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Accounting scandals may not get the public’s attention like a raid by Homeland Security, but questions about the quality of a publicly traded company’s books is a serious matter. This week, an internal report made public by Hipgnosis Songs Fund, the London-listed company that played a major role in turning music rights into a stable, attractive asset class, confirmed what some analysts and shareholders had long suspected.
At best, the 26-page report by Shot Tower Capital, the firm hired by the company’s board of directors in the wake of a shareholder revolt in October, details how the investment advisor, the Merck Mercuriadis-led Hipgnosis Song Management (HSM), made numerous missteps in accounting and financial projections of its vast music rights portfolio that includes music by Red Hot Chili Peppers, Shakira and Journey. At worst, the report suggests the investment advisor chose accounting standards that overstated revenue, inflated the portfolio’s valuation and — as the board previously stated — resulted in larger fees paid for managing the portfolio. In any case, information released Thursday presents an unflattering portrait of HSM and its internal operations.
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For its part, HSM considers some “aspects of the report…to be factually inaccurate and misleading,” the company said in a statement on Thursday (Mar. 28). HSM said it received the report the evening before its release and will respond to the board “in due course.”
To be clear, Shot Tower did not explicitly comment on the investment advisor’s intent in using certain accounting practices. The data-heavy report offers analysis, not speculation. But the report, part of the board of directors’ effort to regain shareholders’ trust, made clear that annual revenue was “materially” overstated and laid out numerous examples where the fund’s numbers didn’t reflect the reality behind its assets.
Take, for example, something called right to income (RTI), which are royalties that are paid to the buyer at the close of an acquisition. (If the acquisition’s effective date is prior to the closing date, royalties received by the seller after the effective date are credited to the buyer.) Normally, the amount of the RTI is deducted from the purchase price and is not included in annual revenue figures. However, Shot Tower found that some RTI revenue from Hipgnosis acquisitions was counted as annual revenues rather than an adjustment in the purchase price. As the board’s Mar. 18 update noted, including RTI revenue with annual revenue amounts to “double counting.” Misclassifying RTI “significantly” increased the fund’s income in 2021 and 2022, according to the report. In fiscal 2019 and fiscal 2020, zero and 5.3% of deals had RTI periods that extended for more than one year. In fiscal 2021 and 2022, those numbers jumped to 43.9% and 60.0%.
RTI also came into play with the proposed sale of a portion of the portfolio to Hipgnosis Songs Capital, a joint venture of HSM and investment firm Blackstone. The catalog was presented to shareholders as having a net purchase price of $424.7 million (including RTI revenue of $15.3 million). With pro-forma annual revenue (PFAR) of $24.1 million, HSM assigned a 17.6x multiple to the proposed sale. But Shot Tower believes the catalog’s multiple should have been 14.9x based on higher annual revenue of $28 million and believed the net sale price should have been $416.7 million. Shareholders voted against the proposed sale in October.
In fiscal 2022, the investment advisor changed how it accounted for accrued revenues. The fund is required to make estimates on revenue earned in the period, rather than recognize revenue when the royalties are collected. A new approach, called “usage accruals,” calculated accruals “based on expected usage” rather than when revenues “are paid to, and processed by, collection societies, publishers and administrators.” Shot Tower noted the adoption of usage accruals occurred “at a time when RTI revenue was declining and the Fund could no longer raise capital for continued acquisitions.” In other words, a lack of fresh funding halted acquisitions and reduced the amount of RTI revenue added to annual revenue. Without the change, Shot Tower believes the fund “would have breached its lender covenants” and fiscal 2022 revenue would have been $36 million lower.
Accrued revenue also caused problems with PFAR, a non-IFRS metric meant to show investors organic growth excluding accruals and RTI. But Shot Tower found PFAR did indeed include accrual estimates of income expected to be included in the period, which “presents a picture of organic growth that is higher than growth suggested by the statement data,” according to the report. As such, Shot Tower warned investors not to rely on PFAR as a metric.
More issues arose in Shot Tower’s due diligence investigations into how individual catalogs were valued. The entire portfolio, which stood at $2.8 billion on Mar. 31, 2023, is instead worth $1.95 billion, according to the report — a difference of some $850 million. Given the transparency into the fund’s accounting practices, however, shareholders were unfazed by the demotion. On Thursday, Hipgnosis Song Fund’s share price jumped 8.3% to 69 pence, its highest closing price since Jan. 31 and 30.4% above its low point in 2024, 52.9 pence, set on Mar. 4. Whether the share price will improve further could depend on how shareholders view the board’s reaction to this report.
The RIAA’s release of 2023 revenue figures show U.S. record labels are increasingly reliant — possibly too much so — on paid subscriptions for both revenue and revenue growth. While consumers continue to pay for premium streaming services, ad-supported on-demand streaming is languishing and newer platforms like TikTok provide more promotion than they do royalties.
The top-line takeaway of the RIAA’s 2023 report is that the U.S. market grew 7.7% to $17.12 billion, an improvement from the 6.6% uptick seen in 2022. Without adjusting for inflation, 2023 revenue was about 17% above the CD-era peak of $14.6 billion set in 1999, marking the ninth straight year of revenue growth after the U.S. market bottomed out at $6.95 billion in 2014. After nearly a decade of gains, the record business is healthy and stable.
But look over the RIAA’s report and you’ll see the U.S. market is missing the dynamism it could — and wants to — have. The revenue mix doesn’t have the diversity of past years. It’s not for lack of effort: Record labels are partnering with AI startups, licensing music to social media platforms and looking for new ways to engage with big spending superfans. But emerging categories remain just that — emerging — while other categories don’t yet provide much of a revenue boost. On-demand streaming turned around the industry, made music into an appealing asset class for investors and allowed handfuls of companies to go public. But where does it go from here?
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Here are five takeaways from the report.
The U.S. market is more reliant on paid subscriptions than ever.
Revenue from paid subscriptions from premium music streaming services such as Spotify and Apple Music totaled $10.15 billion and accounted for 59.3% of total recorded music revenues in 2023, an increase from 57.8% in 2022 (and far higher than percentages seen during the preceding years: 57.2% in 2021, 57.4% in 2020, 53.4% in 2019 and 47.3% in 2018). But U.S. labels were even more reliant on subscriptions for revenue growth, with paid subscriptions accounting for 79.4% of that growth in 2023. Ad-supported streaming — services such as TikTok and Facebook — grew 21.5%, or $56.2 million, but accounted for only 4.6% of annual growth.
