Royalties are the ultimate in passive income. Create a piece of work once… and receive payment for it many times. In some cases, many, many, many, many times.
Haven’t composed a catchy song… penned a hit Broadway musical… or written a Hollywood blockbuster? No problem.
You can still tap into other people’s royalty streams.
It’s the easiest way to capitalize on OPM — other people’s money. Think about it… you don’t have to invest time creating an asset, yet you get to benefit from its ongoing value. Someone else does all the hard work, while you make money. Pretty cool.
There are opportunities to invest in royalties across all kinds of creative products. Here’s a look at the top three: music, Broadway shows and movies.
A musician writes a song and a potential cash cow is born.
Next, the cow — er, song — is registered with a publishing company as intellectual property (IP) of the songwriter. If you examine the fine print of song credits, you’ll see the author(s) listed and then the publishing company that owns the rights.
Once the song is registered, the publishing company can negotiate deals for rights and the revenue streams begin. There are two primary types of revenue generated…
One from the song itself…
And one from the recording…
As you can see, if a song is popular, there are a number of opportunities for it to earn its rights-holders money.
Very successful musicians who write lots of popular songs therefore have entire catalogs of valuable IP — which offer even bigger possibilities for making money.
David Bowie was the first to monetize his song catalog in a big way.
In 1997, a cool $55 million in bonds was issued, backed by Bowie’s 25-album catalog (until 1990). The terms were attractive — 7.9% interest paid twice a year for 15 years. They were sold in denominations of $1,000.
A division of Prudential bought all the bonds from Fahnestock & Co., the issuer, and sold them to the public, advertising them as a way for fans to own a piece of the artist.
“Bowie Bonds” (as they were called) were as big a hit as Bowie’s records. Their success inspired Fahnestock to issue bonds on the James Brown, Isley Brothers, Ashford & Simpson and Holland-Dozier-Holland (the songwriting team of Motown’s golden era) publishing catalogs.
For this investment type, “Buy what you like” isn’t the best advice, unless you really know the music genre concerned and think you’re the next Phil Spector, Todd Rundgren or other such genius producer.
To get started, you’re best off sticking with music that’s already well-known or has a track record of paying royalties.
Show business is big business. According to Off Broadway Alliance, the Broadway industry can gross $1 billion or more in a year.
There’s an interesting saying on Broadway: “You can’t make a living, but you can make a killing.” And there’s a lot of truth to it. Only 25% of Broadway musicals make money. The others merely break even or lose money.
But when a show hits — as one in four do — it goes to the moon. The most recent example of this is Lin-Manuel Miranda’s Hamilton. After nearly four years on Broadway and launching a touring company, seats are still moving like hotcakes and the soundtrack is racking up downloads.
A friend of mine invested in the Hamilton touring show. She’s very happy she wrote a check when she did, before anyone knew how successful the tour would be. Now she receives a tidy check on a regular basis.
To become a Broadway backer, investors can buy shares called units. The minimum investment for a Broadway show is generally $25,000. The producers get nothing until the show starts making money, at which time profits start to be split among producers and investors.
The deal gets sweeter if the show goes “blue chip.” Merchandise, domestic and international tours, a film adaptation… a piece of all of that goes in your pocket. Plus, depending on the producers and how much you invested or your relationship with them, you may get fringe benefits such as rehearsal attendance, cast parties, a backstage tour, free tickets and more.
But the party doesn’t go on forever… Top-billed stars move on, shows close and audiences move on to the Next Big Thing. There’s also usually a time limit on how long investors’ rights to collect last. And investors don’t always benefit from ownership of the score.
What you want to look for is a producer who has a track record of success. Someone who demonstrates they understand the artistic and financial sides of production. A Tony-winning producer is highly desirable (producer Ken Davenport studied hit shows and discovered about 75% won a Tony).
Want to start small? Try Off-Broadway productions. You can get in for as little as $5,000 — sometimes less. You won’t make as much, but you can get your feet wet without risking as much of your capital.
To avoid losing money, just say no to the shows with huge budgets (i.e., half a million a week or more) or with a star who has too much creative or financial power.
Last year, the film Black Panther decimated box office records worldwide — raking in an astounding $201.8 million in its first three days in North America and topping $1 billion globally less than a month after release.
The king of Wakanda makes major bank, helping Disney put up its 16th billion-dollar box office…
For some, returns like that stimulate an appetite for film investing.
It’s tricky, though. Of the three opportunities for royalties presented here, this one is the riskiest. One producer likens film investing to venture capital investing in startups. Having worked in Silicon Valley back in the day and seen startups come and go, I can tell you this investment isn’t for everyone.
It’s like investing in a Broadway production on steroids — everything’s bigger. The money, paychecks, the budgets, the sets, the number of people needed. And of course, there are huge egos and all the movie biz jargon to decode.
But if film investing truly interests you, I have some good news. There are a number of crowdfunding sites out there now that cater to films of various types.
The beauty of a crowdfunding site is you have a lot of company. Plus, you get a direct connection to the filmmakers and you can choose how much money you want to put up.
They also offer interesting benefits. Rewards that run the gamut from a tweet of your name all the way up to a part in the film. And one celebrity director raising money for an independent project was willing to take anyone who contributed $10,000 to a basketball game.
First, check out IndieGogo. It’s a tried-and-true platform that features interesting projects of all kinds seeking funding, including movies. The project proposals are generally very detailed, so start your research there.
One of the best things about these three royalty investing ideas is the fun you can have with them. Each comes with a unique, personal experience. You don’t usually get that with stocks and bonds.
To your wealth,
Editor-at-large, Unconventional Wealth
Steffi Baker is the editor-at-large of Unconventional Wealth. For the past 10 years, she worked with a small strategy consulting firm that dealt exclusively with wealth-management companies, helping them market themselves to ultra-high-net-worth clients.
Through this line of work, Steffi attended events in London and New York and hobnobbed with household names and international...