Hello, back at it again with your favorite, or hopefully favorite, newsletter about the music industry. If you’re in New York City, a couple of friends of mine and I will be hosting our party hulaHOOP at Mood Ring tonight from 10pm to 2am. Come dance and enjoy some trance! If you like the newsletter, please recommend it to a friend, otherwise, let’s wrap up our 2023 in-review series of streaming platforms.
This week, I’ll conclude my overview of major global music streaming platforms by looking at the biggest platforms in Asia and the Middle East. Where the last few newsletters harped upon a theme of lack of ingenuity, poor business fundamentals, and a broad malaise setting up on this particular part of the music and technology sector, a bit more diversity can be found here today. There are core issues with music streaming that remain, but it's outside of the West that there appears to be a bit more vision in working within a fairly poor business context. So, let’s look at arguably the best example of this: Tencent Music.
Tencent Music is shrinking. Users peaked right before the coronavirus pandemic at 657,000,000, many millions more than Spotify in 2023, with nearly a quarter billion using its “social entertainment” products. Over the last few years, the company’s lost about a hundred million users from each bucket but its profitability has been able to hold steady at around ¥1 billion. The company’s two revenue lines operate right now on two fairly unfortunate trajectories.
In 2018, Tencent Music’s revenue stood at a nearly 10:1 ratio of social entertainment vs. its music streaming product, but that’s now shrunk to 2:1, as social entertainment collapsed due to the coronavirus while music streaming’s gone up. This unfortunately means that the cost of revenue over those five years has increased from around 60% of revenue to closer to 70%, putting Tencent Music's margins now much closer to its western streaming peers. Yet, unlike those firms, Tencent established a business that wasn’t so shackled to intellectual property holders.
At the end of the 2010s, Tencent Music stood as the most-sound major music streaming platform. The company derived most of its revenue from “social entertainment”, but as that’s collapsed. The firm, especially its stock price, keeps getting knocked down a peg. The Chinese government hit Tencent in its anti-tech regulations that forced the company to get rid of its exclusive music licenses. In an attempt to avoid a bit of the increased tensions between China and the United States, the company listed itself in Hong Kong. Government oversight, geopolitical strife, and declining base of its higher margin business have kept Tencent’s stock well below its covid-19 bottom since August 2021.
Even if Tencent Music’s stock spiked along the pandemic ride upward, the company’s core business was built on a solid foundation. Ironically while Spotify leans further into the two-sided marketplace idea where fans, and now musicians will be their markets, Tencent Music is still able to hold healthy quarterly profits through that ever elusive fan monetization. Perhaps as covid-19 restrictions lift, the company’s core business can properly bounce back.
Over the last month, a rather public battle emerged between Hybe (home of BTS) and Kakao Entertainment, one of South Korea’s biggest music companies, over ownership of SM Entertainment. The result of the public squabbling was that Hybe pulled back from the deal and SM remained independent, though certainly under more pressure to improve performance. As Kara over at Idolcast noted, the tussle between the companies wasn’t over strategy but rather which firm would get to further push K-Pop into ever more explicit IP exploitation. Kakao Entertainment was already making its own moves before this tussle.
One explanation Hybe provided for pulling away from SM was that it risked overheating the market, i.e. the company didn’t want to get into a bidding war. There's a good reason for that. In January, Kakao raised nearly a billion dollars from Saudi Arabia’s Public Investment Fund (PIF) and PWARP Investment, a Singaporean sovereign wealth fund; the press around the deal was rather vague in regards to where the capital may go, but potentially could've been one area. Especially since Kakao Entertainment already owns South Korea’s biggest music streaming platform (Melon) and spent $950 million on the comics apps Tapas and Radish. (Though the company did just shut down the small Tapas offices in South Korea, citing those pesky uncertain economic conditions). The company is fully invested in the broader playbook of South Korean music firms to further consolidate the music supply chain with an eye towards everymore multimedia revenue lines.
The fact that the South Korean music industry doesn’t have the same extensive history as its western peers precluded reproducing the extended clashes between 20th-century rights holders and 21st-century technology firms. Instead, through a combination of state investment and forward-thinking business decisions, a higher level of synergy exists between different parts of the business. Major labels may own small shares of Spotify, but the biggest labels don’t own shares of one other. Even if K-Pop is becoming ever more globally facing, domestic players continue to further interlock.