New subscribers are harder to find.
For all the growth attributable to subscription services over the last decade, it might not be enough for some markets. As Billboard noted on March 15, SNEP, France’s recorded music trade group, warned that revenue growth from subscriptions “is slowing down here while our market is far from having reached maturity.” Fortunately for the United States, subscription penetration has surpassed 50% of U.S. internet users, according to MusicWatch. But the 2023 RIAA figures suggest streaming services have already picked the low-hanging fruit and will need new products to attract new customers. With far fewer new subscribers in 2023 than in previous years, labels were fortunate that Spotify raised the price for its standard individual plan in 2023. After adding 7.6 million subscribers in 2022 and 8.5 million in 2021, the U.S. market added just 5.2 million in 2023. That’s a sharp drop from the 15.1 million new subscribers gained in 2020 when pandemic restrictions caused an uptick in both music and video on-demand streaming services. Price increases by Spotify in July and Amazon Music in both January 2023 and August helped average monthly revenue per user improve to $8.74, up from $8.35 in 2022.
Advertising has stumbled.
A few years after advertising revenue surged, ad-supported streaming’s strength is probably its potential to convert some free users into paying customers. Ad-supported, on-demand streaming revenue rose just 2.3% in 2023, an even worse showing than the 3.5% improvement in 2022. Things looked much better a couple of years ago after ad-supported, on-demand streaming revenue jumped 46.7% in 2021 following a slowdown in 2020 due to the COVID-19 pandemic. Ad-supported on-demand streaming actually did better in pandemic-stricken 2020, rising 32.2% even though the bottom fell out of the ad market when brands braced for a recession by curtailing their ad spending. It was a remarkable turn of fortune for the promise of ad-supported music; after Spotify’s ad-supported revenue jumped 81% in 2021, CEO Daniel Ek said the growing online ad market bode well for India, Indonesia and other developing markets where Spotify operates. Since then, however, subscriptions — especially in mature markets like the United States — have carried the load for Spotify and others.
Social media is growing fast but remains small.
The highest growth rate of any category in 2023 came from “other ad-supported streaming,” which includes relative newcomers to licensing agreements such as TikTok. Other ad-supporting streaming jumped 21.5%, to $317.7 million, making the category about 75% as valuable as the fast-declining download and ringtone category (which was down 12.2% last year). The downside is that the category remains a small part of labels’ business:. Last year, other ad-supported streaming accounted for less than 5% of total revenue growth — about 6% as much as subscription services.
Physical sales were dependable, not explosive.
Both LPs and CDs had double-digit growth in 2023 — 10.3% for LPs and 11.3% for CDs — as physical formats benefitted from enthusiasm for vinyl collectibles and K-pop fans’ penchant for buying multiple CD variants of new releases. Total physical revenue increased by $181 million, or 10.5%, to $1.91 billion, and it has grown 66% since 2018. That more than compensated for the $60 million decline in legacy digital formats such as track and album downloads and ringtones. Still, vinyl and CD sales accounted for 14.8% of 2023’s revenue gains compared to subscriptions’ 79.4%.
In a New Year letter to staff in January, Warner Music Group CEO Robert Kyncl said the company needed to offer better services to the “middle class of artists,” an area being feverishly pursued by his major-label competitors, as well as a handful of independent distribution companies.
This week, WMG revealed it is interested in acquiring French company Believe, which owns a large label services business, digital distributor TuneCore, publishing administration service Sentric and a stable of record labels including Naïve, Nuclear Blast and Groove Attack. WMG said it is willing to pay “at least” 17 euros ($18.60) per share, a premium to the 15 euros ($16.41) per share offered by a consortium led by Believe CEO Denis Ladegaillerie and investment funds EQT and TCV. WMG’s bid values Believe at roughly 1.65 billion euros ($1.8 billion).
WMG’s interest in Believe doesn’t come as a surprise. The middle class of artists Kyncl referenced wants alternatives to traditional recording and publishing deals — and WMG needs the tools to give those artists what they want.
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While WMG can likely bring greater value to Believe’s assets as well, a Believe deal “solves a real stack problem for [WMG],” says Matt Pincus, founder and CEO of MUSIC, a venture with investment bank Liontree. A full “stack” — a tech term that refers to all the technologies and skills required for a project — would allow WMG to serve a more complete range of artists. Presently, WMG’s product offering is missing a distributor for self-published artists, says Pincus, that provides a level of artist services between a do-it-yourself distribution deal and a record label contract. That would augment WMG’s ADA, which distributes indie labels, and create a funnel to bring rising artists into WMG’s system.
Kyncl need only look at how his competitors are serving middle-class artists. Following the rise of iTunes, some independent distributors were eventually acquired by other major labels that wanted to distribute music on a greater scale. Sony Music has The Orchard, a digital distributor acquired in 2015, and AWAL, an artist-development company acquired from Kobalt in 2022. Universal Music Group acquired digital distributor Ingrooves in 2019 and folded it into its artist- and label-services division, Virgin Music Group in 2022. TuneCore, founded in 2006 to allow artists to access a new era of digital stores and services, was acquired by Believe in 2015.
The majors’ emphasis on label services is an acknowledgement that today’s marketplace is a mix of traditional artist deals, do-it-yourself independent artists and everything in-between — distribution deals, joint ventures, licensing deals, profit-sharing arrangements and releases from independent artists backed by a major’s label services provider. Budding superstars often want independence but need the majors’ global infrastructure and expertise. “What really makes a difference in this world is to do what [CEO] Brad [Navin] and the Orchard did with the Bad Bunny record [Un Verano Sin Ti],” says Pincus. “They really helped break that record worldwide.”
Believe would also provide WMG a publishing solution for those same independent artists. “When you consider that Believe also acquired Sentric publishing, this brings together master and publishing for many of these indie artists,” says Vickie Nauman of advisory firm CrossBorderWorks. “That also opens up opportunities for new synch licensing models that otherwise fragmented rights do not allow.”
Geography is another aspect of Believe’s business that could be attractive to WMG. Although the majority of Believe’s revenue comes from Europe, it has employees in more than 50 countries and has a presence in fast-growing markets such as Indian — where it invested in two record labels, Venus and Think Music — and Indonesia. Approximately 27% of Believe’s total revenue in the first nine months of 2023 came from Asia-Pacific and Africa, a 17.4% increase from the prior-year period.
