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.

MIDiA Index - Top Streamed and Top Listened to Artists - the Beatles 

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

Aaron_Smith
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

Taylor-SwiftThe 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.

2018 Global Label Market Share: Stream Engine

Recorded music revenues grew in 2018 for the fourth consecutive year, reaching $18.8 billion, up $2.2 billion from 2017. Streaming was the engine room of growth, up 30% year on year to reach $9.6 billion. For the first time streaming became the majority of label revenue (51%), and its growth continues to outpace the decline of legacy formats. Major label rankings remained unchanged in 2018, but the majors enjoyed varying fortunes and the continued meteoric rise of Artists Direct points to market transforming changes that are reshaping the entire business of record labels.

2018 was shaped by three key factors:

  • Continued growth: Global recorded music revenues grew 7.9%. Though 2017 revenues grew by a higher 9.0%, the market grew the same in absolute terms in 2018, adding $1.4 billion of net new revenues as in 2017. Since 2015 the total market has increased by 26%, adding $3.9 billion of net new revenue.
  • Stream powered: Though relative growth is slowing, streaming added the same amount of net new revenue – $2.2 billion – in 2018 as it did in 2017. Though 2019 will see mature streaming markets such as the US and UK slow, mid-tier markets such as Mexico and Brazil, coupled with Japan and Germany, will ensure that streaming revenues grow by another $2 billion in 2019.
  • Artists Direct:The major record labels retained the lion’s share of revenues in 2018, accounting for 69.2% of the total. Changes in global market shares typically move at a relatively slow pace, particularly at a major vs independent level. However, Artists Direct – i.e. artists without record labels – are changing the shape of the market, growing nearly four times as fast as the total market to end 2018 with $0.6 billion of revenue.

midia music market shares 2018

There were mixed fortunes in terms of market shares. Universal Music and Warner Music both gained 0.6 points of market share in 2018, up to 30.3% and 18.3% respectively, with Sony Music losing 1.5 points of share in 2018. Though Sony’s 2018 revenues were constrained in part by the company implementing new revenue recognition practices in 2018, Universal’s market share lead over the second placed label is now an impressive 9.7 points.Artists Direct and Independents together accounted for 30.8%, though this figure is measured on a distribution basis (i.e. Major revenues include independent labels distributed by majors and major owned companies). The independent share based on an ownership share will therefore be higher.

More of the same, but change too

In many respects 2018 was a re-run of 2017: total revenues grew in high single digit percentage terms; streaming was the engine room of growth and added more revenue than the prior year; Warner Music gained most major market share; Universal Music added more revenue than any other label; Artists Direct gained most market share.  But it is this latter point that may say most about where the overall market is heading. The range of tools now available to an artist are more comprehensive than ever before, while deal types that labels are offering (e.g. label services, joint ventures) are changing too. Artists are effectively able to custom-build the right model for them. The market will always need labels, but what constitutes a label is becoming a fluid concept. And in so becoming, it may put us on the verge of the biggest shift in record label business models since, well, ever.

These findings are highlights of the MIDiA Research report: Recorded Music Market 2018: Stream Engine. If you are a MIDiA client you can access the full report, slides and datasets here. You can also purchase the report and all its assets here.

Just Who Would Buy Universal Music?

Vivendi continues to look for a buyer for a portion of Universal Music. Though the process has been running officially since May 2018, the transaction (or transactions) may not close until 2020. In many instances, dragging out a sale could reflect badly, suggesting that the seller is struggling to find suitable buyers. But in the case of UMG it probably helps the case. A seller will always seek to maximise the sale price of a company, which means selling as close to the peak as possible. It is a delicate balance, sell too early and you reduce your potential earnings, sell too late and the price can go down as most buyers want a booming business, not a slowing business. In the case of UMG, with institutional investors looking for a way into the booming recorded music business, UMG is pretty much the only game in town for large scale, global institutional investors.

In this sellers’ market, banks have been falling over themselves to say just how valuable UMG could be, with valuations ranging from $22 billion to $33 billionand Vivendi even suggesting $40 billion. Meanwhile, recorded music revenues continue to grow — up 9.0% in 2017, and up 8.2% in 2018 according to MIDiA’s estimates. 2019 will likely be up a further 6%, all driven by streaming. With UMG’s market share (on a distribution base) relatively stable, the market growth thus increases UMG’s valuation. This in turn increases Vivendi’s perceived value, and that is the crux of the matter.

