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 business and its key gamers?
Effectively, 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 business? 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 few of the standout happenings, tensions, and hopes of the music biz in 2023.
And we do know that you simply’re in all probability going to be higher armed for no matter this yr throws on the music rights business if you happen to perceive why every of them is so vital…
1) 5%… and what’s a famous person?
You might bear in mind this one from last year, however it’s most actually price revisiting.
In line with Warner Music Group, again in 2012, its High 5 largest world superstars generated 15% of the corporate’s annual recorded music (bodily and digital) income. A decade on, in 2022, that yr’s High 5 superstars at Warner generated simply 5% of equal income.
MBW did the mathematics on that determine: In line with our estimates, the amount of cash generated by the High 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: By way of one lens, this can be 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 pattern that’s larger than WMG happening right here: The atomization of royalty income amongst a far wider pool of top-tier artists – whether or not by way of streaming’s globalization of listening, or by way of 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 recommend that Universal Music Group‘s current re-launch and investment in its world artists and label providers division, Virgin Music Group, plus the rampant success of Sony Music‘s The Orchard lately each additionally nod in direction of this pattern.
The massive query it asks: If superstars are solely producing 5% of a serious document firm’s income in the present day, 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 acquired fairly the response to a piece we published the other day stating that Spotify is now price someplace round a 3rd of Common Music Group when it comes to market cap worth – after the 2 corporations have been price roughly the identical quantity a yr prior.
A lot of that response has taken the identical tone. As one US government put it in a textual content to MBW in the present day: ‘How the F- are Spotify alleged to develop their worth when the most important labels take all of their revenue??!!’
Excitable grammatical thrives apart, this sums up a thesis that’s extensively shared over music business dinners worldwide, and for good cause: In line with 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 cause: 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 ‘Common and Administrative’. Meaning 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 workers: In 2021 (the final yr for which Spotify has printed an annual report), SPOT employed 6,617 folks 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 specifically has lengthy been quietly questioned by its music rightsholder companions (lest we overlook that Common Music Group continues to personal round 3.4% of Spotify, according to UMG’s 2021 annual report). That Gross sales and Advertising value shot as much as almost half a billion US {dollars} (EUR €432m) in Q3 2022.
The massive query it asks: Largely due to analyst disappointment over that gross margin impacting on share worth, Spotify is presently solely price about $15 billion on the New York Inventory Change. If it doesn’t enhance its gross margin quickly, might it turn out to be an acquisition goal for a tech large 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 manner into music enterprise lore (MBW was first to report it, naturally): Over 100,000 tracks at the moment are being uploaded to streaming providers globally.
That’s in line with two of the most important music corporations, who’re, it’s honest to say, beginning to turn out to be somewhat involved in regards to the influence this tidal wave of distributed music (music of it coming by way of 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 every 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 at some point see sure forms of music valued larger – in royalty phrases – than different forms of music. Notably, in Stringer’s phrases, the 31-second “flotsam and jetsam” tracks that clog up sleep/rest/rain-sounds playlists on Spotify and different providers, 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 mentioned: “[In] the dwell music house, the value varies relying on who you’re seeing and what your expertise is. I feel 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 every 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, in line with 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 providers like SPOT will certainly solely dilute that market share but additional.
The massive query it asks: To the most effective of our data, the now-infamous 100,000-tracks-a-day stat is in reference – at the least 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 is just not an organization that struggles for profitability. In 2021, the corporate’s annual adjusted EBITDA soared above USD $2 billion. In 2022, it’ll grow even higher (we’ll discover out when UMG publishes its This fall 2022 outcomes quickly).
For any typical investor, figures like these would immediately translate into completely happy 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 succeed in 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 strategy 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 prime of its firm – to not point out ‘encouraging’ activist investors like Invoice Ackman – you wouldn’t guess in opposition to UMG hitting that 25% EBITDA margin objective 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 percentages, 2022 was an ideal yr for subscription streaming income progress: Partly due to continued progress within the variety of subscribers globally, and partly due to some sensible worth 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 worth rises from the likes of Spotify will proceed to pump new oxygen into the subscription streaming story for rightsholders. However Common will even know that key markets just like the US and UK are quick changing into absolutely matured streaming markets (i.e. the hopes for locating new sources of subscribers annually 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 seemingly should be generated elsewhere. Which leads us on to our ultimate stat right here, and the next question…
The massive query it asks: The main 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 by way of two-year ‘buyout’ offers, somewhat than by way of 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 identical theme to No.4 above, however from a distinct angle.
This morning (January 4), the UK’s commerce physique for the most important document corporations – the BPI – issued new stats reflecting how the British market had carried out in 2022.
A type of stats particularly caught MBW’s eye: There have been 159.3 billion on-demand audio streams, mentioned 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 seemingly 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 succeed in the US.) The massive 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 taking part in short-form video to hearken to stream music on the similar price because the earlier era.
The massive query(s) it asks: If audio streaming does now plateau – and even begin to decline – in mature markets, and the enchantment of short-form video performs a cloth function, will the music business have the suitable offers in place with TikTok et al for optimum business profit? What do these offers appear to be? And can 2023 turn out to be the essential yr the place are set in stone as soon as and for all?Music Enterprise Worldwide
