Years Matter More Than Ears When Evaluating Music Investments
It’s always tempting to invent an elaborate story for why a particular investment is brilliant, why a trend is about to start (or reverse!), or why some incredible, sweeping change will alter the world and make savvy investors a profit.
But there’s an easier place to start, which is to assume that trends are going to be pretty much the same as they always were.
Investors diving into the music royalties business for instance may wonder: how can you predict which catalogs will perform? It might be tempting to “buy what you know,” but tastes vary — and there’s an easier way.
As it turns out, royalty investors can take advantage of a phenomenon known as the “Lindy Effect.”
The Lindy Effect is the observation that the best predictor of how long something will last is how long it’s already been around. If a book is a bestseller today, it might be populating used bookstores and stoops in six months. But if it’s been in print for a year, it has staying power. If it’s been in print for a decade, it’s going to be around longer. (The bestselling book published in 2019, Where the Crawdads Sing, sold 4.5 million copies. But that’s about 1/20th of the number of copies of the Bible sells in a given year. And it’s been in print since the invention of the printing press!)
The Lindy Effect works for music, too. If you want one analytical tool to estimate how well a given catalog will perform, look at the “dollar age” of royalties.
Computing the “dollar age” of a royalty stream is simple: take each royalty payment, multiply it by its age, and compute the average.
Here are two examples:
In this case, Catalog A has produced lower overall results, but in a smaller range; Catalog B has a lower dollar age — it’s getting more popular.
We can see this in live data as well. Here’s an example of a longstanding catalog with a dollar age of 4.6 years:
As this chart shows, the catalog had declining revenue for a long time — but continued to produce a stream of royalties. Then, in late 2018, royalties picked up again.
The beauty of this calculation is that it does the research for you: you don’t…