Unfrozen: What will the new physical mechanical rates do to or do for valuations?

There are some decades in which nothing happens and some weeks in which decades happen. This was one of those weeks.

You no doubt have seen that the Copyright Royalty Judges offered a breath of fresh air in the contentious and labyrinthine Phonorecords III and IV proceedings by refusing to accept the insider “settlement” worked out by the powers that be. I’ve had a couple interesting calls this week from smart people asking what effect the ruling will have on catalog valuations.

These were people who believed the party line that the mechanical royalties from physical were unimportant but never asked why–now they discover that the physical income stream was not low but was understated because it was frozen. So the answer the Judges rejected was “let’s freeze it some more.”

The Judges note that merely adjusting the 9.1¢ frozen rate for inflation “would yield a 2021 royalty rate of $ 0.12 (an upward 31.9% inflation adjustment over the sixteen-year period).” Understating a revenue stream by 30% or so is not insignificant. When you consider that publishing catalogs have to offer a 20x multiple to make it worth getting out of bed, understating a revenue stream by 30% to just keep pace on buying power will ratchet through the transaction.

It also must be said that if you consider the entire period of the freeze, it will cover years where physical was a higher percentage of the product mix, so by freezing the rates any catalogs sold during that time would arguably have had their selling price understated.

This is an inexact science, but it does seem that valuations need to be adjusted upward.

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