Talk Your Book: Investing in Music

0:00Today's Animal Spirits Talk Your Book is brought to you by Music. That's M-U-S-Q. Go to M-U-S-Q-E-T-F.com to learn more about the M-U-S-Q-E-T-F and how you can invest in the music industry. That's M-U-S-Q-E-T-F.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

0:37Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:45Welcome to Animal Spirits with Michael and Ben. Michael, you said something kind of funny in our interview today. You said that we literally never talk about music on the show, and that's probably true. In our recommendations, we talk about what we watch and stuff, but we never talk about music. And I think you want to know why? Because we're washed and we're middle age and we're past the point of giving recommendations for new music. I don't think I've listened to any new music in 20 years. I don't listen to a ton. I don't listen to a ton of new music, most because it's so easy to listen to old music right now.

1:13And I like what I like. Yes. It's easy to stay in that lane. I will say I've in the last year or so, the majority of my music listening has gone to Zach Bryan and I was never a country person. He kind of straddles the line, I guess, between country and non-country, like country pop these days. But the guy puts out a new album like every six months. So he's my new favorite. But other than that, I never really thought about the fact that the music industry could be undervalued. Because I think a lot of people, when I was in, I remember Napster and those types of services coming into my life in late high school, early college years.

1:53and it was kind of like, okay, this is it. The music industry is toast. And they went through all the legal battles and they figured it out. And now it's like, well, okay, we have streaming. And I talked about this a couple of weeks ago on the podcast, the Columbia thing where I had, you'd spend one cent to buy a CD or something and they'd send it to you in the mail. And how much easier life is now just having music available at your fingertips. And I was saying that we should all be thrilled with that. Never thinking that like, oh, wait, now that they've got us locked in, like they're going to start raising the prices on this stuff.

2:22They kind of have to. Or they should, because I'm not going to give up those music services. Now that I have the ability to have a new album anytime I want, or any old album I want to see anytime I want, or tell my Alexa to play anytime I want, it is kind of hard to think that music is in such a better place than the streaming video wars right now. Because it's not like competing services. There are a handful of services, but it's kind of - Is music recession resistant? I'm sure that ticket sales, live tickets, definitely ebb and flow with the economy, right? Like that's expensive. That's easy to cut if you're not doing well.

3:00That's probably going to get whacked really hard. But something like Spotify, where you're paying 10 bucks a month, I think Oswalt Demodian was talking about like Netflix is a consumer staple. It's like the last thing to go. I wonder what goes first, Netflix or music, Netflix or Spotify. It's probably easier to get rid of. I would think it'd be easier to get rid of Netflix than it would be. And I also think the concert thing coming out of the pandemic, So more people are working from home than ever and not having as much contact. I think that that shared experience of going to something with 10 ,000 different people or 100 different people, however big or small the venue is, I think that that mindset has shifted since the pandemic.

3:36And I think that's something that's going to stick. I don't think it's going to be crazy, huge tours like we're having with Taylor Swift every year. But I think more people are willing to go to a live show to experience it with other people than they were in the past. Did you see videos over the weekend of the sphere in Vegas? It did look pretty awesome. That's the kind of thing that you'd pay up for just to say that you did it and share the pictures. To experience it. Yeah, that's what I mean, yes. But that's what I'm saying. I think the music experience is part of it. And I know you're still a movie theater guy, but I don't think going to the theater is so much different than just the ability to watch it at home on a huge screen TV these days.

4:18It's a little better to go to the theater, but going to a concert versus listening to music at your house, that's a totally different experience than you get anywhere else. I don't have nearly as much fun watching a stand-up on Netflix as I do going to the crowd and watching a stand-up while there. I think music is that similar experience. I saw a tweet today. I don't know if it's accurate, but the Sphere costs$4 billion. By the way, that's a publicly traded company. We didn't get into that with David. but the Sphere cost$4 billion to build and to advertise on it I think the tweet said for a day it's like 500 grand or something like that and after the one concert the stock popped 15 % or something the day after when it opened today so we talked with music CEO and founder David Schulhoff all about the music industry and how he thinks it's totally undervalued and he created a fund MUSQ which stands for music nothing else to invest in the music industry across a bunch of different companies.

