Will 2016 be a Happy New Year for the global music business?
Whether or not the revenues of the industry increase over the next 12 months is less certain than this fact: it’s going to be another year stuffed with deeply significant milestones.
2015 saw such momentous moments as the launch of Apple Music and TIDAL, The Beatles land on streaming services, Kobalt ostensibly launch its own collection society and PRS sue, then settle with, SoundCloud.
Early indications suggest that 2016 could prove even more significant in the super-fast evolution of the music biz.
Here are seven huge headlines to look out for…
1) THRILLER: Sony/ATV goes independent… or goes major
In amongst the maelstrom of industry news last year, one gigantic moment got a little lost: Sony Music Entertainment triggering a buy/sell clause for Sony/ATV with the 50% co-owner of the world’s biggest publisher – the Jackson estate.
Sony and Michael Jackson had jointly owned the company, worth around $2bn, since 1995 before Jackson’s untimely death in 2009.
Since the story broke in October last year, we’ve learned that the Jackson Estate is very serious about buying up Sony’s share – with Jackson estate rep John Branca publicly confirming the intention to acquire.
If that eventuality took place, Sony/ATV (or whatever it was renamed without any Sony control) would automatically become the world’s biggest independent music company.
“If the jackson estate buys, Sony/ATV will automatically become the world’s biggest indie music company.”
It would also almost certainly need to find an administrative partner, which, oddly, may take the ‘Sony/ATV’ catalogue to a rival publisher.
There’s also the outside possibility that a third-party bidder could please both Sony and the Jackson Estate’s requirements, and take the asset elsewhere.
(It’s important to note that only copyrights directly controlled by Sony/ATV appear to be on the table. Between them, Sony and the Jackson estate own around 40% of EMI Music Publishing, which Sony/ATV administers. Other co-owners of this real estate include David Geffen. EMI repertoire appears to be off the table for now.)
Then again, sources tell MBW that Sony is itself quietly keen to buy the publishing company from the Jacksons.
Which means that either both Sony/ATV co-owners are genuinely interested in an acquisition, or we’re going to see plenty of dramatic public attempts to push up the sale price.
Aka: Don’t Stop ‘Til You Get Enough.
2) Universal goes back into acquisition mode
The dust hasn’t quite settled on the colossal industry impact made by the sale of EMI Music to Universal Music Group in 2012.
Universal completed its acquisition of most of EMI’s recorded music assets for £1.2bn ($1.9bn) in September 2012, but the EC forced it to sell off the gold-standard Parlophone catalogue (minus The Beatles) – including classics from David Bowie, Pink Floyd, Blur, Kate Bush and Coldplay.
Warner agreed to subsequently divest $200m+ in assets to the independent sector. That was 1,049 days ago.
Hopefully we can expect this part of the deal to finally be completed in 2016.
As for Universal, its dealing with PLG acts in Europe is frozen in time, despite the fact it may still represent them in the US: the EC ruled that UMG could not ‘re-acquire the assets or re-sign any artists signed with the relevant entities for a period of ten years’ following the buyout.
However, that doesn’t preclude UMG from buying up other assets. And right now, its parent has a lot of spare dosh with which to do so.
Four months ago, MBW reported that Vivendi had €6.3bn ($7bn) net cash in the bank. By the end of 2015, that figure had grown to €8bn ($8.8bn).
Speaking to investors in September, Vivendi CEO Arnaud De Pufontaine said something to send a chill down the backs of UMG competitors everywhere:
“While strengthening our main businesses, we [Vivendi] are considering bolt-on acquisition in content creation and distribution.”
Translation: we know our shareholders are wondering why we’re sitting on all of this cash rather than paying it out as a dividend. So rest assured, we’re going to spend it.
Since that statement, Vivendi has made a handful of significant acquisitions in non-music markets.
“Vivendi has targeted india, Africa and china for UMG’s expansion in the next five years – and the easiest strategy will be acquisition.”
In November, it bought up stakes in Paris-based video games developers/publishers Gameloft (26%) and Ubisoft (10%) for a total of around €300m.
(Daniel Ek may want to pay attention to the hilarious, unprotected reality of the publicly-traded market here: Ubisoft management told staff in an internal email that Vivendi’s initial acquisition of shares was “unwelcome”… before it went back and bought a load more.)
In December, Vivendi then swooped for 64.4% of the share capital of Radionomy Group, a major global player in the digital radio industry.
Evidently, UMG’s parent is spending big in a bid to expand its multimedia portfolio.
It’s not as if Universal hasn’t dipped its toe in acquisitive waters since the EC slapped its wrist over EMI, either.
In April 2014, UMG snapped up music programming producer and distributor Eagle Rock Entertainment for an undisclosed fee.