In January, the NASDAQ made a request of Anghami. The biggest middle eastern streaming platform, which went public via SPAC only a year ago, hadn’t properly filed its Q2 2022 earnings. The company was given until March 10th to come up with a plan to get this info over to the NASDAQ, or it would have to begin the process of delisting. Anghami’s publicly-reported financial information is sparse, again making it curious the company failed to produce that Q2 report. Billboard added more reason for my speculation in reporting that PopArabia, now owned by Reservoir Media, sued Anghami for copyright infringement. The article also mentioned the company's former auditor Ernst & Young Middle East stepped away. Certainly not a great way to start the year.
Last year, Anghami, not unlike many tech companies, wasn’t sure what narrative would best serve it. Headlines careened from creating AI music (!) to describing how Arabic, not western, music is what’s preferred by its listeners. This is on top of a November announcement of the industry standard 22% layoffs, in a bid for profitability. Those cost-cutting measures arrived even though Anghami raised an unreported amount of money from Shuaa Capital in 2021. (The Dubai-based asset manager experienced its own executive and board-level musical chairs, and saw a notable dip in revenue and total asset valuation over the last year). There was even a rumor, perhaps one-sided, that Spotify was interested in the company. No deal emerged. The pivots, cuts, and unclear financial reporting show signs of a company that perhaps like its peers might’ve gotten a bit ahead of its skis in the era of free money and isn’t sure where the economic winds blow.
Vikram Mehra, chairman of the Indian Music Industry (IMI) and head of India's oldest music label, offered a rather bleak assessment of the streaming industry. He forecasted a downfall of Indian streaming platforms with a specific mention of Gaana. One of India’s biggest streaming platforms, the company has recently struggled with increased domestic and internal competition. Last year, the company’s losses stood at ₹316,000,000, only slightly better than the ₹335,000,000 in losses in 2021. A step deeper into the company’s finances showed in 2022, the company’s operating revenue only stood at ₹118,530,000, while the costs for licensing deals stood at ₹181,780,000. A rather distressing reality is that even excluding all the other costs, the company’s revenue only covers about two-thirds of content costs. Clearly, a shift needs to occur.
The company decided to entirely phased out its advertising tier, as Times Online, Gaana’s owner, was conducting cuts across its business lines. Before the move, rumors swirled that Bharti Airtel, a massive Indian telecommunications company, was interested in buying Gaana but nothing materialized. Reporting around the deal stressed a sudden shift away from advertising towards subscriptions as if this was needed for the company’s survival. What’s striking is that Gaana advertising revenue was triple its subscription revenue in 2022, which raises questions about just how expensive rights holders made it for the company. Now Gaana’s financials may be in shambles but the company raised $40 million from Tencent in the summer of 2021, and $50 million in debt back in the fall of 2020, not all that long ago. Even if that money was raised recently, the shifts within the tech market certainly haven’t been favorable for a company in Gaana’s position. (Not growing and entirely unprofitable)
Even though Gaana’s losses are fairly dramatic, it’s hard to not see the same trend across these businesses. There isn’t a clear market for pure music streaming right now despite the decent amount of capital pushed into this idea. Kakao Entertainment and Tencent Music appeared to understand this dynamic and found revenue paths with far less onerous labels deals than it appears Anghami and Gaana were able to do. The model of growth first and profits last worked well for these companies but as that begins to shift, expect ever more scrambling and shuffling toward a workable business model, if that’s even possible.
Bandcamp is unionizing! Workers announced they were joining OPEIU 1010, adding to a number of other tech and non-profit white-collar workers who’ve unionized the last few years. In less positive workers news, Amazon, Facebook, and Twitch confirmed they’re planning to continue with additional layoffs. Also, workers at Google are organizing around the mishandling of job cuts and certain business decisions. A bet made by major labels was that tech firms would be where new forms of growth could be found but each layoff round, and some news I’ll cover below, makes me ever more skeptical we’ll see that come to fruition.
Earlier this month, when Spotify made a number of product announcements, one that wasn’t missed by industry observers was an expansion of “Discovery Mode”. The business line is where artists can opt for a lower royalty rate to receive better promotion from the company. Many folks, including the Future of Music Coalition, have compared this unfavorably to payola. I’d also mention that the more folks that buy into this program, the effectiveness of the promotion would quickly deteriorate. Considering this product received the attention of American lawmakers would make me wonder just how much Spotify is committed to this effort.
