Key points:
- Hipgnosis benefits from the confirmed rise in US streaming payments
- It's also likely that the next contract settlement will be higher
- How much does this benefit Hipgnosis though?
Hipgnosis Song Fund (LON: SONG) shares are up 2% in London this morning on the back of a change in the US copyright fees for song streaming. The change is quite large, so we might actually expect more movement than this. But then the US is not the entire global market, so perhaps not. The bigger question here though is whether this should change our view of Hipgnosis as an investment?
The basic idea, that songs have a 70 year life after the death of their writer, does mean that there's a business in buying the song rights and then enjoying that income stream. The song writers might well enjoy spending the money now rather than leaving an estate to be squabbled over in 69 years' time. This then allows a mutually profitable trade, capital now for the income stream. Which is what Hipgnosis actually does.
The risks are of course that the income stream doesn't live up to estimations. That can be changed upward by good marketing perhaps. But also, what if the terms of the income stream change? Which is what today's announcement is about. The US has determined that the copyright part of he streaming income is to be higher than at first decided. This is beneficial to the Hipgnosis investment story.
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The specific announcement today is: “will culminate in a 44% uplift in the “all in” (mechanical and performance) statutory minimum rates for streaming paid in the US, rising from 10.5% of streaming revenues prior to 2018 to 15.1% in 2022.”
Hipgnosis has been paid – largely – at that lower rate and will now receive the extra amount over time. Which is good. However, in the long term, for any new songbooks bought, this won't have quite so much effect. For this higher rate of income will likely t=feed through into higher capital sums that have to be used to buy them.
Where this really makes a difference though is in the current songbooks owned plus the likely next royalty rates to be set. There's a four year cycle here, and 2023-27 rates are about to be set. If those rates in the immediate past are higher then it's a good bet that the rates about to be set will also be higher. This increases the income streams from the songbooks that Hipgnosis already owns. But without Hipgnosis haveing to pay more to purchase them.
So, in the one sense we can see that this is beneficial to the Hipgnosis investment case. But there's also another way of looking at this. Hipgnosis owns assets with a minimum (near all of their songbooks are from living artists) 70 year life. Which is great – but not so great if the price gets reset every four years. At minimum that increases risk to the value of the income stream. So, we can think this isn't so good given the reminder of the price risk being carried.
The real way to think of Hignosis is as an inflation protected bond which is largely uncorrelated with any other investment class. Whether that's attractive as an idea or not will largely determine trading positions.