The Ledger
Page: 7
The Ledger is a weekly newsletter that covers the financial and economic side of the music business. An abridged version appears at Billboard Pro. Sign up here to receive the newsletter.
Ticket fees have been called everything from “exorbitant” (Sens. Richard Blumenthal and Amy Klobuchar) to “completely bats—” (Last Week Tonight with John Oliver). And they can increase the price of a concert ticket by an average of 27-31%, according to a 2017 study by the U.S. Government Accountability Office.
Unfortunately for ticket buyers, those fees aren’t going anywhere quickly. They may change or disappear completely, but consumers won’t reap any savings in the end, Live Nation CEO Michael Rapino explained during Live Nation’s fourth quarter 2022 earnings call on Thursday.
Say, for example, a venue is prohibited from charging fees on top of a ticket’s face value. “Well, then the venue would say, ‘Okay, artists, the rent isn’t $50,000 anymore. It’s $100,000,’” Rapino said.
The ticket fee is a surcharge that helps cover a venue’s costs. Rapino’s point is that the venue needs to cover its costs, so it’s going to collect money to cover them, no matter what. In a normal scenario, the consumer helps cover those costs by paying a surcharge directly to the venue.
If fees were eliminated, artists — who are the final authority on primary ticket prices — would be forced to raise them to cover the additional cost. The surcharge may have disappeared, but that cost would still exist in the form of a higher face value. Regardless of the approach, the consumer’s expense and the venue’s revenues would be unchanged.
“The true cost of going to a show and making the show happen is the full price all-in,” said Rapino. The concept is apparent to anybody who has pondered how airlines set prices. If airlines charged an all-in fee that encompassed all its costs, ticket prices would be dramatically higher. Legislation that banned fees for checked baggage could result in higher prices for everything from flight themselves to in-flight beverages. Airlines that previously allowed free carry-on bags might start imposing fees on those. They could also charge more to change your travel plans (which used to cost the consumer nothing).
Rapino acknowledged that Live Nation, which owns and operates venues, would do the same. “If tomorrow someone said, ‘You know, you can’t charge 20% service fees on your amphitheater, you have to [charge] 10%.’ Well, then the $75,000 house rent that we charge artists would be $100,000,” he said as an example. Live Nation couldn’t simply absorb the cost, he explained. Since the company requires money to pay staff and operate the venue, it would find a way to recoup the lost fees.
While what consumers pay won’t change, they may get more transparency. In the wake of Ticketmaster’s disastrous Taylor Swift Eras Tour pre-sale, President Joe Biden unveiled an initiative to limit, among other types of fees, mandatory, back-end fees that “often hide the full price” of a good or service. The White House pointed to research that found hiding the full price encourages consumers to spend more than they would have otherwise.
Live Nation has also come out publicly — and forcefully — against hidden fees. On Thursday, Rapino called numerous times for the industry to adopt all-in pricing that show the ticket buyer a single price at the beginning of the transaction. Also on Thursday, Live Nation issued a press release that encouraged lawmakers to introduce legislation that includes, among other things, mandatory all-in pricing.
The uproar against Live Nation and Ticketmaster over ticket fees is just one of many criticisms to gain momentum in recent months. Some members of Congress have called Live Nation a monopoly that limits competition in the touring business and harms consumers by charging high prices and leaving some unable to purchase tickets for in-demand concerts like Swift’s Eras tour. Many inside and outside of Washington have called for the Department of Justice to break up the company’s concert promotion and ticketing operations. On Thursday, Sens. Klobuchar and Mike Lee sent evidence of the Jan. 24 Senate hearing on the ticketing market to the Department of Justice and encouraged its antitrust division “to take action if it finds that Ticketmaster has walled itself off from competitive pressure at the expense of the industry and fans.” Others have suggested Ticketmaster improve its security practices to deal with the bot attacks that derailed Swift’s pre-sale.
Ticketmaster may be most reviled for its fees, though. And as Rapino pointed out, those aren’t going away anytime soon.
The Ledger is a weekly newsletter that covers the financial and economic side of the music business. An abridged version appears at Billboard Pro. Pro subscribers automatically receive The Ledger. Sign up here to receive the newsletter without a Pro subscription.
Keen observers noticed that last quarter Warner Music Group’s global streaming revenues were down 2.6% year over year, a rare sputter in the music industry’s main engine of growth. The company’s total revenue declined 7.8% as losses in recorded music’s physical and digital revenues couldn’t make up for publishing gains.
