State Champ Radio The Ledger
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The Ledger is a weekly newsletter about the economics of the music business sent to Billboard Pro subscribers. An abbreviated version of the newsletter is published online.
After a miserable year for music stocks — and stocks in general — 2022 could end on a string of positive notes.
As rising interest rates have hammered stocks and erased big gains made during the pandemic, the Billboard Global Music Index, a float-adjusted group of 20 publicly traded music companies, is down 36.1% in 2022, and shares of vital companies such as Spotify and Warner Music Group are down 65.7% and 20.5%, respectively.
But in recent weeks, the momentum has reversed dramatically. The Billboard Global Music Index is up 12.6% over the last two weeks and 14.6% in the five weeks since Oct. 28.
Since Oct. 28, the week when music companies began to release third-quarter financial results, the stocks of major labels rose an average of 23.1%. Indie music companies — Reservoir Media, Believe, Hipgnosis Songs Fund and Round Hill Music Royal Fund — rose an average of 8.2% over that time period. K-pop companies from South Korea averaged a 16.1% improvement.
Part of music stocks’ rebound can be attributed to overall market sentiment. Stocks have improved in recent weeks — the New York Stock Exchange composite index is up 6.6% in the last five weeks and the S&P 500 is up 4.4% over that time. This week, stocks surged on Wednesday (Nov. 30) after Federal Reserve chairman Jerome Powell said upcoming interest rate hikes will be smaller following “promising developments” in the Fed’s efforts to slow inflation. Stocks gave back some of those gains on Friday, however, after a solid U.S. jobs report showed a combination of strong hourly earnings and lower labor force participation. Higher wages erode corporations’ profits and persistent inflation could mean more rate hikes by the Federal Reserve.
But music companies have outperformed the broader stock markets thanks to solid third-quarter earnings results that met and occasionally exceeded expectations. In addition, many companies increased their fourth-quarter guidance when they announced third-quarter results. That tends to increase share prices as investors adjust upward their expectations for future performance.
Among the best performers of late has been Warner Music Group, whose shares improved 31.1% in the last five weeks. Last week, Warner beat analysts’ expectations for both revenue and earnings per share in the fiscal fourth quarter ended Sept. 30 and announced on Nov. 22. It posted revenue of $1.5 billion, up 16% year-over-year at constant currency (+9% as reported). Adjusted earnings before interest, taxes, amortization and depreciation grew by 16% to $276 million.
Shares of Universal Music Group have risen 16.1% since Oct. 28. The day prior, UMG’s third-quarter earnings showed a 13.3% jump in revenue at constant currency. Sony Corp., the parent company of Sony Music Group, climbed 23.7% over the same period. Sony Music’s quarterly earnings, released on Nov. 1, showed 5.9% year-over-year revenue growth. Sony’s music division accounts for just 11.4% of the company’s consolidated revenue and 16.7% of its operating income while UMG and WMG are pure-play music companies.
Smaller labels and publishing companies have improved, too. Reservoir Media shares have climbed 14.9% over the five weeks, while shares of Believe rose 19.1% over five weeks but stumbled 7.8% in the last two weeks. Both companies raised guidance for their fourth quarter results. Korean music companies have also fared well: the shares of four K-pop-focused companies — HYBE, SM Entertainment, YG Entertainment and JYP Entertainment — rose an average of 16.1% in the last five weeks.
Labels’ and publishers’ financial results were augmented by positive news that suggests even stronger streaming revenue in 2023. According to WMG CEO Stephen Cooper during the company’s Nov. 22 earnings call, announcements of price increases by Apple Music [on Oct. 24] and Deezer “in the current economic environment shows that music subscription services offer amazing value to consumers. Music remains undervalued, but we’re optimistic that there will be other increases to come.”
