finance
Page: 3
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.
iHeartMedia shares dropped 19.6% to $2.01 this week as the company warned investors of continued softness in radio advertising dollars. Fourth quarter results “will be weaker than we originally anticipated,” said CEO Bob Pittman during Thursday’s earnings call. In October, consolidated revenue was down 8% from the prior-year period. For the fourth quarter, iHeartMedia expects consolidated revenue excluding political ad revenue to decline in the low single digits.
Still, iHeartMedia’s third-quarter results were in line with previous guidance. Revenue of $953 million was down 3.6% from the prior-year period, a bit better than the guidance of a low single-digit decrease. Adjusted earnings before interest, taxes, depreciation and amortization of $204 million was within the guidance of $195 million to $205 million.
The week’s sharp decline brought iHeartMedia’s year-to-date loss to 67.2%, far deeper than the declines of broadcast radio company Cumulus Media (-21.9%) and satellite radio company SiriusXM (-20.7%). Not only has broadcast radio suffered from weak national advertising, it lacks the high growth rates of music streaming and podcasting. PwC’s latest forecasts call for U.S. radio advertising revenues to rise just 4% from 2023 to 2027 while U.S. podcast advertising — where iHeartMedia has a large footprint — will grow 41% to $2 billion.
Next year’s elections should provide a shot in the arm, though. “As we look forward to 2024, we expect to generate significantly better free cash flow driven in part by an improving macro environment, as well as the impact of political dollars,” said CFO Rich Bressler. In 2020, the company generated $167 million in political revenues, he noted.
The Billboard Global Music Index mostly held steady this week, dropping just 0.3% to 1,390.68. Of the index’s 20 stocks, seven gained this while while 13 finished in negative territory. Most stocks had low-single-digit gains or losses and iHeartMedia was the only stock with a double-digit move in either direction.
French company Believe was the index’s greatest gainer of the week after improving 7.4% to 9.93 euros ($10.64). German concert promoter CTS Eventim, which will release third-quarter earnings on Nov. 21, gained 5.5% to 62.75 euros ($67.24). Music streaming company LiveOne gained 4.7% to $1.12. Chinese music streamer Cloud Music, which has not yet announced the date of its third-quarter earnings release, gained 3.3% to 99.50 HKD ($12.74).
Shares of Sphere Entertainment Co. dropped 1.5% to $35.95 after a roller-coaster week. Following the company’s Nov. 3 announcement that CFO Gautum Ranji had left the company, Sphere Entertainment shares dropped 9.6% to $32.97 on Monday. The share price fell an additional 4.5% to $31.87 on Wednesday following the quarterly earnings release. But Sphere Entertainment picked up momentum in the latter half of the week, gaining 12.8% over Thursday and Friday to close at $35.95.
U.S. stocks were broadly up this week despite news that consumer sentiment declined in November and expectations for future inflation reached their highest level since 2011. The Nasdaq composite rose 2.4% while the S&P 500 improved 1.3%. Many major U.S. tech stocks posted big gains. Microsoft hit an all-time high of $370.09 on Friday and finished the week at $369.67, up 4.8%. Apple rose 5.5% to $186.40. Amazon improved 3.6% to $143.56. Meta jumped 4.5% to $32.8.77. In the United Kingdom, the FTSE 100 fell 0.8%. South Korea’s KOSPI composite index gained 1.7%.
Music companies’ third-quarter earnings reports have so far been full of good news and positive trends. Subscription and streaming growth continue to drive revenues for record labels and publishers. Live entertainment continues its post-pandemic expansion. Margins are healthy. Overall, these have been solid report cards for the state of the music business.
Among the companies to report thus far are Universal Music Group, Sony Music, Spotify, Believe, Sphere Entertainment Co., MSG Entertainment, HYBE and SiriusXM. Next week’s earnings reports will come from Warner Music Group (Nov. 16) and Tencent Music Entertainment (Nov. 14). German concert promoter CTS Eventim will report on Nov. 21.
