The latest sounds of music

One issue arising from the shifting nature of music consumption centres on licensing and rightsholding. In September 2016, the European Commission (EC) released a proposal for a directive on copyright in the digital single market. Referencing the emergence of new digital technologies, the EC noted that authors and rights holders needed a guarantee they would “receive a fair share of the value that is generated by the use of their works and other subject matter”.

Some of the biggest public music companies are listed in the US. But investors can also buy into the industry here in the UK, where businesses are helping to drive different experiential forms: for example, virtual reality. And the Aim market plays host to a number of companies specialising in hardware and instruments for making music.

The physical decline

Despite what one reads day to day, it's a fact that CD sales are waning. Physical format revenues fell by 7.6 per cent in 2016, according to recording industry expert IFPI – an acceleration on the previous year's 3.9 per cent decline. Physical music still constitutes 34 per cent of the global market, buoyed by Japan and Germany, but PwC finds that both physical recorded music revenues and digital download revenues are expected to continue shrinking until 2021 against other formats.

Streaming towards growth

Inevitably, this means there's increasing competition among the top music streaming companies, with each seemingly striving for dominance. In the US, Nasdaq-listed technology and software behemoths Apple and Amazon (US:AMZN) each have their own streaming services: Apple Music and Amazon Music. The former currently costs £9.99 a month for an individual subscription, and in June reported 27m subscribers. Amazon Music costs the same, but offers a reduced rate to existent Prime subscription members.

Apple and Amazon are huge, diversified companies, and their respective music businesses can be viewed as subsidiaries. Apple doesn’t break out music revenues within its financial statements, rather these fall into the broader ‘services’ category – a division that grew sales 22 per cent year on year in the third quarter of 2017 to $7.3bn, which represented 16 per cent of Apple’s overall top line.

By comparison, Spotify focuses purely on music. Accounts for the full year to 31 December 2016 revealed revenue growth of 52 per cent to €2.9bn (£2.7bn) and a 70 per cent rise in gross profits to €451m. But the effects aren't being felt further down the income statement: operating losses widened significantly to €349m, from €236m in the previous year, due to “substantial investments" in "product development, international expansion and a general increase in personnel”.

In recent months, there's been media speculation that Spotify will undergo a direct listing on the New York Stock Exchange, whereby investors could buy shares in the company from existing owners without new capital being raised. A potential float would give investors another choice in which to invest. Irrespective of Spotify’s possible path, the company is currently the most popular service, with 140m users as of June 2017 and more than 60m subscribers as of July 2017. Growth has been rapid: when we last covered the music industry in January 2016, Spotify had around 20m subscribers and 75m listeners. Again, subscribers pay £9.99 a month for a premium account, or opt for free accounts which include advert breaks.

But with Apple and Amazon Music giving chase, what can Spotify do to maintain its momentum? Not to mention Chinese technology giant Tencent, which may take its music streaming business public. It apparently has 15m paid subscribers, 600m monthly active users, and licensing agreements with all the key record labels.

Streaming services rely on their music libraries, which are enabled by licensing deals. Spotify has renewed agreements with the top three global music labels: Sony Music, Universal Music Group and, most recently, Warner Music Group. As the latest deal was announced, Warner Music Group’s chief digital officer, Ole Obermann, noted: “It’s taken us a while to get here, but it’s been worth it, as we’ve arrived at a balanced set of future-focused deal terms.” He added that “even with the current pace of growth, there’s still so much potential for music subscription to reach new audiences and territories”.

Radio has also entered the streaming realm. Apple, Amazon and Spotify all have personalised radio services, while New York-listed Pandora Media (P) specialises in tailormade radio streaming. Here in the UK, Aim-listed 7Digital (7DIG) provides technical infrastructure and music rights to customers for music streaming and radio services.

Live music

Do people still attend concerts when so many digital options are available? The answer is yes. PwC forecasts that live music ticket sales will climb to $28.9bn by 2021 from $25bn in 2016, with the US out in front. By comparison, total digital revenues are forecast to reach $18.7bn. New York-listed LiveNation (LYV) dominates the live music segment, particularly as it owns TicketMaster, the world’s leading ticketing company. That said, Reuters reported recently that Amazon was allegedly seeking to partner with US venue owners with a view to selling tickets. This could pose a threat to other industry players.

In the UK, Aim-listed accesso Technology (ACSO) also earns revenues from ticketing and queuing services for events including music festivals and concerts – enabled by its ShoWare cloud-based technology. The company saw 10 per cent revenue growth to $103m, reduced net debt and improved cash conversion during 2016. 

An alternative to attending concerts in person could be watching from home with a virtual reality (VR) headset. Aim-listed EVR Holdings (EVR), a creator of VR music content, floated last year and has struck agreements with hardware developers, rights holders and music labels – including the big three recording companies. MelodyVR, EVR’s main product, hasn’t launched yet, so there aren't any sales figures or indeed forecasts. Chief executive Anthony Matchett explains that the VR market needs to reach a buoyant level of 25m-30m headsets before the app can go live, which might happen by Christmas 2017 or early 2018. Shares have risen over 360 per cent in the past 12 months, giving EVR a market capitalisation of nearly £80m.

Investing in equipment

Aim-listed Focusrite (TUNE) is a global music and audio company selling software and hardware to both professional musicians and complete beginners. It has two core brands: Focusrite, which provides audio interfaces and other products for recording musicians and Novation, which the company acquired in 2004. This enables customers to make electronic music with synthesisers, and is also known for its Launchpad device.  

Gear4music (G4M), also Aim-traded, sells music equipment and instruments online. These include the company’s own-brand products and those of other music businesses. A focus on expansion – it opened new distribution centres in Sweden and Germany during the most recent financial year – has reduced cash levels. But a placing in May raised a further £4.2m to help Gear4music fund “various ongoing organic growth projects”. 

The expert's view

Growth driven by investment and innovation

In 2016, the global recorded music market grew by 5.9 per cent, the fastest rate of growth since IFPI started tracking the market in 1997. This was a second consecutive year of global growth for the industry, with revenue increasing in the vast majority of markets, including nine of the top 10. This growth, however, should be viewed in the context of the industry losing nearly 40 per cent of its revenues in the preceding 15 years.

Streaming has been the clear driver of this growth, with revenues surging by 60.4 per cent. With more than 100m users of paid subscriptions globally, streaming has passed a crucial milestone. It makes up the majority of digital revenue, which, in turn, now accounts for 50 per cent of total recorded music revenues.

Record companies are driving this digital evolution. Even through more than a decade of market decline, they continued their central mission to discover, nurture and promote artists and their music. Alongside this, record companies have built the systems and infrastructure that has enabled the widespread licensing of digital music services and supported their development. They have engaged on a global scale, while recognising the need for bespoke, local approaches to develop new and emerging markets.

The global digital market is now seeing unprecedented competition, with streaming services developing and extending their offerings around the world. Rather than cannibalising the existing streaming base, these developments are expanding it, providing fans with a more varied, richer experience and bringing streaming to new audiences and new territories.

Far from being the conclusion of a long-term transition, however, record companies see this moment as the start of a new chapter in recorded music, albeit one that is underpinned by a continuing commitment to invest in music and develop artists, and driven by the need to deliver their music to fans in ever more varied and exciting ways.

Crucially, the industry is also working to convert the positive revenue trend currently being experienced into sustainable growth. To achieve this, music must be properly protected in an increasingly digital marketplace. The market flaw known as the ‘value gap’ must be fixed and fair revenue must return to those who invest in and create music.

Based on an extract from IFPI, “Global Music Report 2017”