Guest post by\u00a0James Shotwell<\/strong>\u00a0of\u00a0Haulix<\/a><\/em><\/p>\n Most of 2020 has been a disaster, but the ever-resilient music industry is finding a way to continue growing in spite of the global pandemic.<\/strong><\/p>\n There are countless ways to gauge the health of the music industry. At Haulix, we often examine the volume of new releases and the reception they see when consider how well things are going. Others may look at touring revenue, audience sizes, or any one of a million other data points.<\/p>\n Recently, our friends at\u00a0Toptal<\/em><\/a>\u00a0did a thorough examination of the music industry from a strictly financial point of view. Their work considers the changing trends in consumption, the spread of COVID-19, and many more factors that inform what is happening day to day throughout the music business. Lucky for us, they\u2019re allowing us to share their insights with you.<\/p>\n 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\u2019s revenue bottomed out at $14 billion in 2014 but grew to $20 billion in 2019, back in line with 2004 levels.<\/p>\n The convenience and personalization of music streaming, combined with the accessibility afforded by smartphones and smart devices, has driven recorded music\u2019s growth. IFPI notes that global streaming revenues grew at a 42% CAGR (compound annual growth rate) since 2015, compared to the entire recording industry\u2019s 9% CAGR. The following chart from IFPI shows the evolution of the industry\u2019s revenue composition and how streaming growth has more than offset declines in physical and downloaded formats over the past decade.<\/p>\n Global Music Recording Industry Revenues: 2001-2019 ($ Billion)<\/strong><\/p>\n 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\u00a0collections<\/a>\u00a0(performance royalties) increased from \u20ac6.5 billion in 2013 to \u20ac8.5 billion in 2018. Will Page, the former chief economist at Spotify,\u00a0estimates<\/a>\u00a0that the global publishing business \u2013 CISAC collections plus estimates of non-CISAC publisher revenues from Music & Copyright \u2013 is worth $11.7 billion in 2020.<\/p>\n 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:<\/p>\n 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 \u2013 including lyrics, composition, and sound recording \u2013 is protected under copyright law.<\/p>\n 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\u2019s death.<\/p>\n A song contains two copyrights:<\/p>\n Several positive catalysts for music IP rightsholders are currently on the horizon, including:<\/p>\n 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\u2019 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\u00a050%<\/a>\u00a0of 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.<\/p>\n Most music publishing rights are regulated, and recent regulatory announcements have been beneficial to music IP rightsholders\u2019 interests. For example, US musical composition\u00a0mechanical royalties<\/a>\u00a0are 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\u00a0increase<\/a>\u00a0the 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.<\/p>\n Emerging markets, such as China and India, are only just starting to pay for music IP. According to IFPI\u2019s 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\u2019s two largest populations. Goldman Sachs\u2019 \u201cMusic in the Air\u201d 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.<\/p>\n Music Spend per Capita Across Regions: 2015 (USD)<\/strong><\/p>\n 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.<\/p>\n The music recording and publishing industries have many players.\u00a0Record labels<\/strong>\u00a0and\u00a0music publishers<\/strong>\u00a0are 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,\u00a0music royalty funds<\/strong>\u00a0focus 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.<\/p>\n The music industry is concentrated and dominated by three main players.<\/strong>\u00a0According<\/a>\u00a0to Music & Copyright, the three largest record labels \u2013 Universal Music Group (32% market share), Sony Music Entertainment (20%), and Warner Music Group (16%) \u2013 hold a 68% share of the music recording market. Similarly, the three largest music publishers \u2013 Sony (25%), Universal Music Publishing (21%), and Warner Chappell Music (12%) \u2013 maintain a 58% share of the music publishing market.