Play it again: how music became profitable
After two decades in decline, revenues from recorded music are rising – as is the investment potential for both classic songs and fresh compositions
Music soundtracks our lives. It can create a mood, enhance an experience and bring people together; people listen to music irrespective of macro-economic or political conditions.
Back in the 1980s, the music industry’s global revenues started a steady ascent as compact discs joined vinyl, cassettes and the convenience of the Sony Walkman. They peaked by the turn of the millennium, when file sharing, then most commonly identified with Napster, made paying for music optional. It would be 15 years before the industry would next see revenue growth – having lost half its income.
When Freddie Mercury sang, “Everything I had to know, I heard it on my radio,” for Queen’s 1984 single ‘Radio Ga Ga’, it was a sentimental defence of a medium long-since overtaken by television. But TV wasn’t the enemy, after all – it was the internet, with the ability to share files providing consumers with the freedom to access the music they wanted. This came at a massive cost to the artists, songwriters and music companies whose work was being pirated, yet it is these same principles of sharing and freedom that have led to the industry’s renaissance.
In the 1980s a record was released, shipped to stores and sold – or not. Shelf space was limited, so few songs were stocked more than a year after their release. Once it was off the shelf, it was much harder to purchase; if you were the artist, you couldn’t earn from it. Today, just about every song released over the past 75 years is available at the press of a button or a voice instruction on each new household device that can play music. Streaming now accounts for over 80 per cent of UK music consumption, according to figures from the British Phonographic Industry (BPI) and makes up 65 per cent of global revenue for recorded music. Some forecasts predict global revenue from recorded, live and publishing music will hit $131bn by 2030.
Turning hit songs into assets
From an investor’s perspective, the longevity and enduring popularity of music provides the prospect of long-term returns supported by copyright laws that generally last the lifetime of a songwriter plus 70 years. The world’s largest global alternative asset management firm Blackstone is one major investor that has seen the potential, having launched a partnership with Hipgnosis Song Management in 2021. Hipgnosis was founded by Merck Mercuriadis – who has managed some of music’s biggest artists – and musician Nile Rodgers to offer investors exposure to songs and associated musical intellectual property. It matches songwriters who want to sell the rights to their hits with investors attracted by the prospect of long-term stable returns and capital growth.
Hipgnosis has invested close to $3bn across its funds, including catalogues by Justin Bieber, Justin Timberlake, Nile Rodgers, Leonard Cohen and just-crowned Grammy Songwriter Of The Year Tobias Jesso Jr in its Hipgnosis Songs Capital fund. Across its funds, Hipgnosis now co-owns 90 of the 356 Songs in Spotify’s Billions Club of songs played more than one billion times on the platform.
“While songs are still a relatively new asset class, the fundamentals behind the value are strong,” says Qasim Abbas, European Head of Blackstone’s Tactical Opportunities business, which has invested in Hipgnosis. “The asset class offers long term income that benefits from supportive consumption trends. We believe it is highly predictable in a portfolio context and we have high conviction in its continued growth.”
“Music streaming is probably the best value entertainment product available,” says Mercuriadis. “When we buy a song catalogue, we are taking on an enormous responsibility both to the songwriter and to our investors, which is why we’ve created a new paradigm of responsible song management – to nurture the songs and introduce them to new audiences.”
With a dedicated focus and commitment to active song management, Hipgnosis has developed proprietary capabilities across technology, data science and music in order to drive better song management outcomes. In addition, there are exciting market developments such as the role of social-media channels, which are becoming an increasingly significant revenue stream for music royalty holders. In 2018, YouTube had barely paid $2bn to rights holders, compared to an estimated $6bn in 2022. Over the course of 15 years the environment has shifted from one where almost all music consumption was unpaid for, to one where almost all is paid for.
Soundtracking the internet
The proliferation of smartphones, affordable editing software and popular social platforms has made it easier than ever to produce high quality content and share it instantly with a global audience. There are some 37 million channels on YouTube alone, and global content spend has grown from $38bn in 2016 to over $100bn in 2020. Yet putting music behind this content is incredibly complicated, with rights varying by geography, format and means of distribution. Creators run the risk of copyright infringement and removal of their content.
Blackstone-backed Epidemic Sound offers a solution, by commissioning music directly from artists and offering it to users on a subscription basis – all while sharing the music streaming revenue with its artists. Epidemic co-founder and CEO Oscar Höglund envisions a world in which high-quality music flows freely, allowing content creators to incorporate it into their projects. His mission is for Epidemic Sound to “soundtrack the internet” for a new generation of creators.
“This is a fast-growing market and by helping Epidemic become a global champion, Blackstone can play another role in supporting the creative economy as well as delivering for investors,” says Vincent Letteri, Senior Managing Director in Blackstone’s Growth Equity Business. Music tracks and sound effects from Epidemic’s library of over 125,000 recordings appear in videos that receive over two billion views per day on YouTube. Seventy of the top 100 channels on YouTube feature Epidemic Sound’s music.
As broadband and mobile data speeds continue to increase and more people around the world get connected, the ease of creating, sharing and enjoying content gets simpler. This means the demand for music to soundtrack the internet – be that classic hits or royalty-free tracks – will undoubtedly continue to grow.
