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Deserting discs

How the music industry saved its soul

Matthew Walton
Senior Associate – Private Wealth

Lucian Grainge walked into the boardroom and switched off the lights. His executives sat in the dark, blinking. He barked, “That is what is going to happen here if you guys don’t start getting some records on the board” and left.

That was 2001 and the music industry was in crisis. Early internet adopters had figured out how to make music available, free, online (with varying degrees of legality). Record sales went into freefall and revenues in the United States plummeted by over 25% between 1999 and 2003.1 Music executives like Lucian Grainge needed to work out how to keep the lights on.

The streaming revolution

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.

Click to view larger image

Share it fairly, but don't take a slice of my pie

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

The battle for eyes and ears

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

As good as gold or oil

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’
Cut off the label?

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.

Funnelling the stream

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.

The rights to remain

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.

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  1. Recording Industry Association of America
  2. Ibid
  3. Pink Floyd (1973), Money
  4. According to best estimates, Spotify does not disclose the exact figure
  5. Lead Edge Capital
  6. Edison Research
  7. RIAA
  8. JPMorgan, Pershing Square
  9. RIAA, Statista
  10. Warner Music, Q1 2021 earnings call
  11. Soundcharts, Ruffer calculations. £500k calculated based on $0.00318 per stream Spotify is reported to pay out, multiplied by the number of streams in December 2020.
  13. Colossus podcast, 27 October 2021
  14. Billboard/MRC Mid-year Report, US 2021
  15. Hipgnosis Company, Report, 2021
  16. Colossus podcast, 27 October 2021
  17. Spotify
  18. MIDIA, Spotify Annual Report 2020
  19. Ibid
  20. Ibid
  21. Bloomberg

This article first appeared in The Ruffer Review 2022.

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. Read the full disclaimer.


80 Victoria Street
London SW1E 5JL
31 Charlotte Square
Edinburgh EH2 4ET
103 boulevard Haussmann
75008 Paris, France