The Ledger
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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.
If rock and roll were dead, it would be bad news for the Marshall Group, the Swedish company that manufactures its namesake guitar amplifier. But the company behind the amp doesn’t think rock is anywhere close to expiring — and its most recent earnings result backs that up.
In fact, the Marshall Group doesn’t believe rock is confined to a music genre. “We think Marshall represents the rock and roll attitude,” says CEO Jeremy de Maillard. “We don’t think this is about the music genre, we think this is about attitude.”
Since last year, Marshall, which was founded in the United Kingdom, has been running out of a country better known for Spotify and pop music: Sweden. In 2023, Stockholm-based Zound Industries, a maker of headphones and wireless speakers, acquired Marshall Amplification and took the name The Marshall Group. The Marshall family retained a 24% stake in the company and family heirs Terry and Victoria Marshall each have a seat on the board of directors. Altor Funds came aboard in September as a minority investor.
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De Maillard calls it “a very complimentary acquisition” that retained “almost everyone” from both companies other than “a couple changes at the very top,” as the two companies’ management structures were integrated into one group. And Zound and Marshall had a history well before the acquisition: Zound had collaborated with Marshall for 14 years and put the Marshall brand on its headphones and speakers. “It’s kind of like we were dating, and now we’re married,” de Maillard adds.
The marriage appears to be off to a good start. Last year, the Marshall Group’s revenue increased 29% to 4 billion kroner ($380 million) and its adjusted operating profit improved 77% to 757 million kroner ($72 million), the company announced Thursday (Feb. 14). Pro-forma revenue — which includes Marshall Amplification and its subsidiaries for the full year — grew 18% year over year. Although the company is privately held, it releases select financial information to the public: “We believe that having the right rigor and financial reporting that is expected of a public company is good behavior and makes us a stronger company,” explains de Maillard.
A quarter of the Marshall Group’s sales come from headphones while 70% is derived from speakers and 5% come from amplifiers, according to de Maillard. The Marshall brand accounts for 98% of the Marshall Group’s revenue, with the remaining 2% coming from Urbanears and adidas headphones.
With the merger behind him, de Maillard’s plan is to invest in the Marshall brand and launch new products to increase its share of the $100 billion music technology market that currently stands at less than 1%. In the last six months, the Marshall Group has invested in Marshall’s U.K. manufacturing facility, which produces hand-made valve amps and houses a recording studio. This year, the Marshall Group will begin to offer its entire portfolio at a revamped Marshall website to build a stronger direct-to-consumer sales channel.
The company will continue to push its iconic hand-made valve amplifiers but will step up its strategy with its digital amplifiers and digital tools, says de Maillard. Digital amps have a variety of uses, he explains; the smaller amps are good for practicing and rehearsing in small spaces, for example, and don’t require the muscle or energy requirements of a larger valve amplifier. Last year, the Marshall Group launched the Studio JTM Amplifier and the Middleton, a portable speaker, while also debuting wireless noise-canceling headphones called the Motif II A.N.C. More products are set to launch in 2024, de Maillard says.
“It’s one of the most known and loved brands in that space that has over 60 years of incredible legacy,” says de Maillard. “We see our responsibility now as the Marshall Group to write the next chapter of that and to build the next 60 years.”
What’s the best way to become a superstar? First, become a successful mainstream artist.
That’s one of the key takeaways from the inaugural annual report from music data company Chartmetric.
Of the roughly 710,000 new artists added to Chartmetric’s platform in 2023 that placed into one of six career stages — ranging from “undiscovered” to “legendary,” only a small fraction of a percent finished the year amongst the top 35,000 artists. Instead, most new artists — 87.6% of them — fell into the “undiscovered” category, while 12.3% of them reached “developing,” one category above.
The upper echelons were incredibly difficult for new artists to reach. Just 0.05% of new artists — about 355 — finished in the mid-level category or higher — meaning they ranked in the top 35,000 on the platform. Chartmetric created its proprietary Career Stages categories by taking into account artists’ performance across streaming services, social media platforms and radio airplay.
But wait, the numbers are even more imposing! There were actually 1.3 million new artists added to Chartmetric in 2023, but only 710,000 of them were actually assigned a career stage. Chartmetric told Billboard it does not assign every artist a career stage to limit duplicates, remove non-artist profiles and filter out artists with limited data.
