BOWIE BONDS : AN ANALYSIS OF SECURITISATION OF INTELLECTUAL PROPERTY RIGHTS

Introduction

Almost everyone knows David Robert Jones, a.k.a David Bowie as one of the leading and influential figures of the music industry in the 20th Century. His distinct visual style of presentation, coupled with amazing music and stagecraft had a significant impact on popular music. His alter ego Ziggy Stardust, became a figurehead of the LGBTQ movement at a time when mainstream society had not yet learnt to accept alternative lifestyles. Mr. Bowie experienced a resurgence in popularity in the 21st century with a starring role in Christopher Nolan’s The Prestige as Nikolai Tesla, where he often overshadowed the other actors with his screen presence, and when his seminal song “Moonage Daydream” was used in the movie Guardians Of The Galaxy.

In addition to being a trailblazing artist, David Bowie was a financial genius as well.

Bowie Bonds

In February 1997, David Bowie realised a vision, devised over lunch two years prior with Dr. Richard Sandor and film director Krzystof Kieslowski; the vision of issuing royalty backed securities totalling USD 55 million, a first in the entertainment and financial industries. The underlying asset of the securities issued as bonds, was the royalty payable from 287 songs that comprised of 25 albums that David Bowie had written and recorded prior to 1990. The securities had a 10-year maturity, a Moody’s A3 rating, and a 7.9% interest rate. These security instruments became popularly known as Bowie Bonds. The entire issue was purchased by the Prudential Insurance Company. Assisting David Bowie in the transaction was David Pullman, the banker who created the bonds and helped selling them.

The issuance of Bowie Bonds showed that intangible assets such as intellectual property may be securitised. The main benefit of this transaction was that David Bowie did not have to pay any tax on the royalty streams for the life of the bonds and kept any future copyrights with himself. The credit rating of the bonds were enhanced as they were guaranteed by David Bowie’s record label EMI.

David Bowie was the ideal musician to securitise his own intellectual property because he controlled all the rights associated with collection of works that was underlying the bonds. In addition, these assets had predictable cash flow over a long enough period of time, making them attractive as asset backed securities. This made the bonds attractive to investors because they presented at the time what was viewed as a steady long term investment. It also allowed fans of David Bowie’s music to own a piece of their favourite rock star.

David Bowie used the proceeds from the bond issuance to purchase back the rights to his remaining catalog of works that was owned by his manager, thereby regaining complete control of his intellectual property.

How Securitisation of Intellectual Property Rights Works

In such a securitisation process, the owner of the intellectual property assigns the assets to a special purpose vehicle (“SPV”), which is usually a company. David Bowie had agreed to transfer the royalty streams of his music from the 25 albums into the assets of the Bowie Bonds to be held by the SPV. The SPV acts as an issuer of the bonds based on revenue streams backed by the rights in the intellectual property assigned to it and uses the proceeds from the security issuance to pay back the owner for the initial assignment.

The basic outline of the bond issuance can be seen in the flow chart set out below:

Were Bowie Bonds Viable

The Bowie Bonds faced a major hurdle in 2004, triggered mostly by illegal download of music and the rise of internet piracy in the wake of Napster. Moody’s downgraded the ratings of the bonds from A3 to Baa3, or one notch above junk status. This downgrade was prompted by lower than expected revenue generated by the assets due to lessened sales of recorded music. Bowie had said in a 2002 interview with the New York Times:

“The absolute transformation of everything that we ever thought about music will take place within 10 years, and nothing is going to be able to stop it. I see absolutely no point in pretending that it’s not going to happen. I’m fully confident that copyright, for instance, will no longer exist in 10 years, and authorship and intellectual property is in for such a bashing.”

“Music itself is going to become like running water or electricity,” he added. ”So it’s like, just take advantage of these last few years because none of this is ever going to happen again. You’d better be prepared for doing a lot of touring because that’s really the only unique situation that’s going to be left. It’s terribly exciting. But on the other hand it doesn’t matter if you think it’s exciting or not; it’s what’s going to happen.”

Despite the downgrading, investors were still drawn to the instruments. In 2005, James Altucher, a hedge fund manager had this to say for a piece in the Financial Times:

“I like the asset-backed lending space because it usually involves significantly higher-than-prime interest rates, and assets backing the coupon payments in the case of a default.”

However, there was a turn in the fortune of the bonds due to the advent of legal online music retailers such as Spotify, that regularised the sharing and access of music in the digital space and brought order to the disarray of music piracy over the internet. The Bowie Bonds matured in 2007 when they were liquidated and the assets were returned to David Bowie. However the role of Bowie Bonds in the history of securitisation is worth noting. The Bowie Bonds were transparently structured, with clear details of the underlying income generating assets being made known to investors. David Bowie had composed, recoded and performed the majority of the music by himself. In addition, Bowie had retained ownership of the 25 albums that were the underlying assets of the bonds. Therefore, Bowie had the right to collect all royalties for use of the work, without having to share it with other parties. Further, since he was a solo artist and solo composer, there were few third parties with whom he was obligated to share the royalties with. There were no copyright disputes in relation to the intellectual property as well. It ensured that the royalty stream to the assets of the Bowie Bonds flowed in steadily and uninterruptedly.

