MBW’s Stat Of The Week is a series in which we show why a single data point deserves the attention of the global music industry. Stat Of the Week is supported by Cinq Music Group, a technology-driven record label, distribution, and rights management company.
In the last year where full accounts are available, 2019, the UK’s de facto songwriter and publisher PRO, PRS For Music, said its annual costs amounted to 11.0% of the money it brought through the door.
These figures – when applied against annual revenue numbers and run through MBW’s calculator – tell us something important about the pre-pandemic global music industry.
They tell us this: across ASCAP, BMI, PRS For Music and GEMA alone, the cumulative operating expenses of PROs in 2019 stood at comfortably north of half a billion dollars.
Songwriters and music publishers picked up this tab.
One can only imagine how colossal this bill became when all PROs, in every corner of the world, paid for their expenses – from offices to staff, technology, bonuses, pensions etc.
“The cumulative operating expense of ASCAP, BMI, PRS For Music and GEMA in 2019 stood at comfortably north of half a billion dollars.”
Understandably, music rightsholders have long raised prickly questions about PRO expenditure and efficiency.
At the same time, PROs have staunchly defended the chunk of cash they burn – pointing to, amongst other things, the trillions of lines of data they process annually in the modern era.
Yet a storm might now be brewing at the heart of this conversation, propelled by two very topical factors.
Factor 1: The new breed
The past few years has seen large-scale financial entities move their money into music rights in a big way.
To pick a few recent examples: KKR, Providence Equity Partners, Blackstone, and Morgan Stanley have jointly committed billions of dollars to buying music rights. Each has a reputation for fierce financial discipline.
Said financial discipline is also shared by other institutional and/or public investors in new school music companies such as Hipgnosis Songs Fund, Round Hill, Reservoir, and Primary Wave. (That’s not to mention public investors in Warner Music Group, which floated last year, and Universal Music Group, which will float later this year.)
“If you’re a music company and it’s not in your DNA to hand money to partners if you can avoid it, if the money gets stuck in your pipes on the way out, that could kill returns for well-capitalized partners.”
Hartwig Masuch, BMG (speaking to MBW last month)
You can bet big, then, that each of these parties is microscopically scrutinizing the full value chain of their music rights investments – weeding out profligacy, and demanding that not a penny is spent out of place.
In this regard, the likes of KKR and Morgan Stanley are very much “on the same side” of songwriters.
As BMG’s Hartwig Masuch recently phrased it, in reference to his company’s new billion-dollar-backed alliance with KKR: “If you’re a music company and it’s not in your DNA to hand money to partners if you can avoid it, if the money gets stuck in your pipes on the way out, that could kill returns for well-capitalized partners.”
That’s especially true for PROs when we consider the second, rather depressing factor, in this new confluence of circumstances.
Factor 2: Public performance money in publishing for 2020 took a serious nosedive
Songwriters and music catalog owners have already been warned to brace themselves for a Covid-hit decline in public performance income for 2020.
This was due to international pandemic lockdowns hitting performance royalties for music catalogs in major markets, via the shutdown of bars, restaurants, nightclubs and live concerts.
In the past seven days, we have seen the first concrete evidence of this trend – and the early news is not good.
MBW’s Stat Of The Week: Germany’s GEMA and the UK’s PRS For Music both say they saw a double-digit drop in revenue collections in 2020 (-10% for GEMA and -20% for PRS). That drop in revenue, across both PROS, amounted to a combined YoY decline of approximately USD $330 million. (That’s a €110.5m ($125m) drop at GEMA, and a £160m ($205m) drop at PRS.)
Germany’s GEMA has today (May 4) published its annual figures for 2020.
They reveal that the PRO saw its total collected revenues fall by just over 10% last year (-€110.5m) to EUR €958.8 million.
The main cause of this drop was a painful 43% fall YoY in “regional office collections” – aka royalties from public performance of live and recorded music in Germany – to €230.1 million.
GEMA made up some of this shortfall with a €97.7m YoY increase in “remuneration rights”. However, this was largely due to a one-off payment for retrospective royalties from the Zentralstelle für private Überspielungsrechte (The Central Office for Private Transfer Rights). It won’t be repeated this year.
