Q&A Merck Mercuriadis (part 1): 'I want to change the way the songwriter sits in the economic equation'

 

Merck Mercuriadis (Photo: Jill Furmanovsky)

A few weeks ago, when asked if he was interested in assets from Kobalt, Merck Mercuriadis responded with a smile. Earlier in the conversation, he said, “We are in the middle of making the biggest acquisition that we've ever made, literally times five!” 

  Then we learned that his company Hipgnosis Songs Fund had spent $322.9 million to acquire Kobalt Music Copyrights, a portfolio of music copyright assets owned by Kobalt Capital, the investment arm of Kobalt. It includes the rights to 33,000 songs or cuts in songs written by over 1,500 songwriters from 42 catalogues. It was Hipgnosis biggest catalogue acquisition to date.

  Then a week after, Hipgnosis got its hand of 50% of the catalogue of 97 songs from R&B artists Rick James. Hipgnosis Songs Fund owns 117 catalogues with a total of 57,000 songs. Overall, the aggregate acquisition value of the catalogues is worth £1.18bn ($1.5bn). Artists who have made a deal with Hipgnosis include Debbie Harry and Chris Stein (Blondie), Chrissie Hynde (Pretenders), Nile Rodgers (Chic), Nikki Sixx (Motley Crue), RZA (Wu-Tan-Clan), Rodney Jerkins, Dave Stewart (Eurythmics), among others.

  Hipgnosis has also acquired established music publishing unit Big Deal, re-branded it Hipgnosis Songs Group, and retained its management, notably Kenny McPherson as CEO. As part of the Big Deal package, Hipgnosis acquired 4,400 songs and a royalty management service, Words & Music.

  Mercuriadis is not someone new to the business. As a manager, he worked with artists such as Iron Maiden, Elton John, Beyoncé and Morrissey. Mercuriadis ran the American business of British company Sanctuary, which had created a model of management centered around Iron Maiden, and then expanding in recorded music, publishing, distribution. Victim of over-expansion, the company eventually shut down.

  Mercuriadis continued as a manager, but he also had something else in mind: he saw the value of catalogues from heritage artists and thought he could build a business by aggregating the4 assets of some of the most iconic artists and songwriters. But to do that he needed money. So he started to become an evangelist and met with whoever wanted to listen to him explaining why it would be a wise thing to invest in music assets.

  Some companies like Kobalt, or Round Hill, have successfully been able to attract capital to build their portfolios through acquisitions. André de Raaff even got the Dutch pension fund to finance the acquisitions that led to the creation of Imagem, before the company was sold to Concord. But no one has gone as systematically as Mercuriadis to convert investors to the value of investing in music.

  Emmanuel Legrand caught up with Mercuriadis a couple of weeks ago, and the conversation has been updated to take into account the latest deal with Kobalt. The artist manager turned copyright assets manager was in London, where his company Hipgnosis is listed (the company is incorporated in Guernsey), and was running his business in Covid time as intensely as ever, if not more. “Luckily for me I have some of the greatest songs ever written to keep me company,” he joked.

  Here's an edited version of the discussion. We will publish part 2 of the conversation next week.

The Kobalt Copyrights catalogue is by far your biggest acquisition. How does this catalogue fit with your overall vision of Hipgnosis?
Merck Mercuriadis: All of our Hipgnosis catalogue acquisitions have two characteristics in common. First, the songs are extraordinarily successful. Second, they are of great cultural importance. Being able to add the incredible work of Steve Winwood, Lindsey Buckingham, George Benson, Bonnie McKee, Skrillex, Stefan Johnson and so many others to our catalogue in one fell swoop was irresistible as was the deal. It was something I actively pursued since this time last year.  

You seem to be busier than ever. So Covid has no impact on your business?
When you look at our performance on every level, from revenue through to share price during the course of this pandemic, it's just gone from strength to strength. We had our biggest share price only ten days ago. Our revenues are going through the roof, as you are seeing with other rights holders.  

