The audiovisual market, formerly dominated by record labels and producers and, more recently, also by streaming, has drawn the attention of institutional investors, generally focused on other sectors and segments. The predictability of royalties and revenue flow has attracted alternative asset investment firms and even traditional private equity firms, such as KKR, Pimco and Blackstone. In partnership with expert consultants, these players seek a range of intellectual property assets, including music catalogs, books, movies and even video games to add to their portfolios.[1]
In case of music catalogues, singers and other copyright owners see several benefits and opportunities in these operations. For example, some seek to remake revenue stemming from the cancellation of shows during the pandemic years, while others intend to structure the transmission of their already consolidated assets and avoid disputes between heirs.
The frenzy for copyright investments should be no different in Brazil. The Brazilian recording industry, which already had annual revenues worth more than US$ 1 billion in the 1990s, has been recovering and remains the largest recording production in Latin America.[2]
According to a report by the International Federation of the Phonographic Industry (IFPI), income from music produced in Brazil increased by 24.5% in 2020 alone – with a total of US$ 306.4 million generated. There was a significant growth in the reproduction of songs on streaming in the region.[3]
In Brazil, the copyrights of lyrics and songs is protected by Law 9,610/98, which guarantees the author moral and property rights over his/her creations. Moral rights are personal and inalienable, while property rights may be licensed or disposed of to third parties, not unlike other forms of ownership. Legal protection is granted automatically, from the moment of creation of the protected work, and is independent of registration in a public agency.
For the exploitation of such rights and in order to receive royalties and other revenues, in addition to the possibility of licensing or assignment of copyright directly by the author or the new rightholder (for example, a record label that acquired the artist's property rights), it is market practice to link the artist or rightholder to a collective management association and the registration of his repertoire in that association.
Collective management associations act as agents of a group of artists and are centralized in the Central Office of Collection and Distribution (Ecad). Ecad is the main actor in collective copyright management, in charge of managing the payment of royalties. Users (such as streaming platforms, radio and TV stations, marketing producers, among others) report the execution of songs on their communication channels and make the respective payments to Ecad monthly, in case of continuous use, or eventual, as shows and events take place. Ecad, in turn, distributes the payments between authors, interpreters, record companies and other parties that have property rights over the work.
In the case of streaming platforms (currently the largest players in the market),[4] Ecad has specific contracts with them[5] whereby the platform undertakes to send Ecad a report detailing the songs played by its users. Such report is then processed by Ecad to confirm the royalty amounts to be paid by the platform. Once Ecad receives the royalty payments, it passes along to the holders of the property rights, whether artists or third parties to whom such rights have been transferred. The streaming platforms have made the receivables chain safer, but also contribute to reducing piracy and provide information and data on the potential profitability of these assets.
Investors considering copyright investments in Brazil should do a preliminary due diligence to confirm the ownership of rights (since copyrights in Brazil arise automatically and not from enrollment or record – as it is the case of real estate, patents or trademarks), and the status of the catalog of songs and the artist’s enrollment with collective management associations, as well as any disputes involving the artist or his musical catalog – especially those related to plagiarism or piracy.
It is also necessary to consider aspects related to the artist himself who owns the copyright, such as the involvement in illegal acts and/or with incidents that may compromise his image and reputation, since such actions may affect the distribution of his work and the collection of royalties. Investors should demand that the artist to give assurance about his past conduct and undertake to comply with applicable laws and indemnify investors for losses to which it gives cause. These provisions are rather common in M&A deals and do not differ substantially from contractual clauses and other provisions adopted by institutional investors in other investment deals.
The structuring of the investment is flexible and can occur through investment funds in credit rights or even with the creation of specific purpose companies focused on the management of copyright or with financing based on such rights. Once in the portfolio, the property rights themselves can be guaranteed in full, or even partially, for example, through the assignment of their receivables flow.
Despite the relevance of the Brazilian phonographic market and the growing wave of streaming in the region, which makes musical assets more attractive, this type of investment is still scarce in Brazil and should appeal to a large part of investors seeking alternative investments.
Other references:
https://www.privateequityinternational.com/why-music-rights-strike-a-positive-note/
https://www3.ecad.org.br/associacoes/Paginas/default.aspx
[1] Asset manager Pimco joins song copyright investment frenzy. Available in: https://www.ft.com/content/01f54a76-24eb-4f5f-935b-c5f68389360f Accessed February 2022; KKR, Blackstone strike billion-dollar deals for music rights. Available in: https://www.privatedebtinvestor.com/kkr-blackstone-strike-billion-dollar-deals-for-music-rights/ Accessed February 2022.
[2] Global Music Market Overview. International Federation of the Phonographic Industry (IFPI). Available in: https://gmr2021.ifpi.org/report. Accessed February 2022.
[3] World music industry grows 7.4% in 2020; Published on March 23, 2021. Available in: http://www.ubc.org.br/publicacoes/noticia/17762/industria-fonografica-mundial-cresce-74-em-2020 Accessed February 2022.
[4] The services of streaming correspond to 62.1% of the share of global income related to musical reproductions.
[5] Ecad What Brazil hears. https://www3.ecad.org.br/em-pauta/Documents/O%20que%20o%20Brasil%20Ouve%20-%20Streaming.pdf.
