Disclosure: I do not possess any financial interest in Musicow, Inc and do not have any financial relationship with the company at the time of writing of this post. I own approximately $200 worth of copyright purchased via Musicow, and I plan on disclosing my stake for transparency. Contents of this post is my opinion and should not be used as the basis for your investment.
Copyright Investment
Amist heightened volatiltiy in financial market, I sought out for an alternative investment which will provide me with a more consistent return (possessing a cashflow structure of bond) and is un- or weakly correlated with the market. In pursuit of such investable asset, I ended up discovering Musicow.com (formerly, Musicoin.co).
Musicow is a website/platform on which one can participate in an auction or secondary-market trade of K-pop copyrights. I wanted to introduce this platform because it rightfully aims at benefitting all parties: investors by sharing royalty, musicians by providing funds, and fans by granting meaningful souvenir. More so, copyright to music possesses the characteristics that I was seeking for and will be helpful for other investors to diversify their risks. I will discuss the legal aspect and financial aspect to assess advantages and disadvantages associated with copyright as an investable class of asset.
Over the last few months, Musicow has been actively trying to provide more material information; however, I find the provided information to be insufficient to make an investment decision. That said, I plan on utilizing the publicly disclosed information available on the webiste to develop analyses and metrics. I hope to use my analyses for my own investment, and provide the readers an unwarranted guidances to how copyright could be evaluated.
This website is available in both English and Korean, so I recommend that you pay a visit for more information.
Introduction to Products
To date, Musicow facilitates two markets: (1) Primary Auction Market and (2) Secondary User Market.
Primary / Auction Market (Ongoing Acution)
The navigation page contains a list of songs for which the original copyright holders have decided to monetize either partly of or entirety of their claim to the copyright and royalty.
This page offers information relating to:
- Artist Name
- Title of the Song
- Type of Right (to be discussed in a latter post/section)
- Highest Bid (expected annualized return based on the trailing 12-month royalty income)
- Lowest Bid (expected annualized return based on the trailing 12-month royalty income)
- Competition Rate
Once you select participate, the page leads you to the particular song's auction page. This page contains:
1. Song Information & Overview of the Auction
2. Bid Order Box
3. Bid Status
4. Song Detail & Link to the Music
(This seems to be prepared only in Korean)
5. Recent Trends & Past Royalty Payment per Share with Breakdown
6. Copyright Information
Secondary Market (User Market)
When all bids are filled and auction is closed, these copyrights are then migrated to "Closed Auction" and "User Market" navigations, where users can trade P2P. In addition to the information carried over from the auction market's page, this page contains:
1. Bid & Ask Quotes / Status
2. Market Price, Volume & Transactions
As mentioned, all the information shared in the Auction page is available in the secondary market navigations as well.
Operational & Counterparty Risk
Musicow is a for-profit company, which does not qualify to be a trustee to assume activities such as collection and distribution of copyright royalties under Korean legal framework. Instead of obtaining an authorization from the Minstery of Culture, Sports, and Tourism, Musicow is registered as a member of the Copyright Trust. Hence, Musicow appears to be purchasing copyrights that are administered by the Copyright Trust Management as any other copyright buyers, but operates a business model that facilitates and intermediates the redistribution of collected royalty to the users/auction participant/secondary buyer.
Much of these information is based on my interpretation of information provided via Musicow's website. However, the fact that I can only deduce their business model through FAQ page of the company that deals primarily in clearing counterparty risks is a manifestation of a massive risk.
At this point, there is substantially insufficient amount of information to determine whether the facilitator/intermediator of the copyright trade, the Musicow Inc, is a credit-worthy and financially stable entity. Without establishing that this company will persist throughout the legally binding lifetime of the purchased copyright, it will be difficult for any investor to make a sweeping decision to incorporate such trade into their portfolio. * Provided that the company provides a quasi-proxy service of purchasing fractional share of copyright claim, the purchase rights may not be terminated upon the liquidation or bankruptcy of the intermediator.
Anyhow, it is clear that Musicow plays a role as a clearing house, which assumes counterparty risks from Copyright Trust and private investors. This business model, upon unexpected stress, may suffer from shortage of liquidity and other operational risks. Hence, full disclosure and transparency relating to (1) business model (profit generating model), (2) evidances that support the company's legal rights, and (3) firm's financial stability are necessary. These are necessary insofar as the tradition asset classes necessitate the provider or seller of the product to fully disclose the associated risks and legal foundation. The lack thereof, however, is the largest drawback the Musicow users will have to face until the firm decides to disclose such information.
