Bowie Bonds as a financial instrument
Bowie Bonds consisted of a type of bond characterized by the inclusion of cash flow generated by future royalties as the underlying asset that supported investors.
A bond is a financial instrument where an entity or individual issues debt that will be repaid over a period of time, with an applicable interest rate included.
The issuance was structured through a financial vehicle based on the income generated by Bowie’s catalog, a vehicle that was required to pay investors their invested capital and returns.
This was done using the cash flow from royalties derived from his masters recorded before 1990.
They were pioneers in their type, known as Pullman Bonds, as they were designed by David Pullman.
Bowie Bonds were already discussed in our article on foreign laws in contracts.
Featured image: David Bowie (1987), Elmar J. Lordemann (de:User:Jo Atmon), CC BY-SA 2.0.
TL;DR – Starman Summary
The Bowie Bonds were a form of asset-backed securities (ABS):
- Bowie received $55 million upfront
- Investors bought bonds backed by future royalty income
- The royalties came from Bowie’s catalog (1969–1990)
- Investors were repaid using those future cash flows + interest
So instead of waiting years to collect royalties, Bowie monetized them immediately.
Bowie Bonds: In slow motion
There are several angles from which these bonds can be studied, given their particular nature.
Among them: intellectual property, securitization, time preference, historical context, and their results.
How was the intellectual property of Bowie’s catalog handled?
There are two crucial aspects here.
The first is that Bowie licensed his catalog to EMI to distribute the albums released between 1969 and 1990.
By doing so, he retained intellectual property over the masters, as this was a license rather than an assignment.
What EMI acquired was a contractual authorization to distribute and sell the masters, but it did not become the rights holder, which remained with Bowie.
The second aspect is that, when issuing the bonds, Bowie did not assign or license any intellectual property rights to investors.
Nor did he use the rights themselves as collateral. Instead, he used the future cash flows generated by royalties derived from those rights, which is a substantially different matter.
By doing this, Bowie retained ownership of his catalog at all times.
Securitization: how Bowie turned cash flows into bonds
This term is used in finance to describe exactly that: taking an asset that generates steady cash flows and using it to service debt, such as bonds.
Exactly what Bowie did, but the innovation lies in the fact that he did it using royalties derived from intellectual property rights.
This type of structure is commonly used in more conventional businesses, such as mortgages, standard loans, leasing arrangements, or credit-financed sales.
That is why Bowie Bonds were innovative.
How bonds coordinate time preference
This is a central concept in economics and finance.
Time preference is the value an individual assigns to consumption or the receipt of a good over time.
In other words, it explains why humans prefer things now rather than later.
For someone to prefer receiving something later, it must offer greater value.
This is why 100 euros are worth more today than in one year.
And for someone to prefer receiving them in the future, they must receive 110.
This is why interest rates exist.
Author’s note: Without unnecessarily complicating matters, this should not be confused with inflation, which is a different phenomenon.
High time preference vs low time preference
Bonds are a way of coordinating the time preferences of multiple economic actors.
Time preference can be high or low.
In economics, a high time preference indicates that an economic actor tends to prefer immediate consumption over future consumption in order to satisfy immediate needs.
By contrast, a low time preference indicates that an economic actor tends to postpone consumption in order to obtain a higher value outcome in the future.
We must start from a basic reality: not everyone has the same time preference at all times.
Since valuations are subjective, the same good may be valued differently by different agents depending on the time required to obtain or consume it.
How Bowie Bonds reflect time preference
In this case, David Bowie can be understood as having a high time preference, as he preferred to receive money from investors rather than wait for future royalties to materialize.
On the other hand, investors exhibit a low time preference, as they chose to postpone alternative uses of their capital in exchange for an expected future return that they considered more valuable than any present use.
Author’s note: These are complex topics, but they are worth understanding. Time preference exists across all domains of human action, and the artistic, technological, and creative fields are no exception.
The historical context: 1997 as a turning point in the music industry
The late 1990s were marked by the rise of the Internet and the anticipated emergence of peer to peer file sharing systems.
These technological developments triggered an unprecedented transformation in the industry, which later caused a significant decline in physical sales, the core of the business at the time.
Many industry actors anticipated this shift, including Bowie. In his own words (translated quote):
The absolute transformation of everything we ever thought about music will take place within ten years, and nothing will be able to stop it. I see no point in pretending it is not going to happen. I am fully confident that copyright, for example, will no longer exist in ten years, and authorship and intellectual property will take a very hard hit.
He also suggested that music would become like water or electricity, and therefore sought to take advantage of the final years of physical distribution before the model changed permanently.
At that time, the conventional way for artists to obtain financing was by entering into a record deal.
Bowie Bonds represented an alternative financing mechanism.
Bowie’s subjective context
This is critically important.
Despite being one of the wealthiest artists in the world, Bowie faced liquidity constraints at the time.
If Bowie wanted to finance a production, he had to either sell assets or enter into a record deal and potentially give up publishing or masters, recoup advances, among other things.
This is why he considered monetizing his catalog.
However, to avoid doing so, Pullman proposed the idea that later evolved into Bowie Bonds.
The results of the Bowie Bonds
Based on the historical context, this can be seen as an example of forward looking business strategy on Bowie’s part.
This type of foresight may or may not be correct, given the radical uncertainty of life.
In Bowie’s case, it appears to have been largely correct in essence.
The Bowie Bonds raised approximately 55 million dollars.
They received an AAA rating, the highest rating assigned by Moody’s, which evaluates bond risk and quality. A triple A rating indicates the highest quality bonds.
However, the physical music market declined seven years later due to Internet piracy and formats such as iTunes, causing the rating to fall to BAA3, which is significantly lower than AAA.
Even so, in 2007, when the bonds matured, Bowie was able to repay them, with full control over his catalog restored.