Chartmetric’s statistics throw cold water on the notion that social media and do-it-yourself distribution can help any artist reach the levels of success previously attainable only to artists on record labels. Those rare instances grab headlines and feed the narrative that technology has eroded traditional gatekeepers’ powers and democratized access to audiences. And while it’s true that artists such as Armani White and Jxdn rode TikTok fame to major-label record deals, those success stories are outliers. Anonymity, or something close to it, is the norm.
Economic mobility is far from impossible, though. Because Chartmetric tracks so many artists, even incredibly low odds of success can result in a meaningful number of artists moving up the ranks. The 355 new artists that broke into or surpassed the mid-tier level is a big enough number of breakthrough new artists to feed a system of record labels and artist-services companies that must constantly seek out young candidates to become future stars.
Still, the challenging math underpinning success in music makes sense. Getting heard is difficult when audiences live under a constant deluge of listening options. A massive amount of music is released every day — more than 110,000 on average every day in 2023, according to Luminate. Chartmetric added 17.2 million new tracks to its database in 2023 — 7.7 million were released last year — and has 103.9 million tracks in its system.
To evaluate career stage development, Chartmetric took a sample of artists who had reached a career stage on June 11. The vast majority of artists fell into the undiscovered category. In fact, undiscovered artists made up all but 150,000 of the roughly 1.5 million artists who had been given any career stage category on June 11.
Rather than take huge jumps in career stages, most artists who break out to superstar status come from the mainstream, not from the mid-level or developing categories. More than half — 54.2% — of mid-level artists (No. 12,000 to No. 35,000) rose to the mainstream category (No. 1,500 to No. 12,000), the strongest relationship between any two career stages, says Chartmetric.
Put another way, getting to the upper echelon usually means you’ve already had considerable success. This is likely to result of “a steady, consistent rise to the top,” Chartmetric opines, rather than overnight fame.
This path to success makes sense given the advantageous starting point of most major label artists. Rare is the artist plucked from obscurity and developed into a chart-topping success from scratch. In most cases, artists build a career independently and prove themselves — whether through a TikTok hit or ticket sales — before signing with a record label. The bidding war comes after, not before, an artist finds an audience. Undiscovered artists are far riskier propositions for record labels than mid-tier artists.
There is some economic mobility for less successful careers — but not much. About 12% of developing artists were able to rise to mid-level status (No. 12,000 to No. 35,000). Far fewer jumped all the way to the upper echelons: Just 0.25% of developing artists jumped mid-level status and reached mainstream (No. 1,500 to No. 12,000) or superstar (top 1,500).
Just as economic mobility characterizes the “American dream,” the idea that a person can strive to achieve a better life, the great hope of the modern music business is that artists can make a living on streaming royalties. Whether the system is fair is under debate. Spotify, Deezer and SoundCloud have changed their royalty calculations to favor professional and developing artists over undeveloped artists and non-music content. In the European Union, lawmakers are pressing music streaming services to improve payouts to artists.
Chartmetric’s report doesn’t dispel any notions that the odds are stacked against new artists hoping to break into the mainstream. Success is possible, but it’s rare.
At the beginning of 2024, the always-changing music business is going through rapid transformation unlike anything in the last decade. How music companies organize themselves is changing. How royalties are calculated and paid is changing. How companies engage with fans is changing. And investors have different expectations of public companies — more focus on margins, less obsession with growth.
Music companies’ earnings results for the fourth quarter of 2023 will provide insights into how companies have performed and, more importantly, what they expect to do in the future. Only one company, SiriusXM, has announced to date. Next week’s earnings releases include Spotify (Tuesday, Feb. 6), Reservoir Media (Wednesday, Feb. 7) and Warner Music Group (Thursday, Feb. 8). Universal Music Group (UMG) announces earnings on Feb. 28. Here are some things to watch for in upcoming earnings calls.
