The financial layout on major artist investment deals last year was more than $5b, marking a 180% increase over 2020. But higher interest rates, inflation and the war in Ukraine have prompted questions about what happens next, as Ben Gilbert reports.
The Russian invasion of Ukraine has mobilized a global response encompassing every facet of society. Naturally, the music industry has been keen to help and in recent months an array of artists have offered their time in a bid to raise both funds for those affected and the profile of the ongoing conflict. Ed Sheeran, Camila Cabello and Gregory Porter where among the performers at the swiftly arranged Concert for Ukraine in London, U2’s Bono and The Edge were metaphorically parachuted into Kyiv to play a show at a subway station, while Pink Floyd reunited for a one-off single, ‘Hey, Hey, Rise Up’, their first new material since 1994.
Featuring vocals from Ukrainian singer Andriy Khlyvnyuk, David Gilmour confirmed that the release was always intended as a one-off: “We want to spread this message of peace and we want to raise the morale of the people who are defending their homeland there in Ukraine,” he told Rolling Stone. Pink Floyd’s last release was 2014’s ‘The Endless River’ outtakes compilation but their economic value continues to expand in the wake of the sad passing of founding members Syd Barrett and Richard Wright and reports of ongoing tensions between Gilmour and Mason, who played on the new single, and Roger Waters, who did not.
Despite their ongoing hiatus, the band’s recordings will remain profoundly valuable, whether they decide against touring or recording ever again. In fact, the group are currently said to be the subject of “the biggest single-artist catalog sale to date”. As the music industry continues to grabble with an evolving landscape prompted by the digital era, alongside the impact of the pandemic and other issues across broader society, legacy acts like Pink Floyd provide the context to suggest there is a route out of this that can be extraordinarily lucrative.
Sony Music’s acquisition of Bruce Springsteen’s recorded music and songwriting assets in 2021 signaled the first $500 million-plus artist catalog deal. It was a move that highlighted unprecedented growth in this field. The layout on such investments last year is reported to have been more than $5b, a 180% increase over 2020. The negotiations around Pink Floyd – said to focus on bids from Warner Music Group and KKR-backed BMG – suggest this is a trend that could be about to continue.
Uncertainty surrounds the 2022 international financial markets
However, The Financial Times struck a more cautionary tone in their analysis of this speculative news, addressing the uncertainty that surrounds the international financial markets in 2022. They state that “music prices have softened in recent months as interest rates rise and the global economy slows”. It is a view that was amplified last month by Bloomberg UK in a piece entitled: “The Music Catalog Boom May Be Coming to an End”.
The article, which featured in their Screentime newsletter, highlighted the challenges apparently being encountered by Concord, one of the largest independent music companies in the world, as it also looks for a buyer to take ownership of a catalog encompassing almost one million songs. “Higher interest rates, inflation and a war in Ukraine have compelled prospective buyers to be a bit more cautious, according to about a dozen people involved in music dealmaking,” reports Bloomberg.
Discussing the speculation, Concord Chief Executive Officer Scott Pascucci said: “Inflation affects everything; there is no corner of the market unaffected.” In May, the Federal Reserve issued the US’s biggest interest rate rise in more than two decades, while Andrew Bailey, Governor of the Bank of England, warned he expects to see a “sharp economic slowdown” in 2022. So how will this impact an industry that recently saw notable profits for the likes of Universal Music Group, Live Nation and Believe?
“Music royalty assets are and will continue to be a strong alternative asset investment class. The fundamentals have not changed.”
– Richard Conlon, Catch Point Rights Partners
Richard Conlon, Founding Partner at Catch Point Rights Partners, is confident that the foundations remain sound in both the short and long term. “Music royalty assets are and will continue to be a strong alternative asset investment class. The fundamentals have not changed. We believe that music consumption has shown itself over time to be resilient in the face of economic uncertainty, generally, and we don’t believe consumption (or demand) is sensitive to interest rates,” he told Synchtank.
“This asset class is resilient in the face of economic challenges”
“During the pandemic we saw music and entertainment consumption increase – certainly there was a shift from live to at-home consumption but this shows how resilient our asset class is in the face of economic challenges. The market remains as active as we have seen it, with growing acceptance and interest from the capital markets as well as growing acceptance by rightsholders as a potential path to monetization,” commented Conlon.
Music Catalog Valuation Expert Alaister Moughan agreed, while remaining somewhat circumspect about the current economic climate. He explained: “The arguments certainly have merit in the longer term. However, what I think also impacts this is the sheer number of buyers and capital seeking to be deployed. It takes time to raise capital so there is often a delay from the ideal macroeconomic situations to invest and when the capital is ready, and by this stage committed, to being invested into buying catalogs. As such I think that catalog sales will continue at a good clip.”
Writing on his Leveling Up Substack page, investments expert Jimmy Stone sought to untangle the complexities that exist here, in a post titled: “Where Do Music Catalog Valuations Go From Here?” Within the piece he detailed the parameters that facilitated an explosion in deal activity across recent history. These were broken down into four specific themes: 1) The emergence of streaming leading to higher cash flow growth expectations. 2) The recurring nature of music royalties. 3) The low correlation to economic activity. 4) Attractive yields in an environment with low interest rates and dividend yield.
