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.