Every other major category of collection for GEMA – including broadcast and online collections – fell YoY in Germany in 2020.
Worse news may now be on the way for music rightsholders, according to GEMA boss Dr. Harald Heker, who said: “All in all, we have concluded the crisis year 2020 in a satisfactory manner for GEMA. This may, however, not hide the fact that the situation remains extremely tense.
“The pandemic is going to significantly reduce pay-outs of GEMA in the current  and probably also in the coming  year. For many music creators there will be an enormous financial drought phase.”
“The pandemic is going to significantly reduce pay-outs of GEMA in the current and probably also in the coming year.”
Dr. Harald Heker, GEMA
Eagle-eyed music rightsholders might note in the table above that GEMA’s expenses in 2020 dropped by €11.4 million YoY during the pandemic-hit 2020, while the PRO’s revenues fell by €110.5 million.
As a result, GEMA’s operating cost margin rose considerably – from 13.4% of revenues in 2019 to 14.9% in 2020, as its overall cost margin bounded up to 15.9%.
Pressure will now build on Dr. Harald Heker (annual salary: €691k in 2019) to find more efficiencies, and slash more costs, at GEMA amid the “financial drought” he predicts for 2021.
Another important set of financial results from the PRO world arrived last week from the UK’s PRS For Music.
They showed that revenues collected worldwide by PRS For Music declined by 19.7% in 2020 versus 2019 – down £159.9m to GBP £650.5m.
Revenues generated by live performance of music fell 79% YoY at PRS in 2020, down to just £11.3m.
“Revenues collected worldwide by PRS For Music declined by 19.7% in 2020 versus 2019.”
Like GEMA, PRS For Music has fired an early warning shot about 2021, noting: “[M]any of the royalties paid out last year were collected before the first lockdown, meaning that the sharp decline in income will be felt by music creators through 2021 and beyond, with distributions [in the current year] expected to fall by at least 10%.”
(PRS’s distributions, rather than its collections, actually rose very slightly in 2020, but would have benefitted from any lag in payouts from royalty collections made outside Covid-enforced lockdowns.)
With our headline above in mind, here’s an extra-interesting stat from PRS: the PRO says that its net costs “excluding charitable donations and subsidies” fell by by £12.1m, or 13.8%, in 2020, as it tightened its belt during the pandemic.
The problem? That’s £147.8 million less of a drop that PRS saw in total royalty collections year-on-year (-£159.9m).
In other words, just like at GEMA, PRS’s cost reduction in 2020 seemingly won’t be enough to stop its operating cost margin (as a percentage of revenue) spiralling upwards.
“The dramatic fall in [PRS’s] revenues during the last year will be reflected in declining distributions throughout 2021.”
Andrea c. Martin, PRS For Music
This is not the kind of statistic that will please music’s newest, and richest, institutional investors. And it’s something PRS For Music CEO, Andrea C. Martin, will have to wrestle with over the next 12 months.
(Martin’s salary, for now, remains unknown: in PRS’s last annual filing with UK Companies House, it simply says that the firm’s ‘Highest Paid Director’ earned £991,000 in 2019. This was Martin’s predecessor, Robert Ashcroft, who left PRS that year. The filing also reveals Ashcroft was paid a sum of £294,000 “for compensation for loss of office”.)
In October last year, in reference to the pandemic’s anticipated effects on publishers’ performance royalties, Warner Chappell Music CEO & co-Chairman Guy Moot told MBW: “I don’t think collection societies should be first to sing the blues here.
“Some are good, some aren’t so good; some feel like allies and partners, but some are inefficient, holding on to money and charging high commission rates.”
Moot certainly won’t be alone in this view – both in the music industry, and throughout Wall Street.
At PRS For Music, Andrea Martin has told her constituents to brace for a “challenging” year ahead “as the dramatic fall in revenues during the last year will be reflected in declining distributions throughout 2021”.
Yet the scrutiny heaped upon the expenditure of not-for-profit PROs in major music markets – whether PRS, GEMA, ASCAP, BMI or beyond – definitely won’t be in decline in 2021.
In fact, it might hit fever pitch.
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