“The unique nature and the diversification of our sources of income mean music publishers are well protected compared to most businesses – but we are certainly not fully protected. In the last downturn in 2008 music publishing was barely affected. However, the unique and unprecedented nature of the response to COVID-19, with the closure of so many retail establishments, will have a prolonged negative effect. Live obviously will take a hit, so will general licensing from bars restaurants etc. Audio streaming should hold up, and audio visual streaming is likely up. Terrestrial radio is problematic because of the loss of advertisers, however, that might get boosted by increased rates from radio with BMI. Sync will be down. Yet there is new revenue this year from non-traditional digital sources like Peloton, Facebook, and as soon as they license with the independent community, TikTok. With all of that in mind, you can see how the diversification of income is key to maintaining revenue.” – Josh Gruss, CEO Round Hill Music[1]
This is the second article in our three-part series on music intellectual property (“IP”) investing. In this article, we will review the current state of the global music market and the dynamics that impact music industry cash flows. We will highlight the key music industry players, and discuss the industry’s growth drivers, particularly the impact of COVID-19 on different sources of income. Finally, we will review recent music IP acquisition and capital markets activity.
Overview of the Current State of Global Recorded Music & Music Publishing
The global recorded music industry is growing again. According to the International Federation of the Phonographic Industry (IFPI), the recorded music industry revenues increased in 2015, after nearly a decade of piracy driven declines.[2] The global recorded music industry bottomed at $14 billion in 2014 and has grown to $20 billion in 2019, which is in-line with 2004 levels.
Streaming is driving this growth. The convenience and personalization of music streaming combined with the accessibility via smart phones and other smart devices has driven the recorded music industry’s return to growth. According to the International Federation of the Phonographic Industry (“IFPI”), global recorded streaming revenues have grown at a 42% CAGR since 2015 while the entire recorded industry has grown at a 9% CAGR. The graph below from IFPI shows how streaming growth has more than offset declines in physical and download formats over that period.
Meanwhile, the global music publishing industry has been resilient through economic cycles over the past decade. According to the International Confederation of Societies of Authors and Composers (CISAC), global publishing collections have increased steadily from €6.1 billion in 2008 to €8.5 billion in 2018, as shown in the graph below.[3] Will Page, the former chief economist at Spotify, estimates that the global publishing business – CISAC collections plus estimates of non-CISAC publisher revenues from Music & Copyright – is currently $11.7 billion.[4]
Streaming is still in the early innings of adoption. Let’s do some market penetration math:
According to IFPI, there were 341 million global paid streaming accounts by the end of 2019.[5]
This represents less than 11% of the 3.2 billion smartphone users globally.[6]
According to the Digital Media Association, the US market had 99 million paid streaming subscribers (or 30% of the US population) at the end of 2019.[7]
For comparison, in Sweden (the birthplace of Spotify), global paid music streaming penetration is 52%.
Goldman Sachs expects the music industry – recorded music, music publishing, and live music – revenues to increase from $77 billion in 2019 to $142 billion in 2030, representing a 6% CAGR.
In May 2020, Goldman updated their report, increasing their 2030 market size estimate by 37% from $104 billion.[8]
Several positive catalysts for music IP rightsholders are potentially on the horizon, including 1) new licensing opportunities; 2) regulatory changes; 3) emerging market growth.
1) There are new licensing opportunities for music IP owners that are just starting to be realized. Short-form videos (e.g. TikTok and Triller), e-fitness (e.g. Peloton), and other platforms (e.g. Facebook) are just starting to license music IP from rightsholders, creating new sources of future monetization. For example, in July 2020, the National Music Publishers’ Association (“NMPA”) reached a licensing agreement with TikTok, a short form video platform with roughly 100 million US monthly active users and 700 million worldwide monthly active users. Prior to signing the licensing deal, the NMPA claimed that approximately 50% of the music publishing market was unlicensed with TikTok.[9] Other large platforms, such as Facebook and Peloton, have recently signed inaugural licensing deals with music rightsholders. These licensing deals create exciting new future sources of income for music IP owners.