The role of Bolloré Group

Vivendi board member and major shareholder Vincent Bolloré was Vivendi chairman until April 2018, when he handed power to his son Yannick, one month before he was reportedly taken into police custody for questioning as part of an investigation into allegations of corrupt business practices in Africa. Bolloré senior remains the chairman and CEO of Bolloré Group, which retains major shareholdings in Vivendi. Bolloré Group’s Vivendi holdings will inherently be devalued by a sale of prize asset UMG, which is a key reason why only a portion of the music group is up for sale. But, even selling a portion of UMG will have a negative impact on Vivendi’s valuation and thus also on Bolloré Group’s holdings. So, the sale price needs to be high enough to ensure that Bolloré Group makes enough money from the sale to offset any fall in valuation. Hence, dragging out the sale while the streaming market continues to boom. All this also means the sale is of key benefit to Bolloré Group and other Vivendi investors. It is perhaps as welcome as a hole in the head to UMG. Little wonder that some are suggesting UMG is markedly less enthusiastic about this deal than Vivendi is.

vivendi umg potential buyers

All of which brings us onto which company could buy a share of UMG. These can be grouped into the four key segments shown in the chart above. Normally, higher risk buyers (i.e. those that could negatively impact UMG’s business by damaging relationships with partners etc.) would not be serious contenders but as this is a Vivendi / Bolloré Group driven process rather than a UMG driven one, the appetite for risk will be higher. This is because the primary focus is on near-term revenue generation rather than long-term strategic vision. Both are part of the mix, but the former trumps the latter. Nonetheless, the higher-risk strategic buyers are unlikely to be serious contenders. Allowing a tech major to own a share of UMG would create seismic ripples across the music business, as would a sale to Spotify.

Financial investors

So that leaves us with the lower-risk strategic buyers, and both categories of financial buyers. Let’s look at the financial buyers first. Private equity (PE) is one of the more likely segments. We only need to look back at WMG, which was bought by a group of investors including THL and Providence Equity before selling to Len Blavatnik’s Access Industries in 2011 for $3.3 billion. Private equity companies take many different forms these days, with a wider range of investment theses than was the case a decade ago. But the underlying principle remains selling for multiples of what was paid. Put crudely, buy and then flip. The WMG investors put in around half a billion into the company, but a six-fold increase is less likely for UMG, as the transaction is taking place in a bull market while WMG was bought by Providence and co in a bear market. Where the risk comes in for UMG is to whom the PE company/companies would sell to in the future. At that stage, one of the current high-risk strategic companies could become a potential buyer, which would be a future challenge for UMG. The other complication regarding PE companies is that many would want a controlling stake for an investment that could number in the tens of billions.

Institutional investors such as pension funds are the safest option, as they would be looking for long-term stakes in low-risk, high-yield companies to add to their long-term investment portfolios. This would also enable Vivendi to divide and rule, distributing share ownership across a mix of funds, thus not ceding as much block voting power as it would with PE companies.

Strategic investors

The last group of potential buyers is also the most interesting: lower risk strategic. These are mainly holding companies that are building portfolios of related companies. Liberty Media is one of the key options, with holdings in Live Nation, Saavn, SiriusXM, Pandora, Formula 1 Racing and MLB team Atlanta Braves. Not only would UMG fill a gap in that portfolio, Liberty has gone on record stating it would be interested in buying into UMG.

Access Industries is the one that really catches the eye though. Alongside WMG, the Access portfolio includes Perform, Deezer and First Access Entertainment. On the surface Access might appear to be a problematic buyer as it owns WMG. But compared to many other potential investors, it is clearly committed to music and media, and is likely to have a strategic vision that is more aligned with UMG’s than many other potential suitors.

There is of course the possibility of being blocked by regulators on anti-competitive grounds. However, at year end 2017 WMG had an 18% market share, while UMG had 29.7% (both on a distribution basis). If Access acquired 25% of UMG, respective market shares would change to 25.4% for WMG and UMG for 22.2% (still slightly ahead of Sony on 22.1%). It would mean that the market would actually be less consolidated as the market share of the leading label (WMG) would be smaller than UMG’s current market leading share. While the likes of IMPALA would have a lot to say about such a deal, there is nonetheless a glimmer of regulatory hope for Access. Especially when you consider the continued growth of independents and Artists Direct. All of which point to a market that is becoming less, not more, consolidated.

