The 10 Commandments of Valuing a Music Catalog: A Real-World Anatomy
Budding new music.
To an outsider, valuing a music catalog can seem like black magic. It's an asset class driven by culture, emotion, and unpredictable hits. But for a disciplined investor, it's a process guided by foundational rules. Success isn't about guessing what's popular; it's about rigorously applying a framework to the available data.
This article will provide the ten core principles—the "commandments"—that every royalty investor should follow. To make these rules tangible, we will apply them to a single, fictional but realistic case study throughout: a 2,000-track catalog of production music and radio jingles with stable, six-figure earnings and a 5-year "Dollar Age." (Note: This case study is a fictionalized composite, created for educational purposes to illustrate the principles of analysis on a common type of asset found in the market.)
The 10 Commandments
I. Thou Shalt Not Fall in Love with the Song.
The Principle: The single greatest liability in this asset class is emotional attachment. Your goal is to acquire a predictable cash flow stream, not to own a piece of your favorite artist's work. Data must always trump fandom.
Anatomy Example: Our case study catalog of production jingles has zero "fan" appeal. No one is streaming "News at 5 Theme" on their workout playlist. Its value is purely in its commercial utility and its data, making it a perfect example of emotionless, business-first investing.
II. Thou Shalt Honor Thy Dollar Age.
The Principle: "Dollar Age" is a metric that measures how long a catalog has been earning. A higher number indicates a more stable, predictable asset that has entered its "long tail" of earnings, making future projections more reliable.
Anatomy Example: Our catalog's Dollar Age is ~5 years. This is a point for careful analysis. It's not a brand-new, volatile asset, but it hasn't yet proven its "evergreen" status (10+ years). Our financial model must account for a slightly higher potential decay rate than it would for a 15-year-old catalog.
III. Thou Shalt Scrutinize Thy Revenue Sources.
The Principle: Understand exactly where the money comes from. Is it driven by millions of small Spotify streams, or a few large synchronization licenses? Is it domestic or international?
Anatomy Example: This catalog earns over 90% of its income from Performance Royalties collected by PROs like PRS in the UK for radio broadcasts. This is a strength (highly stable, reliable payors) and a potential weakness (it lacks the direct growth upside from the consumer streaming market).
IV. Thou Shalt Normalize Thine Earnings.
The Principle: The Last Twelve Months' (LTM) earnings can be misleading. Always dig deeper to identify and mentally discount any large, one-time payments (like a movie sync fee) that artificially inflate the recent average. You must value the repeatable baseline income.
Anatomy Example: In our analysis of this catalog, we would meticulously review the royalty statements to ensure the ~$100k LTM is from consistent, recurring broadcast usage, not from a one-off ad campaign that ended six months ago.
V. Thou Shalt Know the Clock Is Ticking.
The Principle: The investment term fundamentally changes the entire valuation model. A "Life of Rights" deal is an asset that can be held or sold in the future. A "10-Year Term" deal is a depreciating asset that will be worth $0 at the end of its term. You cannot use the same purchase multiple for both.
Anatomy Example: Our case study is a Life of Rights deal. This perpetual term justifies a higher valuation multiple and means we must consider its long-term durability, not just a 10-year payback period.
VI. Thou Shalt Set a Maximum Price (and Walk Away).
The Principle: The most profitable move an investor can make is often the one they don't make. Create your own valuation based on a conservative model before you start bidding, and have the discipline to walk away if the price gets carried away by emotion or competition.
Anatomy Example: Based on a pro forma analysis, we might determine that a 6.5x multiple is our maximum price for this catalog. If bidding surpasses that number, we walk away, no matter how much we like the asset's stability.
VII. Thou Shalt Understand the Platform.
The Principle: Different marketplaces have different rules, fees, and auction dynamics. A winning bid on one platform may have different net costs than on another. Understand the environment you are operating in.
Anatomy Example: If we were acquiring this catalog on a platform like Royalty Exchange, factoring in the buyer's premium or the benefits of an All-Access membership would be a key part of our final price calculation.
VIII. Thou Shalt Not Covet Thy Neighbor's "Hot" Deal.
The Principle: Do not let FOMO (Fear Of Missing Out) dictate your strategy. An asset with a flurry of bids is not necessarily a good deal; it's often just a popular "story" asset that is being bid up past its intrinsic value.
Anatomy Example: Our "boring" production music catalog may have very few public bidders, while a catalog for a trendy pop artist is seeing a bidding war. The disciplined investor ignores the noise and focuses on the fact that our "boring" asset has a more predictable and fairly-priced cash flow.
IX. Thou Shalt Render Unto the CPA.
The Principle: Stress that the tax implications (especially amortization) are powerful but complex, and professional advice is non-negotiable.
Anatomy Example: For our case study asset, a hypothetical $650,000 purchase price could generate over $43,000 in amortization deductions each year for 15 years, significantly shielding the income from taxes. A CPA is essential to maximizing this benefit.
X. Thou Shalt Not Invest Alone.
The Principle: Leverage the power of community for collective due diligence. A small group of informed investors is the best defense against fraudulent sellers and well-hidden red flags.
Anatomy Example: Before finalizing a purchase of this size, we would share the (non-confidential) data points with a trusted community to ask, "What am I missing?" The collective wisdom is an invaluable part of the final check.
The path to successful music royalty investing isn't a secret. It's the disciplined combination of timeless principles like these commandments with a rigorous, data-driven analysis of the specific asset in front of you. This framework is your best defense against risk and your clearest path to building a valuable portfolio.
This is just a sample of the frameworks found in my upcoming book, The Sound of Money. To get a downloadable version of my advanced investment calculator and be the first to know when the book is released, join the official pre-launch list.
