Schubert Music Is the Latest Publisher to Push Into Recordings

Schubert Music Europe, the holding company of Schubert Music Publishing, today announced a deal with Sony’s independent label distribution division The Orchard. Under the deal, Schubert will distribute ten new record labels. This is just the latest example of an emerging trend that MIDiA identified back in November in a report entitled ‘Music Publishing | A Full-Stack Revolution’. The concept is a simple but important one: a growing number of music publishers are using the growing flow of capital going into music publishing catalogue mergers and acquisitions (M&A) to reverse into the recordings business. It is a trend with major implications for the future of the music business. 

The rise of the full-stack music company

Historically labels and music publishers have been largely distinct entities, even though the major music companies all have both within their corporate entities. There were some good historical reasons for the divisions, but these have become progressively less relevant in today’s global music market. A wave of both new and older companies are building a whole new take on what a music company should be, acquiring catalogues across both masters and publishing, as well as other assets such as library music (e.g. Anthem / Jingle Punks / 5 Alarm Music) and distributors (e.g. Downtown Music Holdings / AVL / Fuga). The future of music companies is one of diversification and the emergence of many different types of ‘full-stack’ music companies, meaning that categorisations such as ‘label’ and ‘publisher’ are becoming much less useful.

This is the model that Schubert Music, which already has some label assets, is pursuing. As  CEO Andreas Schubert explained,we want to set new impulses and, in combination with our other services such as publishing, management and booking, be an attractive label alternative for artists from various genres”.

Getting a bigger share of revenue

Underpinning this market-level shift is a very simple but very important commercial imperative: publishers wanting a bigger share of streaming revenue. To heavily over-simplify, master recordings get around 50-55% of streaming revenue, compared to around 15% for the publishing side of the equation. This means that masters streaming revenue will grow much more than publisher streaming revenue in absolute terms. Assuming for illustrative purposes that rates do not change (though they will), a record label with the same number of rights and same market share as a music publisher will see its average streaming revenue per copyright increase by 3.5x more than a publisher in absolute revenue terms by 2026. Although the publisher’s revenue per copyright will grow at a faster rate, masters will gain more earning power. This is why publishers are building out their capabilities on the masters’ side of the equation (and I am saying ‘masters’ rather than ‘label’ as independent artists are very much part of this equation also).

Expect plenty more announcements like Schubert’s in 2020. This new decade is going to be more transformative for the structure of the music business than the last one was… and that one was pretty transformational!

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.

2019.10.14_Music Publishing Blog graphic

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.