Here are seven items from the earnings releases to date that stood out and deserve more attention.
Universal Music Group struck out against “merchants of garbage.” During Universal Music Group’s Oct. 26 earnings call, chairman and CEO Lucian Grainge got a lot of attention when he bemoaned the “merchants of garbage” — creators of low-value functional music such as generic mood music and nature sounds — that want to be on equal royalty terms at streaming platforms as such UMG artists as Taylor Swift, The Beatles and The Rolling Stones. Grainge’s memorable turn of phrase came in defense of UMG’s artist-centric royalty scheme crafted in partnership with French music streaming service Deezer. “Sorry, I can’t really think of another word for content that no one really actually wants to listen to,” Grainge said.
Spotify’s price increase gave a much-needed uplift to subscription revenues. The price for an individual Spotify subscription in the U.S. was $9.99 from 2011 to July 2023. The price hike to $10.99 in roughly 50 markets may have arrived later than its competitors, but it came just when Spotify needed a boost. Spotify’s premium average revenue per user dropped 6% year over year (1% at constant currency) mainly because the company had a larger share of family plans compared to the prior-year, CFO Paul Vogel said during the July 25 earnings call. Early returns from the price increase in the U.S., U.K. and dozens of other markets helped offset those losses. Because Spotify’s number of subscribers increased 16% year over year to 226 million, subscription revenue grew 10% year over year (16% at constant currency) to 2.9 billion euros ($3.1 billion). With three full months of a price increase in the fourth quarter and considering the price increase covered about 75% of Spotify’s revenue base, the company expects the price increase to provide “a positive, mid-single digit” benefit (excluding foreign exchange) in the fourth quarter, said Vogel.
No company lowered guidance, and some have raised guidance. Sony Music raised guidance for revenue and adjusted operating income before depreciation and amortization by 5% and 4%, respectively. Reservoir Media raised guidance for fiscal 2024 revenue and adjusted EBITDA by 10% each. It’s one thing for a company to meet expectations it had previously laid out to investors. But raising previously released expectations is something else altogether — a sign the future will be better than expected. It’s usually a benefit to the stock price, too. The share price is the present value of future cash flows. When an estimate for future cash flows takes a sudden jump, that changes the financial model used to calculate the share price.
Consumers aren’t slowing their spending on live music. In August, concerns arose that a resumption of student loan payments, paused to help people struggling during the pandemic, would take a bite out of pocketbooks and cause music fans to pull back on the record amounts they were spending on live entertainment. Three months later, there is no indication that consumers are slowing down, according to Live Nation. “We’re seeing no sign of weaknesses,” said president and CFO Joe Berchtold, noting that Ticketmaster’s October sales in North American were up double-digits year over year. “We’re not seeing any pullback in any way from a club to a stadium tour from Milan to Argentina right now,” added president and CEO Michael Rapino.
SM Entertainment has big plans for its new publishing subsidiary, Kreation Music Rights. The K-pop stalwart has been “aggressively recruiting global writers” and plans to have 80 of them under contract this year, CEO Jang Cheol Hyuk said during the Nov. 8 earnings call. SM Entertainment is pursuing collaborations with both domestic and international publishers and plans to recruit foreign writers “who wish to advance into K-pop by establishing overseas subsidiaries,” Jiang said.
Radio advertising continues to struggle — but the clouds may be starting to part. iHeartMedia’s October revenues were down 8% and the company expects its fourth-quarter revenue excluding political revenue to be down in the mid-single digit percent year over year. The fourth quarter will be iHeartMedia’s strongest quarter of the year “but will be weaker than we originally anticipated due to some dampening of advertising demand which coincided with the uncertainty caused by the recent geopolitical events,” CEO Bob Pittman said during Thursday’s earnings call. That said, iHeartMedia’s digital business “is sort of in recovery mode,” said Pittman, and the company is “seeing the pieces falling into place” for radio’s recovery as most advertisers expect to be “back in growth mode…and spending to support that” in 2024.
