A billion dollars is probably the wrong price for Queen’s songbook

The biggest mystery of “Bohemian Rhapsody” is why anyone would want to listen to it twice. The second-biggest mystery relates to who gets paid when they do, though that might soon become clearer.

Per MainFT:

Sony Music has created a financial vehicle titled “Rock Bidco” as the record company bids for the music catalogue of British rock band Queen, which is expected to fetch a billion-dollar sum. 

“Rock Bidco” was incorporated on May 17 and is controlled by Tim Major, the co-leader of Sony Music Publishing, according to a filing with the UK Companies House. Queen had been shopping its music catalogue around for more than a year and had held talks with Sony Music and its rival Universal Music, according to people familiar with the matter.

While Queen’s catalogue offers bidders one of the last A-list music assets still controlled by the band, legacy part-securitisatisation helps demonstrate what a mess of carve-ups and conflicting interests the music rentiers now have to unpick.

It all began in the late 1980s, when record companies were overvalued because EMI and Virgin Records were overpaying for acquisitions. Disney boss Michael Eisner wanted to sell film soundtracks and tie-in bands, but buying an established label was too expensive, so in 1989 Disney set up Hollywood Records.

It was a disaster. Hollywood Records passed on mouse-hostile bands and artists including Nirvana, Cypress Hill and Dr Dre while backing no-hit wonders such as The Party, a wholesome pop troupe of former Mickey Mouse Club Mouseketeers.

But Hollywood Records got lucky. In 1989 it bought US and Canadian recorded-music rights for Queen’s catalogue. Queen’s star was in decline at the time, not helped by EMI and its North American subsidiary Capitol Records botching CD reissues of its back catalogue. The licence was reported to have cost Disney just $10mn.

Freddie Mercury’s death in 1991 proved the Elvis Presley dictum about posthumous sales, and the “Bohemian Rhapsody” scene in 1992 movie Wayne’s World introduced operatic pomp-rock to new audience. By 1995, Disney had made an estimated near-tenfold return on the Queen investment. Hollywood Records went ten years without an original hit, so the cash mostly just subsidised losses elsewhere, but Eisner still felt vindicated:

Everything has changed in the intervening years, except the songs.

We’ve written often on these pixels about how the lopsided economics of streaming has changed the music industry but to summarise, “Bohemian Rhapsody” is in an elite category of golden oldies that are played on repeat:

These songs are in the approximately 1 per cent (Y axis) that account for more than 90 per cent of the streams (x axis) . . . 

Back-catalogue accounts for between a quarter and two-thirds of the streaming market, depending on how it’s defined . . . 

. . . and as the average age of subscribers to streaming services rises, their desire to hear anything that’s unfamiliar has been falling:

Being so reliant on a handful of vintage properties, with regional revenue-share contracts attached that might predate the eight-track, makes for an odd and opaque asset class.

For example, Queen’s surviving members retain recorded music rights outside North America. Their royalties peaked following the release of the Bohemian Rhapsody biopic in 2018 and have since levelled off. Queen Productions Limited, their main vehicle, reported royalties for 12 months ending September 2022 of £36.8mn, down from £71.5mn in the 2019 financial year.

The more interesting line in the Queen Productions accounts is other income, which went from £271,000 in the 2021 financial year to £4.1mn. The introduction attributes the improvement to a UK theatre tour for the We Will Rock You jukebox musical and higher live-music licence fees.

We Will Rock You’s original West End run ended in 2014, and Queen Productions only started itemising revenue in its 2019 accounts, so it’s tricky to see exactly what’s going on with other income. But as the trend between 2019 and 2022 was for revenue ex-royalties to be in the low six figures, it’s reasonable to assume that a partner is taking a sizeable cut of Queeniverse IP.

By far the most likely candidate is Universal Media Group. The world’s biggest music publisher said in a 2018 press release that it was Queen’s official music distributor outside North America, and its Bravado brand management division supports Queen’s global merchandise and retail licensing. Mercury Studios, UMG’s film and TV division, publishes Queen concert DVDs.

These agreements add up to a “potentially a fairly material distribution deal for UMG, albeit in the context of a revenue base that is not characterised by a high level of concentration,” says Citigroup:

The point here is that if a deal with Sony is concluded, it is not inconceivable that this might then be accompanied by a change in distribution arrangements. Indeed, we suspect it would make sense that if Sony was the eventual acquirer, that it would move distribution rights in house as this could be a source of fairly significant financial upside. In this context, there is potentially a risk to consensus estimates for UMG in the event that a transaction away from them is confirmed.

Exactly a year ago, CNN reported that UMG was nearing an agreement with Disney to buy the Queen catalogue for $1bn. (Disney told CNN at the time that it had no plans to sell.) Today’s MainFT story says, citing sources, that UMG is no longer willing to pay $1bn and has dropped out of the bidding.

UMG controls approximately one-third of the market for recorded music so its investors don’t have to worry much about any one artist, even when that artist is Taylor Swift. Citigroup’s take on the seriousness of the situation does not seem to be widely held, with UMG shares up a tad in today’s falling market having underperformed by a tad on Wednesday. Easy come, easy go, little high, little low.

More telling might be the news that UMG no longer wants to pay approximately $1bn for an estimated revenue of $45mn a year.

A gross yield of 4.5 per cent might’ve looked acceptable to UMG in May 2023, when the Fed had just done hiking and the first cut looked possible before the year end.

Any deal now is dependent on being able to sweat the assets harder — and, if reports are accurate, the biggest and most efficient sweatshop in the business doesn’t fancy its chances.

A Queen sale to Sony won’t mark the top of the market for music rights; that happened a couple of years ago. Neither is it likely to affect enthusiasm for the asset class among private equity funds.

The big warning is for sellers. If it’s a “no” from the manager that knows the songbook best, with the most potential synergies to extract and the fewest legacy conflicts to fix, then that’s a signal of rationality being restored to the concentrated market for A-list assets. And if that happens, valuations will remain under pressure.