It hardly came as a surprise, but Kobalt’s second giant catalog sale in less than a year made headlines on Tuesday morning when the company announced that KKR, together with its co-investor, Dundee Partners, purchased the KMR Music Royalties II portfolio for a whopping $1.1 billion — even more than the billion the company was said to be seeking. Included in that 62,000-copyright catalog are hits by the Weeknd, Lorde, Jimmy Jam and Terry Lewis, Max Martin collaborator Shellback, Glassnote Records master recordings and its Insieme music publishing division, and more. This follows a deal last November that saw the company selling a separate, 33,000 copyright catalog to Hipgnosis Songs for $323 million.
So does that mean Kobalt is rolling up the sidewalks and going home? Actually the opposite: It’s a new beginning, founder Willard Ahdritz and CEO Laurent Hubert said in a 30-minute conversation with Variety several hours after the deal was announced.
Kobalt was launched in 2000 as a disruptor, famously bringing transparency and accountability to a notoriously opaque and confusing business. That helped it not only to become wildly popular with artists — attracting hitmakers like Paul McCartney, Max Martin, Childish Gambino, the Foo Fighters and many others — but it also changed the industry, with all major publishers now touting their transparency, accountability and quick and accurate statements. And although Kobalt has tightened its focus by selling off those two funds as well as AWAL, its label-services division (sold to Sony for $430 million in a deal that is still awaiting U.K. regulatory approval), it plans to double down on its publishing division and AMRA, its digital-collection society — and move ahead with acquiring copyrights for Kobalt, not a separate fund.
What does the sale of these two big catalogs mean for Kobalt?
Ahdritz: I think there’s a message that needs to be corrected: People are saying that Kobalt is selling, but in reality, there are just now new owners of those copyrights, and we are still administrating and [managing] them. Going forward, we are not going to start a third fund at this time — we are going to invest in the company instead. We are actually stronger than ever and doubling down on publishing and AMRA.
Song catalogs are worth more than ever now and many people think they will continue to gain value. So why sell now?
Ahdritz: We had a number of incoming calls about the assets we owned, we talked to our investors, they wanted to explore what it could mean for them, and we selected one partner — so it was driven by the market. Kobalt will continue to administrate those [songs] and we will continue to buy copyrights where we see that it is a good fit.
Hubert: Kobalt created a lot of value for those investors, we did a very good job administrating those copyrights and that translated [into value]. Copyrights do not grow on trees, they have to be actively managed, and that’s what we do, so I always want to be sure people understand the value in that equation.
Second, we’ve done a lot of work in the last 18 months: We’ve right-sized the business, we improved the balance sheet, we improved our tech platform and also it made sense for us to simplify our business with the AWAL transaction. So we are really focusing on music publishing and AMRA. The fund was created because some of our clients were saying they wanted to sell their catalogs, and the only way we could do that at the time was to create a separate vehicle, a fund, to buy those catalogs. In the context of the those deals, the lion’s share of the economics goes to the investors, not to Kobalt Music. So by essentially phasing out the funds, as we’ve been doing — sometimes opportunistically, sometimes strategically — we have now an opportunity to use our balance sheet to invest in strengthening [the company] but also to do acquisitions, which we didn’t have with the funds. So there is a very definite strategy here to grow the value of the business by doing that.
Ahdritz: It started as a response to clients who wanted to sell their catalogs but stay on the Kobalt platform. Even if you sell your publishing rights, you have your residual performers rights, your mechanical rights, which you need someone to run and your synch business. At the time we did not have the capital for copyright acquisitions and that was the driver.
But you’re already acquiring copyrights that will be owned by Kobalt, not a new fund?
Hubert: Yes. We will own copyrights, and in fact we’ve started doing acquisitions over the past year and we’re going to be doubling down on that.
You still haven’t answered why now was the right time to do this deal.
Ahdritz: I believe music is a good asset class to be in, but the decision was made by investors in the fund. They had invested over the years and they had their return targets and their timing and they wanted to sell now, given the proposals they saw and how they looked at returns. So that position was not necessarily favored by Kobalt, but I am the chief investment officer in a regulated investment fund, I think it was a good transaction and a good return for our investors. It all depends on how you look at things as an investor.
Lots of companies have adapted aspects of your business model. What differentiates Kobalt from other publishers now?
Hubert: Frankly our mission is to remove all the friction in the collection ecosystem, and we’re doing this because we believe in it. Others are doing it because they are reacting to competitive pressure — that’s a fundamental distinction. We haven’t stopped and there’s many more things we need to do. I also think it’s important to point out that Willard created this business 20 years ago to provide transparency and accountability — this was not some form of competitive reaction to what was happening, so we are true transformers.
Ahdritz: We are stronger than ever and we have focused the business: before we had three investor bases, funds I and II and our core business. Now we have one that is unified to build a strong, great company going forward. The music business is complex and Kobalt has a complex structure, so I think we needed to tell people what it actually looks like. And now, 3.0 — the beautiful sequel in our beautiful story!
What does Kobalt 3.0 look like?
Hubert: First, it’s amplifying what we’re doing: the core publishing business and AMRA. In our publishing, we are going to continue to invest quite heavily both in signing and acquisitions and [expanding] beyond the Anglo-American repertoire — if you think about the history of Kobalt, most of the repertoire that we’ve dealt with has been Anglo-American, and of course Sweden. But we’re also branching outside of that. We [opened] a French office this summer, we’ve been in Germany for a long time and signed a lot of local repertoire, so we are really looking at expanding our business in other markets and also other repertoire. I also want to provide the context: pre-sale of the funds and AWAL, we were managing five businesses, today we’re managing two. So we have a lot more ability to execute and focus and move quickly.
Then we have AMRA, which we see as a vector of industry transformation with respect to the collection-society framework we have today. In the last eight quarters, our share of digital revenue went from 35% to 66% and we think it will soon be about 80%. So of course that shows how AMRA can play a role as a global licensing platform and that is something we will take advantage of. Kobalt has a history of innovation and we have position AMRA to be the first global digital collection society.
Ahdritz: In my opinion, I believe we will be an even bigger differentiator for our clients than Kobalt was [previously] for the publishing industry. [Via AMRA], having one global truth of data and licensing and collection and statementing and distribution, 100% transparent, our clients have audit rights from our society — and we don’t even have audit rights [from other societies]. With everything else going on, we have not given AMRA the attention it deserves. Within a couple of years people are going to say this is absolutely brilliant and also necessary to have a global efficient industry.
AMRA is probably the most brave and difficult thing Kobalt has started and executed on, and five years after we started it is hitting the ball out of the park, or however you say it here in the United States. Kobalt has upped the game!