On its face, a year-over-year decline in streaming revenue – the driving force behind growth at labels as well as the rise in music catalog valuations – might seem alarming. Declines are routinely seen in download and physical sales. Streaming is typically the dependable bright spot of any earnings report.
The decline was more noticeable when compared to companies that released earnings for the same quarter. Sony Music Entertainment posted strong growth in the same period. SME’s streaming revenue improved 33.2% in its recorded music division and 59.8% in its publishing division. Reservoir Media didn’t show streaming softness last quarter, either. In its recorded music division, digital revenues were up 17% year-over-year. Digital revenues in its publishing division rose 29%.
So, what happened? Some of it is due to a quirk of WMG accounting, some of it is due to WMG, and some of it is due to factors that affect the entire music business.
One factor in WMG’s weak streaming revenue was a shorter quarter: WMG’s last quarter had one fewer week than the prior-year quarter, which gave the company a tough basis for comparison even before other factors could be considered. A 14-week quarter has 7.1% more days to generate income than a 13-week one and that’s a big gap to overcome. Adjusting for that, WMG streaming revenues would have been up 5% year-over-year.
The stronger dollar — WMG’s financial statements are reported in dollars, Sony reports in yen, Universal Music Group in euros — also played a part in the decline. In WMG’s recorded music division, streaming revenues declined 4% as reported but were flat on a constant currency basis (which assumes no change in foreign exchange rates). In its publishing division, streaming revenues grew 13.2% as reported and 16.8% at constant currency.
WMG also blamed the soft streaming numbers on a new release line-up that CFO Eric Levin called “a softer, largely U.S.-based release schedule” that “could roll into our fiscal Q2. But given our release schedule as second half-oriented this year,” he added, “we do feel good about our performance of releases and strength in the second half of the year.”
Another factor was not specific to WMG: a slowing ad market. Levin called it “a dislocated ad market” and warned “the decline is getting more pronounced.” The decline in ad-supported streaming revenue isn’t a surprise. The Ledger wrote about the soft advertising market in August 2022. Spotify CFO Paul Vogel warned advertising growth in the third quarter would be “slower than we might have forecast earlier in the year.” French music company Believe said “ad-funded streaming activities should be affected by rising inflation and economic uncertainties.”
The streaming market has become bifurcated. Subscription services have fared well through the pandemic and high inflation. Advertising is more closely associated with the direction of the broader economy. Consumers are generally reluctant to cancel entertainment subscriptions, but it’s easier for brands to pull back on ad spending, hurting everything from YouTube to broadcast radio companies like iHeartMedia (and music publishers to a lesser extent). At WMG, “subscription streaming grew by high single digits” but was partially offset by a drop “in the mid-teens” in ad-supported revenue, Levin said. WMG also noticed the slowdown in brands’ spending has created “a somewhat softer market for synch.”
In the fourth quarter, Spotify’s advertising revenue rose 14% compared to an 18% improvement for subscription revenue. With the growth of Spotify’s podcasting business, not all the advertising growth could be attributed to music. Advertising growth lagged subscription growth in the third quarter by three percentage points.
The Ledger is a weekly newsletter that covers the financial and economic side of the music business. An abridged version appears at Billboard Pro. Pro subscribers automatically receive The Ledger. Sign up here to receive the newsletter without a Pro subscription.
On Feb. 1, days before the Grammy Awards, Billboard honored HYBE chairman Bang Si-hyuk with the Clive Davis Visionary Award at the annual Power 100 event for creating a company that, as Bang put it in his acceptance speech, “challenges the traditional boundaries of music and entertainment.” Fittingly, just one week later, Bang put the global music industry on notice with two major deals that further solidified HYBE’s status as more than the home of BTS and a budding empire and force in pop culture.
First, HYBE America, the U.S. division led by CEO Scooter Braun, acquired QC Media Holdings, the parent company of Atlanta-based hip-hop label Quality Control Music, home to Migos, Lil Baby, Lil Yachty, City Girls and others. Quality Control gives HYBE a hip-hop presence to complement its core K-pop acts (BTS, TOMORROW X TOGETHER) and HYBE America’s pop- and country-leaning rosters from SB Projects (Justin Bieber, Ariana Grande) and Big Machine Label Group (Tim McGraw, Thomas Rhett), respectively. The deal also further diversifies HYBE beyond K-pop and helps alleviate the loss of BTS while its members pursue solo projects and enter government-mandated military service.
