Are Music Tech Companies A Better Investment Than Traditional Music Businesses?
Just glancing upon the Nasdaq share prices yesterday it seems very apparent that investor confidence in the traditional music business is very low. Live Nation (NASDAQ: LYV) is not profitable and its shares have hovered around the $7 mark for a few years. I’ve been told when it does pay a dividend it has been paltry. Bronfman Jnr managed to lose over $400 million whilst at the helm of WMG in the space of five years and before it went private its share price was abysmal. Sirius XM Radio (NASDAQ: SIRI) shares are just over the $1.85 mark.
Yet on the flipside, Pandora (NASDAQ: P) who’s IPO earlier this year enabled the company to be valued at close to 2 billion dollars even though it was not profitable. Shares have hovered around the $12.50 – $15 mark each. This is a re-sounding vote of confidence in Pandora from the markets in TMV’s view. We’ve read stories stating it will not stay that high, but hey it has, and a $12 – $15 stock price is a hell of a lot healthier than a seven dollar stock little own a two dollar one.
So what makes a music tech start-up more attractive than a traditional music business? Numerous things including the fact people are willing to pay for access to digital music services that fit their needs including the likes of Soundcloud and Songkick to name but a few. The common feature between many of these music tech start-ups is that they DO NOT need to license catalogues of music with the accompanying outrageous fees (which rarely ever make it to the artist), along with the one-sided license conditions.
Or if they do intend to invest in digital music streaming and retail business its best to keep away from the US market, al-la Deezer and it’s strategic decision to launch in 130 countries but not the US. Most investors have clearly learned that investing in companies that require funding to license catalogues of music are a non-business proposition, unless of course losing money is the aim.
Globally music magazine titles both industry and consumer focused have experienced serious declines in circulation numbers and hence revenue. Yes some have managed to pick up the pieces and develop engaging online propositions. However, online web advertising is far more accountable, yet there lies the problem. Accountable means less being spent on high cost unaccountable print advertising and more being spent on lower cost online advertising revenue.
Whilst yes Pandora is not yet profitable, it has more than 100 million users and is still growing. On the flip side where a lot of traditional music businesses have failed is the fact they are so short-termist in demanding unreasonable license fees. Hence upfront license fees blind the labels to the asset where the real value lies – which is in the data. TMV hear countless complaints from labels (both indie and major) and performing rights societies alike that the data they receive from iTunes is a joke…
Just look at Facebook, its valuation is based on the data it holds on its user base. Imagine as a label if you had access to that type of data on the fans that buy music from the bands they like? Using Pandora as an example, if you had access to the data from the 100 million users – try and understand how you could more closely personalise sales opportunities and therefore create a higher sales conversion rate.
To get investor confidence back into investing in digital music retail propositions it is important for rights owners to understand that perhaps lowering licensing fees in exchange for customer usage data is key to ensuring the viability of your business. Investors will continue to shy away from investing in companies that require excessive funds to license catalogues, where the fees and terms just do not make viable business sense.
On a final note, by continuing to accept receiving poor data, labels just devalue their own worth in the eyes of investors even further, little own their artist clients. Data equals control. Rights owners you have the assets you just need to leverage them for access to the right data.
This does not mean restricting users it means embracing fans usage and allowing them to consume how they choose, but using data to be more effective in the manner you engage with them. Until changes occur, it is crystal clear that music technology companies will remain a better investment bet than traditional music businesses.
It should be very clear that neither TMV nor I have any investment knowledge or training and so the above post should not be taken as investment advice. It should be taken as the opinionated musings of a layperson.