By Stephen Duval, Co-Founder 23 Capital
The music industry is again at an inflection point, one that is in stark contrast to the situation we faced twenty years ago when the hugely profitable business was nearly decimated overnight by digital disruption.
In 1999, global revenue speaked at more than$39 billion. Within a year, Napster, the brainchild of college student Shawn Fanning and Sean Parker, would have over 80 million illegal subscribers, making it arguably the fastest growing company of all time. Its offering, free and instant music, was simply too alluring to prevent nearly an entire market from breaking the law.
While Napster would not survive another year, eventually collapsing under the weight of legal action, its arrival had already begun to transform the face of the music industry forever. Swedish entrepreneur Daniel Ek was so inspired by the project that he hired Sean Parker to assist him with his own project, Spotify.
Launched in 2008, the advent of Spotify would again rewrite the rules of the industry. Despite being a freemium service, Spotify has now passed 100 million paying users, resurrecting the hope that consumers would once again be willing to part with their money in exchange for music. Now the long-term outlook for the music market looks strong with streaming growing at a double-digit pace and research from the IFPI predicting that music revenues could almost double by 2030 to over $100 billion.
The amazing success of the streaming giants Spotify, Tidal and Apple can be attributed to a number of factors, but none are as important as the improved user experience they offered. Subscribers to these apps now have a streamlined access to an on-demand content library of over 30 million songsat a low, inclusive price point of entry. This growth is being augmented further by global smartphone penetration. It can be easy to forget that the iPhone began life as the iPod, with music the central offering in the devices.
Encouraged by this growth, the tech giants Amazon, Google and Apple are now battling for home court advantage. Devices like the Echo are proving to be another pathway to streaming income, with 28% of in-home connected device owners saying the device drove them to a streaming subscription purchase, according to Wall Street Research. Given the same research suggests 55% of all households in developed markets will have a smart speaker by 2022, music should continue to become more engrained in consumers, with the total number of connected devices projected to grow to 125 billion by 2030.
Worldwide connectivity is also only adding fuel to the fire. 562 million streaming enabled cars are expected to hit to the roads by 2022, meaning in-car streaming could represent an $8 billion incremental revenue opportunity not previously registered. Meanwhile, the maturation of major streaming music markets such as the U.S. and the U.K. has Spotify and its rivals chasing emerging opportunities in China, Brazil, Mexico, India, and “late adopter” nations like Germany and Japan. Developed markets generated $3 billion in streaming revenue in 2016, while only $514 million was driven by emerging markets. With the subscriber base in these emerging markets estimated to grow by 850% by 2030, total streaming industry revenue could grow from $3.5billion to around $28 billion in just over a decade, fuelled by the rise in international smartphones and the growth in connected devices in these regions. Spotify’s monthly active users grew by 51% in emerging markets in 2017 for example, far outpacing other markets.
Investors are attracted to publishing because a credible catalogue has a highly predictable cash flow, based on royalties grossed from prior years. Streaming can therefore provide a passive, consistent and recurring revenue that requires limited administrative overhead. Ownership over intellectual property generates an annuity-like income stream with minimal oversight, with 80-90% of all modern music rights not requiring any active management besides a core team of specialists and financial consultants on hand to advise and inform acquisitions.
Nor is content holder disintermediation a threat. Strong copyright laws support the continuity and sustainability of music as an asset. Distribution channels and strategies can change, but rights holders always win. Music’s inclusion in film, TV, theatre and adverts only drives growth while strategic bundles that provide untethered access to multiple distributors tend to increase usage and reduce subscription churn.
What this gives investors is a protected and non-correlated asset class in a market with record high content creation and unstoppable growth. It’s taken the music industry almost 20 years to recover from technology’s entrance to the sector, but it looks to have finally found a model that works for consumers, artists and business alike. Now, the adoption of digital technology by consumers that once risked ruining the industry, is the very thing driving its success.
This document does not constitute and should not be considered as any form of financial opinion or recommendation by 23 Capital or any of its affiliates. It is for informational purposes only and you should not construe any such information as legal, tax, investment, financial, or other advice.