The scope of layoffs
In October, UMG executives primed investors for cost-cutting measures that would improve margins and allow for investments in growth opportunities. The result would be hundreds of layoffs, according to a Jan. 12 Bloomberg report. On Thursday, UMG revealed some details of a bi-coastal label group restructuring. But what’s missing, so far, are details on the number of layoffs and the cost savings UMG expects to get from a restructuring. UMG’s fourth-quarter earnings release on Feb. 28 will be an opportunity for analysts to ask the company to give an update on its restructuring plans. As Billboard noted last week, the music industry is seeing widespread layoffs despite continued streaming growth. Warner Music Group (WMG), Downtown Music Holdings and BMG cut jobs in 2023. Digital music companies have shrunk their head counts, too: Spotify, Amazon Music, SoundCloud, Tidal and Bandcamp went through downsizings of various sizes.
More troubles in TikTok-land?
When UMG failed to renew its licensing contract with TikTok, it made licensing to the social video platform a major topic of conversation for upcoming earnings calls. Analysts and investors should want to know how a company’s negotiations with TikTok are proceeding and whether to expect an interruption if the two sides cannot reach an agreement. TikTok and WMG reached an agreement in July 2023, but investors may want progress reports from other public companies — Reservoir Media, Believe, Sony Music — about their licensing talks.
UMG’s decision is not without precedent: In 2008 and 2009, WMG pulled its catalog from YouTube for nine months while the two companies’ licensing negotiations were at an impasse. In 2011, Google launched an audio music streaming service, Music Beta by Google, without licenses from both Sony Music Entertainment (SME) and WMG. When Google added MP3s to its Google Music service later that year, the SME and WMG catalogs were initially absent.
The direct financial hit to UMG will be minimal since TikTok accounts for 1% of the company’s revenue, UMG stated in an open letter about the licensing talks. But because TikTok is an important promotional vehicle and a popular place to discover music, the indirect financial hit is more substantial. Investors always want to know about direct dollar impacts of a company’s moves, and they should want to understand the downsides of leaving a hit-making social platform.
How much have price increases mattered?
Music subscription prices didn’t budge for over a decade before succumbing to change in 2022 and 2023. The big fish was Spotify, which finally raised prices in the United States and other major markets in July. A higher price creates a multiplier effect on top of existing subscriber growth and will augment what would have otherwise been record quarterly revenues. The gains should come without an increase in churn: Spotify CFO Paul Vogel said during an Oct. 27 earnings call that Spotify didn’t lose any subscribers in the third quarter due to the price increase.
For record labels and publishers, a 10% price increase atop year-over-year subscriber growth stands to accelerate revenue growth. Guggenheim analysts said in a recent note to investors that they expect price increases at Spotify, YouTube and Deezer to raise UMG’s subscription revenue growth to 14.8% in the fourth quarter from 13.0% in the third quarter.
The state of the advertising business
While the subscription market has been strong, the ad-supported side of the business has struggled to keep chase. Through the first three quarters, Spotify’s ad-supported streaming revenue increased 14.9% year over year. That’s better than the 11.4% improvement in subscription revenue but well below the 22.2% and 62.1% gains in ad revenue in full-year 2022 and 2021, respectively.
Broadcast radio has fared even worse. Companies such as iHeartMedia, Cumulus Media and Audacy have blamed a slowdown in national broadcast advertising on some disappointing earnings in recent quarters.
SiriusXM provided the latest clue about broadcast advertising. “SiriusXM’s advertising revenue remains challenged,” CFO Tom Barry said during Thursday’s earnings call, “which we believe is a product of a tough broadcast advertising market.” Elsewhere, however, SiriusXM’s digital advertising improved versus 2022: Pandora had “strong growth” in its podcasting and programmatic advertising businesses, added Barry.
Some positive news in recent days shows advertising — perhaps not for broadcast businesses — is rebounding. U.S. ad spending in November was up 25% year over year, according to MediaRadar, an advertising intelligence company. The number of advertisers declined 8%, however, suggesting existing advertisers were ramping up spending.
More good news came from major ad-driven tech companies. Google’s advertising revenue in the fourth quarter increased 11% from the prior-year period, the company announced Wednesday, up from year-over-year improvements of 3.3% and 9.5% in the second and third quarters, respectively. Meta’s revenue grew 25% and its ad impressions rose 28% in the fourth quarter, the company announced Thursday.