The market for catalog acquisitions isn’t slowing down. Reservoir Media CEO Golnar Khosrowshahi said catalog prices aren’t contracting despite higher interest rates. “We’re still seeing a lot of demand for assets and continued infusion of new capital within the competitive set,” she said during Tuesday’s earnings call. “And that is certainly fueling the demand. The pipeline is robust. And it ranges in size from large to a lot of smaller deals.” Reservoir Media hasn’t been suffering from sticker shock, though. Acquisitions in the Middle East-North Africa market — such as some catalog of Saudi Arabian label Mashrex in June — provide the company with good value, Khosrowshahi added. “If we’re looking at a market here that is somewhat saturated with a lot of capital in the marketplace, and we’re able to execute [deals in MENA] at these lower multiples, that makes it just that much more attractive to us.”
Reservoir Media reported Tuesday (Nov. 7) that revenue grew by 15% year-over-year to $38.4 million for the second quarter of fiscal 2024, ending Sept. 30, 2023. During the quarter, the independent music company acquired new catalogs like Joe Walsh, Latin music icon Rudy Perez and country writer Brent Maher as well as continued expansion in its Arabic music catalog through its partnership with PopArabia — contributing to its inorganic growth.
This quarter’s rise in revenue, up from $33.3 million in Q2 of fiscal 2023, was mostly thanks to growth in its recorded music division, which was up 22% from last year’s second quarter, and publishing, which was up 8%. Reservoir notes that the growth in recorded music is largely driven by Chrysalis Music (acquired in 2019) and Tommy Boy (acquired in 2021) and partially offset by lower synchronization and film/tv licensing revenue, likely hindered by the WGA and SAG-AFTRA strikes.
Chrysalis’ sprawling catalog of masters includes “Dancing With Myself” by Generation X and “Nothing Compares 2 U” by Sinead O’Connor, whose catalog saw a 2,885% spike in listenership after her death earlier this quarter. Tommy Boy is home to some of hip-hop’s most pioneering players, including De La Soul, the trio that Reservoir ushered on to streaming services for the first time during Q4 of fiscal year 2023 to a solid monetary boost.
In the publishing sector of their business, Reservoir’s revenue reached $25.9 million, compared to $24.1 million in last fiscal year’s second quarter. The gain was a product of strong results in performance and mechanical revenue in particular. Performance monies were up 47% YoY and mechanical was up 25% YoY. These wins, however, were offset by changes with the Copyright Royalty Board — which regulates publishing royalty rates in the U.S. — Reservoir says, leading to a decrease in digital by $2.1 million which was recognized in the prior year quarter related to the newly affirmed royalty rates for the 2018-2022 period.
The company also signed a handful of award-winning frontline songwriters in the past quarter, including Steph Jones, Rob Ragosta, Cam Becker, Josh Record, and Wé Ani.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), a closely watched metric of profitability, was up 24% this quarter to $15.9 million.
Founder and CEO, Golnar Khosrowshahi, says the company is confident in its position, both in the U.S. and emerging markets “We are encouraged by the growing opportunities internationally and welcome recent additions of El Sawareekh and RE Media expanding our presence in the emerging markets,” she says. “We will continue to pursue acquisitions in the U.S. and across the globe, and we have the right team and strategy to close accretive deals enhancing the portfolio and building long term value for the business and our shareholders.”
Jim Heindlmeyer, CFO, says that, as a result of the company’s “consistent progress against our strategic growth plan demonstrates the resilience of our business model and ongoing tailwinds from the growing music industry,” Reservoir is raising both its revenue and adjusted EBITDA guidance for fiscal 2024. “We are pleased to announce another quarter of strong performance, driven by meaningful top-line growth in both business segments,” he says.
The company’s outlook for fiscal 2024:
Revenue is anticipated to be $133 million-$137 million for the year ending March 31, 2024, with 10% growth at midpoint
Adjusted EBITDA is expected to be between $50 million-$52 million with 10% growth at midpoint
Apple reported a blowout quarterly earnings report, with its serviced division (which includes Apple TV+, Apple Music and other media-related offerings) hitting another new record with $22.3 billion in revenue.
