The Ledger
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In May, Taylor Swift notched her 14th No. 1 album on the Billboard 200 with the help of 14 different vinyl versions of The Tortured Poets Department, which sold an astounding 859,000 units in the album’s debut week. She has now stayed atop the Billboard 200 for eight consecutive weeks by rolling out additional variants, proving the pop megastar has mastered the art of giving superfans what they want.
Swift isn’t alone in upping her variant game. Luminate looked at the number of physical variants — defined as distinct UPCs per project — in the top 10 of the Billboard 200 albums chart each week since the beginning of 2019 and found that the amount has trended upwards since that year, when the average number of physical variants in the top 10 was 3.3 per week, according to data shared with Billboard. While that number fell to 2.8 per week in 2020 due to the COVID-19 pandemic and its effect on release schedules and supply chains — physical album sales also fell, from 73.5 million units in 2019 to 68 million units in 2020 due to a sharp drop in CD sales — the average number of physical variants in the top 10 has increased sharply in the post-pandemic years.
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Making albums available in different colors, formats and packages has proven to be a shrewd move for prominent artists aiming for the top of the chart. In 2021, Adele’s 30 debuted atop the Billboard 200 with a Target-exclusive CD, vinyl exclusives at Amazon and Walmart, and three items sold through her official webstore: a cassette and two deluxe boxed sets.
Like she did with The Tortured Poets Department, Swift has frequently topped the Billboard 200 with the help of physical variants. Her 2022 album Midnights had the biggest week for an album in nearly seven years. And in 2023, her 1989 (Taylor’s Version) had the biggest week in nearly a decade with the help of 15 collectible physical formats.
Also in 2023, Travis Scott’s Utopia reached No. 1 thanks to 84 variants, as the album was made available in three different track lists and multiple CD and LP variants including zine and merchandise bundles. The same year, Fall Out Boy’s So Much (for) Stardust had a whopping 116 physical variants, according to Luminate, although it reached only No. 6 on Billboard 200.
CD variants have helped numerous K-pop artists achieve high Billboard 200 debuts. K-pop fans have long clamored for collectibles from their favorite artists, and in South Korea, labels employ lottery-style marketing strategies and package CDs with merchandise — even though many fans don’t own a CD player. In March, With YOU-th by TWICE debuted atop the Billboard 200 with the help of 14 CD variants. “To the fans, it’s not just an issue of buying music,” Bernie Cho, the head of DFSB Kollective, a Korean music export agency, told Billboard in 2020. “You’re showing your loyalty.”
But physical variants aren’t the exclusive domain of albums popular enough to land in the top 10. “For certain records, multiple variants can support a chart position, but it’s not the main driver for Concord,” says Joe Dent, executive vp of operations at Concord Label Group.
“Fans want to support their favorite artists of course, but oftentimes they want to support a particular shop or webstore that they love as well,” Dent continues. “We strive to meet those fans wherever they are.” For example, Concord’s Rounder Records made vinyl variants of Sierra Ferrell’s Trail of Flowers available as exclusives to indie record stores, Magnolia Record Club and Spotify Fans First, while several other vinyl variants sold through her website and the Rounder Records webstore, says Dent.
AWAL, home to such indie artists as Laufey and JVKE, has a similar mindset. “The way we look at physical never starts with the commercial opportunity,” says CEO Lonny Olinick. “It starts with how the artist wants to express themselves and what the fans are likely to love. And what it really comes down to is how an artist can deepen the connection they have with their fans.”
Variants can also be a marketing strategy for catalog albums that aren’t likely to achieve a high chart position. “We use the variants as an opportunity to excite the market,” says Rell Lafargue, president/COO at Reservoir Music. “For example, if we have something that has been out of print for decades, we might want to do a color variant to reintroduce it into the marketplace as a new, distinct and fun physical product.” Reservoir’s Tommy Boy Records took this approach for the upcoming reissue of Afrika Bambaataa & Soulsonic Force’s 1986 album Planet Rock by opting for a limited edition pressing with a three-color splatter.
Each additional variant adds to the complexity of releasing an album. That challenge was exacerbated by COVID-related supply chain issues, leading to longer lead times and searches for alternate manufacturers. But while logistical challenges remain, says Lafargue, they aren’t as persistent. “While it can be challenging to manage multiple variants or exclusives instead of a singular version, it is worth the extra effort to expose the record to different retailers and get it into the hands of even more fans,” he says.
The proliferation of physical variants doesn’t come as a surprise. Streaming has made music both plentiful and easily accessible — almost to a fault. Some artists are now releasing physical albums a week or two before making them available on streaming platforms. So while chart position remains a big motivator for many, there’s also something to be said for the way physical variants can foster a feeling of closeness between artists and fans.
Artists “look to cut through the volume of digital music being released,” says Olinick. “Bringing that connection into the real world, whether through live shows or physical products, is hugely impactful.”
In February 2021, Spotify announced its high-quality audio offering, called HiFi, and released a promotional video featuring Billie Eilish and her brother/producer, Finneas, waxing about the benefits of listening to recordings in their natural state rather than the compressed files that became standard in the digital era. “The streaming war is going Hi-Fi,” Billboard proclaimed a few months later.
But it was a false start. Spotify’s HiFi didn’t materialize, and the company officially announced its delay in January 2022. There were rumblings about HiFi in June 2023, but the rumors amounted to nothing. Instead, Spotify pushed ahead with building an all-in-one audio platform by building its podcast business and launching an audiobook offering.
