Why does Taylor Swift Hate Scooter Braun? A Story about David Bowie, Streaming, Asset Backed Securitizations, and Private Equity
In November 2020, Taylor Swift released a statement explaining her recent public feud with music producer Scooter Braun. “As you know, for the past year I’ve been actively trying to regain ownership of my master recordings,” Taylor wrote.[1]
Unbeknownst to the average music fan, this tweet was the ending of a long saga involving a type of esoteric asset backed securitization deal that had occurred behind the scenes. The deal implicated issues that often rise to the fore when artists are in dispute with their record labels, such as an artist’s ability to control their own music and who profits from the sale of music rights. The type of deal that transpired is called a royalty securitization. Royalty securitization is not a new concept: David Bowie was the first to participate in such a securitization arrangement, working with an investment banker to transform his right to future music revenue into a present cash payout.[2]
The deal worked something like this. A pool of income-generating assets (i.e. Bowie’s records) were sold to a special purpose vehicle (like a trust or a corporation), which then issued bonds to investors who received interest and principal from the income-producing assets (i.e. future album sales and licensing fees).[3] As the owner of his masters, Bowie received a $55 million upfront payday.[4] The bonds had a ten year maturity date and a 7.9% coupon rate, providing investors with a 0.5 percentage point over other asset-backed securitizations available at the time.[5] While the ten year “Bowie bond” didn’t ultimately live up to investor expectations (being down-rated to junk status in 2004, as online downloads overtook physical CD sales), similar arrangements were created for James Brown and Marvin Gaye. Since then, interest in the instrument appeared to petter out, and royalty securitizations have remained a relatively rare occurrence.[6] A similar deal was attempted more recently by Eminem in 2017, with the recognition that streaming could provide a new long-term cash flow to artists and owners of master recordings.[7]
Around 2017, Shamrock Capital similarly recognized the opportunity that streaming could offer, and pounced on a massive scale. The firm, originally the family office for Roy E. Disney, has long had an interest in intellectual property (IP) acquisition.[8] Only a few months before Ms. Swift’s tweet in 2020, Shamrock Capital announced the final closing of its $400 million Capital Content Fund II.[9] This second content fund continued Shamrock’s previous IP acquisition strategy, raising $250 million in 2016 to purchase interests in over 800 films, 1000 TV episodes, and 5000 songs.[10] Based on marketing materials for its inaugural capital content fund, the firm previously acquired 100% ownership of the Spyglass entertainment library, including Bruce Almighty and The Sixth Sense,[11] and 100% ownership of the publishing and writes share of the Stargate catalogue, including number one songs by Rihanna, Beyoncé, Katy Perry, Coldplay, and Selena Gomez.[12] As of 2019, the Capital Content Fund I is said to have earned a gross Internal Rate of Return (“IRR”) of 30.1% and a net fund IRR of 7%.[13] Capital Content Fund II has garnered some institutional interest, with the Employee’s Retirement System of Rhode Island[14] and Maryland State Retirement and Pension System[15] both investing as limited partners.
This brings us back to Taylor Swift. In 2005, she signed a recording contract with Big Machine Records that, like most recording contracts offered to young artists, gave the record company sole control of her masters.[16] As the owner of the copyright, Big Machine Records had exclusive rights “to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership”.[17] This means that, unlike Bowie’s deal, Ms. Swift received nothing from the sale of her masters and will receive no part of the resulting securitization.
The controversy surrounding the private equity deal has pointed to potential downside risks of such financial arrangements. The “assets” that asset-backed securities are built on should produce a consistent stream of cash flows that can cover the principal and coupon payments owed to investors as well as the administrative expenses and eventual carry owed to fund managers.[18] The assets must be able to reliably retain value over the long-term, and continue producing cashflows for as long as possible. In 2021, Ms. Swift began the process of re-recording her old albums, to much fan excitement. She has indicated that she intends to continue on with the re-recordings,[19] potentially diverting at least some percentage of digital streams and licensing fees away from Shamrock’s investors. Industry professionals seem to think that the cash flow diversion will not be astronomical, and that the original records will be difficult to replace.[20] Beyond this, streaming and album sales are highly dependent on music tastes and fan enthusiasm, both of which are unpredictable. The returns from Shamrock’s IP acquisition strategy will have to demonstrate whether such a strategy is worth the large upfront cost of media acquisition.
Perhaps the major takeaway from this story is that young artists should remain aware of the importance of control of their master recordings, and potentially attempt to contract for control as soon as possible. The capital markets will see if such a trend continues, and if these securitizations pay out as they are promised. In the meantime, artists should know that private equity magic is happening somewhere in the background and keep in mind who is getting paid.
Footnotes