Legal Background & Risk
Under Korean Copyright Act, the traded product is classified as "Author's Property Right". Author's Property Right has a lifetime is until 70 years after the original composer/writer's death. This right is
consisted of:
1. Right of Reproduction
2. Right of Public Performance
3. Right of Public Transmission
4. Right of Exhibition
5. Right of Distribution
6. Right of Rental
7. Right of the Production of Derivative Works
Musicow's copyright selection can be classified largely into:
1. Neighboring Rights with No Adaptation Right/Right of the Production of Derivative Works
2. Author's Property Right with Adaptation Right/Right of the Production of Derivative Works
Financial Asepct from
Investor's Point of View
Now, let's summary information material to evaluating an investment.
1. Source of Cashflow
Royalty payment is combination of several sources of income. This includes:
- Broadcast (TV, Radio, Youtube)
- Gift (Record Distribution Company, Ringtone)
- Replication (Reocrds, Movies, Advertisements, etc)
- Performance (Karaoke, Entertainment facilities, etc)
- Foreign
- Other
While I do not have solid evidence, but I can imagine that some of these profit pipelines being more persisting (long-lasting) than others. That said, an investigation into classic best return songs and breakdown of their revenue pipeline may help us identify songs that are likely to provide high and stable level of return. This will also help decomposing and understanding whether a jump in royalty payment in the last year was a temporary spike or a lasting trend.
Investors may be mistaken that the royalty fee is settled each month; however, there seem to be a different payout schedule depending on the breakdown of the cashflow.
Depending on the source of collected royalty fees, the payout schedule is very different. This would mean that the expected fee may fluctuate on a month-to-month basis depending on the song's primary revenue source (i.e., if the song is being played most often in hotels, stores & parks, the pay out will be delayed by 6 months).
2. Type of Copyright
As discussed earlier, the platform offers two types of products, one with and the other without claim on derivative works. This appears to be similar to one being a vanilla bond and the other being bonds with preemptive rights (techincally different but the fact that there is an chance of making extra return). Some replicable music pieces (this eliminates majority of K-pop idol music) are remade over time and it appears that the copyright owner gains claim on these remade music. If this is true, this right will provide excess cashflow from the additional songs from which the copyright holder can collect royalty fees with approximtaly 1-6 months lag (as shown above). This more or less offers an insurance-like protection to the diminishing cashflow.
3. Properties of Music and Royalty
The properties to be discussed are entirely my conjectures. These will have be to tested through analyses.
A. Misleading Early Spike
In first few months since release, most songs will enjoy a high return. However, these will only remain for a couple of months and subside as the hype settles.
B. Diminishing Return
While some music may be everlasting, like Michael Jackson's Beat It, utilization of majority of songs will tend to monotonically diminish over time.
C. Preemptive Right Premium
Copyrights with claim on derivative will tend to have higher quoted price than the counterfactual.
D. Factor Investing
By and large, popular songs appear to be mispriced (extremely overvalued for profitability) due primarily to fans purchasing the copyright as sourvenir. On the other end, there appear to be specialized songs, such as Jung Woo Sung's Serenade, a song that seem to be freqently used in ceremonies or events. This song is neither popular nor expensive, but generates consistent royalty fee throughout the year.
Based on these observations, I came to a conjecture that there must be working factors, characteristics shared among profitable songs. To list a couple of factors I can think of: (1) Popularity Factor, (2) Genre Factor, (3) Derivative Work Factor (how many derivatives have already been published may point to how many more will happen), (4) Royalty Fee Momentum Factor, and (5) Value Factor (extremely undervalued due to lack of popularity).
F. Inflation Hedge
While I do not have solid number, I am certain that the royalty fee is computed as percentage of certain revenue value. This suggests that the amount that a fraction of a copyright can claim will increase proportionally to the amount that media platforms, broadcasters, and other media content users charge or generate. Again, this suggests that revenue will be protected against inflation, although the impact may not be visible due to copyright's nature of B. Dimishining Return.
Looking Forward
In the upcoming posts, I intend to share my copyrights holdings and also run a couple of valuation model tests (if possible factor analyses, as well).
