The Universal appeal of music companies

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Music companies, or if you prefer the quaintly old-fashioned name, record labels, were supposed to be going the way of makers of photographic film.


Most if not all record companies were asleep at the wheel in the noughties as Apple moved in and ate a large part of their lunch with its iTunes store.


That was in the downloads era; we’re now in the streaming age and the record companies are back in the game, baby!


According to the International Federation of the Phonographic Industry (IFPI), recorded music revenue ended a decade long slump in 2015, returning to growth that has continued and seen revenues return to a level last seen in 2004.


All of which makes it a propitious time for the French media company Vivendi to hive off Universal Music Group, the largest of the Big Three music companies – the other two being Sony (NYSE:SNE) Music Entertainment and Warner Music Group.


The Big Three account for almost 80% of all music sales, with Universal snagging almost half of that 80% (i.e. 40%).


Universal owns many labels that the casual observer might expect to be independent operations, such as Tamla Motown, A&M, Decca, Island and Capitol.


New labels come and go as they have always done but perhaps more so now that it is perfectly feasible to record a hit album in one’s front room and yet the position of the Big Three looks unassailable.


Because of their market clout, their distribution channels, their support infrastructure, the majors can usually make a convincing argument to any potential challenger that giving up independence to be part of a bigger group is the sensible way to go.


Meanwhile, although streaming has already revitalised the industry, it looks like there is plenty more room for growth.


The IFPI’s figures indicate that global streaming revenues have grown at a 42% CAGR (compound annualised growth rate) since 2015, which has been the driving force behind the record industry’s 9% CAGR.


Music industry revenues

At the end of 2019, there were 341mln paid-for streaming accounts in existence, which is barely 11% of the 3.2bn smartphones owned across the globe.


Goldman Sachs (NYSE:GS), back in May of last year, estimated that the music industry’s revenue, comprising revenues from live music, recorded music and publishing rights, would practically double from 2017’s US$62bn to US$131bn in 2030.


Furthermore, it is not just the streaming platforms – Spotify, Pandora, Deezer and YouTube – that are a potential source of revenue for the music companies; there are also licensing opportunities from social media platforms such as TikTok and Facebook, film and television studios and advertisers.


Music, it seems, makes the world go around, although much of the world is only just getting the hang of this streaming lark. According to the IFPI’s 2019 Global Music Report, China was only the world’s seventh-biggest recorded music market while India did not even make the top 10.


Chinese conglomerate Tencent certainly seems hip to the growth potential. Before Vivendi decided to spin off Universal Music Group (UMG) it paid roughly US$6bn for a 20% stake.


Special purpose acquisition company (SPAC) Pershing Square Tontine Holdings, led by hedge fund manager Bill Ackman, was interested in buying the whole darn shooting match but had to settle for 10% of UMG for which it paid about US$4bn.


It’s true that initially, the COVID-19 pandemic led to a dip in streaming activity as housebound punters turned to other forms of home entertainment, such as video streaming, computer gaming and the ever-popular vegging out in front of the telly but the dip did not last long, which is more than can be said for live music revenues.


Between 2007 and 2019, global live music revenue grew by 5% annually and although this revenue fell off a cliff in 2020 and 2021, Goldman Sachs (NYSE:GS) expects revenues to recover to previous levels in 2022.

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