The time is now

Whatever the final outcome, Bolloré Group and Vivendi are currently in the driving seat, but they should not take too much time. 2019 will likely see a streaming growth slowdown in big developed streaming markets such as the US and UK, and it is not yet clear whether later stage major markets Germany and Japan will grow quick enough to offset that slowdown in 2019. So now is the time to act.

Taylor Swift, Label Services and What Comes Next

universal-music-group-logoTaylor Swift has done it again, striking a deal with UMG that includes a commitment from the world’s largest label group to share proceeds from Spotify stock sales with artists, even if they are not recouped (ie haven’t generated enough revenue to have paid off the balance on their advance so not yet eligible to earn royalty income). This follows Swift’s 2015 move to persuade Apple to pay artists for Apple Music trials. That Swift has influence is clear, though whether she has that much influence is a different question. Let’s just say it served both Apple and Universal well to be seen to be listening to the voice of artists. But it is what appears to be a label services part of the deal that has the most profound long-term implications, with Swift stating that she is retaining ownership of her master recordings.

The rise of label services

The traditional label model of building large banks of copyrights and exploiting them is slowly being replaced, or at the very least complemented, by the rise of label services deals. In the former model the label retains ownership of the master recordings for the life time of the artist plus a period eg 70 years. In label services deals the label has an exclusive period for exploiting the rights, after which they revert to full ownership of the artist. Artist normally cede something in return, such as sharing costs. Companies like Kobalt’s AWAL and BMG Music Rights have led the charge of the label services movement. However, Cooking Vinyl can lay claim to being the ‘ice breaker’ with its pioneering 1993 label services deal with Billy Bragg, negotiated between his manager Pete Jenner and Cooking Vinyl boss Martin Goldschmidt. It may have taken a couple of decades, but the recording industry has finally caught up.

Major labels in on the act

The major labels remain the powerhouses of the recorded music business in part because they have learned to embrace and then supercharge innovation that comes out of the independent sector. Label services is no exception. Each of the major labels has their own label services division, including buying up independent ones. Label services are proving to be a crucial asset for major labels. The likes of AWAL and BMG have been mopping up established artists in the latter stages of their careers, with enough learned knowledge to want more control over their careers. By adding label services divisions the majors now have another set of options to present to artists. This enables them to not only hold onto more artists but also to win new ones – which if of course technically what UMG did with Swift, even though it had previously been Swift’s distributor. As with all new movements, examples are often few and far between but they are there. The UK’s Stormzy is a case in point, signing a label services deal with WMG before upgrading it to a JV deal between WMG’s Atlantic Records and his label #MERKY. For an interesting, if lengthy, take on why Stormzy and WMG took this approach – including the concept of secret ‘Mindie Deals’ that allow more underground artists maintain some major label distance for appearances’ sake, see this piece.

The early follower strategy 

In August 2018UMG’s Sir Lucian Grainge called out the success of UMG’s label services and distribution division Caroline, noting it had doubled its US market share over the previous year. UMG was already not only on the label services deal path but had identified it as a key growth area and wanted the world – including investors – to know. UMG has stayed ahead of the pack by pursuing an early follow strategy of identifying new trends, testing them out and then throwing its weight behind them. Before you think of that as damning with faint praise, the early follower strategy is the one pursued by the world’s most successful companies. Google wasn’t the first search engine, Apple wasn’t the first smartphone maker, Facebook wasn’t the first social network, Amazon wasn’t the first online retailer.

What comes next

The label services component of the UMG deal was actually announced by Taylor Swift herself rather than UMG, writing:

“It’s also incredibly exciting to know that I own all of my master recordings that I make from now on. It’s really important to me to see eye to eye with a label regarding the future of our industry.”

While this might betray which party feels most positive about this component of the deal, the inescapable fact is that other major artists at the peak of their powers will now want similar deals. Label services success stories to date had been older artists such as Rick Astley, Janet Jacksonand Nick Cave as well as upcoming artists like Stormzy. Now we will start to see them becoming far more commonplace in the mainstream.