Now the No. 1 K-pop music company by market capitalization ($6.5 billion), HYBE on Thursday (Feb. 9) announced it spent $334 million for a 14.8% stake in K-pop rival SM Entertainment, the company behind NCT 127 and SuperM. In buying the majority of founder Lee Soo-man‘s shares, HYBE became the top shareholder in the third-largest Korean music company. With a market capitalization of $1.85 billion, as of its closing price on Friday (Feb. 10), SM Entertainment ranks only slightly behind JYP Entertainment’s $1.9 billion and is more than double YG Entertainment’s $780 million.
Becoming SM Entertainment’s top shareholder can further HYBE’s leading position in South Korea, an increasingly important music market worth $6 billion in 2021, according to the U.S. Department of Commerce. A 15% stake doesn’t give HYBE control over SM Entertainment, but it creates opportunities to work for mutually beneficial outcomes. One could see SM Entertainment artists taking advantage of HYBE’s Weverse social media platform, for example.
The Quality Control deal was worth $300 million in cash and stock, according to HYBE’s regulatory filing. Valuing the company at a multiple of 12 times earnings before interest, taxes, depreciation and amortization — the midpoint of the 10 to 14 times enterprise value-to-EBITDA multiple typically seen in deals for similar music companies — implies Quality Control has annual EBITDA of roughly $25 million. That should provide a nice boost to HYBE’s bottom line. In 2021, HYBE had adjusted EBITDA of $232 million. Through the first nine months of 2022, HYBE’s adjusted EBITDA was $220 million. That implies Quality Control could provide HYBE with a 7.5% to 10% boost in adjusted EBITDA if it finishes 2022 by merely matching its adjusted EBITDA from the fourth quarter of 2021 — and that’s without considering any cost savings resulting from the merger.
HYBE’s annual EBITDA puts it in a middle ground between the three majors and large independent companies. Universal Music Group’s calendar 2021 EBITDA was $2 billion (1.68 billion euros). Warner Music Group’s EBITDA for the year ended Sept. 30, 2022, was $1.2 billion. Sony Music Entertainment does not report EBITDA but paces well ahead of HYBE. After the majors, however, there’s a large gap. BMG’s 2021 EBITDA was $170 million. Hipgnosis Songs Fund posted EBITDA of $130 million in its year ended March 31, 2022. Reservoir Media’s EBITDA in the year ended March 31, 2022, was $41 million. If HYBE matches its EBITDA from the fourth quarter of 2021, it would exceed $300 million in calendar 2022. Had HYBE owned Quality Control during 2022, its EBITDA would have been in the area of $325 million (assuming $92 million in fourth-quarter 2022 EBITDA).
HYBE’s two moves this week are proof the music industry is more competitive and dynamic than some market share numbers might suggest. While the three major labels dominate the record business, independent companies — some distributed by the majors — are flourishing. HYBE certainly has its connections to the majors: Its music is distributed in the United States and other regions by UMG, it has a joint venture with UMG’s Geffen Records and many of its management clients are signed to major labels. But HYBE is ultimately independent of the majors. Based in South Korea, not London or New York, it’s a nimble outsider with a unique approach to melding music and technology.
Perhaps most important to HYBE’s continued growth — and what sets it apart from much of its competition — is how it’s going about doing it. Whereas catalog (music older than 18 months) has taken a larger share of consumption and the industry’s biggest deals and investments have involved established catalogs from Bob Dylan, Bruce Springsteen, Paul Simon, Sting and others prized as safe investments — billions of dollars are flowing into the music industry to acquire intellectual property that’s often many decades old — HYBE is paving its way through entrepreneurism of a different sort.
Like 300 Entertainment (purchased by Warner Music Group in 2021), Alamo Entertainment (purchased by Sony Music Entertainment in 2022) and LVRN (recently valued at more than $100 million), HYBE builds new artists from scratch, sets trends and influences pop culture — beyond TikTok, at that. Now, as it rapidly builds its empire, Bang, Braun and the rest of the company are starting to show what that looks like at scale.
The Ledger is a weekly newsletter about the economics of the music business. An abbreviated version of the newsletter is published online. The Ledger is sent to Billboard Pro subscribers. You can also sign up here to receive The Ledger and many other Billboard newsletters.
A youth movement of sorts hit music’s top 10 tracks in the U.S. last year, even as music consumption generally shifted toward older recordings.