Cooper was also encouraged by subscriber growth reported by streaming companies. Spotify exceeded expectations in the third quarter by adding seven million subscribers — 1 million more than its guidance. YouTube announced on Nov. 11 it had reached 80 million subscribers of YouTube Music and Premium just 14 months after surpassing the 50-million mark. “Developed markets continue to grow in the double digits while emerging markets are growing at higher percentages,” said Cooper. “With global smartphone penetration expected to increase meaningfully in the coming years, our conviction in streaming growth remains strong.”
While labels and publishers have surged, streaming companies have been mixed. On average, streaming companies’ stocks rose 24.4% over the last five weeks. The biggest gains came from much smaller Tencent Music Group and Cloud Music, up 101.6% and 28.4%, respectively — but both have relatively small floats and remain majority owned by Tencent and NetEase, respectively. Even smaller yet are Anghami (-3.1%) and Deezer (-1.5%). Spotify, one of the largest companies in the index, declined 3.7%.
Companies in the live and ticketing space haven’t fared as well as others, however. Live Nation shares are down 7.7% in the last five weeks, due mainly to a 7.5% drop following its third-quarter earnings release and a 10.3% decline on Nov. 18 following reports that the company was being investigated by the Department of Justice after its controversial presale for Taylor Swift’s upcoming tour. The latter was a short-lived dip, however, and Live Nation shares have reclaimed that lost ground and more by rising 11.6% in the last two weeks. Over five weeks, MSG Entertainment shares rose just 2% and Vivid Seats shares are off 1.2%. On the other hand, shares of German concert promoter CTS Eventim rose 27.7% over five weeks after posting strong third-quarter results and sounding more confident about full-year results than comments it made in its second-quarter earnings release.
Four radio companies — iHeartMedia, Cumulus Media, Audacy and Townsquare Media — have fared the worst, falling an average of 6.8% since Oct. 28. IHeartMedia, the largest radio company and a member of the Billboard Global Stock Index, fell 9% over that time.
The Ledger is a weekly newsletter about the economics of the music business sent to Billboard Pro subscribers. An abbreviated version of the newsletter is published online.
Is Ticketmaster a monopoly that treats customers unfairly? Problems with Taylor Swift’s record-breaking The Eras Tour onsale this week has created choruses of complaints around the ticketing giant that have now led to a reported Justice Department investigation.
On Thursday, Sen. Amy Klobuchar sent an open letter to Live Nation CEO Michael Rapino detailing her “concerns about the state of competition in the ticketing industry and its harmful impact on consumers.” The problem, wrote Klobuchar, is a lack of competition “that typically push[es] companies to innovate and improve their services. That can result in dramatic service failures, where consumers are the ones that pay the price.”
Breaking up Live Nation and Ticketmaster wouldn’t necessarily have prevented this problem. It’s likely that any ticketing platform would have struggled with such a high level of demand. StubHub crashed in 2018 after University of Georgia fans flooded the site to purchase tickets to see their team play in the NCAA football national championship game — and that was just one game.
Ticketmaster blamed the outage on a surge of unregistered fans and billions of bots. According to the company, over 3.5 million people pre-registered for Swift’s Verified Fan credentials, the largest registration in its history. Typically, only a fraction of registered fans show up to buy a ticket. This time, “a staggering number of bot attacks as well as fans who didn’t have invite codes” resulted in 3.5 billion total system requests — four times the previous record number.
One could argue Ticketmaster could have been better prepared for such a high level of demand. Perhaps the company should Swift-proof the platform in anticipation of a flood of speculators and unregistered fans — Swift said Friday (Nov. 18) that her team “asked them, multiple times, if they could handle this kind of demand and we were assured they could.” Overall, problems on the platform are relatively rare given Ticketmaster’s volume of business, but we talk about them because they happen with high-profile concerts that attract large numbers of customers. Those attract the most attention and complaints online, which in turn attracts politicians. Ticketmaster is one of the few non-partisan issues in America in 2022.
