Take Five (the big five stories and data you need to know) October 14th 2019

Fortnite black hole: In what may be the most audacious global games marketing stunt ever, Epic Games killed off Fortnite in Sunday’s end-of-season event, which one million people viewed live on Twitch. The game got sucked into a black hole, with Epic deleting 12,000 Fortnite tweets and all information on its website. Has Fortnite really gone for good? Did Elon Musk delete it? The likelihood is it will be back for chapter two sometime this week.

CDbaby, independent artist boom: Independent artist distributor CDbaby is now collecting $1million a day in revenue for its 750,000 independent artists. Earlier this year, ambitious publishing group Downtown acquired CDbaby’sparent AVL meaning the publisher is also now a top player in the independent artists space. Publishers are reversing into recordings.

Analytics curve ball:Little Big League baseball team Minnesota Twins isusing analytics to revamp its pitching staff, including figuring out which players should be throwing what types of balls. Sports has long been ahead of the performance analytics curve. Lots of lessons for media companies here.

Netflix Italy deal: Netflix has agreed a co-production deal with Italian media giant Mediaset. Under the deal the two companies will co finance seven movies that first will be distributed globally by Netflix then broadcast free-to-air in Italy one year later. Netflix needs to deepen its international content but can’t afford to do it by itself anymore.

Spotify/Apple – regulation storm brewing: It is a case of when, not if, tech majors (Apple, Alphabet, Amazon, Facebook) are going to be regulated. The effect could be like when the EU compelled Microsoft to unbundle Windows Media Player in the 2000s, instigating its long-term decline. Spotify’s complaint against Apple is building momentum with US law makers and could be the first step.

How Music Publishers Are Driving a Full Stack Revolution

Music publishing catalogues are gaining momentum fast as an asset class for institutional investments, with transactions ranging from large catalogue mergers and acquisitions (M&A) through to investment vehicles for songwriters’ shares such as the Hipgnosis Fund and Royalty Exchange. Since 2010 the number of publicly announced music catalogue transactions – across recordings and publishing – totalled $6.5 billion, with a large volume of additional non-disclosed transactions. This growing influx of capital has implications far beyond publishing, however, as ambitious publishers are using the access to debt and investment to reverse into the recordings business.

Streaming the change catalyst

As with so many music market shifts, streaming is the catalyst for these changes. Streaming represented 27% of publisher revenues in 2018 and is set to near 50% by 2026. However, songwriter-related royalties – incorporating publisher and CMO payments – from streaming are less than a third of what labels get. Small-but-important increments such as the US disputed mechanical royalties rate increaseare a) difficult to push through, and b) will not get publishing royalties to parity with label royalties. This means that publishers will underperform compared to labels in the fastest-growing revenue stream. The alternative is a ‘if you can’t beat them, join them’ strategy.

BMG Music Rights and Kobalt set the precedent with label services divisions alongside their publishing businesses, enabling them to play on both sides of the streaming equation. Now a wide range of publishers, both traditional and next generation, are expanding their non-publishing businesses. – from ole/Anthem buying production music companies Jingle Punks and 5 Alarm Music, through Reservoir Music buying Chrysalis Recordsto Downtown buying CDBaby parent AVL. All have the common theme of publishers diversifying away from their core businesses to ensure they compete across a wider strand of the music business value chain.

In the traditional music business, it made sense for artists to sign their recordings to one company and their publishing to another. The next phase is the emergence of full-stack music companies that not only combine publishing and recordings but also include other assets to create agile businesses that are primed for the streaming era. Many of these are publishing companies expanding into the recordings business by leveraging the inflow of capital into publishing catalogues to fund diversification. The potential strategic benefits presented by the full-stack approach are well understood by incumbents.

Downtown, Round Hill, Kobalt, ole/Anthem, Primary Wave and Create Group are examples that reflect just how diverse this strategy is, with each business building very different strategic stacks. However, the unifying factor is the access to capital for music publishing companies gives them the ability to build war chests that most record labels could only dream of.

One of the most interesting permutations is the breadth of capabilities that some of these companies are building, as illustrated by the structural maps of Kobalt and Downtown. These are companies that are both built to thrive in the streaming era and to ensure that their creators can monetise across a diverse mix of otherwise fragmented income streams.