The average age of a track in the top ten on-demand streaming songs in the U.S. was nearly five months younger in 2022 (346 days) than in 2021 (492 days), according to a Billboard analysis of Luminate data. In 2021, the top 10 tracks were evenly divided between current (defined by Luminate as younger than 18 months) and catalog (older than 18 months), as of Dec. 31, 2021. Glass Animals’ “Heat Waves,” released in June 2020, was No. 5 that year. The No. 1 track, Dua Lipa’s “Levitating,” was released in March 2020. The No. 10 track, The Weeknd’s “Blinding Lights,” was released in 2019.
In 2022, nine of the top 10 tracks were current releases, meaning they were less than 18 months old on Dec. 31, 2022. “Heat Waves” was the lone catalog track in the top 10. The top track, Harry Styles’ “As It Was,” was a spry 276 days old. Steve Lacy’s “Bad Habit,” the No. 9 track, was youngest at 185 days. “Levitating” still resonated with listeners but slipped to No. 20.
Outside of the top 10, however, the most popular music of the year continued to get older.
From 2021 to 2022, the average age of the top 25 on-demand tracks increased about a month and a half to 470 days old, excluding a notable outlier: Kate Bush’s 1985 recording “Running Up That Hill,” the No. 16 track of the year. Including Bush’s 13,620-day-old (as of Dec. 31, 2022) surprise hit, the average age of the top 25 tracks more than doubled.
Aging was more pronounced beyond the top 25. The average age of the top 1,000 on-demand audio streaming tracks increased from 3,287 days in 2021 to 3,462 days in 2022 — an increase of 176 days, or nearly six months. Notably, some younger catalog titles continued to defy gravity. Chris Stapleton’s 2014 track “Tennessee Whiskey” rose from No. 43 in 2021 to No. 33. Morgan Wallen’s “Whiskey Glasses,” from 2016, climbed from No. 62 to No. 32. The Neighborhood’s 2012 track “Sweater Weather,” a TikTok hit way back in Nov. 2020, improved from No. 76 to No. 34.
The aging of on-demand audio streams mirrors the continuing trend of catalog tracks accounting for a larger share of what Americans stream and purchase. According to Luminate, catalog’s share of total consumption — across all formats — climbed to 72.2% in 2022, up from 69.8% in 2021 and 65.1% in 2020.
Years ago, the line between current and catalog music meant more, since it usually followed the way stores shelved music. “That timeframe makes sense when you are talking about an artist’s typical album release cycle,” says Andy Moats, executive vp and director of music, sports and entertainment at Pinnacle Financial Partners.
In a financial sense, however, current music transitions to catalog over a long period of time. After an initial burst of earnings, music will earn less over some number of years — called “decay” — before settling at a consistent amount of annual royalties. “Most new release decay will occur in the first 36 to 48 months from release,” says Moats, and tracks typically level off and show growth from years 7 to 10.
Outliers like “Running Up That Hill” aside, increased catalog consumption stems mostly from music remaining popular beyond the 18-month mark. (Billboard wrote about the longevity of this “shallow catalog” in April 2022.) Today, catalog is as much about Fleetwood Mac’s 1977 song “Dreams” as The Weeknd’s 2020 song “Save Your Tears,” which remains popular on streaming services and was the No. 19 on-demand audio streaming track in the U.S. last year (down from No. 4 in 2021).
To the experts who value music assets, the ability of a relatively young catalog to increase its market share makes it more attractive. While older songs are typically more appealing to buyers because their earnings potential is more predictable than newer songs still experiencing annual decay, the trends seen in Luminate’s data suggest there could be more deals like Hipgnosis Capital Fund’s $200 million acquisition of Justin Bieber’s songwriting catalog and recorded music royalties. Nari Matsuura, partner at Citrin Cooperman, sees the catalog trends in Luminate’s data as a good sign for relatively young music. “This suggests that the value of newer catalogs should increase since their earnings will not decline as much in the near term but will be sustained at a higher level over a longer period.”
The Ledger is a weekly newsletter that covers the financial and economic side of the music business. An abridged version appears at Billboard Pro. Pro subscribers automatically receive The Ledger. Sign up here to receive the newsletter without a Pro subscription.
Music companies across the board grew revenues in 2022, fueled by global streaming growth and the return of live music. Their stock prices went in a different direction, though.
The Billboard Global Music Index, a group of 20 music-focused companies listed in five countries, declined 36.4% in 2022.
