UMG’s buoyant stock debut is a new chapter for the music business

Universal Music Group (UMG) had an extremely positive first day of trading as a standalone entity, with shares at one stage trading 35% up from their reference point and making the market cap leap to $55 billion, while former-parent, Vivendi, saw a drop of two thirds in its value. Prior to the first day of trading, there were questions over whether Vivendi had pushed the indicative value of UMG shares too high, due to, in part, a series of UMG equity sell offs – but day one suggests that pent-up demand was sufficiently high to negate those concerns. Meanwhile, Warner Music Group’s (WMG) stock also surged, showing that investors see this as a market dynamic rather than a pure company dynamic. So, what is going on? Why is there so much investor enthusiasm in the music industry? The answers lie in the two-tier narrative that is building around today’s music business.

If the UMG listing had happened as recently as two years ago, we probably would not be talking about such a stellar trading debut. The fact that we are doing so now is because the music market has moved on a lot since then – and I mean a lot. This is what the music market looked like in September 2019:

• Spotify had only just closed down its direct artists platform – the first to blink in its contest against the labels to decide who would be the future of the music business
• Hipgnosis had not yet moved to the premium segment of the London Stock Exchange (it did so in November). 2019 was the year in which catalogue M+A first truly lifted off, with $4.2 billion of deals compared to $2.6 billion in 2018
• Article 13 had only just been put into the legislative process in April
• Downtown Music Holdings had only recently acquired AVL (CD Baby etc) in March 2019
• Marshmello had kicked off the music / games cross over boom with his Fortnite event in February 2019
• TikTok passed 500 million global users and had just 4% US penetration in Q2 19, compared to 44% in Q2 21

For those deep in the music business, it is sometimes hard to appreciate just how much change has happened in such a short period of time. As CS Lewis once wrote: Isn’t it funny how day by day nothing changes, but when you look back everything is different? Crucially for UMG’s listing, these changes have contributed to a major shift in the music industry’s metanarrative for investors:

• 2019: The Spotify vs the labels narrative was in full swing. Investors viewed the market through the lens of ‘rights vs distribution’. They were backing Spotify against UMG, vice versa or simply backing both horses in the race as a sector hedge. Record labels looked vulnerable in a market which was dominated by digital service provider (DSP) growth, which, in turn, was dominated by Spotify. Streaming’s future was bright, but there was a risk that as streaming got bigger, the labels would get weaker.
  
• 2020: Streaming revenues continue to grow strongly, up 18.3% in 2020 with 467 million subscribers, and up a further 25.9% in H1 21 in the US. But, crucially, the market is diversifying beyond DSPs. New growth drivers (social, short-form video, games, fitness, and mindfulness) are now making a truly meaningful contribution to label revenues (around $1.5bn in 2020). Music is becoming the soundtrack to the new digital entertainment universe. Vitally, unlike the traditional approach of sync (an ad hoc model that struggles to be agile and to scale), the labels are applying scalable licenses, born out of the DSP model, to ensure music rights can be agile enough to grow with the fast-changing digital entertainment marketplace. On top of this, a) the catalogue M+A boom has established music as an investor asset class, b) recorded music grew during the pandemic while live declined, thus demonstrating it to be the most resilient component of the wider music industry. The outlook for music is now a multi-layered narrative, with DSPs still centre stage but no longer the only game in town.

What this all means is that music rights are a compelling investment proposition for bigger institutional investors. However, the thing about bigger institutional investors is that they typically like to invest in big established companies. So, looking at the marketplace, unless an investor wants to build a catalogue investment fund (which is a highly specialised approach), there are not many big companies to invest in. WMG is the smallest major, Sony Music is just one smallish part of the Sony Corporation, and Believe is an indie label. So, while those are still interesting options for investors, the opportunity to invest into the world’s largest music company was previously the exclusive domain of a few large investors. Now, finally, everyone can have a part of UMG. 

