The Ledger is a weekly newsletter about the economics of the music business sent to Billboard Pro subscribers. An abbreviated version of the newsletter is published online.
Music companies face a multitude of pressures as 2022 comes to an end: crippling inflation, a tight labor market, a chaotic environment for breaking new artists, interest rates that are dampening catalog valuations, and high costs of touring amidst a crush of artists on the road, among other challenges. The upcoming slate of corporate earnings provides an opportunity to hear about these opportunities and challenges from leaders of publicly traded music companies who rarely go on the record.
Spotify reports third-quarter earnings after the close of trading on Tuesday (Oct. 25). Universal Music Group and Deezer follow on Thursday (Oct. 27) after the close of trading in the Netherlands and France, respectively. Cumulus Media reports Friday morning (Oct. 28). SiriusXM reports earnings on the morning of Nov. 1. Tencent Music Entertainment announces earnings on Nov. 15. The other 14 publicly traded music companies in the Billboard Global Music Index have not yet announced when they will report.
Look for executives to comment about subscription prices and digital platforms’ ability — or reservation — to raise subscription prices. It’s been a recurring theme from digital and label executives throughout the years, in part because it’s been over a decade since streamers last did it in any meaningful way. “Music is a good value” seems like a popular position when streaming video on-demand services are engaged in cut-throat competition and undercutting one another’s prices to attract new customers and prevent current customers from departing. But the industry has arguably moved past that stage, with many now interested in other means to grow revenue. Still, expect music streaming companies to be reticent to hike prices while inflation is running at a 40-year high.
On Tuesday. Spotify could offer a bevy of information and insights about its progress toward its drive to improve margins, as laid out in its June 9 investor presentation: goals for 35% gross margins in music and 30-35% gross margins in podcasting within the next three to five years. Music margins will be helped by improvements in ad monetization in developing markets as well as price increases in mature markets.
More pressing will be Spotify’s opinions on macroeconomic forces that could affect its growth. The company’s advertising business was roiled by an advertising slowdown during the first year of the pandemic, and now many experts are predicting a recession in 2023 that could again dampen online advertising. On Alphabet’s July 26 earnings call, the company repeatedly used the word “uncertain” when talking about the economy, while reporting that YouTube ad sales grew at their slowest pace since the company started disclosing metrics in 2018. Meta’s second-quarter revenue, meanwhile, was 1% lower than a year earlier — its first decline in a decade. If the same market conditions affect Spotify, how will it react? Even though advertising accounted for only 12.6% of the company’s total revenues in the second quarter, it’s critical to the podcasting business that’s expected to deliver margin relief in the coming years.
If social media company Snap’s third-quarter results Thursday are any indication, a weak advertising market will be a recurring theme throughout October and November earnings reports. In a letter to shareholders, Snap warned its “advertising partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures and rising costs of capital.” At the same time, Snap announced a stock repurchase program of up to $500 million “to protect shareholder value from the impact of dilution.” Investors reacted quickly and decisively by sending Snap shares down as far as 32% to $7.33 on Friday — 87.9% below its 52-week high of $60.78.
Also, expect questions about Spotify’s long-awaited HiFi subscription tier. Last week, reports surfaced that Spotify could be prepping a “platinum” subscription plan that bundles high-fidelity audio with other products. The reports were based on an online survey that sought consumers’ opinions on various product bundles, not hard evidence of an upcoming product launch. But the fact that Spotify would sweeten the offer with reduced advertising in podcasts and other items could suggest it realized demand for a standalone HiFi tier is weaker than hoped — especially when Apple Music and Amazon Music are offering it at no additional cost. What CEO Daniel Ek will say is another matter, however, as Spotify is unlikely to discuss details about a product before an official announcement.
High-fidelity audio is pertinent to Spotify investors because it could help improve gross margins. The June 16 acquisition of audiobook distributor Findaway led to the Sept. 20 launch of an audiobook download store. As both retailer and distributor, Spotify can get 60% margin in audiobook purchases, more than double its current gross margin. Of course, the more important question is how many margin dollars audiobooks will ultimately deliver. With only a few weeks of audiobook sales under its belt, and no audiobook sales in the third quarter earnings, Spotify will have few tangible results for a progress report.
Universal Music Group reports earnings on Thursday (Oct. 27) after the end of the trading day in Amsterdam, where UMG shares are listed. UMG’s share of the U.S. recorded music market dropped slightly from 38.3% in the first half of 2022 to 37.1% at the end of the third quarter, which was lower than its 38.4% share in the prior-year period. UMG’s biggest competitor, Sony Music Entertainment, meanwhile, saw its share boosted from 26.3% to 26.7% thanks to the runaway success of Bad Bunny‘s Un Verano Sin Ti, the biggest album of 2022. UMG biggest releases were Kendrick Lamar’s Mr. Morale and the Big Steppers and The Weeknd’s Dawn FM (Republic). A handful of albums released in 2021 were also in the top 10 in total consumption: Morgan Wallen‘s Dangerous (Jan. 8, 2021), The Weeknd’s The Highlights (Feb. 5, 2021) Olivia Rodrigo’s Sour (May 21, 2021) and Drake‘s Certified Lover Boy (Sept. 21, 2021).
During UMG’s last earnings call, on July 27, CEO Lucian Grainge recounted a string of recent releases (Drake’s Honestly, Nevermind got off to a great start), partnerships (HYBE’s first release through its deal with UMG’s Ingrooves/Geffen), how it planned to get a return on investment on some recent acquisitions (Frank Zappa and Neil Diamond) and how the new Mercury Studios (which produced documentary films on The Rolling Stones and Shania Twain) had helped lift catalog streams.
More important to investors and industry professionals are concrete examples of UMG moving its business forward. Last quarter, Grainge announced UMG’s new licensing deal with Meta and revealed the company had become one of its top 10 revenue-generating digital platforms. He also announced the creation of the New Music Media Network, a service that connects brands and partners with proprietary data and exclusive media from UMG. Given the vital role advertising plays in today’s streaming-led music business and the platforms of tomorrow, a progress update on the New Music Media Network would be helpful.
Less important are comments made about Web3, NFTs and metaverse initiatives. Despite initial enthusiasm around NFTs, these businesses are a work-in-progress and represent an immaterial amount of revenue to a major music company. Conversation about these businesses merely shows that a company is looking ahead and taking the proper steps to capitalize — somehow — on them in the future. That requires hiring the right people, making investments, striking partnerships and trying new things to learn and gain experience. But as of now, Web3, NFTs and the metaverse are solidly in the experiment phase.