The global music recording industry is back in growth territory again. According to the International Federation of the Phonographic Industry (IFPI), recorded music revenue returned to growth in 2015, after nearly two decades of piracy-driven declines. The global industry’s revenue bottomed out at $14 billion in 2014 but grew to $20 billion in 2019, back in line with 2004 levels.
Streaming Is Driving Music’s Growth
The convenience and personalization of music streaming, combined with the accessibility afforded by smartphones and smart devices, has driven recorded music’s growth. IFPI notes that global streaming revenues grew at a 42% CAGR (compound annual growth rate) since 2015, compared to the entire recording industry’s 9% CAGR. The following chart from IFPI shows the evolution of the industry’s revenue composition and how streaming growth has more than offset declines in physical and downloaded formats over the past decade.
Global Music Recording Industry Revenues: 2001-2019 ($ Billion)
Meanwhile, the global music publishing industry has proven resilient throughout the economic cycles of the past decade. According to the International Confederation of Societies of Authors and Composers (CISAC), publishing collections (performance royalties) increased from €6.5 billion in 2013 to €8.5 billion in 2018. 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 worth $11.7 billion in 2020.
Despite its seeming ubiquity, streaming is still in the early innings of mass adoption. The following statistics highlight how the market still has room to expand:
- According to IFPI, there were 341 million global paid streaming accounts by the end of 2019.
- The figure represents less than 11% of the 3.2 billion global smartphone users.
- 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.
- For comparison, in Sweden (the home of Spotify), global paid music streaming penetration is 52%.
- In May 2020, Goldman Sachs estimated the entire music industry’s revenue (live, recorded, and publishing) to increase from $62 billion in 2017 to $131 billion in 2030, representing a 6% CAGR. The 2030 estimate was an increase on its original prediction of $104 billion, made in October 2016.
Music Intellectual Property Rights in the Spotlight
Music royalty payments derive from the underlying intellectual property (IP) rights of songs. The most common types of IP are copyrights, trademarks, patents, and trade secrets. Music - including lyrics, composition, and sound recording - is protected under copyright law.
What Is Music Copyright?
When music is put into tangible form (e.g., recorded or written in sheet music), a copyright is created. Further protections are given under law once the work is registered with the U.S. Copyright Office. Copyright provides its owner(s) with exclusive rights for a period of time. In general, rights last for 70 years after an author’s death.
A song contains two copyrights:
- Sound recording copyright is “a fixation of a series of sounds” associated with a particular recording. The sound recording copyright is owned by an artist, who often assigns ownership to their representative record label.
- Musical composition copyright is the song’s composition (music and lyrics) by the songwriter(s). The musical composition copyright is owned by a songwriter, who often assigns ownership and representation to a music publisher.
Several positive catalysts for music IP rightsholders are currently on the horizon, including:
- New licensing opportunities
- Regulatory changes
- Emerging market growth
New Licensing Opportunities
There are new licensing opportunities for music IP owners that are just starting to emerge. 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 platform with roughly 100 million US monthly active users and 700 million worldwide monthly active users. Before signing the licensing deal, the NMPA claimed that approximately 50% of the music publishing market was unlicensed with TikTok. 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.
Most music publishing rights are regulated, and recent regulatory announcements have been beneficial to music IP rightsholders’ interests. 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 and Apple Music) must increase the percentage of revenue paid to songwriters and publishers by 44% to 15.1% of revenue over the five years of 2018 to 2022. While several streaming services are currently appealing the decision, it could have a very positive impact on composition mechanical royalties for US rightsholders.
Emerging Market Growth
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 seventh-largest music recording market, and India was not even in the top 10, despite having the world’s two largest populations. Goldman Sachs’ “Music in the Air” analysis notes that paid streaming penetration rates in China and India are currently 4% and 3%, respectively. Furthermore, the following chart from Goldman shows how little is currently spent per capita on music in emerging markets relative to developed markets.
Music Spend per Capita Across Regions: 2015 (USD)
Despite the gulf in spending, IFPI reported strong 2019 recorded music revenue growth in China and India of 16% and 19%, respectively, attributed to progress in copyright enforcement and streaming adoption. If the trend continues, China and India will increasingly grow as a revenue source for the industry.
Who Are the Key Music Industry Players?
The music recording and publishing industries have many players. 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 with a history of stable cash flows. Music royalty fund formation has increased significantly over the past several years. Prominent royalty funds include Hipgnosis Songs Fund, Round Hill Music, Kobalt Capital, Tempo Music Investments, and Shamrock Capital. In some instances, royalty funds have also signed artists and songwriters to release new music, blurring the line between them and traditional labels and publishers.
The music industry is concentrated and dominated by three main players. According to Music & Copyright, the three largest record labels - Universal Music Group (32% market share), Sony Music Entertainment (20%), and Warner Music Group (16%) - hold a 68% share of the music recording 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.
Universal, Sony, and Warner are collectively referred to as the “Majors,” or the “Big Three.” Industry concentration is relevant in music because the majors’ deals with streaming services benefit from their market share: As streaming services’ revenues grow, so should the majors’ income. Furthermore, streaming and digital download margins are roughly 50-60%, compared to physical margins of 40-50%, lower due to manufacturing and distribution costs. As streaming continues to take a greater share of sales, the majors’ operating margins will benefit.
How Has COVID-19 Impacted the Music Industry?
