Music as an Asset Class
Sasha Stoikov, Aadityaa Singla, Umu Cetin, Luis Alonso Cendra Villalobos
TL;DR
The paper tackles the challenge of pricing and evaluating music royalty assets in a fragmented, illiquid market by calibrating three discounted cashflow models to 1295 Royalty Exchange transactions. It defines returns with $r_i=\frac{p_{i+1}+c_i-p_i-t_i}{p_i}$ and uses model-implied prices to backtest one-year and five-year horizons, comparing performance to equities after transaction costs. Life of Rights assets show risk-adjusted returns comparable to S&P 500 stocks over five years, with stable dividends and modest appreciation, while 10-year contracts deliver higher income but more depreciation; the results support considering music royalties as a diversifying asset class due to likely low correlation with equities. The study provides a quantitative framework for pricing music royalties and informs portfolio allocation, while highlighting limitations such as potential non-financial drivers and in-sample design, paving the way for future integration of musical quality and market dynamics into pricing models.
Abstract
In the streaming era, music revenues distributed to rights holders have become more transparent. However, it is not yet clear how to quantify the risk and return characteristics of music royalty assets, as is done with equities. In this paper, we fit three discounted cashflow models to transactions on the Royalty Exchange platform. We use our best model to backtest the one year and five year performance of music royalty assets, after transaction costs. We find that Life of Rights (LOR) music assets had risk and return characteristics comparable to stocks in the S\&P500, when held over 5 years. Since the performance of stocks and music assets are likely to be uncorrelated, this result may help investors assess this asset class within the context of a more traditional stock and bond portfolio.