Music Meets Big Money in New York
The music industry depends on private savings, the source of all investment. Some of that investment is channeled into music, allowing the trade to grow and take more risks. Artists get signed. Publishing catalogs fetch higher ‘multiples’. The business of live music expands, for example, to emerging economies, where construction of large-venues may not have reached the over-saturation of North America and Western Europe. Finally, whenever money flows both to the recorded and live music trades, it gives impetus to the business of musical instrument accessories and recording gear.
The outlook for music investments would seem predictably skittish, given current events in the world economy and a gloomy forecast in America. But what does the music landscape really look like to today’s purse-string holders? For instance: what new acquisitions are being contemplated or undertaken by venture capitalists, if any? And what does this tell us about the music marketplace of the future?
I sought answers at this year’s Music & Money Symposium early in March at the St. Regis Hotel in Manhattan. Historically, this conference attracts a clientele interested in financing recorded music, live music, and publishing–but not music products. That industry, not generally covered in the pages of Billboard magazine, is of low concern for investors looking for media-type assets.
I did not perceive a bearish mood at the St. Regis. Wealthy individuals naturally want profitable outlets for their savings, regardless of circumstance. When the capital markets are tight and there is a dearth of alternative investment opportunities, the right disbursement in the music industry might turn up a bargain.
Nevertheless, recorded music was shunned. The contrast with 2004, for instance, was stark. Conference proceedings, and a keynote address, were then dominated by discussions of Edgar Bronfman’s Jr. purchase of Warner Music and Warner Chappell. The deal involved a novel partnership with much outside private funding coming from Thomas H. Lee Partners and Bain Capital. This year, there was a rumor that BMG Music would be going to the selling block soon. Clive Davis, its CEO, and Charles Goldstuck, the COO, confirmed the story. However, they were clearly in the dark on the details. Even if one were to accept the need for secrecy in trade, this seemed to underscore the current divide that exists between music managers and financiers. It is puzzling to observe Clive Davis, one of the founding fathers of the record business, sitting this one out on the sideline.
Still, there was some private equity spent late last year in recorded music, when Guy Hands purchased EMI for $2.4 billion for the UK group Terra Firma. But at this conference, attendees were still mulling the steep price of EMI’s purchase and the uncertain prospect of the disbursement (despite Guy Hands’ excellent reputation for cost-cutting management, recent IFPI data continues to show recorded music sales are plummeting worldwide).
A good guess is that money angels will likely fear to tread on recorded music assets until a critical mass of purchases over cell phones heralds new winds of change for the industry. Strangely, mobile music did not get the attention it deserved at the conference (Billboard will run its own Mobile Entertainment event in a few weeks).
This year the bargains were exclusively in publishing, and all the talk of acquisition was confined to that area. The premise was that getting funding to put together an outstanding team of TV specialists, music supervisors, marketing managers, product managers, and consumer researchers, could add value to a songwriter’s work. It was in this sense that publishing catalogs were perceived as being generally undervalued, for existing marketing practices may not be taking advantage of the full range of media and new outlets available for music.
Financiers of all kind are willing to invest in publishing. 2006 witnessed the largest music publishing acquisition in history, i.e. Universal Music Publishing Group‘s (UMPG) purchase of BMG Music Publishing for $2.1 billion. This year, a week before the conference, a new independent publishing entity was created in Europe with Dutch pension money. ImagenMusic was formed to manage part of Zomba’s catalog, along with other assets of UMPG, for a total of nearly $200 million.
There are two similar examples from the US.
First, Larry Mestel, Partner/CEO of Primary Wave Music Publishing, detailed how he raised more than $100 million in little more than a week to purchase songs from artists with iconic status such as Kurt Cobain, Hall and Oates, Earth, Wind and Fire, and Aerosmith. The selling point was simply better, more tailored placements for individual songs. “We offer the best music marketing team in the publishing business”, he said, and “[we look for] strategic deals with film and TV companies”.
Second, John Rudolph, CEO of Bug Music, was driven to purchase catalog that was proven to be already sound, though not always stellar. In the $50,000-$1 million NPS (net publisher’s share) range, the multiples paid were affordable and there was no need for private equity or institutional lenders. It was also good business to buy large catalogs with more than $10 million in NPS because multiples in that region dropped.
While Larry Mestel seemed to base business on a good marketing plan, John Rudolph, who purchased Bug Music less than two years ago, emphasized the fundamental soundness of a well-priced catalog. Both entrepreneurs embody, perhaps, a new industry-type: the outside-specialist looking in and peering over a mass of music related data for long-term gain.
Yet publishers are not immune to the malaise of the recorded music sector, and they will end up in the near future with diminished collections for mechanicals. This is especially true in the US, where the mechanical rate is likely to be lowered due to the strong lobbying power of the record labels.
It is, however, the collection of higher synchronization and performance licenses due to digitization and the ubiquitous use of music that is now driving the business forward. The bullish interest of investors quoted above points in this direction. Another example is the revenue generated for publishers from relatively small webcasters such as Pandora: SoundExchange, the collecting agency for music streamed online was created in 2000 and is collecting anew for many independent labels and their publishers. Indies, noted Richard Bengloff, head of the American Association of Independent Music (A2IM), make two-fifths of the radio playlists online compared to less than one-tenth in terrestrial radio.
The distinguished head of Sony/ATV publishing, Martin Bandier, would comment that publishers are in the “breadcrumbs” business. If so, they are making good. In fact, they are adjusting to current market conditions, perhaps more readily than anyone else in the trade.
Sean Moriarty, CEO of Ticketmaster, gave the keynote. Live music was strong, and festivals were doing especially well. Clubs and midsize venues seemed to offer the best opportunities for musicians, but there appeared to be a scarcity of talent to fill arenas. A report by Valentina Nucete, Senior Analyst at Nielsen Music, circulated by the conference organizers, seemed to confirm this. Ticket grosses for the combined total of the top five stadiums and the top five amphitheaters did not come close to the revenue generated by the top five venues above 15,000. But the real story, at least since 2003, is the higher receipt produced by the top five venues 5-10,000 and the top five venues 5000 or less.
Technology is crowding the supply chain in which Ticketmaster operates, and rival companies like Live Nation will shortly issue their own tickets. Moriarty reflected that future growth might in part be tied to the construction of venue facilities in China, the city of Berlin, and Iceland. Ticketmaster is also betting that the resale ticket market will grow dramatically. It will need new capital for this and other investments beyond the $13 million it spent in 2007 for the partial purchase of the music discovery site iLike. This or next year, Moriarty said, Ticketmaster may go public.
The convergence of the live and recorded music industries was another theme to emerge from the conference, through allusions to “360-degree deals” by many participants. Live Nation appeared to put the topic on the table squarely in October 2007, when it signed Madonna to a 10-year deal for $120 million through its new division, Live Nation Artists. The deal involved touring, new studio albums, merchandising, fan clubs, DVDs, TV and film projects, and, generally, anything that could be gainfully made from the Madonna brand. Wind-Up Records, the largest independently owned and operated label in the United States, appears to be on the same track as Live Nation Artists. Jim Cooperman, Wind-Up’s COO and EVP of Business and Legal Affairs, maintains, “We always try to sign 360-degree deals.”
This suggests that the existing map of the music trade, which boldly divides recorded music from live music, can no longer be accurate. Labels, live music sellers, and investors are all changing the business of underwriting talent dramatically. Risks are being hedged against an artist’s entire career, and contracts that only consider recordings as a sufficient collateral may soon be outdated.
By Peter Alhadeff