You've raised over a billion dollars so far. How did it happen?
One of the things that made us so successful is that I literally spent three years educating the financial community and these big institutions and investors from the Church of England to AXA, etc. We have 75 of the biggest institutional investors in the world, but before they became investors I spent the better part of three years talking with these investors, sometimes over multiple meetings, educating them about the fact that this was the new asset class that was worthy developing. These great songs had very predictable reliable income, and when you look at those traits – predictability and reliability – those are what investors are looking for. What really makes songs such a special asset class is that the revenues of songs are uncorrelated to what's happening in the marketplace.  

How would you describe your business?  
A former head of business affairs from Warner Chappell said to me the other day that he figured out what I am doing and why it is working. And I said, 'Oh enlighten me!' (laughs) This guy is a very well respected lawyer from a law firm representing some of the top artists and songwriters in the business. He said: 'You recognised that most music companies make all their money out of ten per cent of their assets and you are buying that ten per cent.' Well, while it is an imperfect explanation, to some degree it is highly true. Everything that we buy has high demand, is extraordinarily successful, is also culturally important, so it does not matter if it is 'Sweet Dreams (Are Made of This)' or 'Don't Stop Believing' or 'Living On A Prayer' or 'Good Times' or 'Shape of You', these songs have high high demand and are constantly being consumed, and as a result we are doing great. From an acquisitions' point of view, it is all about having gained the trust of these institutional investors that back us. That's why I have been able, in a pandemic environment, to raise in the space of two months over half a billion dollars, and putting it to work immediately. One of the things that the pandemic has also done is that it's created opportunities that may not have been out there. At 60+ or 70 years of age, many of these artists are quite rightly foreseeing a situation where they may be 73 or 75 when they can go back on the road again, and not really knowing what your energy will be like and what you're health would be like. So they are choosing to make a sale in order to de-risk their future. The only person who is doing this and who has made their reputation, money and success with songwriters, artists and producers – as opposed to at the expense of artists, songwriters and producers – is me. Therefore they trust me, they know I understand the ethos of their careers, and they understand that I am going to make decisions on how to use the songs that are commensurate to the decisions they would have made and that I am never going to do anything that takes anything away from their brand. We've become the favoured buyer to the songwriting community and that has created a tremendous amount of opportunities in this period.

As a manager, when did you decide that it was time to flip, change the paradigm and start raising money?
I made that transition in 2013-2014. But it took me a long time to come up with a plan and put up a structure that I knew I could sell to institutional investors. The germination of all of that was with streaming and the growth of Spotify. I spoke with [Spotify co-founders] Daniel Ek and Martin Laurentzon, and I explained to them in 2010 that they were going to transform this business. I could see that streaming would bring the passive consumer to the table and for the first time ever, more people were going to start paying for music. Because of the offering they would go from paying nothing for music to paying 120 dollars a year for music. What that has eventually done was that music went from being a discretionary or luxury purchase to now being a utility purchase. And I was able to articulate this to the financial community. They understood that. And what I told them eventually became true. We went from 50 million subscribers a few years ago to 400 million today, and what is predicted to be 460 million by the end of this year, to what is predicted to be two billion by the end of the decade. We also predicted that they Copyright Royalty Board would rule favourably on the songwriter, because the songwriter only had three raises [in mechanical rates] in 75-76 years. And this has happened despite Spotify doing their best to appeal it and we ultimately believe that these rates will prevail. We also had this concept of song management versus publishing. I want to obliterate the concept of publishing and I want to replace it with song management.

