Prologue
While we were in the middle of a hectic week trying to gauge what the Fed had to say, whether the Evergrande default will take place and what synergies will the Zee and Sony merger in India create, the world’s biggest record label UMG (AS:UMG) listed at a valuation of USD 53 billion.
This has been the largest European listing this year. Is this a one-off event? Probably not. Earlier this year, Warner Music Group Inc. raised USD 1.9 billion in an upsized IPO valuing the company at USD 13 billion. As early as June ‘21, the French record label was listed at a valuation of USD 2.2 billion.
While record labels are now getting mainstream investor attention, this actually started in the year 2020 when music catalog sales peaked with a record amount of private equity money flowing into buying of catalogs. More on this later.
So, why has investor interest suddenly sky-rocketed? Let’s try and understand the business in detail.
Background
For years, the music industry revenues had been declining because of piracy and the decline in the sale of physical records. When the legendary entrepreneur Sean Parker brought Napster, the world got the first taste of an access-based model of consuming music - similar to how video OTT consumption takes place today. While it did come fraught with privacy and no cuts flowing back to the artists or the label, Spotify changed the game, followed by Apple (NASDAQ:AAPL) Music and other streaming players worldwide.
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While streaming did revive the fortunes of the music industry, it is yet to reach the 2001 peak. If we take a closer look at what has really been reviving the fortunes, here’s how the Streaming pie looks like -
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At a CAGR of 37%, the streaming revenue has gone 5x in 5 years!
Streaming has not revived the industry, it has transformed the industry into Music-as-a-Service (MAAS - for lack of a better acronym). Just like the software industry there has been a transition from one-time lumpy sales of products (physical record labels in this case) to recurring subscription revenues.
The LTV of subscription is phenomenally higher than one-time sales.
How is music different from other entertainment sources?
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Source: TIPS Annual Report
This pyramid gives us a well rounded view of how music lies right on top of The Content Pyramid. There is an inverse correlation with repeatability and volume of the content. Unless you’re listening to Shine on You Crazy Diamond by Pink Floyd, an average music track is 3 minutes long on an average. You may listen to a piece of news or binge watch on a web-series once but there is a high degree of probability that you can end up listening to a song multiple times over multiple time-frames.
Despite this, music continues to remain one of the most low-cost form of entertainment globally.
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Source: JP Morgan Research
Streaming Companies
Since streaming companies have been able to revive the fortunes of the entire industry, how have they fared themselves?
Well, for starters - let’s look at Spotify. While Apple Music and Prime Music also have a sizable share, they operate more like ecosystem retainers within their respective companies.
Spotify generated USD 9.2 bn in topline split between paid subscribers (USD 8.4 bn) and ad-supported streams (USD 0.8 bn). These are the basis of the reported numbers for the Year ended 31st December 2020.
Spotify had 354 mn subscribers of which 155 mn were paying subscribers, growing at a rate of ~27% between 2018 and 2020.
The Average Revenue per user for Spotify translates as follows:
o Premium – USD 54.1
o Free / Ad Tier – USD 4.0
Despite being one of the best paid-to-total user ratios, Spotify is still in the red when it comes to the bottom line.
Why is that?
Royalties
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Source: Billboard Insights
Every time a song is streamed, Spotify has to pay a fixed royalty irrespective of the tier of membership the user is on. To count as one stream, a user has to listen to a minimum 30 seconds of the song which explains why the average song length has come down in the past decade to almost 3 minutes.
Another interesting thing to note is the fact that artist catalogues have now become a sought after asset class.
On one end technology has helped in tracking streaming numbers and estimating the true value of an album and on the other end, investors’ appetite for looking at an asset class with the stability of fixed returns over a given time frame has rejuvenated interest in this space.
Low-interest rate and the appetite for looking at asset classes that have a low correlation with stock markets has stemmed from this interest. It is not just record labels that are going after this but also private equity investors.
Despite that, global music is controlled by three major record labels -
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Source: Bill Ackman’s Music is Universal presentation
How important is India?