So, what we have is the confluence of two factors:

• Pent-up investor demand
• A compelling and diversified industry narrative

The timing for UMG is perfect, but, of course, it has not been a neutral player simply watching the sands shift. It has actively driven this narrative, not just through what Sir Lucian Grainge and other executives have been telling the market, but also through its succession of equity transactions which helped build demand and value recognition. Part of the reason UMG is the world’s biggest music group is because it is the world’s biggest music group. It uses its scale and influence to help shape the market and its future trajectory. This is arguably one of UMG’s most valuable assets: it exercises control over its own destiny.Whether UMG’s share price falls or whether it grows in the coming weeks, the listing represents a high water mark for the music business as an asset class and may well be reflected upon as a useful bookend for one phase of the music business as another emerges.

Just what is Tencent’s Endgame?

Tencent’s combined $200 million investment in WMG follows on the heels of its $3.6 billion joint investment in Universal Music. It is hardly Tencent’s first investments in music, having spent $6.2 billion on music investments since 2016. But music is just one part of a much larger, supremely bold and undoubtedly disruptive strategy that is making the Chinese company an entertainment business powerhouse in the East and West alike.

Tencent is a product of the Chinese economic system

Tencent being a Chinese company is not incidental – it is pivotal. The Chinese economy does not operate like Western economies. Rather than following free market principles, it is a controlled economy in which everything – in one way or another – ultimately comes back to the state. In China, the economy is an extension of the state. The state takes an active role in the running of successful Chinese companies, sometimes very openly, sometimes in less direct ways, such as ensuring party nominees end up in management positions.

Chinese companies are used to working closely with the state – in its most positive light – as a business partner. When a company’s objectives align with those of the state, an individual company may gain preferential treatment at the direct expense of competitors. This is exactly the opposite way in which state involvement happens in the West (or is at least supposed to) – i.e. regulation. Tencent has benefited well from this approach, not least in music.

Tencent Music is the leading music service provider in China (78% market share in Q1 2020) and is also the exclusive sub-licensor of Universal, Sony and Warner in China. This means that Tencent’s streaming competitors have to license the Western majors’ music directly from it. Tencent clearly has a market incentive to ensure terms are less favourable than it receives itself. Netease’s CEO call the set up ‘unfair’ and regulatory authorities are at the least going through the motions of investigating. But the fact this set up could ever exist illustrates just how different the Chinese regulatory worldview is.

Investing in reach and influence

Why this all matters, is that when Tencent views overseas markets it does so with a very different worldview than most Western companies. Taking investments in two of the world’s three biggest record labels might feel uncomfortable from a Western free-market perspective, but to Tencent it just makes good business sense to have influence over as much of the market as it can get. What better way to help ensure you get good deals in the marketplace? Such as, for instance, exclusive sub-licensing into China.

Music is not Tencent’s main priority. For example, its combined $6.2 billion spent on music investments is less than the $8.6 billion that Tencent spent on acquiring 84% of gaming company Supercell in 2016). Nonetheless, music – along with games, video, messaging and live streaming – is one of the central strands of Tencent’s entertainment portfolio strategy.

Just as Apple, Amazon and Alphabet are building digital entertainment portfolios designed to compete in the ‘attention economy’, so is Tencent. In fact, it is fair to say that Tencent is prepping itself as a direct competitor to those companies. But while each of the Western tech majors compete in familiar (Western) ways, Tencent is taking a more Chinese approach.

If you don’t like the rules of the game, play a different game

Tencent’s entertainment investment strategy can be synthesised as follows:

• Take (predominately) minority stakes in companies to get the benefit of influence without having to shoulder the burden of ownership
• Invest end-to-end across the supply chain, from rights through to distribution
• Systematically invest in direct competitors so that they are all each other’s enemies but are all Tencent’s friend

This strategy has given Tencent access to and / or control of:

• Audience (e.g. QQ, WeChat, Weibo, Snapchat (12%), Kakao (14%), AMC Cinemas – via its stake in Wanda Group),
• Distribution (e.g. Tencent Music, Tencent Video, Tencent Games, Joox, Spotify (10%), Gaana, KuGou, Kuwo, QQ Music, Tencent Video, Tencent Games, Epic Games (40%)
• Rights (e.g. UMG (<10%), WMG (1.6%), Skydance (5%–10%), Supercell (84%), Glumobile (15%), Activision Blizzard (5%), Ubisoft (5%), Tencent Pictures)

The Western tech majors have built similar ecosystems, acquiring the audience and distribution parts of the supply chain (e.g. iOS, YouTube, Instagram, Twitch, Apple Music) but only rarely getting into rights (e.g. Apple TV+ originals) and never systematically investing in competing rights holders.