Some observers have conflated the issues surrounding Ticketmaster’s market power, though. Rep. David Cicilline, chairman of the House Judiciary Committee’s Antitrust, Commercial and Administrative Law Subcommittee, wrote about the Swift on-sale that “excessive wait times and fees are completely unacceptable … and are a symptom of a larger problem.” It’s fair for Cicilline to suggest that Ticketmaster does not invest enough in its platform to avoid the technical issues and wait times Swift fans recently experienced. That’s debatable, but it’s a defensible argument.
Fees are, however, an entirely different issue. Ticketmaster is a pioneer in the area of ticket fees but does not have a monopoly on the ability to charge them. More competition in ticketing would not prevent venues and promoters from adding to the face value of tickets. The ticket purchase is an opportunity for all parties involved to capitalize on fans’ demand for live music. As Bruce Springsteen’s controversial leap into dynamic pricing showed, leaving money on the table is an increasingly uncommon strategy in the modern music business.
Ticket prices occasionally get dragged into the argument, too. Politicians and consumers seem to want a form of price competition that doesn’t exist. Prices for an in-demand concert ticket won’t necessarily become more affordable if they’re sold at, say, StubHub rather than Ticketmaster. The laws of supply and demand say that prices for in-demand, scarce objects like a Swift concert ticket are going to be high no matter who’s selling them.
So, what tangible results might come from the calamitous The Eras Tour on-sale? Sen. Klobuchar’s letter points to customers’ desire for fair access to concert tickets. She asked Rapino, “Generally, what percentage of high-profile tour tickets are made available to the general public compared to those allocated to pre-sales, radio stations, VIPs, and other restricted opportunities?”
Klobuchar wants to know what percentage of tickets the average person has a realistic shot at getting without being the customer of a particular credit card, without buying high-priced VIP packages, without winning a radio station contest or without being a member of an artist’s fan club. In this case, Capital One is a sponsor of the Eras tour and offered a pre-sale to its customers.
But how do lawmakers regulate access? Do they establish rules that dictate what kind of marketing partnerships artists can and cannot establish? Would they tell American Express to stop giving such long-standing perks as pre-sale access and dedicated tickets to its credit card holders? If Congress really wanted to create a more level playing field for fans, they could do what the lawmakers in Victoria, Australia, did in 2021: pass a law that limits the resale value of a ticket to 110% of its face value. That could lower the number of resellers and bots clogging up Ticketmaster’s system for high-traffic on-sales like the Eras Tour. At the very least, price limits would bring a much-desired sense of fairness to the secondary market. Whether the U.S. Congress has the stomach to establish price controls on private companies remains to be seen.
A more likely outcome of the Eras Tour debacle is increased transparency. New York State legislators passed a law in June that improves transparency by requiring all-in pricing and prohibits revealing the ticket’s total cost — face value plus fees — after multiple clicks in a check-out process. The bill could have gone further: a requirement to disclose the percentage of tickets made available to pre-sales and VIPs was in an early form of the bill but not the final version.
But, again, are lawmakers willing to mandate such disclosures from private businesses? This would more likely be a voluntary disclosure done at the behest of the artist – Swift is exactly the kind of powerful artist who could persuade ticket sellers to reveal this information. Transparency wouldn’t immediately translate into greater access for the average fan, but it could fuel a larger conversation about how fans get access to concert tickets. That wouldn’t ease the pain of many Swift fans, but it would be a step forward.
The Ledger is a weekly newsletter about the economics of the music business sent to Billboard Pro subscribers. An abbreviated version of the newsletter is published online.
Music companies face a multitude of pressures as 2022 comes to an end: crippling inflation, a tight labor market, a chaotic environment for breaking new artists, interest rates that are dampening catalog valuations, and high costs of touring amidst a crush of artists on the road, among other challenges. The upcoming slate of corporate earnings provides an opportunity to hear about these opportunities and challenges from leaders of publicly traded music companies who rarely go on the record.