While the global market has been growing in double digits, it is no surprise that India as a market cannot be ignored. This is on account of three reasons -
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Highest population in the 16-24 age group
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Lowest Data cost with the highest data consumption
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Highest weekly consumption of music - 22 hours (Global average is 18 hours)
In fact, the world’s biggest record label had a very interesting section about India in their prospectus.
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FYI - Both Filhaal and Filhaal 2 have close to 1.5+ bn views on YouTube! (From the label Desi Melodies)
Looking at the world’s second-biggest record label, they have a content distribution agreement with Tips Industries and have been instrumental in distributing their content to Facebook (NASDAQ:META), Spotify, Apple Music and the likes.
The streaming space in India has also gathered a lot of steam. Homegrown streaming platform Gaana dominates the space, followed by JioSaavn and Wynk Music. Gaana has also been able to attract international interest with Tencent pumping USD 182 mn into the platform (They currently hold a 34% stake).
Spotify entered India in 2019 and also got entangled in a legal battle w.r.t. putting up Saregama’s catalogue on their platform which ultimately ended in the latter’s favour. All said and done, they have been really aggressive with marketing and pushing users to upgrade to paid subscriptions.
How does the market stack up in India?
The music industry in India is worth ~1,800 cr. Of this pie, 85% comes from streaming. The remaining is a mix of performance rights, collection societies, etc. which declined by ~67% due to restrictions in travel and movement.
Just like the global decline and resurgence, the Indian market seems better placed for exponential growth on account of a larger share of the 16-24 cohort and 85% share in streaming compared to the global average of 60%.
While piracy is still high in India compared to global averages, gone are the days when users would download songs from torrents, and pirated websites and share them through Bluetooth. Better and cheap data connectivity has helped streaming to thrive. Music consumption takes place on YouTube, Spotify, Instagram, and the likes.
Exit Tik-Tok, Enter Short Form Video App Explosion
The 2020 Tik-Tok ban in India proved to be a bane for short-form video apps. Banning Tik-Tok was a classic case of shooting the messenger. Indians had become wildly comfortable in consuming bite-sized videos of 15-30 seconds.
Tik-Tok’s exit was overcompensated by an explosion of short-form video apps in India right from names like Chingari, Moj, Mx TakaTak, Roposo, Josh, and Triller to name a few. This also led the foundation to make YouTube’s Shorts and Instagram’s Reels really popular in India. As per a RedSeer estimate, time spent on short-form consumption is going to equal time spent on OTT in the next 2 years!
How is this relevant to music labels?
Well, a large part of music discovery takes place on short-form apps these days. In order to have the song used for User Generated Content (UGC), the platform needs to sign a licensing deal with the record label.
Presently, most of these deals have been signed under a fixed-fee model with a Minimum Guarantee on revenues; this does hold the potential to move to a variable share in the future based on usage in line with Music OTT platforms.
How do Saregama and Tips stack up?
Given the recent battle that had taken place to race for pole position in terms of getting YouTube subscribers globally, it is no surprise that T-Series rules the roost in India.
While T-Series is not listed, the only two listed players we get in India are Saregama and Tips.
Both the companies have their own unique strengths. Here’s a quick snapshot of their key numbers -
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Let’s first start with Saregama.
A common misconception that people often have about the label is that they are historically a ‘retro-heavy’ or an ‘old-label’. There is no denying that Carvaan, the revolutionary audio hardware product, despite being in the age of Alexa smart speakers has managed to achieve peak annual sales of 295 cr. making retro ‘cool’ again, the money lies in licensing.
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58% of Saregama’s revenues come from ‘post-retro’ songs.
Another interesting insight that actually holds true for most of the record labels is the fact that User-Generated Content (UGC) views are actually 5 times the Original Content views which helps in driving more streams thereby increasing the catalogue usage for the record label.
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Source: Saregama Annual Report FY21 (Across all Saregama channels)
Let’s now have a look at Tips Industries. While the catalogue of Tips is relatively smaller compared to Saregama, the company looks interesting from two perspectives -
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Tips have a loss-making films division which is present amidst the process of a planned and approved demerger
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Warner Music Group (WMG) - the world’s second-biggest record label is their global content distribution partner
In fact, Tips had led the journey for regulatory intervention by suing Wynk Music in the High Court to demand a better share of broadcasting revenues which helped record labels get their fair share of royalties.
