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At this rate, music rights valuations are likely to remain stable into the new year, according to dealmakers.
According to Luminate’s 2022 year-end report, total music consumption in the United States increased by 9.2%. This was slower than his 11.3% consumption growth in 2021, but he said, “9.2% compared to 11.3% is not a big growth move.” David Dunn, Managing Partner of Shot Tower Capital. “Overall, growth is in line with my expectations and remains very healthy,” he adds. Andy Moates, Executive Vice President and Director of Music, Sports and Entertainment at Pinnacle Financial Partners. Last year’s figures were Daniel Wiseman, Principal of Bernstein Private Wealth Management. “Goldman Sachs report published in June 2022 shows his CAGR for streaming. [cumulative annual growth rate] 12%,” he says.
A mitigating factor is the margin difference between digital and physical formats. On-demand song streaming—both audio and video—he climbed 12.2%. On-demand audio streaming grew 12.1%, the same rate as in 2021. Physical album sales were down 3.5%. While CD sales fell slightly by 11.6%, LP sales increased by 4.5% to reach his record 43.5 million units.Even though Taylor Swift sold nearly 1 million of her midnight Record albums and Beyoncé have shown strong album sales in vinyl and CD formats, and music consumption has gone digital more than in previous years.
More streaming, less physical formats, the combination favors the catalog. “Profit margins are improving,” Dunn said, as a result of increased digital consumption. Digital music has lower distribution costs than physical formats, especially vinyl, which has relatively low profit margins and high shipping costs. The cost of generating additional downloads or streams is virtually zero, with the exception of negligible costs for data storage and bandwidth. This is a net positive for catalog ratings. Professionals value music catalogs by discounting future cash flows to a single present value. As revenue moves to higher-margin digital formats, rights holders will receive more cash.
However, gain is not evenly distributed across all recordings and compositions. Last year’s growth in streaming could “potentially” support the current ratings of the decade-plus-old catalog.
However, young catalogs with slowing royalty growth are another matter. “I think it’s hard to argue that all the external economic factors, such as higher interest rates and inflation, are not having an impact on the new catalog, which has not yet leveled off and increased royalties.” Weisman says.
Changes in the product mix especially affect the evaluation of recorded music. As consumption leans more and more towards digital, the profit margins of recorded catalogs will catch up with those of the publishing business, Dunn says. “I think the profit margins in general are continuing to grow. I think investors are realizing that the recorded catalog is available at the same profit margins as the publication.”
However, just looking at the number of units sold does not tell the whole story. Vinyl records may have relatively low profit margins, but higher vinyl prices create more margin dollars for labels.In the first half of 2022, the average selling price of a record in the United States will be 5.6%, according to the RIAA. It rose to $26.16.
Streaming is also becoming more valuable. Companies like Apple, Amazon, and Deezer have set fixed subscription prices for 10 years or more and are increasing prices. His CEO of Spotify has indicated that the company intends to raise prices in his 2023 as well. With these increases, often as little as $1 per account, the U.S. streaming market could generate hundreds of millions more dollars this year without sacrificing a significant number of subscribers.
Nari MatsuuraCitron Cooperman partner believes the US market is even healthier than Luminate’s data suggests. This is because music has become more ubiquitous with technology in our daily lives. That means there’s revenue growth that consumption data can’t track.
“A few years ago the growth of streaming captured all narratives in the US market, but now narratives have changed to include more than streaming,” she says. “Growth should also factor in the licensing of alternative music platforms such as Peloton and Facebook, as well as the phenomenal growth of synchronous licenses due to the amount of new programming with her SVOD competing for subscribers.”