Deserting discs

The saviour of the industry turned out to be a pirate. Daniel Ek, like lots of people, had begun to get his music for free through peer-to-peer file sharing services. CDs were expensive, and labels showed no signs of cutting prices. The middle of the market – quality sound at affordable prices – had been hollowed out.

So Ek created Spotify – a business which would revolutionise the music distribution market and eventually halt a 16 year trend of declining revenues.²

Success didn’t happen overnight but today, for a monthly fee equal to the cost of a single album, Spotify customers can have access to almost every song that has ever existed.

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Streaming services like Spotify have a problem. Their profit margins are skinny. For every £1 it collects in revenue, Spotify pays out roughly 70p in royalties to the labels, artists and songwriters.⁴  That leaves 30p for Spotify to cover all other costs. This gross margin (as your portfolio manager might call it) is roughly one third the level of most subscription software businesses.⁵

We listen to more music now than ever before – the average American is exposed to more than four hours of audio per day.⁶ And yet music revenues languish at around half the level they were in the late 1990s.⁷ The hourly cost of a music streaming subscription is a fraction of the cost for other forms of media.⁸ And just a quarter of American households have a music streaming subscription today, compared with 75% which have a video streaming subscription.⁹ Competition is fierce in the attention economy and, in the words of Steve Cooper, CEO of Warner Music, a gap has emerged between the “monetisation of ears and the monetisation of eyeballs”.¹⁰

Most people like the festive season. But few like it as much as Mariah Carey. Year after year, her 1994 hit All I Want for Christmas is You rakes in hundreds of thousands of pounds from streaming revenue.¹¹  This raises a question investors are used to asking: ‘how much should I pay now for say, £500,000 of income per year in perpetuity?’ If they can put a price on an income stream, they can put a price on music royalties. That was the thinking of Merck Mercuriadis, the founder of Hipgnosis Songs. Hipgnosis Songs is the UK’s first investment company focused on buying songwriter royalties from their original creators. Mercuriadis believes this predictable and reliable income stream from royalties is ‘as good as gold or oil’.

Rights and royalties

• Songwriter rights typically expire 70 years after the death of the last composer.¹²
• Half of all streams come from just 50 artists.¹³
• Two-thirds of streaming revenue comes from music over 18 months old, up from 55% in 2016.¹⁴

Hipgnosis Songs Fund ¹⁵

• Owns eight of Spotify’s 25 most played songs of all time
• Total raised to date: £2 billion; adds value to its songs by incorporating them into films, advertisements and video games – royalties from these are known as ‘synchronisation fees’

I don’t even know why I would want to be on a label in a few years, because I don’t think it’s going to work by labels and by distribution systems in the same way… music itself is going to become like running water or electricity.” David Bowie, 2002

Ziggy Stardust was half right. 

Traditionally, music labels have handled the discovery, financing, marketing, production and distribution of artists’ work. This makes sense in a world where nine out of ten signed artists fail to make back the label’s initial advance.¹⁶

These functions have been made vastly easier by the internet: today an emerging musician can be discovered on YouTube, crowdfunded, market herself through social media and upload her content direct to streaming platforms free of charge. 

And yet, they survive. A new song is uploaded to Spotify every 1.4 seconds.¹⁷ In a world of boundless variety, artists need help to stand out. Labels identify and carve out an audience and offer powerful networking opportunities to up-and-coming musicians.

Who has the power in the music industry? Is it the streaming platforms (like Spotify) or rights holders (like Universal Music Group, Warner Music and Hipgnosis)?

Several years ago, rights holders looked vulnerable in a market dominated by a few big platforms. Streaming revenues continued to grow strongly during the coronavirus lockdowns¹⁸ and the market began to diversify beyond the big platforms. In 2016, Spotify accounted for 38% of all record label streaming revenue; that fell to 31% in 2021.¹⁹

New opportunities also emerged in the form of gaming, fitness and social media. These have become lucrative additional sources of revenue for rights holders.²⁰

Streaming is often only the beginning of a song’s story – it brings awareness of an artist to as many consumers as possible. The larger the group of consumers caught in the top of the funnel, the larger the potential market for lucrative tour tickets, merchandise and brand collaborations.

Song rights might even be a savvy investment in a more inflationary world.

An asset with significant pricing power that, unlike traditional physical inflation hedges like gold or oil, does not require substantial reinvestment each year to sustain its production.

The proposition gets better still. Thanks to streaming, record labels no longer have to pay manufacturing and distribution costs for physical copies of CDs or records.

After almost two decades in the doldrums, the music industry is on the rise once more. In September 2021, Universal Music Group (UMG) listed on the public equity markets at a value of $50 billion.²¹

And Lucian Grainge? He is now Chief Executive of UMG – presiding over an industry in which the lights are burning bright.