The Ledger: How will 2022’s music consumption trends affect catalog ratings?

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As things stand, the valuation of music rights is likely to remain stable in the new year, according to dealmakers.

Total music consumption in the US increased by 9.2% according to Luminate’s 2022 year-end report. While that was slower than consumption growth of 11.3% in 2021, “9.2% versus 11.3% is not a massive increase in growth,” says David Dunn, managing partner at Shot Tower Capital. “Overall, the growth rates are within expectations for me and still very healthy,” he adds Andy Moats, executive vip and director of music, sports and entertainment at Pinnacle Financial Partners. Last year’s figures were also in line with expectations regarding Daniel Weisman, principal at Bernstein Private Wealth Management. “Goldman Sachs’ report published in June 2022 set the streaming CAGR [cumulative annual growth rate] of 12%, he says.

A mitigating factor is the difference in margins between digital and physical formats. On-demand song streaming – both audio and video – increased 12.2%. On-demand audio streaming grew 12.1%, the same rate achieved in 2021. Sales of physical album units fell 3.5%. CD unit sales fell a modest 11.6%, while vinyl LP unit sales grew 4.5% to a record 43.5 million units. Despite Taylor Swift selling almost 1 million units of her Midnights album on vinyl and Beyonce with strong album sales across vinyl and CD formats, music consumption was – again – more digital than the year before.

With streaming up and physical formats down, this mix is ​​favorable for catalogs. “Margins are improving” as a result of increased digital consumption, Dunn says. Digital music is cheaper to distribute than physical formats – especially vinyl, which has relatively thin margins and high shipping costs. The cost of producing an additional download or stream is effectively zero, apart from negligible data storage and bandwidth costs. This is a net positive for catalog ratings. Experts value music catalogs by discounting future cash flows to a single present value. As revenues shift to digital formats with higher margins, rights holders will receive more money.

However, the profit does not accrue equally to all recordings and compositions. Last year’s streaming growth could “potentially” support current valuations for a catalog 10 years or older, “especially in a rising rate environment,” Weisman says.

However, younger catalogs with declining royalty growth are a different matter. “I think that for newer catalogs that haven’t leveled off yet, and if royalties aren’t going up, it’s hard to argue that all the external economic factors — rising interest rates, inflation, etc. — aren’t having an impact,” Weisman says.

The shift in product mix has implications for valuations of recorded music specifically. As consumption increasingly skews toward digital, registered catalog margins will catch up with those in the publishing industry, Dunn says. “Overall, I think margin growth will continue, and I think investors are realizing that you can leverage recorded catalogs with margins similar to publishing.”

However, focusing only on unit sales does not tell the whole story. Vinyl records may have relatively poor margins, but rising vinyl prices create more margin dollars for labels. In the first half of 2022, the average selling price of vinyl in the US rose 5.6% to $26.16, according to the RIAA.

Streaming is also becoming more valuable. After more than a decade of flat subscription prices, companies such as Apple, Amazon and Deezer are raising prices. Spotify’s CEO has indicated that the company also intends to raise prices in 2023. Because of these increases – often as little as $1 per account — could the US streaming market generate hundreds of millions of additional dollars this year without sacrificing any meaningful subscriber numbers.

Nari Matsuura, partner at Citron Cooperman, believes that the US market is even healthier than Luminate’s data shows. That’s because music is becoming more ubiquitous with technology in our everyday lives, which means there’s revenue growth that consumption data can’t track.

“While streaming growth captured the entire narrative of the US market a few years ago, the narrative has now changed to include much more than streaming,” she says. “Growth must also take into account the licensing of alternative music platforms, such as Peloton and Facebook, as well as the fantastic growth in sync licensing due to the volume of new programming from SVODs as they compete for subscribers.”

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