The index aggregates the market capitalizations of 20 music companies spanning record labels, music publishing, live music, streaming and broadcasting. Each company’s float — the outstanding shares — has been adjusted to remove corporate owners, executives, directors and other long-term shareholders.
Music companies weren’t the only stock losers of 2022. Markets were down across the board as interest rates rose, inflation soared and investors placed greater value on profits than growth potential. The index’s deficit was slightly bigger than that of the tech-heavy Nasdaq composite and almost double the 19.4% decline of the S&P 500. The Dow Jones Industrial Average, a collection of 30 blue-chip companies such as Johnson & Johnson and Home Depot, fell just 8.8%.
The two largest companies in the index, Universal Music Group and Warner Music Group, fared relatively well. UMG’s share price fell 9.2% and WMG’s declined 18.9%. Another label group, South Korea’s SM Entertainment, improved 3.4% — one of only two companies in the index whose share prices rose in 2022. As a group, however, record labels and publishers’ adjusted float declined 23.1%. The largest deficit of the group was 50.3% by South Korea’s HYBE, whose main artist, BTS, sent the stock spiraling by announcing a hiatus in June.
The six streaming companies’ index value declined 54.9%, the worst of the index’s four sectors. Spotify’s share price dropped 66.3% and the company dropped to the fourth-largest contributor to index value, after finishing as the top contributor at the end of 2021. The dramatic downturn wasn’t surprising given what was happening in the broader marketplace. Streaming stocks generally benefited from the early days of the pandemic as consumers listened to and viewed more content online and subscriptions spiked. But investors fled many pandemic darlings in 2022: Netflix shares fell 51.1% and Disney shares dropped 43.9%.
With a 20.9% gain in 2022, Tencent Music Entertainment was the rare company in positive territory — not that it isn’t well below its all-time high. While Spotify and other stocks started to drop in mid-December 2021 after the Federal Reserve announced it would raise interest rates in 2022, Tencent Music’s share price had nowhere to go but up. In March 2021, after Chinese regulators cracked down on Tencent Music’s exclusive licensing contracts — many other Chinese companies also came under fire for various reasons — the share price fell 58.5% over three days and another 70.9% through Dec. 20, 2021.
The smaller streaming companies, on average, fared worse than their larger competitors. Abu Dhabi-based Anghami declined 84.3% and French streamer Deezer dropped 51.4%. Both companies went public in 2022 via reverse mergers with publicly traded blank check companies (SPACs), so their annual performance is calculated using the Dec. 31, 2021, share price of the public companies they merged with. Shares of LiveOne fell 49.7%.
Streaming companies’ declines mirrored the losses of some high-profile tech stocks. Amazon, another high-flying pandemic stock, fell 49.6%. Meta sank 64.2% as the company put billions of dollars into building a metaverse that few people seemingly want to visit. Tesla fared even worse by slipping 65% as investors appeared worried that CEO Elon Musk was spending too much time mismanaging his latest acquisition, Twitter, and hurting the brand’s value amongst liberal consumers.
The index value of live music companies — Live Nation, CTS Eventim and MSG Entertainment — declined 35.9%. Even though Live Nation posted record revenues in the second and third quarters as the touring business recovered from pandemic-era lows, the company’s index value dropped 41.7% in 2022. Live Nation’s shares stumbled 10.9% over two days in November after the problematic pre-sale for Taylor Swift’s Eras Tour enraged consumers and brought the possibility of regulatory action (about half of that loss was recovered by the end of December). MSG Entertainment shares fell 36.6% while German promoter CTS Eventim fell just 7.4%.
Broadcasters’ index value declined 33.3%. Even though shares of satellite radio company SiriusXM, the largest broadcaster by market capitalization, declined just 8.0%, the two terrestrial broadcasters in the index fared much worse. IHeartMedia shares fell 70.9% and Cumulus Media dropped 44.8%.
The relatively good performance of labels and publishers — especially the larger ones — brought those eight companies’ share of the index’s value to 49.2%, up from 40.7% at the end of 2021. The six streaming companies’ share of the index value declined to 22.1% from 31.1%.
U.S.-listed companies improved their share of the index to 58.9%, up from 49.9% at the end of 2021. Some of the change can be attributed to the growth in the dollar, which reduces the value of foreign-listed companies when adjusted market capitalizations are converted to U.S. dollars. Compared to the dollar, the euro was down 5.5%, the pound sterling was down 10.4%, the Korean won was down 5.8% and the Hong Kong dollar was down 0.2% in 2022.
