Q&A Merck Mercuriadis (part 2): 'Hipgnosis has a buy and hold strategy, not a buy and sell strategy'

 By Emmanuel Legrand

In part 2 of the interview with Merck Mercuriadis, we discuss his vision for Hipgnosis, the company he founded less than three years ago that has invested over a billion dollars in music assets, how he managed to raise money for acquisitions, and how he sees the company evolving.

You said you wanted to change the songwriter's position in the economic equation. How can you achieve that?

The stranglehold of Universal, Warner and Sony means that they stopped advocating for songwriters and they push as much of the economic improvement towards the recorded music company. By the way, my issue is not with the companies, or the people that work at the companies, because I think there are tremendous people working there, and they do a good job developing new songwriters and artists, but my issue is with the paradigm, and this paradigm has been allowed to exist for 75 years, and I want to change it. Whether you are [Universal Music Group Chairman and CEO] Lucian Grainge or [Warner Music Group CEO] Stephen Cooper, you can't argue with the fact that songwriters should be paid more money. I am very vocal about wanting to change the system. The British government has announced recently that they are going to investigate the quote-unquote business practices of the streaming services. As they dig into that, what they are going to find is that their real investigation is not going to be in the business practices of the streaming services – although services like Spotify need to be taken to task for their clumsy attempt to appeal the Copyright Board ruling – and that the business practice that need investigation is not how Spotify or Apple get 30% – yes you could make an argument that this 30% should be 25%, but I don't think any of us should argue that with 25 or 30%, Spotify or Apple or the other DSPs are being overpaid for the tremendous service that they offer – but the real issue is what remains of that 70% and how that 70% is split as 58% and 12% between recording and songwriting. If the recording artist is lucky, he will get one sixth of that 58%, and the remaining 12% is split between the songwriter and the publisher. 

As a manager, you signed contracts like that, didn't you? 

Yes, because I accepted the paradigm. But I created Hipgnosis to change that paradigm. The only reason that this 58-12 split exists is because the three big song companies are not fighting to get songwriters to be paid more money, because they are owned by the three biggest recorded music companies. I have no problems with Universal, Warner and Sony being in the recorded music business and being in the song business as long as the song company is independent and able to advocate on behalf of its own constituents. So you're right, I did it in the past as a manager, I accepted certain contracts, but I recognised that the paradigm was wrong and I decided to do something about that. As I sat there, managing the careers of people like Diane Warren, and The Dream, I thought, in a era where when I started, 90% of the people would write their songs, perform their songs, had a very good idea of who they were, or who they would become, what their album cover should look like, what their stage show should look like, and my job was to believe in them and make other people believe in them, and bring the success to fruition. That was 35 years ago. Today, 90% of the artists that are being signed are very talented kids for whom the ultimate goal is fame and celebrity, and it does not matter whose songs they are singing, or whether your fame comes from a TV talent show or social media. Right now we are seven years into an era where there has not been a Billboard Top 100 album that does not have an outside songwriter on it. Even Coldplay or Ed Sheeran! By the way, it does not mean that Coldplay or Ed Sheeran are not beasts when it comes to writing songs, it just means that we've evolved into a situation where the songs are more sophisticated, there are more hooks, there are more writers, etc. So looking at the careers of Diane Warren and The Dream, I decided that these people were not being paid fairly. And I thought, how could I possibly get them to do more? I recognised that the only way to fight this paradigm was to have incredible financial support an leverage. It does not matter that I happened to manage Elton John or Guns'n Roses, because all of that can be blown out of the water. What you can't blow out of the water is billions of dollars. So I set about to create the situation that would give me that kind of leverage.

But your model – focusing on established songs – is not helping regenerate the eco-system by investing in new songwriters. You are still expecting people to do that job so that eventually you can capture the assets that somebody else has created to make your business model work.

Two things. With the acquisition of Big Deal in America, which is now Hipgnosis Songs, now a small part of our business is the creation and development of new songwriters that will turn into new catalogues of the future. But my focus is actually somehow different. My focus is in empowering the biggest songwriters in the world in order to be able to change this system that has the lowest man or woman in the totem pole. What you'll see in the year to come is that not only have we empowered 82 of the biggest songwriters of this world, and put them in a position where they are no longer reliant on someone else's money to de-risk their future and make decisions that are in their best interest. Equally, I will fund what will be the first real songwriters' guild, that will be owned by songwriters for songwriters, and it will advocate for songwriters in the way no other organisation does.