Developing markets have great potential for a couple reasons, Kyncl explained Wednesday at the Morgan Stanley Technology, Media and Telecom 2024 conference. In the Middle East, for example, markets that have young populations, an underdeveloped subscription market and lack collection societies “will see quite a lot of value appreciation.” Developing markets are increasingly becoming music exporters, and Kyncl believes that provides WMG with an arbitrage opportunity. “Let’s say if you have Indonesian content that’s traveling to America,” he said. “It’s a smart place to put money because it’s [going] from a low ARPU country to high ARPU streams [in a developed market].”
An acquisition is hardly a done deal, though. To date, WMG has only expressed an interest in Believe. WMG is playing catch-up, too: The consortium attempting to take Believe private has lined up blocks representing nearly 72% of share capital — enough to “prevent a competing bidder from acquiring control,” according to Believe’s ad-hoc committee — although WMG’s higher bid could change that. An acquisition would require regulatory approval, too, and there is likely to be pushback from music companies and trade associations such as the UK-based Association of Independent Music against further industry consolidation.
But, setting aside the potential roadblocks, WMG would be a good fit for Believe. Sony Music and UMG are both larger than WMG, already have Believe-like companies and would thus face more regulatory scrutiny. The 1.65 billion-euros ($1.8 billion) price tag is in what astronomers call the “Goldilocks zone” for habitable planets’ distance to their suns: It’s too expensive for many independent companies but affordable enough for WMG.
If 2023 was the year of Taylor Swift, 2024 could be the year of the superfan.
While Swift’s The Eras Tour proved that music fans are willing to spend large sums and travel far to see their favorite artist, for years promoters have improved their revenues by selling premium experiences to concerts and festivals. Whether it’s dynamically priced seats close to the stage, VIP access or a revamped cocktail offering, there are more options for fans willing to pay more to enjoy the sights, sounds and hospitality of live music. Expect an even greater emphasis on this in the new year.
The focus on superfans isn’t confined to live music. The CEOs of Universal Music Group and Warner Music Group both started the year by highlighting a desire to better serve superfans. In the recent past, that may have meant NFTs and newfangled web3 offerings. Today, superfans buy multiple copies of albums (both LP and CD) and merchandise, often directly from the artist’s web store. Streaming services could soon be getting into the game, too, by offering “superfan clubs,” Spotify CEO Daniel Ek suggested in a Jan. 24 open letter.
But live music has a unique ability to upcharge for premium experiences — and add to companies’ bottom lines in the process. Tickets for superstar acts have proven to have remarkably resistant to price increases. In 2023, the average price of a Taylor Swift concert ticket on Stubhub was nearly $1,100. Drake, Morgan Wallen and Beyonce prices averaged about $450, $390 and $324, respectively.
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Emphasis on superfans makes sense in an era of higher priced primary tickets that capture value that would otherwise go the secondary market. Artists are increasingly willing to charge more up front rather than lose money to re-sellers. Still, the typical secondary ticket is still almost twice the price of a primary ticket, Live Nation president and COO Joe Berchtold said during the company’s earnings call on Thursday. Currently, about 9% of Live Nation’s amphitheater business comes from premium offerings such as VIP boxes, added president and CEO Michael Rapino. He thinks that should be 30% to 35% instead. To get those numbers, Live Nation is upgrading the concert experience.
This year, Live Nation plans to spend $300 million of its $540 million of capital expenditures on revenue-generating projects. The top four projects — including Foro Sol in Mexico City and Northwell Health at Jones Beach on Long Island — will account for $150 million of the $300 million. The other half includes several projects in the tens of millions of dollars such as VIP clubs, viewing decks, rock boxes and new bar designs, said Berchtold. Those “tactical improvements,” as he called them, can produce a return on investment in the 40–50% range.
Putting more emphasis on revenue-generating enhancements will boost the bottom line in 2024. Following a stadium-heavy touring slate in 2023, Live Nation will put more tours in owned and operated amphitheaters and arenas that allow the company to capture fan spending on parking and hospitality. Stadium shows have higher average ticket prices, Rapino explained, but amphitheater and arena shows produce higher per-person spending. In other words, the venues are smaller but have better margins for the promoter. As a result, Live Nation expects higher adjusted operating income in the second and third quarters. “We’re going to have a fabulous year,” said Rapino.
Dynamic pricing — seats closer to the stage are priced far above seats further away — is just getting started outside of the United States and presents “a great growth opportunity” as it expands from Europe to South America and Australia, said Rapino. There’s room for growth in the United States, too, as dynamic pricing extends beyond the top artists and into amphitheaters and other concerts. “We still think that’s a multi-year opportunity to continue to grow our top line plus [our] bottom line,” he said.
The price-conscious fan isn’t forgotten as concerts increasingly cater to big spenders. Live Nation offers a lawn pass for amphitheaters called Lawnie Pass — the 2024 edition costs $239 each and offers lawn admission to multiple shows at select amphitheaters — and sold an unlimited pass for select clubs called Club Pass in 2022. And company executives have repeatedly stated that a benefit of dynamic pricing is that higher prices for in-demand seats allow for lower prices for seats further from the stage.
But from live music to music streaming, companies are searching for ways to beef up their margins. As such, expect the market to continue segmenting into higher-value and lower-value fans.
What’s the best way to become a superstar? First, become a successful mainstream artist.
That’s one of the key takeaways from the inaugural annual report from music data company Chartmetric.
Of the roughly 710,000 new artists added to Chartmetric’s platform in 2023 that placed into one of six career stages — ranging from “undiscovered” to “legendary,” only a small fraction of a percent finished the year amongst the top 35,000 artists. Instead, most new artists — 87.6% of them — fell into the “undiscovered” category, while 12.3% of them reached “developing,” one category above.
The upper echelons were incredibly difficult for new artists to reach. Just 0.05% of new artists — about 355 — finished in the mid-level category or higher — meaning they ranked in the top 35,000 on the platform. Chartmetric created its proprietary Career Stages categories by taking into account artists’ performance across streaming services, social media platforms and radio airplay.