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Now, HiFi appears to be back on track. This month, news broke that Spotify will finally launch a high-definition audio tier later this year. Still called HiFi, Spotify will offer the tier for an extra $5 per month for individual plans ($16.99 compared to $11.99, which bakes in an expected $1 increase from the current $10.99), according to a Bloomberg report. The HiFi tier for family plans is reported to be $19.99, $3 more than the current $16.99.
Waiting three years could come with some advantages. First, there’s a large addressable market that wants high-quality audio. A 2023 MusicWatch survey found that 85 million Americans aged 13 and over agreed that obtaining the highest sound quality is important and that they would be willing to pay more to get it, according to MusicWatch’s Russ Crupnick. That’s a big uptick from 2020 when a previous MusicWatch survey found that it found that 69.2 million people aged 13 to 65 were open to paying more for studio-quality sound. Most of that change represents greater interest in high-quality audio, as population growth has been “only about 1% per year,” says Crupnick.
“Once people realize that audio quality is available and they hear it, it is hard to go back,” says Qobuz managing director Dan Mackta. “The challenge is just getting people to actually hear it.”
There are two types of premium audio streaming: 16-bit, known as “lossless” or “CD-quality,” and 24-bit, which is commonly referred to as “high-resolution.” Both Apple Music and Amazon Music Unlimited offer CD-quality and higher definition tiers that go up to 24-bit/192 kHz. Qobuz streams 24-bit audio up to 192 kHz. Spotify streams up to 256 kbps for subscribers — far below CD quality of 1,411 kbps— and 128 kbps for ad-supported users.
Early high-definition entrants like Qobuz, Tidal, Amazon Music Unlimited and Apple Music have done much of the dirty work educating consumers about audio quality. Amazon Music, which debuted high-definition audio in 2019, saw strong demand and engagement, Amazon Music vp Steve Boom told Billboard in 2021. Apple Music rolled out lossless audio and Spatial Audio in June 2021. More than 90% of Apple Music listeners have engaged with Spatial Audio, the company said in January, adding that plays of music available in the format have more than tripled in the previous two years.
The streaming market has matured over the last three years. Spotify currently has 59 million more subscribers than it did at the end of 2021, giving it a larger base from which to upsell a premium audio tier. Consumers have also warmed to the notion of paying more for a music subscription. Spotify’s first large-scale price increase in July 2023 was followed by an additional increase in May in the United Kingdom and Australia, and the United States will follow later this year — all without a material amount of subscriber churn, company executives have said.
Spotify will have to convince its subscribers that high-quality audio is worth a premium, however. Amazon Music Unlimited originally charged a premium for high-definition audio but later made it a standard feature for the lower-priced, standard subscriber plan. Likewise, Apple Music offers lossless audio and Spatial Audio at no extra cost. To counter its competitors’ pricing strategies, Spotify could make HiFi a bundle of premium features. In 2022, Spotify reportedly surveyed consumers about their willingness to pay for a premium tier that offers high-definition audio, additional playlist and library features, limited-ad Spotify playlists, and other add-ons.
But Spotify HiFi could also encourage its competitors to follow suit by further raising prices. Mackta says Qobuz intends to raise prices at some point in the future. In fact, Qobuz lowered prices in 2019 — a standard plan is currently $12.99 per month — in response to larger services like Apple Music and Amazon Music making high-definition audio a standard feature. “In general,” he says, “music is too cheap.”
Equity analysts aren’t convinced the U.S. Department of Justice will accomplish its larger goal of separating Live Nation’s concert promotion and ticketing businesses, thereby undoing the controversial merger it allowed in 2010. But if Live Nation and Ticketmaster were to become separate companies, analysts estimate the combined companies would be worth from $85 to $96 per share, based on a handful of reports Billboard has seen.
Live Nation shares were trading around $101 to $102 the day before the lawsuit was announced on May 23. But shares have since traded in the $93 to $94 range, putting the current price at the upper end of analysts’ “sum of the parts” (SOTP) valuations. In the wake of the lawsuit, some analysts have lowered their price targets for Live Nation, and S&P Global downgraded its rating on Live Nation’s debt.
Any good merger creates value greater than the sum of the parts. Live Nation’s business model is a “flywheel” in which one segment (such as concerts) generates value for other segments (ticketing or sponsorship and advertisements). To the company, the flywheel is the result of hard-won competitive advantages built over the past 14 years. To the DOJ, the flywheel represents Live Nation’s ability to use its dominant market position to its advantage in anti-competitive ways.
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Breaking up Live Nation would eliminate the synergies that create value for the combined company. What is currently one stock would become two stocks of two separate companies with different management teams. Live Nation shareholders would likely get ownership in the new, standalone Ticketmaster. Analysts have calculated the value of Live Nation and Ticketmaster using a SOTP approach that combines the value of the business segments as if they were standalone companies.
But analysts have serious doubts the DOJ will succeed in breaking up the company. “Federal Judges…are generally pro-business and we doubt — at least based on [the DOJ’s 128-page] summary — the case is strong enough to either break up Live Nation or for the DOJ to win the lawsuit,” wrote Huber Research analyst Doug Arthur in a Thursday (June 6) note to investors. Similarly, J.P. Morgan sees “a real possibility that [Live Nation] comes out of this a winner” and fends off the DOJ’s ultimate goal of breaking up the company, analysts wrote in a May 29 note to investors.
