Right here we go once more. The music enterprise is gently ushering itself again into motion following some much-needed Vacation respite.
However what does 2023 maintain in retailer for the trade and its key gamers?
Properly, to be fully trustworthy with you, we don’t precisely know. How on earth might we?
(That’s one of many key flaws, isn’t it, about this glorious trade? Amongst its many, many attributes: Too many individuals pretending they know what couldn’t probably be recognized about the way forward for the music enterprise, when the way forward for the music enterprise has proven itself – time and time once more – to be one of many least predictable issues within the business universe.)
Anyway, right here’s what we do know. We do know that the next 5 stats actually set the scene for a number of the standout happenings, tensions, and hopes of the music biz in 2023.
And we do know that you simply’re most likely going to be higher armed for no matter this yr throws on the music rights trade for those who perceive why every of them is so necessary…
1) 5%… and what’s a famous person?
It’s possible you’ll bear in mind this one from last year, however it’s most actually value revisiting.
In response to Warner Music Group, again in 2012, its Prime 5 largest international superstars generated 15% of the corporate’s annual recorded music (bodily and digital) income. A decade on, in 2022, that yr’s Prime 5 superstars at Warner generated simply 5% of equal income.
MBW did the maths on that determine: In response to our estimates, the sum of money generated by the Prime 5 superstars in every of those years really fell – in actual numerical phrases – from 2012 to 2022 (see chart beneath), regardless of Warner’s total recorded music (bodily & digital income) greater than doubling throughout the identical timeframe.
Why it issues: Via one lens, it is a story about Warner Music Group, and the way its new CEO, Robert Kyncl, will reposition WMG amid the shifting dynamics of the ‘famous person economic system’. But there’s a development that’s larger than WMG occurring right here: The atomization of royalty income amongst a far wider pool of top-tier artists – whether or not through streaming’s globalization of listening, or through the rise of the so-called ‘center class’ of artists – has chomped into royalty earnings that have been as soon as the unique protect of worldwide pop icons. It’s not a stretch to counsel that Universal Music Group‘s current re-launch and investment in its international artists and label companies division, Virgin Music Group, plus the rampant success of Sony Music‘s The Orchard in recent times each additionally nod in the direction of this development.
The large query it asks: If superstars are solely producing 5% of a serious document firm’s income at the moment, what occurs when that quantity sinks to 2% – or beneath 1%? At that time, what even is a ‘famous person’?
2) $1 billion… and the fallacy that “the labels are taking all of Spotify‘s cash”
MBW has obtained fairly the response to a piece we published the other day declaring that Spotify is now value someplace round a 3rd of Common Music Group when it comes to market cap worth – after the 2 corporations have been value roughly the identical quantity a yr prior.
A lot of that response has taken the identical tone. As one US govt put it in a textual content to MBW at the moment: ‘How the F- are Spotify imagined to develop their worth when the key labels take all of their revenue??!!’
Excitable grammatical prospers apart, this sums up a thesis that’s extensively shared over music trade dinners worldwide, and for good purpose: In response to Spotify’s Q3 2022 results (the final to be introduced), the corporate spent 75.3% of its EUR €3.04 billion in income that quarter on ‘value of income’ – a class primarily comprised of royalty funds to labels and publishers.
Nevertheless, look a bit deeper and this story will get extra nuanced.
Q3 2022 was a milestone quarter for an additional purpose: Spotify spent an all-time excessive of EUR €978 million on working prices within the three months to finish of September, throughout three sub-categories: ‘Analysis and Improvement’, ‘Gross sales and Advertising and marketing’, and ‘Common and Administrative’. Which means Spotify spent comfortably over USD $1 billion on working prices in a single quarter.
A lot of that $1 billion-plus working expenditure in Q3 would have gone on employees: In 2021 (the final yr for which Spotify has printed an annual report), SPOT employed 6,617 individuals on common, a determine that was up by over 1,000 YoY.
Why it issues: Spotify-focused analysts expressed disappointment over the corporate’s gross margin efficiency all through 2022, regardless of an impressive performance when it came to subscription revenue. Associated: in Q3, Spotify posted a quarterly working lack of €228 million. Spotify’s spending on Gross sales and Advertising and marketing particularly has lengthy been quietly questioned by its music rightsholder companions (lest we neglect that Common Music Group continues to personal round 3.4% of Spotify, according to UMG’s 2021 annual report). That Gross sales and Advertising and marketing value shot as much as practically half a billion US {dollars} (EUR €432m) in Q3 2022.
The large query it asks: Largely due to analyst disappointment over that gross margin impacting on share value, Spotify is presently solely value about $15 billion on the New York Inventory Change. If it doesn’t enhance its gross margin quickly, might it change into an acquisition goal for a tech big in 2022? (Talking of which, only for enjoyable: Think about Twitter buys it tomorrow. What’s the very first thing Elon Musk does?)
3) 100,000… and the battle to outline ‘premium’ music
It’s a quantity that’s already labored its method into music enterprise lore (MBW was first to report it, naturally): Over 100,000 tracks at the moment are being uploaded to streaming companies globally.
That’s based on two of the key music corporations, who’re, it’s honest to say, beginning to change into relatively involved in regards to the impression this tidal wave of distributed music (music of it coming through the likes of DistroKid and Tunecore) is having on their streaming market share.
“Ever since we had 99 cent downloads, there’s been a bent for music to be priced the identical. And everyone knows that each one music isn’t equal.”