The mission to reach superfans
Major music companies are suddenly taking a greater interest in serving superfans, those heavy-spending consumers that drive the concert and merchandise businesses but have less effect in a world of flat-rate, all-you-can-eat music subscription services. The 80-20 rule says 80% of a company’s business comes from 20% of its consumers. With music streaming, however, a $10.99-per-month service doesn’t capture a superfan’s willingness to pay more for additional value. Spotify hinted that “superfan clubs” were in the works in an announcement about the Digital Markets Act in the European Union. UMG CEO Lucian Grainge’s letter to staff in January said the company will focus on “strengthening the artist-fan relationship through superfan experiences and products.”
The problem isn’t that consumers won’t pay more money to engage with their favorite artists. The problem is no platforms have found a winning formula. Numerous previous attempts to court superfans fizzled. Drip, a platform that allowed artists to provide fans with music and other items for a recurring monthly fee, lasted from 2011 to 2016 (it relaunched a Kickstarter in 2017 but shut down in 2018). PledgeMusic shut down in 2019 amidst financial problems and allegations of improprieties. Most recently, startups’ attempts to use Web3 technologies to build superfan communities ran headfirst into the public’s sudden distrust of cryptocurrency and disinterest in NFTs. Given Spotify’s market size and resources, though, the company could make a real impact.
We live in the age of unparalleled music discovery and easy and cheap, often free, access to the world’s music. Listeners have never had it better. Luminate, the company that tracks music streaming and sales globally, said in its 2023 year-end report that its database of ISRCs — international sound recording codes, the identifiers given to unique recordings that allow them to collect royalties — reached 184 million in 2023.
But most of those songs barely register with listeners. Of those 184 million tracks, 60% — 109.5 million — weren’t streamed enough times to pay for a cup of coffee. About 16% — 30 million tracks — were streamed from 101 to 1,000 times. Another 18% — 33.9 million — were only streamed up to 10 times.
For companies that must handle the deluge of new music, the more alarming statistic is the number of tracks that went completely ignored. A quarter of those 184 million tracks —45.6 million — were not played even once, according to Luminate. That’s 45.6 million tracks with official ISRCs, made available through one of many digital distributors and taking up server space, that didn’t receive a single play last year. Not too long ago, 45.6 million was the entirety of a streaming service’s licensed catalog!
A few decades ago, the promise of streaming — as popularized by the 2006 book The Long Tail — was the ability for niche music to find an audience. No longer faced with the limited shelf space of a brick-and-mortar retailer, consumers could explore deep catalogs and find music they loved rather than buy whatever was readily available.
The economics of streaming is what helps more music get heard. On a streaming service, the cost of listening to one more song is zero. At most, it’s the value of the time spent listening to the song. With downloads, the cost of enjoying one more song is 99 cents (or $1.29 for the more popular tracks). The all-you-can-eat streaming service’s flat fee means people don’t have to pay more to consume more. Ad-supported streaming doesn’t even have a flat fee — the cost of listening is the cost of waiting through an advertisement.
The low cost of streaming, although great for music discovery and falling into musical rabbit holes, has never been a guarantee a recording will find an audience. In written testimony in 2016 to the Copyright Royalty Board, Will Page, then Spotify’s director of economics, noted that in 2013, 20% of Spotify’s 20 million-track catalog received no streams. Spotify “is not just increasing the sheer number of tracks available to the public,” Page wrote, “it’s ensuring that music can actually be heard.”
Well, not everything was getting heard. One-fifth of a catalog going untouched is a large void, but it was an improvement: Page also noted that a 2008 U.K. study found that over 80% of digital tracks went unsold. Just because digital distribution and inexpensive recording tools lowered the barriers to entry didn’t mean people would buy the music. Still, streaming allowed more music to get heard. But as the amount of music released annually exploded, the number of unheard tracks deepened dramatically. In 2013, when Spotify’s catalog had 20 million tracks, only 4 million didn’t get a single stream. Last year, Luminate counted 11 times that many tracks across all streaming services that didn’t receive one stream.
