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COVID-19: Music is the answer for many, but what’s the impact on the industry?

The entertainment and media industry

Like many other sectors, the entertainment and media industry has been significantly affected by COVID-19, with notably severe impacts on cinemas, live music and advertising sales, as outlined in our recent Where Next for Media? report. As people turn to music for emotional support and comfort in these tough times, any negative impact on music listening has been more limited. There have, however, been immediate implications for some income streams: the cancellation or postponement of most live music events has hit many artists; a reduction in physical sales from the closure of retail stores has tempered the rejuvenation of vinyl (albeit this represents a small component of overall sales); and there will be some negative impact on synch opportunities as the production of visual content dips. The impact on live is particularly severe for many artists, venues, clubs and the industry that sits around that - this is going to take some time to recover from and some elements of this part of the industry may never be the same again. The knock-on impact of this on merchandising sales is also significant.

In our view, while COVID-19 will negatively impact some revenue streams, music publishing should hold much of its ground as it has in prior downturns, and the recorded music sector is more resilient now than before. The continued trend to on-demand should continue (and may accelerate) which will help to support the valuation of music rights assets. 

Music streaming during COVID-19 lockdown

As many countries have moved into lockdown, it was expected that there would be a rise in music streaming consumption to soundtrack our homebound existence. Initial indications suggested however that streaming consumption fell relative to pre-COVID-19 levels. The New York Times reported on 6 April that the combined streams of the Top 200 on Spotify in the US slipped for the third consecutive week – hitting the lowest point of the year. Spotify confirmed this trend in their recent Q1 2020 results announcement, observing an initial decline in daily active users in hard hit territories, particularly Italy and Spain. One of the drivers of this is that music consumption tends to be an activity that co-exists with others, such as commuting to work, time spent in cars, and going to the gym. These have been cut back or lost completely during lockdown.

Although some of the top artists took an initial hit on streaming volumes, some consumers are choosing to revisit older content in lockdown, particularly in the classical, folk, classic rock and children’s music genres. This has directed value to content in the deeper catalogue. Listening parties on Twitter for classic albums have underscored this trend. It seems the benefit of streaming to the long tail of content may have been accelerated by lockdown.

Although streaming volumes are a good pulse on consumer behaviours, it is the number of paid subscribers which is the key driver of the size of the streaming market. Spotify recently announced significant growth in their user and subscriber base in their Q1 2020 results, with paid subscribers increasing by 31% from Q1 2019. Spotify outperformed expectations across almost all metrics, albeit noting a decline in Average Revenue Per User (ARPU) relative to last year (which may be amplified by recent offers to extend the payment free initial subscription periods). This shows that despite consumers perhaps reducing their streaming volume initially, their desire to access music streaming platforms seems to be undimmed. Early indications of the impact on the music streaming industry are that it is relatively resilient, although the continuation of this trend remains uncertain as the global economy falls into recession.

Other positive indications from the market include Universal Music and Warner Music embarking on IPOs (with Warner achieving a significant first day bounce post-listing). In the UK market, the performance of the Hipgnosis Songs Fund, an investor in music IP rights which is listed on the London Stock Exchange, has been positive, trading close to pre-COVID-19 share price levels.

So it seems streaming revenues may hold up, and accelerated structural shifts are likely to drive further growth. This should compensate at least to some extent for stymied synch and mechanical revenues, in addition to some reduction in performance income. Recording rights should benefit most from the streaming trends; publishing rights have historically been stable even in economic downturns, but may be negatively impacted in the short term by reductions in synch and performance revenues. That said, positive industry momentum will continue to flow to publishers and songwriters. It seems labels are faring better than artists, at least those below the top tier, who depend significantly on touring for income and for whom streaming income has not replaced lost income from physical sales from their smaller but more die-hard fanbases.

What does this mean for the value of recording and publishing assets in the short-term in and into the longer-term? 

There has been significant interest in investing in the music sector in recent years, with demand for investment driving the price and earnings multiples achieved for recording assets up closer to the level of publishing assets, multiples for which have also continued to increase. Despite the short-term reduction in performance and synch revenue available to rights holders due to COVID-19, we expect valuations of music assets (both publishing and recording) to be relatively resilient, although there may be some limit to the rate of growth in valuations post-COVID-19 given at some point the newer distribution models must mature. That said, continuing convergence between media channels presents further opportunities for music, whether that be via gaming, social or other means of delivery. Utilising this breadth of channels to market to build further engagement with fans will also be key to driving success.

It is a time of significant uncertainty for the overall economy, but initial indications suggest that music recording and publishing assets should continue to be a solid and defensive investment. That said, performance across different assets is likely to vary, in some cases significantly, so careful consideration and assessment will be needed to get the right handle on value.

Contact us

Simon Harris

Simon Harris

Technology, Media & Telecommunications Valuations Partner, PwC United Kingdom

Tel: +44 (0)7841 490474

Jordan Holdsworth

Jordan Holdsworth

Technology, Media & Telecommunications Senior Manager, PwC United Kingdom

Tel: +44 (0)7710 035 480

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