But wait, the numbers are even more imposing! There were actually 1.3 million new artists added to Chartmetric in 2023, but only 710,000 of them were actually assigned a career stage. Chartmetric told Billboard it does not assign every artist a career stage to limit duplicates, remove non-artist profiles and filter out artists with limited data.
Chartmetric’s statistics throw cold water on the notion that social media and do-it-yourself distribution can help any artist reach the levels of success previously attainable only to artists on record labels. Those rare instances grab headlines and feed the narrative that technology has eroded traditional gatekeepers’ powers and democratized access to audiences. And while it’s true that artists such as Armani White and Jxdn rode TikTok fame to major-label record deals, those success stories are outliers. Anonymity, or something close to it, is the norm.
Economic mobility is far from impossible, though. Because Chartmetric tracks so many artists, even incredibly low odds of success can result in a meaningful number of artists moving up the ranks. The 355 new artists that broke into or surpassed the mid-tier level is a big enough number of breakthrough new artists to feed a system of record labels and artist-services companies that must constantly seek out young candidates to become future stars.
Still, the challenging math underpinning success in music makes sense. Getting heard is difficult when audiences live under a constant deluge of listening options. A massive amount of music is released every day — more than 110,000 on average every day in 2023, according to Luminate. Chartmetric added 17.2 million new tracks to its database in 2023 — 7.7 million were released last year — and has 103.9 million tracks in its system.
To evaluate career stage development, Chartmetric took a sample of artists who had reached a career stage on June 11. The vast majority of artists fell into the undiscovered category. In fact, undiscovered artists made up all but 150,000 of the roughly 1.5 million artists who had been given any career stage category on June 11.
Rather than take huge jumps in career stages, most artists who break out to superstar status come from the mainstream, not from the mid-level or developing categories. More than half — 54.2% — of mid-level artists (No. 12,000 to No. 35,000) rose to the mainstream category (No. 1,500 to No. 12,000), the strongest relationship between any two career stages, says Chartmetric.
Put another way, getting to the upper echelon usually means you’ve already had considerable success. This is likely to result of “a steady, consistent rise to the top,” Chartmetric opines, rather than overnight fame.
This path to success makes sense given the advantageous starting point of most major label artists. Rare is the artist plucked from obscurity and developed into a chart-topping success from scratch. In most cases, artists build a career independently and prove themselves — whether through a TikTok hit or ticket sales — before signing with a record label. The bidding war comes after, not before, an artist finds an audience. Undiscovered artists are far riskier propositions for record labels than mid-tier artists.
There is some economic mobility for less successful careers — but not much. About 12% of developing artists were able to rise to mid-level status (No. 12,000 to No. 35,000). Far fewer jumped all the way to the upper echelons: Just 0.25% of developing artists jumped mid-level status and reached mainstream (No. 1,500 to No. 12,000) or superstar (top 1,500).
Just as economic mobility characterizes the “American dream,” the idea that a person can strive to achieve a better life, the great hope of the modern music business is that artists can make a living on streaming royalties. Whether the system is fair is under debate. Spotify, Deezer and SoundCloud have changed their royalty calculations to favor professional and developing artists over undeveloped artists and non-music content. In the European Union, lawmakers are pressing music streaming services to improve payouts to artists.
Chartmetric’s report doesn’t dispel any notions that the odds are stacked against new artists hoping to break into the mainstream. Success is possible, but it’s rare.
Queen is finally getting close to selling its catalog, according to sources — and may even already be in an exclusive period with an undisclosed suitor.
The music assets include recorded music, publishing and ancillary income streams, according to sources, who suggest Queen is seeking a $1.2 billion payday. Those ancillary revenue streams include revenue from the 2018 smash film Bohemian Rhapsody, merchandise and other licensing opportunities. The deal may also include royalties from the North America master recordings catalog, which Queen sold to the Disney-owned Hollywood Records at some unknown point since the label began licensing the band’s recordings in the early 1990s.
In the past, Hollywood has maintained that when it acquired Queen’s master recordings it was for life of copyright, which could mean the label has the band’s later albums in the U.S. for a total of 35 years, given that U.S. copyright law allows creators to terminate and reclaim their copyright after that term.
There have been numerous media reports about Queen seeking a record $1 billion catalog sale since the band started shopping it in May 2023 — the first of which by Music Business Worldwide. While many of those stories suggested that Queen was in discussions with Universal Music Group and that Disney, Hollywood’s owner, was also approached, sources say that the band’s music assets were shopped to only a few select suitors because the band members wanted to be comfortable in entrusting stewardship of its catalog. Moreover, because of the price the band is seeking, sources suggest that some of the potential strategic buyers may have partnered with financial institutions to make an offer.
Sources say that each band member — Brian May, Roger Taylor, John Deacon and the estate of the late Freddie Mercury — has his own lawyer involved to collectively shop the deal. Billboard reached out to lawyers who are or were officers for the band’s company, Queen Productions Ltd., as well as Hollywood Records and UMG, all of whom either declined a request for comment or didn’t respond.
The Queen catalog includes iconic hit songs such as “Bohemian Rhapsody,” “Killer Queen,” “Another One Bites the Dust,” “Radio Ga Ga,” “Somebody to Love,” “Crazy Little Thing Called Love,” “You’re My Best Friend, “We Will Rock You” and “We Are the Champions.” Since 1991, the Queen catalog has generated nearly 38 million album consumption units in the U.S.; and has nearly 41.7 billion in global on-demand streams, according to Luminate.
Since late 2018, Queen’s sales and streaming activity has been turbocharged by the Bohemian Rhapsody theatrical film that came out that year.
For perspective, from 1991 to the end of 2017, Queen’s U.S. sales and streaming activity totaled 25.9 million album consumption units, according to Luminate. And in the three years leading up to the Bohemian Rhapsody film’s release, Queen’s annual catalog album consumption averaged about 752,000 units. But then in 2018, with the film’s release that November, the band’s album consumption unit count jumped to 2.074 million. In 2019, its catalog activity exploded to nearly 3.58 million units.
At the end of 2023, Queen’s U.S. album consumption sales activity to date since 1991 totals nearly 37.7 million units, an increase of 45.5% from the 25.9 million in 2017.
