By: Joseph Lisi & Julien Lin
Overview
Recently large private equity firms have seen the potential the music industry holds while simultaneously providing massive upside for investors. KKR, Providence Equity Partners, Shamrock Capital, and Blackstone are a few key players that have already entered into the space since 2016. Currently there is no limit to the type or genre of music as most record labels and catalogs hold numerous artists and therefore adds a level of diversification. There are multiple types of investments that an investor can make to get involved within the industry. Such as stakes in steaming platforms, record labels, or funds with yields based on royalties.
A New Beat for the Music Industry
Simply, streaming services have injected life back into the music industry, and this has caught the attention of investors. As the industry continues to see a shift away from offline music towards online listeners, the race to owning the artist fan relationship continues to increase. Goldman Sachs recently reported the music industry as a whole should continue to grow at a 6% CAGR between 2019-2030 that equates to a total valuation of $142bn by 2030. Double today's estimated value!
A rise of users from streaming platforms have also allowed companies to directly target consumers (D2C) with merch and live streaming events. Although COVID prevented revenues from live events and new music releases, the adoption rate into streaming increased by 22% over the same period that supports a 12% CAGR (2030). PE firms have stiff competition and it is expected to intensify from Amazon music, Byte dance, Spotify, and Apple Music as they begin penetrating into the China and India market.
Why is this an attractive opportunity?
Streaming royalties have made music rights an attractive opportunity for PE firms. The shelf life of music albums, along with the revenue it generated, used to be extremely front loaded. Revenues were made in the first couple weeks of an album’s release, with world tours and concerts hosted in order to boost awareness. Retail shops also had very little incentive to hold older albums, given their limited shelf space. Thus, the way to maximize an album’s return was to make heavy investments early to boost album sales, so that ROI could be realized within 2 to 3 months of an album’s release.
Streaming has completely changed the cash flow profile of the music industry. Since streaming revenues are calculated on a per-listen basis, users just need to revisit and listen to older songs for them to continuously generate free cash 10 to 20 years after release. This cash flow profile as well as other traits of music exhibit common PE investment traits
Stable cash flows: Most popular music artists, and especially specific songs pursued by PE firms, often have loyal fan bases that will continuously revisit older songs of the artists. Other songs could be cult classics that will always generate clicks. In either case, if songs exhibit a pattern of generating clicks for the first 5-8 years, it is unlikely for the number to decrease, thus generating predictable cash flows for the firm.
Low-maintenance: Since most of the investments in selling an artist’s album are front-loaded, a PE firm does not need to invest any cash in maintaining a song’s popularity.
Sustainable competitive advantages: Since the competitive advantage lies with the artist and song in of itself (IP), the competitive advantage is durable, especially considering that most artists have extremely loyal fanbases
Areas to create value: PE firms can focus on negotiating higher royalties for their songs
Some notable transactions so far in the music industry as follows:
- Blackstone and Hipgnosis Song Management launch $1bn partnership backed by funds managed by Blackstone to acquire music catalogues and music rights
- Providence Equity and Warner Music Group launch $650mn partnership to invest in music catalogues. One of its first investments is in selected copyrights of Grammy winner Jeff Bhasker.
- KKR has acquired the music catalog KMR Music Royalties II from Kobalt Music for $1.1bn, including music from The Weeknd and Lorde