“The government’s burden is going to be pretty high,” Bill Morrison, partner at Haynes & Boone, tells Billboard. “It’s long been the case in antitrust jurisprudence that it’s not illegal to have a monopoly. What’s illegal is to use that monopoly power in an anti-competitive way. And so that would be the burden that the DOJ would have to prove, which is to show that Live Nation abused its monopoly power and it acted unreasonably to restrain trade to maintain its monopoly.”
There could be outcomes other than a forced divestiture, however. Wolfe Research analysts note the “DOJ does not lose if it reached for the stars and landed on the moon,” they wrote in a May 23 note. “From that perspective, it is entirely possible the DOJ wants to get Live Nation/Ticketmaster to agree to remedies, such as eliminating exclusive ticketing deals, and is using the threat of a breakup to achieve those goals.”
The very existence of the DOJ’s lawsuit has changed how investors will approach Live Nation. The health of the concert business and Live Nation’s strengths will be overshadowed by the pall cast by the DOJ. Northcoast Research downgraded Live Nation from “buy” to “neutral” because analysts believe the stock price will be based on legal news and the political environment rather than fundamentals and business performance. J.P. Morgan also noted a “sentiment overhang” related to the DOJ’s lawsuit and lowered its price target to $116 from $126, although it kept its recommendation at “overweight.”
One variable that has largely gone unmentioned is the possible change in the administration at the White House. President Biden has taken an aggressive stance on protecting competition — the DOJ sank proposed mergers by Spirit-JetBlue and Penguin Random House-Simon & Schuster — reducing the fees consumers face everywhere from airlines to concert tickets, and criminally prosecuting companies over no-poaching rules and wage-fixing. A second Trump administration would bring an entirely new slate of appointments to head influential antitrust positions. “It depends on who is in those key [regulatory] spots, and then what the priorities are of those offices and the philosophy,” Morrison says. “We’ve seen big pivots in the past.”
Live Nation did not immediately respond to a request for comment on this story.
What began as a music-only streaming platform evolved into a broader audio platform that included podcasts and audiobooks. Now, Spotify is venturing into video — in both snippets and long-form content, although the latter is only in an experimental phase.
During Tuesday’s Q2 earnings call, CEO Daniel Ek and interim CFO Ben Kung repeatedly referred to “the Spotify Machine” when explaining the company’s expansion beyond music. As Ek explained, the term means the company “isn’t just a sort of one-trick pony anymore, but it’s actually multiple verticals working together” to create more choice for consumers and drive more engagement.
“Because you may come for the music and stay for the audiobooks,” Ek said. “Some customers may come for the podcast and stay for the audiobooks.”
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The term makes sense: Spotify is an increasingly complex product with multiple moving parts, numerous audio and video formats, and a variety of paid tiers. Each new component to the machine is meant to make the company more valuable as a whole. Similarly, concert promoter and ticketing company Live Nation uses the term “flywheel” to describe how its various products and business segments provide momentum for the larger entity. But “the machine” has a better ring to it.
The machine is integral to becoming a sustainable, profitable company. As Spotify detailed in its 2022 investor day presentation, branching out from music will help improve its gross margins and become the profitable company it has long aspired to be. Music margins are roughly 30% of revenue — the remaining 70% goes to rights holders — and will top out at 35%, the company has said. At that 2022 presentation, Spotify said podcast margins can reach 40-50% gross margin and overall gross margin can get to 40% (gross margin rose to 27.6% in Q1 from 25.2% a year earlier).
The machine helps increase engagement. Spotify is more valuable if people spend more time using it. When engagement increases, churn decreases, which in turn reduces the expense involved in bringing those lapsed customers back. When engagement increases, free users are more likely to become paid subscribers. The last thing a streaming service wants is an infrequent customer who doesn’t enjoy the features or delve deep into its content. Audiobooks are a good example of keeping people hooked: Ek said that in the markets where audiobooks are available, 25% of users are listening to them. What’s more, in the first two weeks a Spotify user listens to audiobooks, Spotify sees “over two and a half hours of incremental usage on the audiobook side,” he said.
The machine gives users greater freedom of choice. Ek confirmed Spotify will have an audiobook-only subscription tier along with a music-only tier; the standard subscription tier offers both music and audiobooks. Over the years, Spotify has given consumers multiple options to choose from: an individual plan, a two-person plan called Duo, a multi-user family plan, and, in certain markets, the ability to purchase one day at a time. Spotify wants to provide “as much flexibility as possible in this next stage of Spotify” to convert more users to paid subscribers, Ek explained.
The machine is built to maximize value. Ek and Kung frequently mentioned a particular internal metric, a value-to-price ratio, that Spotify uses as a North Star these days. By adding podcasts, audiobooks and education, as well as features such as Wrapped — Spotify’s personalized year-end recap — Spotify delivers more value than it provided when it was a simpler, music-only service. Ek singled out the videos that Spotify has added in “11 or 12” markets and built anticipation for video clips that will allow artists to tell stories about their new releases. Such videos are one way Spotify is “focused on winning discovery” to make the platform a better listening experience, Ek said. Spotify’s recent foray into educational video courses in the U.K. is another stab at adding value.
The machine ultimately gives Spotify the ability to raise prices. When Spotify adds products and features, EK explained, it increases its value-to-price ratio. That, in turn, allows it to occasionally raise prices to capture the value it created. “The way you should think about this as investors is the better we can improve the product, the more people engage with our product, and the more value we ultimately create,” Ek said. “And the more value we create, the more ability we will have to then capture some of that value by price increases.” After more than a decade of value creation and stagnant prices, Spotify raised rates in July 2023. In April, it again hiked rates in select markets — including the United Kingdom and Australia — and is expected to expand those increases to additional markets.