The Western tech majors may have often tetchy relationships with rights holders but their strategic focus (for now at least) is to be partners for rights holders. Tencent’s strategy is one of command and control: vertical supply chain integration secured through the sort of behind-closed-doors influence that billions of dollars’ worth of equity stakes get you.

Tencent may be the future of digital entertainment

Tencent is building the foundations of being one of – perhaps even the – global digital entertainment powerhouse. By taking stakes in two of the Western major labels, Tencent broke the unspoken gentleman’s agreement that streaming services and rights holders would remain independent of each other in order to ensure the market remains open and competitive. Now the Western tech majors have to choose whether to continue playing the old game or to get a seat at the table of the new game. Back in 2018 MIDiA predicted that over the coming decade Apple, Amazon or Spotify would buy a major record label. Maybe that prediction is not quite so outlandish anymore.

Recorded Music Revenues Hit $21.5 Billion in 2019

With IPOs from Warner Music and Universal Music pending and continued institutional investment into music catalogues, the music business is firmly in the sights of big money. The performance of the recorded music business in 2019 is going to heat up interest even further. The global recorded music industry continued its resurgence in 2019 with a fifth successive year of growth. Global revenues grew by 11.4% in 2019 to reach $21.5 billion, an increase of $2.2 billion on 2018. That growth was bigger than 2018 in both absolute and relative terms. Whichever way you look at it, growth accelerated, and – crucially – this growth was achieved even though streaming revenue growth slowed.

These are the key trends that underpinned growth:

• Independence is on the rise: The major record labels retained the lion’s share of the overall market in 2019, accounting for 67.5% of the total – down half a point from 68.0% in 2018. The remaining 32.5% accounted for by independent labels and artists combined was up 0.5 points from 2017 and 4.6 points from 2015. Artists direct – i.e. artists without record labels – was again the fastest-growing segment of the market, growing by 32.1% in 2019 to reach $873 million, representing 4.1% of the total market, up from 1.7% in 2015.
• Big year for Universal: Universal Music Group was the big winner among the majors, growing both faster than the other two majors and the total market to reach 30% market share. Universal also added more revenue in 2019 ($729 million) than Warner Music and Sony Music combined ($650 million).
• Race for 2^nd heats up: In 2015 Warner Music’s recorded music revenue was just 67% of Sony Music’s, and at the end of 2019 that share had increased to 93%. Just $279 million separated Warner and Sony at the end of 2019. Based on 2019 growth rates, Warner would be level with Sony by the end of 2022.
• Still stream powered: Streaming was again the key source of growth, up 24% year-on-year to reach $11.9 billion, representing 56% of all label revenues. But growth is slowing; streaming revenue grew by $2.3 billion, which was $64 million less than in 2018. The reason that the total market was able to grow as fast as it did in spite of this is because downloads and physical fell by $0.4 billion less than in 2018. So, ironically, it was the improved performance of legacy formats that enabled streaming’s performance to be good enough to drive 11.4% growth. 

Despite the inevitable slowdown in streaming revenue growth, the recorded music market managed to not only consolidate on its strong 2018 performance but improve upon it in 2019. The continued boom in recorded music revenues is accompanied by a growing complexity to the underlying business, with increased diversification of business models and artist/label relationships. Over the next few years continued revenue growth will be both accompanied and driven by business model innovation and disruption.

What UMG’s IPO Means for the Business of Music

Finishing 2019 on $6.4 billion, Universal Music is to go to IPO hot on the heels of Warner Music’s announcement to do the same. This of course also follows the Tencent-led agreement to acquire 10% of UMG for $3 billion with an option to acquire another 10%. Added into the context of a total of $10 billion in music rights mergers and acquisitions (M&A) in the last decade, we have a clear case of capital flowing into the booming recorded and music publishing businesses. The global recorded music market looks set to have reached a little under $21 billion in 2019, up 10% on 2018 (MIDiA’s definitive market estimate will be ready within the next few weeks). That 10% growth was up on the 8% seen in 2018. Investors of all sizes are either already invested in the music business or are looking for a route in, and UMG just gave them a new, very attractive option. But where is all this heading? How far can it go? And what are the implications for the business of music itself?