Streaming platforms, for all their playlists and ability to personalize the listening experience, can’t draw attention to every new recording. The better business decision appears to be to guide listeners to music they’ll most likely enjoy. Playlists are popular places to find new music, but the most popular ones cover only a small fraction of the more popular new releases. According to Chartmetric data shared with Billboard, there were 5,256 unique tracks on Spotify’s New Music Friday playlist last year (it currently has 4.8 million followers). Chartmetric tracked about 8.4 million tracks released in 2023 on Spotify last year (it doesn’t track every track uploaded to the service). That means 0.06% of those new releases found their way onto New Music Friday. A new track had an even lower odds of appearing on Spotify’s Today’s Top Hits playlist (34.6 million followers), which had only 201 unique tracks in 2023.
Of course, Spotify and other streaming platforms have far more than those two playlists, as well as personalization features and algorithm-driven tools to introduce people to music. And there is some evidence listeners are branching out well beyond the most popular tracks.
According to Luminate data shared with Billboard, the top 10,000 U.S. tracks’ share of total on-demand audio streams fell from 50.4% in 2018 to 40.3% in 2023. By Billboard‘s estimate, as streaming exploded in those six years, the 10.1 percentage-point swing equates to 377 billion on-demand audio streams that migrated from the top 10,000 tracks to less popular music. That’s a collective win for today’s do-it-yourself artists, hobbyists, bedroom producers, aspiring professionals and working-class musicians — and a more modest win for any single artist’s royalty income.
But 38 million new tracks per year seems to have broken the system. Those services reach far more users today than seven years ago. People have shifted their listening time from owned media (CDs, downloads) and radio to streaming. And yet with more streamers and more time spent streaming, a quarter of all commercially available tracks received zero streams in 2023.
There are financial implications to this sea of unheard and seldom-heard music. The marginal cost of server space is small, but the cost of handling music at this scale isn’t zero. Staff must be hired to build and maintain systems that ingest tracks, manage assets and handle royalty accounting. Cloud storage must be obtained for tens of millions of tracks with little to no economic value. If a quarter of the products aren’t selling because supply and demand are mismatched, that’s a big deadweight loss to the industry. This hasn’t been lost on labels, distributors and streaming platforms, of course. One solution has been to adopt new royalty calculations that set a minimum threshold of streams to receive royalty payouts.
None of this is a surprise. ISRCs are inexpensive for an artist to obtain, and it’s never been easier to record a song and upload it to a digital platform. There will continue to be a mismatch between the supply of music and listeners’ demand for that amount of music. The question is what the music industry wants to do about it.
The modern music industry may run on subscriptions — streaming, satellite radio, Peloton, et al. — but it still depends greatly on the advertising business. Indeed, non-subscription-based streaming, along with social media and broadcast radio, continues to produce important royalties and licensing income for record labels and music publishers.
Unfortunately, 2023 was a lackluster year for advertising-based businesses, as brands held back due to economic pressures. The slowdown extended into the fourth quarter: Trade Desk, a digital advertising platform, warned in November that expectations for revenue growth in 2024 “may be premature.”
So, can people expect improvements in 2024? According to a new report by Mediaocean, the outlook is mixed: While some advertising-based businesses can expect more demand this year, others may not witness a rebound.
In November, Mediaocean surveyed nearly 1,100 marketers, ad agencies, media companies and tech platforms, among other companies, about how they expect to spend on various types of advertising in the coming year. The survey revealed that advertising dollars will continue to flee from legacy media — namely print and television — in favor of social media, digital display and video and connected TVs.
Social platforms such as TikTok top the list of predicted ad spending in 2024: 69% of respondents said they expect to increase their spend in 2024 on social media, while only 28% said they will maintain social media spending and just 3% plan to decrease spending. Social media has taken the biggest jump in the last two years. When surveyed at the end of 2021, 56% of respondents — 13 percentage points less than the latest survey — said they expected to spend more on social platforms, while the percentage of people who planned to maintain spending in 2022 was 10 percentage points higher at 38%.
Digital display and video advertising showed a similar breakdown to social media: 65% of respondents expect to increase, 30% plan to maintain and 5% expect to decrease their spending. Most respondents also expect to increase their spending for connected TV and search. These categories were little changed from the prior year.