5:18And I felt one of the most interesting parts was just the fact that this is a global fund. Hang on. I have to defend my honor. On the show, David called MUSQ an acronym. I'm sorry. I raised my hand and took the loss. I was right. An acronym is the National Basketball Association, the NBA. That's an acronym. MUSQ, I understand what he's doing. It doesn't stand for anything. It's music. MUSQ. It's a different way of - I don't know what the word is for that, but it's not an acronym. It's just a, yeah, it's a different way of spelling. I thought this talk was fascinating. Plus one, great talk. I'm seeing this through the lens of my nine-year-old daughter who has been obsessed with Taylor Swift for the last 12 months.

5:59And honestly, like once a week, I have to say, can we please not listen to it anymore? I need a break. I need you to find a different artist to listen to. And she won't, and she's a super fan. So here is our talk with David Schulhoff, founder and CEO of Music.

6:15We're joined today by David Sholhoff. David is the founder and CEO of MUSIC. I'm told that's a four-letter acronym, M-E-U-S-Q. David, welcome to the show. Hey, thanks a lot, guys. So I want to know what the acronym stands for, but are you coming to this industry? What's your background? Are you a music guy? Are you a finance guy? Is there overlap? Yeah, no, I'm definitely a music guy. I mean, I've been in the industry for 25 years, Michael. You know, my first job was working at Disney, overseeing music for a lot of the studios. They're producing tons of soundtracks. I was the head of music for Miramax and Dimension Films, produced a lot of music soundtracks, ran our music publishing company.

6:53And then I left and started my first music. I started a company called Evergreen, and I bought the rights to a lot of acts. Tupac Shakur, Michael Jackson, Eric Clapton, Joe Cocker, Roy Orbison. We actually had one of our early writers was Liz Rose, who was the early writer for Taylor Swift. So we published her material, too. So I come out of the world as a producer and as a music publisher. So you've personally invested in the music industry in the past, it sounds like. What's the thesis here between what you're trying to get out of this fund? Yeah, well, you know, so I've operated and started a lot of public and private companies.

7:31And about a year ago, I wanted to design something for the public market, for investors, to capture all the growth and innovation around music. I mean, music today is on steroids, right? Every aspect of music, streaming, content, live music, ticketing, equipment, technology. So I wanted to design a fund that gave investors total liquid exposure to the whole industry. So that's what MUSQ is. What does MUSQ stand for? No, I'm saying it's just music. No, music is just the ticker. It's the ticker of the funds. All right. Well, listen, this is my lack of, listen, I didn't go to an Ivy League college.

8:06I thought an acronym stood for something. So that's how many hand up. Does an acronym stand for something? Either way. Either way. So the music industry is on fire. I'm not a huge music guy. So that is news to me. When you say the music industry is on fire, is this the Taylor Swift phenomenon or is it bigger than that? No, I mean, Taylor Swift is just a part of it, right? That's live music. Music today, let's start here, right, which kind of goes right into the investment thesis. Music today is the most overlooked, under-monetized media asset, okay? And that's not just me saying that. That's JP Morgan saying that.

8:41That's Goldman Sachs saying that, okay? Music is cheap compared to other media assets. Go look at what you pay for Hulu, for Netflix, for HBO, okay? It's 45 or 50 % of that, right? And so music's under monetized. Streaming is under monetized. And the industry, right now there's, I think, 7 billion cell phone users. Only 11 % are paid music users, okay? So if you look at the recent report from Goldman Sachs, from JP Morgan, the music streaming business is about to double to 1.2 billion paid subscribers in the next six or seven years. The industry is doubling to$152 billion by 2030. Live music is up 10 times from pandemic.

9:28Taylor Swift represents, it's not just her, it's Ed Sheeran, it's Harry Styles, it's Elton John. People want to be out. They want to buy tickets. They want to experience music. So everything about it, and we can go on into details around every asset of it, but all the way to AI and blockchain, everything's changing about it. Today, it's all about streaming. 87 % of all music revenues today are coming from streaming. AI and blockchain are completely transforming the way consumers discover music, the way artists and songwriters get paid. So everything has been digitized today. The whole industry is now, you know, is about to explode.

