The streaming revolution has made a huge impact on the music industry, causing a return to strong profits and a new industry-wide optimism. One interesting sign and side effect of this new optimism is the announcement of potentially game-changing IPOs for major record labels.
Warner Music Group announced its intentions to go public last month (temporarily on hold due to coronavirus-caused market fluctuations), while Universal Music Group is in the planning stages of a new IPO within the next few years. One thing’s for sure: these IPOs are going to have a huge impact on the music industry.
Changing Music Fortunes and the IPO Rush
It’s widely acknowledged that the rise of streaming services like Apple Music and Spotify have been highly profitable for the music industry. What’s more, their profitability has translated to real upticks in the bottom line for record labels. In the first six months of last year, revenue from streaming services has risen 26%, representing a revenue of $4.3 billion according to reports. In this same period, paid subscriptions grew by 31%, while the record industry overall has seen an 18% increase in revenue in this same period, growing to $5.4 billion.
While physical media sales have risen in this period, both for vinyl (5%) and CDs (13%), streaming is a huge part of this picture. In the first half of 2019, streaming revenue makes about 80% of the industry’s total revenue, fueling the uptick in industry profits. Streaming services pay large monthly license fees to make music available to subscribers, so their growth is great business for the major labels.
With record companies diversifying their revenue streams and investments, this new windfall has been transformed into a massive tidal wave of revenue for many record companies. Mitch Glazier, Chairman and CEO of the Recording Industry Association of America (RIAA) explained the shift in an interview with Axios:
“The record companies have transformed themselves into music entertainment companies that provide services to all artists at any stage of their career and regardless of whether they are signed to that label. [T]hat kind of diversification expands revenue options, creates more opportunity in the industry and creates more competition.”
It’s a good time to be in the industry, and this increased confidence has produced some major new IPOs for some of the biggest record companies in the world, including Warner and Universal.
Pausing The Inevitable: Warner Music's Halted IPO
Earlier in February 2020, Warner Music Group initially filed documents to sell shares to the public following a long uptick in streaming-driven profits. Len Blavatnik’s Access Industries Inc. acquired the company in 2011 for $3.3 billion, turning it from a publicly traded company to a private one, and will retain voting control following the eventual IPO. The company, which owns Elektra Records, Atlantic Records, and Warner Records as well as Warner Chappell Music (the third-largest music publisher) is one of the biggest titans in the music industry.
That IPO will have to wait, however, as Warner paused progress on it, joining other business and entertainment conglomerates in concerns over the coronavirus and its impact on the stock market. The company’s pause came after coronavirus fears triggered the S&P 500’s loss of 12% of its value in a short amount of time. According to a report from Reuters, Warner had:
“hoped to communicate to the market their targeted price ranges for their shares and begin formal meetings with potential IPO investors on Monday. The companies have now put these plans on ice until the market improves.”
One it resumes, the IPO is expected to be one of the year’s largest, and industry analysts expect it to resume progress once fears subside. For now, while the virus will undoubtedly have an impact on the market, the overall strength of the music industry and record labels remain strong.
Universal’s IPO Plans
Joining Warner’s IPO plans (but with a longer time horizon) is the Universal Music Group. Vivendi, of which UMG is a subsidiary, recently sold 10% of UMG to a Tencent Holdings consortium for $3.3 billion. Details on the UMG IPO are buried in Vivendi’s earnings report, reading:
“Vivendi is very happy with the arrival of Tencent and its co-investors. In addition, Vivendi’s Supervisory Board was informed of ongoing negotiations regarding the possible sale of additional minority interests, which negotiation engagement, based on a minimum valuation of €30 billion, was announced on December 31, 2019. Eight banks have been mandated by Vivendi to assist it in this matter. An initial public offering is currently planned for early 2023 at the latest.”
The UMG IPO is intended to coast on the growing strength of the music industry, with UMG sitting easily as the largest music company in the world whose value is growing apace with the industry. In its earnings report, UMG saw an increase in its revenue up to 14% due to a 21.5% uptick in its streaming revenue. UMG also saw an 11.5% increase in its recorded music revenues, a 9.2% increase in its publishing revenues, and a 74% increase in its merchandise and other revenues resulting from growth in touring and direct-to-consumer sales. The longer time horizon may hopefully allow UMG to escape the impact of coronavirus-caused market fluctuations and the inevitable recovery period for stock prices that follows.
The effects of an IPO can be contingent on a number of factors, including the general health of the global economy, the relative evaluation of its prospects, and others. An underwhelming IPO can certainly hurt a company’s value, but a strong IPO can easily amplify its value to a large degree. What Universal will be looking for is overall market stability and a couple years of hopeful continued growth, putting energy behind its future IPO.
First and foremost, so long as the global market stabilizes enough to facilitate a strong IPO, these offerings will likely make investors and shareholders a large amount of money. The factors that are fueling growth in the music industry are still present. Streaming is stronger than ever, and as increasing virus fears mount, ‘stay-at-home’ streaming service stocks like Netflix are considered among the safer bets. They’re unaffected by fears of being in public, and at-home entertainment options are understandably great choices in a situation where people are increasingly afraid of public places.
Overall market confidence undoubtedly will affect investments in Warner or Universal until the investment climate improves, but they’ll be able to recover easier than most. The heavy impact of these kinds of safer assets in WMG and UMG’s offerings will also make a strong IPO more likely as investors search for less risky bets, and we’re unlikely to see a decline in streaming in anything resembling the near future.
As the market leader, Universal may fare better than Warner. Its longer-term plans will allow for stronger recovery in the global market in advance of an IPO, and analysts have expressed concern over Warner’s existing debt. Universal’s valuation seems more robust and less debt ridden, but while its three-year rough timeline is an advantage at the present moment markets are notoriously unpredictable. Three years is certainly enough time for market corrections, changes in widespread consumer behavior patterns, or major global threats like war, pandemics, or recessions to emerge.
What is certain in this climate of uncertainty is that these IPOs will be moving forward. The streaming revolution will continue to drive music industry growth (and is likely to help Warner and Universal weather the coronavirus market fluctuations to some degree), making these IPOs as safe a bet for investors as one may hope. And whatever fiscal entanglements emerge following substantial investments from one major investor or another will undoubtedly have a huge effect on the music industry moving forward. It’s entirely uncertain now what that future will look like, but we can expect to see it relatively soon.
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