‘A flood of money into music IP is about to change the music industry forever.’

Has Hartwig Masuch finally fallen in love with hits?

For years, BMG CEO Masuch has seemingly avoided the hits business in favor of a repertoire strategy focused on established and proven artists and songwriters.

This has served BMG well, with a consistent EBITDA margin of over 20%. Sure enough, in spite of coronavirus, BMG turned in an impressive first six months of 2020: total revenues hit €282m ($308m) in the six months to end of June, up 4.8% year-on-year.

Some 69% of this revenue came from the publishing side of BMG’s business, but a significant 31% chunk came from recorded music.

Naturally, streaming was at the heart of this growth, with recorded music streaming revenues up 26% YoY.

Yet for the first time at BMG, much of this success seemed to be driven by frontline hits. These included Curtis Waters’ Stunnin’, Conkarah’s Banana (feat Shaggy) – now at nearly 1bn total streams, propelled by a TikTok dance trend – as well as KSI’s Dissimulation, the biggest debut artist album in the UK across the first six months of 2020.

In a (socially-distanced, of course) interview in London, MBW asks Masuch about BMG’s streaming strategy, as well as what he thinks the music business will look like when the Covid-19 pandemic is finally, hopefully, a memory – rather than a day-to-day reality…

KSi, Conkarah, Curtis Waters: has BMG gone pop?

Not quite. We are having some great pop success, but do not mistake this for a change in strategy. In fact while our overall recorded streaming business was up 26%, our catalog streaming [revenue] was up 49%. This represented an explosion in our catalog business.

The emergence of catalog as the driving force in the music business is the great revelation of streaming. It was always the case, but in the past it wasn’t possible to see how many times people played a CD or LP. Now streaming allows us to see what’s really popular – and that’s overwhelmingly catalog.

“The reality of music consumption goes way beyond hits – therefore the whole perspective of the industry must also change. For some, that’s definitely something to worry about – for others it’s something to be happy about.”

I think we’ll see more companies having to acknowledge that the reality of music consumption goes way beyond hits – therefore the whole perspective of the industry must also change. For some, that’s definitely something to worry about – for others it’s something to be happy about. We are happy!

We want to support the development of new artists, but I don’t want to put all our bets on ‘Hey, we have X% market share in contemporary pop.’ That sort of metric is flawed when most of the consumption on streaming today is geared towards catalog.

What does this pattern of catalog vs. frontline mean for the record business more generally in future?

I obviously don’t know what strategy individual companies are following. But at a certain point, you have to start looking at the metrics – as shareholders of music companies will do – and say, ‘Are my assets managed with the right level of return?’

It will be interesting to see if those shareholders ultimately enforce a change of focus and say, ‘Our best investment is in established catalogs. That’s something we can bank on; while the game of developing new artists is a very risky business and can lead to very disappointing outcomes.’ When we start hearing that from music company shareholders, it will lead to some interesting discussions.

“if catalog is increasingly what listeners are interested in, [focusing on it] doesn’t leave your success or otherwise at the mercy of being on a ‘music of the week’ playlist.”

Focusing on catalog [over frontline] has the advantage that it gives you stronger leverage with music industry [partners] too: if catalog is increasingly what listeners are interested in, that approach doesn’t leave your success or otherwise at the mercy of being on a ‘music of the week’ playlist.

I think, honestly, the whole industry needed this big wake up call to realize that, yes, it’s absolutely exciting to break new artists – but if that comes at the expense of paying attention to what actually pays the bills, it can’t have a happy ending.

Traditionally large music catalog owners have benefitted from historical terms in those deals that give them a large margin – with artist contracts signed in the ’60s and ’70s, for example, often giving artists a 10% to 15% royalty rate or lower. How do you think the growing importance of catalog more generally in the market might affect this?

Obviously artists will say: hang on a minute, my share of income for the music industry is more relevant than it was five years ago. So what’s in this growth in catalog for me?

The reality is, a lot of the relevant artists will have a chance to claw back their rights in the years ahead, so as a [record label] you’ll have come up with a very compelling price or service proposal to stay involved.