Looking for a return

The power behind UMG parent Vivendi is Vincent Bolloré. Although he stepped down from the board last year, he helped instigate a share buyback programme that will leave his family the majority shareholder and could even trigger a mandatory takeover. Additionally, Vincent Bolloré remains as a ‘censor and special advisor’ to Vivendi’s chairman, his son Yannick. This all matters because the motivations of Vivendi’s prime mover are, according to investors we’ve spoken to, focused on maximisation of value for Bolloré Group and for investors. This is not inherently a bad thing. The Bolloré Group has invested billions in Vivendi, so it is only natural that it will be seeking a return on that investment. And the likelihood is that Vivendi will only list a minority of UMG stock, otherwise Vivendi – Bolloré Group’s key financial interest here – would most likely lose value.

Why an IPO?

The IPO announcement follows a previous statement from Vivendi that it would look for other equity buyers for UMG. The IPO may well reflect that this course of action has not delivered fruit. But this does not mean the IPO would struggle. Equity buyers may have balked at the valuation and the lack of company control they would acquire. Stock investors, however, have a different perspective. For example, asset managers will be looking to add a profile of asset class that slots into a particular segment of their portfolios. Meanwhile, hedge funds would see UMG stock as a way to directly bet for (and against) rights in the emerging ‘rights versus distribution’ investment thesis. Finally, publicly-traded stock inherently reflects what the market values a company at, not what the company values itself at.

Investing back into the music business

Sales and IPOs during the peak of markets are usually a good way of maximising return. The question is how much of the income from the equity sales and IPO will flow back into the UMG business, compared to profit taking by investors. The same question of course applies to Len Blavatnik’s Access Industries’ proposed WMG IPO.

In its earnings release Vivendi stated that the income from the various UMG transactions “could be used for substantial share buyback operations and acquisitions”. Share buyback suggests further potential consolidation of the Bolloré Group’s relative dominance of Vivendi shareholding, while acquisitions could refer to activity at both Vivendi and UMG levels. There is a strong case for IPO proceeds being reinvested in the businesses of both UMG and WMG. The music market is growing and both companies outperformed total market growth in 2019 – but a slowdown is coming. Both UMG and WMG added less new streaming revenue in 2019 than they did in 2018. Not by much, but the early signs are there.

Time for plan B, C and D

Emerging and mid-tier markets will drive much of the growth over the next half decade, but the lower average revenue per user (ARPU) rates mean that subscribers will grow faster than revenue. So, the record labels need a new revenue driver. UMG actually saw physical sales grow a little in 2019 (due in part to deluxe editions of Beatles classic releases). But physical is not going to be the long-term revenue driver. Innovating in new revenue streams (e.g. creator tools) and new business models (e.g. streaming services that monetise fandom rather than consumption) is more promising. There is an opportunity here for UMG and WMG to supercharge growth beyond the coming streaming slowdown. In fact, MIDiA would go further and say there is an imperative to do so. Larger independents such as Downtown Music Holdings, Kobalt, BMG and Concord are collectively taking billions worth of capital and investing it in growing their businesses. If the majors do not follow suit, then they will lose ground to this emerging generation of innovative music companies.

This is looking to be the time to capitalise on the music industry’s revenue renaissance. Which begs the question: if/when will Sony spin off some of Sony Music via an IPO?

Take Five (the big five stories and data you need to know) December 9th 2019

Go east: Universal Music launched Red Records, an Asian repertoire joint venture label with AirAsia Group. With Western repertoire accounting for around only a third of all streams in Asian markets, UMG needs local bets to benefit from the Asian opportunity. They’ll be hoping for some BTS-style export successes, too.

Gameloft closure: Pioneering French games company Gameloft closed its UK office, following rumours of a Brisbane closure also. The lesson here is that it is hard to build a games publisher with the sort of longevity that music labels and TV studios have. Not many do so (without getting bought, that is).