Investors remain worried about COVID, but positive towards stamp duty holiday
By Jamie Johnson, CEO of FJP Investment
The journey back to economic normality will be strenuous. COVID-19 has imbued many financial markets with a great deal of uncertainty, making accurate forecasts difficult for fear that a second spike in cases or further lockdown measures may affect market confidence at a moment’s notice.
However, ensuring investor confidence remains high in the short-to-medium term is paramount for avoiding economic stagnation throughout the rest of 2020. Without economic stimulus, the UK’s post-pandemic economic recovery will remain delayed until the virus is contained globally; and given the uncertainty surrounding when this will be accomplished, the economic damage inflicted in the meantime could be grave.
The Government, of course, has been quick to recognise this. It has implemented numerous policies designed to coax activity back to some key markets, most notably in the property sector.
The stamp duty land tax (SDLT) holiday especially seems to be succeeding in attracting buyers back to the market, with property listing site Rightmove recording an immediate 75% increase in buyer enquiries following the policy’s implementation. Meanwhile, Halifax’s August house price index (HPI) revealed a year-on-year average house price rise of 5.2%.
After months of the government dissuading people from moving home due to COVID-19 contagion fears, it seems as though the SDLT holiday is managing to release some of the pent-up demand for property that accrued during lockdown. Domestic and international buyers alike are now compelled to take advantage of the lucrative real estate opportunities on offer, with tax savings of up to £15,000 available during the holiday.
What is crucial, however, is that this momentum is sustained. As COVID-19 case numbers begin rising once again, if people view the UK as not having a handle on the spread of the virus, they may be reluctant to make any major decisions regarding their asset portfolio.
To explore how exactly investors are currently perceiving the government’s capacity for effective COVID-19 containment, and how they are managing their financial affairs during this challenging period, FJP Investment recently commissioned an independent survey of over 900 UK-based investors. Each of the investors surveyed has an investment portfolio in excess of £10,000, excluding savings, pensions, SIPPs and residential property.
What we discovered was that, although the SDLT holiday referenced above is being positively received, there are still obstacles to overcome within the wider economic bounce-back.
Among those surveyed, a quarter (24%) of investors stated they are planning on buying one or more new properties to take advantage of the SDLT holiday, a figure that rises to 43% for those aged between 18 and 34.]
Given the substantial potential discounts available, it makes sense that those keen on making their first step onto the property ladder – or building a real estate portfolio – would jump at the chance while market conditions are right. With the SDLT holiday period coming to a close at the end of March 2021, buyers will be keen on finalising their transactions before this key date.
However, 43% of the investors surveyed believed that more financial incentives and support should be offered by the government. Sticking to the property sector, over half (54%) think the mortgage payment holiday relief scheme should be extended beyond its current finishing date of 31st October 2020.
Elsewhere, FJP Investment’s research showed that 57% of investors are keen to see more financial relief for businesses that have experienced disruption to their cashflow due to the pandemic.
Facilitating the strong economic recovery
More worryingly for the government, however, is the current lackluster reception of its recent public health strategy. The majority (54%) of the investors surveyed admitted they had lost confidence in Boris Johnson’s government due to their apparent mishandling of the COVID-19 pandemic so far.
Increasing case numbers and unfavourable international comparisons risk deterring both domestic and international investors away from UK property – elongating pandemic-related economic stagnation for the foreseeable future.
Ensuring the government soon regains a reputation for good governance and epidemiological competence, then, should be an absolute priority for government advisers. Prospective investors – not just in property but all manner of UK-based assets – must have confidence their assets will not undergo a surprise devaluation due to factors outside of their control.
Personally, I’m confident that the right decisions will be made and the current boom in demand for UK property will be sustained. Investors will continue to be successfully attracted back to the market, and the UK can enjoy a prosperous real estate market once again – fuelling a wider post-pandemic economic resurgence across the nation.
