New Music Abounds. But Back-Catalogs Are Driving the Music Industry - Rolling Stone
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New Music Drops Every Minute. But Back-Catalogs Are Driving the Industry’s Transformation

Amid a pandemic and an abundance of new music, the value of older music catalogs keeps rising — and the investor interest may spark seismic shifts in the record business

Killer Mike, left, and El-P of Run The Jewels perform at the Bunbury Music Festival on Sunday, June 2, 2019, in Cincinnati. (Photo by Amy Harris/Invision/AP)Killer Mike, left, and El-P of Run The Jewels perform at the Bunbury Music Festival on Sunday, June 2, 2019, in Cincinnati. (Photo by Amy Harris/Invision/AP)

Run The Jewels were one of BMG's biggest frontline successes in H1 2020 – but 'new' music was outpaced by 'old' music on streaming services

Amy Harris/Invision/AP

There was a telling stat buried within the financial results of BMG, the recorded music and publishing company with a $670 million-plus annual turnover, last week.

According to its German parent Bertelsmann, BMG’s total recorded music streaming revenue in the first half of 2020 was up by 26% year-on-year — an impressively larger percentage jump than that seen at bigger music companies Universal (+12.4%), Sony (+15.6%) or Warner (+9.1%) in the period.

But here’s the really interesting thing: BMG’s revenue from catalog streams — that’s music released at least three years before the listener pressed play — were up by 49%. Thus, the streaming of “new” music is growing for the company… but the streaming of “old” music is growing materially faster.

It’s a similar story at Universal Music Group, the biggest music rights company on Earth: According to parent company Vivendi’s annual reports, catalog music contributed 57% of Universal’s global digital revenues in 2019, up from 54% the year before.

The value of old

This trend of catalog eating into the market share of new music tessellates with the fact that the fastest-growing segment of music streaming subscribers in leading markets is now middle-aged. Some 60% of new music streaming subscribers in the UK in the 12 months to end of February this year, for example, were over 45 years old, with MusicWatch stats showing a similar trend in the United States.

Meanwhile, the pandemic, ushering a comparatively quiet time for blockbuster new artist releases, appears to have been an additional catalyst for driving streaming traffic away from “frontline” music and towards catalog. Stats from Quartz (reminiscent of trends reported here on Rolling Stone), show that cumulative plays of Spotify’s Top 40 tracks are currently smaller in size than they were in 2018, despite the huge growth in Spotify’s user base since then.

All these trends point to precisely why music catalog is attracting hot and heavy interest from Wall Street right now: It makes serious dollars. Last week, BMG rival Concord told Rolling Stone that it’s aware of “billions and billions” of institutional investor money currently “waiting on the sidelines” of the music industry, keen to acquire rights.

Hipgnosis Songs Fund, whose sole objective is to buy proven catalog hits, has whipped up this interest even further. As Hipgnosis founder Merck Mercuriadis noted in his firm’s recent annual report, catalog song revenues seem “uncorrelated” with wider stock market frailties — included the impact of the pandemic. Of his spending spree, Mercuriadis said to Rolling Stone earlier this year that “I’ve never had more opportunities put in front of me.”

A fork in the road?

Where, then, is all of this leading? One suggestion put to me by a couple of very senior people in the global business recently is that it could eventually change the historic structure of music’s biggest companies — as investor interests collide head-on with the traditional way of doing things.

The theory goes like this: With catalog worth significantly more than “new” repertoire (and, according to BMG and Universal’s recent numbers, increasingly so), it may soon be time for major music companies to spin out their catalog rights into separately-held vehicles.

If you took the recordings or publishing catalog of any major music company today and dumped it in a basket — away from all overhead, untouched and unloved — the popularity of streaming would still provide you with a significant guaranteed return each year. Considering the complete lack of operative costs involved in this structure, this basket of rights would naturally carry a very high profit margin, and therefore, demand a very high valuation.

Right now, however, billions of dollars in annual returns from catalog music are being re-invested into the frontline A&R activity of the record/publishing companies that own them. For example, in 2019 Universal Music Group generated $8.04 billion across all of its divisions but spent more than half of this money ($4.6 billion) on “investments for artist development” (i.e. A&R) during the year. UMG’s annual operating income at the close of 2019 ended up at $1.31 billion, around a sixth of its total revenue.

This burden of A&R outgoings significantly reduces the potential profitability, and the resultant multiple valuation, of owned music catalogs like Universal’s. Therefore, if you were an activist investor in a major music company today and wanted to maximize your payday, you might encourage said music company to spin out only the most valuable part of its assets — namely, its catalog rights — and keep the signing-and-developing-new-talent part of its business completely separate.

Whether that separate operating company should handle services like sync and marketing for those catalog assets — vital functions of a modern record label — is up for debate. Hipgnosis, for one, reveals in its annual report that it had zero direct employees at the close of FY 2020; instead it relied on a number of service providers and external advisors to help maximize opportunities for its music rights.

Market pressure

All three major music companies are exposed to public markets in 2020. Warner Music Group floated on the NASDAQ this year, albeit still being almost completely controlled by Len Blavatnik and Access Industries. Sony Music Group is 100% owned by Sony Corporation, which is publicly traded in Japan. And Universal Music Group’s parent company Vivendi has promised to spin out Universal onto a stock exchange before 2023.

That last one is a particularly interesting case. If Vivendi wanted to gain the greatest cash windfall, might it consider splitting Universal into two? A basket of owned catalog rights on one side, and A&R-driven operating machine on the other — with only the former going public?

Of course, such an action would fly in the face of long-held music industry wisdom.

The majors’ management have posited for decades that, in order to have the best chance of building lucrative catalog for the future, one needs to speculate to accumulate, losing money on the majority of A&R bets in order to find the one golden goose — the Ed Sheeran, Travis Scott, Ariana Grande, Dua Lipa or Billie Eilish — who will continue to make you money as an evergreen star. Access to catalog music revenues are essential, goes the argument, if these A&R bets aren’t to be dramatically curbed.

Time will tell how receptive modern music investors — hungry to cash in on the pandemic-proof, Hipgnosis-inflated value of music catalog rights — are to this point of view.

Tim Ingham is the founder and publisher of Music Business Worldwide, which has serviced the global industry with news, analysis, and jobs since 2015. He writes a weekly column for Rolling Stone.

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