Manchester City sponsorship: EPL club Manchester City just signed its first training kit partner Marathonbet for an eight-figure deal. The deal illustrates both how much value lies in top-tier sports leagues and how much betting companies are willing to spend on acquiring customers.

Not buzzing now: Last year MIDiA predicted BuzzFeed would either close or be bought. It is now under threat of strike-off from regulators for being two months late filing accounts. In its prime, BuzzFeed was a pioneer in making digital-first content and – for better or for worse – helped shape today’s digital media landscape. Unfortunately for BuzzFeed, in doing so it taught the world how to compete with it. 

More woe for Saatchi and Saatchi: Another accounting error for the UK ad agency (this time bigger…) sent shares tumbling. The ad agency sector is in crisis phase. Beyond accounting scandals, the whole premise of agency ad buying is challenged by the power of self-serve ad platforms and companies wanting to own their customer data.

Abbey Road 50 Years On: The Two Worlds of Music Listening

Half a century after it first after it first topped the charts, the Beatles’ Abbey Road is back at the summit of the UK charts. With the anniversary editions retailing for between $20 and $100, the impact on Universal Music’s revenue will be even more pronounced than the chart position, as we saw with the deluxe editions of the White Album (which had editions priced up to $145) helping the Beatles become the fourth-biggest UMG artist in revenue terms in 2018. The continued success of the Beatles tells us three main things:

1. The band has enduring appeal in a way few bands have so long after their demise
2. Universal is doing a fantastic job of managing the legacy of the Beatles with smart and effective catalogue marketing and product strategy
3. Older, physical-focused music fans remain the quickest route to high-value, large-scale revenue

It is this last point that is going to be explored here.

Streaming is not yet everything, by a long stretch

While streaming is well established, it is still a minority activity (i.e. less than half of the population streams – the rate is even lower when you factor in emerging market regions such as sub-Saharan Africa). Most of you reading this will have been streaming for many years now, so this may sound a bit crazy, but we all live in our own filter bubbles, surrounded by people with similar world views and behaviours. The reality is that we are still in a transition period where the old and the new coexist. This dual-reality paradigm underpins the Beatles’ continued success.

 

Looking at data from MIDiA’s forthcoming artist insight platform Index, we can see that the top 15 biggest audiences ranked by overall listening is significantly different from the top 15 streaming audiences. The differences become far more pronounced as we work our way down the rankings. Mass market linear media (especially TV and radio) used to be the only way in which record labels turned artists into mainstream brands. The biggest artists of today (in fact all of the artists in both of the top 15 rankings) built their fanbases sitting on the shoulders of big, traditional media. Big media of course still plays a crucial role – as illustrated by the fact that the top five most-listened to artists have all recently been in major movies. In fact, movies are emerging as the mass medium that can still create globally relevant cultural moments in the way that radio and TV used to.

Niche is the new mainstream

Now though, newer artists are building their fanbases outside of traditional media, using digital marketing channels to laser-target specific audiences rather than the traditional carpet-bombing approach. As a consequence, when we look at the top 15 most-streamed artists based on those audiences that actually know the artist we see a totally different picture with artists like Post Malone, Martin Garrix and Bille Eilish among the top performing. These are still-big artists; artists that have found global niches with genuine scale, but niches nonetheless. This is the era of fragmented fandom. Niche is the new mainstream.

The first global pop band, perhaps

The Beatles were arguably the first big, global pop band – I say ‘arguably’ because there are many other claimants to that title, but whether they were first, or among the first, they helped create the template for artist success that shaped the modern recorded music industry. Now, as part of our cultural history they have an additional emphasis. The film ‘Yesterday’ will have introduced new audiences to the Beatles’ music, as will the hype around the return of Abbey Road. However, the majority of Beatles fans are old (59% are aged over 45) with an average age of 46. This aligns with average age of consumers that still buy CDs and that still listen to albums.

This does not mean that young people are not listening to the Beatles also (and on streaming they skew younger), also even with an average age of 45 this means that a large portion of the core fanbase are not from the Beatles’ original generation.