The machine also requires a feat of engineering. “It’s a fairly complex machine,” Kung said, because Spotify has both variable-cost models, such as revenue sharing and per-hour royalties, and fixed-cost models — some in-house and licensed podcast content, perhaps. Ek added that “the machine takes care of all the complexity on the back end to deal with what was historically a very difficult problem to solve, which is multiple business models in one consumer experience.” Spotify’s engineering challenge is incorporating additional verticals into a seamless user experience without getting clunky — a criticism often launched at iTunes, which started as a music store and added videos, books, apps, podcasts and iTunes U, a place for educational materials. “Simplicity is hard,” a former Apple product designer once wrote. “Very hard. But when you get it, it’s beautiful.”
The machine might take some getting used to. As Spotify branches out to non-music verticals, it has stakeholders other than the music rights holders, artists and songwriters it has served for more than a decade. Now, Spotify also supports podcasters, authors and — although in the early stages — educators. That has already created some tension between music publishers and Spotify following news that Spotify considers its music-audiobook subscription offering to be a bundle under the Phonorecords IV mechanical rate structure in the United States. Subscription bundles allow Spotify to pay a slightly lower royalty rate. But really, is anybody surprised that the machine is trying to save a little money?
As growth slows in large, developed markets, music companies are looking elsewhere for opportunities. Increasingly, companies are targeting superfans, the most fervent and high-spending of music consumers, to provide those revenue gains.
The Pareto Principle says that roughly 20% of customers provide 80% of a company’s revenue. Whatever the breakdown, music companies are expecting more from a small subset of big spenders. Concert promoter Live Nation wants premium offerings such as VIP boxes to increase to 30% to 35% of its amphitheater business from the current 9%, president/CEO Michael Rapino told investors during the company’s Feb. 22 earnings call. Earlier this year, the heads of Universal Music Group and Warner Music Group revealed their desire to offer new types of services and products for the most fervent of music fans.
Coming out of the pandemic, people — especially younger consumers — spent money “as a way to make up for lost time” and, later, to cope with stress, Intuit Credit Karma, a financial management platform, explained. Consulting firm McKinsey & Company calls this behavior “selective splurging.” According to a November 2023 global survey by McKinsey, 20% of all consumers planned to splurge on out-of-home entertainment such as concerts — less than restaurants (38%), apparel (34%) and travel (28%).
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More than two in five Gen Z consumers (42%) spent more on live concerts than before the pandemic, according to a September 2023 survey by Qualtrics on behalf of Intuit Credit Karma. That was well above Millennials (34%), Gen X (19%) and Baby Boomers (11%). Last year, music fans paid high prices to see the two biggest cultural events: tours by Taylor Swift and Beyonce. Fittingly, Swift’s The Eras Tour was sponsored by Capital One, and some fans signed up for their first credit card as a result.
A couple of years after pandemic restrictions ended, though, consumers have a spending hangover and seem less willing to reach deeper into their pockets. Ample data suggest that consumers are increasingly stressed from high prices — U.S. inflation rose to 3.5% in March from 3.2% in February — and the ending of pandemic-era forbearances that allowed people to put off payments on their mortgages and student loans.
Splurging has given way to focusing on the basics. Consumers intend to spend more than usual on essentials such as gasoline, groceries, produce and pet food, as well as health and fitness, in the next three months, according to a McKinsey survey in February. In contrast, consumers intend to spend less on discretionary items: entertainment, domestic flights, hotel and resort stays, home improvement and alcoholic beverages. Luxuries such as jewelry, furniture and home decorations have the biggest gap between spenders and savers.
Rising debt is one reason consumers are pulling back on spending. In the United States, the ratio of credit cards and auto loans becoming past due by 90 days or more exceeds pre-pandemic levels. Delinquency rates are especially bad for younger consumers who are most likely to spend money on concerts and entertainment. In the fourth quarter of 2023, the Gen Z delinquency transition rate — transitioning into delinquency — reached 11.86% compared to 8.53% in the fourth quarter of 2021, according to the New York Federal Reserve. Millennials’ delinquency transition rate rose to 9.56% from 6.53% two years earlier. Gen X and Baby Boomers’ delinquencies are also trending up but faring better (7.01% and 4.78%, respectively).
For many young consumers who have taken on debt, 2024 will be a year to pull back. A third of Millennials and Gen Z say they have a shopping addiction, according to a survey by Qualtrics for Intuit Credit Karma conducted in February and March of this year. About three-quarters of Millennials and Gen Z surveyed by Qualtrics say they plan to change how they spend money. A full 20% of them said 2024 will be a “no buy year,” a recent trend where people swear off spending except to replace items, and 56% said they will have a “low buy year,” meaning they will reduce shopping significantly.
Credit card debt is nothing new, though, and some experts believe consumers can take it in stride. Although credit card balances increased in 2023, consumers “largely still have the wherewithal to repay their existing obligations,” according to credit monitoring service Experian. In fact, the average FICO credit score improved to 715 in 2023 from 714 in 2022 despite the average credit card balance increasing 10%. In February, credit ratings agency Fitch revised its forecast for U.S. real (adjusted for inflation) consumer spending to 1.3% from 0.6%, largely on the belief that consumers will draw down savings throughout the year.