That was up from $19.2 billion a year ago, and from $21.2 billion in its last quarter.
In total, Apple delivered revenues of $89.5 billion in its fiscal Q4, with profits of $23 billion, reflecting strong demand for its iPhone line.
“Today Apple is pleased to report a September quarter revenue record for iPhone and an all-time revenue record in Services,” said Tim Cook, Apple’s CEO, in a statement. “We now have our strongest lineup of products ever heading into the holiday season, including the iPhone 15 lineup and our first carbon neutral Apple Watch models, a major milestone in our efforts to make all Apple products carbon neutral by 2030.”
Apple is seeking to improve its revenues and margins in its services business, raising prices on Apple TV+ and other subscription offerings last month. Apple TV+ now costs $9.99 per month, though it is also included in the Apple One subscription bundle, which includes products like Apple Arcade, Apple News, and extra cloud storage.
“We achieved all time revenue records across App Store, advertising, Apple Care, iCloud, payment services and video, as well as the September quarter revenue record on Apple Music,” Cook added on the earnings call.
As for Apple TV+, Cook touted Martin Scorsese’s new movie Killers of the Flower Moon, and noted the awards that ths ervice has garnered.
“We’re telling impactful stories that inspire imagination and stir the soul,” Cook said. “Making movies that make a difference is also at the heart of Apple TV+, and we were thrilled to produce Martin Scorsese’s Killers of the Flower Moon, a powerful work of cinema that premiered in theaters around the world last month.”
Apple CFO Luca Maestri added on the call that Apple’s services division now has “well more than one billion” subscribers.
Also on the call, Cook confirmed that the company is investing significantly in generative artificial intelligence: “Obviously we have work going on, I’m not going to get into details about what it is because as you know, we don’t we really don’t do that,” Cook said in response to a question from an analyst. “But you can bet that we’re investing, we’re investing quite a bit. We’re going to do it responsibly. And you will see product advancements over time where those technologies are at the heart of them.”
This article was originally published by The Hollywood Reporter.
Kobalt, the digital-focused publishing administration company, has teamed up with investment funds managed by Morgan Stanley Tactical Value to invest more than $700 million into music IP in the next few years. The partnership will see Kobalt managing the creative, sync, licensing, administration and investment services for the copyrights that are purchased.
The deal, which was advised by Goldman Sachs, marks Kobalt’s return to managing investment for outside capital. Previously, Kobalt had two funds it worked with under Kobalt Capital, its investment management arm, both of which were sold in recent years. Kobalt’s first fund contained over 33,000 songs, including songs recorded by Lindsey Buckingham, Steve Winwood, the B52’s, 50 Cent, George Benson, Bonnie McKee, Nelly and Skrillex. It sold to Hipgnosis Songs Fund in late 2020 for a price tag of $323 million or 18.3 times the net publishers share, and it realized a $20 million gain for Kobalt. While it was the biggest sale for Kobalt at the time, the first fund represented less than 30% of Kobalt’s IP holdings at the time.
The second fund, Kobalt Music Royalty Fund II, sold to an investment group comprising of KKR and Dundee Partners the following year for $1.1 billion. To manage the investments of the royalty fund as well as other IP previously acquired by KKR, the partners formed a platform Chord Music Partners, which tapped Kobalt Music Publishing to continue to handle publishing administration for the works. The fund is believed to have included the SONGS publishing catalog, Insieme Music catalog, which it acquired from Glassnote, and the David Hodges catalog.
Since that sale, Kobalt has not worked with outside money for catalog acquisition.
Outside of Kobalt Capital, the publishing administrator, helmed by chief executive Laurent Hubert, has made a number of other major changes in its business. In 2021, it also sold off AWAL, the artist services company and distributor to some of music’s most successful independent talent, and its neighboring rights operations to Sony. In September 2022, following reports of its first-ever profitable year, Kobalt sold a majority stake to Francisco Partners.
