and hearing that music that is there to create an ambience, you’re not actually directly listening to it. But, all that music, it pays royalties to the rights holder. Now, what is the definition of a rights holder?
PJ Miklus: Sure. The ecosystem of rights holders is huge. When you look at a given song or a given catalog of songs, there’s not just one rights holder. It’s not just the artist and/or the writer. There’s quite a few other rights holders that are associated. It could be the recording studio got some royalties in exchange for their services. It could be the manager of the band. It could be backup singers, other guests on the song or the recording. There’s a number of different entities that are going to control and hold the rights for a given recording, or a given composition.
That’s one of the major things that we’re focused on educating people about, is that it’s not just … For the example… Royalty Flow is a company that we’re IPO’ing that’s going to acquire and hold premium multimillion dollar royalty assets, the first asset of which is that of Eminem, the rapper.
Steve Pomeranz: Right. Congratulations on that, by the way.
PJ Miklus: A lot of people just assume that we bought those royalties from Eminem, whereas we actually bought them from the production team that discovered and developed him in his early years and worked with him on his early recordings.
Steve Pomeranz: I see. Wow. Interesting. There was an article about a woman who had written songs, was a writer, and she was getting about $2000 a year from the royalties. Not very much. Through the auction, or the exchange, they cut her a check for $20,000, which was basically 10 years of this flow of rights right up front. It’s a very interesting thing.
Let’s talk about the music business and all this streaming, and really the destruction of the cash flow model of the music business for so many years. Remember we had CDs, we had records, we had tapes, and now with streaming, that all went away. Really, I think artists were getting the short end of the stick. Explain how that, if it has, explain how that has changed now.
PJ Miklus: Yeah, of course. I think you’re referencing that a lot of different institutional investment firms and banks, like Goldman Sachs, have come out with research reports talking about where the music industry has come from, where it is today, and where it’s going. We’re certainly on the same page as a lot of those. So, basically, in the years started 1999 till about 2014, there was a pretty extreme bear market in the music industry. It started, of course, with Napster and piracy, also disaggregation, the ability to buy songs for $1 on say Apple iTunes vs. having to buy a whole album.
Steve Pomeranz: Yeah.
PJ Miklus: That 15-year period saw the music industry revenues decrease by about 40%. Now, we’ve hit this inflection point in 2014 to 2015, where the growth of streaming and the growth of digital downloads has not just overcome the losses that you’ve seen there, but it’s actually really led to a tremendous rebound in the industry to now, where you’re seeing double-digit growth year over year, based on the fact that just more and more people are streaming based on the ease of accessing the catalogs and the songs that they want to access.
So, you’ve seen people, whether it be with Spotify or other entities, they’re paying $10 to $15 per month for membership and just access to those entire catalogs of songs. One interesting stat that, in my conversations with investors, that always seems to kind of stand out for them, is that of all global smartphones in the world today, only 3% have streaming subscriptions associated with them. So, there’s certainly been some growth there, but there’s still plenty of room left for growth. I think investing in music royalties at this time gives an investor access in the early stages of a bull market and direct access to the growth in the music industry because you see a lot of these royalty streams growing in revenue at this time.
Steve Pomeranz: Okay. So, let’s take the point of view of the investor now. What is the least amount someone can invest in a lot of these?
PJ Miklus: Sure. At Royalty Exchange, we actually have two avenues for investing in royalties right now. You could do so through direct ownership of a royalty, and the way that we provide access to that is through our exchange. It’s an auction platform. There’s, of course, bidding associated with it, the highest bidder wins. That’s, of course, a one-to-one transaction.
Just yesterday, we had a transaction that … it was Busta Rhymes and Mariah Carey’s song, “I Know What You Want”. It went for just about an eight-times multiple. The price of that was about $36,500 was the winning bid. That can be restrictive for an investor because they have to, of course, win the auction to get access to a direct music royalty.
There’s also Royalty Flow, which is actually in its IPO fundraise period right now. That’s what I referenced before, with the Eminem asset being the first asset, the anchor asset. What we’re doing is we’re IPO’ing a company called Royalty Flow that’s going to acquire and hold premium royalty assets. What’s interesting about that is that investors can size and time their entry and exit. They can decide how much they want to invest at a given time. Then, of course, they have liquidity on the back end because this will within a couple of months, we intend to list publicly on the Nasdaq capital market, so it will be a publicly-traded stock that will be the first of its kind granting direct access to premium music royalty assets.
Steve Pomeranz: So, there’s two ways to buy in this pending IPO, and that is you can contact Royalty Exchange and invest pre IPO … am I understanding this? Or, when it does go IPO and becomes public, of course, you can sell. Or, as a buyer, now it’s publicly traded, you can kind of determine what price you want to pay based on the projected revenue stream, and then kind of figure out your own rate of return and invest. Did I get that right?