Then, in September last year, the major quietly bought a 50% stake in leading India music festival Enchanted Valley Carnival.
Towards the end of last year, MBW understands, UMG made inquiries about German metal label Century Media, before Sony nabbed it for around $17m.
So where will UMG be looking for its next buyout target?
Well, Vivendi has named India, China and Africa as key markets for the music company’s expansion in the coming five years – and the easiest way to grow in these tricky territories will be through acquisition.
Perhaps it will be local repertoire. Perhaps it will be a regionally successful streaming service or retailer. Perhaps, like Enchanted Valley, it will be in live.
But it’s going to happen.
When the EC forced UMG to promise not to re-acquire PLG assets in 2013, it did so with a big splodge of reassurance for independent operators.
It wrote in its summing up: “The Commission [has] avoided [a scenario where] competitors would be confronted with a significantly larger Universal, which would have had the ability to seriously reduce their access to sufficient distribution channels.”
We’ll get back to you on that one.
3) Someone else goes bust
Sorry to say it, but it’s coming.
When The Beatles announced that their catalogue was arriving on streaming services before Christmas, they took great care to name nine platforms on which fans could find their music: (1) Apple Music, (2) Deezer, (3) Google Play Music, (4) Microsoft Groove, (5) Amazon Prime Music, (6) Rhapsody/Napster, (7) Slacker Radio, (8) Spotify and (9) TIDAL.
It doesn’t take a business seer to forecast that this level of competition between samey products simply isn’t sustainable in any market, let alone one as fragile and fledgling as music streaming.
And that’s before you throw other global players, such as India’s Saavn, South Korea’s KK Box or Australia’s Guvera, into the mix.
Remember that, according to the IFPI, just 41m people paid for a streaming music service in 2014.
That’s less than 1% of the world’s population, and little over 1.2% of all people connected to the internet. Clearly, these paying customers are thinly spread.
2015 saw the fall of streaming services such as Rdio and Germany’s Simfy, while France’s HD contender Qobuz entered into receivership.
Who will be next to stumble? The obvious area to place your bets would be the smaller independent services.
“Who will be next to stumble? It’s not only the independents at risk…”
Deezer, for example, suffered a failed IPO bid last year after admitting it had just 3.8m ‘revenue-generating’ subscribers – and it actually lost total subscribers in the year.
Rhapsody/Napster is growing by around 100,000 paying subs a month, but still finds itself around 20m subscribers behind Spotify (which is somewhere between 20m and 30m) and around 5m behind Apple Music (estimated to be at around 8m subs).
Not that it’s only the independents at risk.
The likes of Microsoft, for example, might have billions in resources to keep their music project afloat, but if it’s not making the numbers, corporations can easily quit music.
Just looked at Sony, whose own Music Unlimited was unceremoniously scrapped last year, and closed. A partnership was signed with Spotify instead.
The reality is that streaming music is a very expensive business, especially for those not at the top table.
According to Rdio’s recent bankruptcy filing, it was spending an unthinkable $4m in monthly operating expenses when it went bust – across 140 staff, tech costs and royalty payments to rights-holders – while bringing in just $1.65m every four weeks.
That adds up to inevitable disaster.
Not only for the company in question, but its creditors: Rdio, remember, went under owing Sony Music more than $2m.
4) Spotify floats. Or sells. And changes its model.
2016 is make or break time for Spotify.
Apple Music is forecast to catch right up with its paying subscriber base by Christmas.
It also now looks certain that at some point, an artist will break down Daniel Ek’s once-indomitable rule and successfully place their music exclusively on the service’s premium tier.
(Interestingly, that artist was not to be The Beatles, whose catalogue is currently available in full on Spotify free.)
We all know that Daniel Ek has his eyes fixed on an IPO. So much so that, the other year, his management team even staged phony earnings calls to make sure they wouldn’t make plonkers of themselves on Wall Street.
Some in the industry believe Spotify’s current valuation – which ranges anywhere between $8bn and $11bn – is on the high side. (Or downright preposterous, depending on who you ask.)
Pandora‘s current market cap on the NYSE, for example, stands at $2.8bn, with a similar number of total users as Spotify – though it has seen $5bn wiped off that figure in just 18 months.
In addition, conditions for Ek’s big IPO moment are currently not ideal.
The investment community will have been spooked by a number of recent speed-bumps for streaming. These include:
- Deezer’s failed flotation;
- Pandora’s falling listener base;
- The arrival of stiff competition to Spotify in the shape of Apple Music;
- The death of Rdio and those shocking financial figures;
- And, last but not least, the fact that songwriters are beginning to take out class action lawsuits against Spotify claiming millions in unpaid mechanical royalties.
