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During an October earnings call, Universal Music Group CFO Boyd Muir told investors the company was conducting “a careful review” of its costs. In the world of public company statements, that was a hint that UMG expected to make cuts to its workforce of roughly 10,000 — specifically hundreds of jobs in the first quarter of the year, as Bloomberg later revealed.
UMG has plenty of company. Until late last year, the music business had mostly escaped the job-cutting that ravaged industries that depend more on advertising in 2022 and 2023. That was still the best of times for the industry, which had found double-digit revenue growth in streaming. Since 2020, 10 music companies have gone public to take advantage of investors’ enthusiasm for music, including labels and publishers (UMG, Warner Music Group, HYBE, Reservoir Media, Believe, Round Hill Music Royalty Fund), streaming services (Deezer, Anghami, Cloud Music) and live-entertainment firms (a spinoff of MSG Entertainment).
That changed during 2023. In March, WMG’s new CEO, Robert Kyncl, a former YouTube executive, laid off around 270 people — 4% of the company’s workforce — to focus more on technology initiatives and “new skills for artist and songwriter development,” as he wrote in a memo to staff at the time. Downtown Music Holdings — owner of CD Baby, FUGA, Songtrust and more — also thinned its payroll in May. BMG laid off about 30 people in October. Digital music companies fared even worse in 2023: Spotify cut about 23% of its workforce in two rounds of layoffs, TIDAL cut 10%, SoundCloud cut 8%, and Bandcamp chopped half its head count after being acquired by Songtradr.
But UMG? The company’s revenue in the first nine months of 2023 was up 9.4% on a constant currency basis, 6.8% as reported due to foreign currency fluctuations. More than two years after spinning off from former corporate parent Vivendi, UMG is a profitable, hit-making machine that controlled 29.4% of the U.S. recorded-music market in 2023, easily besting Sony Music’s 18.9% and WMG’s 15.6%. It has Taylor Swift, Morgan Wallen, Drake and many other big stars. Perhaps understandably, there has been talk that other labels could follow, with cuts of one size or another.
UMG’s decision may be the most dramatic example of just how profoundly the music business is changing — and how quickly. Lean is the new black. Bloat, or anything that evokes it, is out. The old ways of finding, developing and marketing artists no longer work the way they used to. How big a radio promotion department does a label need — how many radio promotion departments does its parent company need — at a time when radio no longer plays as important a part in breaking hits? Social media and data analysis might matter just as much. So could developing markets that once didn’t account for much revenue.
UMG’s next focus, chairman/CEO Lucian Grainge wrote in a memo to staff in early January, will be “creating the blueprint for the labels of the future” by building the technology to do more work in-house, expanding in developing markets and finding ways to better monetize superfans. That requires moving resources away from the “legacy business,” Muir said in the October earnings call, to “benefit from all of the opportunities that we see ahead.” What that will mean for how UMG reshuffles its organizational chart remains to be seen, but it is already building an artist services business with Virgin Music Group and making aggressive moves in developing markets with investments in TM Ventures in India and Chabaka in the United Arab Emirates.
Other music companies are also reassessing their priorities. BMG’s staffing changes were spurred by new CEO Thomas Coesfeld as a response to an international marketing structure that didn’t meet expectations and duplicated the efforts of local teams, he wrote in a memo to staff.
“Businesses are repositioning themselves slightly to become more competitive,” Downtown Music president Peter van Rijn says. “One must always be mindful to not get complacent,” he adds, noting that his company needed to stay nimble enough to respond to the marketplace. “What you do see, in general, is the music industry is maturing. The digital growth is still there, but it’s slowing down.”
The world is changing, too. Along with the major labels, companies like Believe and Reservoir Media are investing in Africa, the Middle East, Southeast Asia and other regions where music revenue is growing. And both new companies and the established majors are expanding their artist services businesses to court creators who can now choose from among an increasing number of alternatives to a traditional major-label deal. Sony acquired the artist services company AWAL in 2022, UMG is building up Virgin, and WMG’s Kyncl wrote in an early-January memo that he wants to augment services to the “middle class of artists” and scale up the company’s publishing administration business.
Public companies in the music industry face pressure from investors to constantly improve their bottom lines, especially as streaming growth levels off. “Two-and-a-half years ago, we started making cuts because we knew the market was no longer about just growth,” says Rob Ellin, CEO of music streaming company LiveOne, which is cutting up to 100 staffers in a restructuring. “You had to be profitable.”
The growth-over-profits era finally ended at Spotify, too. When the streaming giant announced it would cut 17% of its global workforce in December, CEO Daniel Ek explained that costs were too high, efficiency was too low and too few people “contribut[ed] to opportunities with real impact.” Cutting roughly 1,500 jobs and seeking a replacement for CFO Paul Vogel, Ek wrote in an open letter, were necessary to become “relentlessly resourceful.”
Record labels and music publishers have better margins than Spotify, which will rarely turn a profit — but investors also expect more of them. In the first half of 2021, UMG — then a subsidiary of Vivendi — had a margin of 21.5% in earnings before interest, taxes, depreciation and amortization and told investors in August it expected to reach the “mid-20s” soon. Two years later, revenue had increased 34% but its EBITDA margin was almost unchanged at 21.5% (or 14.9% after deducting 345 million euros of noncash, share-based compensation for senior management). With layoffs can come better margins. Restructuring saved Warner $19 million in the fiscal year ended Sept. 30, and Barclays analysts estimated UMG’s layoffs could save the company $70 million annually.