Spotify reports third-quarter earnings after the close of trading on Tuesday (Oct. 25). Universal Music Group and Deezer follow on Thursday (Oct. 27) after the close of trading in the Netherlands and France, respectively. Cumulus Media reports Friday morning (Oct. 28). SiriusXM reports earnings on the morning of Nov. 1. Tencent Music Entertainment announces earnings on Nov. 15. The other 14 publicly traded music companies in the Billboard Global Music Index have not yet announced when they will report.
Look for executives to comment about subscription prices and digital platforms’ ability — or reservation — to raise subscription prices. It’s been a recurring theme from digital and label executives throughout the years, in part because it’s been over a decade since streamers last did it in any meaningful way. “Music is a good value” seems like a popular position when streaming video on-demand services are engaged in cut-throat competition and undercutting one another’s prices to attract new customers and prevent current customers from departing. But the industry has arguably moved past that stage, with many now interested in other means to grow revenue. Still, expect music streaming companies to be reticent to hike prices while inflation is running at a 40-year high.
On Tuesday. Spotify could offer a bevy of information and insights about its progress toward its drive to improve margins, as laid out in its June 9 investor presentation: goals for 35% gross margins in music and 30-35% gross margins in podcasting within the next three to five years. Music margins will be helped by improvements in ad monetization in developing markets as well as price increases in mature markets.
More pressing will be Spotify’s opinions on macroeconomic forces that could affect its growth. The company’s advertising business was roiled by an advertising slowdown during the first year of the pandemic, and now many experts are predicting a recession in 2023 that could again dampen online advertising. On Alphabet’s July 26 earnings call, the company repeatedly used the word “uncertain” when talking about the economy, while reporting that YouTube ad sales grew at their slowest pace since the company started disclosing metrics in 2018. Meta’s second-quarter revenue, meanwhile, was 1% lower than a year earlier — its first decline in a decade. If the same market conditions affect Spotify, how will it react? Even though advertising accounted for only 12.6% of the company’s total revenues in the second quarter, it’s critical to the podcasting business that’s expected to deliver margin relief in the coming years.
If social media company Snap’s third-quarter results Thursday are any indication, a weak advertising market will be a recurring theme throughout October and November earnings reports. In a letter to shareholders, Snap warned its “advertising partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures and rising costs of capital.” At the same time, Snap announced a stock repurchase program of up to $500 million “to protect shareholder value from the impact of dilution.” Investors reacted quickly and decisively by sending Snap shares down as far as 32% to $7.33 on Friday — 87.9% below its 52-week high of $60.78.
Also, expect questions about Spotify’s long-awaited HiFi subscription tier. Last week, reports surfaced that Spotify could be prepping a “platinum” subscription plan that bundles high-fidelity audio with other products. The reports were based on an online survey that sought consumers’ opinions on various product bundles, not hard evidence of an upcoming product launch. But the fact that Spotify would sweeten the offer with reduced advertising in podcasts and other items could suggest it realized demand for a standalone HiFi tier is weaker than hoped — especially when Apple Music and Amazon Music are offering it at no additional cost. What CEO Daniel Ek will say is another matter, however, as Spotify is unlikely to discuss details about a product before an official announcement.
High-fidelity audio is pertinent to Spotify investors because it could help improve gross margins. The June 16 acquisition of audiobook distributor Findaway led to the Sept. 20 launch of an audiobook download store. As both retailer and distributor, Spotify can get 60% margin in audiobook purchases, more than double its current gross margin. Of course, the more important question is how many margin dollars audiobooks will ultimately deliver. With only a few weeks of audiobook sales under its belt, and no audiobook sales in the third quarter earnings, Spotify will have few tangible results for a progress report.