Radio and audio advertising will fare about the same as last year: 24% of respondents expect to increase spending on radio and audio in 2024, down from 25% in 2023, while 54% of respondents plan to maintain their spending levels and 22% expect to decrease their spending. Going into 2023, 51% of respondents expected to maintain radio and audio spending and 24% planned to spend less. However, those numbers mark a distinct downward trend from 2022, when 61% of respondents said they expected to maintain radio ad spending while just 15% expected a reduction.
Given that data, radio companies that have both digital and broadcast businesses should fare better than those without a digital component – and they may already be seeing a recovery. Speaking at the Wells Fargo TMT Summit on November 29, iHeartMedia chairman and CEO Bob Pittman said the company’s digital advertising “seems to have already recovered” and that radio advertising will recover when brands see an economic recovery on the horizon. “Advertising tends to be a leading indicator,” he added. The same trend can be seen, albeit in a more negative direction, at Audacy, which faces a possible bankruptcy caused in part by lagging broadcast revenue: In the third quarter of 2023, spot and network advertising was down 8.9% year over year while digital revenue rose 3.4%.
TV advertising has taken the biggest fall over the last two years. Going into 2022, only 15% of respondents expected to spend less on local TV and 13% planned to spend less on national TV. Two years later, 33% expect to spend less on local TV and 27% expect to reduce spending on national TV.
Although audio streaming has eaten into the time people spend listening to radio, about 90% of Americans still listen to the radio each week. The same can’t be said for video, however, as video streaming has sharply reduced the audience for cable television. In the third quarter, the penetration rate of traditional pay TV — cable, telco and satellite — fell to 54.8% after those companies lost nearly 2 million subscribers, according to MoffettNathanson. That marks the lowest penetration rate since 1989.
That can be chalked up to the swift rise of video streaming platforms. In the third quarter, YouTube TV surpassed satellite company Dish Network to become the fourth-largest multi-channel video programming distributor. MoffetNathanson believes YouTube TV could surpass satellite company DirecTV for third place in less than a year.
The concert business has had a record year in 2023 — tours by Taylor Swift and Beyoncé were pop culture moments, festivals roared back to life and consumers’ splurging on tickets seemed to defy gravity. There’s likely more good news on the horizon, too. By all forecasts, next year is shaping up for continued success, even as consumers still feel pinched by inflation.
Among the big names to announce stadium tours next year are The Rolling Stones, Foo Fighters, Green Day and a pairing of Journey and Def Leppard. Chris Stapleton, Zach Bryan and Luke Combs will hit both stadiums and arenas. Drake, Bad Bunny, Thirty Seconds to Mars, Hootie & the Blowfish, New Kids on the Block, Alanis Morissette and The Trilogy Tour featuring Enrique Iglesias, Ricky Martin and Pitbull will play arenas and amphitheaters. Taylor Swift’s The Eras Tour continues in 2024, too, with 85 shows announced for Asia, Australia and North America.
Advanced ticket sales suggest consumers remain eager to see their favorite artists perform live. Through mid-October, Live Nation’s event-related deferred revenue — from ticket sales to events that had not yet occurred — was up 39% year over year, according to the company’s third-quarter earnings release.
AEG Presents, the second-largest promoter, is “feeling really positive” about 2024 tours across all venue sizes and genres, says Rich Schaefer, president of global touring. “I think people are discovering new artists and want to see big shows — and they’re willing to pay for it.” They’re buying well in advance, too: AEG put tickets on sale for 76 Zach Bryan shows in 2024 — some won’t happen until December — and has “largely sold everything out,” says Schaeffer. “That artist especially has a crazy connection with his fans. They’ve seen videos of what his shows are like, and I think everybody wants to experience it.”
Those big tours — and thousands of others — are counting on consumers to continue to open their wallets despite continued high prices for staples and living expenses, rising debt delinquencies and Americans’ credit card debt reaching a record level in the third quarter. The holidays are presenting mixed signals: Black Friday spending was up 2.5% compared to 2022, but numerous surveys have found consumers plan to spend less on gifts this year.