10:09And I wanted to really design a fund that captured all of those companies. So if you look at all the companies in our fund, I broke it down into five different buckets. We have streaming, we have content and distribution, we have live music and ticketing, we have equipment and technology and satellite and radio. We have 48 companies in the fund across the entire music ecosystem. 45 % of those companies are domestic, 55 % of those companies are foreign. So this gives an investor access globally to the entire music ecosystem. David, explain. I have a few questions on the streaming side of things because, first of all, that number you gave that only 11 % of mobile users have a streaming subscription is way low to me.

10:50Yeah, I can't believe how low that is. Ben, do you pay for Spotify? I have Apple Music. I'm a boomer as far as music. I do that because it goes across all my Apple products. David, am I right? What? This guy pays for Apple Music? What a dweeb. Well, I pay for four services. Yeah, no, actually. I pay for Apple and Amazon. actually, because Amazon music only works with my Alexa. It's easier. So anyway, I pay for two of them, and I don't pay for Spotify yet. So here's my question, though, on the streaming thing, because the way that streaming works for video is Netflix or Amazon or Apple or whoever pays for a movie or a show up front, and then they can stream it as many times as they want.

11:29They're not paying going forward. They're paying everything up front. But with streaming, isn't it true that they have to pay the royalties with every song player or whatever, and it doesn't scale nearly as well? Who ends up winning? Because I thought the reason that so many artists were going to concerts now and making so much of their money on concerts is because they don't make as much money on the streaming anymore. So who's making money on streaming for music? Right. OK. So you're right. Like artists are making a lot of their money on streaming. So streaming today, they pay, you know, the big the big companies, Apple, Amazon, Google, Spotify, they pay anywhere from, you know, 0.003 to 0.005 cent per stream.

12:05OK, but now there's a combination of streaming revenues that they also pay. So there's really a combination, right, that the way that the payments have been structured with the labels, and it's basically an oligopoly today, OK? You have Universal Warners and Sony controlling the lion's share of the global recorded music market. Artists and songwriters are getting a combination of some of that paid revenue, some of that advertising revenue, and some of that stream revenue. But here's the part of it that's really interesting is that there are only about 600 to 700 million paid users today. And that's going to 1.2 billion.

12:40It's basically close to doubling by 2030. It's still a fraction of cell phone adoption worldwide. So I don't know a single person that has a cell phone that doesn't use or consume music in some way. So when you think about the cell phone penetration for music, these numbers are very conservative. Also, we're just scratching the surface right now with price hikes, okay? Music is cheap. That was back to my first comment. You're paying$11 for access to 150 million songs. It's going to go up. The rates are going to go up by 10 % to 20 % every two to three years, okay? It's still 45 % of what Netflix charges.

13:18So all the streamers are going to raise rates. That makes sense to me. I told Michael this a few weeks ago. We used to buy CDs back in the day for one song or for two songs. And now, like, I do agree that the amount of music you can get for paying a monthly fee is, 1990s me would have been blown away by the amount of choice I have. A brand new album comes out. I'm a big, Zach Bryan is my newfound love of music. I love Zach. He had two new albums in the last month, and they're just immediately, like, overnight, they're on my phone. And I didn't have to do anything but pay a monthly subscription.

13:49Ben, what was your first record that you bought? Oh, I don't know. Something back in the 90s. Probably, like, MC Hammer or Vanilla Ice. something. I mean, it was a tape because that tape. I remember mine. It was they were cassettes. Mine was throwing copper. OK, live and not bad. But so, by the way, you just hit on a really good point, Ben. Consumers today are paying 40 percent less than they paid 10 or 15 years ago when CDs were around. So that's my point, too. Not only can rates go up even more with little churn, right? You would pay twelve dollars for one hundred fifty. So who's the winner besides like Spotify and Apple here?

