Music Investments: What's Next?
What has changed?
The recorded music industry went through challenging times of widespread piracy and unbundling, brought on by the development of the internet and technology changes at the end of the 1990s and early 2000s. This led to a halving of the global recorded market in revenue terms about 10 years after Napster launched in 1999.
Today, the emergence of new technologies such as internet radio and music streaming is driving a new era of growth for the recorded music industry. Players such as Spotify, Apple or Pandora have disentangled music content from its delivery. The resulting convenience, accessibility and personalization has driven more consumption of legal music and greater willingness to pay for it, at a time of improving connectivity and growing consumer preference for accessing rather than owning music. Sweden, for instance, saw a dramatic decline in piracy in early 2000s with the launch of Spotify from 90% piracy to approximately 5% piracy today (2).
In 2017, the global recorded music market grew by 8.1%. This was the third consecutive year of global growth. Driven by streaming engagement, digital revenues now account for more than half (54%) of the global recorded music market. Total streaming revenues increased by 41.1% and, for the first time, became the single largest revenue source. However, to put this recovery in context, total industry revenues for 2017 were still just 68.4% of the market’s peak in 1999 (1). According to Goldman Sachs, the overall music industry, including recording, publishing and live, is now set to double to over $100 bn by 2030 (2).
Source: Global Music Report, IFPI
Investments in Music and Royalties
Music investors are compensated via royalties, which are monetary cash flows paid to the owner of an asset. In the music industry, royalties are a “cut off the top” of revenue earned from music. In particular, the owner of a royalty gets paid before stockholders, company executives, and others at specified intervals like annually, quarterly or monthly (3).
When thinking about royalties in the music industry, it is important to separate out the different copyrights. Songwriters own the rights to the lyrics and melody of a piece of music. Performance artists own the rights to a particular recording of a song. By acquiring a portfolio of copyrights, investors can profit from a consistent income during the life of the artist plus an additional 70 years.
Why we like Music Investments
Music royalties are characterized by a relative price stability and a consistent long term income. In addition, music consumption has historically been uncorrelated to changes in interest rates or stock market volatility. From a growth perspective, we see a great potential from emerging markets catching up to the penetration levels we currently see in Sweden and Norway. By the end of 2017, there were 176 million users of paid subscription accounts globally, with 64 million having been added during the year (1). This represents only a 4% share of the global smartphone population. In particular, the entire Chinese music market was smaller than that of Sweden until 2017. On top of that, the adoption of streaming services in emerging markets will also likely be further fueled by the necessity to reduce the elevated piracy rates in these countries (IIPA estimated piracy rate >90% in China, India, Mexico and Brazil).
To conclude, we believe that we’re currently standing at the inception of a long-term growth trend in the music industry which will benefit all of the involved stakeholders.
(1) IFPI, Global Music Report 2018
(2) Goldman Sachs, Stairway to Heaven
(3) Royalty Flow Presentation