Why? What's the difference?
Song management is about managing your catalogue of great hits with the sense of responsibility that you manage artists with. If you look at Universal, Warner and Sony– and it's not only them, it's also smaller publishers – when you assign 20,000 songs to one person, you cannot possibly actively manage each song. We operate with 500 to 2,000 songs per person in order to have the bandwidth to do more with our catalogue. And we are adding people constantly. Last summer, Royal Bank of Canada, on the date of Warner's IPO, which happened on the same day of our year-end figures, put out a fact sheet that showed that Warner Chappell earned 640 million dollars last year, while we earned 85 million dollars that year. They did it on 1.4 million songs, we did it on 13,000 songs. We did 14% of their revenue on less than one per cent of their assets. Our song put out 6,286 dollars per song while they put out 150 dollars per song. That's the difference between song management and publishing. At its core it is about two entirely different business models. The Universal, Warner and Sony model is about creating new IP. If you are “Big” Jon [Platt, Chairman and CEO of Sony/ATV Music Publishing], Jodi [Gerson, Chairman and CEO of Universal Music Publishing Group] or Guy Moot [co-chair and CEO of Warner Chappell Music], you know that you are not going to get credit or be paid based on what Chuck Berry did or what Nile Rodgers did. You are going to be paid by finding the next Benny Blanco and developing them into being great songwriters and delivering new hits. The underwriting for that business comes from the passive income from these great catalogues and these great proven songs. And these great proven song, when they are in those administration systems, they are allowed to languish. That's not out business at all. Ours is about focusing on these proven songs and getting more out of them, not because we are smarter and better than those people, but because we are structured differently and we have the bandwidth to nurture them back into life. We get them into movies, TV shows, ads, video games, get new artists to cover them, etc. And get them deliver optimal income while at the same time serving the artists' legacy well.  

What makes you different from someone who walks into a room with a checkbook, pays for assets and owns the assets?
There's a few reasons. No disrespect for my competitors, but most of them are bankers in suits, or people that work with majors that have made their money and reputation at the expense of songwriters, artists and producers. I have made mine with them. I understand how they built their careers. I am not someone who can play the guitar, sing a song or write a song. I am completely in awe of people who can and the only thing that I bring to the table is responsibility and taking that responsibility seriously. Our company has a great pedigree now with people like Amy Thomson who's joined – she is one of the best artist managers of the past 15 years – and Ted Cockle – who was one of the best record executive in the country, very pro-artists. We have a motive, which is to make money for ourselves and our shareholders, and I am very clear with songwriters, artists and producers about that. But equally, we have an ulterior motive that I am very vocal about, which is that I want to change the way the songwriter sits in the economic equation. The songwriter, despite delivering the most important part for an artists to have a hit record, is, in this day and age, the low man or women in the totem pole, and the only reason they are in that situation is that Universal, Warner and Sony, as the three biggest song companies in the world, don't advocate for songwriters because they are owned by Universal, Warner and Sony, the three biggest recorded music companies in the world. On the recorded side of the business, they are making four-fifth of the money, they are making an 80% gross margin, a 40% net margin, and in general, as you know, they own these recording assets in perpetuity. Very few artists own their masters. On the song side of the business, you've got one fifth of the money, one fifth of the margin, and quite rightly, whether it is through good lawyering and good management in the first place, or renegotiations or reversions, the songs are back in the hands of the people that co-created them. I only buy from those people. I only buy from songwriters, artists and producers directly. I don't buy publishing companies.

Well, you did. 
Yes, but that's one deal deal in 80. 

When you make a deal with Chrissie Hynde or Nile Rodgers, do you stay in touch with them once the deal is closed?
The transaction is the beginning of the relationship. I own Chrissie's catalogue so the approval is now mine, but I don't operate on that basis. I work of the basis of working with the songwriter and the artists to amplify their legacy and to maintain and grow the value of their songs. In the few weeks that we've owned Chrissie's catalogue, I've sent every opportunity that we create through to Chrissie for approval, and to her manager Ian Grenfell [Quietus Management]. If we get requests, I put then through to her, I let her know what I think, I listen to what she thinks. We are working together and I want to amplify the incredible career that she's built. It is in the best interests of my shareholders and myself but it is also in the best interests of this model that I am trying to create of song management. Ten years from now I want every artist to have their manager, to have their booking agent, to have their record company, to have an administrator to collect their rights and I want every artist to want to have a proper song manager. I really believe that this is the future of our business. Publishing is a broken model hat needs to go away and needs to be replaced by song management. What you'll have in the beginning is a few elite artists who will benefit from this structure, and eventually everyone will want to benefit from it.