According to financial reports from Queen’s shared company, Queen Productions Limited, filed with the United Kingdom’s Companies House agency, the band reported a net profit of 18 million pounds on nearly 41 million pounds in revenue for the year ended Sept. 30, 2022. The company also reported 32.4 million pounds in gross profit and 22.16 million pounds after expenses but before taxes. For the prior fiscal year, the company reported 13.6 million pounds in net profit on revenues of 39.2 million pounds.
Music assets usually trade based on financial models built around an average of the catalog’s performance for the most recent three years. They trade on what’s known as net label share — gross profit after cost of goods but before marketing costs. Or, in the case of publishing, net publishers share — gross profit after paying out royalties.
However, the Bohemian Rhapsody film produced incredible financial rewards, throwing off the kinds of averages commonly used to price these deals. When investors look at music catalogs, they try to eliminate what they consider one-time activity bonanzas like a new boxset coming out; or in the case of Queen, setting aside the sales and streaming activity in the immediate aftermath of the film.
By the time the Queen music assets came to market in May 2023, interested suitors were likely scrutinizing the catalog’s activity from 2020 to 2022, when the band’s music averaged nearly 1.53 million album consumption units a year. That’s more than double the 752,000 album consumption units that the band averaged in the three years before to the film’s release. After discounting 2018 and 2019 as an anomaly, Queen’s camp, however, is likely arguing that the movie has brought Queen to a bigger audience and that success will be sustained. But suitors considering the Queen acquisition nevertheless might be worried that some of that activity might still be from the film’s afterglow. And if so, how much decay might still occur before sales and streaming activity level off and become predictable?
Overall, in 2019 — the year the band’s financials were most impacted by the film — Queen reported 72.8 million pounds in revenue and, after cost of sales, a gross profit of 58.8 million pounds. In the three years prior to the movie being released, from 2016 through 2018, the Queen catalog averaged 17.6 million pounds — due to an atypically low 2016 when revenue was only 12.34 million pounds — while gross profit averaged 13.5 million pounds. From 2020 through 2022, the catalog averaged revenues of 40.7 million pounds, and gross profits of 22.2 million pounds.
It’s likely that the Queen financials don’t include all Queen revenue, as well. For example, while it may include music publishing royalties paid to the band’s publishing company, it likely doesn’t include the individual payouts from global collection societies that are paid directly to writers. With that under consideration, Billboard estimates Queen’s publishing revenue likely totals about $17 million annually, based on the 2020–2022 three years average.
For masters, Billboard estimates — also based on a three-year average — annual global revenue of about $48 million for the Queen catalog. Of that, about $16 million is from North America — where sources say the band receives artist royalties. For the remaining $32 million outside North America, Queen owns its catalog. Figuring Queen takes a quarter of the revenue from North America, and three-quarters elsewhere, the band would earn roughly $28 million annually off recorded music.
In all, that’s about $45 million that Queen earns from recorded and publishing annually, based on estimates.
Sources say Queen’s annual royalties in the deal total about $50 million, which likely also includes royalties from Bohemian Rhapsody DVD and Blu-Ray sales, band merchandise and Queen theatrical productions in the U.K.
Valuing Queen’s publishing catalog at a 25-times multiple would come to about $420 million. The masters and other income streams at a 20 times multiple would bring that valuation to $660 million. And then, adding in other tertiary income streams and then likeness and image rights could get it to $1 billion valuation.
Queen is seeking more than that, though. And the steep $1.2 billion price tag sources suggest could be one of the reasons why the catalog has been in play for so long. Now, though, it seems a deal may finally be close.
“Rap beef is so washed and tired. Exhausting. Embarrassing. Just f—ing over all corny as f—.”
The rapper Coi Leray made this pronouncement in a since-deleted tweet on Jan. 26. She was responding to an Eminem verse in a new Lyrical Lemonade song titled “Doomsday Pt. 2,” but the spat — and Leray’s suggestion that beef was a waste of energy — was quickly forgotten.
That’s because, that same day, Megan Thee Stallion released “Hiss,” a withering track that hurls vitriol at blogs, exes, shit-talkers, copycats, “Z-list hoes,” and more. Nicki Minaj is not named in the song, but she took offense to a line, and has spent her subsequent days letting the world know in interviews and on social media. She also attacked Megan Thee Stallion in a venomous new song called “Big Foot.”
All of this has been great for the commercial reception of “Hiss,” which launched at No. 1 on the Hot 100, far higher than Megan Thee Stallion’s last single, “Cobra” (No. 32). On-demand audio streams of “Cobra” started at around 1.7 million the day of release and then slid to a plateau around 1.1 to 1.2 million, according to Luminate. “Hiss” started out higher — earning 3.2 million on-demand audio streams opening day — and then began to make a similar slide, falling to 2.3 million plays by Sunday, a drop of around 27%. However, when Minaj released “Big Foot” Sunday at midnight, streams of “Hiss” shot back up — hitting 3.8 million on Monday, a jump of more than 60% — and they stayed strong for the rest of the week.
That’s all worth real money. Billboard estimates that “Hiss” earned around $121,000 in royalties from those on-demand audio streams — about $33,000 of which came from that “Big Foot” bump. (Megan Thee Stallion recently signed a distribution deal with Warner Music Group.) “Big Foot,” meanwhile, has earned more than $44,000 in recorded music royalties from its audio streams, Billboard estimates. (These figures don’t take into account other sources of streams or sales, which were especially significant for Megan Thee Stallion.)
In an industry where the competition for attention is fiercer than ever, the combination of controversy and celebrity remains the closest thing to a surefire winner. “When you’re in a very crowded marketplace with however many songs coming out on streaming services every day, you have to figure out an angle to cut through the noise,” says Eddie Blackmon, a longtime A&R. “Obviously this is cutting through the noise.”
“Beef always helps music, because it just brings attention,” adds another rap executive who requested anonymity to speak candidly. “In the clickbait world that we’re in, that gets the headlines, that’s what people talk about, that gets the barbershops going. People react to negativity more than they do positivity.”
Megan Thee Stallion has already proved adept at using celebrity and controversy to galvanize headlines and streaming, of course. When she released “WAP” with Cardi B in 2020, conservatives objected to the sexually explicit lyrics, turning the single into a culture-war-flashpoint — and a No. 1 hit. (When the two rappers released “Bongos” in 2023, it failed to incense right-wing commentators, debuted at No. 14, and quickly faded from view.) Lil Nas X achieved a similar feat with “Montero (Call Me By Your Name),” transforming conservative outrage over the track’s video into a tail-wind that propelled him to No. 1.