<\/p>\n Universal, Sony, and Warner are collectively referred to as the \u201cMajors,\u201d or the \u201cBig Three.\u201d\u00a0Industry concentration is relevant in music<\/strong>\u00a0because the majors\u2019 deals with streaming services benefit from their\u00a0market share<\/a>: As streaming services\u2019 revenues grow, so should the majors\u2019 income. Furthermore, streaming and digital download margins are roughly\u00a050-60%<\/a>, 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\u2019 operating margins will benefit.<\/p>\n \u201cThe unique nature and the diversification of our sources of income mean music publishers are well protected compared to most businesses.\u201d<\/em><\/p>\n Josh Gruss, CEO of Round Hill Music<\/em>\u00a0(Source<\/a>)<\/p>\n 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.<\/p>\n 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,\u00a0according<\/a>\u00a0to Billboard, these declines returned to growth by the end of April.<\/p>\n Indeed, the modest decline in engagement measured by listening hours has not impacted consumers\u2019 willingness to pay for audio streaming. Spotify\u2019s 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\u2019s\u00a0Q2 2020<\/a>\u00a0premium revenue increased by 17% year-on-year.<\/p>\n Spotify Monthly Active Users (MAUs): 2017-2020 (Q2)<\/strong><\/p>\n 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\u00a0expects<\/a>\u00a0concerts 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.<\/p>\n 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\u00a0expects<\/a>\u00a0total company sales to decline by 3%.<\/p>\n 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\u00a0improved<\/a>\u00a0each month from April (down 50% year-on-year) through July (down 27% year-on-year).<\/p>\n 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\u00a0noted<\/a>\u00a0in April 2020 that as more licensee businesses shut down, the pandemic will \u201chave a material and negative impact financially on almost every category of licensing.\u201d<\/p>\n The three \u201cmajor\u201d 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%<\/a>), while Sony (-12%<\/a>) and Warner Music Group (-5%<\/a>) 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.<\/p>\n Wall Street has been taking notice of the music industry\u2019s 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:<\/p>\n Meanwhile, several private equity firms have raised funds focused on music IP rights:<\/p>\n Overall, there is a significant amount of activity in the equity and debt capital markets for music IP assets.<\/p>\n With capital pouring into the space, music IP acquisition activity has been hot. Recent years have seen several significant deals:<\/p>\n 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\u2019s CEO Hartwig Masuch even\u00a0calling<\/a>\u00a0the current environment \u201ca feeding frenzy.\u201d<\/p>\n 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\u2019s value, the potential pitfalls to look out for, and the instruments used for IP investing.<\/p>\nThe State of the Music Industry in 2020<\/h2>\n
Streaming Is Driving Music\u2019s Growth<\/h3>\n
![\"Global](\"https:\/\/i0.wp.com\/bs-uploads.toptal.io\/blackfish-uploads\/uploaded_file\/file\/402267\/image-1601840340557.489-b87510509cb13fd9057df094ccdbbbc9.png?w=640&ssl=1\")
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Music Intellectual Property Rights in the Spotlight<\/h3>\n
WHAT IS MUSIC COPYRIGHT?<\/h4>\n
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NEW LICENSING OPPORTUNITIES<\/h4>\n
REGULATORY CHANGES<\/h4>\n
EMERGING MARKET GROWTH<\/h4>\n
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<\/figure>\nWho Are the Key Music Industry Players?<\/h2>\n
How Has COVID-19 Impacted the Music Industry?<\/h2>\n
Streaming Remains Resilient<\/h3>\n
![\"Spotify](\"https:\/\/i1.wp.com\/bs-uploads.toptal.io\/blackfish-uploads\/uploaded_file\/file\/402269\/image-1601840380685-355a3c65560dbdc350435c42b9dacb3a.png?w=640&ssl=1\")
<\/figure>\nLive Music Has Suffered<\/h3>\n
Reduced Advertising Weighs on Radio and General Licensing Income<\/h3>\n
The \u201cMajors\u201d Are Impacted, Positively and Negatively, by All Factors<\/h3>\n
Recent Music IP Acquisition and Capital Markets Activity<\/h2>\n
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