How can you achieve that? 

My model is the Screenwriters' Guild. You are Emmanuel, the head of Paramount and I am Merck, the head of the Screenwriters' Guild and we meet every three years and I say 'Listen Emmanuel, it is great that you had Reese Witherspoon and Denzel Washington, but if you don't have a script, there is no movie to make. And you are not going to get my script unless you pay my writers properly.' Every three years, they scream, they shout, and call each others' names, threaten to bring production to a standstill, but at the end of the day, they figure out a way to pay the writers more money and everyone lives happily ever after. That's never happened in the music business.  

In the case of the music industry, who is Paramount? The labels, the DSPs or both?

The record companies, but it could eventually be both.

When is it going to happen?

It would have happened by now if it wasn't for the pandemic. It will happen before Christmas or early in the New Year.

Your business model comes at a cost. Many hold you responsible for bringing the price of music assets up, and paying multiples that are off the roof. How do you feel about all of that? Do you feel a responsibility?

So, first of all, we have established songs as an asset class, right? We’ve gone in two years and two months from being a listed fund on the specialist fund segment on the London stock market to being one of the 250 biggest companies on the stock market. We have been as high as the number 23 biggest yielder on the stock market. In a pandemic when people are cutting their dividends or not paying their dividends at all, we are growing our dividends. This is all about having established songs as an assets class that has predictable reliable income. Now, remember that one of the things that is key to this assets class and to being able to do this in general, is that these great songs are protected, as a generalisation, 70 years after the death of the last co-composer. So our catalogue as it stands right now has a 110 years worth of earnings coming from it. We’ve invested a billion and a half at a 14. 3 multiple and we're going to benefit for 110 years from this as an asset class. You don’t have to be graduate of the London School of Economics to know that’s good business. What I’ve recognised and what I’ve been doing by empowering the songwriter is recognising where the true value is. If you are paying 14.3 times for extraordinary assets that stand the test of time – 'Living on a Prayer' is 35 years old and has been massive success each of those 35 years, 38 years for 'Sweet Dreams Are Made Of This', 40 years for 'Good Times', 43 years for 'Le Freak', the biggest selling single in the history of Atlantic Records–, these songs are going to endure for another 110 years without question in my mind and we are the owners of them in perpetuity. At the same time not only are we delivering great value for our shareholders, but we’ve empowered the songwriter. I think the songwriters share of the income is only going up. 

Are you going to buy into recorded music assets?

We do buy recorded music assets and I think they are tremendous assets as well, we do buy them when they are available with the songs. Obviously everything benefits from the same factors, which is the growth of streaming. We bought Journey's recording music assets at the same time we bought the songs. We bought Barry Manilow's recorded assets recently.  

Do you understand why it is easier now to find money to invest in music when for so many years the only people who could get money were the majors? What has changed?  

Hipgnosis! That’s a fact. What’s changed is Hipgnosis. We raised 200 million pounds at a point and time when no one else was listed, and we invested it very quickly in great songs. We managed those songs well and we paid dividends and we’ve now done that over, over and over again. We are growing and making massive acquisitions every day. Then you have the other factor which is that in systemic change there is always opportunity. We started to do this it was the end of the illegal downloading era, we had 15 years of technological disruption in this space and it almost killed off the music business. There is only one good thing that came out of that is that it left these great songs at attractive prices right at a point and time when streaming was growing the pie. I seriously considered why really great people that I think are much smarter than I am – like Richard Branson from Virgin or Chris Wright from Chrysalis – had failed in the stock market. Even Sanctuary! Andy Taylor was an incredibly bright man and a great partner for a long long time like 20 years. The reason why these companies failed in the stock market, or at least in my estimation, is that they were asking you as the institutional investor to believe in their track record and that their track record would deliver future results. And that to me was the mistake. So what I did was bringing this concept of proven assets to the stock market. I wasn’t asking you to invest in my track record and what I might do in the future, I was asking you to invest in proven assets that I had access too. So what you were getting from me was access, but what you were actually investing in was the best songs of Dave Stewart, Nile Rogers and Bernard Edwards, Timberland, Chrissie Hynde, etc. These are predictable reliable assets. What the financial community wants is data, so when you can deliver them six-month statements that are 10,000 pages long and then have billion of micro-transactions, they can have a field day analysing that. You can figure out what the predictable reliable income of this asset actually is and therefore you can invest in it. I have to give credit to someone like Larry Mestel at Primary Wave who was doing this before any of the rest of us were doing it, but he difference is that we did it in the public market and the reason why we did it in the public market was because I wanted permanent capital. I could have done this with private equity with a company like KKR that had funded BMG and make more money on a personal level but with those private equity companies there is a ceiling on how much they are going to let you invest, probably 500 million dollars, and there is a term to that money, whether that’s 5 year money, 7 year money, or 10 year money. What I wanted was permanent capital and the reason why I wanted this permanent capital was that I did it from the point of view of changing where the songwriter sits in the economic equation. To see that through, I needed to have permanent capital. 