14:20Or is that the easy answer? No, the content. Well, they are a big winner, but so are the content owners. Like I said, because they benefit from the revenues and growth. That's how streaming royalties are being calculated, right? There's a percentage of the revenue from the streamers, and that gets attributable down to the artist, depending on how many streams they have. As you mentioned, I never really thought about it the way that music is so underpriced relative to streaming TV and movies. Do you think Spotify and the likes are like 10 years behind where Netflix was when they launched their streaming?

14:56There's no question about it. And 10 years behind where the video game business was too. I mean, if you listen to Lisa Yang's new report, Music in the Air, which she wrote, I mean, this is expected to grow in line with the video game business, right? Rates are going to go up every 10 % every two to three years. We're just scratching the surface right now on price hikes. and in a macro environment, by the way, when shit hits the fan, right? And then there's a recession, like people are going to quit video before they stop audio, right? This is a much cheaper alternative to consumption, right? So I think music's in a really good place right now.

15:32It's very under monetized. People are spending less than they used to. I think this summer with live tours, they've proven that they want to go out. It was the summer of funflation. They wanted to spend money. They were spending$700 to$800 for Beyonce tickets. They were spending$5 ,000 for VIP packages. So they want to see their favorite artists. They want to go out. I mean, look at this venue they just opened in Vegas, this sphere. Sick, dude. Apparently that's like state-of-the-art AI. I didn't go for the opening. That's like just an example of some of the stuff that's like happening out there with live music.

16:07You can't replace that with goggles. You can't replace that on TV. So I think live music, that's what I'm saying when the whole thing is on steroids, streaming is growing, live music is out, and then AI and blockchain is just changing the way artists get paid and songwriters get paid. That's a great point on streaming being recession-proof because you're right. You can hop in and out of Netflix or one of these streaming videos because you want to watch a show on HBO, and then you binge it and it's done, and then you cancel it. But with music, it's ever-present. And people are, I mean, younger people now are listening to stuff their parents did or other generations did before anything else because they can find that, you know, their catalog is endless, basically.

16:48But who makes the most money on the concerts? Because my wife and daughter went to see Taylor Swift, and I agree with you that people want that shared experience, and they haven't stopped talking about it since. They went two or three months ago in Detroit, and it was like a life-changing event for them or something. They still talk about it so fondly to this day. Michael and I have talked a lot about Ticketmaster and StubHub and these ticket venues. We've got bones to pick. We have many bones to pick. Why has that not been cracked yet, where you still have to pay so much in fees for these ticket places?

17:19How come no one has figured this out yet? Well, okay. Well, first of all, you're touching on a lot of really important topics. So look, Live Nation is under pressure right now, right? They own Ticketmaster and these bots that are buying the tickets and then arbitraging them and making a shitload of money, like that's an issue right now, right? It's an issue for Springsteen fans. It's an issue for Taylor Swift fans, for Beyonce fans. Look what they're doing with Olivia Rodrigo on her Guts tour. Now you can't even reserve a seat when you buy the ticket, right? You have to pick it up at Will Call and there's going to be no seat assignment there.

17:51What year is this? Right now, this is happening on her Guts tour. It's starting in February. Exactly. And you would think like they should have done this a long time ago. So the ticketing companies have benefited. They really haven't had an incentive to fix it. In our fund, we have all the concert promoters and the ticketing companies like Vivid Seats and Live Nation. So we just like to, we want to capture all the growth that's happening. But there's changes happening. There's policies that are being put in place. They're making it, the pre-registrations are more difficult. You know, like I said, the seats, you know, so SeatGeek and StubHub, they can't trade and flip it.

18:23But look, the artists are still getting very big guarantees. They have big pieces of the back end. And, you know, Taylor Swift and Beyonce, they're each going to probably do over a billion dollars in revenue from these two tours. OK, it's amazing. And forget the impact of the overall economy. What they've done is not only economically amazing, it's culturally amazing, too. Right. They've really kept like businesses out of a recession. Right. Look at the impact on hotels and on lodging. You know, they come into a city and hotel occupancy rates that were like 33 percent. They're now like 95 percent when they're there.