But perhaps now is the time. Catalogue revenues are going to undergo big change in the coming years, as MIDiA identified in our June 2018 report The Outlook for Music Catalogue: Streaming Changes Everything. Deep catalogue is not where the action is anymore. For example, 1960s tracks accounted for just 6.4% of all UK catalogue streams in the UK in 2017, while catalogue from the 2000s accounted for 60.4%, according to the BPI’s invaluable All About the Music report. So, by striking a long-term label services type deal, UMG secures Swift’s signature and can still benefit from the main catalogue opportunity for the first few releases without actually owning the catalogue.

Label services have come a long way since Billy Bragg’s 1993 deal and Taylor Swift has just announced that they are ready for prime time.

Penny for the thoughts of Bill Bragg having paved the way for the queen of pop’s latest deal….

Could Spotify Buy Universal? 

Vivendi is reported to be proposing to its board a plan for spinning out Universal Music. It is certainly the right time for a spin off (always sell before the peak), but a full divestment would leave Vivendi unbalanced and a shell of its former self. Canal+ is facing the same Netflix-inspired cord-cutting pains as other pay-TV operators (and is relying heavily on sub-Saharan Africa for subscriber growth), while other assets such as those in Vivendi Village have failed to deliver. With CEO Vincent Bolloré having invested heavily in Vivendi, he would be devaluing his own wealth. For a man who is not shy of saying that he’s in the game to make money, this scenario simply doesn’t add up. As one investment specialist recently suggested to me, this talk of a spin-off is probably exactly that, talk. Talk aimed at driving up Vivendi’s valuation by association and, at most, potentially resulting in a partial spin-off or partial listing. However, it is not beyond the realms of possibility that a big enough offer for Universal would persuade Bolloré to sell. So, let’s for a moment assume that Universal is on the market and have a little fun with who could buy it.

The Chinese option

It is widely rumoured that Alibaba was in advanced discussions with Vivendi to buy some size of stake in Universal. Those conversations derailed when the Chinese government tightened up regulations on Chinese companies buying overseas assets, which is why we now see Tencent buying a growing number of minority stakes in companies rather than outright acquisitions. So, an outright Chinese acquisition is likely off the table. This doesn’t rule out other Asian bidders (Softbank had an $8.5 billion bid rejected in 2013), though perhaps Chinese companies are the only ones with the requisite scale and access to cash that would meet a far, far higher 2018 price point.

The tech major option

The most likely scenario (if Universal were for sale) is that one of the tech majors (Apple, Alphabet, Amazon, Facebook) swoops in. Given Google’s long-held antipathy for the traditional copyright regime, Alphabet is not the most likely, while Facebook is too early in its music journey (though check back in 18 months if all goes well). Apple and Amazon are different cases entirely. Both companies are run by teams of older executives whose formative cultural reference points were shaped by traditional media companies. These are companies that, even if they may not state it, see themselves as the natural evolution of media, moving it from the physical era of transactions to the digital era of access. Thus far, Apple and Amazon have focused principally on distribution, although both have invested in rights too. Apple less so, (e.g. Frank Ocean, Chance the Rapper) but Amazon much more so (e.g. Man in the High Castle, Manchester by the Sea). Acquiring a major media company is a logical next step for Amazon. A TV studio and, or network would likely be the first move (especially as Netflix will likely buy one first, forcing Amazon’s hand), but a record label wouldn’t be inconceivable. And it would have to be a big label – such as UMG, that would guarantee enough share of ear to generate ROI. Apple though, could well buy a sports league, which would use up its budget.

The Spotify option

While the tech majors are more likely long-term buyers of Universal, Spotify arguably needs it more (and is certainly less distracted by other media formats). Right now, Spotify has a prisoner’s dilemma; it knows it needs to make disruptive changes to its business model if it is going to create the step change investors clearly want (look at what happened to Spotify’s stock price despite an impressive enough set of Q1 results). But it also knows that making such changes too quickly could result in labels pulling content, which would destroy its present in the hope of building a future. Meanwhile, labels are worried Spotify is going to disintermediate them but can’t risk damaging their business by withdrawing content now – hence the prisoner’s dilemma. Neither side dares make the first move.

That’s the problem with the ‘do a Netflix’ argument: do it too fast and the whole edifice comes tumbling down. Moreover, original content will not be the same silver bullet for Spotify as it was for Netflix. This is mainly because there is a far smaller catalogue of TV content than music, so a dollar spent on original video goes a lot further than a dollar spent on original music. It is not beyond the realm of possibility that Spotify will get to a tipping point, where the labels see a shiny-toothed wolf lurking under the lamb’s wool, and with its cover blown it will be forced to go nuclear. If this happened, buying a major label would become an option. And, as with the tech majors, it would have to be a major label to deliver enough share of ear.