To those who remember the crisis caused by the death of the CD, this talk of restructuring might have a familiar ring. As piracy ravaged the music business, the majors scaled back their physical distribution businesses, sold their CD pressing plants and retooled for a digital world. That’s why Grainge reminded investors that UMG is no stranger to managing disruption. “We’ve got decades of experience in executing cost-cutting programs in the various cycles of the industry, right back to the piracy days,” he said during the October earnings call. And currently, “we’re seeing a change in the business.”
SoundCloud has been eyeing a sale — and actively pursuing initiatives internally “that would increase the valuation of the company” — since the second half of 2022, according to two former employees who spoke to Billboard on the condition of anonymity. Meanwhile, COO and CFO Drew Wilson is preparing to leave the company after nearly three years in the role, according to a staff memo obtained by Billboard.
Sky News reported on Sunday that SoundCloud was planning to pursue a sale in 2024. This has been in the works “for some time,” one former employee tells Billboard. “A lot of decision making has been based on this.”
SoundCloud announced it was slashing 8% of its workforce last May — less than a year after a 20% cut — to achieve “profitability this year,” as CEO Eliah Seton wrote in an email to staff at the time. “The ambition to reach profitability was not just for the obvious reason of being profitable,” the former employee continues. “The bigger need was for this, to sell the company. The stakeholders have major investments; it’s time.” (SoundCloud previously secured a $170 million investment led by The Raine Group and Temasek in 2017, and an additional $75 million investment from SiriusXM in February 2020.)
A rep for SoundCloud declined to comment. The Raine Group also declined to comment.
SoundCloud leadership had previously tossed around the idea — a best case scenario — of reaching a $2.5 billion valuation for the company, sources said. (The company likes to aim big: In internal meetings, executives also expressed a hope that one of the artists SoundCloud signed to deals in 2022 would have a major chart hit, one of the employees said; this has not happened.)
The more commonly cited valuation goal, the sources say, was around $1 billion. “There’s a billion-dollar-plus opportunity in front of us,” Tracy Chan, who joined SoundCloud as senior vp of creator in 2022, said at an all-hands meeting that year. One of SoundCloud’s former employees said most of the interest in the company came from private equity firms, not music companies.
For comparison’s sake, when Square acquired TIDAL in 2021, the streaming service was valued at around $375 million. Though SoundCloud is not just a streaming service — it also provides tools to creators to help them distribute, market, and monetize music. Creator tools and services brought in more than $26 million for the platform in the first quarter of 2023, according to screenshots from an all-hands meeting shared with Billboard, nearly as much as subscriptions ($29.9 million).
Those screenshots indicate that SoundCloud had a gross profit of around $22 million in the first quarter of the year. But it spent around $4 million on marketing and another $23 million on staffing and general and administrative expenses, leaving it around $5 million short of breaking even.
In May 2023, SoundCloud aimed to reduce that headcount cost through a second round of cuts. (Profitability has been a goal since 2022, if not before: “Investors are looking for companies that are a little more stable right now,” former CEO Michael Weissman told staff during an all-hands meeting that followed the first round of layoffs in 2022. “Investors are looking for companies that are very profitable.”) The company said it finally reached profitability in December.
“Now that we have achieved profitability and are making progress on our strategic plan, we have nothing but opportunity in front of us,” Seton wrote in an email to staff on Monday (Jan. 8) that was obtained by Billboard. “As we have mentioned in previous All Hands [meetings] and AMAs, we will explore a range of options for our capital structure, but there is nothing to report right now, nor will there be any time soon.”
Audacy is expected to file for Chapter 11 bankruptcy after reaching an agreement with its lenders, according to a report at the Wall Street Journal. The prepackaged bankrupcy would be financed by the lenders, who would take ownership of the radio company following the restructuring, the report said.
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An Audacy spokesperson had no comment when contacted by Billboard.
Audacy, formerly named Entercom, is saddled by $2 billion in debt acquired primarily from its 2017 merger with CBS Radio. That deal expanded Audacy’s revenue but also increased its debt nearly fourfold from $468 million at the end of 2016 to $1.86 billion at the end of 2017.
The Philadelphia-based company’s portfolio of about 230 radio stations includes WCBS in New York, KROQ in Los Angeles, WFAN Sports Radio in New York and WBBM Newsradio in Chicago. Audacy’s podcasting brands include two studios, Cadence13 and Pineapple Street Studios, and Popcorn, an online marketplace for connecting creators and brands.
The company sounded alarm bells in May when it warned that a weak financial outlook could cause it to default on its debt. In an SEC filing, the company said “macroeconomic conditions” such as rising interest rates and depressed advertising revenue “have created, and may continue to create, significant uncertainty in operations.” As a result, its forecasted revenue was “unlikely to be sufficient” to maintain its debt covenants.
Third-quarter revenue of $299.2 million was down 5.6% year over year and in early November its fourth-quarter revenue was on pace to decline 9% from the prior-year period. Noting the company’s “current challenges,” CEO David J. Field said Audacy was in conversation with its lenders to recapitalize its balance sheet.
