The Major Music Companies' Profits Are Soaring in the Year of Chaos - Rolling Stone
×
Home RS Pro Music Biz Features

Why the Major Music Companies’ Profits Are Soaring in the Year of Chaos

Universal, Sony and Warner appear to have curbed their spending in 2020 while boosting profits. But what happens when record labels need to ramp expenditure back up next year?

Canadien rap singer Drake (his name is Audrey Drake Graham) performs live at AccorHotels Arena. Paris, France - 12/03/2017 (Sipa via AP Images)

Drake has confirmed he will release Certified Lover Boy, his first full studio album since 2018's Scorpion, via Universal — but not until January 2021.

Edmond Sadaka Edmond/SIPA/AP

At the start of the pandemic, concerns were mounting that the record industry was going to get lacerated. But at least in the case of the major music companies — Universal, Sony, and Warner — a different narrative is now starting to emerge.

Not only were Sony’s recorded music revenues up 11.2% in the third quarter of 2020, but in its latest quarterly fiscal results last week, the company confirmed it was upping its annual profits forecast for its music division by an eye-opening 16.9%. Sony’s music division (recorded music, publishing, and “Visual Media & Platform”) now expects to generate $1.4 billion in operating profit in its fiscal year ending March 2021. Based on an annual revenue projection of $8 billion, this would deliver Sony’s music operation a 17.5% operating margin in the pandemic year — up on the 16.7% operating margin of that division in the prior year.

A parallel pattern is playing out at Universal Music Group: According to Universal parent Vivendi, in the first six months of 2020, Universal posted earnings before interest, taxes, and amortization (EBITA) of $619 million, representing a 16.4% profit margin on $3.78 billion in revenue. In the prior year, that EBITA margin was materially smaller, at 14.8%.

So what’s going on?

For starters, the majors are simply releasing fewer blockbuster albums as Covid-19 dominates news cycles and takes a hammer to live music. Taylor Swift and Dua Lipa, who both dropped huge albums in quarantine, are the exceptions; other megastars like Drake (via Universal), Ed Sheeran (via Warner), Bruno Mars (via Warner), Adele (via Sony) and Travis Scott (via Sony) are all looking at 2021 timelines for their new LPs. Fewer big albums means fewer big expenses for the majors, especially in terms of physical goods. 

Frustratingly, Universal and Sony do not publish a detailed breakdown of how costs are being curbed within their companies — but as a publicly traded body, Warner Music Group does provide some insight on this topic in its SEC filings. Looking at WMG’s recorded music numbers from the second calendar quarter (Warner has not yet released its third-quarter results) Warner’s “product costs,” a.k.a. the cost of manufacturing, packaging and distribution costs for physical albums, fell 22% year-on-year. The firm’s recorded music marketing expense also tumbled, down 14% from the same quarter in the prior year.

Meanwhile, music streaming, the majors’ main source of income, is alive and kicking in the year of Covid, as music fans enthusiastically stream away their time locked down at home. Recorded music streaming revenues were up 22.6% at Universal in the third quarter; at Sony, 19.3%. (More good news on this score just came from Spotify, which posted a 14% year-on-year revenue climb in the three months to end of September.)

As expenses reduce at the world’s biggest music companies, then, streaming’s growth is stretching profit margins to numbers that should have investors smiling. But what will be the long-term effect of this fattened-up bottom line on these companies?

There’s certainly one change I can see leaving a lasting imprint on the majors.

Spotify’s chief financial officer Paul Vogel let slip during his firm’s Q3 earnings call last week that Spotify now counts “65 million to 70 million music tracks” in its library. That’s some massive growth: In its 2019 annual report, Spotify described hosting “over 50 million tracks.” In 2018, it was “over 40 million tracks.” Obviously the use of “over” makes this directional, but it sounds like Spotify may have added 10 to 20 million tracks to its platform in 2020 alone — which fits with the trend of independent and DIY artists releasing a flood of music onto streaming platforms during pandemic lockdown.

For a long time, the major record companies have focused on fighting this phenomenon, signing and releasing new music with unrelenting frequency in a bid to maintain weekly market share of total plays on Spotify et al. This goal has often shaped a rapid-fire A&R strategy at the majors: IFPI figures suggest that, as recently as 2017, Universal, Sony and Warner were cumulatively spending an average of $11 million a day on A&R, in order to sign over 50 artists per month.

In 2020, however, this relentless A&R approach has been rendered starkly illogical, catalyzed by the fact that “breaking” even a single new artist in the touring space is currently an impossibility. A resultant slowdown in new artist signings doesn’t appear to have impaired the majors’ streaming revenue growth, however. Indeed, according to Goldman Sachs, lockdown streaming listening habits simply appear to be tipping away from new music and more towards evergreen catalog, much of which is owned by — you guessed it — the major record companies.

Buoyed by new levels of profitability and encouraged by investors, the majors could now more regularly adopt an A&R mentality that puts less emphasis on chasing weekly streaming volume and more emphasis on return on investment (ROI) — something critics of sky-high record-label spending have been calling for all along.

Tim Ingham is the founder and publisher of Music Business Worldwide, which has serviced the global industry with news, analysis, and jobs since 2015. He writes a weekly column for Rolling Stone.

Universal and Sony’s revenue, profit and margin figures in this column have been calculated on a US dollar basis, based on prevailing quarterly rates.

Newswire

Powered by
Arrow Created with Sketch. Calendar Created with Sketch. Path Created with Sketch. Shape Created with Sketch. Plus Created with Sketch. minus Created with Sketch.