These days, culture war controversy may be the most effective rocket fuel for hits. For two other examples that helped mint No. 1’s in 2023, see Oliver Anthony Music’s “Rich Men North of Richmond” and Jason Aldean’s “Try That in a Small Town.”
Hip-hop feuds are another strain of controversy with their own long history, fodder for many an internet list: MC Shan vs. KRS-One; Lil’ Kim vs. Foxy Brown; Jay-Z vs. Nas; 50 Cent vs. Ja Rule; Meek Mill vs. Drake; Minaj vs. Remy Ma, and many, many, many more.
Sha Money XL produced 50 Cent’s “Wanksta,” a hooky Ja Rule diss that came out in 2002. “That was 50’s first break-through record,” Sha Money XL says. “DJs went crazy with it.”
A dispute between artists “is definitely going to raise your attention,” the producer and longtime record executive adds. “The bad thing is there can be fights, shoot-outs, that come with it.”
Listeners love to take sides in abstract debates — which rapper is more talented, or more of a sellout — especially in an era where zealous fan armies vie for primacy online, but there can be dangerous real-world consequences. “With beefs there can be a bravado there; guys want to hurt each other or defend their ego,” says Ray Daniels, a veteran hip-hop executive and host of The GAUDS Show.
In the case of Megan Thee Stallion and Nicki Minaj, Daniels continues, “no one is saying, ‘tool up and get security up.’ So to me, it’s a great thing that they’re using their platforms to shine lights on each other, whether that’s good light or bad light. Both songs are streaming; it’s obviously working.” (Though while streams of “Hiss” rebounded and stayed high, “Big Foot” enjoyed a big debut — 4.1 million on-demand audio streams — then fell off quickly, logging 1.1 million plays in the last day of the track week, according to Luminate.)
If sales can be a side effect of some spats, they can also be the main event, the whole purpose of the fracas. 50 Cent and Kanye West battled over who would sell more units in 2007, as did Minaj and Travis Scott in 2018. (At the time, Minaj memorably ridiculed Scott as “this Auto-Tune man coming up here selling f—ing sweaters.”)
Squabbles over sales also help drive sales, of course — it’s not a coincidence that West’s Graduation earned the biggest opening week of his career at that point. “Some skeptical hip-hop fans believe that most of these feuds are merely cheap marketing stunts meant to help sell records,” The New York Times noted at the time. “This feud was unabashedly a marketing stunt, with record sales not the hidden agenda but the main point.”
“We know there are real beefs and then there are manufactured beefs,” acknowledges Blackmon, who started his career working at West’s G.O.O.D. Music label. “But they all help build awareness of the songs that are being released. It’s all marketing at the end of the day. If it takes on a life of its own, the companies and teams around it figure out how to fan the flame.”
That fanning process can happen more quickly in the social media era. “Social media makes little things bigger, magnifies the tension and the opinions,” Sha Money XL notes.
Many of the prominent music- and culture-focused accounts on X, Instagram, and TikTok are entrepreneurial, meaning they accept money for posts. “People spend tens of thousands of dollars across Instagram, blogs, and X culture accounts,” says one digital marketer who is not working with either Megan Thee Stallion or Minaj. “Narrative-based campaigns are everything. You’re getting the internet to see the parts of the story you want them to see; if you wanted to hurt somebody, for example, you seed out their low first-week numbers [when they release an album], knowing that everybody’s just gonna roast them.”
“Black Twitter has had a field day right now with this whole feud” between Minaj and Megan Thee Stallion, the digital marketer adds. His advice: “Keep fueling it.”
“You want to continue the conversation,” a second digital marketer uninvolved with either rapper agrees. If a rivalry is developing, he continues, artist’s teams can go to culture-focused accounts and pay $50 or $100 for posts asking something as simple as, “who’s harder?” “It’s much easier to push a narrative on X, especially if you’re a large artist,” the digital marketer says. “You’re going to get impressions just by using the name.”
Both Megan Thee Stallion and Minaj seem keenly aware that their clash has the potential to drive clicks. Even as Minaj insults Megan Thee Stallion in “Big Foot,” she claims that she’s doing her rival a favor: “It’s the most attention you’ve ever gotten.” Meanwhile, “Hiss” targets anyone “usin’ my name for likes.” “All this free promo,” Megan raps. “I’m turnin’ a profit.”
The music industry’s Cold War with TikTok just turned very hot — and extremely complicated. By the end of the month, Universal Music Group (UMG) will require the platform to take down music it controls even a small part of, by using what some music executives call “the nuclear option.” This will prevent some other rights holders from making money on TikTok — but at least some of them are cheering it on.
On Jan. 30, the day before UMG’s latest deal with TikTok lapsed, the company announced in an open letter that “we must call time out on TikTok” and began removing its recorded music from the platform. After a 30-day grace period, UMG says it will also require TikTok to take down any song in which Universal Music Publishing Group (UMPG) controls any rights. That means songs by Harry Styles, SZA and Bad Bunny; those with writing credit from creators like Metro Boomin and Jack Antonoff; and even those that sample compositions by UMPG songwriters. In some markets, that might account for more than half of the music used on the platform.
The question is what this means for the rest of the business. Styles, SZA and Bad Bunny are three of the biggest acts signed to or distributed by Sony Music Entertainment, so this would affect that label, as well as Warner Music Group, BMG and scores of independents. From the end of February until UMG and TikTok reach a new licensing deal, they will not earn any money on music to which UMG has any rights — a relatively minor income stream at this point — while losing out on an important source of promotion. In the long term, of course, a win for UMG that pushes TikTok to pay more for the rights to music could also help the entire industry.
This Cold War turned hot pretty suddenly. For years, rights holders have embraced TikTok as a promotional vehicle while griping about the short-form video platform’s low payouts in what seemed like a repeat of the music industry’s contentious relationship with YouTube. Both can pay less than other platforms because in many cases they can essentially operate under the Digital Millennium Copyright Act, which allows them to make available content uploaded by users until rights holders ask for a takedown. In language that sounds like it could have come from YouTube a decade ago — or from a file-sharing service a decade before that, for that matter — in a statement released on social media, TikTok said that UMG had abandoned a popular platform “that serves as a free promotional and discovery vehicle for their talent.” Basically, they offer exposure. But as creators and rights holders might say — and here you have to imagine a Borscht Belt delivery — you could DIE of exposure!