Consumers may feel beleaguered, but they continue to spend to see their favorite artists perform live. “I have weekly booking calls with the over 40 presidents around the world and we talk booking clubs up to stadiums and festivals, and we have not seen anything taper off in any sense,” said Live Nation CEO Michael Rapino during the company’s Nov. 2 earnings call. The company is “not seeing any pullback in any way” in consumer demand regardless of the region or venue size, he added.
A big question, though, is whether consumers will be in a spending mood throughout 2024. A new Goldman Sachs economic outlook report says the U.S. economy today is better than was expected a year ago, inflation will continue to subside and the likelihood of a recession in 2024 is “limited.” The latest data from the University of Michigan is encouraging: U.S. consumer sentiment soared in December and people’s expectations for year-ahead inflation dropped to 3.1% from 4.5% last month.
Whatever uncertainties exist — including falling savings rates and weakening credit conditions — have not materialized in ticket sales thus far. “We certainly see the headlines [about macroeconomic conditions], but it’s not flowing through to numbers that we can see,” Lawrence Fey, CFO of secondary ticket marketplace Vivid Seats, said during a Nov. 7 earnings call.
One could simply look at who’s touring in 2024 to get a sense of where ticket buyers are thinking. “You got The Stones going on the road in parts in North America,” says Doug Arthur of Huber Research Partners. “They’re always a pretty big draw. The Stones are pretty savvy historically about touring when they think the economics support it.”
Consumers’ willingness to spend increasing amounts on live music isn’t a new trend — although some of 2023’s record-setting box office numbers appear to be the result of music fans may be clamoring for live events in after suffering through pandemic-era restrictions. The concert industry has benefited from a lasting shift among consumers from goods to experiences over the last 10 to 15 years, says Brandon Ross, an analyst with LightShed Partners.
This year’s boffo box office numbers weren’t outliers, and Ross expects to see “outsized performance on a global basis” in 2024. “There has been a year-and-a-half long concern for a broader pullback in consumer spending,” says Ross. “I don’t think will not impact growth, but I think there’s substantial tailwind supporting this industry.”
Those tailwinds probably won’t be strong enough for next year’s touring business to duplicate 2023’s stellar growth rate — but no one seems to be expecting that. “I don’t think you’re talking about another up 30% type of year, and I don’t think [Live Nation is] talking about that either,” says Arthur. “But can the concert revenues be up high single digits between volume, fans per show, price per ticket and spending per fan? Yeah, I think that’s not unreasonable at all.”
Artists and promoters will continue to encounter high costs in 2024 — labor, catering, buses and staging are stretched thin with a high number of big tours on the road. That’ll continue to push ticket prices up. Even so, AEG hasn’t seen resistance to higher prices, says Schaefer. “There’s very few instances where we think that pricing is responsible for tickets not selling.”
Spotify’s announcement this week that it was laying off 17% of its global workforce surprised a music business enjoying a renaissance. After all, Spotify ignited the subscription-streaming boom that saved the industry. And while the companies that depend on the online advertising business go through booms and busts — think of Meta cutting 21,000 jobs since 2022 — music business jobs have been relatively safe.
Spotify’s decision to eliminate about 1,500 full-time staffers shouldn’t have come as a surprise, though. As CEO Daniel Ek put it in a letter announcing the layoffs, “Today, we still have too many people dedicated to supporting work and even doing work around the work rather than contributing to opportunities with real impact.”
Over a decade and a half, Spotify pioneered a new model for music subscriptions by prioritizing growth over profit. While on-demand video streaming services such as Netflix frequently raised prices, Spotify left most of its prices unchanged until July. Digital music platforms have a notoriously tricky path to profitability, but Spotify’s share price soared thanks to a pandemic-era boost to streaming companies as well as high expectations for its nascent podcasting business. By February 2021, as Spotify poured money into acquisitions and pricey podcasting content, the stock was trading at $364.59 per share, valuing the company at roughly $71 billion.
By 2022, however, Spotify’s investors had run out of patience. The stock was trading at $110 on June 8 when Ek and CFO Paul Vogel shared their ambitious plan at the company’s Investor Day presentation: $100 billion in annual revenue, 40% gross margins and 20% operating margins. To get there, Spotify would continue to scale its podcasting business and lean on its audio content acquisitions — The Ringer, Parcast, Megaphone and Anchor — to help the format reach larger audiences. Now, Spotify also wants to do for audiobooks what it did with podcasts: piggyback on its massive base of music listeners, develop innovative products and build a bigger market.
