Bankers Hope for a Reprise of 'Bowie Bonds'



Bankers Hope for a Reprise of 'Bowie Bonds'

By KAREN RICHARDSON

Staff Reporter of THE WALL STREET JOURNAL

August 23, 2005; Page C1

(See Corrections & Amplifications item below.)

The boom in digital downloads is music to the ears of bankers and others hoping to start shifting "Bowie bonds" again.

These bonds give investors a piece of future earnings by a musician or other notable artist. The original bond sold in 1997 raised $55 million for musician David Bowie, whose album sales created the revenue stream for the securities. Other bonds followed, securitizing the tuneful takings of James Brown, Ashford & Simpson and the Isley Brothers.

Then the recording industry skidded into an extended downturn, and the Bowie bond structure lost much of its glam. Last year, Mr. Bowie's bonds fell to Earth when Moody's Investors Service lowered its rating on them to just one notch above "junk," citing lower-than-expected revenue "due to weakness in sales for recorded music." Few Bowie bonds have been sold since 2001, and music-backed bonds today represent less than 1% of the so-called asset-backed securities market.

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Now, with iTunes and other online platforms showing promise in selling songs again, bankers and others are hoping for an encore performance for the bonds.

The legal, paid-for downloading of tunes "definitely helps," says James Altucher, managing partner at Formula Capital LLC, a hedge fund in New York. Mr. Altucher says he would be interested in buying new Bowie bonds. He thinks other hedge-fund managers also would be keen to hold bonds that capitalize on intellectual property and aren't necessarily tied to the fortunes of broader bond and stock markets.

"Technology is bad for us in terms of illegal file-sharing, but it's positive in terms of 500 cable-TV channels, iTunes and online ads," says David Pullman, head of Pullman Group LLC, who created and launched the Bowie bond in 1997. "Technology is disruptive for a short time, but the volume of sales is going to be so much greater."

Mr. Pullman's firm has had a sometimes-contentious relationship with other banks over the creation of new Bowie bonds, but Pullman Group is now in talks with heirs of Bob Marley to create bonds based on the deceased reggae artist's song catalog. The firm also has copyrights from several dozen artists and songwriters for songs from the 1940s to the 1980s with an eye toward more bonds.

Large investors are also doing deals that seek to unlock the value of an established musician's oeuvre. In May, Fortress Investment Group LLC, a New York investment fund that manages some $15 billion for institutions and wealthy individuals, bought $270 million in loans from Bank of America Corp. A big chunk of those loans are backed by pop star Michael Jackson's 50% interest in the Beatles' catalogue.

Of course, digital technology and the Internet continue to pose huge risks to the music industry and have hurt royalty streams, which for decades were based on multisong recordings (Frank Sinatra helped usher in the "long-play" format in the 1950s with his theme albums). The International Federation of the Phonographic Industry estimates about 870 million music files are offered illegally online, costing the music industry more than $2 billion a year in lost revenue.

"Pirates will always find new ways of challenging copyright lawyers," says Alan Dalinka, a partner in Chicago law-firm DLA Piper Rudnick Gray Cary US LLP.

But while royalties from new sources such as digital downloads, satellite radio and cellphone ring tones are small relative to the industry's lost revenue, they are growing fast. "If more people figure out how to make money from music digitally, then you have a new, predictable revenue stream that you can securitize," Mr. Dalinka says.

Consider: Apple Computer Inc.'s iTunes Web-based music store has already sold more than 500 million songs since it was launched in 2003, and song sales now account for a big chunk of Apple's revenue.

And while the Internet has in one sense taken consumers back to the days of the 45-rpm record, buying just one song at a time, it has also opened up other potential revenue streams that can be turned into bonds. For example, ring tones -- snippets of original recordings that announce an incoming call on a cellphone -- "are growing exponentially" as a royalty stream, says Mark Friesen, founder of market-research firm Consect, whose assets were recently bought by Nielsen Entertainment. He expects sales to more than double this year in the U.S. to $700 million; last year, global sales were about $4 billion.

Meanwhile, the price competition already affecting the music-download business may squeeze profit margins for record companies, but it doesn't cut the artists' payday: Every single downloaded to burn a new CD, "ring" a cellphone or serve as fodder for spirited karaoke fans by law pays the musician about 8.5 U.S. cents. These so-called mechanical royalties are similarly protected in much of the rest of the world.

Write to Karen Richardson at karen.richardson@

Corrections & Amplifications:

Mechanical royalties are paid to copyright owners of songs each time one of their songs is legally downloaded from the Internet. This article said that musicians receive the royalties but failed to make clear that they must also be the copyright owner to qualify for the payment.

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