Business focus: Universal Music put up for sale just as streaming reaches its high tide moment

The music industry could change shape rapidly now it has pulses racing in the City
Boom time: Dua Lipa is among the most streamed artists in Britain as casual listeners enter the market
Jeff Spicer/Getty
Alex Lawson @MrAlexLawson16 November 2018

As investors with an ability to call the top of the market go, there are few sharper than Vincent Bolloré.

The French billionaire has carved out a fearsome reputation as a corporate raider across the channel and this week saw Universal Music owner Vivendi hoist a For-Sale sign over 50% of the £30 billion label, hiring bankers for the long-awaited move first mooted in the summer.

Bolloré, 67, this year handed over the chairmanship of the global media conglomerate to his son Yannick, amid a corruption probe at its advertising arm.

But he has a 24% stake in Vivendi and the timing of the Universal sale offers a clue to his thinking on the streaming market, widely seen as having rescued the piracy-ravaged industry and making once unloved music companies command high prices.

So what has changed the market so drastically since the grim days of Guy Hands’ EMI ownership?

To rewind the tape: the launch of consumer-friendly streaming services like Spotify, where subscribers pay a premium to go ad free, has brought in swathes of new, more casual listeners.

The streaming market is dominated by Spotify, Apple, Amazon and newly acquired Pandora, with a cluster of smaller players like Deezer, Tidal and Napster behind them. Nielsen data showed there were 176 million paid streaming subscriptions last year, accounting for 38.4% of industry revenues.

The streaming market is set to grow 8% to $12.4 billion (£9.6 billion) by 2020, Statista says. The physical music market, meanwhile, has stabilised, aided by vinyl’s comeback.

Kantar Worldpanel analyst James Brown adds: “Spotify is way out in front but everyone in the market is growing.” In the UK, the most streamed artists include Ed Sheeran, Dua Lipa, Stormzy and Jess Glynne.

One man cheered by the boom is Amazon Music UK boss Paul Firth. “There are an awful of people out there who do not already have a streaming service. There are a lot of people to go at,” the Mancunian says when we meet at the tech giant’s Shoreditch office to mark two years since the launch of its Unlimited music service.

He adds that the 70% of people who would spend £30 a year on music are now adopting streaming. “Their record purchases last year were probably Now That’s What I Call Music and Ed Sheeran. There’s many people who would consider themselves music fans who have not adopted it yet.”

What’s more, Amazon algorithms, sense checked by humans, can analyse 50 million songs looking at their key, lyrics, tempo and other attributes to use machine learning feed them into mood-themed playlists. Other curated playlists have become crucial in breaking artists’ careers.

Shifts in digital formats are fuelling the boom. The expansion from listening on smartphones to voice-controlled home speakers is drawing in new generations while automotive is the next frontier. “It’s one of the best use cases for voice-controlled streaming. It’s much safer than rummaging through the glove box for a CD,” says Firth, who adds that Amazon has done deals with BMW and Ford.

INVESTOR OPTIONS

Backers have few stocks they can pick when trying to invest directly in streaming, but here are a handful:

SPOTIFY

It may be unprofitable but has more than 80m subscribers and some believe its stock, now below float price, is cheap amid tech’s sell-off.

Value: £23.8bn 

HIPGNOSIS SONGS FUND

Run by Nile Rodgers’ manager Merck Mercuriadis, who hopes to make proven hit songs as investable as gold.

Value: £216m 

7DIGITAL

The British firm offers tech services to brands and broadcasters as well as downloads for consumers.

Value: £11m

ONE MEDIA IP

The AIM tiddler has 10,000 hours of video and 250,000 largely classical and retro titles and is led by media titans Lord Grade and Ivan Dunleavy.

Value: £8.7m

Ivan Dunleavy, chairman of AIM-listed classical music rights group One Media IP, adds that in-built, in-car streaming “is going to be a significant boost to the market”. Smaller features like being able to scroll to the exact lyrics you want to hear and tapping into local playlists are also enhancing the user experience.

But some believe there’s a stagnation in a western market used to huge shifts (vinyl, tape, CD, downloads, um minidiscs).

Mark Mulligan, managing director of MIDiA Research which advises investors, says: “In the last five years there has been no innovation. The music industry, including the labels who have such a monopoly they effectively have a UN Security Council vote, have settled on a £9.99 subscription. If you look at US video streaming there are niche services for cars and horror, because no one has a stranglehold on the market so there’s innovation.”

If streaming has piqued the interest of the casual music fan, it has set pulses racing among the City’s moneymen. “Institutional investors weren’t interested in the music industry five years ago,” says Mulligan. “they’ve started taking an interest for the first time in a long time.” But their options are limited. The main frustration is that the big players, including Apple, Amazon and Google, are too diversified, meaning it’s impossible to make a bet solely on their music divisions.

Among the trio of major labels Japan’s Sony’s empire is dominated by TVs and games consoles and Warner Music is privately owned by billionaire Len Blavatnik, who also owns Deezer. That just leaves Vivendi for potential investors.

“It’s an artificially defined market,” Mulligan argues. “If institutions only have a few places to put their money then supply outstrips demand.” On Vivendi, he adds: “It looks a good time to sell.

Streaming growth is incredibly strong in developed markets but they always slow down; Spotify is the poster child but there’s uncertainty over the share price.” Mulligan adds that the industry hasn’t realised back catalogues are not worth what they were: Vivendi’s Beatles catalogue accounts for less than 3% of catalogue streaming in the UK, while the market for CD reissues of the Fab Four’s hits is drying up.

As for Vivendi’s potential buyers, private equity players appear most likely. But some believe a tech bidder, like Apple or Amazon, could swoop for a bolt-on acquisition, albeit a complex one due to conflict issues. “People think that’s unimaginable but don’t forget Vivendi was a water treatment company. EMI used to be owned by a lightbulb company,” says Mulligan.

Away from pure streaming companies and labels, there’s plenty of smaller M&A activity. Music rights are at the forefront of this: Sony’s $288 million deal for control of Michael Jackson’s recordings in the summer caused a stir as did Blackstone’s deal for music rights group Sesac, rumoured to be worth $1 billion, last year. In Britain, indie publisher Salli Isaak Music was snapped up as part of a spree by New York’s Downtown Music.

In Silicon Valley venture capitalists have been backing music blockchain specialists revamping the ticketing market. “There’s a wave of smaller, privately owned music companies attracting attention,” a City source says.

But investors smacking their lips should remember it isn’t any old business. Like football, its fans are an impassioned bunch — seeing prized assets fall into suited hands can hurt reputations.

Private equity baron Guy Hands’ disastrous chapter owning EMI began with the Rolling Stones and Radiohead cutting ties with the Terra Firma-owned label. Moreover, the tiny per song payments to artists remain a focus for fans, and the issue could yet spark a backlash against certain platforms.

Vivendi has got the bankers licking their lips, and the shape of the industry could change rapidly.