High-priced concert tickets and experiences might be out of the question, but superfan spending is also more mundane. Artists routinely put out new albums with multiple CD and vinyl LP variants knowing that their most hardcore fans consider them to be collectibles (and purchase them to help their favorite artists top the charts). Swift’s 2022 album Midnights had 20 different versions across all physical formats. Those album sales accounted for 1.14 million of the 1.58 million units sold in its first week of release. At $20 or $30 apiece, supporting a favorite artist doesn’t require going into debt.
Music isn’t a necessity like food and shelter, but it’s proved to be both recession-proof and pandemic-proof. Regardless of the rises and falls in consumer sentiment, inflation rates and unemployment trends, people will spend money on music. But the broader trends around consumer spending may mean that the growth the music business hopes to reap from those superfans may not be as lucrative, at least for now, as they may have hoped.
Accounting scandals may not get the public’s attention like a raid by Homeland Security, but questions about the quality of a publicly traded company’s books is a serious matter. This week, an internal report made public by Hipgnosis Songs Fund, the London-listed company that played a major role in turning music rights into a stable, attractive asset class, confirmed what some analysts and shareholders had long suspected.
At best, the 26-page report by Shot Tower Capital, the firm hired by the company’s board of directors in the wake of a shareholder revolt in October, details how the investment advisor, the Merck Mercuriadis-led Hipgnosis Song Management (HSM), made numerous missteps in accounting and financial projections of its vast music rights portfolio that includes music by Red Hot Chili Peppers, Shakira and Journey. At worst, the report suggests the investment advisor chose accounting standards that overstated revenue, inflated the portfolio’s valuation and — as the board previously stated — resulted in larger fees paid for managing the portfolio. In any case, information released Thursday presents an unflattering portrait of HSM and its internal operations.
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For its part, HSM considers some “aspects of the report…to be factually inaccurate and misleading,” the company said in a statement on Thursday (Mar. 28). HSM said it received the report the evening before its release and will respond to the board “in due course.”
To be clear, Shot Tower did not explicitly comment on the investment advisor’s intent in using certain accounting practices. The data-heavy report offers analysis, not speculation. But the report, part of the board of directors’ effort to regain shareholders’ trust, made clear that annual revenue was “materially” overstated and laid out numerous examples where the fund’s numbers didn’t reflect the reality behind its assets.
Take, for example, something called right to income (RTI), which are royalties that are paid to the buyer at the close of an acquisition. (If the acquisition’s effective date is prior to the closing date, royalties received by the seller after the effective date are credited to the buyer.) Normally, the amount of the RTI is deducted from the purchase price and is not included in annual revenue figures. However, Shot Tower found that some RTI revenue from Hipgnosis acquisitions was counted as annual revenues rather than an adjustment in the purchase price. As the board’s Mar. 18 update noted, including RTI revenue with annual revenue amounts to “double counting.” Misclassifying RTI “significantly” increased the fund’s income in 2021 and 2022, according to the report. In fiscal 2019 and fiscal 2020, zero and 5.3% of deals had RTI periods that extended for more than one year. In fiscal 2021 and 2022, those numbers jumped to 43.9% and 60.0%.
RTI also came into play with the proposed sale of a portion of the portfolio to Hipgnosis Songs Capital, a joint venture of HSM and investment firm Blackstone. The catalog was presented to shareholders as having a net purchase price of $424.7 million (including RTI revenue of $15.3 million). With pro-forma annual revenue (PFAR) of $24.1 million, HSM assigned a 17.6x multiple to the proposed sale. But Shot Tower believes the catalog’s multiple should have been 14.9x based on higher annual revenue of $28 million and believed the net sale price should have been $416.7 million. Shareholders voted against the proposed sale in October.
In fiscal 2022, the investment advisor changed how it accounted for accrued revenues. The fund is required to make estimates on revenue earned in the period, rather than recognize revenue when the royalties are collected. A new approach, called “usage accruals,” calculated accruals “based on expected usage” rather than when revenues “are paid to, and processed by, collection societies, publishers and administrators.” Shot Tower noted the adoption of usage accruals occurred “at a time when RTI revenue was declining and the Fund could no longer raise capital for continued acquisitions.” In other words, a lack of fresh funding halted acquisitions and reduced the amount of RTI revenue added to annual revenue. Without the change, Shot Tower believes the fund “would have breached its lender covenants” and fiscal 2022 revenue would have been $36 million lower.
Accrued revenue also caused problems with PFAR, a non-IFRS metric meant to show investors organic growth excluding accruals and RTI. But Shot Tower found PFAR did indeed include accrual estimates of income expected to be included in the period, which “presents a picture of organic growth that is higher than growth suggested by the statement data,” according to the report. As such, Shot Tower warned investors not to rely on PFAR as a metric.
More issues arose in Shot Tower’s due diligence investigations into how individual catalogs were valued. The entire portfolio, which stood at $2.8 billion on Mar. 31, 2023, is instead worth $1.95 billion, according to the report — a difference of some $850 million. Given the transparency into the fund’s accounting practices, however, shareholders were unfazed by the demotion. On Thursday, Hipgnosis Song Fund’s share price jumped 8.3% to 69 pence, its highest closing price since Jan. 31 and 30.4% above its low point in 2024, 52.9 pence, set on Mar. 4. Whether the share price will improve further could depend on how shareholders view the board’s reaction to this report.
The IFPI’s annual figure for global recorded music revenue, announced Thursday (Mar. 21) for 2023, is the gold standard for tracking the health of the music business. It’s the number most often cited in corporate reports, market research and media articles. It’s also a bit outdated.
