Two years ago, Goldman Sachs issued a report which whipped up global excitement over the future of the record business — most particularly, the future of the three major music rightsholders, Universal Music Group, Sony Music Entertainment and Warner Music Group.
The headline was an exciting one: Goldman’s report forecast that global recorded music industry revenues would more than double by 2030, with annual streaming sales reaching $28 billion by the same date.
The investment banking community certainly paid attention to Goldman’s optimism; witness the ever-escalating valuations of Universal Music Group which have followed. Grizzled veterans of the music business, though – people who learned lessons about bursting bubbles and powerful threats during the Napster era – made some skeptical noises. (Goldman’s write-up was called “Music In The Air”; one industry joker forwarded it on to me saying, “More like Pie In The Sky.”)
Early signs, however, suggest that Goldman’s forecasts may have been conservative. Within its data, Goldman predicted that, in 2018, global recorded music revenues would reach $18.1 billion, with streaming revenues of $8.4 billion. The reality was even better: According to since-published IFPI data, global recorded music revenues in 2018 rose 9.7 percent to $19.1 billion, with streaming revenues weighing in at $8.9 billion.
The recorded music industry is buoyant, then, with Universal Music Group thumping its chest over just posting what it calls “the best year for any music company ever.” But the music business would be both naive, and ignorant of recent history, to suggest that there aren’t some menacing potential hazards ahead of it.
While some high-fiving over the industry’s recent commercial boom is warranted, the major record companies should also be battening down the hatches for the following five threats.
1. A slowdown in European revenues
Chock full of positive numbers like those mentioned above, the IFPI’s 2019 Global Music Report – the industry-standard worldwide sales sheet – is a lesson in triumphalism… with the notable exception of one particular set of numbers stinking up the place. Europe, a global economic superpower, saw almost zero growth last year in annual recorded music revenues – up just 0.1 percent from 2017.
This was largely the product of two factors: the continued prominence of the declining CD format in Germany, and the near-saturation of streaming services in the Nordics. Germany, the fourth-biggest recorded music market in the world, saw revenues drop 9.9 percent, with sales of physical formats falling by $127 million year-on-year. Money from streaming services in the market grew, but only by $113 million, failing to make up the shortfall from CDs’ decline.
The U.K. also had a rocky year. The market’s wholesale recorded music revenues increased 3.1 percent in 2018, according to local trade body the BPI. But inflation in the country actually increased by a bigger number (3.3 percent) in the same period – meaning that, economically speaking, the U.K.’s industry saw a slight decline with inflation factored in.
Over in Scandinavia, a different problem is becoming apparent. Sweden’s total market grew by just 2.8 percent in 2018, while Norway was up by an even slimmer 1.7 percent. Both nations have seen streaming become completely dominant (making up 90.5 percent of all “sales” revenues in Norway last year, and 89.4 percent in Sweden). Concerns are now rising over where growth is going to come from in the future.
The USA isn’t exempt from concerns of a streaming slowdown, either: In Q1 2019, Spotify added 800,000 active users in North America. That’s a steep dropoff from the same quarter of the prior year (Q1 2018), when Spotify added more than three times as many active users (3.5 million).
2. A surge in artist power – and pricier deals
Some more IFPI statistics drew further music industry celebration last week. According to a new report from the global trade body, record label investment in A&R during 2017 reached $4.1 billion, as total expenditure by those same labels on their artists (including marketing costs) hit $5.8 billion. This was significantly up, in both cases, from 2015, when A&R spending by the record labels stood at $2.8 billion, with total expenditure reaching $4.5 billion.
Why is this not such good news for Universal, Sony and Warner? Considered against the industry’s total revenues in 2017, spending on artists claimed 33.8 percent. Yet in 2015, says the IFPI, total record company spending on artists burned through 27 percent of these firms’ total revenues. In other words, record companies are spending a significantly bigger percentage of their profits on artists than they were two years ago.