Revitalising the token market
By Gavin Smith, CEO at Panxora
With interest rates near zero and fears that whipsawing stock markets are set for further plunges, many investors are turning to alternative markets in the search for returns. Money flowing into cryptocurrency hedge funds and trusts like Grayscale is at all-time highs and the large cap coins seem to be entering a bull phase, but that capital is not trickling down into new token projects. Why are blockchain token projects struggling to attract funding?
Seed investor scepticism
Setting aside the reputational issues with mainstream investors, even those educated in blockchain tech are not signing on the dotted line. This is certainly due in part to the hangover from the early token market.
During the heady days of 2016/17, investors could buy tokens during the token sale, and if the project was legitimate – even if the business case wasn’t particularly strong – prices would soar based on market enthusiasm. Early investors purchased at a discount and cashed out almost immediately for a handsome profit – and then repeated the process again. The token sale allowed founders to amass a war chest large enough to finance the entire token project – without having to give up a large chunk of company equity. Everyone got what they needed out of the deal.
Running a token sale is far more expensive today than it was during the boom. Getting the attention of the token buying public in a market where advertorial has replaced editorial is expensive. This coupled with a regulatory framework that requires the advice of accountants, solicitors and information gathering of KYC details for investors all comes with an escalating price tag.
To accommodate the change in cost structure, tokens now need to acquire funding in two rounds. Frequently there is a first round where capital is raised from a few, large investors. This cash is then used to finance setup and marketing the main token sale. The token sale, in turn, provides the capital needed to run the entire business project.
Bridging the gap between token projects’ needs and early stage investors
To successfully get a token through the capital raising process, founders must acknowledge the risk assumed by those very early investors and reward them appropriately. And given that tokens may stagnate or fall in price post token sale means that a deep discount in token price is not necessarily attractive enough to get investors to commit.
Many tokens have turned to offering equity in the business in the effort to raise that first tranche of capital. If you look at the number of successfully concluded token sales, the downward trend has continued since Q2 2018, so offering equity is not sufficiently stimulating the market.
Two sides of the coin
So, what is the answer? It’s a complex question but one thing is certain. Any solution must be rooted in a deep understanding of what both parties need to successfully conclude the deal.
On the one hand, token founders’ needs are clear: they need enough capital to get the token ready for and through a successful liquidity event that will provide sufficient funds to build the project. The challenge lies in striking the right balance between accruing that capital and making sure not to offer so much project equity that give up either the control or the incentive founders need to drive the project forward.
On the other hand, while the needs of the seed capital investors are more complex, there are two areas of key concern: transparency and profit incentives.
Transparency can mean many things, but almost always includes providing more informative cost and profit projections, as well as answers to a whole range of questions, not least the following:
- What happens to investor capital if the token sale event fails? Token founders must be transparent from the outset. The token market is highly speculative and early investors run the risk of losing their money should the project fail. Therefore, investors require a well-established fund governance process in place throughout the fundraising so they can make informed decisions on whether the project is worthwhile.
- How are the assets for the entire project managed? Investors need to know that their money is in good hands and that proper treasury management techniques are being used to manage cryptocurrency volatility risk. Ideally, an independent custodian will be used to hold the funds and limit founders’ ability to draw down the capital – releasing funds to an agreed-upon schedule of milestones.
- How are the rights of investors protected, for instance in the case of a trade sale? Investors need to know what happens if the company they are investing in is sold. What impact could this have on the value of their stake? Would a separate governance framework need to be established? These are critical questions and investors aren’t likely to settle for any ambiguity in the answers.
Profit incentives are important when it comes to encouraging early participation in a project. Investors need convincing that the proposition will keep risks to a minimum and focus on providing a strong probability of a return. This means that founders need to be able to defend the case for the increase in the value of their token.
But this isn’t the only incentive that matters. Investors can also be incentivised by preferential offerings such as early access to projects and services that might help their own business.
Let’s not forget that investors don’t support just any project. What really matters is that there is something special and unique about the business being underwritten by the token. Preferably something that could be shared upfront and directly benefit the investor – proof that the investment is really worth it.