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.
This was a year without splashy public offerings, like Universal Music Group’s last year and Warner Music Group’s the year before. Some of the biggest rights acquisitions of all time — for Bob Dylan’s and Bruce Springsteen’s recordings and publishing, and David Bowie’s publishing took place in those years, too. And the time when the biggest companies in the business could acquire their rivals may be over for the time being as well.
Rising interest rates put a chill on the catalog acquisition market and brought down valuations, but there was no shortage of investors for a seemingly never-ending supply of creators willing to take advantage of the streaming boom to part with their catalogs. The list of deals that didn’t even make this list includes various rights for the music of The Ramones, Justin Timberlake, Keith Urban, Louis Prima, Swedish House Mafia, Future and Blake Shelton.
Only two of the last year’s top 10 deals — ranked by dollar amount — didn’t involve a catalog changing hands. One was a reverse merger that made French streaming company Deezer a publicly traded company, while he other was Spotify’s latest acquisition to further its goal of becoming a one-stop destination for audio.
Concord sells asset-backed securities ($1.8 billion)
This month, Concord priced the biggest music-related asset-backed securitization in history: $1.8 billion of senior notes backed by a diversified catalog of music publishing and recorded music rights valued at $4.1 billion. Apollo’s Capital Solutions business structured the transaction and formed an investor syndicate led by Apollo-managed funds. JP Morgan was the co-structuring agent. Music-backed securitization was made famous in 1997 with $55 million of asset-backed securities, commonly referred to as Bowie Bonds, supported by royalties from Bowie’s recorded music catalog. Concord’s offering was significantly larger and diverse than Bowie’s: The catalog behind Concord’s bonds includes compositions and recordings by Phil Collins, Creedence Clearwater Revival, Daft Punk, Miles Davis, Imagine Dragons, Pink Floyd, Cyndi Lauper, Little Richard and James Taylor.
Brookfield Asset Management Invests in Primary Wave ($1.7 billion)
The biggest music industry deal of the year by dollar amount was something of a surprise. The 100-year-old Canadian asset manager Brookfield’s decision to put $1.7 billion into Primary Wave, an active buyer of music rights for nearly 17 years, came during a lull in the market. Rising interest rates were making music rights a less attractive investment, headline-grabbing acquisitions had slowed since the Fed began hiking rates in March and possible changes to tax treatment of catalog sales in 2022 culminated a busy 2021. Brookfield wasn’t discouraged by market forces, though. The two companies spent six months hashing out a deal, Brookfield managing partner Angelo Rufino told Billboard. Brookfield was attracted to Primary Wave’s model of employing marketing and branding experts to build the value of its acquisitions. He called Primary Wave CEO Larry Mestel “the best I’ve ever seen at leveraging brand extensions to supercharge the growth of these assets.”
Kobalt sells majority interest to Francisco Partners ($750 million)
Kobalt has been selling off assets left and right in recent years. It sold its two investment funds that owned music assets — one went to Hipgnosis Song Management for $323 million in 2020, the other to KKR and Dundee Partners for $1.1 billion in 2021 (which resulted in the Chord Music Partners bond offering this year, see below) — and Sony Music purchased Kobalt’s independent distributor and label services provider, AWAL, as well as its neighboring rights business. These moves allowed Kobalt to pay off its debt and finish 2021 with $315 million in cash. This year, Kobalt sold a piece of itself when tech-focused investment firm Francisco Partners, along with Dundee Partners and Matt Pincus’ MUSIC, bought a majority stake in the company for $750 million.
KKR sells asset-backed security ($732.5 million)
The technical sounding Hi-Fi Music IP Issuer II L.P., Series 2022-1, was a bond offering by Chord Music Partners in February, backed by a music catalog valued at $1.13 billion. What the bond lacked in curb appeal it made up for in sheer dollar volume after raising $732.5 million for Chord Music Partners, a venture of KKR Credit Advisors and Dundee Partners. The music publishing catalog behind Hi-Fi Music offering — about 62,000 titles in all — was purchased from Kobalt three months earlier. The According to a report by ratings agency KBRA, the Hi-Fi offering is backed by over 65,000 compositions and master recordings and related assets and includes artists and songwriters such as The Weeknd, Maroon 5, Childish Gambino, Dua Lipa, Mumford & Sons and Stevie Nicks.
