Song Publishers Call Tune in Seller’s Market

In the entertainment industry, music publishing used to be considered the plain little sister of the more glamorous movie, TV, record and video businesses.

Not anymore, however. Spurred on by increased record sales, higher song royalty rates and licensing fees, and an explosion of music-consuming cable and satellite TV programming overseas, music publishing has suddenly become one of the hottest commodities in show business. In fact, some think the song market is overheating.

Recent acquisitions of music publishing catalogues have totaled more than $1 billion, according to some estimates. Last week alone, Sony Corp.’s CBS Records unit paid about $40 million for Nashville-based country music publisher Tree International, and the British entertainment conglomerate Thorn-EMI agreed to purchase the 250,000-song catalogue of SBK Entertainment World for an unprecedented $337 million.

As an example of the inflationary spiral, SBK Entertainment bought nearly all of its song catalogue in 1986 from CBS Records’ former owner, CBS Inc., for $125 million--a price that many thought was high at the time. Some experts said the same thing last year, when Warner Bros. Music purchased Chappell & Co., with its estimated 400,000-song catalogue, for a reported $225 million to $250 million.

“Now people are saying it again about Thorn-EMI; everybody’s got a new number to criticize,” said Jay Morgenstern, executive vice president of Warner-Chappell Music.

“It’s totally a seller’s market right now,” said Chuck Kaye, who was president of Warner Bros. Music at the time of the Chappell takeover and later quit to form his own Burbank-based publishing company, Windswept Pacific.

“I saw this coming,” Kaye said. “When I saw what was being paid for Chappell, I said, ‘I have to get a piece of this; I want to be in on it.’ ”

With financing from a Japanese telecommunications firm, Fuji-Sankei Group, Kaye’s Windswept recently acquired New York-based Big Seven Music, whose 6,000-song catalogue includes such 1950s and 1960s pop hits as “Why Do Fools Fall in Love,” “I Think We’re Alone Now” and “Mony, Mony.”

Assets ‘Undervalued’

“I think the economics finally caught up with the business,” Kaye said. “And I just got in under the wire.”

A music publisher owns or oversees song copyrights, licensing them for use in television, movies, advertising and other commercial contexts. The publisher collects the fees and royalties from the various uses of its songs, generally splitting the proceeds with the songwriter or copyright owner.

According to Edward P. Murphy, president of the National Music Publishers Assn., the high prices being paid for song catalogues are not unwarranted. “I think these assets have been undervalued for some time in relationship to earnings,” he said.

In addition to increased royalties paid to music publishers by record companies--which have seen their unit sales rise at an annual rate of nearly 20% in the past few years--”the amount of music being used in TV commercials has increased, at very high fees,” Murphy said. “The price range for a song used on a national commercial is now $200,000 and on up.”

In addition, foreign income for music publishers “is going up between 30% and 40% a year,” Murphy said. “As a result of all the expansion in Europe--cable TV, satellite TV, free TV, the BBC’s addition of new channels--they are using music over there at a higher rate all of a sudden. The amount of music being consumed is tremendous--also in South America and other emerging nations. The demand for Anglo-American repertoire is just incredible.”

“Software is king in the entertainment business, and music is just another form of entertainment software,” said Fred Anschel, an analyst for the New York investment firm of Dean Witter Reynolds. “What they are getting is their pound of flesh for all the new uses of music, all the new TV channels.”

Easier Than Drilling

Jeffrey Logsdon, an analyst for the Los Angeles investment firm of Crowell, Weedon & Co., said he sees an analogy between what’s happening in the music publishing business and the oil industry.

“It’s always easier to buy reserves than to drill,” he said. “And song copyrights are reserves. They’re an annuity whose value can go up ten- or a hundredfold.”

Logsdon offered an extreme example of the current frenzy to acquire song copyrights:

“We recently saw a deal involving a two-artist company with a negative net worth and major lawsuit against them that they are going to lose. And 50% of that company is being bought for $4 million--with only seven song titles in copyright.”

One aspect of the recent acquisition binge has been a marked consolidation in the industry. The four largest firms of just four years ago--Warner Bros. Music, Chappell & Co., EMI Music and CBS Songs--have been reduced to two huge firms, holding close to 1 million copyrights between them.

“I don’t know if that’s good for the business or not,” said Chuck Kaye. “It’s made a lot of people wealthy and put lot of copyrights in a couple of corporate pockets, but those big companies can’t dictate the economic policy of the industry because royalty rates are dictated by the government and tribunals. They cannot set economic standards.”

‘Like Pork Bellies’

Some in the industry are concerned about the buying and selling frenzy. “It’s a little bit reactionary; I see song catalogues being passed around like poker chips,” said Lance Freed, president of Los Angeles-based Almo Irving Music.

“There used to be a set multiple for buying a song--four to eight times its annual net publisher earnings,” said Freed. “But now they’re becoming commodities like pork bellies or gold, where the value is what people are are willing to speculate.

“I just hope that, despite all this insanity and the focusing on the bottom line that will result from these huge prices being paid, the business stays somewhat creative.”

“We think the premiums being paid right now are extreme,” said Nicholas Firth, president of BMG Music Publishing Group in New York. “People are investing right, left and center, and a lot of these purchases are being made based on a very bullish scenario. It’s like the leveraged buyout game--one thing feeds on another.”

Nonetheless, Irwin Z. Robinson, president of EMI Music Publishing Worldwide, still thinks his company is getting a bargain in its $337-million purchase of SBK Entertainment.

“A very good copyright lawyer, Lee Eastman, who is also Paul McCartney’s father-in-law, once said to me, ‘Irwin, when you buy a copyright that has a track record, you can almost never overpay for it.’

“And I’ve pretty much lived by that ever since,” Robinson said.