They Really Dig Their Music

Michael Hedges January 8, 2018 Follow on Twitter

Music streaming is hot. The music streaming business is a little more difficult. The subscription model is in, ad-serving not so much, at least with investors. Artists and their publishers wave their hands - or lawyers - and rights fees are raised. The biggest of the music streamers have deep pockets and, maybe, time to play. Investors see supply and demand. It’s not like coal mining.

Music streaming surged in 2017, showing significant growth in the UK, US and elsewhere. Music consumption overall hit a two-decade peak in the UK, according to trade organization BPI. Year on year growth for audio streaming in the US was 58%, according Nielsen’s year end report (January 4). Global recorded music revenues were up 5.9%, fastest in two decades according to IFPI, with streaming revenues up 60% one year on. CDs and downloads, generally, have suffered. Physical albums - vinyl - have seen a hipster rebirth in recent years.

The global streaming music market leader is Spotify with more than 70 million paid subscribers and, reported The Verge (January 4), 140 million active users. Spotify was developed in Sweden just short of a decade ago and has a major operational base in London, a subsidiary of a Luxembourg holding company. It has been very popular, too, with big league institutional investors. The company’s market value, estimated by Reuters (December 14), is US$19 billion, up from US$16 billion earlier last year.

Spotify’s much anticipated initial public offering (IPO) is coming soon as a direct private offering (DPO). Just before the new year the company filed paperwork with the US Securities and Exchange Commission (SEC) for listing on the New York Stock Exchange (NYSE). Fat with cash the company is using the rare direct listing method to allow current investors - now debt holders - to cash-out as those huge investment banking fees are avoided. Stock traders were also somewhat surprised the company has chosen the NYSE over the more tech-friendly NASDEQ. Expect the big day somewhere around mid-March and Spotify might opt instead for an IPO.

Music streaming services live and die by their relationships with copyright holders, all of whom keep their own business by eking out incrementally higher fees. Both Facebook and YouTube recently struck deals to license music videos from the Universal Music Group (UMG) catalogue. Shortly before filing the SEC papers, Spotify heard from Wixen Music Publishing demanding US$1.6 billion for increased compensation plus “injunctive relief,” reported Hollywood Reporter (January 2). Wixen Music administers rights for a slew of hits, including the Doors “Light My Fire,” and composers Neil Young, Donald Fagen (Steely Dan) and the estate of the late Tom Petty. Risk-averse Investors are generally skittish about loud lawsuits falling ahead of an IPO - or DPO, in this case - but demand for music streaming investment vehicles is high and supply is low.

Others in the music streaming sphere are under pressure. Apple bought popular music recognition app Shazam in December, planning to fold it into Apple Music. The long expected demise of the iTunes Music Store in favor of the Apple Music product has been consistently denied by the company. Then, too, legendary music industry executive Jimmy Iovine, who without a specific title gets credit for propelling Apple Music, is leaving the company later this year.

"The streaming services have a bad situation, there's no margins, they're not making any money," said Mr. Iovine, quoted by Billboard (November 29). "Amazon sells Prime; Apple sells telephones and iPads; Spotify, they're going to have to figure out a way to get that audience to buy something else. If tomorrow morning (Amazon chief executive) Jeff Bezos wakes up and says, 'You know what? I heard the word "$7.99" I don't know what it means, and someone says, 'Why don't we try $7.99 for music?' Woah, guess what happens?"

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