Music publishers of all kinds are expanding their reach across the music industry value chain, from artist distribution to library music and in doing so are starting a rebalancing of the music industry value chain. These are exciting times indeed.

This analysis is taken from MIDiA’s new report Music Publishing|AFull-Stack Revolution. Clients can click on the link to view the report and its dataset. The 3,000 word report contains details of 45 M&A transactions, annual M&A trends and analysis of the strategies of music publishers. 

If you are not yet a MIDiA client and would like to learn more about how to become one and how to access this report then email stephen@midiaresearch.com.

Big Machine (Inadvertently) Just Did a Promo Ad for Label Services Deals

The sales of Taylor Swift’s former label Big Machine Records to Scooter Braun has resulted in an ugly spat that has been played out very publicly. First Braun enthused about acquiring a ‘brilliant’ company and the global ‘opportunities’.Then Swift responded with an open letter saying that Braun had ‘stripped her of her life’s work,before Big Machine’s Scott Borchetta responded saying he had given her the ‘opportunity to own her masters’. The feud clearly has some distance to run but the issues of ‘who got what text message when’ are not the big deal here, the real deal is the big deal.

Whether she likes it or loathes it, Taylor Swift’s catalogue is Big Machine’s asset

Late last year Swift left Big Machine to sign a long-term deal with Universal Music that was most likely a label services deal. At the time she said it was ‘incredibly exciting’ to own her masters. But, however good her UMG deal might be, she is now in a position whereby her recordings are being sold to someone she’d much rather not have ownership of them. In her post she calls this a ‘worst case scenario’. From Big Machine’s perspective, it simply couldn’t sell the company without having either Taylor Swift or her recordings on its balance sheet. Without one of those, the company’s value would have been much lower. Swift may not like the feeling of being someone else’s asset but that is the very nature of what happens when an artist signs a traditional label deal.

Artists now have unprecedented commercial choice

Back in the early 2000s the Beatles wentto court to try to regain ownership of their master recordings because of a dispute with their label. Fast forward to now and we have another massive pop act angered at not having control of their own creation. At one level the world has not changed much, but on another it has done so, and dramatically so. The fact that Swift signed a label services type deal with UMG shows just how much more choice artists have with the type of deals they sign, whether that be label services, joint ventures, distribution deals or combinations of all three. Artists have never been so empowered and so educated. Nor have they ever had so many commercial options, from doing direct distribution with a CDbaby or Amuse, a label services deal with an AWAL or BMG or simply going direct to fans with platforms like Bandcamp.

Big Machine just highlighted the downside of traditional label deals

By allowing the dispute with Swift to become so public, Big Machine has just inadvertently done a promo campaign for label services deals. The more that the media is awash with stories like this, the more that artists will be considering their options. This does not however mean that all artists will be turning down traditional masters deals in favour of label services deal. A label services deal normally means trade-offs. A record label is going to get less, so in return it is going to give less back. Artists have to balance out factors such as smaller advances, lower royalty income, higher risk and bearing costs. For an artist that has spent years building to the point of signing a deal, a fat advance and guaranteed marketing spend will often be a more appealing prospect. Especially when you consider that successful artists will expect recording income to be just a minority of their total music income.

Artists increasingly use labels to build their own artist brands 

In this context, the record label becomes a marketing asset to the artist, a tool with which to become famous enough to ensure that all the other income streams (live, merch, publishing, brand partnerships etc.) kick in. In this era of empowered artists, more artists will be making an informed decision that matches their priorities. If they prioritise creative independence and control, then label services will make most sense. If they value building a large-scale audience fast, they may opt for a traditional label deal. Or they’ll take something in the middle. The bottom line is that there is no standard approach anymore. Any artist signing a deal now that finds themselves five years from now complaining about not having control of their masters will, to put it bluntly, only have themselves to blame. It will have been their choice.