Universal Music Group reports earnings on Thursday (Oct. 27) after the end of the trading day in Amsterdam, where UMG shares are listed. UMG’s share of the U.S. recorded music market dropped slightly from 38.3% in the first half of 2022 to 37.1% at the end of the third quarter, which was lower than its 38.4% share in the prior-year period. UMG’s biggest competitor, Sony Music Entertainment, meanwhile, saw its share boosted from 26.3% to 26.7% thanks to the runaway success of Bad Bunny‘s Un Verano Sin Ti, the biggest album of 2022. UMG biggest releases were Kendrick Lamar’s Mr. Morale and the Big Steppers and The Weeknd’s Dawn FM (Republic). A handful of albums released in 2021 were also in the top 10 in total consumption: Morgan Wallen‘s Dangerous (Jan. 8, 2021), The Weeknd’s The Highlights (Feb. 5, 2021) Olivia Rodrigo’s Sour (May 21, 2021) and Drake‘s Certified Lover Boy (Sept. 21, 2021).
During UMG’s last earnings call, on July 27, CEO Lucian Grainge recounted a string of recent releases (Drake’s Honestly, Nevermind got off to a great start), partnerships (HYBE’s first release through its deal with UMG’s Ingrooves/Geffen), how it planned to get a return on investment on some recent acquisitions (Frank Zappa and Neil Diamond) and how the new Mercury Studios (which produced documentary films on The Rolling Stones and Shania Twain) had helped lift catalog streams.
More important to investors and industry professionals are concrete examples of UMG moving its business forward. Last quarter, Grainge announced UMG’s new licensing deal with Meta and revealed the company had become one of its top 10 revenue-generating digital platforms. He also announced the creation of the New Music Media Network, a service that connects brands and partners with proprietary data and exclusive media from UMG. Given the vital role advertising plays in today’s streaming-led music business and the platforms of tomorrow, a progress update on the New Music Media Network would be helpful.
Less important are comments made about Web3, NFTs and metaverse initiatives. Despite initial enthusiasm around NFTs, these businesses are a work-in-progress and represent an immaterial amount of revenue to a major music company. Conversation about these businesses merely shows that a company is looking ahead and taking the proper steps to capitalize — somehow — on them in the future. That requires hiring the right people, making investments, striking partnerships and trying new things to learn and gain experience. But as of now, Web3, NFTs and the metaverse are solidly in the experiment phase.
The Ledger is a weekly newsletter about the economics of the music business sent to Billboard Pro subscribers. An abbreviated version of the newsletter is published online.
The 2004 documentary Super Size Me took a humorous look at the health consequences of fast-food restaurants’ practice of up-selling customers to higher-priced, larger-portioned items – a super-sized cup of Coca-Cola rather than a large, for example. To the customer, up-selling looked like a good deal: the additional soda or food cost only a few cents more. For restaurants, the tactic padded margins because the difference in price dwarfed the cost of goods.
Super Size Me comes to mind when looking at music subscription services and their quest to improve their margins. Those services have the equivalent of a super-sized option: the family plan, which generally costs 50% more than an individual subscription and includes up to six subscribers on a single plan. But unlike up-selling in the fast-food business, super-sizing a music subscription service doesn’t pay off in the short term. The family plan may help retention, which can improve subscribers’ lifetime value – that, not average revenue per user, is the key metric in the subscription business – but it does nothing to boost margins.
For years, high-fidelity audio was presumed to be music’s version of super-sized food portions: an up-sell product that carried a higher price without a commensurate increase in costs to the platform. But high-fidelity audio now appears to be a standard option for most streaming platforms, another carrot to entice people to sign up rather than a means to segment consumers based on willingness to pay. That means music licensed from record labels and distributors doesn’t provide a path to better margins. In fact, there’s only a small amount of upside left to wring out of licensors: Spotify expects it can get its music margins to 30% and eventually to 35%, up from the 28.1% margin it reported for 2021.
The future of the music streaming business looks more like gas stations than fast food. Gas stations have turned into convenience stores that sell junk food, beverages and household staples. Gas itself is almost a loss leader. Stations make their margins on everything else – a $3 bottle of Coca-Cola, a $2 candy bar or a $6 package of Ibuprofen pills. According to an examination of the economics of gas stations at The Hustle, stations earn a 1.4% profit margin on fuel compared to 200% on soda machines and 100% on lottery tickets.