In recent months, Audacy has reached agreements with a number of lenders to extend the grace periods for interest payments from a credit facility and outstanding notes.
Audacy was delisted from the New York Stock Exchange the May for violating the exchange’s rules on minimum share price. It has since traded over the counter. Although a 30-for-1 reverse stock split increased the share price from $0.07 to $2.13 on June 30, the stock lost nearly all its value over the next six months.
On Wednesday, Audacy shares closed at $0.1896 per share, giving the company a market capitalization of less than $900,000.
The Billboard Global Music Index — a diverse collection of 20 publicly traded music companies — finished 2023 up 31.3% as Spotify’s share price alone climbed 138% thanks to cost-cutting and focus on margins. Spotify is the single-largest component of the float-adjusted index and has one of the largest market capitalizations of any music company.
The music index was outperformed by the tech-heavy Nasdaq composite, which gained 43.4% with the help of triple-digit gains from chipmaker Nvidia Corp (+239%) and Meta Platforms (+194%). But the Billboard Global Music Index exceeded some other major indexes: the S&P 500 gained 24.2%, South Korea’s KOSPI composite index grew 18.7% and the FTSE 100 improved 3.8%.
Other than Spotify, a handful of major companies had double-digit gains in 2023 that drove the index’s improvement. Universal Music Group finished the year up 14.7%. Concert promoter Live Nation rode a string of record-setting quarters to a 34.2% gain. HYBE, the increasingly diversified K-pop company, rose 34.6%. SM Entertainment, in which HYBE acquired a minority stake in March, gained 20.1%.
A handful of smaller companies also finished the year with big gains. LiveOne gained 117.4%. Reservoir Media improved 19.4%. Chinese music streamer Cloud Music improved 15.8%.
The biggest loser on the Billboard Global Music Index in 2023 was radio broadcaster iHeartMedia, which fell 56.4%. Abu Dhabi-based music streamer Anghami finished 2023 down 34.8%. After a series of large fluctuations in recent months, Anghami ended the year 69% below its high mark for 2023. Hipgnosis Songs Fund, currently undergoing a strategic review after shareholders voted against continuation in October, finished the year down 16.6%.
Sphere Entertainment Co., which split from MSG Entertainment’s live entertainment business back in April, ended 2023 down 24.4%. Most of that decline came before the company opened its flagship venue, Sphere, in Las Vegas on September 29, however. Since U2 opened the venue to widespread acclaim and earned Sphere global media coverage, the stock dropped only 8.5%.
For the week, the index rose 1.1% to 1,534.07. Fourteen of the index’s 20 stocks posted gains this week, four dropped in price and one was unchanged.
LiveOne shares rose 15.7% to $1.40 after the company announced on Friday (Dec. 29) it added 63,000 new paid memberships in December and surpassed 3.5 million total memberships, an increase of 29% year over year. iHeartMedia shares climbed 14.6% to $2.67. Anghami continued its ping-pong trajectory by finishing the week up 16.9%.
Hipgnosis Songs Fund capped off an eventful 2023 by lowering the value of its music catalog amidst internal conflict over exactly what the company’s star-studded catalog is worth.
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The publicly listed royalty fund said its operative net asset value per share declined 9.2% to $1.74 on Sept. 30 from $1.92 on March 31, according to its half-year earnings report on Thursday (Dec. 21). The sharp decline stemmed primarily from a “material reduction” in expectations for CRB III and CRB IV income.
The company’s self-reported valuation has long exceeded the value implied by its share price and estimates of equity analysts. In recent months, Hipgnosis Songs Fund has proposed and completed partial catalog sales at discounts to their net asset values.
New board chair Robert Naylor‘s statement to investors described a strained relationship with the fund’s investment advisor, the Merck Mercuriadis-led Hipgnosis Song Management, over the valuation of the five-year-old company’s catalog that includes stakes in songs by Neil Young, Journey and Fleetwood Mac.
Two days earlier, the board postponed the release of half-year earnings after the investment advisor produced a “heavily caveated” opinion on the catalog valuation provided by independent firm Citrin Cooperman that was “materially higher than the valuation implied by proposed and recent transactions in the sector.”
Internal conflicts continued while the results were delayed. According to Naylor, the board’s request of Hipgnosis Song Management about “the matter to be published on the Company’s website in order to provide transparency for shareholders” was rebuffed “under the confidentiality clauses of the Investment Advisory Agreement.”
On Thursday, Naylor urged Hipgnosis Songs Management to provide an opinion on the valuation of Hipgnosis Songs Fund “without caveats” to provide greater transparency to shareholders. In the absence of a caveat-free opinion, the board urged investors to use “a higher degree of caution and less certainty” than normal when considering its fair value and operative NAV.
Hipgnosis Songs Fund shares fell 1% to 0.70 GBP on Thursday.
Gross revenue from continuing operations declined 26.9% to $63.2 million from $86.4 million in the six-month period ended March 31, 2023.
Net revenue from continuing operations declined 29.7% to $54 million from $76.8 million. About half of the decline came from a $11.9 million reversal of accrued royalties in October. Excluding those accrued revenues, net revenue grew 14% to $65.8 million.