Traditionally, record labels have sold and streamed music, secured synch licenses and collected performance and neighboring rights royalties. But a modern record label also collects expanded rights revenues — from multi-right, 360-degree recording contracts — by taking a share of artists’ income from merchandise, touring and branding, among other sources. Those expanded rights revenues aren’t part of the IFPI’s annual revenue tally, but MIDiA Research includes that — and more — in its annual estimate.
MIDiA’s more fulsome figure for global recorded music revenue in 2023 was $35.1 billion, nearly 23% higher than the IFPI’s $28.6 billion. According to MIDiA, which tells Billboard its estimate came from publicly available information and interviews, expanded rights revenue totaled $3.5 billion in 2023.
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Some expanded rights revenue is in plain sight. Universal Music Group, for example, took in 706 million euros ($764 million) of merchandising revenue from Bravado, its wholly owned merchandise company, in 2023. For other companies, expanded rights are harder to pin down. Warner Music Group had $744 million of artist services and expanded-rights revenue in 2023. WMG’s expanded rights includes merchandising, VIP ticketing, fan clubs, concert promotion and management, according to its latest quarterly report.
Neither global revenue figure is right or wrong; they’re just different. The IFPI’s revenue figures reflect how labels monetize the rights associated with master recordings through sales, streaming and licensing. MIDiA’s revenue figure acknowledges the role of record labels has expanded far beyond monetization of masters.
Even the term “expanded rights” is problematic because it suggests merchandise and branding isn’t central to a record label’s mission. That isn’t necessarily the case in 2024. Consider the wave of K-pop companies expanding globally out of South Korea. HYBE, home of boy band BTS, is a hybrid record label, talent agency and management company with a slow, painstaking artist development process and a business model that captures far more than recorded music sales. In 2023, 55% of HYBE’s revenue came from sources other than recorded music. Concerts accounted for roughly 16% of revenue, merchandise and licensing were 15%, and ads and appearances were 7%. In fact, MIDiA estimated that Korean labels — including SM Entertainment, YG Entertainment, JYP Entertainment and Starship Entertainment — accounted for nearly 70% of non-major-label expanded rights revenue.
Another difference between the IFPI and MIDiA reports is the latter’s emphasis on the fast-growing independent artist community. Easy access to recording tools and distribution has gotten the everyday artist’s recordings on digital platforms around the world. MIDiA estimates there was $1.8 billion in “artist direct” revenue in 2023. Artist direct is a category of self-publishing, independent artists who use self-serve platforms like DistroKid and TuneCore, and MIDiA’s 2023 Creator Survey estimated there are 6.4 million artists in this segment. While 38% of these independent artists aspire to be full-time musicians, 36% do not expect to focus on music as a sole career. Deducting expanded rights and artist direct revenues from MIDiA’s $35.1 billion estimate narrows the difference between that and the IFPI’s $28.6 million figure.
Another difference between the two reports stems from MIDiA’s inclusion of revenue from production libraries in its synch revenue figure. Production music — which spans everything from beat marketplace BeatStars to online library Epidemic Sound — often exists outside of the record label system that traditionally develops and markets artists. Unlike artist-oriented music, production music is often nameless and faceless content that advertisers and other content creators license for its specific sound and style rather than artist name recognition. Lacking star power is the point, however: Production music libraries are increasingly popular amongst content creators in need of affordable background music.
Broader measurements will be crucial for tracking the recorded music business of the future. Record labels will pursue “superfans” through products and services that may not produce typical sales and streams. Artificial intelligence will create new licensing opportunities. Greater adoption of the K-pop model will change what it means to be a record label. When that happens broadly, $28.6 billion of annual revenue will be a starting point. Judging by MiDIA’s 2023 report, it already is.
In a New Year letter to staff in January, Warner Music Group CEO Robert Kyncl said the company needed to offer better services to the “middle class of artists,” an area being feverishly pursued by his major-label competitors, as well as a handful of independent distribution companies.
This week, WMG revealed it is interested in acquiring French company Believe, which owns a large label services business, digital distributor TuneCore, publishing administration service Sentric and a stable of record labels including Naïve, Nuclear Blast and Groove Attack. WMG said it is willing to pay “at least” 17 euros ($18.60) per share, a premium to the 15 euros ($16.41) per share offered by a consortium led by Believe CEO Denis Ladegaillerie and investment funds EQT and TCV. WMG’s bid values Believe at roughly 1.65 billion euros ($1.8 billion).
WMG’s interest in Believe doesn’t come as a surprise. The middle class of artists Kyncl referenced wants alternatives to traditional recording and publishing deals — and WMG needs the tools to give those artists what they want.
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While WMG can likely bring greater value to Believe’s assets as well, a Believe deal “solves a real stack problem for [WMG],” says Matt Pincus, founder and CEO of MUSIC, a venture with investment bank Liontree. A full “stack” — a tech term that refers to all the technologies and skills required for a project — would allow WMG to serve a more complete range of artists. Presently, WMG’s product offering is missing a distributor for self-published artists, says Pincus, that provides a level of artist services between a do-it-yourself distribution deal and a record label contract. That would augment WMG’s ADA, which distributes indie labels, and create a funnel to bring rising artists into WMG’s system.
Kyncl need only look at how his competitors are serving middle-class artists. Following the rise of iTunes, some independent distributors were eventually acquired by other major labels that wanted to distribute music on a greater scale. Sony Music has The Orchard, a digital distributor acquired in 2015, and AWAL, an artist-development company acquired from Kobalt in 2022. Universal Music Group acquired digital distributor Ingrooves in 2019 and folded it into its artist- and label-services division, Virgin Music Group in 2022. TuneCore, founded in 2006 to allow artists to access a new era of digital stores and services, was acquired by Believe in 2015.
