What is behind the big decision Bob Dylan just made

Universal Music Group's recent announcement that it acquired the song catalog of Bob Dylan was light on details, like how much it paid, and there was no statement from Dylan on his decision to sell.

Maybe his reason was so obvious no one thought to ask for one.

He and his advisers apparently know the best time to sell any asset is when people with money are clamoring to buy.

The purchase price for the Dylan catalog reportedly was around $400 million. That might be some sort of modern valuation record, although any shortlist of the all-time greatest in American music has to include the Nobel laureate Bob Dylan, born 79 years ago in Duluth and raised in Hibbing.

It has been a busy time for such asset sales, as singer and songwriter Stevie Nicks, another boomer favorite, just sold an 80% interest in her catalog that's reportedly worth about $100 million. Some rights to Taylor Swift's first six albums changed hands again, too, although once again she didn't receive a nickel of the proceeds.

The buyer of the Dylan catalog, the Universal Music Group business controlled by the French-based media giant Vivendi SA, is one of the big three left in the record business. Companies like this have lately had to contend with upstarts with money that have jumped into the market, such as the publicly held company Hipgnosis Songs Fund.

Hipgnosis, with a home page that opens with a securities disclaimer, aspires to turn music rights into plain old tradable assets, like stocks, bonds and commodities. It seems to be succeeding.

A few words in the Google search box turned up a 55-page "The Ultimate Guide to Buying Music Royalties," produced by a Denver-based firm that operates a market for such intellectual property.

That something like this guide into a complex market even exists for novices to download seems to be a stock-tips-from-the-shoeshine-man moment in a wildly overheated market.

The common explanation for all this buying and selling at big prices is that streaming has fundamentally changed the music business. While that's true, it may not be obvious how that led to a pop in asset prices.

It's easily possible in one lifetime to have bought vinyl records, eight track and cassette tapes, compact discs and finally digital downloads from sites such as Apple Inc.'s iTunes store, yet all that innovation didn't change the basic model that much.

When digital downloads started, in what became known as the iTunes era, that broke loose the tight grip traditional record labels had on the music market, Joel Waldfogel, an economist at the University of Minnesota's Carlson School of Management, explained to me. More artists had the chance to make at least a little money selling downloads, and at least a few could become stars.

But it was still the same business, with consumers buying music they then owned whether they listened to it or not.

Now in the streaming era, through services like Spotify and Pandora, a consumer isn't making a one-time purchase and what matters to the owners of song rights is how often a song actually gets played.

This might look familiar, a business moving from a sales model to a subscription model, and it has happened in other industries. Once the switch happens, the risk to the owners is different and so is the value of what they own.

Song rights, just like shares of a stock or sole ownership of a small business, are worth all the future cash flow streams when converted into cash today. Arriving at the value takes a sometimes complicated financial calculation to, among other things, account for the risk the cash flow might not materialize as expected.

The more uncertain the future cash flows are, the greater the discount when negotiating the purchase price.

That's why private-equity firms once passed on exciting tech firms to instead buy boring distributors and manufacturers. The more unexciting the product, the better. A profitable business selling cool stuff is fine, but one that can predictably and consistently make money well down the road is even better.

Private-equity firms only started chasing after software companies once the sales model shifted from selling software licenses as a one-time purchase to offering software as a service, which is predictably billed and collected monthly.

With so much information available to potential buyers of how songs are performing, Waldfogel explained, song rights have become an almost perfect asset for financial propeller heads to analyze, carefully forecast and eventually put a price tag on.

Waldfogel has years of streaming data from Spotify, within minutes providing a table from 2019's daily top 200 streamed songs. About 59% had been released that year, with just 2.8% of the most popular streamed songs from 2010 or earlier.

Bob Dylan wrote and recorded the greatest song of all time, at least according to Rolling Stone magazine's definitive list. Yet his great song "Like a Rolling Stone" was released 55 years ago.

On the other hand, Dylan still has a sizable audience, with more than 10 million monthly listeners on Spotify. "Like a Rolling Stone" has been played 200 million times on that service alone.

The origins of the current bull market in song rights were clearly laid out in a long interview the trade magazine Billboard published earlier this year with Nashville-based financial adviser Dan Weisman. The report wrapped up with a real-world example of a 40-ish pop singer trying to decide whether to sell.

The offer on the table for her catalog was about 13 times the average of the last five years income stream, or about $3.2 million. So sell it?

Well, the proceeds from performing on tour (once that starts up again) generally cover her living costs, so she doesn't really need the money. Any gain on sale would be taxed at lower, capital gains tax rates but tax rates might be increasing next year.

What Weisman was describing must sound familiar to any business owner who has ever wrestled with selling. That includes what might be the toughest thing to fully grasp, as Dylan surely came to understand by the time he decided to sell:

You can only sell your life's work once.