Valuation of Music Catalogs Ivan Kosyuk and Sasha Stoikov September 21, 2022 Abstract We propose a risk neutral approach to forecast the cashflows of music catalogs, based on historical revenue data. We use a discounted cashflows formula to produce reasonable ranges of multipliers for these assets, based on the age of the catalog, the last-twelve-months revenue and the duration of the contract. We compare the multipliers implied by the cashflows of top, median and bottom performing songs on the Royalty Exchange platform. We find that ask prices are close to the multipliers justified by median song cashflows. The best bids are near the multipliers justified by the bottom decile of song cashflows. 1 Introduction Nowadays, when new music is released, streaming revenues look small relative to what the sale of CDs used to generate. This has had a profound impact on the timing and magnitude of musicians’ revenues [4]. The slow trickle of cashflows in the early years after a release may be helpful in predicting the long term streaming revenues for a song or album. This has opened the possibility for financial instruments that allow investors to participate in the future cashflows of music, an activity that has grown to an estimated US$5bn in music rights transactions in 2021 [8]. The structure of these instruments have been debated from a legal perspective [6]. From a practical perspective, musicians may want to sell their rights to receive payments upfront, based on the revenue they are expected to generate over a future time period. The money raised this way can provide a lump sum to fund music production, marketing and help artists diversify their assets. At the fundamental level, the value of these rights depends on: • The Last Twelve Month (LTM) revenues. Prices are usually quoted in terms of multipliers of the LTM. • The duration d of the rights. This may be a fixed horizon, say 10 or 30 years, or life-of-rights assets that last 70 years after the death of the artist. • The discount rate r used to discount cashflows. There has been much debate about what the discount rate should be [2],[3], [5] and [7]. In this paper we fix this rate at 10%. • The expected future cashflows ˆ C t+i , where t is a value-weighted average of the ages of the songs in a catalog and 1 ≤ i ≤ d are the future dates of the cashflows. Other metadata such as the the genre, the sources of revenue, the nature of the rights (recording or publishing copyrights), the artist’s language, country and gender may also be considered. The overall outlook of the the music streaming business may also be an important factor (see the latest ”Music in the Air” report by Goldman Sachs [8]). The fair price can be expressed as a sum of expected discounted cashflows, P d t = d  i=1 ˆ C t+i (1 + r) i where the main challenge is estimating the cashflows ˆ C . Cashflows are notoriously hard to estimate, as hits tend to emerge in very unpredictable ways. Effectively, rights buyers are buying a form of high 1 arXiv:2209.09719v1 [q-fin.PR] 20 Sep 2022