For a number of reasons, late 2020 may be the absolute optimal moment to sell a top-tier music catalog, and Bob Dylan’s catalog is arguably on a tier of its own near the very top. Universal Music Group announced on Dec. 7 that it had bought Dylan’s catalog of some 600 songs; while UMG didn’t disclose the price, speculation in the industry hovers around $300 million.
The deal’s value to Dylan depends on how the proceeds get taxed. A gigantic windfall like his would normally be taxed as a capital gain at a rate of 20% under current law. But President-elect Biden has proposed taxing capital gains as ordinary income for taxpayers with income over $400,000. The top ordinary income rate is now 37%, and Biden has proposed raising it to 39.6%. If the Democrat candidates win both senatorial elections in Georgia, giving the party a Senate majority, significant changes to tax law become a plausible scenario.
Such changes rarely happen quickly, but changes to tax law have sometimes been retroactive to the beginning of the year in which they’re enacted. The Skadden Arps Slate Meagher & Flom law firm is warning clients: “The potential elimination of the capital gains rate preference, along with the anticipation of a likely corporate rate increase, could also serve as potential catalysts for taxpayers to close M&A deals this year if they anticipate that these proposals could be enacted in the first year of a Biden presidency, with the possibility of a retroactive effective date of January 1, 2021.”
Bottom line: The tax on a deal like Dylan’s could almost double if it doesn’t get done by New Year’s Eve. “I have a number of clients who were trying to do deals before the first of the year because they had fear of the new administration pushing its tax agenda,” says Josh Escovedo, a lawyer whose specialties at the Weintraub Tobin law firm include copyright and trademark issues. “It’s quite possible” that those considerations could have influenced Dylan’s deal, he notes.
Dylan had another excellent reason for selling now: The past few years have been boom times for music catalogs. Just days before Dylan sold his catalog, former Fleetwood Mac singer Stevie Nicks reportedly sold an 80% interest in her catalog to a publishing and talent management firm called Primary Wave in a deal that valued the catalog at $100 million; the Wall Street Journal initially reported the transaction. Investors with little music industry experience, including Morgan Stanley and Google Ventures, have been moving into the field. Hipgnosis Songs, founded by former talent manager Merck Mercuriadis, has raised and spent over $1 billion on catalogs over the past 29 months.
The explanation for all this activity, in one word: Spotify. “It’s a disrupter,” says Escovedo. “Spotify has brought about a more quantifiable and predictable model for the industry, so companies can bring in the suits and figure out the value of [artists’] income streams.”
Those income streams can last a long time, another attraction for investors. “Dylan’s copyrights on his work before 1978 expire 95 years after publication,” says Dotan Oliar, a professor at the University of Virginia Law School who focuses on intellectual property. So the earliest songs in Dylan’s catalog, from 1962 (“Blowin’ in the Wind,” for example), could produce income until 2057. Copyrights on songs written on or after Jan. 1, 1978, Oliar says, “will expire 70 years after his death.” Dylan, 79, seems to be in excellent health, but even he can’t actually remain forever young, so let’s say he’s around until age 95. His post-1977 songs could then produce income until 2106.
Popular music is a fickle, volatile business, but it would be hard to name any company making a longer-term investment than the one Universal Music Group just made.
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