“Kobalt is a pioneer in investing in music, increasing the value of copyrights, and creating music as a viable asset class,” says Hubert. “Morgan Stanley Tactical Value’s trust in Kobalt is a testament to our platform and leadership in the music industry. We are proud to form this unique partnership.”
“Morgan Stanley Tactical Value has profound respect for songwriters and the immense value of their art,” said Cameron Smalls, managing director, Morgan Stanley Tactical Value. “We are thrilled to partner with the leading creator-first publisher that is a pioneer in maximizing royalty collections for songwriters and rightsholders. Together with Kobalt’s infrastructure and deep commitment to bettering the music industry, we are excited about our partnership and the opportunities ahead.”
Shares of K-pop companies sank this week following news that a member of K-pop ground EXO is leaving SM Entertainment for a different agency. According to reports, D.O. will leave SM Entertainment for a new agency being established by his longtime manager. D.O.’s contract expires in early November, SM Entertainment said in a statement, and the artist “will continue with his EXO activities with SM” but pursue acting and other activities through the new agency.
SM Entertainment shares fell 9% to 113,400 won ($83.93). Shares of YG Entertainment, home of girl group BLACKPINK, dropped 9.3% to 53,700 won ($39.74). Shares of JYP Entertainment, home of Stray Kids and Twice, plummeted 11.1% to 100,900 won ($74.67). HYBE, home to BTS and Tomorrow X Together, fell 8.2% to 224,500 won ($166.15). Shares of Kakao Corp. dropped 9.6% to 39,050 won ($28.90). Kakao and its subsidiary Kakao Entertainment own 40% of SM Entertainment’s common stock. Earlier this year, Kakao Entertainment formed a North American joint venture with SM Entertainment.
With all K-pop stocks moving in synch, investors appear to be concerned that the established agencies could be threatened by upstarts. Because Korean companies have far smaller rosters than publicly traded Western music companies such as Universal Music Group, Warner Music Group and Believe, any one departure can have an outsized impact. When BTS announced it planned to go on hiatus, HYBE’s share price dropped nearly 25% the following day.
Separately, the chief investment officer of Kakao, Bae Jae-hyun, was charged with manipulating SM Entertainment’s stock price in connection with Kakao’s bidding war against HYBE over SM Entertainment in the first quarter of the year. According to Bloomberg, the executive was arrested Thursday for buying 240 billion won ($178 million) worth of SM Entertainment shares in an effort to disrupt HYBE’s tender offer.
Despite the week’s heavy losses, K-pop stocks are among the best performing music stocks in 2023. Through Friday, HYBE, SM Entertainment, YG Entertainment and JYP Entertainment have gained an average of 37.1% year to date. JYP Entertainment leads the four companies with a year-to-date improvement of 48.8%.
The 21-stock Billboard Global Music Index fell 3.1% to 1,313.44, lowering its year-to-date gain to 12.5%. It was the biggest one-week drop for the index since July and just the seventh time this year the index dropped by more than 3% in a week. Losses were widespread and only four of the 21 stocks posted gains.
Stocks generally had a miserable week. In the United States, the Nasdaq composite index fell 3.2% and the S&P 500 declined 2.4%. In the United Kingdom, the FTSE 100 dropped 2.6%. South Korea’s KOSPI composite index sank 3.3%. As the first wave of companies released third-quarter earnings this week, one of the standouts was Netflix. The streaming video giant gained 16.1% on Thursday after announcing it added 9 million subscribers in the quarter and will raise prices in the U.S., U.K. and France.
Anghami was the index’s greatest gainer for the second straight week after increasing 16.6% to $0.96. Last week, shares of the Abu Dhabi-based music streamer jumped 18% after the company received a written notification from the Nasdaq Stock Market on Oct. 12 regarding its closing share price falling below $1.00 for the previous 30 days. On Tuesday, Anghami issued a press release to reveal the Nasdaq Stock Market issued a written notification notifying the company it is not in compliance with the exchange’s requirement that listed companies maintain a minimum market value of $15 million. Anghami fell below the $15 million threshold from Aug. 29 to Oct. 10. Anghami has until April 8, 2024, to regain compliance.