We’re seeing more examples of streaming services looking for margin relief outside of their core products. On Sept. 20, Spotify, which acquired audiobook distributor Findaway in June, launched a la carte audiobook sales, putting it directly in competition with Amazon-owned Audible. Audiobook downloads provide better margins than Spotify can get from music. As the retailer, Spotify keeps 50% of the audiobook purchase sale proceeds. Findaway’s distributor fee is 20% of the author’s royalties – which works out to 10% of sale proceeds after Spotify takes its 50% cut. In aggregate, Spotify gets a 60% margin in audiobook sales on its platform – double the typical margin in both music streaming and music downloads and more than double Spotify’s gross margin on music last year.
One notable hiccup to Spotify’s foray into audiobooks is the buying process. Spotify sells audiobooks only at its website, not within the Spotify app. That allows it to keep its cushy margins without giving a significant portion to either Apple or Google for in-app purchase fees. Not offering audiobook sales within the app creates an extra step in the buying process, and even a small amount of friction can become a drag on purchase activity. But Spotify could also be a boost to the format, says Tony van Veen, CEO of DIY Media Group, which owns BookBaby, a distributor for independent book authors. “If Spotify offers it and lowers the barrier, will there be more adoption? Yeah, I think so,” he says. Spotify CEO Daniel Ek believes audibooks could eventually achieve 50% of book sales in mature markets compared to their current 6-7% share.
Spotify has already made a big push into podcasts in a search for better margins. Podcasts have been a money-loser with a –57% gross margin but have potential at scale. At a June 8 investor presentation, Spotify CFO Paul Vogel said podcast margins could reach 40% to 50% in the future. Tightening the belt could help get there: news broke on Oct. 7 that Spotify laid off “at least” 38 employees and will shutter 11 podcasts created by Gimlet and Parcast, two content studios Spotify acquired in 2019 for a combined $286 million.
Also searching for better margins, French music streamer Deezer is planning a new product called Zen by Deezer. Expected to debut in France in the first quarter of 2023, the product offers “exclusive music relaxation, sounds, expert tips and guided exercises,” according to the company’s Oct. 4 investor presentation. It’s a sensible product extension given the explosion of apps for meditation, yoga, sleeping and mental health. In the wake of COVID-19, McKinsey put the size of the global wellness industry at a staggering $1.5 trillion.
When Zen by Deezer is running at scale, Deezer believes, its content costs will run about 10% of revenue. That’s compared to roughly 70% for a standard on-demand streaming service that licenses music from record labels, music publishers and performance rights organizations. The difference, the presentation explains, is “one-off content production,” rather than music licensed at standard rates. Whether created in-house or acquired on a one-time, royalty-free basis, Zen by Deezer won’t pay most of its subscription fees to license music.
Elsewhere, music is increasingly a means to hook customers before giving them another product. Abu Dhabi-based Anghami is looking to diversify through podcasts, branded content and live concerts. In June, it purchased Spotlight Events, a concerts company based in the Middle East-North Africa region. Tencent Music Entertainment, China’s largest music streamer, also made a concerted push into spoken-word audio when it acquired audiobook distributor Lazy Audio in 2021. TME also has a growing podcast business.
Using a gas station metaphor for Spotify only goes so far – or does it? Consumers’ reliance on their automobiles makes them dependent on gas stations for transportation. Until electric cars see widespread adoption, most people will be regular customers at gas stations’ convenience stores. Music isn’t quite as entrenched as the automobile, but there’s a growing belief that a music subscription is a basic utility – like internet, gas or water – that most people will carry continuously. That gives streaming services on ongoing billing relationship with hundreds of millions of customers and an opportunity to make better margins on something other than music.