But that scenario is a long, long way off. First, Spotify has to prove it can be successful and generate enough revenue and market cap to put itself in a position where it could buy a major. And that is still far from a clear path. For now, Spotify’s focus is on being a partner to the labels, not a parent company.

All of this talk might sound outlandish but it was not so long ago that an internet company (AOL) co-owned Warner Music and a drinks company (Seagram) owned Universal Music, before selling it to a water utilities company (Vivendi), and, long before that, EMI was owned by a light bulb company (Thorn Electrical Industries). We have got used to this current period of corporate stability for the major record labels, but this situation is a reflection of the recorded music business being in such a poor state that there was little M&A interest. Nonetheless it is all changing, potentially heralding a return to the past. Everything has happened before and will happen again.

Disney, Netflix and the Squeezed Middle: The Real Story Behind Net Neutrality

Unless you have been hiding under a rock this last couple of weeks you’ll have heard at least something about the build up to the decision over turning net neutrality in the US, a decision that was confirmed yesterday. See Zach Fuller’s post for a great summary of what it means. In highly simplistic terms, the implications are that telcos will be able to prioritize access to their networks, which could mean that any digital service will only be able to guarantee their US users a high quality of service if they broker a deal with each and every telco. As Zach explains, we could see similar moves in Europe and elsewhere. If you are a media company or a digital content provider your world just got turned upside down. But this ruling is in many ways an inevitable result of a fundamental shift in value across digital value chains.

net neutrality value chains

Although the ruling effectively only overturns a 2015 ruling that had previously guaranteeing net neutrality, the world has moved on a lot since then, not least with regards to the emergence of the streaming economy across video, music and games. In short, there is a lot more bandwidth being taken up by streaming services and little or no extra value reverting to the upgraded networks.

Value is shifting from rights to distribution

Although the exact timing with the Disney / Fox deal (see Tim Mulligan’s take here) was coincidental the broad timing was not. The last few years have seen a major shift in value from rights companies (eg Disney, Universal Music, EA Games) through to distribution companies (eg Facebook, Amazon, Netflix, Spotify) with the value shift largely bypassing the infrastructure companies (ie the telcos).

The accelerating revenue growth and valuations of the tech majors and the streaming giants have left media companies trailing in their wake. The Disney / Fox deal was two of the world’s biggest media companies realising that consolidation was the only way to even get on the same lap as the tech majors. They needed to do so because those tech majors are all either already or about to become content companies too, using their vast financial fire power to outbid traditional media companies for content.

The value shift has bypassed infrastructure companies

Meanwhile telcos have been left stranded between rock and a hard place. Telcos have long been concerned about becoming relegated to the role of dumb pipes and most had given up any real hope of being content companies themselves (other than the TV companies who also have telco divisions). They see regulatory support for better monetizing their networks by levying access fees to tech companies as their last resort.

In its most basic form, this regulatory decision will allow telcos to throttle the bandwidth available to streaming services either in favour of their favoured partners or until an access fee is paid. The common thought is that telcos are becoming the new gatekeepers. In most instances they are more likely to become toll booths. But in some instances they may well shy away from any semblance of neutrality. For example, Sprint might well decide that it wants to give its part-owned streaming service Tidal a leg up, and throttle access for Spotify and Apple Music for Sprint users. Eventually Spotify and Apple Music users will realise they either need to switch streaming service or mobile provider. Given that one is a need-to-have, contract-based utility and the other is nice-to-have and no contract and is fundamentally the same underlying proposition, a streaming music switch is the more likely option. Similarly, AT&T could opt to throttle access for Netflix in order to give its DirecTV Now service a leg up. Those telcos without strong content plays could find themselves in the market for acquisitions. For example, Verizon could make a bid for Spotify pre-listing, or even post-listing.

The FCC ruling still needs congressional approval and is subject to legal challenges from a bunch of states so it could yet be blocked. If it is not, then the above is how the world will look. Make no mistake, this is the biggest growing pain the streaming economy has yet faced, even if it just ends up with those services having to carve out an extra slice of their wafer-thin margins in order reach their customers.