UMG’s move came at the worst possible time for TikTok: the day before a Senate committee hearing on child safety and social media, during an escalating Middle East conflict that has focused negative attention on TikTok’s Chinese ownership, and during a week when much of the music business was in Los Angeles for the Grammys. This isn’t entirely a coincidence: UMG’s long-term deal actually expired at the end of 2023, and Jan. 31 was just the end of a one-month extension. (A source close to TikTok said that the two sides were close to a deal at the end of December, while a source close to UMG said that was not the case.) Fair or not, the pressure in Washington could be substantial. (I have serious concerns about a Chinese-owned app becoming an important source of news on Taiwan, but I’m not sure that has much to do with music licensing.)
So far, there has been some support for UMG from other companies in the music business. Neither of the other two major labels would comment — Sony declined and a spokesperson for Warner did not return messages — and it’s unlikely that they will, for antitrust reasons. Primary Wave, Downtown and Hipgnosis have expressed support for Universal, though. And at a Grammy Week music publishers event, National Music Publishers’ Association (NMPA) president/CEO David Israelite pointed out that the model contract with TikTok that’s used by many NMPA members expires in April.
Tik-tok, indeed.
The dynamic here is complicated but potentially revolutionary. For the last two decades, most of the negotiations between media and technology companies have involved a few rights holders that each control significant amounts of content and a platform that has a larger share in its market than they do — think labels and streaming services or book publishers and Amazon. Since antitrust law almost always prevents big companies from negotiating together — a lesson Apple and some book publishers learned the hard way — the platforms have an advantage. In this case, UMG managed to get more leverage by using publishing rights that by their nature will affect impact a lot of compositions, creating a situation where some small companies can cheer it on.
The question is what happens after February. Rights holders can live without the money they make on TikTok, but what about the platform’s promotional value for breaking artists? For now, presumably, artists on other labels who don’t work with UMPG songwriters will gain an advantage. If this dispute lasts a few months, that might give smaller labels enough of an advantage to matter. If it lasts longer than that, though, TikTok could face more competition, too. The company has suggested that music accounts for a modest amount of the platform’s value, but that would be tested if TikTok has to compete against other short-form video platforms that have rights to use music that it doesn’t.
The more likely scenario is that UMGand TikTok will reach an agreement — perhaps one that both will grumble about but accept — and then over time find ways to work together that benefit both sides, plus creators of all kinds. Short-form video could eventually grow into a truly important revenue stream. By that time, of course, a new platform will probably come along to challenge that, too.
A year into SoundCloud’s fan-powered royalties, a departure from the traditional “pro rata” method of calculating streaming royalties, artists have a better understanding of their fan bases and a better chance to monetize their listeners, according to a new report by author, podcaster and economics professor Will Page.
Fan-powered royalties — known more broadly as user-centric royalties — is a method for calculating streaming payouts to independent artists based on individual fans’ listening on SoundCloud. The traditional, pro-rata model divvies up a large revenue pool based on a track’s total number of plays. In that scenario, an up-and-coming artist shares the same royalty pool as the biggest superstar.
User-centric royalties turn a big pool into smaller silos by splitting a listener’s subscription or advertising revenue based on only the tracks they streamed. If a listener streams only independent artists, most or all of the user’s subscription or advertising revenue will go to those artists. Since SoundCloud first announced fan-powered royalties in 2021, Warner Music Group and Merlin have agreed to use the calculation approach for their artists.
SoundCloud singles out an artist’s biggest fans and gives artists the tools to engage with those supporters through person-to-person messaging. With the help of tools that help artists engage directly with their fans on the SoundCloud platform, a small number of what SoundCloud calls “true fans” will provide an “outsize” share of an artist’s royalties. (Page did not define “true fan” or explain the threshold that separates them from less passionate ones.) The combination of the engagement tools and the fan-powered royalties “make this true fan game the most desirable to play,” wrote Page.
The promise of fan-powered royalties is a more sustainable business model for up-and-coming and working-class musicians. For SoundCloud, a well-known springboard for young musicians’ entry into the big leagues, a model that benefits independent artists over major-label superstars would help cement that platform’s credentials in the creator community.
So, Page offered three case studies that examined artists in different stages of their careers. In 2022, Rapper Lil Uzi Vert opted into fan-powered royalties and gave SoundCloud an exclusive on the track “Space Cadet” from his Red & White EP. As a result, according to Page, “more of Uzi’s listeners became true fans, and those true fans made up an even greater proportion of the overall revenue.” With fan-powered royalties and insights from the platform, true fans accounted for 6.5% of the rapper’s audience in July 2022, up from 5.2% in the previous month, as well as 71.8% of his revenue, up from 54.6%. The audience he gained was engaged: 6% of them were true fans, 69% were classified as engaged and only 9% were passive listeners.
To show that fan-powered royalties can help a mid-tier, independent artist, Page offers the example of Kelow LaTesha, a rapper with about 14,000 SoundCloud followers. LaTesha used fan-powered royalties to reach more listeners. True fans’ share of her revenue jumped to 45.7% in July 2022 from 32.2% in June 2022. The number of true fans increased, but because she gained a greater share of passive listeners, LaTesha’s true fans accounted for 1.4% of her listeners, down from 1.7%.
The do-it-yourself case study, focusing on EDM producer/DJ ShortRound, improved both his true fans and his revenue from those fans. From June to July 2022, true fans’ share of DJ ShortRound’s SoundCloud audience climbed from 3% to 4.4% and their share of his revenue jumped from 77.7% to 82%.
SoundCloud’s adoption of fan-powered royalties pre-dated a larger effort to make streaming more financially viable for labels and artists. Universal Music Group partnered with streaming service Deezer in 2023 to improve payouts to professional musicians while reducing payouts to background noise and other types of audio content that arguably provide less value to listeners. In Europe, politicians are calling for “fairer models of streaming revenue allocation” for artists.
SoundCloud’s approach might not be the best approach for all streaming platforms, but the handful of case studies is evidence that the approach works for SoundCloud. The combination of fan-powered royalties and creator tools “opens a new path to prosperity that the entire music industry should understand,” wrote Page.