The temperature is rising in those discussions. It will definitely increase the cost of doing business [with large heritage artists] – that’s just a legal reality.

BMG hasn’t made an acquisition at scale since 2017. You grew to scale during a time when Wall Street’s eyes were elsewhere. If you were starting today, if you were one of these funds we see in the market, could you reach scale through acquisition?

We had an opportunistic reaction to market conditions from day one, which helped us to gear up between 2009 and 2011 on publishing.

Then, when there was a really negative sentiment on recordings, in 2012 to 2015, we grew through acquisition there too. We had a forward-thinking shareholder [in Bertelsmann] who was willing to say, ‘Let’s be contrarians, let’s take a long term perspective.’

“Paying these [multiples] doesn’t make sense for operating companies.”

Today, who invests in music rights and at what [price] is obviously a question of what kind of business they think they’re in. It will certainly be very difficult in the next couple of years to build an efficient music operating company based on acquisitions.

Because if you look at the multiples being paid [for music rights] today, we’re in a highly leveraged finance world and not in a music business operating world. Paying those [multiples] doesn’t make sense for operating companies.

I recently wrote about this FOR ROLLING STONE – wondering aloud whether some activist shareholders could push for major music companies to spin out their catalog rights onto the stock market, rather than their whole operation, in pursuit of a bigger short-term valuation. Do you think that’s a realistic possibility?

I do think the two areas [catalog rights and operating companies] are going to separate more and more.

If the value of owning IP in music today is measured at 30-times contribution margin, that’s a very hard formula for any company that is focused on operating efficiently to make sense out of.

As you point out, the shareholders may well look at it and say, ‘Let’s break it up.’ This happens in many other industries: in the retail industry, for example, you sometimes have shareholders that say, ‘Let’s separate real estate from the running of the business’ – and they suddenly find out the real estate they own carries a much higher value than the share price of the combined company.

“In music there are a lot of companies where both [rights and operations] are muddled into one relatively successful model.”

In music, I would predict this could hit the industry especially hard because there are a lot of companies where both [rights and operations] are muddled into one relatively successful model. Obviously a couple of companies in particular sit on incredibly valuable IP and the returns they create don’t reflect at all the true value of those assets.

Shareholders may scratch their head and say: ‘Wait a minute. What if we create our own Hipgnosis and put our assets into [a separate company vehicle] and make it publicly available?’

You reference Hipgnosis: how has the arrival of that fund and Merck Mercuriadis changed the industry?

Merck has obviously been the catalyst for a lot of creative thinking in the financial world. [Hipgnosis] is massively well-funded, with institutional backers, and we now know that every big US investment bank is trying to find the right vehicle in music too. So the music market is about to be flooded with money – and this flood of money into music IP will change the industry forever.

That’s very good new for artists and songwriters, by the way, because it gives them strong positioning in re-negotiations [for their rights]. If you have parts of your publishing rights revert, you can really put a gun to every publishers’ head and say, ‘Here’s the benchmark [set by Hipgnosis]. Can you match it and make me happy?’

Let’s hope that the pandemic is stamped out at some point and everything starts to return back to normal. Where are the new growth opportunities for BMG? What fresh ideas have you come to during quarantine?

Our strategic thinking now is to create as many services around an artist as possible. Our recent moves into neighbouring rights and artist management are good examples of this.

At the end of the day, you have to look at a world where artist managers would like as few partners – and as reliable partners – as possible. That creates an interesting perspective on the future of the music industry. And I say music industry rather than record industry deliberately.

“The best data regarding who’s actually the biggest fan of your act? it’s the person that bought the tickets for $100, rather than the person with a $9.99 Spotify subscription.”

Low-hanging fruit for a company like BMG is obviously to extend your relationship with an artist into neighbouring rights, or into merchandise. But another really interesting area is everything to do with events and the live business.

If you’re in that business, you have the best data regarding who’s actually the biggest fans of your act – it’s the person that bought the tickets for $100, rather than the person with a $9.99 Spotify subscription.

We are privileged to have a very close relationship with our artists. We are always thinking about how we can expand those relationships and add more value.Music Business Worldwide

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