“The unique nature and the diversification of our sources of income mean music publishers are well protected compared to most businesses.”
Josh Gruss, CEO of Round Hill Music (Source)
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.
Streaming Remains Resilient
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 and video gaming). However, according to Billboard, these declines returned to growth by the end of April.
Indeed, the modest decline in engagement measured by listening hours has not impacted consumers’ willingness to pay for audio streaming. Spotify’s Q2 2020 Monthly Active Users (MAU) and paid streaming subscribers increased by 29% and 27% year-on-year, respectively, which was at the top of its guidance. As a result, Spotify’s Q2 2020 premium revenue increased by 17% year-on-year.
Spotify Monthly Active Users (MAUs): 2017-2020 (Q2)
Live Music Has Suffered
Other sources of music income, especially live music, have suffered during the pandemic. Social distancing restrictions have severely impacted the live music market. For example, Live Nation, a leading live entertainment company, experienced a 98% year-on-year revenue decline in Q2 2020, driven by global concert shutdowns. Live Nation management expects concerts to return to scale by summer 2021. Its view is corroborated by Goldman Sachs, which projects live music revenue to decrease 75% in 2020 before recovering in 2021 or 2022.
Reduced Advertising Weighs on Radio and General Licensing Income
Sirius XM, the satellite and digital radio broadcaster, saw total company sales decline 5% year-on-year in Q2 2020, driven by a 34% decline in advertising revenue. For the full year, Sirius XM management expects total company sales to decline by 3%.
Lower advertising spending has also impacted terrestrial radio, although the pullback may be reversing. iHeartMedia, the owner of 800+ AM/FM radio stations, saw an even larger impact than Sirius XM, with Q2 2020 sales declining 47% year-on-year. iHeartMedia did note that annual revenue declines had improved each month from April (down 50% year-on-year) through July (down 27% year-on-year).
As a result, royalties paid by radio stations to Performance Rights Organizations (PROs) will likely fall sharply over the next couple of quarters. ASCAP (one of the largest PROs) President Paul Williams noted in April 2020 that as more licensee businesses shut down, the pandemic will “have a material and negative impact financially on almost every category of licensing.”
The “Majors” Are Impacted, Positively and Negatively, by All Factors
The three “major” record labels and publishers have seen industry trends begin to play out in recent earnings reports. Universal Music Group was the only label to see revenue increase year-on-year up to June 30, 2020 (+6%), while Sony (-12%) and Warner Music Group (-5%) reported declines. Inside the results, all three attributed positive growth trends to streaming, but pandemic-related lockdowns negatively impacted non-digital revenues, especially in the areas of merchandise, physicals (e.g., CDs), and artist services.
Recent Music IP Acquisition and Capital Markets Activity
Wall Street has been taking notice of the music industry’s secular growth story. In recent years, billions of dollars have been raised, privately and publicly, to invest in music intellectual property rights and the companies that own them:
- Warner Music Group recently went public, raising just under $2 billion at a $13 billion valuation.
- Hipgnosis Songs Fund raised more than £850 million in its July 2018 IPO and four subsequent equity offerings.
- Universal Music announced that it is planning an IPO in the next three years.
Meanwhile, several private equity firms have raised funds focused on music IP rights:
- December 2019: Providence Equity Partners announced $650 million of equity and debt capacity for Tempo Music Investments, its music IP acquisition platform.
- July 2020: Shamrock Capital closed its second Content IP Fund, which focuses on different types of intellectual property, including music IP.
- August 2020: Concord Music closed a $1 billion debt financing.
Overall, 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. Recent years have seen several significant deals:
- 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.
- June 2019: Scooter Braun’s Ithaca Holdings and Carlyle Group acquired independent label and publisher Big Machine Label Group for an estimated $300 million.
- March 2020: A consortium led by China’s Tencent Holdings bought a 10% stake in Universal Music Group (UMG) at a €30 billion valuation.
Since going public in July 2018, Hipgnosis Songs Fund has also spent more than $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.”
The combination of capital formation and increased acquisition activity has led music IP valuations to trend upward over the past few years. In a future article, I will go deeper into the asset class of royalties and, in particular, why music royalties are considered an attractive asset class in the current market environment. The article will review the main levers that active investors use when attempting to increase music IP’s value, the potential pitfalls to look out for, and the instruments used for IP investing.
More Resilient: The Music Industry in 2020
The music industry has experienced a dramatic turnaround over the past five years. Technological advances driven by streaming have ushered in a period of growth. While COVID-19 has created several challenges, the industry is holding up relatively well with several new licensing opportunities on the horizon. As a result, capital is flowing into music IP investing, with acquisition activity remaining high.
Understanding the basics
After nearly two decades of piracy-driven declines, the global music recording industry’s revenue bottomed out at $14 billion in 2014. Since then, due in large part to streaming, revenue has grown to $20 billion in 2019, back in line with 2004 levels.
The music industry has benefited from the growth of streaming services, which have been the main driver of global music recording revenue growth since 2015. For music labels, streaming margins are generally higher (50-60%) than physical music products (40-50%).
Between 2007 and 2019, global live music revenue grew by 5% annually. The market has been severely impacted by 2020 lockdowns, with Live Nation experiencing a 98% year-on-year revenue decline in Q2. Goldman Sachs projects global live music revenue to decrease 75% in 2020 before recovering in 2021 or 2022.