Stone suggested the action taken by the US government could be set to impact the fourth component. “Simply put, higher interest rates should result in lower values for music catalogs,” he suggested, before concluding: “In a low interest rate environment, cash flowing music IP assets have been viewed as an attractive asset class. Over the past few years, deal activity has reached all-time highs. However, rising interest rates may have a significant impact on music valuations going forward. If buyers require higher rates of return going forward, catalog cash flows need to accelerate, in order to maintain the same purchase multiples. As a result, the next six to 12 months will be interesting to watch.”
Impact of the “attention recession” on streaming
Other factors are at play here as consumers, commentators and industry figures seek to better understand what is likely to happen in the next phase of the music business. While normal life has resumed in most sectors of society, including workplaces, travel and entertainment, this also frames our long-awaited emergence from lockdown and the limitations – and habits – built up within more confined environments in a term coined the “attention recession”. The concept has also been pinpointed as having a direct impact on streaming platforms, for example Spotify, who have recently reported a slowdown in paid user growth alongside a rise in free customers.
“It is a case of simple arithmetic: more time and more spend during the pandemic benefited all companies. Post-pandemic, both of those increases recede, which means that all entertainment companies have to fight hard to hold on to their newly found boosts to revenue and users, let alone grow,” wrote MIDiA Research in their Music Industry Blog, having previously claimed that such an eventuality would eventually come down the track once the pandemic’s grip had receded.
“When we made that prediction, it was before the additional elements of economic and geo-political trends raised their heads. Rising inflation is going to hit all consumers’ pockets (with food and fuel prices being particularly hit), forcing many households to make trade-offs between essentials and luxuries,” they stated. All of which poses the question: is there concern amid investors around streaming amid the attention recession?
“I would say that the evolution of streaming growth has been unfolding according to expectations and in that sense the slowing of streaming growth could be as much reassuring as concerning. We don’t consider slowing growth to be concerning if it’s slowing predictably and in-line with our forecasts,” said Conlon.
TikTok and Peloton pushing non-DSP streaming revenues
“As consumers have adopted streaming, annual growth in percentage terms has been coming down but the lower growth rates applied to a now much larger base continue to drive meaningful absolute growth of streaming in unit and revenue terms and this appears to be occurring in predictable fashion. Many have anticipated some levelling in demand whether through market saturation at the current price points or due to Covid lockdown lessening,” he added.
But this landscape and these conversations have become increasingly complex in the 21st century, particularly more recently, when the concept of the song economy – which drives the remaking, reconfiguring and reimagining of existing music IP – is constantly opening up new revenue streams. Last month, MIDiA Research outlined that although streaming has become “the bedrock of today’s music industry”, income from a range of other web-based platforms where music has a central role is also growing. In fact, non-DSP streaming revenue from brands such as TikTok and Peloton rose by more than 50% in 2021 to $1.5b.
“These platforms are no longer mere marketing funnels for streaming, but the places where consumption and fandom happens. Complicating things further, a comparison of Spotify’s top songs versus TikTok’s trending sounds reveals that what music is popular varies widely by platform – in part due to fragmented fandom,” they wrote in a post titled “Is the catalogue acquisition market betting tomorrow’s success on yesterday’s metrics?”, which also points to the continuing globalization and interconnectivity of the entertainment and cultural industries.
Catalog valuation processes factoring in new revenue streams
“What is interesting about these emerging revenue streams particularly TikTok and Peloton is that they will likely favor different types of catalogs. These streams are starting to be part of the valuation process. In the last few years, it has been about adjusting these sources which may have been paid out as lump sums. As we move forward, labels and publishers appear to have worked out a formula making TikTok and Peloton in particular part of the valuer’s job to forecast. This means these streams can be considered regular and part of a reasonable forecast. As these sources start being paid out on a direct consumption basis from these channels, it will be interesting to see those catalogs that prosper on these platforms,” Moughan told Synchtank.
“What is interesting about these emerging revenue streams particularly TikTok and Peloton is that they will likely favor different types of catalogs.”
– Alaister Moughan
Conlon also believes that there are reasons to be optimistic when incorporating such elements into valuations. “We are directionally bullish on these emerging use cases as they tend to increase the consumption of music but we are measured and analytical with respect to the degree to which we factor into our models’ assumptions related to direct monetization from these sources at this time. We have seen modest, yet measurable, royalty revenue contributions from social media platforms in royalty statements.
“It’s important to remember that investors look at normalized income so when we analyze new royalty sources, we model them based on a number of factors specific to each type of exploitation. Some of the new services are not paying royalties yet and many of those who do pay are not paying enough. New areas like Web3, the fitness segment, online gaming, social media are all emerging income streams. Our team is experienced in monitoring and modelling royalty trends in these sectors. We see opportunity ahead,” he commented.