Hipgnosis Songs Fund gained 4.9% to 0.775 GBP ($0.94) this week despite dropping 9.3% on Monday following news the company canceled a planned dividend payment. As the week progressed, the London Stock Exchange-listed company’s stock price steadily increased and was helped by the board of director’s announcement on Thursday of a strategic review to help calm investors’ nerves. After Monday’s decline, the share price rose 15.6% through Friday (Oct. 20) to reach its highest closing price since Oct. 3. At the company’s annual meeting on Oct. 26, shareholders will vote to approve a $440 million catalog sale intended to reduce the share price’s discount to Hipgnosis Songs Fund’s net asset value. Shareholders will also vote on a continuation resolution.
Rarely does an accounting issue move markets and surprise people throughout the music business. But that’s what happened Monday when Hipgnosis Songs Fund, the publicly traded investment trust backed by the catalogs of such artists as Neil Young and Stevie Nicks, announced it will cancel a planned quarterly dividend payment to shareholders.
According to Hipgnosis Songs Fund’s board of directors, the decision was the result of the company’s independent valuation expert, Citrin Cooperman, reducing its expectations of “industry-wide” retroactive payments from the Copyright Royalty Board’s Phonorecords III (a.k.a. CRB III) ruling that increased the royalties music publishers receive from on-demand music streaming services for the years 2018 to 2022. Billboard estimated that the music industry would gain over $250 million in total, and another industry expert recently told Billboard they estimated the industry-wide retroactive payment will approach $400 million.
Hipgnosis’ adjustment was substantial: down roughly 54% from $21.7 million to $9.9 million. Meanwhile, Billboard continues to stand by its previous estimate and no other publishers or rights funds that spoke for this story have had to decrease their projections.
“Frankly, I’m shocked… I really do not understand this,” says one music publishing executive.
Multiple sources say there have been no new updates regarding CRB III in recent weeks that would cause a publisher to cut their expectations for accruals by more than half, and it must be an accounting error unique to Hipgnosis and Citrin Cooperman. “None of the data points have changed,” explains another publishing executive. “The ruling is what it is, so they must’ve made a mistake here.” Citrin Cooperman did not respond to Billboard’s request for comment.
The fallout Monday was immediate: With the sudden change in expected retroactive royalties, Hipgnosis Songs Fund was forced to cancel a dividend payment to not risk violating the debt covenants for its $700 million revolving credit facility. That dividend — 1.3125 pence per ordinary share — was announced on Sept. 21 and was to have a payment date of Oct. 27. The company’s share price dropped 10% on Monday’s news. Dividends are an integral component to the fund’s strategy of providing investors with stable returns from proven, successful music catalogs. Since its initial public offering in July 2018 through March, Hipgnosis Songs Fund had declared dividends of 21.6 pence per share, according to the latest annual report.
While the retroactive CRB III payments would be less than Hipgnosis Songs Fund expected and impacted a dividend payment this quarter, the resulting cash crunch likely won’t happen until 2024. Streaming royalties due for the period 2018 to 2020 will be paid directly to rights holders, with everything after that flowing through the Music Licensing Collective with a Feb. 9, 2024, deadline. Most of the adjustment will come from the 2021-2022 royalties owed to the MLC, according to sources. Considering the time it will take the MLC process the distributions, publishers probably won’t receive this tranche of royalties until the spring 2024.
In August, the Copyright Royalty Board stated its final determination for how songwriters and publishers would be paid for the period of 2018-2022. These rates were hotly contested between the music business and streaming services over the past six years. Though rates were nearly finalized in 2018, some streamers remanded it back to the CRB in 2019 in hopes of getting more favorable terms. In the meantime, the streaming services paid songwriters and publishers under the guidelines set by the previous period, Phonorecords II, which was lower than what was ultimately set for 2018-2022.