Over the previous 12 months, we’ve seen feedback from the likes of Rob Stringer (Chairman, Sony Music Group) and Sir Lucian Grainge (Chairman/CEO, Common Music Group) hinting at a hope to in the future see sure kinds of music valued larger – in royalty phrases – than different kinds of music. Significantly, in Stringer’s phrases, the 31-second “flotsam and jetsam” tracks that clog up sleep/leisure/rain-sounds playlists on Spotify and different companies, however which receives a commission the identical per play as, say, A Day In The Life.
Steve Cooper, the outgoing CEO of Warner Music Group, gave a memorable tackle this debate in an interview with MBW on the shut of final yr. He stated: “[In] the dwell music house, the worth varies relying on who you’re seeing and what your expertise is. I believe the recorded music house must be extra like that. Ever since we had 99 cent downloads, there’s been a bent for music to be priced the identical. And everyone knows that each one music isn’t equal.”
Why it issues: The three main document corporations plus Merlin cumulatively had a 77% share of music streams on Spotify within the yr 2021, based on SPOT’s annual report that yr. That 77% determine was down by a full 10% on the 87% they counted in 2017. The inflow of 100,000 tracks a day to companies like SPOT will certainly solely dilute that market share but additional.
The large query it asks: To one of the best of our data, the now-infamous 100,000-tracks-a-day stat is in reference – not less than within the giant majority – to human-made music. What occurs when AI music-making platforms begin spitting out 1000’s of Dua Lipa / Justin Bieber / Travis Scott clones each 24 hours too? Gained’t the majors be extremely involved that Tencent Music is already making thousands of its personal tracks with AI vocals? And that TikTok bought its own AI music firm, Jukedeck, the opposite yr?
4) 25%… and the hunt for TikTok’s revenues
Common Music Group will not be an organization that struggles for profitability. In 2021, the corporate’s annual adjusted EBITDA soared above USD $2 billion. In 2022, it’s going to grow even higher (we’ll discover out when UMG publishes its This autumn 2022 outcomes quickly).
For any typical investor, figures like these would immediately translate into glad days. However shortly earlier than UMG went public in Amsterdam in 2021, at a Capital Markets Day in August that year, UMG made a pledge to the markets: it anticipated to achieve a ‘mid-twenties’ EBITDA in its ‘mid-term outlook’. In different phrases, UMG’s EBITDA margin would contact 25% in some unspecified time in the future over the following few years.
The corporate presently has a method to go to get there: Within the 9 months to finish of September final yr, UMG’s adjusted EBITDA margin stood at 20.5% vs. 21.5% in the identical 9 months of 2021.
With the extent of high quality of management Common has on the high of its firm – to not point out ‘encouraging’ activist investors like Invoice Ackman – you wouldn’t wager towards UMG hitting that 25% EBITDA margin aim in good time.
The larger speaking level (and why this 25% stat is so related to how 2023 performs out) is exactly the place Common finds the business propulsion it requires to bump up that margin to its goal determine.
Towards the chances, 2022 was a terrific yr for subscription streaming income progress: Partly due to continued progress within the variety of subscribers globally, and partly due to some sensible value rises, Spotify noticed its biggest ever YoY growth in subscription revenues within the first 9 months of a yr in 2022 (+$1.37bn YoY).
Additional value rises from the likes of Spotify will proceed to pump new oxygen into the subscription streaming story for rightsholders. However Common may even know that key markets just like the US and UK are quick changing into totally matured streaming markets (i.e. the hopes for locating new sources of subscribers every year in these territories is of course getting smaller).
Why it issues: If subscription streaming isn’t going to supply UMG with the business oomph to hit its EBITDA targets, substantial new income will doubtless need to be generated elsewhere. Which leads us on to our closing stat right here, and the next question…
The large query it asks: The foremost music rightsholders, Common included, seem to really feel that they’re not currently receiving sufficient monetary return from short-form video platforms – particularly TikTok. A lot of this, it’s thought, is as a result of TikTok continues to pay rightsholders through two-year ‘buyout’ offers, relatively than through a direct share of promoting income based mostly on consumption of those corporations’ music. Can we now count on stress to proceed to mount on TikTok from Common (and different majors), as UMG seeks sources of accelerated income to plump up that EBITDA margin throughout the the rest of the 2020s?
5) 12.1 billion… and the hunt for TikTok’s revenues
This one is on an analogous theme to No.4 above, however from a special angle.
This morning (January 4), the UK’s commerce physique for the key document corporations – the BPI – issued new stats reflecting how the British market had carried out in 2022.
A kind of stats particularly caught MBW’s eye: There have been 159.3 billion on-demand audio streams, stated the BPI, of music within the UK final yr.
First, the excellent news: That determine represented year-on-year progress of +12.1 billion, which was an even bigger YoY margin of progress than we noticed in 2021 (+7.9bn).
Nevertheless, 2022’s enhance was nonetheless underneath half the dimensions of the YoY progress in UK streaming consumption seen in 2020 (+25.1bn), and round half the dimensions of the YoY margin we noticed in every of 2019, 2018, and 2017 (see beneath).
Why it issues: It appears doubtless that consumption progress in on-demand audio streaming is, inevitably, beginning to plateau in mature streaming markets. (Spotify launched within the UK again in 2008; it took one other three years to achieve the US.) The large concern for music rightsholders can be to see that annual audio streaming consumption determine start to decline within the years forward – particularly if it’s as a result of Gen Z is simply too busy enjoying short-form video to take heed to stream music on the similar fee because the earlier technology.
The large query(s) it asks: If audio streaming does now plateau – and even begin to decline – in mature markets, and the attraction of short-form video performs a cloth function, will the music trade have the suitable offers in place with TikTok et al for optimum business profit? What do these offers appear to be? And can 2023 change into the essential yr the place are set in stone as soon as and for all?Music Enterprise Worldwide
