From Rags to Riches – The Comeback of the Music Industry

Amid global protests, relaxed lockdown restrictions, and a market rally sparked by positive employment data in the United States, the biggest initial public offering of the year went largely unnoticed. On June 3rd, Warner Music Group went public on the NASDAQ stock exchange at a pre-market price of $25. The offering caught the market’s rise perfectly, skyrocketing 20% by the end of the day and valuing the company at $15.36 billion.

This price tag is a welcome sight for billionaire Len Blavatnik’s Access Industries, which paid just $3.3 billion for the company in 2011 and still owns the vast majority of shares. Home to artists such as Ed Sheeran, Dua Lipa, and Cardi B, this entertainment giant is not the only business of its kind to recently attain such a massive valuation.

This past December, Tencent, the Chinese media and mobile gaming conglomerate, purchased 10% of Universal Music Group for $3.4 billion, valuing it at a whopping $33.6 billion. Subsequently, Vivendi, Universal Music Group’s parent organization, announced that they are hoping to take the company public within the next three years. Two industry leaders looking to public markets after years of private operation begs the question, why now?

In the late 2000s, the music industry faced a harsh reality: CD and album sales were plummeting due to the growing prominence of YouTube and piracy. Data from the Recording Industry Association of America (RIAA) shows that total revenue from U.S. music sales dropped over 56% during the decade ending in 2009, and the future of the industry looked grim. That is, until streaming services entered the scene. 

The first service to take over the music streaming scene was Spotify, launching in July 2011. Shortly after, many competitors jumped on the opportunity with their own applications, including tech giants Apple, Google, and Amazon. These streaming platforms completely revolutionized the industry’s business model, making their revenue through a subscription and ad-based format. While it took some time for users to get accustomed, the tide began to shift quickly in 2016. After years of diminishing sales, the industry shot upwards, with the RIAA reporting double digit revenue growth for four consecutive years. 

This radical change came largely due to luck, as most of the key catalysts materialized around the same time: smartphones exploded in popularity, internet coverage and connections improved drastically, and headphone technology took a leap forward. As a result, consumers are able to listen to any song at any time, and music conglomerates are back in the spotlight with a massive target market. Knowing this, Warner Music Group’s decision makes complete sense - with such promising prospects on the horizon, now is the perfect time to achieve a golden valuation. However, while there are certainly countless more customers to reach and many reasons to be bullish on the industry, contenders are saturating the market for music streaming platforms. 

This increase in competition has led to the development of a strange power dynamic between the three major record labels - Warner, Universal, and Sony - and the main streaming platforms. To this date, virtually every artist who has risen to stardom has done so through one of these three labels. However, this traditional path may be drastically different in the near future. Spotify has already tested direct licensing deals with independent artists, cutting out the middleman and providing more money to both parties. Combine this independence with the fact that artists now have access to more capable production technology than ever before, and it becomes clear that one no longer has to be in the good graces of record labels to become a superstar. As musicians continue to grow empowered, the threat to labels is becoming increasingly worrying. After having just overcome the massive challenge posed by piracy and YouTube, it seems that record labels are face-to-face with yet another crisis. In order to survive, differentiation will be critical to success, either through mergers, acquisitions, or innovation. In fact, we are already seeing some potential trends develop.  

For one, niche platforms are becoming more popular. In May 2019, Beatport released Beatport LINK, a DJ-oriented music service. The application connects directly to various other DJ software, allowing consumers to seamlessly transition between music production applications. Another area companies are looking into is hi-fi, or high-fidelity audio. Rather than using a lossy format like MP3 that can significantly diminish the quality of a song, services such as Tidal and Deezer transmit music through FLAC - a significantly higher audio quality customized for audiophiles. Larger companies are beginning to notice the potential here as well, with Amazon recently having launched Amazon Music HD.

Another interesting area that record labels can look to in order to distinguish themselves is music in the context of virtual and augmented reality. Many services already have music videos playing in the background of a song, but this technology provides the ability to add an extra layer of spatialization. Consumers will be able to wear a headset that immerses them in a simulated world, giving them the sensation that they are in a different location - be it at a concert venue, elsewhere in the world, or in an entirely new world altogether. While this may not appeal to all listeners, music festivals such as Coachella have already begun to explore this area for future growth. The live music industry is massive, generating over $25 billion in revenue in 2019, so while it may take a while before traditional concerts are hosted in the post-pandemic era, virtual reality performances may very well become the new norm. 

In addition to optimizing the consumer experience, these companies also have to compete to create the ideal environment for artists. Historically, creators have made little from royalties because the streaming platforms and record labels took most of the revenues. However, with so many options now on the market, the balance of power has shifted in the artists’ favour, a trend that is shaping the industry going forward. Companies are beginning to implement various initiatives to win over artists, such as Universal Music Group’s detailed insight and analytics program and Spotify’s “Secret Genius” campaign which highlights the lesser-known writers behind many songs. 

After piracy and YouTube almost led record labels to extinction by drastically decreasing CD and album sales, streaming platforms revolutionized the traditional business model and have lifted the industry back into the spotlight. Media conglomerates are seizing this chance to attain a sky-high valuation and position themselves for the future. Now, with more customers and opportunities than ever before, these companies will have to compete to assert their place in the market. The next decade promises to be one full of exciting developments, and ultimately, we as consumers have the power to decide which trends are here to stay.

Editor’s Note: All values mentioned are in USD unless stated otherwise.