Ever since, the music business has been preparing for when the 2018-2022 rates would finally be settled, and streaming services would have to undergo a massive recalibration of what they had previously paid out. When the judges released their final determination in mid-August, it proved that these streaming rates overall would lead to more money for publishers and songwriters.
Other publicly traded publishing companies have also announced the amounts of their expected adjustments ahead of receiving the money. Universal Music Group-owned Universal Music Publishing Group, one of the world’s largest music publishers, expects to book a catch-up adjustment of nearly 30 million euros in the third quarter of 2023 related to Phonorecords III, UMG said in its July 26 earnings call. Warner Music Group, which often ranks as the third largest publisher, according to Billboard’s Publishers Quarterly, recognized a benefit of $20 million — less than the amount of Hipgnosis Songs Fund’s initial estimate — in the quarter ended Sept. 30, 2022, resulting from the CRB’s ruling July 1, 2022, ruling.
Reservoir Media accrued less than $3 million in royalties in the third and fourth quarters of calendar 2022 related to the CRB III decision, says CEO Golnar Khosrowshahi. Reservoir Media doesn’t expect to adjust the size of the CRB III adjustment. “We continue to believe our estimates are accurate,” says Khosrowshahi. “We’ve applied an appropriate level of conservatism in recording that revenue.”
The amount of the expected windfall appears to have received a great deal of consideration inside Hipgnosis Songs Fund. According to Hipgnosis Songs Fund’s latest annual report, the company compared the Phonorecords III accrual estimates to estimates provided by the independent valuer — Citron Cooperman — as well as the fair-value appraiser for the City National Bank-led revolving credit facility. The 182-page report mentions the term “CRB III” 49 times and includes lengthy discussions of the company’s regulatory environment and how the CRB III determination raised the headline royalty rate due to music publishers by 44% from 10.5% to 15.1%.
CRB III will give publishers less than a 44% rate increase, though. The amount owed to music publishers is a complicated formula that includes minimum per-subscriber fees and percentage-of-revenue calculations. Publishers typically received above the headline rate from streaming services from 2018 to 2022, meaning extra amounts owed retroactively will be less than they would otherwise. Sources tell Billboard the effective rate for some streaming services was in the range of 12% to 13% of service revenue rather than 10.5%.
Hipgnosis did not respond to Billboard’s request for comment.
Hipgnosis Songs Fund said on Monday it would not pay its investors a dividend in October because of new, lower projections for the amount of revenue it can expect from the U.S. Copyright Royalty Board for certain streaming royalties, causing its stock to dip more than 10%.
Hipgnosis Songs Fund’s board said it had to withdraw the proposed interim dividend of 1.1325 pence per share, which it had announced to shareholders on Sept. 21, after its independent portfolio valuer, Citrin Cooperman, “materially reduced” Hipgnosis’ projected payments from CRB III, causing the board to cut its expectations for CRB III retroactive accrual to $9.9 million, from $21.7 million. Hipgnosis’s board said it “expects to declare and pay future dividends as targeted,” subject to discussions with its lenders.
The announcement comes 10 days ahead of the London-listed music royalty trust’s first shareholder continuation vote, where investors are asked to vote on whether they want to keep the investment trust going or liquidate the fund.
Hipgnosis Songs Fund made history in the music industry when it went public in July 2018 as the first publicly listed company offering investors the chance to earn returns from the royalties on famous songs like “Sweet Dreams Are Made of This,” “Don’t Stop Believin’,” Neil Young’s catalog and more.
But the company is facing some of its first, serious growing pains as the high interest-rate environment has made acquiring more catalogs more expensive and drawn investors’ interest away from alternative investments like music rights to high-yielding bonds. Hipgnosis Songs Fund’s share price is down more than 25% over the past year and was trading at 66.26 British pence ($0.90 USD) as of 8:50 a.m. New York time.
