The Ledger: Sony Music’s Cautious Catalog Approach & Other Investor Call Highlights
The Ledger is a weekly newsletter about the economics of the music business sent to Billboard Pro subscribers. The newsletter can also be accessed online in an abbreviated form.
Sony’s annual investor presentation was a rare opportunity for Rob Stringer, chairman of Sony Music Group and CEO of Sony Music Entertainment, to go on record on the important financial issues of the day. Any analyst or investor who listened in gained valuable insight into Stringer’s thinking about how Sony spends money, and what will be responsible for future revenue growth.
Stringer’s presentation recapped Sony Music’s fiscal year ended March 31, 2022, as well as its double-digit growth over the previous five years. Revenues were up $3 billion since 2017, profit margins have improved and streaming now accounts for 70% of total revenues. Sony had a busy year when it came to acquisitions. These included the Brazilian label Som Livre and artists services platform AWAL. Alamo Records also acquired the remaining share of Ultra Records. Those deals, along with its chart success, helped SME improve its U.S. market share from 23.2% to 24.2%, according to Luminate, and maintain the top spot in Billboard’s Publisher’s Quarterly rankings for radio and Hot 100 market shares.
From a financial perspective, the presentation and Q&A session provided three key takeaways about Sony’s investments and growth plans.
Not Getting Carried Away with Catalog Acquisitions
Sony Music has been selective in its catalog acquisitions, and has closed “about six” deals in publishing and recordings, Stringer stated on Wednesday. Stringer’s comments were made to calm investors and analysts’ concerns that Sony is in a rush to acquire intellectual properties. Analysts frequently ask music executives questions about the value of their investments. Stringer began by asking about Sony’s capital allocation for catalog deals and their expected return.
Stringer went the extra mile to make it clear that Sony doesn’t do deals based on hunches. “We are extremely aware of the data that is available on, say, a Bruce Springsteen that has been with our company [for] 50 years,” said Stringer, “on a Bob Dylan that has been with the company 60 years, on Paul Simon, who’s been with our company pretty much for 50 years, on Jeff Lynn, who’s been with our company on records and publishing [for] 40 or 50 years.
” This is not a flippant response to market forces,” he said. “It would be obvious that we are interested to retain the catalogs of key cornerstone icons — at a fair price. We have a lot of data about those catalogs. We believe we have [an] inside information…I think this is something we’ve done very carefully. We aren’t starting a new business that has never represented catalogs before. However, we believe the margins to be good and it’s boom-time. We have an enormous amount of research and development on the artists we’ve done long-term catalog deals with and that will continue in the future.”
Streaming Prices Could Rise, But…
Much of today’s value in the music business is dependent on how big the streaming industry will grow over the next decade. Analysts and investors base their forecasts on two main drivers: price change and subscription growth. It is widely agreed that emerging markets offer potential for subscription growth, even though they are more expensive than established markets. Spotify’s low price increases show that established markets can tolerate higher prices without causing customers to cancel their subscriptions. Stringer pointed out that Sony doesn’t set prices. Stringer said, “That’s down the [digital service providers], and not us.” “Do you think the mature markets and the market can withstand price increases?” We do.”
Universal Music Group chairman/CEO Sir Lucian Grainge made the same comment during UMG’s first quarter earnings call on May 3 – without commenting on DSPs’ ability to raise prices. He stated, “We need to be aware of the fact that the DSPs directly decide how they price.” They will have to answer any questions regarding pricing. However, labels can have an impact on prices. They negotiate the licensing terms that determine the prices DSPs can afford to set. A DSP must maintain a reasonable margin, and Spotify is constantly under pressure for improving its margins. It can only keep prices low if it can. Music companies that are publicly traded also have soft power. They can use a pulpit, such as earnings calls and investor presentations, to discuss pricing matters.
New Business Models Growing Quickly
A bucket of new revenue streams that Sony Music calls “growth platforms” gave the company about $500 million annually, up from $400 million a year earlier. “[W]e] We see social, fitness and gaming as revenue models that are increasing dramatically,” Stringer said. Snapchat and TikTok are two social platforms. Fortnite and Roblox are two gaming platforms. A variety of fitness apps, including Peloton, can earn streaming royalties. Sony also includes Web3 in its growth platform bucket, even though NFTs, metaverse, and other revenue streams are still in their infancy and don’t generate much yet. These revenue streams, when combined, are not as big as Spotify, Apple Music and YouTube, or Amazona, which all dominate the streaming market. The important question is “What’s next?” This bucket, which is worth half a million dollars per year, is proof that publishers and labels can look beyond traditional streaming to generate substantial revenue growth.
Through May 27, the % change over the last week, and the year-to-date change.
Universal Music Group (AS: UMG): 20. 86 euros, 2.2%, -15.8% YTD
Spotify (NYSE: SPOT): $112. 97, 5.4%, -51.7% YTD
Warner Music Group (Nasdaq: WMG): $29. 72, -0.1%, -31.2% YTD
HYBE (KS 352820): 218,500 KRW, -1.1%, -37.4% YTD
Live Nation (NYSE: LYV): $95. 49, 7.1%, -20.2% YTD
iHeartMedia (Nasdaq: IHRT): $11. 47, -5.4%, -45.5% YTD
Cumulus Media (Nasdaq: CMLS): $11. 44, -8.5%, 1.7% YTD
Tencent Music Entertainment (NYSE: TME): $4. 09, 11.4%, -40.3% YTD
Cloud Village (HKE: 9899): 81. 70 HKD, 42.1%, -48.0% YTD
NYSE Composite: 15,942. 62, 5.8%, -7.1% YTD
Nasdaq: 12,131. 13, 6.8%, -22.5% YTD
S&P 500: 4,158. 24, 6.6%, -12.8% YTD
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