HIPGNOSIS SONGS FUND (SONG) 117p

Gain to date: 1.3%

Original entry point: Buy at 115.5p, 18 June 2020

Shares in Hipgnosis Songs Fund (SONG) are trading at an 11-month low as the investment trust has been caught up in a spat between musician Neil Young and streaming platform Spotify.

Young has asked for his entire music catalogue to be pulled from Spotify in protest over the platform hosting podcasts by Joe Rogan who has been accused by the musician of spreading Covid misinformation.

Hipgnosis owns 50% of the worldwide copyright and income interests of Young’s catalogue, and the musician has more than 6 million monthly listeners on Spotify.

Investment bank Stifel calculates Young could generate $7.5 million a year in royalties from his catalogue, with reports suggesting Spotify accounts for 60% of all his streamed music.

Joe Rogan may have to be tamed, but with 11 million estimated listeners he is too big a deal for Spotify to cut loose.

‘From Neil Young’s perspective once you have taken a moral stance it is difficult to see how he will be comfortable returning to the platform without Spotify providing something in return. If the stalemate does persist for some time, we would expect that the catalogue valuation may become impaired,’ says Stifel.

While streaming is important to Hipgnosis, its income is also generated by relevant songs being used in films, TV and adverts, played live, or in shops or on the radio. However, the Neil Young situation would suggest Hipgnosis has no control or say in how the songs are consumed despite owning 50% of the rights for this artist, says Stifel.

Hipgnosis should also be concerned if a substantial number of other artists take Young’s side and also boycott Spotify as that could negatively impact streaming income should this involve any songs where it owns a royalty.

We’ve already seen Joni Mitchell (3.7 million monthly listeners) and Lloyd Cole take a stand against Spotify and further artists could follow suit, particularly as tensions were already riding high over the share of money that artists receive each time their songs are played on the platform. For years, many artists have criticised Spotify saying it doesn’t pay artists enough.

The flipside is that Hipgnosis could benefit if the rates change more in favour of the artists, given it too would receive more money.

SHARES SAYS: Neil Young’s boycott presents a new risk to Hipgnosis’ business model, one which is already opaque given a lack of transparency over how much it pays to buy each royalty.

The key attraction for Hipgnosis’ shares is dividends rather than capital gains. While it has a diversified catalogue from which to fund these cash payments to shareholders, it’s clear that Hipgnosis is not a low-risk investment. Shareholders should sit tight for now, pending more clarity on the Young/Spotify fallout.

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