A Note of Financialization
Larrosa Music Group, a new Spain-based music investment company, raised $16 million to buy up Spanish music catalogs. Then speaking of European funds, Pythagoras Music Fund, a dutch music catalog firm, bought the “worldwide publishing rights” for Barton Music, which includes many works by Frank Sinatra and other well-known mid-20th century performers. Iconoclast bought the catalog of Nick Monson, a frequent collaborator with Lady Gaga. Nettwerk Music Group, a long-time player in the world of private equity-backed song catalogs, received an undisclosed investment from Flexpoint, an investment firm with $7.8 billion in assets under management. Money keeps moving in the world of catalogs.
Larry Jackson, former Global Creative Director of Apple Music (what?), raised $1 billion to start what sounds like a record label, production company, or maybe just UnitedMasters. Honestly, the reporting seemed a bit unsure of what Jackson’s vision is beyond that he raised quite a bit of money from Apple, Eldridge Industries, and A24, which they’re already reportedly working on film projects with. Nearly all efforts in the last decade to “disrupt” the record industry from this perspective ended up absorbed back into the major label system (300 Entertainment), are endlessly pivoting (see: all distribution companies), or just quietly fizzle out. Considering the primary backers hold seemingly endless money and thus can make plenty of bad bets, I’m not gonna let the headline number convince me this will turn out much differently. Hopefully, Apple TV gets a couple of decent movies out of it.
6 Links 2 Read
Streaming in the Dark - Public Knowledge
A fascinating paper that dives into the complicated mess of music streaming, and comes away with some rather concrete next steps for the Federal Trade Commission to investigate. Certainly not radical suggestions but with all of the issues the paper identifies, especially the lack of transparency within the current system, this is a potentially great starting point.
Twitter’s Talks Over Licensing Music Are Said to Stall Under Musk - The New York Times
There are companies right now paying $100 million to license music. *looks at the economic situation* I’ll wager there will be fewer companies licensing music very soon.
Buried on iTunes, Can Music Downloads Ever Make a Comeback? - Billboard / Should Musicians Keep Believing in Web3? - Friends with Benefits
I love MP3s, it’s my preferred medium of music. Yet, I chucked when Beatport said its sales have increased steadily over the last few years while overall industry downloads have decreased. The reason is that within certain music markets MP3s aren’t nostalgia tokens but hold actual value for DJs and producers that want to support acts and also perform music live, which opens up non-digital revenue opportunities. That’s partly why the FWB piece on NFTs made me chuckle as the medium moves away from limited edition drops and a promise of future return, they look more like less useful MP3s. Maybe folks could remember the physical commodity of music (think 12” records) could hold more usage (i.e. DJing) beyond simple access to music. Just a thought!
The Incredible Tantrum Venture Capitalists Threw Over Silicon Valley Bank - Slate / A Death in the Valley: What the End of SVB Reveals About VC Class Solidarity - The Nation
I couldn’t not mention the ridiculous collapse of Silicon Valley bank earlier this month that sparked a greater panic in the global banking sector. We’ll see where this goes but I hold, perhaps incorrectly, a bit more faith in the resiliency of the global banking sector, than I do a boutique bank of an industry that valued WeWork at over $20 billion. The end of the zero-interest rate policy really just belies how flimsy this entire sector turned out to be, and we’re only a year into the process.
Fire the Fed - Big
Here is prominent antitrust thinker Matt Stoler with a wide-scoped take on the collapse of Silicon Valley Bank. He gives a history of the Federal Reserve going back to the late 60s and charts the deregulatory shift within the central bank and how such dereliction of duty helped lead to the lax regulator standards that precipitated SVB’s fall. This appears to have lightly hit the music industry (see: MixCloud) but will try and see if this will hold any more additional ripples.
Gen Z Spending Gets Supercharged by Inflation and Wage Growth - Bloomberg (Subscription)
Young people are spending money, despite, or maybe because of the economic instability that’s hit them. Increased wages, low unemployment, and higher inflation is a notably different economic setup than the high unemployment and zero-rate reality for millennials. Yet, a needless paranoia lingers around increasing prices on music streaming platforms as if people would even know where to pirate music in 2023, rather than just pay a couple of extra bucks for a platform they already enjoy.