Concord acquires Genesis, Phil Collins and Mike + The Mechanics rights ($335 million to $375 million)
Phil Collins’ and Genesis’s The Last Domino tour, which concluded at London’s O2 Arena in March, was a reminder of how beloved the 71-year-old Collins remains 47 years after he took over vocal duties when original Genesis singer Peter Gabriel departed in 1975. In that warm afterglow, Concord acquired the recording catalogs and music publishing rights of Collins, as well as Tony Banks and Mike Rutherford for the years they were in Genesis and Mike + The Mechanics, for something in the range of $335 million to $375 million. (Former Genesis members Peter Gabriel and Steve Hackett did not participate in the deal.) Collins’ solo material, focused on a string of four multi-platinum albums from 1981 to 1989, has 403 million streams in the U.S. this year (through Dec. 8), according to Luminate. In addition, Collins’ catalog has nearly 311,000 airplay spins this year. The acquisition includes Collins’ signature solo hit “In The Air Tonight,” from the 1981 album Face Value, that counts for more than a quarter of his year-to-date on-demand streams, and “That’s All,” a No.6 hit on the Hot 100 from the 1983 album Genesis. “Everyone at Concord feels the weight of the cultural significance of this remarkable collection of works,” Concord president Bob Valentine said when the deal was announced.
Sting sells entire publishing catalog to Universal Music Group ($360 million)
Universal Music Group isn’t the most active buyer of music catalogs, but it makes a splash when it decides to pull the trigger. In 2020, it purchased Bob Dylan’s publishing catalog for an estimated $400 million. In February, UMG acquired Sting’s entire publishing catalog, including his compositions with The Police (Sting was the sole songwriter of the group’s most popular songs, such as “Roxanne,” “Every Breath You Take,” “Message in a Bottle,” “Every Little Thing She Does is Magic”) as well as his solo material (“Fields of Gold,” “Englishman in New York,” “Shape of My Heart,” “If You Love Somebody Set Them Free”). Because UMG already has the master recordings to both the Police and Sting’s solo releases, buying the publishing catalog brings both rights under one roof. That should facilitate licensing and enhance UMG’s ability to generate income from the catalog. Billboard believes Sting’s representatives were shopping the catalog with a $360 million price tag, making the deal the largest for a single artist in 2022. Across both the Police and Sting’s solo releases, the catalog generated 469 million on-demand streams in the U.S. in 2022 (through Dec. 8), according to Luminate.
HarbourView Equity Partners acquires SoundHouse ($325 million)
HarborView Equity Partners burst onto the music business scene in 2021, led by founder and CEO Sherrese Clark Soares, an alum of Morgan Stanley and Providence Equity Partners-backed Tempo Music, and $1 billion backing by Apollo Global Management. Among its initial deals were the publishing catalog of Latin star Luis Fonsi that includes a share of the global hit “Despascito,” the master recording income of country star Brad Paisley, the publishing catalog of country group Lady A and the publishing catalog of Dre & Vidal, the songwriting and production duo who has worked with Alicia Keys, Justin Bieber and Mary J. Blige. HarborView’s biggest-single acquisition is an unknown name with considerable star-power: SoundHouse, the owner of about 20 master recording catalogs and the assets of indie contemporary Christian label InPop. That gave HarborView the rights to some master recordings by the likes of Tech N9ne, Trey Songz, George Jones, Whiskey Myers and Tenth Avenue North. Billboard estimates the deal was worth about $325 million. SoundHouse’s 2021 income was said to be about $24 million.
Sony Music acquired Som Livre ($255 million)
Brazil’s largest domestic record label hit the market as its parent company, Grupo Globo, went through organization restructuring. Announced in 2021, Sony Music’s acquisition Som Livre was finalized in Feb. 2022 after Brazilian regulators said there would be “low market concentration and low barriers to entry” from the merger, despite Sony already having the top record label market share in Brazil and Som Livre being third behind Universal Music Brasil. Som Livre is home to more than 80 artists, including sertanejo act Jorge & Mateus, forró star Wesley Safadão and rising stars like Israel & Rodolffo. Domestic music accounts for 70% of total music consumption in Brazil, the world’s 11th largest recorded music market in 2021, according to the IFPI.
