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Article06 Aug 2018

Putting the Band Back Together

Remastering the World of Music
The music industry is in the midst of two profound changes. First, consumers are increasingly opting to rent — rather than buy — music. Second, the demise of physical music has prompted artists to tour more often, driving significant growth in concerts and festivals.

In the U.S., the music industry generated $43 billion in revenue, matching the prior peak in 2006. While business-to-business (B2B) revenues (Music Publishing and Licensing) and music ads (AM/FM, YouTube) are flattish, consumer outlays (Concerts, Subscriptions) are at all-time highs.

While consumer spending habits are undergoing profound changes, the current industry structure has remained relatively static. That is, record labels are still record labels. Music distributors — Apple, Pandora, Sirius, and Spotify — are just music distributors. And, concert promoters — like Live Nation and AEG — are still concert promoters.
Artists’ share of music revenues is small. In 2017, artists captured just 12% of music revenue with most of the value leakage driven by the costs of running a myriad of distribution platforms — AM/FM radio, satellite radio, Internet distributors — augmented by the costs (and profits) of the record labels.

The proportion captured by artists is, however, on the rise (it was just 7% of industry revenues in 2000). The bulk of the improvement is not driven by the growth in music subscription services. Rather, it’s driven by the strength in the concert business. Music labels act as intermediaries for subscription services (Apple, Spotify) but are largely excluded from the economics of the concert business. As such, growth in concert revenue is particularly helpful to artists.

With this backdrop, we think there are three ways the industry’s structure could evolve. First, we could see vertical integration. For example, concert promoters could merge with an existing distribution platform. Second, we could see horizontal integration. For example, existing distribution firms could consolidate. Third, we could see organic forms of vertical integration. That is, existing web-based distribution firms could organically morph into music labels (by targeting younger, less established artists). This would allow artists to capture more of music’s value while allowing Internet-based music distributors to capture profit pools currently earned by the music labels.

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