Pro-forma annual revenue (PFAR), which measures gross royalties received and excludes revenue accruals, grew 10.4% to $64.9 million.
Following shareholders’ vote against continuation at the annual general meeting on Oct. 26, Hipgnosis Songs Fund transformed its board of directors by naming Naylor to succeed Andrew Sutch as chairman and adding Francis Keeling, a former Universal Music Group executive, and Christopher Mills, CEO and investment manager at North Atlantic Smaller Companies Investment Trust, to replace Andrew Wilkinson and Paul Burger, both of whom left prior to the annual general meeting.
The new board undertook a strategic review and named Shot Tower Capital as lead advisor to conduct due diligence on the catalog. On Thursday, Naylor said he was pleased with the strategic review’s progress thus far. “This process will help the new Board bring forward proposals for delivering value to shareholders,” said Naylor.
But Naylor also described “ongoing failures in the financial reporting and control process” since he joined the board. “Whilst we consider substantial progress has been made in identifying and rectifying these issues,” Naylor added, “we have had to suspend the dividend for at least the remainder of the year in order to ensure compliance with our banking covenants.”
Hipgnosis Songs Fund has announced a last-second delay in publishing interim results for the six months ended Sept. 30, citing concerns over its valuation following a series of hiccups for the Merck Mercuriadis-led company.
The fund, which owns full or partial rights to the song catalogs of artists ranging from Justin Bieber, Neil Young, Bruno Mars, Jimmy Iovine, 50 Cent, Shakira, Blondie, Justin Timberlake, Lindsey Buckingham and many more, was scheduled to publish it financial results on Tuesday (Dec. 19) but now expects to announce on New Year’s Eve, according to a regulatory filing.
In explaining the delay, the Hipgnosis board said the valuation it received from an independent firm was “materially higher than the valuation implied by proposed and recent transactions in the sector,” namely two deals involving itself: a proposed $417.5 million sale of 29 catalogs to Blackstone-backed Hipgnosis Songs Capital, a price reflecting a 24.3% discount from a valuation dated March 31, and last week’s sale of 20,000 “non-core songs” to an undisclosed buyer for $23.1 million, which it said reflects a 14.2% discount on the songs’ valuation as of early fall.
Due to the disparity between the independent valuation and the “implied” one tied to recent trends and proposed sales, the board sought advice from its in-house investment advisor, Hipgnosis Song Management Limited, which delivered a “heavily caveated” opinion that led to the board’s concerns as to the valuation of HSF listed in the interim results scheduled to be disclosed today.
Hipgnosis is comprised of three companies: Hipgnosis Song Management, Hipgnosis Songs Capital and Hipgnosis Songs Fund. The latter of the three has been mired in controversy in recent months after it was announced that the London-listed trust would not pay its investors a dividend because of new, lower projections for revenue. On Oct. 26, investors of the fund overwhelmingly demanded structural changes to the music rights company, with more than 80% of Hipgnosis investors voting in favor of the board drawing up “proposals for the reconstruction, reorganization or winding-up of the company to shareholders for their approval within six months.”
Last month the company announced that the fund will not declare dividends before the new fiscal year, which begins next April, in order to ensure it has enough on its balance sheet to pay contractually-mandated catalog bonuses.
Investors are still processing the news, with the company’s stock only slightly down, roughly 2%, in mid-day trading on the London Stock Exchange.
The concert business has had a record year in 2023 — tours by Taylor Swift and Beyoncé were pop culture moments, festivals roared back to life and consumers’ splurging on tickets seemed to defy gravity. There’s likely more good news on the horizon, too. By all forecasts, next year is shaping up for continued success, even as consumers still feel pinched by inflation.
Among the big names to announce stadium tours next year are The Rolling Stones, Foo Fighters, Green Day and a pairing of Journey and Def Leppard. Chris Stapleton, Zach Bryan and Luke Combs will hit both stadiums and arenas. Drake, Bad Bunny, Thirty Seconds to Mars, Hootie & the Blowfish, New Kids on the Block, Alanis Morissette and The Trilogy Tour featuring Enrique Iglesias, Ricky Martin and Pitbull will play arenas and amphitheaters. Taylor Swift’s The Eras Tour continues in 2024, too, with 85 shows announced for Asia, Australia and North America.
Advanced ticket sales suggest consumers remain eager to see their favorite artists perform live. Through mid-October, Live Nation’s event-related deferred revenue — from ticket sales to events that had not yet occurred — was up 39% year over year, according to the company’s third-quarter earnings release.
AEG Presents, the second-largest promoter, is “feeling really positive” about 2024 tours across all venue sizes and genres, says Rich Schaefer, president of global touring. “I think people are discovering new artists and want to see big shows — and they’re willing to pay for it.” They’re buying well in advance, too: AEG put tickets on sale for 76 Zach Bryan shows in 2024 — some won’t happen until December — and has “largely sold everything out,” says Schaeffer. “That artist especially has a crazy connection with his fans. They’ve seen videos of what his shows are like, and I think everybody wants to experience it.”
Those big tours — and thousands of others — are counting on consumers to continue to open their wallets despite continued high prices for staples and living expenses, rising debt delinquencies and Americans’ credit card debt reaching a record level in the third quarter. The holidays are presenting mixed signals: Black Friday spending was up 2.5% compared to 2022, but numerous surveys have found consumers plan to spend less on gifts this year.