PJ Miklus: Yeah, that’s exactly right. The minimum to invest pre-IPO is $2250 at $7.50 a share. That would get an investor 300 shares. We’ve seen a ton of interest there. We’ve actually just formed an agreement with an investment bank based in New York that’s going to lead the rest of the fundraise through March. That investment bank is called Maxim Group, and you can certainly reach out to us for more information on investing pre IPO. But, of course, investors can wait for after the IPO, when Royalty Flow is actually trading and invest any dollar amount that they’d like.
Steve Pomeranz: Got it. Got it. Very interesting. The website address is?
PJ Miklus: Investors can find more information on Royaltyexchange.com. There’s a link at the top of the page that says IPO, that they can click on and access everything from there.
Steve Pomeranz: My guest is PJ Miklus. He is with Royalty Exchange, and we’re talking about this new way of investing. It’s kind of alternative investments. It has its own risks and possible rewards. Again, as I said, in the top of the show, make sure that you do your homework well, and do not invest a dime until you are absolutely sure you understand what the risks are and you’ve become very familiar with what they’re doing here. All right. So, does a larger investor get any benefits over a small investor in this IPO?
PJ Miklus: At this time, everybody has the same type of access and entry point. It’s common shares that are available. Of course, I think a large investor probably has a pretty diverse pool of investments that they’re allocating towards, so this, of course, can provide a diversification benefit in terms of the income produced. But also the fact that you don’t really see these assets performing with much correlation to stocks, bonds, or commodities.
Our business model is based on proving and giving education around the fact that royalties are an asset class, and they can be considered an alternative investment, but they’re arguably actually one of the purest alternative investments available. Because, as you know, alternative investments, by definition, have low correlation to traditional indices.
Steve Pomeranz: Yeah. Yeah. So, let’s talk about the nature of royalty income streams. When you buy a bond, you get a stated rate of interest, and then at some point in the future, at maturity, you get your money back. But, a royalty stream really isn’t that. If you put in $10,000 and you’re going to get $1,000, let’s say a year, as an example, it’s not as if some time in the future you’re going to get your $10,000 back like a bond. So, now you have to kind of calculate what your rate of return is because, in a sense, the first 10 years could be, in a sense, a return of your capital, and then you have to kind of figure out how long do you think the rest of these royalties are going to last. Kind of like an oil well, you know? You invest in an oil well, and it produces oil, and a lot of that initial money coming out of the ground is really your return of principal, and when that’s finally done, then you get … if the oil well continues to produce, or the royalties continue to come, that’s when your real return starts. Then, when you’re all said and done, 20 years in the future, in this example, or something, you calculate it all, and you figure out what your rate of return was. So, my question is, when you’re investing in a particular artist, how long can we really expect these income streams to continue? How do you figure that stuff out?
PJ Miklus: Sure. I’m glad you asked that question. They’re actually paid, royalties are paid, for the life of the last surviving artist that created a song, plus 70 years.
Steve Pomeranz: Wow.
PJ Miklus: If you find an asset, or a royalty, that has a consistent stream of earnings coming from it … we, of course, provide all the financials that we can on any asset that goes onto our exchange and that we’re putting into Royalty Flow, of course. If you can find an asset that has a good amount of sustainability and a long track record, that, of course, is extremely attractive for investors, especially with the situation that we’re at in the music industry right now, where music royalty revenue streams are actually growing. There’s obviously a good likelihood that those returns can continue and potentially grow over time.
So, royalties are different artist to artist, catalog to catalog, song to song. But, if you can see a consistent history of track record, that could give you, hopefully, some good indication of what the future may look like. Like I said, this is a very interesting time because you are seeing a lot of these revenue streams growing as more and more people are starting to stream and download songs digitally.
Steve Pomeranz: I agree.
PJ Miklus: There’s a lot more transparency there as well. There’s a lot more data. We can look at the amount of downloads or streams or plays, down to the single play level. That provides us better windows with the value of an asset and the predictability of an asset’s returns going forward.
Steve Pomeranz: Yeah.
PJ Miklus: So, it’s a really interesting time, and the data’s really only getting better.
Steve Pomeranz: Wow. A very interesting new topic, maybe a new opportunity. My guest, PJ Miklus, from Royalty Exchange. Don’t forget, to listen to this full show, get a summary of everything that we’ve discussed here today, go to our website, which is stevepomeranz.com. While you’re there, don’t forget to sign up for our weekly update where we’ll send you an email with every single segment, separated out, with a summary, with a transcript, so you can hear us, read us, and pick and choose us, or you can listen to the whole show. And, of course, there’s a place for you to contact us because we love your letters.
I want to thank PJ Miklus from the Royalty Exchange for him joining us today. Hey, thank you, PJ.
PJ Miklus: Thank you very much, Steve.