At the beginning of 2024, the always-changing music business is going through rapid transformation unlike anything in the last decade. How music companies organize themselves is changing. How royalties are calculated and paid is changing. How companies engage with fans is changing. And investors have different expectations of public companies — more focus on margins, less obsession with growth.
Music companies’ earnings results for the fourth quarter of 2023 will provide insights into how companies have performed and, more importantly, what they expect to do in the future. Only one company, SiriusXM, has announced to date. Next week’s earnings releases include Spotify (Tuesday, Feb. 6), Reservoir Media (Wednesday, Feb. 7) and Warner Music Group (Thursday, Feb. 8). Universal Music Group (UMG) announces earnings on Feb. 28. Here are some things to watch for in upcoming earnings calls.
The scope of layoffs
In October, UMG executives primed investors for cost-cutting measures that would improve margins and allow for investments in growth opportunities. The result would be hundreds of layoffs, according to a Jan. 12 Bloomberg report. On Thursday, UMG revealed some details of a bi-coastal label group restructuring. But what’s missing, so far, are details on the number of layoffs and the cost savings UMG expects to get from a restructuring. UMG’s fourth-quarter earnings release on Feb. 28 will be an opportunity for analysts to ask the company to give an update on its restructuring plans. As Billboard noted last week, the music industry is seeing widespread layoffs despite continued streaming growth. Warner Music Group (WMG), Downtown Music Holdings and BMG cut jobs in 2023. Digital music companies have shrunk their head counts, too: Spotify, Amazon Music, SoundCloud, Tidal and Bandcamp went through downsizings of various sizes.
More troubles in TikTok-land?
When UMG failed to renew its licensing contract with TikTok, it made licensing to the social video platform a major topic of conversation for upcoming earnings calls. Analysts and investors should want to know how a company’s negotiations with TikTok are proceeding and whether to expect an interruption if the two sides cannot reach an agreement. TikTok and WMG reached an agreement in July 2023, but investors may want progress reports from other public companies — Reservoir Media, Believe, Sony Music — about their licensing talks.
UMG’s decision is not without precedent: In 2008 and 2009, WMG pulled its catalog from YouTube for nine months while the two companies’ licensing negotiations were at an impasse. In 2011, Google launched an audio music streaming service, Music Beta by Google, without licenses from both Sony Music Entertainment (SME) and WMG. When Google added MP3s to its Google Music service later that year, the SME and WMG catalogs were initially absent.
The direct financial hit to UMG will be minimal since TikTok accounts for 1% of the company’s revenue, UMG stated in an open letter about the licensing talks. But because TikTok is an important promotional vehicle and a popular place to discover music, the indirect financial hit is more substantial. Investors always want to know about direct dollar impacts of a company’s moves, and they should want to understand the downsides of leaving a hit-making social platform.
How much have price increases mattered?
Music subscription prices didn’t budge for over a decade before succumbing to change in 2022 and 2023. The big fish was Spotify, which finally raised prices in the United States and other major markets in July. A higher price creates a multiplier effect on top of existing subscriber growth and will augment what would have otherwise been record quarterly revenues. The gains should come without an increase in churn: Spotify CFO Paul Vogel said during an Oct. 27 earnings call that Spotify didn’t lose any subscribers in the third quarter due to the price increase.
For record labels and publishers, a 10% price increase atop year-over-year subscriber growth stands to accelerate revenue growth. Guggenheim analysts said in a recent note to investors that they expect price increases at Spotify, YouTube and Deezer to raise UMG’s subscription revenue growth to 14.8% in the fourth quarter from 13.0% in the third quarter.
The state of the advertising business
While the subscription market has been strong, the ad-supported side of the business has struggled to keep chase. Through the first three quarters, Spotify’s ad-supported streaming revenue increased 14.9% year over year. That’s better than the 11.4% improvement in subscription revenue but well below the 22.2% and 62.1% gains in ad revenue in full-year 2022 and 2021, respectively.
Broadcast radio has fared even worse. Companies such as iHeartMedia, Cumulus Media and Audacy have blamed a slowdown in national broadcast advertising on some disappointing earnings in recent quarters.
SiriusXM provided the latest clue about broadcast advertising. “SiriusXM’s advertising revenue remains challenged,” CFO Tom Barry said during Thursday’s earnings call, “which we believe is a product of a tough broadcast advertising market.” Elsewhere, however, SiriusXM’s digital advertising improved versus 2022: Pandora had “strong growth” in its podcasting and programmatic advertising businesses, added Barry.
Some positive news in recent days shows advertising — perhaps not for broadcast businesses — is rebounding. U.S. ad spending in November was up 25% year over year, according to MediaRadar, an advertising intelligence company. The number of advertisers declined 8%, however, suggesting existing advertisers were ramping up spending.
More good news came from major ad-driven tech companies. Google’s advertising revenue in the fourth quarter increased 11% from the prior-year period, the company announced Wednesday, up from year-over-year improvements of 3.3% and 9.5% in the second and third quarters, respectively. Meta’s revenue grew 25% and its ad impressions rose 28% in the fourth quarter, the company announced Thursday.
The mission to reach superfans
Major music companies are suddenly taking a greater interest in serving superfans, those heavy-spending consumers that drive the concert and merchandise businesses but have less effect in a world of flat-rate, all-you-can-eat music subscription services. The 80-20 rule says 80% of a company’s business comes from 20% of its consumers. With music streaming, however, a $10.99-per-month service doesn’t capture a superfan’s willingness to pay more for additional value. Spotify hinted that “superfan clubs” were in the works in an announcement about the Digital Markets Act in the European Union. UMG CEO Lucian Grainge’s letter to staff in January said the company will focus on “strengthening the artist-fan relationship through superfan experiences and products.”
The problem isn’t that consumers won’t pay more money to engage with their favorite artists. The problem is no platforms have found a winning formula. Numerous previous attempts to court superfans fizzled. Drip, a platform that allowed artists to provide fans with music and other items for a recurring monthly fee, lasted from 2011 to 2016 (it relaunched a Kickstarter in 2017 but shut down in 2018). PledgeMusic shut down in 2019 amidst financial problems and allegations of improprieties. Most recently, startups’ attempts to use Web3 technologies to build superfan communities ran headfirst into the public’s sudden distrust of cryptocurrency and disinterest in NFTs. Given Spotify’s market size and resources, though, the company could make a real impact.