Feb 18, 2020 - Economy & Business

Record labels rush to IPO amid music streaming boom

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Illustration: Caresse Haaser, Rebecca Zisser / Axios

An explosion in people paying for music via streaming services is helping to revive the decades-old record label business, which is now preparing for a slew of public offerings.

Why it matters: "There hasn't been this much optimism in the music business since the invention of the CD," says Ross Gerber, co-founder, president and CEO of Gerber Kawasaki Wealth and Investment Management.

Driving the news: Record labels are eyeing public exits at huge multiples of what they were once worth just a few years ago.

  • Universal Music Group is planning an IPO within the next three years, according to its parent Vivendi's latest earnings report out last week. In December, Vivendi sold 10% of UMG to a group of buyers led by Tencent Holdings, valuing the company at $33 billion.
  • Warner Music Group said two weeks ago that it's filed to go public. The company is owned by Access Industries, which is owned by billionaire Len Blavatnik, who also owns the streaming service DAZN. Blavatnik bought Warner Music in 2011 for $3.3 billion. It's likely Blavatnik wants to bring Warner public now after seeing UMG's valuation skyrocket with the Tencent stake sale.

Be smart: Record labels have increased their valuations by huge multiples in just a few short years, not because they are bringing in more money historically than ever before, but because they are on an upward trajectory.

  • "The music industry still hasn't touched the revenue that it used to make 20 years ago," says Gerber, "but it's going up versus going down."
  • "There's been double digit revenue growth for each of the last three years," says Larry Miller, Professor and Director of the Music Business Program NYU Steinhardt.
  • "Wall Street respects that momentum."

How it happened: "The record companies have transformed themselves into music entertainment companies that provide services to all artists at any stage of their career and regardless of whether they are signed to that label," says Mitch Glazier, Chairman and CEO of the Recording Industry Association of America (RIAA) in a phone interview with Axios.

  • "[T]hat kind of diversification expands revenue options, creates more opportunity in the industry and creates more competition," says Glazier.
  • Glazier notes that record labels today provide everything from social media strategy to merchandising for artists, not just distribution deals.
  • Miller notes that in the digital era, not every artist will rely on a label for distribution. "Labels are much more willing and in fact must meet the artists where they are."
  • He notes that today, technology makes it easy for artists to upload their own content to platforms like YouTube or social media where they can be discovered. He does note, however, that promotional teams at record labels are a huge help in getting many artists discovered.

Yes, but: A slew of public offerings may indicate that executives think there's a growth ceiling on the horizon.

  • Studies indicate that most consumers aren't willing to pay much more than the roughly $10 monthly they pay for music streaming services, and unlike video services which are differentiated with exclusive content, most consumers will only pay for one audio streaming service.
  • "I think that's why these companies want to go public now. I think there's some growth limits to this model," says Miller.
  • Music subscription services that tried to go the exclusive content route, like Tidal, haven't been as successful as the big 3 services: Apple Music, Spotify and Amazon Music, which offer as much content as possible for a low monthly subscription fee.

By the numbers: Paid subscriptions now account for about 80% of streaming music revenue. According to Glazier, that's up from about 25% just five years ago.

  • "Five years is a short amount of time for an industry, even one adapting quickly. That kind of transformation in revenue base and streaming growth adoption for subscriptions is really remarkable," he says.
  • According to recent earnings and company reports, Amazon Music currently has roughly 55 million subscribers. Spotify has about 124 million and Apple Music has more than 60 million.
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Reproduced from Recording Industry Association of America; Chart: Axios Visuals

The bottom line: "If you were to walk through any of major or large independent record companies today, they are exciting places. They're fun. The vibe is amazing. Ten years ago, not so much," says Miller.

Go deeper

Investors are wary of ViacomCBS' new streaming strategy

Data: Yahoo Finance; Chart: Andrew Witherspoon/Axios

Shares of the newly-combined ViacomCBS dropped a startling 15% last week, after the company announced plans for a new streaming service during its first earnings report as a combined entity.

Why it matters: The company is now worth far less combined ($17 billion in market capitalization) than the two companies were worth separately (around $30 billion) prior to their merger.

Free, ad-supported streaming on the rise as major media companies buy up platforms

Data: PwC and Digital TV Research; Chart: Axios VisualsA few of the last remaining major ad-supported streaming platforms are reportedly nearing sales to major media companies.

A few of the last remaining major ad-supported streaming platforms are reportedly nearing sales to major media companies.

Why it matters: The acquisitions show how valuable big media companies think ad-supported streaming services could be to their overall streaming strategies, as they continue to also invest in subscription streaming offerings.

Cole Haan and Warner Music Group postpone IPOs amid coronavirus uncertainty

Illustration: Aïda Amer/Axios

Cole Haan and Warner Music Group are postponing their initial public offerings, which had been scheduled to launch this week, per Reuters.

Why it matters: This reflects how coronavirus is causing deal market chaos, because of both pricing volatility and a growing aversion to in-person meetings. It also should serve as a reminder to companies like Airbnb that "open windows" aren't eternal.