In order to get through this interview without making it an entirely depressing exercise, Hartwig Masuch agrees, we’re going to have to cast our mind back a few weeks, and pretend we’re still there.
Back to a time when COVID-19 wasn’t dominating every single business and tabloid headline, not to mention every business and tabloid conversation; back when the fortunes of the key constituents of the music industry – especially, let’s be in honest, in terms of their competition with one another – seemed like an altogether more pressing concern.
We do, of course, discuss the impact of Coronavirus on the industry and BMG – the Bertelsmann owned music rights company which Masuch has run as CEO since it re-emerged as an independent entity in 2008. (BMG is, Masuch says, “in a position right now where there will be no redundancies… we have to make sure everyone gets through this crisis.” He adds that, due to BMG’s strength in the world of catalog, “we don’t feel massively threatened” by the knock-on economic pain caused by COVID-19 as things stand.)
Yet there’s also plenty of other topical subjects for us to chew over, too.
BMG’s financial annual results for 2019, published earlier this week by parent Bertelsmann, contained a run of positive news for the hybrid publishing and recorded music company.
Total revenues were up 10.1% to €600m ($674m), while the firm’s operating EBITDA profit climbed by a steeper 13.1% – naturally resulting in a larger annual profit margin (23.0%) than BMG posted in 2018.
Half of that €600m revenue haul came from activity in the United States, while the UK was its second most lucrative territory, generating €99m ($111m) in revenue.
BMG’s most successful recorded music releases in the year were typically of a theme, released by artists who have long established their reputation amongst a global fanbase (for example: Kylie Minogue, Jason Aldean, Keith Richards, Dido and The Cranberries).
Within the US, specifically, BMG saw its music streaming revenues grow 62% year-on-year which, as Bertelsmann pointed out in a statement awash with glee, was “nearly three times as much as the industry as a whole” on a percentage basis.
As Masuch reveals to MBW below, BMG’s global revenues from streaming activity of catalog music, specifically, did even better – up 78% year-on-year, which was “significantly above our expectations”…
What were the key driving factors in BMG’s 10% rise in revenues in 2019?
We have a very specific definition of the market we’re focused on – the market of established repertoire, in which we do very well – and in the overall context we feel very comfortable.
We’re not exploding in terms of growth but we are moving in the right direction with a very clear strategy. We are increasing our share of consumption of established repertoire, particularly digitally.
Can you give any more color in terms of recorded music vs. publishing in the BMG figures?
The strongest momentum and growth is in recorded music, because we are very conservative in signings and acquisitions in publishing right now.
Speaking as of four weeks ago [before COVID-19 brought unpredictability to M&A activity], publishing is a totally overheated market, and from our perspective unrealistically priced. Most of our traction now comes from our involvement in recorded music.
How close is the recorded music M&A market to becoming “overheated”, as you say, like publishing?
When it comes to catalog acquisitions, recorded music definitely now gears towards publishing ratios, and interestingly enough, there are not many transactions happening.
On the other hand there are a lot of artists out there who own their catalogs who are not sellers but instead are looking for the best way to market them – and that’s a very attractive area of business for us.
“We feel, specifically in that market – established artists with reverted ownership of their catalogs looking for a partner – we can do better than our competitors.”
We feel, specifically in that market – established artists with reverted ownership of their catalogs looking for a partner – we can do better than our competitors.
That’s simply about our strategic focus – and because other companies, to a very high degree, don’t care.
What do you mean when you say they don’t care?
We have had a couple of encounters in the past month where we’ve been building relationships with artists, and they have told us their biggest frustration is that their deep catalog – which has been owned by other majors – has basically been handled disrespectfully.
We recently had a particularly intense discussion with one very big act, who has made big, iconic records, yet while they still play arena shows, their records are sold at the biggest discount possible, which is a total mistake.
“These artists don’t even get asked when their music is thrown away at budget prices.”
These artists don’t even get asked when their music is thrown away at budget prices.
When you go to a retail store and you can get three of a major act’s classic albums in a slipcase for $9.99, it’s probably not a big surprise that these artists are not that enthusiastic about that approach.
BMG’s approach is more to target super-fans of these artists with something that feels luxurious, and carries a higher price?
Yes. We think the respectful physical presentation leads to much bigger engagement and fan loyalty than the $3.99 CD somewhere in the middle of a big basket of cheap product.
Just before the end of last year, MBW reported that PRIVATE EQUITY GROUP PROVIDENCE WAS ENTERING THE MUSIC RIGHTS BUSINESS, STRIKING A DEAL WITH WARNER MUSIC GROUP TO ADMINISTER ACQUISITIONS MADE BY A $650M FUND. You have previously commented that the publishing market has become “a feeding frenzy which has pushed prices in some cases beyond all reason”. There’s chatter out there of catalogs being sold for 20 times net publisher share. How close are we, in your view, to the bubble bursting?
I’ve changed my perspective on this a little bit. Previously, I would just take the music industry perspective, and say that at the end of the day things have to make sense in terms of music industry valuation criteria.