Consumers may feel beleaguered, but they continue to spend to see their favorite artists perform live. “I have weekly booking calls with the over 40 presidents around the world and we talk booking clubs up to stadiums and festivals, and we have not seen anything taper off in any sense,” said Live Nation CEO Michael Rapino during the company’s Nov. 2 earnings call. The company is “not seeing any pullback in any way” in consumer demand regardless of the region or venue size, he added.
A big question, though, is whether consumers will be in a spending mood throughout 2024. A new Goldman Sachs economic outlook report says the U.S. economy today is better than was expected a year ago, inflation will continue to subside and the likelihood of a recession in 2024 is “limited.” The latest data from the University of Michigan is encouraging: U.S. consumer sentiment soared in December and people’s expectations for year-ahead inflation dropped to 3.1% from 4.5% last month.
Whatever uncertainties exist — including falling savings rates and weakening credit conditions — have not materialized in ticket sales thus far. “We certainly see the headlines [about macroeconomic conditions], but it’s not flowing through to numbers that we can see,” Lawrence Fey, CFO of secondary ticket marketplace Vivid Seats, said during a Nov. 7 earnings call.
One could simply look at who’s touring in 2024 to get a sense of where ticket buyers are thinking. “You got The Stones going on the road in parts in North America,” says Doug Arthur of Huber Research Partners. “They’re always a pretty big draw. The Stones are pretty savvy historically about touring when they think the economics support it.”
Consumers’ willingness to spend increasing amounts on live music isn’t a new trend — although some of 2023’s record-setting box office numbers appear to be the result of music fans may be clamoring for live events in after suffering through pandemic-era restrictions. The concert industry has benefited from a lasting shift among consumers from goods to experiences over the last 10 to 15 years, says Brandon Ross, an analyst with LightShed Partners.
This year’s boffo box office numbers weren’t outliers, and Ross expects to see “outsized performance on a global basis” in 2024. “There has been a year-and-a-half long concern for a broader pullback in consumer spending,” says Ross. “I don’t think will not impact growth, but I think there’s substantial tailwind supporting this industry.”
Those tailwinds probably won’t be strong enough for next year’s touring business to duplicate 2023’s stellar growth rate — but no one seems to be expecting that. “I don’t think you’re talking about another up 30% type of year, and I don’t think [Live Nation is] talking about that either,” says Arthur. “But can the concert revenues be up high single digits between volume, fans per show, price per ticket and spending per fan? Yeah, I think that’s not unreasonable at all.”
Artists and promoters will continue to encounter high costs in 2024 — labor, catering, buses and staging are stretched thin with a high number of big tours on the road. That’ll continue to push ticket prices up. Even so, AEG hasn’t seen resistance to higher prices, says Schaefer. “There’s very few instances where we think that pricing is responsible for tickets not selling.”
Spotify’s announcement this week that it was laying off 17% of its global workforce surprised a music business enjoying a renaissance. After all, Spotify ignited the subscription-streaming boom that saved the industry. And while the companies that depend on the online advertising business go through booms and busts — think of Meta cutting 21,000 jobs since 2022 — music business jobs have been relatively safe.
Spotify’s decision to eliminate about 1,500 full-time staffers shouldn’t have come as a surprise, though. As CEO Daniel Ek put it in a letter announcing the layoffs, “Today, we still have too many people dedicated to supporting work and even doing work around the work rather than contributing to opportunities with real impact.”
Over a decade and a half, Spotify pioneered a new model for music subscriptions by prioritizing growth over profit. While on-demand video streaming services such as Netflix frequently raised prices, Spotify left most of its prices unchanged until July. Digital music platforms have a notoriously tricky path to profitability, but Spotify’s share price soared thanks to a pandemic-era boost to streaming companies as well as high expectations for its nascent podcasting business. By February 2021, as Spotify poured money into acquisitions and pricey podcasting content, the stock was trading at $364.59 per share, valuing the company at roughly $71 billion.
By 2022, however, Spotify’s investors had run out of patience. The stock was trading at $110 on June 8 when Ek and CFO Paul Vogel shared their ambitious plan at the company’s Investor Day presentation: $100 billion in annual revenue, 40% gross margins and 20% operating margins. To get there, Spotify would continue to scale its podcasting business and lean on its audio content acquisitions — The Ringer, Parcast, Megaphone and Anchor — to help the format reach larger audiences. Now, Spotify also wants to do for audiobooks what it did with podcasts: piggyback on its massive base of music listeners, develop innovative products and build a bigger market.
Podcasts and audiobooks, as well as services sold to artists and record labels like merchandise listings and Discovery Mode, are important to reaching the targets of 40% gross margin and 20% operating margin. Given the nature of licensing deals with record labels and music publishers, music margins have little room to improve. Whereas video streamers like Netflix pay fixed costs for much of their content, Spotify pays a percentage of revenue to record labels and music publishers. That means as revenue increases, so do its content costs. And that’s not likely to change. “Our strategy is not predicated on trying to extract margin by negotiating better terms with the content partners we have,” Ek said at the 2022 Investor Day.
