What will change the current music industry?
Despite Corona: the music industry records record sales
WirtschaftsWoche: Mr. Masuch, the world is suffering from the corona pandemic - and the music industry is flourishing. You too were able to increase sales at BMG in the first half of the year thanks to your many archives of old hits. In times of crisis, do music fans prefer to listen to tried and tested pieces from better times?
Hartwig Masuch: Yes, that's the way it is, the catalog is the number 1 growth topic in the entire industry. That was true even before the pandemic. However, it has accelerated a decisive trend once again.
The new subscribers to streaming services are getting older, the next generation subscribers are well over 25 years old. The first to subscribe to Spotify at the time were the 15 to 25-year-olds - the 15-year-olds with the freemium program and the 25-year-olds then increasingly with paid subscriptions. Now the audience is getting older. And then something happens that all of us in the industry have overlooked for a long time - the gap between music consumption and the monetization of music. This gap closes.
If a 40-year-old wanted to listen to his music a few years ago, he would go to his closet, take out “Sticky Fingers” from the Rolling Stones and hang up. He'd paid for the record before, and after that no one saw how often he listened to it. Streaming has completely changed that - now this consumption, which up to now could not be monetized, is still being monetized. And it has always been mainly catalog-heavy. The logical consequence: the “older” the monetization base, the higher the relevance of the catalog.
Isn't the shift in the direction of catalogs also due to the fact that many labels have withheld new releases because of the Corona crisis because there are no concerts and advertising falls flat?
Some physical new releases have been postponed, that's true. But that wasn't so crucial, it fits into the prevailing trend - there will be new releases that are less aggressively marketed overall in the future.
Because everyone in the industry has noticed that it is becoming increasingly difficult to achieve an effect. But that's not a bad thing per se, it is simply a reality. Consumption has been proportioned differently for the past 50 years, only monetization is changing now.
If business with the archives is so profitable for BMG and the other large music groups - what chances do young musicians have to find their audience?
I am not so critical of that. In principle, digitization also plays into the hands of new artists because they no longer have to go through the various filters of the existing industry. You can use their channels directly. So there will continue to be a lot of new music. But because the marketing pressure and sovereignty over the distribution channels are becoming more democratic or more balanced, there is no longer such a quick aha effect. The main question behind this is how much new music the market really wanted in the past and how this new music was related to overall consumption. Five or ten years ago you couldn't really measure that. Now that is possible, and that finally makes the share of catalog use visible for industry, but also for artists themselves.
How high is the proportion?
Of course, this differs from label to label. But if we look at the aggregated data of the established Internet providers, then the catalog usage goes towards 70 or even 75 percent of the total consumption. Ten years ago it was closer to 60 percent. So there has been a shift of historic proportions over the past ten years. We can also see this in our figures: the use of our catalog in streaming has increased by 49 percent year-on-year. If you consider that the overall market in Germany has grown by eight percent during that time, this is a very significant sign that something is happening right now.
In fact, the renaissance of the industry is already being celebrated because the sales figures are no longer shrinking, but growing. Is that really the turning point?
Yes, we are on the way to reaching old record levels in the foreseeable future in the definition of the traditional music market, i.e. in the classic publishing and recorded music business. We're headed for the old all-time high of $ 25 billion. But the interesting thing will be: Is that still the old industry as we know it and how it was once defined? It is a mistake to believe that this development is one-dimensional and that only the share of streaming in total consumption increases. Because that would simply mean overlooking the growing importance of catalogs and their share in the added value within the corporations. A lot will be in motion now. In England suddenly there are funds that say, well, now that I can simply invest in the monetization of rights via digital media without complex business models, let's just see what valuation is possible. And then suddenly we realize that traditional industry is under pressure to even go along with this assessment in view of its own cost structure.
Because the catalogs make a bigger contribution and, in comparison, the apparatus for discovering new artists and making them known is too expensive?
