Tag: Analysis

BMG’s Perspective on Digital Music Revenues

BMG’s Perspective on Digital Music Revenues

With Nielsen and The Recording Industry Association of America (RIAA) releasing their Music Industry Revenues Report for 2016, it has been revealed that many record labels are raking in the profits. For the past decade (thanks to piracy and a drop off in physical CD sales) the music industry has been constantly diminishing in value. Last year, however, music streaming earnings allowed the industry to see an increase in revenue, and music companies love it. Technological breakthroughs have given fans the ability to easily discover new music. It has also allowed artists to showcase their musical talents to the world. However, it has created over saturation in the market. Online music streaming has manifested itself into a new wave of revenue, and record labels are riding it all the way to the bank. However, artists have long expressed their discontent with the marginal pay outs that streaming platforms distribute. Digital Music News published an article illustrating how discouraging music streaming royalties are to the average artist. In the article, they exhibited the royalties an independent band received from having over 1 million streams. The results: $4,955.90, an average of $0.004891 per stream. I believe it’s only a matter of time before artists demand higher cuts in royalties from music streaming.

The Financial Times published another article this month discussing this topic. They sat with Hartwig Masuch, CEO of BMG (Bertelsmann Music Group), and asked for his opinion on music streaming and how it will affect the future of the industry. According to Masuch, there will soon be “wake-up calls” for many record labels who believe they are living the dream. “A return to growth triggered by the upswing in streaming is potentially under threat, as artists start to demand a much greater cut of royalty revenues generated.” Streaming and the inevitable demand for higher royalty rates among artists is impacting all of the major labels, but BMG is sheltering itself from the upcoming storm by paying their artists 75% of streaming royalties. According to Masuch, “big music companies spent an average of 19% of their revenues on artists royalties.” That’s a wide gap compared to what BMG pays its artists. Masuch also stated that major record labels use the “complicated” structure of the music streaming market to minimize royalties paid to artists, but even that explanation will soon fall on deaf ears.

I believe BMG is handling the situation very well and is blazing a trail towards future success. Bertelsmann was a media giant in the music industry before, but Sony acquired the company in 2008 for $1.2 Billion. Masuch then reassembled the company with a new vision, “to help artists and songwriters make the very most of their songs and recordings in the digital age.” Masuch created a new company tailored specifically for a digital market, distancing themselves from traditional label business models and adopting a digital infrastructure that allows for songwriters and artists to gain larger royalty revenues. They’re new business model will certainly attract emerging acts. Most artists choose to stay independent, not because they want to do it all by themselves, but because they want freedom to create and higher profitability. By establishing their stance on music streaming and publically advertising their 75% streaming royalty pay outs to artists, they are positioning themselves favorably among musicians seeking the influential power of a music company.

I believe BMG’s response to the growing frustration artists are experiencing due to low royalty rates will bring long term success to the company. In a Financial Times article that was published this month, Masuch stated that “BMG’s ebitda (earnings before interest, tax, depreciation, and amortization) margin of 22.8 percent in 2016 [is] proof that the larger music businesses have cost bases still mired in the physical world.” According to an article published by Music Business Worldwide, “Universal Music Group posted an annual ebitda figure of $712M… representing a 13% [profit] margin.” Sony had a profit margin of 11.5%, and Warner Music Group had a profit margin of 15.9%. BMG, on the other hand, had a profit margin of 22.8%, larger when compared to the Big 3. Although their total revenue was lower than the other companies, when the data is normalized one can see a big difference in the four company’s profit margin.

The article went on to state how BMG has made over 100 acquisitions over the last 8 years and are now focusing on “organic growth.” I believe the company will do just that within the next few years. But there still remains a question to be answered: How are music streaming platforms going to contribute to higher royalty rates for music artists and labels?

Resources:

http://www.digitalmusicnews.com/2016/05/26/band-1-million-spotify-streams-royalties/

https://www.musicbusinessworldwide.com/bmg-revenue-tops-450m-2016-23-profit-margin

https://www.bmg.com/us/about.html

http://www.completemusicupdate.com/article/bmg-boss-says-streaming-boom-will-force-labels-to-offer-artists-better-royalties/

https://www.ft.com/content/e33399ca-1b76-11e7-bcac-6d03d067f81f

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