The music industry has massive underlying demand. YouTube’s most popular videos and most viewed videos ever are disproportionately music videos. The top ones obtain billions of views, garnering popularity that most forms of content could never fathom even a fraction of from a pure viewership perspective.
At large, the industry is in the most robust competitive position it’s ever been in. Music streaming services have caused the value of the music industry’s assets to skyrocket.
In June 2020, Warner Music went public in one of the largest US IPOs of the year, illustrating the large resurgence in the valuations of music assets. The IPO traded in the upper half of the expected range and has since settled around that debut price.
Because of the Covid-19 disruption, the so-called road show that drums up interest among potential investors went virtual and reached a heeled group of investors in a short period of time.
Warner’s IPO comes on the back of a growing set of valuations in the private merger and acquisition market. Tencent led a consortium of investment in Universal Music. EMI Music Publishing was sold to Sony.
All three of these transactions reflect a level of growth for the owners of music businesses who had owned or purchased these businesses during a time of challenge and transition.
Access Industries purchased Warner Music for $1 billion in equity in 2011.
This was before Sweden-based Spotify, founded in 2008, had launched its streaming service in the US. Today, Warner Music’s market capitalization is more than $15 billion, a 15x money-on-money multiple and a 35 percent annualized return over the holding period.
The Music Industry’s Growth Drivers
The value of the Warner Music IPO followed Spotify’s direct listing two years ago. It gained value in much of the same way – through the collaboration of music artists, content owners, and streaming services brought on by new technological innovations.
This is much different than the music industry of early 2000s. Then, the music industry was seeing declining CD sales and facing challenges from online piracy issues. More companies had to cut costs to remain profitable.
Paid streaming opened a new monetization channel and brought the industry back to better health. Instead of the shrinking industry it was back then, it’s seeing a new wave of growth, with the Warner IPO acting as a testament to its strength.
The Streaming Model and Future Expansion
The streaming model is popular for consumers and has seen widespread adoption in the way people consume music.
It gets delivered to consumers on-demand (similar to video streaming and other content). This flexibility has also allowed these services to hold their value during the Covid-19 pandemic, as people have seen their daily schedules (work, commutes) disrupted. In some respects, the different behavioral patterns brought on the pandemic have aided their adoption.
Digitization allows the data collected on each account to create playlists and personalized recommendations to keep consumers engaged and create value.
These services typically follow a freemium model, where consumers can consume all they want for a limited time period. This also lends itself to high conversion rates for paid subscriptions.
Pricing power is also something the industry can play around with. Sweden was an early adopter of the model in the late 2000s with Spotify. They’re currently trying a higher pricing tier. Amazon Music is doing the same with the additional value-add for audio quality.
Close to half (45.4 percent) of Spotify’s 286 million subscribers are Premium subscribers.
The growth in each category is trending proportionally. In year-over-year terms, overall subscribers are up 32 percent (from 217 million) and Premium are up 30 percent (to 130 million from 100 million).
Expansion into Russia, a nascent podcast market, and twelve other Eastern European markets will bring its expansion to 92 countries. Nearly 90 percent of people in Russia stream music online. With a population of nearly 150 million, that makes it the 17th-largest streaming market globally and one that could break the top-10 by 2030.
Wider adoption and potentially higher pricing and/or upsells as time goes on reflects a quality balance of growth tailwinds.
Consumer behavior’s influence on the music industry
With the popularity of wireless earbuds and Apple’s AirPods, the consumer is taking in more audio content than ever.
The adoption of smart devices and speakers in homes like Alexa and Google Assistant, which often are used to play music, has also paved the way for more music consumption, as well as greater varieties of it.
For instance, parents who set up a smart speaker in a child’s room are more likely to stream child-focused songs. This helps the popularity of new catalogs of music.
Moreover, an increasing number of services, like Peloton (exercise equipment), license and incorporate music playlists into their products. This helps deepen overall consumer interaction with music and helps diversify and broaden the industry’s revenue base.
The diversification value of music
At the same time, songs of well-known performers (e.g., Michael Jackson, Paul McCartney) are very expensive. As a result, more investors are looking for different genres like jazz or newer performers that may be more of a “value play” now but increase in price as their career resume stacks up.
Song catalogs can be good investments because of the royalty payments they generate. They’re sometimes compared to bond-like investments in that they have the capacity to throw off steady and relatively passive income.
However, with music catalogs, the income they generate can be volatile.
There’s a large skew in the distribution of income generated. Royalty payments are high soon after a track is released and then decay fairly rapidly.
After a few years, the income a song generated could be up to 90 percent below what it was making at its peak.
So there’s always the danger of paying too much for music by extrapolating recent earnings that are likely to decay quickly.
Investments in artists’ catalogs that are still widely being listened to decades from now could pan out greatly.
But they also carry risk in the event royalties decay down to a very thin tail. In that event, can enough income be pulled out of the investment over its life to get back your initial investment plus a respectable return?
Investors who are more risk-averse but still want exposure to music can stick with more timeless artists who have proven themselves over decades and retain large fanbases.
For all its ups and downs and unique challenges, the music industry is largely in better shape than it ever has been.
Affordable “all-you-can-consume” streaming services have helped provide a consumer-friendly way of getting the music they want on-demand. With the help of data and algorithms, music platforms can help consumers with better personalization in their feeds and recommendations and keep them engaged with the service longer.
People are consuming music more and in different ways through new services and through the proliferation of various audio devices in their daily lives.
The combination of these forces has led to robust growth tailwinds in the music industry that are likely to continue.