Over a year later, however, Billboard’s analysis of Spotify’s financial statements shows the company is still nowhere near its target margins. Since the first quarter of 2020, its gross profit margin has fallen between 24.1% and 28.4% while its operating profit margin has ranged from –8.8% to 3% and was below zero in 11 of 15 quarters.
Merely adding subscribers isn’t enough. (The company reported 226 million at the end of Q3 2023.) Reaching its targets requires Spotify to cut costs while investing in new growth opportunities such as podcasts and audiobooks. Ek said as much when explaining Vogel’s upcoming departure on Thursday. “I’ve talked a lot with Paul about the need to balance these two objectives carefully,” he said in a statement. “Over time, we’ve come to the conclusion that Spotify is entering a new phase and needs a CFO with a different mix of experiences.”
Spotify’s cost-cutting started in 2022 with a pause on new hires, layoffs in October and the cancellation of six live audio shows in December. This year, it laid off 6% of its global staff in January and in June merged two podcast production houses, Gimlet and Parcast, and further cut its podcast workforce by 2%. In August, it shut down Spotify Live, a short-lived live streaming app. Then on Monday, Spotify announced it would lay off 17% of its workforce. It also canceled two in-house podcasts, Heavyweight and Stolen.
As the graphs show, recent trends in Spotify’s financials made it clear larger cuts were necessary to meet the company’s ambitious targets. Personnel costs as a percentage of revenue rose from 13.8% in 2021 to 16.2% in 2022. Research and development expenses — which include some salaries — jumped from 9.4% of revenue in 2021 to 11.8% in 2022.
As Ek explained in the memo to employees, Spotify grew in 2021 and 2022 to take advantage of lower-cost capital. Today’s environment is different, however, and Ek believes Spotify’s “cost structure for where we need to be is still too big.” Indeed, Spotify’s head count steadily increased as it acquired companies, developed new formats and created product innovations that both resonated (Spotify Wrapped) and flopped (Spotify Live) with users. The number of full-time employees increased nearly 50% from 2020 to 2022.
This growth came without added efficiency, however. The revenue generated per employee peaked at 1.54 million euros ($1.66 million) in 2019 and declined to 1.4 million euros ($1.51 million) in 2022 — the lowest since 2017. The July price increase will help Spotify bring in more revenue without additional staff or resources, though the effectiveness of those increases won’t be known until Spotify releases full-year results in late January.
What’s more, Spotify’s gross profit per employee fell to a five-year low in 2022. Gross profit is what’s left after cost of sales — primarily royalties to labels and publishers — is deducted from revenue. It goes toward personnel costs, sales and marketing expenses, and general and administrative costs. But as Spotify added employees in recent years, gross profit per employee fell to 350,000 euros ($377,000) in 2022 from 391,600 euros ($421,000) in 2021.
An obvious way for Spotify to reach its target margins was to make larger cuts to its workforce and, as Ek phrased it, “become relentlessly resourceful.” Cutting 17% of its personnel costs would have resulted in savings of 323 million euros ($349 million) in 2022, based on total personnel costs of 1.9 billion euros ($2.05 billion). That savings would have halved Spotify’s 2022 operating loss of 659 million euros ($711 million).
Ultimately, the multi-billion-dollar question is simple: Can Spotify continue adding subscribers as fast as it has in previous years and develop its spoken word products into the higher-margin businesses it needs with far fewer employees? That’s the high-stakes situation the new CFO will walk into in 2024 and that will determine the company’s future from here on out.
“I’m a musician. The risk I take is in my chosen career path. I don’t want to take risk in my investments.” This was the most common remark we heard from entertainer clients for years.
And the most common advice those musicians would receive to address their concerns was, “Invest in municipal bonds. Your principal is protected, default risk is low, and you get tax-free income.” For the most part, that was true… until interest rates stayed close to 0% from 2020-2022 and then rose at their fastest pace in US history since then. During that time, municipal bonds were not what they were promised to be — down almost 10% in 2022 — especially for those who thought they couldn’t lose money owning them.
To be fair, barring defaults, and even with the recent price declines, municipal bonds bought prior to the rise in interest rates will give investors the return they signed up for when they bought them. But now we have artists coming to us excited that they are getting paid 5% pre-tax on cash in money market funds. However, those heady money market rates can be cut in half by taxes and they won’t last forever — we suspect they won’t even last much longer from here.
So, what can you do for an attractive risk-adjusted return these days while avoiding the volatility of the stock market? Let’s look at some particularly interesting options.
Intermediate Duration Municipal Bonds
While past performance doesn’t always translate into the future, over rolling two-year periods, high-quality intermediate municipal bonds have never lost money. Now, with interest rates at their highest levels in almost 20 years and municipalities’ finances healthy, these bonds look more attractive than they have in a long time.
However, balancing exposure to different sources of return in fixed income is important. We do not recommend just buying Treasuries or Treasury/municipality ladders. Consider an actively managed bond portfolio (as opposed to laddering) with the flexibility to move between municipal bonds and taxable bonds based on their relative attractiveness. This allows you to maximize after-tax returns while also managing interest rate exposure.
Hedged Exposure to Stocks
The S&P 500 is up over 18% year-to-date (as of Dec. 4), but it’s done so in a fairly volatile manner and more than half of the stocks in it are actually down for the year.