Yes absolutely, there are many indications that there are investors who are already thinking and seeing the game clearly ahead: At some point, certain areas will decouple, and that will lead to a different added value - perhaps the ownership of the rights and their evaluation will be decoupled from the rights evaluation model, which can be very complex. Because how many people do I need to maximize the evaluation of 50,000 rights that have been known for 60 years and are part of our cultural DNA, compared to integrated models where a corporation does everything and that in many countries? As a result of such questions, complete business models and the composition of entire companies are now being scrutinized.
Market leader Universal may want to go public in 2023 - what will they do by then?
I don't want to talk about individual competitors, but let's take the music company model as we know it. This has a dregs of music rights that are beyond all doubts, something like the Beatles, everything that is deep in the catalog and will certainly find listeners for a very long time. If you now take the market valuation of a music fund like Hipgnosis and apply it to the corporations, you come to a very high valuation of these sub-areas, which, however, only make up a small proportion of the costs. Some owners might ask themselves: What actually happens if I split up my company and put practically indestructible parts such as the catalog business on the stock exchange separately?
That may sound attractive from an investor's point of view - but what happens to the other corporate divisions whose value proposition is less?
This may create a problem, because if this remainder also wants to make sense, then you have to see what efficient business models look like. This question is rolling towards industry, which is no different from other areas where bundled models are also being dismantled - take the department store market, where real estate is separated from the sale of goods. Or corporate patent portfolios that can be separated. With many companies you can think about what actually has what value? Then what about the rest of the story? Once that is disclosed, as it is in England ...
... through hipgnosis ...
... has happened, then the world will orient itself to it. And then it will certainly have consequences for all other players. Because either private equity looks at it and says: They don't move at all, now I'll make an offer. Or the owners themselves have a similar mentality and have recognized that there is something to be gained.
What does that mean for BMG with its millions of rights - wouldn't it be time, from Bertelsmann's point of view as the owner, to think about going public? Or a share sale?
That depends on the perspective from which you see it. If you say you are a family business and have no interest in doing anything about it in the next 40 years, then you are in a different position than an activist investor who maximizes value and then moves on. What is certain is that we and Bertelsmann are observing this entire development with great interest.
Just observing will not be enough - the prices for catalogs are rising, but BMG has not bought anything for a long time?
If you look at the prices paid for music rights today, we are in a heavily leveraged world, not the music business. If the prices were different, we would buy too. But BMG is currently not in the acquisition business. All major companies are required to generate more than eight to nine percent total return on investment. We won't be able to do that through acquisitions, because when the multiples are beyond 20, you can assume growth rates as you want, that's where it becomes problematic.
Then your main concern is to keep your artists - how are you going to do that when Hipgnosis is waving the check?
Everyone in this industry has to think more carefully about how to keep “their” artists in line. Our strategic focus is therefore on growing through better, fairer and more efficient service to our artists and songwriters and on helping them maximize their income. We want to be the ones who offer the greatest value proposition at the best prices. And that also applies to artists and rights buyers like Hipgnosis, who ultimately promised their investors a very straightforward business model and therefore will probably source the other services for the creative minds elsewhere.
For example with you?
For example with us. In the end, it's all about the greatest added value and the best service at the best prices. A discussion that the music industry avoided for years and instead preferred to talk about its own creativity. In fact, it's about: What are artists still willing to pay for exercising their rights or certain areas of value creation? And what do investors expect from those who evaluate the rights they have acquired? Both sides will be looking for a partner who, in addition to creativity, has the most efficient and most reliable performance promise.
Mr. Masuch, you've been on stage for Bertelsmann for almost 30 years and at the helm of BMG for many years - how long have you been enjoying it?
I recently saw when I bought my first rock single - that was in 1965. I'm doing something I've always enjoyed, namely artists and songwriters. Why should I stop doing this? As long as my family and Bertelsmann place their trust in me, I'll be happy to do so. I'm lucky enough to be able to sit at the same table with many idols from my youth - it couldn't get much better.
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