Sony Music acquired Bob Dylan’s recorded music catalog ($200 million)
Thirteen months after Universal Music Group acquired Bob Dylan’s songwriting catalog, Sony Music picked up the bard’s recorded music catalog. Sony has not disclosed the terms of the transaction, but Billboard estimates the catalog generates roughly $16 million per year globally and is worth $200 million or more. The catalog covers all of Dylan’s recordings — 39 studio albums and 16 compilations in the Bootleg series — as well as unreleased material that could be released on future collections. (Separately, Primary Wave acquired Dylan’s share of the master and neighboring rights royalties from the Traveling Wilburys supergroup.) It makes sense that Dylan’s recordings ended up with Sony. The artist spent almost his entire career at Columbia Records, save two albums, Planet Waves and Before the Flood, both released by David Geffen’s Asylum Records in 1974 but distributed by Sony for decades. Dylan’s catalog amassed 313.5 million on-demand streams in 2022 (through Dec. 8), according to Luminate, and provides Sony with ample opportunities for licensing for film, television and advertisements (Airbnb used his track “Shelter From The Storm” from 1975’s Blood on the Tracks in a television ad this year). He used his return to Columbia in 1974 to gain ownership of his recordings, according to Dylan: A Biography by Bob Spitz.
Universal Music Group acquires Neil Diamond Catalog ($145 million)
In February, Universal Music Group announced a deal to acquire Neil Diamond’s song and master recording catalogs, reuniting Diamond’s non-UMG work with music released through UMG’s MCA Records during the artist’s successful 1968 to 1972 streak. Diamond’s catalog includes “Sweet Caroline,” “Cracklin Rosie” and “Forever iIn Blue Jeans.” His songwriting catalog includes compositions for other artists that reached No. 1 on the Billboard Hot 100 chart: “I’m a Believer” by The Monkees (1966); “You Don’t Bring Me Flowers” by Barbra Streisand (1978, co-written with Alan and Marilyn Bergman); and “Red, Red Wine” by UB40 (1988). Additionally, the recording of “Girl, You’ll Be a Woman Soon” by Urge Overkill has an indelible place in pop culture for its use in Quentin Tarantino’s 1994 movie Pulp Fiction. The trove of material included 110 unreleased tracks, an unreleased album and archival video. The deal also includes the rights to release any future music by Diamond should he return to the studio. Billboard estimates the deal was worth about $145 million.
Deezer’s reverse merger with SPAC I2PO ($143 million)
Deezer was one of two music companies to go public in 2022 through a reverse merger with a special purpose acquisition company (SPAC) in April before the SPAC craze fizzled in the second half of the year. (The other was Anghami, an Abu Dhabi-based streaming service. A third, wholesale distribution giant Alliance Entertainment, plans to complete a reverse merger with Adara Acquisition Corp.) The reverse merger with French company I2PO, which traded on the Euronext Paris exchange, provided Deezer with 135 million euros and valued Deezer at 1.08 billion euros ($1.17 billion at the time). The money came through a PIPE (private investment in public equity) subscribed by most of Deezer’s existing shareholders, including Access Industries, Universal Music Group, Warner Music Group, French telecom company Orange, Kingdom Holdings, Eurazeo and Xavier Niel. After investors poured money into blank check companies in 2020 and 2021 in pursuit of companies to take public, SPAC deals are increasingly rare these days. Among the many SPACs to end their search and return funds to shareholders are Music Acquisition Corp, which raised $230 million in Feb. 2021, and Liberty Media’s $575 million Liberty Media Acquisition Corporation.
Spotify acquired audiobook distributor Findaway ($122 million)
Findaway was neither Spotify’s priciest acquisition — it paid more for podcast companies The Ringer and Gimlet and tech platforms Anchor and Megaphone — nor was it the splashiest deal the music streaming giant has made in its roughly 15-year history. But buying the Ohio-based audiobook distributor was a pivotal moment in the company’s years-long transition from a music platform to a broader audio platform. With its share price down 68.1% year to date and investors anxious for profits, Spotify is betting that being a single destination for all things audio is a better strategy than focusing solely on music. The more ways Spotify can keep people listening, the idea goes, the longer consumers will engage with the platform , which in turn will funnels more people from the free version to the subscription service. Plus, audiobook margins are about double what Spotify gets for licensing music. Audiobooks also fit neatly with Spotify’s ongoing battle with Apple over the latter’s 30% share of in-app purchases and subscription revenue. Spotify CEO Daniel Ek’s PR push in recent months has been aided — and overshadowed — by new Twitter CEO Elon Musk’s public takedown of Apple over the same in-app fees.
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.