Indian Music Industry (IMI (LON:IMI)), the apex representative body, had put out a report in April, ‘21 estimating the potential loss in Revenues for the industry to be at ~Rs. 3,300 cr. on account of various regulatory loopholes.
Now that we’ve understood the revenue side in fair detail, let’s try and understand the implications from the cost side.
Just like the content consumption pyramid, Music is probably the cheapest compared to other sources of entertainment when it comes to production costs. While Tips directly writes off all production costs in the year of acquisition, Saregama amortises the same over a period of four to five years with ~30-35% write-off in the very first year.
There are chances when a song sung by Badshah may not cross 200 mn views on YouTube but there are also chances that a song sung by a new artist crosses a billion+ views! Music does look like a low-risk high-return form of product in terms of predictability of cash flows.
What about the numbers?
The way to look at music licensing is to compare it with a piece of art that collects royalties 24/7 based on the popularity and the quality of the content.
Let’s first start with Saregama.
While Saregama is also present in other verticals - film production for OTT through Yoodlee Films and Magazine Publication under the name ‘OPEN’, let’s look at their music vertical.
Saregama discloses their licensing revenues annually and carvaan Sales numbers (in terms of units) quarterly. Here’s what we have -
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If we break this down into quarterly phasing, here’s what we get -
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While licensing revenues have been steadily increasing, Carvaan sales have been on the decline partly because of retail stores yet to open at pre-Covid levels alongside a not-so-sharp focus on their digital strategy.
This has also made the operating margins jump from 10% in FY18 to 32% in TTM. Globally, UMG operates at ~18% operating margin. Let’s have a look at Tips.
With the overhang of the films publishing business gone and increasing share of royalties coming in from digital streaming platforms, Tips has managed to increase its Operating Profit margins from 20% in FY18 to 63% in TTM.
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While the quarterly revenues have remained a little lumpy, they have managed to grow it in double digits on a Y-o-Y basis.
Peaking into the future
In a recent article, we published about NFTs. With a lot of global mainstream artists embracing this new digital ‘token’ to provide exclusive access to their content, it does give a big layer of optionality for music labels (owing to their massive catalogue).
As the space heats up, telcos will strive to augment their product offering better through interesting bundling combinations (already seen with video OTT) and global labels will be vying for a share of the Indian pie.
The French record label Believe bought out Venus a few years back and renamed the label as Ishtar in the year 2019.
Will Indians be paying for music?
Here’s a small nugget from The Tips Q3FY21 concall. Do let us know what you think.
“I think subscription is increasing much and all the OTT players who are there and if you are using any apps, they are showing so many ads nowadays so one gets irritated. So what you do is that paying Rs 50-100 is not a problem, so you pay that. So subscription is really increasing too much and going ahead it will increase much more that’s the estimate. And subscription numbers are going to increase big time. You can see the 2020 reports by FICCI that subscription generated is 9.1% and by 2024 it will become 31%. So I think it’s going to be big. According to me, please think like this, Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), Disney, all these video apps, every single app charges you money and you are paying them happily. Once upon a time in the TV industry, we used to take cable connection but then we had to take Tata Sky, and in Tata Sky how the numbers were shooting up. Even in this business also within 2-3 years, it will see a very-very huge jump. Everybody will pay and in India 20 crores to 30 crores people have the capacity to pay Rs. 90 to 100 in a month.
Once upon a time like Raaz was my last hit film I sold 1 crore 25 lakh tapes and at that time the cassette price was Rs. 40 and as far as I remember every customer used to buy 5 to 6 cassettes of superhit films even if he was very poor, he also wanted to listen to music. You think like this that previously even if a poor person could spend Rs. 200-300, I am talking this 20 years back so Rs. 200-300 at that time is today’s Rs. 1000. According to me subscription will be very big, you please think and try to put some rough numbers, 10 crores people will spend Rs. 1000 so how big will be the money.”