I think what we see right now – and this will have a profound impact on the future structure of the industry – is that that kind of thinking doesn’t count anymore. Much of the current music rights M&A market has nothing to do with commercial music industry valuations, but instead with the benchmarks of capital market parameters.
“In the coming years, I think a lot of people who currently own a lot of music assets will think: ‘Wait a minute. If I separate the assets from my operating company, I will have something of incredible value.'”
If you’re building a big portfolio for a life insurance company, and you’re benchmarking against a 10-year British or German government bond, you have every reason to feel positive about buying music rights even at these high multiples, because you can outperform those bonds by a factor of three.
That’s a different game to the music industry, and now we’re seeing it’s becoming the new game: creating big baskets of assets that will probably never go back to the ownership of the music industry, which become an asset class on their own, competing with other safe, lower return asset classes.
In the coming years, I think a lot of people who currently own a lot of these music assets will think: ‘Wait a minute. If I separate the assets from my operating company, I will have something of incredible value.’
That chimes with an ARTICLE WRITTEN IN THE TELEGRAPH NEWSPAPER recently, which suggested Universal could potentially have got an even higher valuation for its recent deal with Tencent had it separated out its pure music rights/assets away from its day-to-day operation – particularly frontline a&R – which is where all the cost lies in its business.
If you talk to the banks who put together deals like that, they’ll tell you, ‘The bigger the better.’ If you can come up with a deal that gives them $500m of contribution margin, they’re more likely to do that deal rather than one with $10m of contribution margin.
This whole idea, the change in that paradigm, might have a very big impact on how the major-level music industry is run in the years ahead.
“If that separation of assets does eventually become a standard, that’s clearly going to benefit companies with efficient operating capabilities like BMG.”
If that separation of assets does eventually become a standard, that’s clearly going to benefit companies with efficient operating capabilities like BMG.
That’s why we’re not focusing on acquisitions so much right now, we’re focusing on improving our operating capabilities.
We’ve talked about how BMG treats catalog artists in the physical world. But what about catalog on streaming. What are the headline trends there?
Our catalog streaming numbers in 2019 were significantly above even our expectations: we were up 78% [in revenue terms] year-on-year in terms of recorded music catalog streaming, without a major acquisition. And we were absolutely surprised by that number.
What’s driving that rise?
First [BMG global catalog chief] Peter Stack’s team have got massively into marketing catalog through social media, making sure whichever artists we’re working with, we have the right social media presence and engagement. That’s a big driver.
Second, it’s the average age of streaming subscribers – the changing age composition of subscribers to the big services. As older subscribers come online, there’s more of a focus on catalog. Third it’s very interesting to see in South America and Mexico, for example, we’re seeing an incredible level of interest in classic Anglo-American repertoire.
We know that a knock-on effect of the global pandemic is that blockbuster releases are likely to dry up or get pushed back to some degree – Italian trade body FIMI said as much earlier this week. Where does that leave BMG’s business?
We’re less exposed to these concerns than any of our main competitors; we don’t feel massively threatened right now. We just delivered a new forecast to Bertelsmann, taking into account disruption cause by the Coronavirus, and it looked less challenged than we might have thought.
“That’s the biggest problem [for the industry RE: COVID-19]: how do you establish new artists when everybody shuts down?”
Catalog holds up. And new releases don’t matter as much to us financially as they do to our competitors – specifically releases from new artists. That’s the biggest problem [for the industry RE: COVID-19]: how do you establish new artists when everybody shuts down?
That could be a massive problem for the rest of the year, or at least until everything goes back to normal.
How is BMG as a business holding up amid the Coronavirus pandemic?
So far, the impact we see – and we have a pretty good perspective on the first quarter now – is close to zero, EBITDA-wise versus our expectations.
It’s quite interesting how streaming holds up. Obviously to a high degree publishing’s not affected [in Q1 2020] because you get paid on activities for the previous year. Also, radio is very active – we’ll see if a slowdown in advertising on commercial stations impacts payments to collection societies but the big public stations are not affected by that.
You have a lot of very stabilizing factors right now, so we feel confident this won’t have a massive impact on our year-end numbers.
Is there any over-riding message you want to get out to the music industry, both in the context of your annual results and living through this bizarre time?
This crisis forces us to think about our responsibilities to support artists who might have massive changes in their income and their ability to monetise their repertoire.
We have to wake up even more to what our responsibilities are to keep our clients’ heads above water. That’s our main concern right now, creating extra capabilities and financial flexibility when it comes to our clients.
“Our focus right now is to stay in close contact with our artists and songwriters and make absolutely sure they are as safe as possible.”
The music industry’s clientele is amongst the most exposed to this massive change in public life. It’s very important that we don’t allow this crisis to bring down the future of talented people who chose a very risky, creative career, rather than going to work for an entity where, Coronavirus or no Coronavirus, you get paid.
Our focus right now is to stay in close contact with our artists and songwriters and make absolutely sure they are as safe as possible. That goes for our employees as well: we’re in a position right now where there will be no redundancies, we’re very comfortable with the size of staff we have; we have to make sure everyone gets through this crisis.Music Business Worldwide