The Ledger: How Will 2022’s Music Consumption Trends Impact Catalog Valuations?

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The way things are going, music rights valuations are likely to remain steady in the new year, according to dealmakers.

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

A mitigating factor is the difference in margins between digital and physical formats. On-demand song streaming — both audio and video — climbed 12.2%. On-demand audio streaming grew 12.1%, the same rate achieved in 2021. Physical album unit sales dropped 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 nearly 1 million units of her Midnights album on vinyl and Beyoncé showing strong album sales across vinyl and CD formats, music consumption was — again — more digital than the prior year.

With streaming up and physical formats down, that mix is favorable for catalogs. “Margins are improving” as a result of increased digital consumption, says Dunn. Digital music is less expensive to distribute than physical formats — especially vinyl, which has relatively weak margins and high shipping costs. The cost of producing an additional download or stream is effectively zero, aside from negligible costs of data storage and bandwidth. That’s a net positive for catalog valuations. Experts value music catalogs by discounting future cash flows to a single present value. When revenues shift to higher-margin digital formats, rights holders will receive more cash.

The gains do not accrue evenly to all recordings and compositions, though. Last year’s streaming growth could “potentially” support current valuations for a catalog 10 years or older, “especially against a rising rate environment,” says Weisman.

Younger catalogs with decaying royalty growth, however, are a different matter. “I think for newer catalogs that have not yet leveled off and whose royalties are not increasing, it’s hard to argue that all the external economic factors — rising interest rates, inflation, etc. — do not have an impact,” says Weisman.

The shift in product mix carries implications for recorded music valuations specifically. As consumption increasingly skews toward digital, recorded catalog margins will catch up to those in the publishing business, says Dunn. “I generally think margin growth is continuing and I think investors are realizing you can exploit recorded catalog at margins similar to publishing.”

Focusing only on unit sales doesn’t tell the entire story, however. 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 sale price of vinyl in the United States 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 the company intends to raise prices in 2023, as well. Due to these increases — often just $1 per account — the U.S. streaming market could generate hundreds of millions of additional dollars this year without sacrificing a meaningful number of subscribers.

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

“While streaming growth captured the whole narrative of the U.S. market a few years ago, now the narrative has changed to include much more than streaming,” she says. “Growth also needs to take into account the licensing of alternative music platforms, such as Peloton and Facebook, as well as the stellar growth in synch licensing due to the volume of new programming by SVODs as they compete for subscribers.”

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