Music catalogs gain more value as streaming grows – Music Industry

The long-term potential of music streaming has had a growing influence on the price investors will pay for an artist or songwriter’s catalogue. That’s according to a new article titled How Streaming Has Impacted the Value of Music of Larry Millerclinical professor and director of the music business program at New York University’s Steinhardt School of Culture, Education, and Human Development.

Miller, with the help of graduate students Felipe Garrido and Matt Palermo, found that streaming revenue was positively correlated with multiples paid for music catalogs. Here, the term multiple refers to the acquisition price as a multiple of the publisher’s net share (NPS), the annual royalties from a publisher’s catalogue; or net label share (NLS), the annual royalties from a catalog of recordings.

From 2011 to 2021, the average catalog multiple increased from 8.6 to 20.7, according to data provided by Shot Tower Capital. In that time span, streaming went from virtually nothing to 65% of global recorded music revenue, according to the IFPI.

Miller found that 61.5% of the value of the average NPS multiple in 2021 came from streaming revenue paid to music publishers. By contrast, only 5% of the NPS multiple came from streaming in 2011.

Importantly, Miller found that investor expectations for future streaming growth were also positively correlated with NPS multiples. For those calculations, Miller and his team used forecasts of MIDiA Research for 2018 to 2021 global publishing revenue and transaction data from Shot Tower Capital.

When MIDiA’s forecast for the four-year cumulative average growth rate was higher, due to higher assumptions about the growth potential of the streaming market, the average NPS multiple was also higher.

The correlation between expectations and valuations goes to the heart of the rise in catalog investing over the past decade. Although acquisitions are generally discussed in terms of a simple multiple (more than 29.5 times the NPS for Bob Dylan and 30 times the NPS for Bruce Springsteen, but lower for the average artist), the purchase price reflects the belief of buyers about the catalog’s ability to generate royalties for years to come.

In mathematical terms, the valuation of a catalog is the present value of the expected future cash flows. experts like Citron Cooperman Y FTI Consulting They value catalogs using financial models that forecast future royalties based on historical song performance and industry-wide growth trends.

Interest rates also affected what investors were willing to pay for catalogs. Miller found that increases in US Treasury bond interest rates were negatively correlated with NPS multiples.

In other words, when debt became more expensive, catalogs were worth less to buyers. Again, the value of a catalog is the sum of its discounted expected future royalties, divided by a discount rate, at a present value. yesIf the cost of debt increases by two percentage points, the discount rate will increase by the same amount. And the higher the discount rate, the lower the present value.

Miller is careful to point out that his analysis is “a look in the rearview mirror” that should not be used to forecast future values. “But it’s certainly helpful in understanding where we’re coming from,” she says.

The document was commissioned by the Digital Media Association (DiMA), a trade group representing member companies Amazon, Apple Music, Google/YouTube, Spotify and Pandora. Miller says that DiMA was not involved in the analysis nor was it involved in the writing of the document.

Streaming has not only created revenue growth for labels and publishers, but the nature of streaming royalties (constant royalties from recurring subscription fees) has also made music more attractive to investors.

To comfortably earn a return for investors, you need “cash flow predictability,” Denise Coletta, a senior vice president at City National Bank, told Miller. Compared to CD purchases and downloads, streaming offers steady royalties, even during a pandemic, when some other segments of the music industry faltered.

“Streaming has certainly led to much better transparency over the last 10 years, which has helped support the logic associated with these multiples,” he added. Music streaming services have had an undeniable impact on the music business over the last decade.

With the rise of streaming, record labels and publishers escaped the doldrums of the download era and now routinely post double-digit revenue growth. That boost reignited investor interest in music as an asset class. In recent years, major financial players such as KKR, BlackRock and Blackstone they have poured money into funds that buy music catalogs as long-term investments, mainly due to streaming.

streaming the life cycle of music has also changed in a way that is attractive to investors. In the past, an album made money quickly and quickly faded as fewer people bought it.

Now the loss of activity, called the rate of decay, is much smaller because streaming represents repeated listening. That has allowed songs and albums to stay popular longer and has changed the way labels market and promote new releases by focusing less on the first few weeks of release. On streaming platforms, songs can earn royalties more consistently and for longer periods.