Scope of Securitisation of Intellectual Property Rights

Royalty based securitisation of intellectual property provided better monetary rewards, was better than waiting for royalty checks to come in, and provided limited risk to an artist or a songwriter from whose intellectual property the securities were being created. The artist was leveraging his risk of not getting as much royalty as expected by transferring the risk to the investors who purchased the bonds. Even if the bond collapsed, the artist would only lose claim to his catalogue of works that formed the basis of the assets, and the investors would not be able to go after any other assets of the artist.

The success of the Bowie Bonds had briefly woken up the music industry to the financial rewards that can be achieved via securitisation of intellectual property in the capital markets. While other well known musicians such as singer James Brown, musicians Isley Brothers, the Holland-Dozier-Holland publishing catalogs and heavy metal band Iron Maiden have followed David Bowie’s lead and issued their own intellectual property backed securities, the financing tool has failed to gain widespread acceptance. One of the main reasons for this was that the creative industry itself was not conducive to the growth of securitisation. Very few artists truly gain the success enjoyed by someone of Bowie’s stature. Even lesser artists have a career spanning as long as Bowie, with a consistent annual royalty flow. Investors would be reluctant to securitise the future royalties of an artist, songwriter or publisher without having historical data that demonstrates a reliable and predictable stream of royalty.

Relevance of Securitisation of Intellectual Property Rights These Days

Post the Covid-19 pandemic, content creation has exploded. The time spent in lockdown has led to the rise of several social media content creators, writers and composers. With the rise in the number of artists, there has been a steady increase in their followers. Even in turbulent times, art has been constant. Platforms like Youtube, Tiktok, and Amazon Publishing allow artists to retain control and copyright over the work they create, while simply providing them with a medium to publish or stream such content. This has lessened the number of conflicts that artists have to engage with to retain claim over their intellectual property rights. Artists also have a chance to increase their revenue with corporate tie ups and brand promotions on their channels, thereby improving the quality of the intellectual property.

In addition, with the increase in popularity of streaming services such as Amazon Prime, Netflix and Hotstar Multiplex, more and more production houses are opting to produce and release mid to low budget, good quality movies and web shows on these platforms. The money is being spent on coming up with intriguing and compelling stories instead of being spent on promotion and booking cinema halls.

These factors have enabled creators and producers to come up with a large catalogue of work that generates steady revenue and can be potentially securitised.

I feel that it might be time to consider and revisit the securitisation of intellectual property once again, especially by creators who have amassed large bodies of work, such as Stephen King, JRR Tolkien, Rolling Stones and Metallica. It would not matter whether the artist has passed away or still alive as most of the assets of well known creators are managed by their estates with uncontested title of ownership to their works. Till the time the works come into public domain, such works continue to generate royalty, upon which the sole claim lies of the artist creating such works. In a situation when only a few big players are able to obtain funds from the capital markets based on their existing business assets and most other entities often languish, securitisation of intellectual property might be a place worth looking into. It has untapped potential and is not simply a theoretical concept. The Bowie Bonds and other similar securitised instruments have demonstrated that songs, writings and other creative works can be securitised. The fact that the global markets are ready for such alternate instruments has been proven by the success of Infrastructure Investment Trusts and Real Estate Investment Trusts. Securitised intellectual property is another instrument that will continue to generate steady income for investors. Artists will benefit from it as well, as they will be able to obtain capital from investors based on their work, without needing approach financial institutions for loans. Such bonds are low risk instruments, and would appeal to investors like pension funds that are looking to invest long term. Once the process of securitisation of intellectual property gains traction, it will encourage artists to create more original work that they may securitise and use to raise money from the markets. It is a scope for mutually assured growth.

The revered actor and geek icon Leonard Nimoy, playing the character of William Bell in the science fiction television show Fringe had famously said, “For in the vacuum created by the loss of what is most precious, opportunity abounds, influences maximize, and desire becomes destiny.” What we have here is a chance to create something innovative, truly remarkable and unique, based on the sweat and toil of people whom we usually take for granted, but who have continued to entertain us through the years with their creations. It might be worth considering securitisation of intellectual property as a new capital markets instrument.

Soumik Chakraborty

Having worked in capital market with one of the leading Corporate Law firms in India for a while, Soumik decided to switch and pursue a career in IP laws about 6 years back. He is currently a part of the trademarks where he advises clients in areas of fast moving consumer goods, food and beverages, healthcare, clothing and footwear, among others. He is also involved in trademark oppositions and rectification proceedings and also design cancellation actions. Additionally, he assists the litigation team on various matters relating to trademarks and designs.

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