However, it is a very different demographic from Spotify users (average age 34) and, for example, Billie Eilish fans (29). Beatles fans skew towards older consumers that are more likely to buy and listen to physical albums.

For all the chart modifications, actual album sales still have key impact

 With all of the reformatting of charts to recognise streams, album sales still carry much more weight, because:

1. A lot of streams are needed to be equivalent to an album (1,500 in the UK, 1,250 paid streams or 3,750 ad-supported streams in the US)
2. Newer, streaming-centric artists tend to be track artists rather than album artists, and tend to have a larger share of ad-supported listeners, so it is harder for them to top album charts

When a once in a generation event like Abbey Road at 50 comes along, and the older, CD and vinyl buying audience comes out in force, you do not need too many of them to create a chart-topping album. As I illustrated in my post on the White Album, 75,000 sales of a $100 deluxe edition can generate the same label income as more than 60 million streams – though how much Universal actually retains of that due to its commercial relationships with the band and its estates is another issue entirely.

The key takeaway from Abbey Road at 50 is that we still have a long, long way to go on the streaming journey. In fact, you might say it is ‘the long and winding road’.

Take Five (the big five stories and data you need to know) August 23rd 2019

Taylor Swift, pre-sale love: Taylor Swift tends not to adhere to prevailing industry trends. As a millennial artist with a strong Gen Z following, streaming should rightly be the core of her recordings career. Having started her career very young in the album era, however, she and her fans still love album sales. So, on the eve of her first UMG album ‘Lover’, she has hit one million pre-sales– which is kind of spectacular in the post-album era. Add this to BTS helping push South Korean sales into growth, and we have an emerging trend: pop acts mobilising young fanbases on a global scale to buy albums as a gesture of fandom. 

Apple TV+, on its way: Apple confirmed plans to launch its video subscription service by November, part of a drive to reach $50 billion in service sales by 2020. Services represent 21% of Apple’s revenue and it is making a big deal of transitioning to being a services business. A cynic might argue that of course Apple would say this when iPhone sales are dipping below 50% revenue. While wearables are booming, there is no iPhone successor on the horizon, so services need to drive mid-term growth.

Korn, brutal mosh pit: Nu-metal veterans Korn have announced they are doing virtual gigs in MMO games AdventureQuest 3D and AQWorlds. The band have had characters made of them and they promise a ‘brutal mosh pit’ and an ‘unforgettably brutal, monster-filled virtual rock concert’ – as well as the opportunity to take selfies backstage with the band. Making in-game concerts work is no easy task (look at how long it has been since Marshmello’s Fortnite ‘gig’). But the potential is clear, and they will get easier to do.

Google, privacy fightback: Since the Cambridge Analytica scandal, privacy has risen in the agenda. Companies that don’t rely on advertising (Apple in particular) have been able to leverage this to position privacy as a product. Google can’t afford to be a passive observer, as advertising is 83% of its revenue ($33 billion last quarter). Its Chrome team has thus proposed a ‘privacy sandbox’, which aims to deliver accurate targeting for advertisers without compromising user privacy. Blocking cookies can reduce publishers’ ad revenue by half, so Google needs a privacy-friendly version of targeting, fast.

PAOK, licensing brinkmanship: Greek Super League football club PAOK will stream its first match of the season on itsown OTT platform because it hasn’t yet got a licensing deal with national broadcaster ERT. Sports licensing is in an unusual place right now. On the one hand, traditional broadcasters are seeing audiences decline while having to spend more on drama to compete with Netflix (so less to spend on sports), while on the other new streaming players are increasing their spend. Expect more speed bumps like this along the way.

