Size Matters
It's not the just the size of the market share, it's how you use it.
If you follow the record music business, one set of statistics you hear a lot about is market share — generally broken down between the three major labels and the independent (non-major labels) and DIY (or artist-direct) sectors. To the casual observer, these numbers come off as a predetermined horse race (Universal by one head or two?), with the occasional narrative about the rise of indies slowly nibbling away at the big guys’ lunch.
But in recent months, we’ve begun to see the actual importance of market share in its varied forms regarding music manufacturers' ability to play hardball when negotiating with the platforms users use to consume the product.
The obvious example is the ongoing nuclear winter between Universal Music Group and TikTok after the former decided to pull all of its IP from the platform when licensing negotiations broke down at the end of January. At first glance, one would assume UMG’s market share of 35% would mean that roughly 35% of the music played on TikTok would vanish. But when the smoke cleared, it turned out that more than 60% of TikTok’s most popular music was silenced, including many artists not signed to UMG, thanks to copyright laws that allowed Universal Music Publishing to pull songs if one of its songwriters had even a small bit of credit. Turns out that not all market share is the same.
Through this lens, it became clearer why the labels seem endlessly interested in buying up music rights. So when UMG bought a minority stake in Chord Music Partners last month for $240M, Lucian Grainge presumably conscripted Warner Music act Twenty One Pilots and John Legend’s Sony-owned catalog into the battle (though last we checked, music by both is still alive on TikTok).
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A prolonged TikTok conflict isn’t the only reason UMG would want to take the reigns. Sometimes, more is just more. There’s also a growing sentiment that investment firms like KKR and Dundee Partners, who formed Chord out of music IP purchased largely from Kobalt for $1.1B in 2021, haven’t been able to capitalize on the portfolio fully. Perhaps record labels are smarter stewarts for music IP, with market share being just one of the many levers at UMG’s disposal. That said, KKR just put money into HarbourView Equity Partners’ $500M debt financing deal secured by HV’s own music rights portfolio. So KKR is clearly not ready to completely walk away from music rights.
UMG isn’t the only major stockpiling songs. It was revealed last week that Warner Music Group approached Believe SA, the owner of Tunecore, with an offer to buy the French digital music company for $1.8B. Independent music makes up about 36% of the global music market share, with 6% coming from artist direct distributors like Tunecore. Tunecore is the largest DIY distributor out there, and combined with Believe’s sprawling portfolio of IP assets, it’s not unreasonable to believe that the acquisition of Believe could increase WMG’s market share by as much as a percentage point.
Warner just made its deal with TikTok last summer, making it last in line to negotiate should UMG wrestle serious concessions from TikTok. And while the standoff continues, Warner also has the most to gain by using TikTok to promote its songs — the ones not caught in UMG’s net.
It’s a high-stakes game, even if TikTok only accounts for 1% of UMG’s revenue. And the stakes got potentially higher this week when the U.S. House of Representatives passed a bill requiring TikTok’s Chinese-owned parent company, Bytedance, to sell to a non-Chinese entity or risk the app being banned in the U.S.
That sort of nation-state level standoff has nothing to do with UMG, WMG or any other part of America’s $16B recorded music market, but as potential buyers start to consider TikTok’s estimated $50B price tag, the state of the app’s music offerings won’t not be considered.
The bill put forth last week by Democratic representatives Rashida Tlaib and Jamaal Bowman on behalf of the United Musicians and Allied Workers is making fewer headlines. If it were to become law, the Living Wage for Musicians Act would push streaming royalties up to $.01 per stream, which would be a bigger blessing for every artist and label than TikTok's total surrender to raising its rates.
Of course, these bills are more show than substance, but they remind us of what could be possible if the federal government intervenes in corporate capitalism. Many have questioned why music deserves special shelter from the storms of the open market. To that end, it’s worth informing the libertarian-leaning amongst us that no economic system is morally mandated, and that every layer of IP law is derived from the Copyright Clause in the Constitution that states, “[The Congress shall have Power . . . ] To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”
In other words, lawmakers can do whatever they feel is in the best interest of useful arts like music by defining what is fair and what is theft (now we’re getting into biblical law).
We recently saw a similar situation in the EU, where Apple was fined $1.95B in its antitrust spat with Spotify. This was on the eve of a new batch of regulations called the Digital Markets Act, which aims to tame anticompetitive tendencies in the app store (and other online places).
The U.S.A. is generally less likely than the EU to take such action, as was seen in January when the Supreme Court shot down Epic Games’ long-running lawsuit against Apple’s restrictions on in-app purchase methods that bypass its own 30% fees.
But while the world’s biggest music companies bulk up for what could be a years-long battle over their place on the world’s sixth-largest social media platform, remember—there’s always a bigger fish.
TAKEAWAYS
Salient statements from this week’s music news.
1. Searches for ‘Rock Music’ Are Up 600% on Spotify
Once again, sentiments regarding the death of guitars seem to have been exagerated.
Takeaway: Spotify says that searches for “rock music,” “alt/rock,” and “rock band” are up 600%, alongside increases in searches for related subgenres, including alternative metal, post-grunge, and indie rock.
2. Hipgnosis Songs Fund’s Lower Valuation Validated Investors’ Long-Held Concerns
The publicly traded music rights fund lowered its once high-profile valuation by 26%.
Takeaway: Strategic buyers — usually music publishers and record labels — will pay a premium to control a song’s administration and licensing or a recording’s distribution. Passive rights typically trade at a discount because they carry more potential risks of counterparts (co-writers, for example) and potential collection risk (as is the case when royalties are re-directed from a label rather than received from a PRO).
3. How Live Music is Helping B2B Brands Strike a New Marketing Chord
Concerts and festivals have become a new venue for reaching a generation of younger and more diverse decision-makers.
Takeaway: These places are today’s version of the clubhouse at Augusta National, and other gatherings of old-school executives. Today, as live music enters an international golden age, top artists can be found all around the world.
