ON the fifth floor of United House next to Notting Hill Gate Tube station is a music industry office that does not look like any you might have seen before. Sure, there’s the grand piano in the lobby “which used to belong to Annie Lennox” anyone who walks in is told. There is the odd Fender guitar lying around, plus amps and vast speakers. But there isn’t much music playing. Odder yet, half the floor looks like a call centre with staff bashing the phones. “Welcome to the future of the music business,” says Merck Mercuriadis, as he greets me.
Mercuriadis, 59, is a music man down to his trademark black Prada. He used to manage Elton John, Beyoncé, and Guns & Roses. But that was in the good old days when record companies pumped out first vinyl, then CDs, which had such a high profit margin that executives rocked up for work at the crack of lunch, headed off to the Groucho Club at 6pm, and still pulled six- or seven-figure salaries. Streaming services — at first illegal — overturned that lifestyle and threatened to take down the entire industry. Revenues fell so sharply that some big names almost collapsed, notably EMI.
Mercuriadis thinks the techno-disruption is over and the music industry is set to enter a period of growth that will dwarf the profits — if not the excesses — of the past. “The music industry has its best days in front of it. Even seven years ago I would not have said that.” The reason? Music is becoming “an asset class”, he says.
Hipgnosis, the company he founded and runs, has spent more than £2 billion buying the catalogues of artists from the Red Hot Chili Peppers to Rick James, via Neil Young and Nile Rogers. Some 60,000 songs valued at around £2.2 billion are held in the Hipgnosis Songs Fund. Other artists’ songs worth hundreds of millions of pounds more are held in separate Hipgnosis funds.
He and the artists benefit from streaming revenue for each song, which is increasing as services expand in developed markets and new streamers spring up in fast-growing new areas, notably Africa.
“We’ve gone from 30 million paid subscribers or music streamers around the world when we started
Hipgnosis five years ago to 600 million now. That figure will rise to as many as two billion in the next decade.”
But Hipgnosis sweats itsnew assets in innovative new ways. Those executives sitting in what looks like the call centre area of the office are scouring the entertainment world to find out what new films and TV shows are in development and pitching their artists’ songs for the soundtrack. They are also offering other artists the chance to use part of the songs Hipgnosis owns for use in collaborations.
Mercuriadis gives me examples. “One of our songs, All The Small Things by Blink-182, was the soundtrack of the most recent John Lewis Christmas TV ad. Last year we had a number one single because Rick James’s Super Freak became Nicki Minaj’s Super Freaky Girl. We have Eurythmics’ Sweet Dreams (Are Made of This) presented for approval for a Chinese artist’s new song. One fifth of chart songs are interpolated songs (new songs that sample existing songs), so there’s a massive upside for our catalogue.”
THE Canada-born, now Greek American has spent most of his life across the pond and has homes in Los Angeles and Miami but chose London for his new venture because “it is just about the best city in which to launch any creative business because it is so open and there’s so much talent.
Plus, music means more in the day-to-day life of the average Brit than it does anywhere else. Radio 1 and Radio 2 are constantly playing new music. There’s — still — music press, plus five or six TV shows on which you’ll see artists, whether it’s Graham Norton or Jonathan Ross. And you have Glastonbury, Reading, Leeds, Latitude, Love Supreme.”
Hipgnosis got off to a good start. Mercuriadis attracted some blue chip backers. Blackstone, the US investment management company, invested $1 billion, attracted by the prospect of a steady income stream from iconic songs. Big name artists wanted into the Hipgnosis funds, including Blondie, Leonard Cohen, Nelly Furtado, Justin Timberlake, Justin Bieber and Dave Stewart.
It has been tough recently, though. Shares in Hipgnosis Songs Fund, the UK-listed group, have almost halved in value in the past two years, as global uncertainty and rising interest rates have dented confidence in most businesses, including entertainment.
Hipgnosis Songs Fund now has a market capitalisation of about £892 million. That is half its net asset value. It can no longer buy the rights to new songs because the heavily discounted share price prevents it from raising equity to fund purchases without diluting existing shareholders’ stakes.
Mercuriadis suffered a high-profile setback recently when Rod Stewart turned him down. Stewart said: “It’s become abundantly clear that this was not the right company to manage my song catalogue, career or legacy.”
Just a negotiating tactic, Mercuriadis insists. Several high profile executives have left the firm over the past 12 months. “I am a demanding person and this new song management model is not for everyone,” he explains.
Mercuriadis faces his biggest test in September. Investors will vote on whether to continue the business or wind it up. Some want to see more capital growth. To keep investors sweet, Mercuriadis has been “working with the board and its largest shareholders on several options to boost value”. It has been reported that he is considering selling off some of the firm’s catalogue to try to narrow the valuation gap between its shares and its assets. The trouble is, any sales would crystallise losses at the worst possible time.
Does he remain confident he can prove the music industry’s best days are ahead of it? “We believe we will get the mandate to continue,” he says.
He adds that the firm’s streaming revenue is growing fast and the business of placing Hipgnosis songs in TV show and movies is up by 25 per a year. “Ten years from now our assets will be worth two to three times what they are worth today. The music won’t stop any time soon.” Or, as one of his artists, Journey, would put it: Don’t stop believin’.