2) As we discussed in Part 1, many music royalty rates are regulated. There have been recent positive regulatory announcements for music IP rightsholders. For example, US musical composition mechanical royalties are regulated by the Copyright Royalty Board (“CRB”), a panel of three judges who determine music royalty rates and terms over a period of time. In January 2018, the CRB ruled that on-demand subscription streaming services (e.g. Spotify, Apple Music, etc.) have to increase the percentage of revenue paid to songwriters and publishers by 44% to 15.1% of revenue over the five-year period of 2018 to 2022.[10] While several streaming services are currently appealing this decision, it could potentially have a very positive impact on US mechanical royalties for rightsholders.
3) Emerging markets, such as China and India, are only just starting to pay for music IP. According to IFPI’s 2019 Global Music Report, China was the 7th largest recorded music market and India was not even in the top 10, despite having the world’s two largest populations.[11] A Goldman Sachs analysis notes that paid streaming penetration rates in China and India are 4% and 3%, respectively.[12] Furthermore, the below chart from Goldman shows how little is currently spent per capita on music in emerging markets relative to developed markets.[13] With that being said, IFPI notes strong 2019 recorded music growth in China and India of 16% and 19%, respectively, as progress is made in copyright laws and streaming adoption.
Key Music Industry Players
The recorded music and music publishing industries have many players. As discussed in Part I of this series, record labels and music publishers are the traditional investors in the space. They sign performing artists and songwriters and help them create and monetize new music. Examples include Universal Music, Sony Music, Warner Music Group, and BMG to name a few. Meanwhile, music royalty funds focus on acquiring existing music rights that have a history of stable cash flows. Music royalty fund formation has increased significantly over the past several years. Some examples of royalty funds include Hipgnosis Songs Fund, Round Hill Music, Kobalt Capital, Tempo Music Investments, and Shamrock Capital. In certain cases, royalty funds have also signed artists and songwriters to release new music, blurring the line between them and traditional labels and publishers. In Part III of this series, we will discuss different ways to invest in music IP.
The music industry is concentrated and dominated by three main players. According to Music & Copyright, the three largest record labels – Universal Music Group (32% share), Sony Music Entertainment (20%), and Warner Music Group (16%) – had a 68% share of the recorded music market. Similarly, the three largest music publishers – Sony (25%), Universal Music Publishing (21%), and Warner Chappell Music (12%) – maintain a 58% share of the music publishing market.[14] Universal, Sony, and Warner are collectively referred to as the “Majors” or the “Big Three.”
COVID-19 Impact on Music Growth Drivers
Music industry revenues have held up relatively well compared to other industries during the COVID-19 pandemic. The growth of digital streaming has allowed consumers to access and enjoy music regardless of social distancing restrictions. At the same time, other forms of music consumption, especially live, have suffered.
There have been modest disruptions to streaming as a result of COVID-19. At the start of the pandemic, audio streaming saw a decrease in listening hours, as consumers drove less and focused on other platforms (e.g. video streaming) and forms of entertainment (e.g. TV, video gaming). However, according to Billboard, these declines returned to growth by the end of April, as shown in the graph below.[15]
Indeed, the modest decline in engagement as measured by listening hours has not impacted consumers’ willingness to pay for audio streaming. Spotify’s 2Q 2020 Monthly Active Users (“MAUs”) and paid streaming subscribers increased 29% and 27% year over year, respectively, which was at the top of the company’s guidance. As a result, Spotify’s 2Q 2020 premium revenue increased 17% year over year.[16]
However, other sources of music income, especially live music, have suffered during the pandemic. The live music market has been severely impacted by the global pandemic. For example, Live Nation, a leading live entertainment company, experienced a 98% year over year revenue decline in 2Q 2020 with global concerts shutdown due to the pandemic. Live Nation management expects concerts to return to scale by summer 2021.[17] Similarly, an analysis by Goldman Sachs projects live music revenue to decrease 75% in 2020 before recovering in 2021 or 2022, as reflected in the graph below.[18]
