Investors may soon be able to speculate on which songs are heading to the top of the streaming charts under plans being developed by a US start-up to launch a futures market linked to music revenues.
Chicago-based Clouty has created a tradeable index of global streaming sales, and is looking at an exchange-traded fund that would draw in retail investors. It is also in early discussions with US exchanges about launching futures linked to individual genres, artists and songs, according to two people with knowledge of the discussions.
Its long-term plan is seeking to capitalise on the rapid financialisation of the music business as deep-pocketed investors battle to secure the revenue streams associated with streaming.
In recent years, private equity groups like Blackstone and KKR have spent billions of dollars on the back catalogues of artists like Leonard Cohen, Neil Diamond and Bruce Springsteen in the hope of securing regular flows of income that are immune to economic downturns. Other famous acts, like Pink Floyd, have explored selling their rights or turning their catalogues into asset-backed securities.
“Music is an asset class that’s hiding in plain sight and hasn’t been unlocked,” said David Umeh, founder and chief executive of Clouty.
Goldman Sachs last year predicted that revenue in the global music industry would grow at a compound annual rate of 12 per cent between 2021 and 2030, with revenues hitting more than $150bn.
As this rush continues, the development of markets allowing investors to trade music rights in a secondary market is “an inevitability”, according to Umeh. “Whether in growth or a recession, people are going to stream,” he added.
Clouty, a three-person company, is conducting a seed funding round but faces an uphill battle to turn an offbeat asset class into a long-term tradeable market. Futures markets can take years to build depth and liquidity. Big futures exchanges like CME Group have offered contracts on unusual assets like air temperature, water and hurricanes but they have failed to gain traction.
“There have been many instances of futures that have failed to succeed, even on well understood products. They’re usually too complex to understand, or too complex to price or understand when it comes to calculating their volatility,” said Andy Simpson, chief executive of Sigma Financial AI, a trading technology company.
Clouty has secured the permission of Bloomberg to display its Musiq 500 index, which tracks the revenues generated by streaming of the top 500 songs globally, on the financial data provider’s terminals. The value of the index has risen more than 25 per cent year on year to more than $10,000. It then intends to launch indices by genre and then individual songs. A futures contract would also need regulatory approval.
Executives who have seen Clouty’s pitch question whether it can find a use by big institutional investors and draw in market makers, whose daily buying and selling helps build liquidity. One potential investor had reservations that the indices were built on streaming, and not royalties.
The large sums pouring into the music business have created risks and potential rewards for streaming platforms and rights holders, creating a natural user base for futures contracts, Umeh said.
The unexpected revivals of songs used on TV shows, like Kate Bush’s “Running Up That Hill” on Stranger Things or Depeche Mode’s “Never Let Me Down Again” on The Last of Us, has generated new millions of dollars in royalty payments for the holders of the publishing rights.
But companies like Netflix and HBO may ultimately face higher costs in licensing the rights to the songs, and could use a futures market to hedge the risk.*
Investors who have spent heavily on music rights could also use futures to shield themselves against the risk of artists falling out of fashion.
*This story has been amended to clarify the types of companies at risk