What’s your exit strategy, if there is one?

Our strategy is a buy and hold strategy, not a buy and sell strategy, and that’s something that’s very clear with everyone that’s in our portfolio: all of our biggest shareholders – including the Church Of England, Investec, Axa, Aviva, Newton, that are just 5 of more than 75 institutional investors in Hipgnosis – understand this is a buy and hold strategy. I think that these assets will be worth triple what they are worth today inside of the next decade, I think that in the next decade there will be even more demand for access into this space than there is today. That demand will drive the multiples up to places that we have never seen. The multiples will be based on much, much fatter income streams than what I’ve paid for and it will be a tremendous ride for ourselves and our shareholders. Our job is to be focused on actively song managing these great catalogues and not only delivering what is an incredible net asset value for our shareholders and also delivering great income.   

You bought assets from Kobalt. What's your view on what they've done so far? 

We have a tremendous strategic alliance with Kobalt. I think that Willard [Ahdritz, founder and Chairman of Kobalt] set out with a goal 20 years ago that is totally in alignment with what we’re doing. His goal was to bring transparency to this business and to collect money. I think he has created a company that collects more money, collects it faster, and pays it through faster. Our goal is in alignment with that in terms of changing where the songwriter sits in the economic equation, taking him from the bottom of the pile to the top of the pile.

With Big Deal, you have also invested in infrastructure. 

Well, I am not interested in infrastructure for the sake of infrastructure; what I am interested in is building the best song management company. You said we did buy a publishing company in Big Deal Music. For me that’s not what I did, I bought a company that was a publishing company and I’m turning into a song management company. I bought that company for one reason and that’s because in the shape of Kenny MacPherson and his soldiers Casey Robison, Jamie Cerreta, Dave Ayers, and Pete Robinson there is a team there that has incredible chemistry and an incredible track record of success. They were operating in the publishing business but they were really operating as song managers and artist developers and therefore it wasn’t going to take much energy to transform what was Big Deal as a publishing company into Hypnosis Songs Group as a song management company. With Big Deal now I see three very key areas: song management, which they’ll do in conjunction with Ted Cockle, Amy Thompson, and all my team here; there’s song creation which is a very small part of our business, with Casey Robison who will continue to the lead the charge on developing incredible writers; and then there’s song administration. So what you will see is that more of our catalogue as it becomes available will become administered by Hypnosis Songs in Americas in order to give us a seat at the table for negotiations with the DSP, the settlements and everything that takes place. It’s the beginning of the transformation of our company into becoming a proper operating company on a global basis.  

Why did you name your company Hipgnosis? 

Hipgnosis was a great name. The great artwork of the 60s and 70s in music was made by Hipgnosis. Storm Thorgerson, who was one half of Hipgnosis [with Aubrey Powell], was both one of my best friends and my client. They gave up the Hipgnosis name in the early 80s because it had become so ubiquitous in the 60s and 70s with everyone from Pink Floyd to Led Zeppelin using their design that it was actually uncool in the 80s. My son is named after Storm, and a few years ago, before he passed away, sadly, he said to me, 'Listen, this new company you are going to create, what are you going to call it?'. And he caught me off guard so, facetiously, but somewhere deep inside, I said 'I want to call it Hipgnosisbut that name is already taken'. And a few days later he wrote me a letter stating: 'I want you to have the name' and there were also a bunch of logos that he had designed for the new company that had expensive price tags next to them. I ended up paying for the name by choosing one of the logos and even then, I didn’t get a chance to choose the one that I wanted. As was Storm’s style, I had to choose the one that he wanted. I called it an upside elephant. So I said to him, 'Look Storm, what does an upside-down elephant have to do with my business?' He said, 'Look, you’re an idiot.' I said, 'I may be an idiot but I know an upside-down elephant when I see it.' He said, 'No, that’s not an upside-down elephant.' I said, 'What is it?' He replied: 'It’s an elephant that is blown away by how good the songs are.'