Digital radio, terrestrial radio, and general licensing income have also been adversely impacted by the pandemic. Sirius XM, the satellite and digital radio broadcaster, saw total company sales decline 5% year over year in 2Q 2020, driven by a 34% decline in advertising revenue. For the full year, Sirius XM management expects total company sales to decline 3% year over year.[19] Lower advertising spending has impacted terrestrial radio too, although the pull back may be improving. iHeartMedia, the owner of 800+ AM/FM radio stations, saw an even larger impact with 2Q 2020 sales declining 47% year over year. iHeartMedia did note that the year over year revenue decline had improved each month from April (down 50% year over year) through July (down 27% year over year).[20] As a result, the royalties paid by radio stations to Performance Rights Organizations (“PROs”) will likely fall sharply over the next couple quarters. Indeed, ASCAP, one the largest PROs, President Paul Williams released the following statement in April 2020: “As COVID-19 has continued to escalate and more and more of our licensee businesses have shut down, we have had to carefully review our cash forecasts and plan for more disruption to our revenue collections and member distributions. As I mentioned in my last letter, the pandemic will have a material and negative impact financially on almost every category of licensing, so it is important to ensure that we are prepared for a decline in both revenues and distributions, which is why we took the step weeks ago to freeze numerous operational expenses.”[21]
The three “major” record labels and publishers have seen these trends begin to play out in recent earnings reports. Universal Music Group, which is a part of Vivendi, reported total company revenue increasing 6% year over year with Recorded Music segment revenue up 7%, Music Publishing segment revenue up 23%, and Merchandising segment revenue down 40%. Universal’s streaming revenues drove the revenue increase offsetting declines in physical (CDs), downloads, and merchandise sales.[22] Sony Music segment revenue declined 12% year over year in the three months ended June 30, 2020. Sony’s Recorded Music streaming revenue increased 4% but was more than offset by declines in other Recorded Music, Music Publishing, and Visual Media revenue primarily caused by COVID-19.[23] Finally, Warner Music Group reported total company revenue decreasing 5% in the three months ended June 30, 2020. Warner’s Recorded Music streaming revenue increased 9% and Music Publishing increased 1% during the quarter but was more than offset by declines in physicals, downloads, and artist services revenues.
Recent Music IP Acquisition & Capital Markets Activity
Wall Street has been taking notice of the industry’s secular growth story. In the past few years, billions of dollars have been raised privately and publicly to invest in music intellectual property rights and the companies that own these rights. Just recently, Warner Music Group went public, raising just under $2 billion and valuing the company at roughly $13 billion.[24] Hipgnosis Songs Fund raised over £850 million in its July 2018 IPO and four subsequent equity offerings.[25] Universal Music announced that it is planning an IPO in the next three years.[26] Meanwhile, several private equity firms have raised funds focused on music IP rights. In December 2019, Providence Equity Partners announced $650 million of equity and debt capacity for its music IP acquisition platform Tempo Music Investments.[27]In July 2020, Shamrock Capital announced the closing of its second Content IP Fund, which focuses on different types of intellectual property including music IP. Meanwhile in the debt capital markets, Concord Music closed a $1 billion debt financing in August 2020. In short, there is a significant amount of activity in the equity and debt capital markets for music IP assets.
With capital pouring into the space, music IP acquisition activity has been hot. For example, in January 2018, Round Hill Music purchased Carlin Music Publishing – home to songs by Elvis Presley, James Brown, and Billie Holiday – for an estimated $240 million.[28] In June 2019, Scooter Braun’s Ithaca Holdings and Carlyle Group acquired independent label and publisher Big Machine Label Group for an estimated $300 million.[29] In March 2020, a consortium led by China’s Tencent Holdings bought a 10% stake in Universal Music Group (“UMG”), valuing UMG at €30 billion. And meanwhile, since going public in July 2018, Hipgnosis Songs Fund has spent over $1 billion, acquiring more than 60 catalogs. In short, the M&A market is very active with BMG’s CEO Hartwig Masuch even calling the current environment a “feeding frenzy.”[30]
The music industry has experienced a dramatic turnaround in the past five years. Technological advances driven by streaming have ushered in a period of growth. And while COVID-19 has created several challenges, the industry is holding up relatively well with several potential new licensing opportunities on the horizon. As a result, capital is flowing into music IP investing with acquisition activity remaining high. The combination of capital formation and increased acquisition activity has led music IP valuations to trend upwards over the past few years.
Looking Ahead
In Part 3 of this three-part series, we will dive deeper into why music royalties are considered an attractive asset class in the current market environment. We will review the main levers that active investors use when attempting to increase the value of their music IP. And finally, we will highlight ways to invest in music IP and some potential pitfalls to look out for.
