UMG Guidance Letter Policy A Problem for Royalty Sales

“Nothing is more important to us than our relationship with our artists and respecting the terms of our recording agreements,” the statement continued.

The company says the policy does not prevent artists or songwriters from independently transferring royalties from UMG to a third party, it just means that UMG will now only pay artists and songwriters; and any investor purchasing the rights to a percentage of this income will have to make their own arrangements with the creators to receive the royalties. It is also unclear whether this policy will be applied retroactively from previous letters of direction to pay investors who have purchased income streams.

Over the past five years, royalty streams have become an increasingly popular investment for private equity firms and other large institutional investors who are outbidding the publishing and ownership of master recordings, which are turning rather towards songwriters’ shares in catalogs and artist royalties for master recordings. Investors can choose royalties from specific titles, licenses or income types or from a creator’s repertoire. They can also invest in the income stream of producers or engineers who owe royalties on song sales, streams and timing placements – all of which are paid from the artist’s share of royalties. These royalties are predictable from year to year based on past income and are generally passive investments that require little expertise beyond collecting and accounting for payments.

With these sales increasing, it seems major labels and publishers are unwilling to deal with new buyers who don’t fully understand the music industry and are using referral letters to leverage a relationship with which majors are more comfortable with. “They can approve the letter of instruction under strict conditions,” says lawyer Scott Bradford by DLA Piper. These could include restricting audit rights or approval rights for syncs, he says, “so it’s just a share of the revenue.”

That’s why it’s up to buyers to keep creators involved in their copyrights after an acquisition so they can secure audit rights, finance officials say. But what happens after a creator dies? Currently, when a creator keeps the income stream, the labels honor those same rights to the heirs. But it’s unclear whether they will continue to do so for the heirs, if the artist had already sold the income streams to a third party.

Reactions around the industry criticized UMG’s policy and its potential effects on an otherwise flourishing aspect of music finance. (“It’s a hostile bet that appears to be aimed at keeping die-hard financial investors out of the market,” says an executive of a company that has invested in music assets in recent years.) But it appears that the other major labels are also less accommodating to investors who buy these royalty streams.

“It’s not just UMG,” says an executive of a company that is acquiring musical assets. Sony Music and Warner Music Group have also shown reluctance in the past quarter to respond to letters of instruction on acquired music assets, sources said. Sources acknowledge the desirability of honoring letters of instruction has been a topic of discussion at some music companies, but has yet to turn into action or politics, while others claim Sony is refusing officially recognize letters of instruction in writing but will continue to reassign them. royalty payments when selling a revenue stream.

Warner and Sony declined to comment for this story.

If Warner or Sony follow UMG’s lead with such drastic approaches against letters of instruction for royalties – majors have a habit of adapting their competitors’ policies if they feel it could be beneficial to them. also – it could seriously hamper the arrival of institutional investors. on the market. One lawyer admits that such a strategy would create undue complexity for a sale, and other investors in music assets fear that UMG’s position will deflate in value.

An investor suggests that the majors could try to “contain value to bring down multiples”. The majors are generally buyers of musical assets and therefore would benefit from lower prices. At the very least, this initiative of the majors seems to aim to cool a market perceived as overheating, adds an executive. “This is probably done to frighten some financial players. If you are a serious gamer, you can find a solution. “

UMG is not the first musical entity to propose a policy of limiting the letters of direction. SoundExchange has a LOD acceptance policy only for people involved in the creative process, like producers and engineers, but not for third parties, a spokesperson said Billboard. Sources suggest that for years at least one of the US performance rights organizations has had a similar policy on letters of instruction, but it is unclear whether these policies are fully enforced. Nevertheless, so far, these policies do not appear to have hampered the market for musical assets. And the Music Modernization Act gave artists the ability to provide guidance letters to SoundExchange to directly pay producers, engineers, and others who work on their records what those contributors are owed.

Opinions vary on how investors might handle UMG’s new position. In one scenario, a seller could open a joint account to which royalties would be paid, according to a source. But an institutional investor argues that this approach would not work because if the seller has access to the account, the buyer cannot “perfect” the acquisition. “That’s why agreements usually have a holdback on payments – to ensure that the revenue stream gets to where it’s supposed to go,” said the finance executive. (“You may not be able to perfect the acquisition of the income stream, but you can guarantee it by a contract with the songwriter,” says another finance official.)

Investors’ views on UMG’s new policy appear to be divided according to the length of their presence in the market. New players interpret the company’s position as more aggressive, while long-term players in the music asset market tend to see it as a new twist. But, they add, this is just an evolution in the typically contentious bickering seen in virtually any musical asset acquisition that requires the consent of the divestiture – especially where the majors are involved. While in the past majors were willing to accept the occasional revenue stream sales referral letter, now that such transactions are becoming frequent they are becoming an incredible accounting problem – which is one of the reasons why the discussion about this policy has even started among the majors, according to some sources.

UMG, meanwhile, could face an optics problem as the new policy spreads and the company may struggle to market itself as artist-friendly, the institutional investor says. “If you have an asset that can be traded, this policy will be seen as a hindrance, so they’re essentially taking money out of the artist’s pocket.” Adds the finance manager: “I think politics has the potential to hurt the value of an asset.”

It could even hamper future transactions, explains another player in musical assets.

“Why will artists or songwriters sign with UMG if they ultimately want to realize the value they have created through the sale of their copyright and royalty income,” wonders this trader. “If I were a songwriter, producer and / or artist, I would ask you, ‘Are you telling me I can’t sell my catalog? “

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