The majors’ emphasis on label services is an acknowledgement that today’s marketplace is a mix of traditional artist deals, do-it-yourself independent artists and everything in-between — distribution deals, joint ventures, licensing deals, profit-sharing arrangements and releases from independent artists backed by a major’s label services provider. Budding superstars often want independence but need the majors’ global infrastructure and expertise. “What really makes a difference in this world is to do what [CEO] Brad [Navin] and the Orchard did with the Bad Bunny record [Un Verano Sin Ti],” says Pincus. “They really helped break that record worldwide.”
Believe would also provide WMG a publishing solution for those same independent artists. “When you consider that Believe also acquired Sentric publishing, this brings together master and publishing for many of these indie artists,” says Vickie Nauman of advisory firm CrossBorderWorks. “That also opens up opportunities for new synch licensing models that otherwise fragmented rights do not allow.”
Geography is another aspect of Believe’s business that could be attractive to WMG. Although the majority of Believe’s revenue comes from Europe, it has employees in more than 50 countries and has a presence in fast-growing markets such as Indian — where it invested in two record labels, Venus and Think Music — and Indonesia. Approximately 27% of Believe’s total revenue in the first nine months of 2023 came from Asia-Pacific and Africa, a 17.4% increase from the prior-year period.
Developing markets have great potential for a couple reasons, Kyncl explained Wednesday at the Morgan Stanley Technology, Media and Telecom 2024 conference. In the Middle East, for example, markets that have young populations, an underdeveloped subscription market and lack collection societies “will see quite a lot of value appreciation.” Developing markets are increasingly becoming music exporters, and Kyncl believes that provides WMG with an arbitrage opportunity. “Let’s say if you have Indonesian content that’s traveling to America,” he said. “It’s a smart place to put money because it’s [going] from a low ARPU country to high ARPU streams [in a developed market].”
An acquisition is hardly a done deal, though. To date, WMG has only expressed an interest in Believe. WMG is playing catch-up, too: The consortium attempting to take Believe private has lined up blocks representing nearly 72% of share capital — enough to “prevent a competing bidder from acquiring control,” according to Believe’s ad-hoc committee — although WMG’s higher bid could change that. An acquisition would require regulatory approval, too, and there is likely to be pushback from music companies and trade associations such as the UK-based Association of Independent Music against further industry consolidation.
But, setting aside the potential roadblocks, WMG would be a good fit for Believe. Sony Music and UMG are both larger than WMG, already have Believe-like companies and would thus face more regulatory scrutiny. The 1.65 billion-euros ($1.8 billion) price tag is in what astronomers call the “Goldilocks zone” for habitable planets’ distance to their suns: It’s too expensive for many independent companies but affordable enough for WMG.
The breakdown in licensing talks between Universal Music Group (UMG) and TikTok affects far more than Universal recording artists and songwriters.
Every now and then, a music company pulls its recorded music catalog, publishing catalog or both from a digital service provider after licensing talks break down — Warner Music Group did this with YouTube in 2008, for example. It happened again starting Feb. 1 when UMG started pulling its recordings from TikTok after the two companies couldn’t come to an agreement on a new licensing deal.
The licensing breakdown first affected artists signed to UMG record labels. Take the Q4 Hot 100, a list of the top 100 tracks in the fourth quarter. UMG’s various record labels — including Republic Records and Interscope Records — released 41 of the 100 tracks, among them Taylor Swift’s “Cruel Summer,” Doja Cat’s “Paint the Town Red” and Brenda Lee’s “Rockin’ Around the Christmas Tree.”
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On Tuesday (Feb. 27), TikTok began removing compositions part-owned by Universal Music Publishing Group (UMPG). On the publishing side, UMG has an interest in 40 of the Q4 2023 Hot 100 tracks, such as SZA’s “Snooze” (a track released by Sony’s RCA Records), Jack Harlow’s “Lovin on Me” (a track released by Warner Music Group’s Atlantic Records) and Usher’s “Good Good” (a track released by gamma, an indie newcomer).
Since every recording involves two copyrights — one for the master recording, one for the composition — the damage of UMG’s decision to pull its repertoire from TikTok is larger yet. Counting both recorded music and music publishing, UMG has an ownership interest in 61 of the Q4 2023 Hot 100 tracks. Twenty of those 61 tracks have a UMG publishing interest but were not released by a UMG-owned record label. Another 20 of those tracks have a UMG publishing interest and were released by a UMG record label. UMG does not have a publishing interest in the remaining 21 of those tracks that were released by a UMG record label.
That’s far larger than UMG’s market share in either recorded music or publishing. UMG had a 39.4% share of U.S. recorded music by distribution in 2023 (a 29.4% share by ownership) and a 15.8% publisher’s market share of the Hot 100 in the fourth quarter of 2023.
Ownership interest, not market share, gets to the true impact of the UMG-TikTok impasse. Today’s popular songs have multiple co-writers, each of whom might have a different music publisher. When a track includes a sample or interpolation of another composition, those works’ songwriters get credits on the new work, too. The 41 tracks on the Hot 100 in which UMG has a publishing interest have an average of 5.5 songwriters. Eight of those 41 tracks had 8 or more co-writers; four of them had 10 or more co-writers. Of the 41 tracks with UMG ownership interest, only Irving Berlin’s 83-year-old “White Christmas” was written by one person.
