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by Stephan Bauer, Euro am Sonntag
C.omebacks are the emotional highlights in the music business. Hardly anyone enjoys more applause than the stars, who seem to have disappeared into oblivion and then shine again in the spotlight. There are many examples. Guitar legend Eric Clapton, for example, conquered the world stages back in 1992 after the tragic accidental death of his son with the touching song “Tears in Heaven” and, after a deep crash, landed a million-dollar hit. The North German rock n roller Udo Lindenberg started a celebrated tour in German arenas before the pandemic at the tender age of 73 and just made it to number 2 in the German album charts.
But the biggest phoenix from the ashes is the music industry itself – of all things in times of Corona, since live performances have been the most important source of income for musicians. However, applause is not given by the masses in the stadiums, but by a rather sober audience: the financial world has rediscovered music.
The world’s largest music publisher, the Universal Music Group (UMG), in which former label celebrities such as Motown or Geffen Records were absorbed in a consolidation process that lasted for decades, has just been granted a market value of 40 billion dollars. US hedge fund manager Bill Ackman is reportedly hanging the price tag so high for the subsidiary of French Vivendi group. Negotiations are ongoing and Ackman is said to be ready to pay around four billion dollars for ten percent. The financier wants to incorporate the package into his SPAC called Pershing Square Tontine Holdings. In the listed blank company, the UMG share could reach the New York stock exchange.
The price has thus more than quintupled. In 2013, the Japanese financial investment Softbank offered just 6.5 billion euros for UMG. Universal has superstars such as Lady Gaga, Drake or Taylor Swift under contract and holds the license rights to a huge catalog of titles, which also includes the world-famous songs of the Beatles.
Fanfare after a long break
Warner Music, number 3 in the world behind UMG and Sony Music, started the boom in music publishing in the summer of 2020. Artists like pop star Bruno Mars or the British bard Ed Sheeran are among the figureheads of the Americans. In the middle of the pandemic, Warner Music achieved a brilliant bustle: 1.9 billion dollars came into the box office. Subscribers and investors who joined shortly after the issue have so far been rewarded with price gains.
The love of the financial world for the long vilified business has a simple cause: the sales revenues from the distribution of recorded music are rising sharply again. The sales of physical sound carriers such as CDs or DVDs are still declining – even if one or the other audiophile fan turns to vinyl discs far more often. According to figures from the IFPI industry association, the world market for “recorded music” grew by 7.4 percent to $ 21.6 billion last year – a record since 2002.
The glamorous majors were in full bloom decades ago. In the 70s and 80s in particular, the few large publishers raked in many millions with the exclusive distribution of sound carriers. Pirated copies played a subordinate role, as the quality of copies on cassettes, for example, was much poorer. With the digitalization everything changed. Digital copies no longer differ in quality from the original, copy and exchange platforms on the Internet such as the famous Napster eroded the basis of business.
The fact that sales have bottomed out in the last few years is due to the audience’s new listening habits. In the pandemic in particular, many people used smartphones and headphones much more often than before to stream their favorite tracks. The music industry, which was one of the first to be overrun by digitization, is celebrating its rebirth thanks to the invention of the digital subscription model. Streaming services such as Spotify or Apple Music are experiencing an influx of new customers because they make almost every title and artist available to users in a matter of seconds.
With sales of $ 13.4 billion last year, streaming made up almost two-thirds of total industry sales outside of the live concert business. Streaming is also growing more dynamically than the overall market, with the area growing by a fifth in 2020.
The license fees that the streaming portals pay for their extensive range go partly to artists, for whom they serve at least as a modest source of income when concerts are canceled. The majority, however, go to the music publishers, the rights holders who supply the streaming services with broad song libraries. At $ 722 million, this business brought Warner Music nearly 60 percent of total first quarter revenue and grew an impressive 23 percent.
Digital channels are also rapidly increasing the number of artists; after all, they can now market themselves via video portals such as YouTube or social networks such as Instagram. As a result, the number of published songs is swelling in a tsunami-like manner: Around 55,000 new titles celebrate their premiere on the web every day, calculates ex-Spotify manager Will Page – the same number of new songs appeared in 1984 throughout the year.
Despite these enormous numbers, however, the audience’s interest is concentrated on a few stars. Therefore, whoever has the rights to the titles of the mega-acts in their portfolio wins. A number of music rights deals have recently made it clear how valuable such top catalogs are. For example, songwriter veteran Bob Dylan sold all of his rights to UMG for around 300 million dollars in December.
Rock n roll owl Neil Young, who previously opposed any commercial marketing, sold 50 percent of his work to the British license fund Hipgnosis for an unknown amount in the millions – based on the Dylan classic “The times they are achangin”. Young must have put in a pretty little smile. Fleetwood Mac singer Stevie Nicks had previously collected around 100 million dollars for 80 percent of her work from the rights exploiter and musician service provider Primary Wave.
Economies of scale increase margins
After all, the rights business is particularly lucrative for publishers. Nothing has to be produced in order to collect license fees – only the controls have to work. Another source of money is the so-called publishing, the publication of titles in films or series, as well as at events or shows. This business is also growing. In the pandemic, publishers also discovered virtual concerts as a new source of income.
In view of the good mood among the financial professionals, Vivendi boss Vincent Bollor is meanwhile pondering intensively about the optimal use of the UMG shares. The one SPAC deal with Ackman is unlikely to last: At the end of March, Bollor had Vivendi shareholders approve a spin-off, and the winning pearl in Amsterdam should hit the floor by the end of the year at the latest. The audience is already applauding rhythmically: After the stock exchange plans were published in the spring, Vivendi shares shot up.
The music subsidiary UMG, which generates around half of the Group’s sales, is expected to be listed as a spin-off in Amsterdam in September. Thanks to the streaming boom, UMG is the French’s revenue pearl. Vivendi shareholders could be booked into the depot in this way, up to 60 percent of the subsidiary. The share has jumped, further price gains are possible, because the spin-off reveals the value of the music subsidiary. Possible update on the spin-off at the Annual General Meeting on June 22nd. Cheap.
Warner has an extensive portfolio of rights. The group relies more on lesser-known musicians than UMG and operates a service division that helps newcomers with marketing, for example. Thanks to the streaming boom, the number 3 in the industry is turning back into positive territory after a weak 2020: Analysts at JP Morgan are expecting a net profit of over 350 million euros after a loss of 475 million in the previous year. The result is expected to climb to 530 million euros in 2022. Attractive.
The streaming leader won three million new customers in the first quarter alone, with profits rising sharply. The Swedes have 158 million subscribers and around 200 million free users who bring advertising revenues. Spotify invests in its own shows, for example in podcasts, in order to increase margins with economies of scale. Licenses and investments cost, analysts do not expect a profit until 2023. Highly rated.
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