18:56So, you know, there's huge benefits to these artists on tour. And I think that, you know, their currency is going to just continue to go up. You know, they're going to get bigger guarantees from companies like Live Nation, which is in our fund. And, you know, and people are and the cost of tickets are going to continue to go up. David, if you could buy a slice of Taylor Swift's current market cap, Ben and I were talking about this the other day, and you could own a piece of her future income in perpetuity. What number would you pay? Is$5 billion too low? Is that too high? Well, you know, look, I'd probably own her publishing over her recordings, right?

19:34First of all, if you want to split up that, because the publishing, you get a benefit when anybody else sings that song, you get a royalty from the publishing, right? And we have all those royalty trusts in our fund, too, by the way. That's what music publishing is about. It's about collecting revenues from other artists. So you want to own her publishing catalog. Who owns that right now? I know there was a lot. She does. No, what happened was with her recording catalog, the issue there quickly was that she was an early artist. She signed to Scott Borchetta at Big Machine. Big Machine and Taylor's manager, they then got with Carlisle and they bought it and she got all pissed.

20:08And now it's owned by Shamrock, right? This private equity firm in LA. So she doesn't own the recordings, but because she was out of her re-recording restrictions, she then re-recorded Taylor's version of all the songs. It's like when you fork something on the blockchain. Well, it's basically you get the, if you're out of your re-recording restriction, you can make your own version of it. And then you force people to use it because they still need the other license, the publishing so they can block it. Right. So if there's a new movie out by Paramount or Sony and they want to license a Taylor song, she could force the publishing.

20:38Anyway, so to answer your question, what would I pay? I don't know. It's worth a lot. The publishing is worth a lot. Her catalogs got 250 songs. She's a songwriting machine. I don't know. Mick Jagger just turned down$500 million for his catalog. I have no idea what Taylor's catalog. Well, he doesn't have that many years left. I mean, Taylor's got 60 years on him. So, but getting back to the blockchain thing, you mentioned that blockchain and I are going to transform this industry. I've spoken about like, I think NFTs, not the pet rocks or anything, but like as somebody that goes to a sporting event, for example, it would be great if I had evidence, not just to sell, but for myself, of all the games that I went to, I don't have any, I have like ticket stubs.

21:19But if you had, I don't know, if you were at like Jordan's last game, the final shot, like that to me is pretty interesting. Yeah. What's interesting for blockchain, Mike, is that it sets up a direct payment rail with whoever's using the music to the songwriter, to the artist, right? Like if there's a song played in a bar, like the artist should know exactly at what time and they get paid right there. Believe it or not, it could take you like nine months to get paid for songs that get performed around the world. It shouldn't take that long. There should be a direct payment rail between the user or the stadium or the venue or the theater owner and the artist.

21:51And that's what blockchain is doing. And AI is also having an amazing impact on the business. AI is just revolutionizing creativity and revolutionizing production right now. And it's giving artists like tons of tools. They can access stems to create new music. If there's a new songwriter, how about this, okay? Ben, you're the Zach Bryan fan. If I'm a songwriter with AI, let's say I wanted to get it to Zach, I could have Zach's voice on all of these new songs that I'm writing to pitch it to Zach, to make it sound like Zach. So it really allows for creativity. It allows for pitching. So all these tools are just amazing to me.

22:31Is there going to be a fight over this with other people using versions of someone's voice for AI? I mean, I know the whole writer's strike part of the deal with that in Hollywood was they didn't want AI to take credit for writing a script or something because you feed all these inputs in and it spits you out of romantic comedy or whatever. Are there going to be lawsuits for years and years ahead on this stuff? How is this all going to work? Yeah, and look, it's a tricky area because you can't copyright a voice, right? That's the problem. You have no copyright protection in your voice. You can protect your harmonies.

22:59You can protect your melodies. And so what's happening is deep fakes are happening. and they're actually suing whoever's using it around a sample infringement. That's how universal, when there was like the fake Weekend and the fake Drake on Spotify, they actually backdoored it through a sample, right? So that's what they have to do. So, but look, here's the thing. Like I said, it's an oligopoly today. All the majors are already working with Google on putting together an AI music incubator, a task force, right? To combat deep fakes and to build protocols in place for consents, for control, and for compensation.