Backing Both Horses: The Thinking Behind Tencent’s UMG Stake

As long expected, Tencent is poised to take a stake in Vivendi, reported to be 10%. While the news might not be surprising, there are a number of important factors at play:

• Tencent fast-tracked? Given that various entities stated their interest in investing in UMG, Vivendi appears to have fast-tracked Tencent. This might well be because Tencent showed the most appetite for paying a premium, and therefore Vivendi wanted to close the deal so as to create a price that subsequent bidders would have to work with.
• Betting on both horses: The investment community is increasingly viewing music as a battle between rights and distribution, with Spotify versus UMG as the publicly traded vehicles through which the contest can be backed. Tencent already secured around 5% of Spotify via its Tencent Music Entertainment subsidiary back in 2017, and it is now securing 10% in UMG. Tencent is backing both horses in the race.
• Investing within constraints: Back in 2016, concerned about capital flowing out of the country,Chinese authorities implemented restrictions on Chinese companies investing in overseas entities. This has compelled Tencent to focus on minority stakes rather than outright acquisitions. The UMG stake fits this investment framework.
• Outgrowing China: Tencent had a 74% market share of the Chinese music subscriptions market in Q2 2018. While growth in the market is solid, it is slowing. Tencent will recognize that there is only so much remaining near-term opportunity at home. Being a part of the global market is a way of ensuring it is not constrained by its domestic marketplace.
• Proxy wars: Back in 2018 I argued that Spotifyshould be wary of Tencent setting itself up as a competitor in markets where Spotify is not yet established (Russia, sub-Saharan Africa, some Asian markets etc). Tencent may still do this, and this may be part of the preparations, but for now ByteDance looks the most likely candidateto pursue this strategy.
• Look east:While streaming is giving an old industry new legs in the west, China’s music industry is effectively being built from scratch. As a consequence, it doesn’t have decades of irrelevant baggage. This is seen in China’s music apps. Western streaming is all about monetising consumption; China’s isabout monetising fandom. If the Western music industry was born today, it too would be putting social at its core. Many argue that apps like WeSing can only really work in China – but I remember people saying the same about mobile picture messaging when i-mode was getting going in Japan nearly 20 years ago. Just look at TikTok’s global success if you need any further convincing.

The Frank Ocean Days May Be Gone, but Streaming Disintermediation Is Just Getting Going

At the start of this month Apple struck a deal with French rap duo PNL. PNL are part of a growing breed of top-tier frontline artists that have opted to retain ownership of their masters. In our just-published Independent Artists report (MIDiA clients can read the full report here)we have sized out the label services marketplace, and when it is coupled with artists direct (i.e. DIY) the independent artist sector was worth 8% of the entire recorded music business in 2018.

While that number may sound relatively modest, it is growing fast and represents the future. Traditional label deals are not disappearing, but they are becoming just one component of an increasingly complex recorded music revenue mix. This is the industry context that enables initiatives such as Apple’s PNL deal and both Spotify and Apple backing Aaron Smith, who incidentally is signed to artist accelerator Platoon, which is a company that Apple acquired in December 2018.

Independent artists open up new opportunities for streaming services

When Apple did its exclusive with Frank Ocean back in 2016it caused such an industry backlash that UMG head Lucian Grainge banned his labels from doing exclusive deals and the movement seemed dead in the water. If there was any doubt, Spotify kicked up so much label ill will when it launched its Direct Artists platform that it officially shuttered the initiative in July. However, now we are seeing that there many more ways to skin the proverbial cat. It is perfectly possible to disintermediate labels without having to actually disintermediate them. Doing an exclusive with an independent artist or giving him / her priority promotion is doubly effective for streaming services as:

1. Record labels have no right to complain because independent artists have just the same right of access to audiences as label artists
2. The more exposure independent artists get, the more their market share will grow, which will lessen record labels’ market share, which makes it harder for them to resist and easier for the streaming services to start making bolder moves down the line

Ambiguity will be the shape of things

Even this structure plays into the traditional view of labels versus the rest. The new truth is much more nuanced. For example, when Stormzy was duetting with Ed Sheeran at the Brits, signed on a label services deal to WMG’s ADA, was he a Warner artist or an independent artist? He was, of course, both. The evolution of the market will be defined by progressively more of this ambiguity, which will give streaming services equally more ability to not only play to these market dynamics but to stress-test the boundaries. The simple fact is that streaming services will become ever-agnostic with regards to artists’ commercial partnerships and in turn they will become a more important component of the value chain. Apple Music did the PNL deal because they had much more commercial flexibility dealing with an independent artist than dealing with a label artist. At some stage, labels will have to decide whether they want to revisit the exclusives model. Without doing so, they may not get a seat at the new table.

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.