[1] Music Business Worldwide, “Anyone Can Go out and Spend $1bn. The Trick is Getting a Good Return for Your Investors”, https://www.musicbusinessworldwide.com/josh-gruss-round-hill-anyone-can-go-out-and-spend-1bn-the-trick-is-getting-a-good-return-for-your-investors/[2] IFPI Annual Report. https://www.ifpi.org/news/IFPI-GLOBAL-MUSIC-REPORT-2019[3] CISAC 2019 Global Collections Report. https://www.cisac.org/CISAC-University/Library/Global-Collections-Reports/Global-Collections-Report-2019[4] Billboard, “Is the Music Copyright Business Worth More Than Ever?”, https://www.billboard.com/articles/insight-reports/9324642/music-copyright-insight-report[5] IFPI 2019 Global Music Report, https://www.ifpi.org/media/downloads/GMR2019-en.pdf[6] https://www.statista.com/statistics/330695/number-of-smartphone-users-worldwide/[7] Digital Media Association, “Streaming Forward Report”, https://dima.org/streaming-forward-report/[8] Goldman Sachs Investment Research, “Music in the Air: The Show Must Go On”, May 2020.[9] Financial Times, “Music companies threaten to sue TikTok over copyright”, April 2020.[10] Music Business Worldwide, “Major Victory for Songwriters as US streaming royalty rates rise 44%”, https://www.musicbusinessworldwide.com/major-victory-songwriters-us-mechanical-rates-will-rise-44-2018/[11] IFPI 2019 Global Music Report, https://www.ifpi.org/media/downloads/GMR2019-en.pdf[12] Goldman Sachs Investment Research, “Music in the Air: The Show Must Go On”, May 2020.[13] Goldman Sachs Investment Research, “Music in the Air: Stairway to Heavev”, October 2016.[14] Music and Copyright, https://musicandcopyright.wordpress.com/tag/market-share/[15] Billboard / MRC Data, “COVID-19: Tracking the Impact on the Entertainment Industry (Release 5)” https://static.billboard.com/files/2020/07/COVID-19-Entertainment-Tracker-Release-1_5-1594044463.pdf[16] Spotify 2Q 2020 earnings release, https://investors.spotify.com/financials/press-release-details/2020/Spotify-Technology-S.A.-Announces-Financial-Results-for-Second-Quarter-2020/default.aspx[17] Live Nation 2Q 2020 earnings release, https://www.livenationentertainment.com/2020/08/live-nation-entertainment-reports-second-quarter-2020-results/[18] Goldman Sachs Investment Research, “Music in the Air: The Show Must Go On”, May 2020.[19] Sirius XM 2Q 2020 Earnings Release, http://siriusxm2019cr.q4web.com/investor-overview/press-releases/press-release-details/2020/Sirius-XM-Reports-Second-Quarter-2020-Results/[20] iHeartMedia 2Q 2020 Earnings Release, https://investors.iheartmedia.com/news/news-details/2020/iHEARTMEDIA-Inc.-Reports-Results-for-2020-Second-Quarter/default.aspx[21] ASCAP press release, April 2020, https://www.ascap.com/news-events/articles/2020/03/message-paul-williams-4320[22] Vivendi 1H 2020 financial results, July 2020, https://www.vivendi.com/wp-content/uploads/2020/07/20200730_ViV_Financial-Report-for-the-HY-2020.pdf[23] Sony fiscal 1Q 2020 financial results, August 2020, https://www.sony.net/SonyInfo/IR/library/download/Sony_Quarterly_Securities_Report_2020Q1.pdf[24] https://www.musicbusinessworldwide.com/warner-music-group-started-today-with-a-12-8bn-valuation-its-now-worth-over-2bn-more/[25] Music Business Worldwide, “Hipgnosis has another $300 million to spend on songs”, July 2020.[26] Variety, “Universal Music Group planning IPO within next three years”, February 2020.[27] https://www.provequity.com/news/providence-and-warner-music-group-launch-tempo-music-investments[28] Variety, “Round Hill Completes $240 Million Acquisition of Carlin Music Publishing”, January 2018.[29] Billboard, “Scooter Braun Acquires Scott Borchetta’s Big Machine Label Group, Taylor Swift Catalog for over $300 million”, June 2019.[30] Music Week, “BMG’s Hartwig Masuch rails against a feeding frenzy of music acquisitions”, August 2019.
Jimmy- thank you for the edifying newsletter on the music industry and investment landscape.