And here’s an extra important note: I’ve checked with the IFPI, and the ‘A&R’ spending of labels in this case includes advances and royalty payments to new artists. The upshot: thanks to increasingly generous deal structures, the major record companies are paying artists a bigger portion of their annual revenues than ever before.
“In [the past] five years, we have virtually eliminated illegal file sharing in the music industry.”
This sentence, delivered by the head of the IFPI in Norway, Marte Thorsby, in 2015, caused much celebration across the music business. She was absolutely right, too: The growth of legitimate streaming services like Spotify has killed off great swathes of activity on torrent download sites like The Pirate Bay. There is, however, a new threat emerging in the piracy space – and it’s anything but eliminated.
According to piracy market monitor MUSO, there were over 189 billion visits to piracy sites in 2018 across the world. Almost 60 percent of these visits, its research suggests, went to unlicensed web streaming sites – where people can illegally stream movies, TV, music and more on cloud-based servers. Just 13 percent of piracy activity was on traditional-style torrent download sites, which decimated the music industry for so long.
There is reason for cheer amongst the record labels, however. MUSO estimates that just 15.9 percent of these 189 billion visits involved music content – and that music actually saw the largest overall decline in piracy of any content type, down 34 percent from the previous year. Still, 15.9 percent of 189 billion means there were some 30 billion music-related piracy site visits in 2018 – hardly a problem which has gone away.
4. Pressure on streaming prices
Rolling Stone has previously covered the perilous decline in Spotify’s “ARPU” (Average Revenue per Paying User) over the past few years. Effectively, Spotify’s average subscription price is tumbling, partly due to economically-sensitive price points in markets like Indonesia, India and Latin America, and partly because of discounted tricks to draw in more customers — including family plans, bundle deals and more standard loss-leading price promotions.
Warner Music Group CEO Steve Cooper is vocally disdainful of this trend, recently commenting that his firm would “continue to push back against the devaluation of our artists’ and songwriters’ music from freemium models, mismanaged family plans and other customer acquisition strategies employed by streaming platforms at the expense of creators.”
Within Warner’s own “‘risk factors” in its financial filings, however, is a clue that such pushing back could get tricky. The firm acknowledges that “there may be downward pressure on our pricing and our profit margin” in the future, if any one streaming partner gains sufficient market leverage to enforce it (say, for example, if Jeff Bezos’ Amazon bought Spotify).
Warner explains: “[We] are currently dependent on a small number of leading digital music services, which allows them to significantly influence the prices we can charge in connection with the distribution of digital music… [As] the music industry continues to transform, it is possible that the share of music sales by… digital music services such as Amazon, Apple Music, Spotify and Tencent will continue to grow, which could further increase their negotiating leverage and put pressure on [our] profit margins.”
5. The unthinkable
Back in February, I suggested in this space that a “storm was coming” to the global music industry thanks to the impending sale of Universal Music Group.
The biggest of all three major music rightsholders, Universal is being valued by certain investment banks at anywhere up to 50 times (50 times!) its last EBITA annual profit of $1 billion. UMG’s owner, Vivendi, is looking to sell up to 50 percent of the music company by the end of January 2020. If UMG sells at a high multiple (anything from 25 times up), that will immediately increase the valuation of its main competitors — whose owners may then choose to cash in.
What hasn’t really been considered up till now, however, is what happens if Universal fails to sell. Bloomberg just suggested this could be a possibility, reporting that “some private equity investors balk at the high price and slow pace” of the UMG sale process.
If UMG can’t flog itself on the free market, it may send a message to the investment community that recent valuations of the digital music industry have been over-baked, and require a negative correction — which is bad news for the owners of Universal’s rivals Sony and Warner (and possibly Spotify shareholders, too).
This scenario would rather dampen down the record industry’s current buoyant mood, potentially acting as the pin that pops today’s widespread market exultation.
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