For investors concerned about volatility, they can consider reducing exposure to the market in the near-to-medium term by using a defined outcome exchange-traded fund (DOETF). Like other ETFs, these types of securities have daily liquidity and relatively low cost. But what makes DOETFs different from the index ETFs that many investors are familiar with is that they utilize options to create a specially designed payoff. For instance, recently created versions of DOETFs allow an investor to capture around 15% of any upside in stocks while not experiencing the first 15% of any market decline.
So, if the market is up 20% over the next year, investors will be up around 15%. If the market rises 8%, investors’ returns will be the same. If the market is down 10%, the investors won’t have any gains but also won’t take any loss. And if the market has an awful year and ends down 20%, investors would only be down 5%.
Private Credit
Every week brings new headlines about banks cutting back lending in different areas. It raises the question, “Who is lending money to businesses these days?” Private debt funds.
This area has grown substantially since the financial crisis as government regulations have made it harder and costlier for banks to lend. The private markets have stepped into that void. One notable aspect of these loans is that they’re made at floating rates, with financing usually made similarly. That’s protected them from the run-up in interest rates, as fixed interest investments have declined in value. That’s also allowed them to keep up better with inflation. Investors contemplating private credit should consider the fact that some of these strategies are only available to accredited investors or qualified purchasers and they’re often illiquid, with money locked up for several years at a time.
Real Estate
In addition to private credit, we’re seeing attractive opportunities to lend into the commercial real estate (CRE) market, partly for the same reasons as private credit (with banks stepping back) and partly for real estate-specific reasons, such as the pressure on office prices since the pandemic. However, with office being only one small piece of the overall market and with lenders having attractive bargaining power as assets are revalued and refinanced, that’s an area we’ve been highlighting in 2023.
Finally, and further up the risk spectrum, is real estate equity. Even inside that asset class, the risks can vary. With the turbulence in the market, we’re starting to see more attractive opportunities emerge in the “core plus” space, which are typically well-leased, income-producing properties in good locations. They’re often found in commuter suburbs in secondary or tertiary markets.
Like private credit, these real estate strategies are often illiquid, and even some of the strategies which are advertised as more liquid have gated investor redemptions recently. But for investors with enough cash flowing in to meet their outflows (even in a distressed situation) and a longer time horizon, the rewards for accepting that illiquidity can be meaningful.
What to Do
As always, investors should consult with a licensed investment advisor before making investment decisions. While each of the asset classes discussed here may be of interest, they are not suitable for all investors. At the same time, we recognize that having excess cash earning 5% in money market funds may feel nice for now, but it may not feel so nice looking back on things in a year’s time. Investors don’t need to feel tied to cash or forced to swing for the fences — there are many options worth considering in the middle ground.
Finally, while we’ve mostly focused on safer options here, which are meant to guard against the risk of market volatility, there’s another risk that investors must weigh — the risk of running out of money during retirement. Taking too little volatility risk can potentially generate excessive depletion risk. We recommend discussing this, and other considerations, with your financial advisor.
Adam Sansiveri is a senior managing director and head of the Nashville Private Client Group at Bernstein. Stacie Jacobsen is a director in Bernstein’s Wealth Strategies Group. Sansiveri and Jacobsen are co-heads of the Sports, Media and Entertainment Group at Bernstein Private Wealth Management, a division of AllianceBernstein. AllianceBernstein is a leading global research and investment management firm headquartered in Nashville with over $700 billion under management and offices in 53 cities in 26 countries.
Artists who decided to sell their catalogs in 2023 did a little better, on average, than the year before, according to a new report by Shot Tower Capital, a Baltimore-based investment banking firm that focuses on media and entertainment.
The average multiple of private music publishing catalogs — excluding a small number of iconic catalogs that fetch a premium — increased to 17.2 times net publisher’s share (or gross profit after paying writer royalties) in 2023 from 16.7 times NPS in 2022. Including iconic catalogs, the average multiple decreased slightly in 2023 to 19.2 times net publishers share from 19.4 times NPS in 2022.
While the average multiple improved this year, the 17.2 times NPS average was well below the peak of 20.1 times NPS in 2019, as well as below the 17.9 NPS average for the period spanning 2019 to 2023.
Even so, catalog valuations have held up well amid recent higher inflation rates, Shot Tower explains, even as interest rates — which began to climb in 2021 after falling to historic lows at the onset of the COVID-19 pandemic in 2020 — have tamped down valuations. That’s because buyers’ future growth expectations have increased, due in part to increased upcoming distributions from the Music Licensing Collective — thanks to favorable Copyright Royalty Board rate determinations this year — and the development of new digital sources such as TikTok.
A shift amongst buyers in the catalog market has also brought catalog valuations down from their 2019 peak.
Hipgnosis Songs Fund, the publicly traded investment trust founded by Merck Mercuriadis, was the price-setter from 2018 to 2021. In the latter year, Hipgnosis Songs Fund bought stakes in such catalogs as Neil Young, Shakira and Red Hot Chili Peppers. Before Hipgnosis Songs Fund’s IPO in 2018, the average publishing catalog multiple was 16.2 times NPS in 2017. That jumped to 18.8 times NPS in 2018 and 20.1 times NPS in 2019 and 18.8 times NPS in 2020. In 2022, though, when Hipgnosis Songs Fund was unable to raise more money through additional equity offerings and stopped buying catalogs, the average publishing multiple dropped to 16.9 times NPS. Since 2022, Hipgnosis Songs Management has been employing a more disciplined approach for its privately held fund, Hipgnosis Songs Capital, which is backed by Blackstone, sources tell Billboard.