Podcasts and audiobooks, as well as services sold to artists and record labels like merchandise listings and Discovery Mode, are important to reaching the targets of 40% gross margin and 20% operating margin. Given the nature of licensing deals with record labels and music publishers, music margins have little room to improve. Whereas video streamers like Netflix pay fixed costs for much of their content, Spotify pays a percentage of revenue to record labels and music publishers. That means as revenue increases, so do its content costs. And that’s not likely to change. “Our strategy is not predicated on trying to extract margin by negotiating better terms with the content partners we have,” Ek said at the 2022 Investor Day.
Over a year later, however, Billboard’s analysis of Spotify’s financial statements shows the company is still nowhere near its target margins. Since the first quarter of 2020, its gross profit margin has fallen between 24.1% and 28.4% while its operating profit margin has ranged from –8.8% to 3% and was below zero in 11 of 15 quarters.
Merely adding subscribers isn’t enough. (The company reported 226 million at the end of Q3 2023.) Reaching its targets requires Spotify to cut costs while investing in new growth opportunities such as podcasts and audiobooks. Ek said as much when explaining Vogel’s upcoming departure on Thursday. “I’ve talked a lot with Paul about the need to balance these two objectives carefully,” he said in a statement. “Over time, we’ve come to the conclusion that Spotify is entering a new phase and needs a CFO with a different mix of experiences.”
Spotify’s cost-cutting started in 2022 with a pause on new hires, layoffs in October and the cancellation of six live audio shows in December. This year, it laid off 6% of its global staff in January and in June merged two podcast production houses, Gimlet and Parcast, and further cut its podcast workforce by 2%. In August, it shut down Spotify Live, a short-lived live streaming app. Then on Monday, Spotify announced it would lay off 17% of its workforce. It also canceled two in-house podcasts, Heavyweight and Stolen.
As the graphs show, recent trends in Spotify’s financials made it clear larger cuts were necessary to meet the company’s ambitious targets. Personnel costs as a percentage of revenue rose from 13.8% in 2021 to 16.2% in 2022. Research and development expenses — which include some salaries — jumped from 9.4% of revenue in 2021 to 11.8% in 2022.
As Ek explained in the memo to employees, Spotify grew in 2021 and 2022 to take advantage of lower-cost capital. Today’s environment is different, however, and Ek believes Spotify’s “cost structure for where we need to be is still too big.” Indeed, Spotify’s head count steadily increased as it acquired companies, developed new formats and created product innovations that both resonated (Spotify Wrapped) and flopped (Spotify Live) with users. The number of full-time employees increased nearly 50% from 2020 to 2022.
This growth came without added efficiency, however. The revenue generated per employee peaked at 1.54 million euros ($1.66 million) in 2019 and declined to 1.4 million euros ($1.51 million) in 2022 — the lowest since 2017. The July price increase will help Spotify bring in more revenue without additional staff or resources, though the effectiveness of those increases won’t be known until Spotify releases full-year results in late January.
What’s more, Spotify’s gross profit per employee fell to a five-year low in 2022. Gross profit is what’s left after cost of sales — primarily royalties to labels and publishers — is deducted from revenue. It goes toward personnel costs, sales and marketing expenses, and general and administrative costs. But as Spotify added employees in recent years, gross profit per employee fell to 350,000 euros ($377,000) in 2022 from 391,600 euros ($421,000) in 2021.
An obvious way for Spotify to reach its target margins was to make larger cuts to its workforce and, as Ek phrased it, “become relentlessly resourceful.” Cutting 17% of its personnel costs would have resulted in savings of 323 million euros ($349 million) in 2022, based on total personnel costs of 1.9 billion euros ($2.05 billion). That savings would have halved Spotify’s 2022 operating loss of 659 million euros ($711 million).
Ultimately, the multi-billion-dollar question is simple: Can Spotify continue adding subscribers as fast as it has in previous years and develop its spoken word products into the higher-margin businesses it needs with far fewer employees? That’s the high-stakes situation the new CFO will walk into in 2024 and that will determine the company’s future from here on out.