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?
Effectively, to be utterly trustworthy with you, we don’t precisely know. How on earth may 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 presumably 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 12 months throws on the music rights trade in the event you perceive why every of them is so necessary…
1) 5%… and what’s a celebrity?
You might bear in mind this one from final 12 months, nevertheless it’s most actually value revisiting.
In line with Warner Music Group, again in 2012, its Prime 5 greatest international superstars generated 15% of the corporate’s annual recorded music (bodily and digital) income. A decade on, in 2022, that 12 months’s Prime 5 superstars at Warner generated simply 5% of equal income.
MBW did the maths on that determine: In line with our estimates, the amount of cash generated by the Prime 5 superstars in every of those years truly fell – in actual numerical phrases – from 2012 to 2022 (see chart under), regardless of Warner’s general recorded music (bodily & digital income) greater than doubling throughout the identical timeframe.
Why it issues: By 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 ‘celebrity financial system’. But there’s a pattern 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 recommend that Common Music Group‘s latest re-launch and funding in its international 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 large query it asks: If superstars are solely producing 5% of a significant file firm’s income at the moment, what occurs when that quantity sinks to 2% – or under 1%? At that time, what even is a ‘celebrity’?
2) $1 billion… and the fallacy that “the labels are taking all of Spotify‘s cash”
MBW has obtained fairly the response to a chunk we revealed the opposite day stating that Spotify is now value someplace round a 3rd of Common Music Group by way of market cap worth – after the 2 firms have been value roughly the identical quantity a 12 months prior.
A lot of that response has taken the identical tone. As one US government put it in a textual content to MBW at the moment: ‘How the F- are Spotify imagined to develop their worth when the main labels take all of their revenue??!!’
Excitable grammatical thrives apart, this sums up a thesis that’s broadly shared over music trade dinners worldwide, and for good purpose: In line with Spotify’s Q3 2022 outcomes (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.
Nonetheless, look a bit deeper and this story will get extra nuanced.
Q3 2022 was a milestone quarter for one more 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 Growth’, ‘Gross sales and Advertising’, and ‘Normal 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 12 months for which Spotify has revealed 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 spectacular efficiency when it got here to subscription income. Associated: in Q3, Spotify posted a quarterly working lack of €228 million. Spotify’s spending on Gross sales and Advertising particularly 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, in response to UMG’s 2021 annual report). That Gross sales and Advertising 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 worth, Spotify is at present solely value about $15 billion on the New York Inventory Change. If it doesn’t enhance its gross margin quickly, may it turn out to be 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 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 response to two of the main music firms, who’re, it’s truthful to say, beginning to turn out to be somewhat involved concerning 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 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 sooner or later see sure sorts of music valued larger – in royalty phrases – than different sorts 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 12 months. He stated: “[In] the reside music house, the value 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 every one music isn’t equal.”
Why it issues: The three main file firms plus Merlin cumulatively had a 77% share of music streams on Spotify within the 12 months 2021, in response to SPOT’s annual report that 12 months. 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 large query it asks: To the perfect of our information, the now-infamous 100,000-tracks-a-day stat is in reference – at the least within the massive 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 1000’s of its personal tracks with AI vocals? And that TikTok purchased its personal AI music firm, Jukedeck, the opposite 12 months?
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 can develop even larger (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 12 months, 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% sooner or later over the subsequent few years.
The corporate at present has a solution to go to get there: Within the 9 months to finish of September final 12 months, 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 buyers like Invoice Ackman – you wouldn’t wager towards 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 chances, 2022 was an incredible 12 months for subscription streaming income development: Partly due to continued development within the variety of subscribers globally, and partly due to some sensible worth rises, Spotify noticed its greatest ever YoY development in subscription revenues within the first 9 months of a 12 months 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 may also know that key markets just like the US and UK are quick turning into totally 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 offer UMG with the business oomph to hit its EBITDA targets, substantial new income will probably need to be generated elsewhere. Which leads us on to our ultimate stat right here, and the next question…
The large query it asks: The main music rightsholders, Common included, seem to really feel that they’re not at present receiving ample financial return from short-form video platforms – specifically TikTok. A lot of this, it’s thought, is as a result of TikTok continues to pay rightsholders through two-year ‘buyout’ offers, somewhat than through a direct share of promoting income based mostly on consumption of those firms’ music. Can we now anticipate strain 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 unique angle.
This morning (January 4), the UK’s commerce physique for the main file firms – 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, stated the BPI, of music within the UK final 12 months.
First, the excellent news: That determine represented year-on-year development of +12.1 billion, which was a much bigger YoY margin of development than we noticed in 2021 (+7.9bn).
Nonetheless, 2022’s improve was nonetheless beneath half the dimensions of the YoY development 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 under).
Why it issues: It appears probably that consumption development 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 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 just too busy enjoying short-form video to take heed to stream music on the identical charge 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 enchantment of short-form video performs a cloth position, will the music trade have the correct offers in place with TikTok et al for optimum business profit? What do these offers seem like? And can 2023 turn out to be the essential 12 months the place are set in stone as soon as and for all?Music Enterprise Worldwide