Don’t forget that the three major music companies own somewhere around 15% – 20% in Spotify, so a big payday from a flotation would be a rosy day for UMG, Sony and Warner.
If, that is, it’s allowed to happen.
Is there an alternative for Ek if his stock exchange dream goes awry? Perhaps.
In 2014, it was reported that senior YouTube execs had expressed an interest in acquiring Spotify – conversations that ultimately ran aground. Yet intriguing connections between the two businesses remain.
Google’s Chief Business Officer, Omid Kordestani, is also on the board of Spotify.
More intrigue: the Google/Alphabet exec most keen on buying Spotify two years ago was said to be Susan Wojcicki, CEO of YouTube – a platform which recently began merging its background operatives, not to mention its promotional bundle deals, with Spotify rival Google Play Music.
Wheels within wheels.
5) Pandora goes interactive, and goes global (again)
Pandora is currently only licensed in three global territories: its home market of the US, where it benefits from minuscule statutory royalty payments to songwriters and publishers, plus Oz and New Zealand.
Some suspect the latter deal was achieved by playing off licensing bodies in the the two Australasian territories against each other.
To expand beyond these borders, the service is going to need a wealth of licensing agreements in place, both direct with rights-holders and with territory-specific collection bodies.
These agreements should soon allow Pandora to launch a fully-fledged interactive streaming service, using the technological assets it acquired from Rdio for $70m last year.
Pandora has said it expects “to offer an expanded Pandora listening experience” – that’s an on-demand Spotify rival, if you missed it – by Q4 2016 at the latest, pending its ability to obtain necessary licenses.
“Pandora expects to offer an on-demand spotify rival by Q4 2016 at the latest.”
In terms of global expansion, Pandora has previously learned harsh lessons.
It quit the UK market in 2008, citing excessive streaming royalty rate demands from PRS For Music.
Pandora founder Tim Westergren wrote in 2012: “The current rate demanded by PRS of 0.065 pence per listener per track equates to 47% of the revenue Pandora achieved on a per listener per track basis in the year we just completed, during which we generated $274 million (£172) in revenue and were the clear leader in monetising internet radio.”
This year, Pandora is on course to generate $1bn in revenue – almost four times as much as the sum cited by Westergren three years ago.
PRS For Music has just collected a handsome settlement from SoundCloud, which it was unafraid to sue over bad licensing practice.
The game has very much changed.
6) Free gets its wings clipped
Will the real story of 2016 be that Lucian Grainge gets his way?
Take a quick glance at recent shenanigans in the music streaming space suggests the ‘free’ part of a freemium model is under real pressure:
- Vevo looks like it’s poised to announce some kind of paid-for subscription tier;
- Apple Music’s numbers might not have revolutionised streaming, but its Netflix-like model is steadily bearing fruit: experts predict it will reach 20m paid-for subs by the end of this year;
- Pandora is loudly lambasting Spotify’s free tier in the press on moral grounds – a model which, funnily enough, represents a threat to Pandora’s own interactive streaming plans;
- Spotify looks likely to begin placing some music only on its paid-for tier in the near future.
In addition, the double-headed bete noire of rights-holders everywhere, YouTube and SoundCloud, are both under a lot of pressure to change their ways.
PRS For Music sued SoundCloud last year for its failure to pay proper mechanical/performance royalties to songwriters in Europe over the past five years.
“We’ve called on the EC to examine the boundaries of safe harbour legislation.”
Robert Ashcroft, PRS For Music
Just before Christmas, they announced a settlement (involving a lump sum payment from SoundCloud for historical wrongs) plus a licence for future use in the EU.
More importantly, the legal defence that SoundCloud and YouTube have hidden behind when it comes to copyright infringement in both the US and Europe, safe harbour/harbor, is now under real threat.
“We’ve called on the European Commission to examine the boundaries of who can benefit from the hosting defence under safe harbour legislation and who cannot,” PRS boss Robert Ashcroft told MBW in late December.
“We’ve called for a clear distinction between those services that are purely passive, like DropBox, and those that are active in that they provide search, curation and various other means of accessing music.”
Ashcroft admitted that taking legal action against SoundCloud was a useful way to ‘accelerate’ licensing discussions – and he hasn’t ruled out doing the same to YouTube.
The EC is including safe harbour laws in its current copyright review, and it’s the same story over in the US, where the Copyright Office has just confirmed a similar investigation into the market’s legislation.
Consider the fact that YouTube and SoundCloud are now both seeking licenses for the worldwide launches of their own subscription tiers (YouTube Red, in the former’s case) and the music business’s ability to put the squeeze on those giving away its content for nowt looks like it’s gone up a few notches.
That is, until the next SoundCloud comes along…Music Business Worldwide