Music industry revenues in review – what 2022 tells us about 2023

With a 2023 set to be a challenging year for the global economy, it is a good time to look at how the music industry has performed in the year to date. That is exactly what we have done in our forthcoming report: ‘Music industry earnings Q3 2022: Pre-recession growth’. We have tracked the performance of leading labels, publishers, DSPs, and live companies across the globe to create a holistic view of how the music business is performing across rights, distribution and live. Here are a few highlights that provide useful pointers as to how 2023 might shape up.

These are the key trends for revenue growth for Q1-Q3 2022 compared to Q1-Q3 2021:

• Record labels were up 14.3%, which is above the 11.8% that MIDiA forecasted at the start of the year, but with Q4 looking to be the quarter most heavily hit by the economic downturn, the full-year figure may well end up closer to 12% than 14%. Nonetheless, double-digit growth is commendable performance in such a tough economic environment, and bodes well for 2023.
  
• Publishers were up 21.1%, outperforming labels, reflecting factors such as the effect of historical digital royalty settlements, improved shares of streaming revenue (especially non-DSP), and the rebound of traditional performance income. Publishers have worked hard over recent years to ensure that they get a large share of income flowing to their songwriters, and 2022 reflects a job well done, though, of course, with further room for improvement.
  
• DSPs saw revenue growth of a more modest 6.2%, though this was pulled down by a dramatic slowdown in the Chinese market with Tencent Music Entertainment’s revenues flat. Spotify performed more strongly (7.7%), which was almost exactly in line with the major label’s streaming revenue growth of 7.3%. Subscriber growth across all companies was more than ten points stronger, thus indicating that consumer demand for streaming is strong going into 2023.
  
• Live continued its post-Covid rebound, with dramatic growth, benefiting from the still strong latent demand both from consumers and artists, eager to get touring again. However, with going out and going to concerts being the main things that consumers state they will cut back on during the recession, live may find the coming year more difficult than music rightsholders and DSPs.

Recessions have a habit of being self-fulfilling prophesies, with companies slowing down spend in anticipation of a coming slowdown, thus slowing down revenue growth for their suppliers, who then pass on the same cut backs to their suppliers and so forth. Despite all this, music rights and streaming may be well placed in the recession.

The lipstick effect

The case for music lies in lipstick, of all places. During previous recessions, lipstick sales boomed, representing an affordable luxury for consumers who could no longer afford the big-ticket items that they had been saving for or were used to buying. Music subscriptions may play an affordable luxury role, the soundtrack to evenings spent at home, when going out is a cost too far.

The early 2020s saw an influx of capital into the music business, with the promise of music rights being an asset class that was uncorrelated with the wider economy. The irony is that, as music catalogue investments slowed (due to rising costs of capital), the first nine months of 2022 saw the music business deliver a performance that suggests the industry is indeed setting a path that is not being pulled down by recessionary conditions as much as many other industries. There were areas of concern, of course, but the overall picture so far is a positive one.

The Global Music Industry Will Decline in 2020

Sorry to be the bearer of bad tidings but the global music industry will decline in 2020.

Although we are now nearing the post-lockdown era in many countries across the globe, we are only just at the start of the recession phase that is coming next. Over the coming months we will start to see concrete examples of the downturn (including Q2 financial results) that will transform the recession from an abstract possibility into something far more tangible.

Although live music is the most obviously impacted, all elements of the music industry will be hit. In a forthcoming MIDiA client report we will be publishing our detailed forecasts of exactly what this impact could look like. In this blog post I am sharing some of the top-level trends.

In order to forecast recessionary impact on music revenues MIDiA broke down all of music’s sub-industries (recorded, publishing, live, merch, sponsorship) and all relevant sub categories (streaming, sync etc.), and then divided these into the financial quarters of the year. We then modelled the impact of lockdown, longer-term social-distancing measures and the recession on each of these quarters. We then put this model through bear, mid and bull cases. The sum totals are what you see in the chart above. In all cases, the Q2 decimation of live revenue and the subsequent slow clawback in the remainder of 2020 account for the majority of the decline.

In our mid case (i.e. what we consider to be the most likely case) we forecast a 30% decline on 2019 revenues with the following sector-level changes:

• Recorded music (retail values) +2.5%
• Publishing -3.6%
• Live -75%
• Merch -54%
• Sponsorship – 30%

This is how we are thinking about each sector:

• Recorded music: Music streaming will be far less affected by a recession than many other sectors. But under no circumstances is it immune, and ad supported in particular is anything but ‘resilient’. When the recession bites, consumers will cut discretionary spending, including subscriptions. We expect the increase in existing music subscriber churn to be relatively modest but the growth of new subscribers to slow in markets hardest hit by a recession. Unfortunately, millennials – streaming’s heartland – are the most vulnerable to job cuts. Ad supported is going to struggle whichever way you look at it. Spotify was struggling to make ad supported work even before the recession, while Alphabet was seeing a weakening Google ad business even last year. But it is the other parts of the labels’ businesses that lockdown has hurt most so far: physical sales due to store closures; sync due to the halt in TV and film production; performance due to store and restaurant closures. Q2 revenues could average out at between -2% and +1.5% up on Q1. If the recession deepens significantly in the second half of 2020, the combined effect of higher unemployment and reduced consumer spending could result in a worst case scenario of -4.0% annual growth for recorded music. If the economy recovers in 2021, recorded music revenue will return to growth also.
• Publishing: Music publishing has been a steady earner for so long and as a consequence has enjoyed an influx of investment in recent years. 2020 though looks set to be a year of revenue decline. Our base case is for a -3.6% change on 2019. Key to this are: reduced syncs due to the halt in filming; reduced performance royalties due to a) live music decline; b) commercial radio declines; c) retail and leisure closures. Physical mechanicals, though small, will be hit by store closures. If the economy recovers in 2021, music publishing revenue will return to growth also, though performance revenues will see long-term transformation due to changes in lifestyles, e.g. more homeworking means less commuting (less radio) and less time spent in urban centres (less retail and leisure) both of which impact publisher income. If the economy recovers in 2021, publishing revenue will return to growth also.

 

• Live: Even if live events can be put on in Q3, reduced capacities and some venues not being able to operate at all will mean that live revenue growth will be a slow clawback – a process that will run into 2022 and that will only be partially offset by the (much needed) growth in virtual event revenue.
• Merch: Although there have been some great merch success stories during lockdown (including veteran UK synth poppers OMD selling £75,000 of merch during one live stream) merch sales are so often closely tied to live. Once the lockdown bump is over, the natural cycle of merch sales will remain disrupted by live’s slow clawback.
• Sponsorship: Artist sponsorship will be hit by brands scaling back their marketing budgets as the advertising economy contracts.

In addition to the forthcoming MIDiA client report we will be exploring these themes and others in our free-to-attend webinar next week: Recovery Economics: Bounce Forward Not Back. Register here.

Sweden Might Just Have Shown Us What the Future of Music Revenues Will Look Like

Earlier this week the IFPI released its Global Music Report – an essential tool for anyone with a serious interest in the global recorded music business. One interesting trend to emerge was the slowdown in Swedish streaming growth and its knock-on effect on overall recorded music revenues. Sweden has long been the leading indicator for where streaming is likely to head, providing a picture of just how vibrant a sophisticated streaming market can be. But now, with the market reaching saturation, it also gives us some clues as to what the long-term revenue outlook for the global music market could be.

According to the IFPI, Swedish streaming revenues reached $141.3 million in 2017, up from $125.7 million in 2016, with subscriptions accounting for 96% of the total. That was an increase of just $9.3 million, or 7% year-on-year growth, down from 10% in 2016 and 23% in 2015. This is a typical trajectory for a market when it has progressed to the top end of the growth curve. With synchronisationand performance revenues collectively growing by just $1.5 million in 2017 and downloads and physical both continuing their long-term decline, streaming is not only the beating heart of Swedish music revenues, it is the only driver of growth. Consequently, overall Swedish recorded music revenues grew by just 4% in 2017, compared to 6% in 2016 and 10% in 2015. As streaming matures, total market growth slows.

So what can we extrapolate from Sweden onto the global market? Firstly, there are a number of unique market characteristics to be considered:

• Sweden is the home of Spotify, so adoption over indexes
• Incumbent telco Telia provided a lot of early stage growth for Spotify
• iTunes never really got going in Sweden, so the legacy download market was a much smaller part of the market than it is globally
• Physical music sales are further along in their decline (now just 10% of all revenues)

These factors considered imply that Sweden is an indicator of an optimum state streaming market; others may not get there or will not get there so quickly. This could mean that legacy formats decline more quickly in comparison, making total revenue growth slower. However, given that downloads are a bigger chunk of revenues in most markets, these factors should cancel each other out. Therefore, an annual growth of 4% in total music revenues is a decent benchmark for long-term revenue growth.

The question is, what happens to the remnants of declining legacy format revenue? Do those CD and download buyers disappear out of the market, or does some of their revenue switch over to ensure that growth continues further? The likelihood is that Apple will see much of its longer-term growth come from converting higher value iTunes customers into subscribers, but there is a clear case for expanding the market beyond 9.99. The current 10% price hike experiment Spotify is running in Norway is one route. But, a suite of higher tier products is a better solution, as are super-cheap low-end products (e.g. $0.25 a week for Today’s Top Hits) and, of course, boosting ad-supported revenue to steal audience from radio. That latter point is probably the best long-term option for pushing real continual recorded music industry growth.