The board has announced a number of initiatives since September that appear to be aimed at addressing investors’ concerns ahead of the Oct. 26 continuation vote, including the proposed sale of $440 million worth of catalogs from its portfolio to the private side of Hipgnosis — Hipgnosis Songs Capital, which is backed by private equity goliath Blackstone. The board said it would use the proceeds to buy back up to $180 million of its own stock, pay down $250 million of its revolving debt and to introduce new, lower advisory fees to be paid to Hipgnosis Song Management Limited.
The board has said it hopes the proposal, which must be approved by shareholders, would help to “re-rate” the company’s share price in the eyes of investors and the broader market.
The board said it learned of the reduction in expected payments around Sept. 30, after Citirn Cooperman “reduced its expectations of industry-wide retroactive payments in relation to the U.S. Copyright Royalty Board’s decision in relation to royalties payable to songwriters for the period covering 2018-2022 (“CRB III“) for its valuation of the Company’s portfolio.”
Abu Dhabi-based music streamer Anghami led all music stocks this week after gaining 17.6% to $0.82. On Thursday, the company announced through an SEC filing it had received a written notification from the Nasdaq Stock Market regarding its closing share price being below $1.00 for the previous 30 days. The Nasdaq gives companies 180 days to regain compliance or face de-listing from the exchange.
The warning appeared to spur a 16.5% gain on Thursday as investors saw signs the share price won’t remain under $1. In its SEC filing, Anghami stated if the share price remains under the $1 threshold it will “consider available options to cure the deficiency,” including a reverse share split (which would increase the share price by reducing the number of shares outstanding while the market capitalization remains unchanged).
SiriusXM gained 5.7% on Friday (Oct. 13) and finished the week up 11.8%. Its $4.85 closing price was the highest for the satellite radio company since Aug. 9. The typically steady stock has fallen 17% this year as self-pay satellite radio subscribers stagnated at or around 32 million for eight straight quarters. SiriusXM will host a Nov. 8 presentation to unveil a new streaming app and preview upcoming in-car innovations and new programming.
The 21-stock Billboard Global Music Index fell 1.3% to 1,355.65 this week as 13 stocks were in negative territory and only eight stocks gained ground. Year to date, the index has gained 16.1%. Led by SiriusXM’s gain and a 7.6% increase from Cumulus Media, the index’s three radio stocks had an average improvement of 5.5%. Eight record labels and publishers had an average weekly gain of 0.3%. HYBE improved 6.8% while Believe climbed 3.6% and Universal Music Group added 0.6%. Streaming companies were, on average, flat this week.
Live music stocks dropped an average of 4.8%. Shares of Sphere Entertainment Co. dropped 11.1%, effectively offsetting the 11% gain on Oct. 2 following U2’s debut performances at Sphere in Las Vegas. Live Nation dropped 3.9%, MSG Entertainment fell 3.5% and CTS Eventim shares fell 0.7%. If investors are curious what’s next for Sphere Entertainment, clues comes from an interview published Thursday. Executive chairman and CEO James Dolan said the company is “actively pursuing other markets” and “has six different kinds of spheres down to a 3,000-seater.” A Las Vegas-style Sphere may not work in London, where according to reports residents are concerned about the location and light pollution that could arise from a massive external display similar to the Las Vegas venue.
Music stocks underperformed numerous indexes. In the United States, the S&P 500 gained 0.1% and the Nasdaq composite fell 0.3%. In the United Kingdom, the FTSE 100 gained 1.4%. South Korea’s KOSPI composite index rose 2%.
Stocks faded after the release of consumer sentiment data for October by the University of Michigan showed a decline from September based on “a substantial increase” in concerns about inflation. Expectations for inflation in one year rose from 3.2% in September to 3.8% this month. That’s the highest mark since May 2023 and substantially above the 2.3% to 3% range seen in the two years before the pandemic.
Also a factor in stock prices, the U.S. Federal Reserve expects to raise interest rates one more time, according to minutes released from its September policy meeting. Interest rates have an inverse relationship with equity prices. Higher interest rates make borrowing more expensive and cut down on corporate profits.