The more songwriters who are on a single track, the higher the odds that any one music publisher can remove a track during a licensing dispute. An example of this complexity is “What It Is (Block Boy)” by Doechii featuring Kodak Black, released by UMG-owned Capitol Records (the track entered the Hot 100 in May thanks to success on TikTok). The recording includes a sample of TLC’s 1999 hit “No Scrubs” and interpolates a hook from “Some Cut” by Lil Scrappy and Trillville, which reached No. 15 on the Hot 100 in 2005. “What It Is (Block Boy)” has 16 co-writers, including the 4 co-writers of “No Scrubs” and 6 co-writers of “Some Cut.”
A wide swatch of the music publishing business is represented in “What It Is (Block Boy).” The Music Licensing Collective’s public database lists 7 different publishers attached to the composition: UMPG, Sony/ATV, Warner Chappell Music, Disney, BMG, Concord and Reservoir Media. UMPG’s 3% collection share is the smallest of the seven publishers.
To be sure, the Hot 100 from the fourth quarter of 2023 isn’t a perfect reflection of what is currently most popular — or would be popular if not for the licensing impasse — at TikTok. The TikTok Billboard 50 shows the platform’s most popular music is a mix of Hot 100 staples (“Lovin On Me”) and indie music that otherwise wouldn’t be seen on a Billboard chart (Aphex Twin’s “QKThr”).
This headline-grabbing development isn’t a story of one music company against one tech company; labels and publishers that renewed their licensing deals with TikTok have unwillingly joined UMG’s battle with the platform. UMG’s inability to reach a deal with TikTok impacts every major label group and likely touches every music publisher of note.
If 2023 was the year of Taylor Swift, 2024 could be the year of the superfan.
While Swift’s The Eras Tour proved that music fans are willing to spend large sums and travel far to see their favorite artist, for years promoters have improved their revenues by selling premium experiences to concerts and festivals. Whether it’s dynamically priced seats close to the stage, VIP access or a revamped cocktail offering, there are more options for fans willing to pay more to enjoy the sights, sounds and hospitality of live music. Expect an even greater emphasis on this in the new year.
The focus on superfans isn’t confined to live music. The CEOs of Universal Music Group and Warner Music Group both started the year by highlighting a desire to better serve superfans. In the recent past, that may have meant NFTs and newfangled web3 offerings. Today, superfans buy multiple copies of albums (both LP and CD) and merchandise, often directly from the artist’s web store. Streaming services could soon be getting into the game, too, by offering “superfan clubs,” Spotify CEO Daniel Ek suggested in a Jan. 24 open letter.
But live music has a unique ability to upcharge for premium experiences — and add to companies’ bottom lines in the process. Tickets for superstar acts have proven to have remarkably resistant to price increases. In 2023, the average price of a Taylor Swift concert ticket on Stubhub was nearly $1,100. Drake, Morgan Wallen and Beyonce prices averaged about $450, $390 and $324, respectively.
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Emphasis on superfans makes sense in an era of higher priced primary tickets that capture value that would otherwise go the secondary market. Artists are increasingly willing to charge more up front rather than lose money to re-sellers. Still, the typical secondary ticket is still almost twice the price of a primary ticket, Live Nation president and COO Joe Berchtold said during the company’s earnings call on Thursday. Currently, about 9% of Live Nation’s amphitheater business comes from premium offerings such as VIP boxes, added president and CEO Michael Rapino. He thinks that should be 30% to 35% instead. To get those numbers, Live Nation is upgrading the concert experience.
This year, Live Nation plans to spend $300 million of its $540 million of capital expenditures on revenue-generating projects. The top four projects — including Foro Sol in Mexico City and Northwell Health at Jones Beach on Long Island — will account for $150 million of the $300 million. The other half includes several projects in the tens of millions of dollars such as VIP clubs, viewing decks, rock boxes and new bar designs, said Berchtold. Those “tactical improvements,” as he called them, can produce a return on investment in the 40–50% range.
Putting more emphasis on revenue-generating enhancements will boost the bottom line in 2024. Following a stadium-heavy touring slate in 2023, Live Nation will put more tours in owned and operated amphitheaters and arenas that allow the company to capture fan spending on parking and hospitality. Stadium shows have higher average ticket prices, Rapino explained, but amphitheater and arena shows produce higher per-person spending. In other words, the venues are smaller but have better margins for the promoter. As a result, Live Nation expects higher adjusted operating income in the second and third quarters. “We’re going to have a fabulous year,” said Rapino.
Dynamic pricing — seats closer to the stage are priced far above seats further away — is just getting started outside of the United States and presents “a great growth opportunity” as it expands from Europe to South America and Australia, said Rapino. There’s room for growth in the United States, too, as dynamic pricing extends beyond the top artists and into amphitheaters and other concerts. “We still think that’s a multi-year opportunity to continue to grow our top line plus [our] bottom line,” he said.
The price-conscious fan isn’t forgotten as concerts increasingly cater to big spenders. Live Nation offers a lawn pass for amphitheaters called Lawnie Pass — the 2024 edition costs $239 each and offers lawn admission to multiple shows at select amphitheaters — and sold an unlimited pass for select clubs called Club Pass in 2022. And company executives have repeatedly stated that a benefit of dynamic pricing is that higher prices for in-demand seats allow for lower prices for seats further from the stage.
But from live music to music streaming, companies are searching for ways to beef up their margins. As such, expect the market to continue segmenting into higher-value and lower-value fans.