Shot Tower believes catalog buyers like Hipgnosis Songs Fund and Round Hill Music Royalty Fund — another publicly listed investment trust that Concord acquired in October — now have less influence in current transaction valuations. Instead, large companies are showing their willingness to pay a premium to control rights such as licensing. As interest rates increase, the Shot Tower report states, “yield-focused financial investors have pulled back” and strategic buyers — major labels and publishers — “continue their focus on acquiring quality assets with control where they can impact long-term growth.”
New capital investment will favor the approach taken by these strategic buyers, according to the report. Publishing and recorded music catalogs that provide full control — such as owning 100% of the publisher’s and songwriter’s shares — will continue to be highly valued by strategic buyers. Rights of “marginal quality” catalogs and passive income “are finding less demand.” There’s are good reasons for placing a premium on control: Shot Tower estimates the ability to eliminate third-party distribution and administration costs is equal to an immediate increase in a valuation multiple of 2.0 times NPS or NLS. In addition, having control over a catalog provides opportunities for licensing and new projects with “potential to drive growth far in excess of industry averages.”
While the typical publishing catalog transaction value has leveled off since the 2019 peak, a few iconic catalogs — Shot Tower defines them as exceeding $200 million — approached 30 times NPS in 2023, a level matched in 2021 but higher than amounts paid in 2022. These catalogs go “primarily to an existing label/publisher with highly strategic (and sometimes defensive) reasons for purchasing at above-market prices,” the report explains.
One such iconic recorded music catalog sold for nearly 30 times net label share in 2023, according to the report — a much higher multiple than recorded music deals in previous years. (The report does not name the iconic catalog sold in 2023, but the only recorded music transaction exceeding $200 million that was made public this year was Litmus Music’s purchase of Katy Perry’s catalog for $225 million.) In previous years, iconic recorded music catalogs sold for between 22 times and 26 times net label share, or profit after royalty payments; and distribution, manufacturing, warehousing and shipment costs, but before marketing expenses.
Recorded music multiples — for both iconic and non-iconic catalogs — have risen over time while publishing multiples are consistent with levels seen in the late ‘90s, according to Shot Tower. That’s because the record business’s shift from physical to digital has helped improve record labels’ margins. Shot Tower points to Warner Music Group as an example: In 2010, when physical sales exceeded digital revenues, WMG’s adjusted earnings before taxes, interest, depreciation and amortization margin was 13.4%. By 2023, WMG’s adjusted EBITDA margin had improved to 23.8%. Shot Tower estimates that every 1% shift in revenue from physical to digital and streaming has increased WMG’s EBITDA and cash flow margins by about 25 basis points (a basis point is one-hundredth of a percentage point). If digital sources eventually account for 95% of recorded music sales, margins have the potential to improve another 5%.
Expect similar multiples in the coming years, says Shot Tower. Although its crystal ball is “a bit hazy” — uncertain interest rate and macroeconomic environments make predictions difficult — the firm expects interests to “moderate” in the first half of 2024 and multiples “to remain steady for the foreseeable future with higher-than-projected industry growth being offset by the continued drag of higher interest rates.”
Based on current growth projections, and adjusting for the current interest rate environment, ex-icon publishing multiples will range from 15.9 to 16.7 times NPS over the next four years. That’s in line with prior periods but a slip from the most recent years and well below the peaks from 2018 to 2020. Multiples averaged 16.4 times NPS from 2014 to 2022 but exceeded 18.0 times NPS from 2018 and 2020 and peaked at 20.1 times NPS in 2019.
As for recorded music, Shot Tower expects an average ex-icon multiple of 12.9 to 13.4 times net label share over the next four years. That’s in line with post-2020 trends that saw multiples jump as investors became convinced streaming would be a financial boon to recorded music revenues. Historically, the larger marketing spending associated with master recordings and a lower diversity of revenue streams has caused recorded music to trade at lower multiples to publishing assets. Shot Tower believes recorded music will continue to trade at a discount to publishing multiples despite margins improving as streaming accounts for a higher percentage of recorded music’s revenue mix.
But the value gap has become closer between music publishing and recorded music assets. In 2020, recorded music transactions carried an average NLS multiple of 10.4 times while music publishing transactions averaged an 18.8 NPS multiple that year — with a gap of 8.4 times between them. In 2022, that gap narrowed to 4.3 times, with a 12.4 times NLS multiple for recorded music and a 16.7 NPS for music publishing.
Shot Tower Capital has closed financings and M&A transactions in excess of $16 billion since its founding in 2012. Those have included such deals as the sale of Imagem to Concord, the sales of Phil Collins and Genesis catalogs also to Concord, and Michael Jackson’s estate share of Sony/ATV to Sony. If the Shot Tower principals David Dunn and Rob Law’s entertainment deals from the prior employment at the firms Alex. Brown and and Bear Stearns, respectively, are included, they have closed over 125 media, entertainment and consumer related transactions representing aggregate value exceeding $70 billion, according to the report.