All Songs Considered*
One of the great investment stories in the last couple of years has been the reemergence of the music industry. Universal Music Group (UMG) spun-off from Vivendi earlier this year, Warner Music listed last year; and the the catalogues of musicians are being snapped up at record prices -- UMG paid US$300 million for Bob Dylan’s catalogue and funds like Hipgnosis Songs Fund have quickly snapped up catalogues as diverse as those of Blondie, Neil Young and Fleetwood Mac.
The graph below from the Financial Times demonstrates the success of this investment story:
Source: Financial Times 27 October 2021
There are a couple of interesting features of the graph. The first is the dip -- this is due to the music industry scrambling to reorganise after two distinct disruptions -- 1), Downloaded music (iTunes, Napster, etc), and, 2) Streaming music (Spotify, Apple Music, Youtube Music, etc).
We are cautious when it comes to calling something a “disruption”. Buzzwords are easy. However, these two events were real disruptions which caused a sector-wide decline. Now the framework for a streaming-first industry has been defined and industry revenues have corrected themselves; they are on the ascent. It is a remarkable recovery and a testament to how an industry can reorganise around a disruption.
The second thing of note in the graph is the increase in performance rights. These are rights stemming from using the song live or in content. This reflects the success of TikTok and short-form content, where a “meme song” is integral to the content itself. The beauty of TikTok’s format is that its approach to songs is ahistorical: a Fleetwood Mac song (Dreams) can become popular with an audience who have never been familiar with Fleetwood Mac in its original incarnation (or even knows who they are); likewise a completely unknown song can shoot to stardom -- like NZ’s own Benee’s Supalonely. Every time a song is used on TikTok for a seconds-long dance or meme a performance royalty is paid. This is a democratisation of song rights, which previously were via cashed-up studios.
Investors in the Elevation Capital Global Shares Fund have exposure to the music industry’s resurgence in three ways: via Spotify, Universal Music Group (UMG) and Tencent. Our to-date return on our Spotify holding is approximately +130%, from inception at 12 November 2018 (a 34.19% IRR). We continue to see opportunity in the company; their latest quarterly results are encouraging -- podcasts and better targeting drove advertisement revenue up +75% YoY, while a price increase (reflecting Spotify’s pricing power) increased premium subscriber margins to +29.1%.
We like Spotify because it commands a royalty on the listening habits of its ~381 million users (Spotify estimates this will grow to ~400 million by the end of 2021). We think this is analogous to Charlie Munger’s famous valuation of Coca Cola, where he said Coca Cola takes a royalty on “sips”.
Spotify meaningfully differentiates itself by its significant investment in original content (the Joe Rogan podcast is the most well-known example, recent acquisitions include Call Her Daddy and Dax Sheppard’s Armchair Expert). The effect of original content is that it renders Spotify a one-stop shop for users: they can log on, listen to Joe Rogan and cue up a playlist afterwards (an often overlooked strength of any platform when it achieves scale; once you’re hooked in -- with all your playlists, preferences, and an algorithm that knows your trade -- changing to a competitor is not a light undertaking).
Yet we are also interested in Spotify’s recent acquisition of Megaphone, an advertising technology company and Anchor -- a podcast creation tool. We think this may point to Spotify’s growing ambition: to not just be a content platform and creator, but to empower other creators. We think this sentence from Lucas Shaw’s recent Bloomberg column to be clarifying:
“[Spotify CEO Daniel] Ek has started to talk about radio the same way Netflix talks about cable TV. More people still listen to radio than stream audio, and more advertising dollars are spent on radio than on streaming. Yet while radio has flatlined (like TV), streaming is getting all the new money.”
We consider the +75% YoY growth in ad-supported revenue to be a sign of Spotify’s strategy paying off. Spotify’s ambition is audio, whole.
Investors in the Elevation Capital Global Shares Fund also own shares in UMG and Tencent. We received shares in UMG via a spinoff from our investment in the French holding company Vivendi. UMG is the world’s biggest record label and a beneficiary of the music streaming story -- its recent quarterly results demonstrate its strength; streaming revenue is up +16.1% YoY and music publishing revenue is up 19.8% YoY. This provides exposure to both sides of the transaction: the creation and publishing of the music itself (UMG) as well as the streaming and consumption of it (Spotify).
The third way investors in the Elevation Capital Global Shares Fund gain access to the music story is Tencent. Tencent is a Chinese conglomerate with broad interests - from fintech to gaming to social media to music. Tencent owns 10% of UMG, 9% of Spotify and 5.2% of Warner Music.
We like to have our cake and eat it too when we can. Here we see a rare opportunity where we can do just that -- on one side, secular headwinds mean that record labels will have sustained levels of revenue from both increased streams and performance rights. On the other hand, increased streams mean streaming platforms like Spotify take a royalty on each stream (whilst Spotify’s foray into the content field means it clips the ticket twice -- on content and streams.
Whichever way you put it -- it’s all cake.
As of 3 November 2021, The Elevation Capital Global Shares fund owns shares in: Spotify (SPOT), Universal Music Group (UMG) and Tencent (0700 HK).
*All Songs Considered is a NPR radio show, home of the Tiny Desk Concert series.
