Matthew Smith

To paraphrase an old cliché, "There's gold in them thar catalogs!" That's what Matthew Smith has discovered with his company, Royalty Exchange. The company provides the forum for songwriter and copyright owners to put their efforts up for auction. Thus, the public has the opportunity to bid for the royalty rights to work by The Grateful Dead, 50 Cent and many others. The highest bidder acquires a novel revenue stream, while the content owner can earn significant capital upfront. Smith describes the "musical stock market" here.

What made you decide to acquire Royalty Exchange?

Coming from an investment perspective, the biggest thing that excited me was that there was a lot of potential to create yield for investors. Today's landscape offers stocks and bonds to individuals, as well as things like pension funds. But there are few other places in the world where anyone can find a substantial yield. What kind of interest rate is there in a checking or savings account? It's insulting, it's so low. We felt royalties are interesting in that they're not related with other markets, but could generate substantial income. Those are two things that really appeal to investors. Judging by the information that's available, the royalty market is actually underserved. Bringing market transparency would create new value for artists, as their royalties will be valued more fairly and the investors can generate more yield.

Were you satisfied with the way the company was being run at the time, or did you tweak it?

I've started a lot of different businesses in my life, and I made every mistake an entrepreneur can make. The founder of this business did a remarkable job with a lot of things and of course, made some mistakes, too. I made some when I started some businesses from scratch as well. Here, I took the core model and built a better launching pad to generate more awareness for shareholders and investors.

I'm actually a bit surprised at how successful we've become so quickly. We've increased the number of auctions to more than 200 and have brought in millions of dollars from participants who are outside of the music business. We still have a long way to go; we're constantly improving our approach to the market in how we serve the product, but I'm satisfied and proud of what we've already accomplished.

Please describe your business in a nutshell.

Essentially, Royalty Exchange gives people the opportunity to raise capital using their back catalog; the individual rights holders and songwriters who have been earning royalties can carve out portion of their catalog and put a piece of it up for auction. There, investors compete to acquire it to earn the royalties. That competition creates a better process for discovery and gives artists' real fair market value for their work. They can earn up to10 to 12 times their yearly earnings upfront. The biggest thing is that it also offers lot of flexibility. They can keep the copyrights. By not signing a deal with publishers that'll obligate them to future work, they can just leverage just a part of their body of work and still raise large chunks of capital.

Royalty Exchange has a subsidiary, Royalty Flow, which is going through an IPO. It will acquire and manage royalty interests in media assets. Our first acquisition will be Mark and Jeff Bass' producer royalties from Eminem's entire recording catalog from 1999-2013. We'll be adding several catalogs soon after that.

How do you ensure royalty investing is a win-win for all parties involved?

The number-one way to do that is with information. The goal is to get more people to understand a royalty right as an asset -- the income, the macro environment of the asset -- and compare that with other assets. That enables investors to make better decisions in pricing. Our job as a marketplace is to provide a lot of transparency and information that enables people to make smarter decisions. Of course, there are no guarantees in auctions; sometimes people get too competitive over an asset and pay more than they initially imagined.

We're working to create the right transparent process. The problems with all catalog sales covered to date is, frankly, that because there's not an active competitive demand, and information about them is not widely known or understood, those assets are underpriced relative to stocks and bonds. By bringing more transparency to the marketplace, we can increase the value of the artist's assets.

Are certain artists or kinds of music for applicable for auction than others?

We don't see a genre that necessarily does better than others. It's really more related to the royalties themselves. The catalogs that are older tend to do lot better. A Barry White song that recently sold in the marketplace did extremely well. Everyone had heard the song for decades; it had a long track record, so people paid a lot more than they would pay for something that had only been around for a few years.

That's interesting, as one would assume a newer hit record would be more desired in terms of getting more radio airplay and its sync rights being used in movies, TV shows and commercials.

You're right in the sense that a more contemporary catalog might generate more revenue in publishing, but I'm referring to proven hits, and investors are more willing to pay more for these royalties because of their track record. They tend to believe that if the asset has been around for 10 years, it'll be around at least 10 more years. That lowers risk for the investors' business model.

How do you approach an artist/publisher about putting up their work for auction?

Actually, most of our clients come to us. They come for a variety of reasons; what we have to do then is basically find out what the clients are trying to accomplish ... what do they hope to achieve? Usually, they have to generate capital for something like a new studio, or go on tour, or to delay a publishing deal. Once we find what they want to accomplish, then we work backwards from there and determine if the auction would be suitable for them and if so, what portion of their catalog they have to sell. In the end, we are challenging conventional wisdom that selling catalogs are almost always a market failure. That happens when it's never properly valued in the light of day. When assets are being valued in the light of day, you don't have to worry about how you are perceived and you don't have to compete with existing taboos. Once people understand the value of royalties, you create a fundamentally different environment and context, which enables you to be more successful.

How has the streaming economy impacted the royalty auction business?

Here's the biggest thing: In most of the catalogs we reviewed early on, which is certainly nearing 1,000 at this point, most of them were in decline in some way about a year-and-a-half ago. However today, more often than not, they're growing. That change has increased investor confidence. Instead of trying to catch something that's falling in value, now that some are increasing more than others, it certainly has a lot of effect on all the ecosystems of the creators.

In other words, all these streaming "plays" would benefit catalogs that aren't getting played on the radio anymore...

Exactly. Because streaming is turning catalogs from decaying in royalties to now increasing, investors are willing to pay much more to essentially ride that macro growth in the music industry. When you look at the numbers of Goldman Sachs and others in the investment community, they are anticipating growth in the music business - and we're right in the beginning of that. We've been actively communicating that to investors, and we're getting more participating investors into our space than otherwise would have been here.

What do you feel needs to happen to improve the royalty auction business in 2018?

The number-one thing would be able to reduce risk for both the seller and buyer. Reducing risk for investors and creators can come in a number of ways. One fundamental way is to provide more information, some key statistics that we use internally in valuing catalogs. If we make that available to everyone, it would encourage investors and give them the confidence to pay more for the assets.

We're also looking at some ways to reduce risk for the artists, which could include a lot of different things. We expect to innovate around new products in the next couple of years. In addition to all that, we have the Royalty Flow IPO, which will close and then be traded on NASDAQ by around April 1st of this year, which we're very excited about.

In this business, can you plan for a long-term future, or are you more focused on what's going on the block in the near future?

It's hard to put a time limit on it. Certainly some changes will occur in next two years in our industry, but our current primary goals are to create the infrastructure to allow a billion-dollar cap to be deployed. That may be a small number in the overall world of finance, but it's an incredibly meaningful number for creators -- especially when that kind of capital is coming into the market with a level of transparency to increase the value of all the rights artists current have.