10 Trends That Will Reshape the Music Industry

The IFPI has reported that global recorded music revenues have hit $19.1 billion, which means that MIDiA’s own estimates published in March were within 1.6% of the actual results. This revenue growth story is strong and sustained but the market itself is undergoing dramatic change. Here are 10 trends that will reshape the recorded music business over the coming years:

1. Streaming is eating radio: Younger audiences are abandoning radio for streaming. Just 39% of 16-19-year olds listen to music radio, while 56% use YouTube instead for music. Gen Z is unlikely to ever ‘grow into radio’; if you are trying to break an artist with a young audience, it is no longer your best friend. To make matters worse, podcasts are looking like a Netflix moment for radio and may start stealing older audiences. This is essentially a demographic pincer movement.
2. Streaming deflation: Streaming music has allowed itself to be outpaced by inflation. A $9.99 subscription from 2009 is actually $13.36 when inflation is factored in. Contrast this with Netflix, for which theinflation-adjusted price is $10.34 but the actual 2019 price is $12.99. Netflix has stayed ahead of inflation; Spotify and co. have fallen behind. It is easier for Netflix to increase prices as it has exclusive content, but rights holders and streaming services need to figure out a way to bring prices closer to inflation. A market-wide increase to $10.99 would be a sound start, and the fact that so many Spotify subscribers are willing to pay $13 a month via iTunes shows there is pricing tolerance in the market.
3. Catalogue pressure: Deep catalogue has been the investment fund of labels for years. But with most catalogue streams coming from music made in this century, catalogue values are being turned upside down (in the streaming era, the Spice Girls are worth more than the Beatles!). Labels can still extract high revenue from legacy artists with super premium editions like UMG did with the Beatles in 2018, but a new long-term approach is required for valuing catalogue. Matters are complicated further by the fact that labels are now doing so many label services deals, and therefore not building future catalogue value.
4. Labels as a service (LAAS): Artists can now create their own virtual label from a vast selection of services such as 23 Capital, Amuse, Splice, Instrumental, and CDBaby. A logical next step is for a 3^rdparty to aggregate a selection of these services into a single platform (an opening for Spotify?). Labels need to get ahead of this trend by better communicating the soft skills and assets they bring to the equation, e.g. dedicated personnel, mentoring, and artist and repertoire (A+R) support.
5. Value chain disruption: LAAS is just part of a wider trend of value chain disruption with multiple stakeholders trying to expand their roles, from streaming services signing artists to labels launching streaming services. Things are only going to get messier, with virtually everyone becoming a frenemy of the other.
6. Tech major bundling: Amazon set the ball rolling with its Prime bundle, and Apple will likely follow suit with its own take on the tech major bundle. Music is going to become just one part of content offerings from tech majors and it will need to fight for supremacy, especially in the ultra-competitive world of the attention economy.
7. Global culture: Streaming – YouTube especially – propelled Latin music onto the global stage and soon we may see Spotify and T-Series combining to propel Indian music into a similar position. The standard response by Western labels has been to slap their artists onto collaborations with Latin artists. The bigger issue to understand, however, is that something that looks like a global trend may not be a global trend at all but is simply reflecting the size of a regional fanbase. The old music business saw English-speaking artists as the global superstars. The future will see global fandom fragmented with much more regional diversity. The rise of indigenous rap scenes in Germany, France and the Netherlands illustrates that streaming enables local cultural movements to steal local mainstream success away from global artist brands.
8. Post-album creativity: Half a decade ago most new artists still wanted to make albums. Now, new streaming-era artists increasingly do not want to be constrained by the album format, but instead want to release steady streams of tracks in order to keep their fan bases engaged. The album is still important for established artists but will diminish in importance for the next generation of musicians.
9. Post-album economics: Labels will have to accelerate their shift to post-album economics, figuring out how to drive margin with more fragmented revenue despite having to invest similar amounts of money into marketing and building artist profiles.
10. The search for another format: In 1999 the recorded music business was booming, relying on a long established, successful format that did not have a successor. 20 years on, we are in a similar place with streaming. The days of true format shifts are gone due to the fact we don’t have dedicated format-specific music hardware anymore. However, the case for new commercial models and user experiences is clear. Outside of China, depressingly little has changed in terms of digital music experiences over the last decade. Even playlist innovation has stalled. One potential direction is social music. Streaming has monetized consumption; now we need to monetize fandom.