And that’s what it all comes down to. Ultimately, while token projects are having a hard time finding funds at the moment, if they can prove their worth and provide full transparency and clear profit incentives to ease investors’ concerns, the money is out there. And deals can be done.
Achieving steady returns in challenging times for later life planning
By Matt Dickens, Senior Business Development Director at Ingenious
The macro-economic conditions of the last five years have presented a relentless challenge for money managers seeking to produce consistent returns. It seems an all too distant memory that UK markets were caught in a happy period of low volatility and positive growth since the recovery from the financial crisis started in 2009. Enter 2016 and we have since found ourselves in an era of exceptional uncertainty. An acrimonious Brexit referendum and the following ambiguity, pressure on sterling, repeated challenges to the UK Government, a trade war between two of the world’s super-powers and now a global pandemic. All this as the world is going through a digital revolution.
Under these exceptional conditions, many investment strategies have understandably struggled to sustain the growth that investors had previously enjoyed without taking on elevated levels of risk and experiencing greater volatility and its associated negative impact. However, Ingenious Estate Planning has been operating alternative investment strategies for several years, which have produced a steady return with low volatility over this time as they possess little correlation to the main listed markets.
The affordable end of the UK’s residential real estate market has proven to be extremely robust during the recent uncertainty. The market benefits from some core fundamentals that have assisted it withstanding a lot of the pressures experienced by other sectors. Firstly, a large and sustained supply deficit. In 2018 the UK built 80,000 fewer houses than the actual requirement of 300,0001. This strong, inherent demand poses a clear investment opportunity to investors who can fund construction projects in the safe knowledge that there is an established demand on completion.
Secondly, this supply deficit has been recognised by Governments for several years and there has been a raft of policies enacted, all supportive of building more houses. For instance, the Help to Buy scheme has enabled many, often first-time buyers onto the property ladder. This scheme means there is a well-established and subsidised group of buyers ready to buy whenever developers complete construction. Thirdly, and more recently, the Government has acted quickly to identify the property sector as one that is key to the UK’s recovery from Covid-19. Through relaxing planning laws and offering stamp duty holidays, both the construction and sales market are being given valuable incentives that support an ongoing return for real estate investors.
Secured lending model
Despite these positive forces however, there remain some risks with investing in the property market, so a conservative investment strategy is key to protecting investors. Rather than take a 100% equity, or ownership, position in a house-builder, developer or single property, a portfolio-based, secured lending model, has a number of clear risk-mitigating benefits. For instance, by lending to a portfolio of developers, carefully selected on a project-by-project basis, and by earning a fixed rate of interest, rather than taking equity risk, there is inherently lower volatility in returns given the protection of a senior debt position on each development. Contracts set out clear loan terms meaning that regular interest is paid on the investment and upon final sale the repayment is made in full, all with the benefit of banking-style security protections. By contrast, equity investments and associated valuations can fluctuate over time as the asset price changes and so it is far more vulnerable to market conditions and sentiment, and ultimately any drop in value is suffered by the investor. In the lending model, any loss is initially felt by the borrower.
Benefits for estate planning
Ingenious Estate Planning Private Real Estate utilises this secured lending investment strategy. The Business Relief- qualifying service is commonly used by clients planning for later life. As savers and investors reach retirement and decumulation, they present wealth managers with a unique set of investment problems. Without careful planning, the start of this phase for many could signal the end of any capital growth and herald their savings being eroded to pay for life’s needs. Any investment offering both high volatility and potential drawdowns may therefore become unpalatable. And while many would wish to gift savings to their children to mitigate the risks to their beneficiaries of paying a hefty inheritance tax bill upon their death, the thought of losing both control and access to these savings when they may still need them, means many feel uncomfortable in taking that step.
However, this does not need to be a fate accepted by savvy investors and planners who can utilise a proven trading strategy that continues to both carefully and predictably grow their investment while also providing potentially full relief from inheritance tax.
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