MBW Reacts is a series of analytical commentaries from Music Business Worldwide written in response to major recent entertainment events or news stories. Only MBW+ subscribers have unlimited access to these articles. MBW Reacts is supported by JKBX, a technology platform that offers consumers access to music royalties as an asset class. The below article originally appeared within January’s MBW+ Monthly Review email, issued exclusively to MBW+ subscribers.
Earlier this month, we learned that the founder and CEO of DistroKid, Philip Kaplan, was ‘moving upstairs’ to the role of Chairman at the company; Phil Bauer was simultaneously named President of the DIY distributor, “taking over day-to-day leadership duties”.
This news came just over two years after DistroKid was valued at a whopping USD $1.3 billion, in August 2021, following an investment from private equity firm Insight Partners.
Said frothy $1.3bn valuation was clearly based on the promise of a ‘revolutionary future’, where the ‘pie’ of music streaming royalties would be increasingly thinly sliced amongst a fast-mutating volume of indie artists. The logic: year after year, millions of ‘DIY’ tracks and artists would cumulatively increase their market share on Spotify etc., at the continued expense of the three major music companies.
DistroKid – and its boasts of processing “30-40% of all new music in the world [by volume]” – was right at the heart of this Promised Land.
Now, though, things have changed. The budding ‘revolutionary future’ for DIY distributors has been scorched by new streaming royalty policies, particularly at Spotify.
These policies have been inspired by Universal Music Group‘s ‘artist-centric’ streaming strategy – which sees a portion of streaming royalties shifting back from relatively unpopular artists (and machine-made ‘noise’) towards relatively popular artists.
Spotify’s most controversial new policy? From this quarter (Q1 2024) onwards, it will no longer pay out any recorded music royalties for tracks with under 1,000 plays on its service in the trailing 12 months.
New data from Luminate indicates just how many tracks, largely distributed by DIY aggregators like DistroKid, will be demonetized by this plan. As recently reported by MBW, 158.6 million tracks received 1,000 or fewer plays on all on-demand audio streaming services in 2023.
Digging further into that figure: a scarcely-conceivable 113.0 million tracks received somewhere between 1 and 1,000 plays. Had Spotify’s new policy been in place from Q1 2023, none of these 113.0 million tracks – nor their distributors – would have received a penny in royalties from the world’s largest subscription streaming platform.
Spotify’s sub-1,000-plays change won’t directly affect DistroKid’s own net revenues: DK’s pricing model sees it charge ‘DIY’ artists a flat subscription fee, leaving acts to collect 100% of their royalty earnings. But in the famously thin-margin world of DIY distribution, platforms like DistroKid can no longer over-rely on the automatic/recurrent revenue of mass-volume DIY music uploads. Instead, they’re finding themselves having to push harder into value-added services for “professionally aspiring” artists. (See: DistroKid’s acquisition last year of the successful promotional/website-building indie artist services company, Bandzoogle.)
And it’s in this world – ‘distributors’ that provide substantial marketing, promotion, and financing to so-called ‘middle class’ indie artists, with significant fanbases – that I can see blockbuster-priced M&A activity ratcheting up in 2024.
In late 2023, we heard rumors that San Francisco-headquartered EMPIRE could one day be sold, with chatter around a $1 billion valuation pinging around. Now, SoundCloud has joined the fray. Earlier this month, SoundCloud CEO Eliah Seton confirmed to MBW that the company may sell, or take on outside investment, in the months ahead.
Reports suggest that SoundCloud’s board/owners – particularly Raine Group and Temasek – have consulted with investment banks to begin a potential sale process, with yet another $1 billion+ price-tag bandied around.
That number may seem fantastical to those who’ve seen SoundCloud’s projected 2023 annual financials: EUR €288 million in revenues; a positive EBITDA of €2m. But, of course, SoundCloud is far from just a third-party distributor/services company: it is also a platfom in its own right, presenting music directly to consumers (aka: D2C).
And while SoundCloud may have lost the grip it once held on shaping the zeitgeist (the days of ‘SoundCloud rap’ seem fossilized back in a pre-TikTok era), it’s worth noting that the leaders of both Universal Music Group (Sir Lucian Grainge) and Warner Music Group (Robert Kyncl) nodded towards the importance of growing their respective D2C businesses in separate New Year memos to staff this month.
Elsewhere in the world of ‘quality’ artist and label distribution, we have Believe – currently in talks with potential private backers to take its business back off the stock market. Since floating in 2021, Believe’s public valuation has bounced between USD $1 billion and USD $2 billion-plus. It’s currently at the lower end of that spectrum.
Even so, Believe is significantly more valuable than it was in summer 2017, when a report in Japan’s Nikkei suggested – incorrectly – that the company was selling to Sony Music. The more interesting piece of that report in hindsight? Believe’s valuation at the time was understood to sit somewhere around the USD $445 million mark.
Might any of the three major music companies now regret not making a half-billion-dollar move for Believe back then?
What about the indie-label B2B delivery/distribution specialists like FUGA – sold to Downtown in 2020 for a price believed to be not much more than $40 million, and understood to be worth a multiple of that today? Or AudioSalad, with clients like Secretly Group, ATO Records, and Mad Decent – which sold to SESAC in Q1 last year?
Could any of the three majors, looking for a swift market share boost, execute a humdinger of a distribution acquisition in the rest of 2024?
Perhaps Warner Music Group, whose streaming recorded music revenues currently track at slightly over half the size of Universal’s, wouldn’t be a bad bet.
For what it’s worth, Warner’s Robert Kyncl did say in his New Year’s note to staff (bolding mine): “We are building scaled and highly effective distribution infrastructure so that we can radically and efficiently grow the large ‘middle class’ of artists while our frontline labels can remain focused on artists with the highest potential.”
Whether WMG will do so by building automated tech solutions, laying down hard cash for an acquisition, or both, remains to be seen.
One thing we know for sure: Kyncl isn’t frightened of signing off large checks for opportunistic acquisitions.
WMG’s latest annual fiscal report shows that the company acquired 51% of Elliot Grainge‘s 10K Projects in August 2023 for a base purchase price of $102 million, with $98 million transferred on the acquisition date.
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