An under-appreciated darling with significant upside

Curtis Cifuentes

Avenir Capital

On 13 February 2021, Vivendi announced that it was considering distributing its 60% stake in Universal Music to Vivendi shareholders in the form of a special dividend and the stock jumped 20%. Tencent recently increased their stake in Universal to 20%, at a valuation of €30b. Universal, Warner and Sony dominate the global recorded music industry today with a combined share of around 70%. Avenir has a position in Sony, with the music business being an important part of the investment thesis, though not the only part. Sony is benefitting from multiple trends – music, gaming and a leading image sensor business.

While the recorded music industry is a minnow (US$20b in revenue) compared to movies/television (US$150b box office and home entertainment) and even games (US$180b across smartphones, consoles and PCs) it is increasingly garnering investor interest thanks to a shift to subscriptions that give visibility to longer-term revenues as well as recognition of the enduring value of the back catalogue.

Plenty of room for growth

While the industry has grown about one-third from its 2014 nadir of about US$15b, in inflation-adjusted terms the recorded music industry is still half the US$40b it was at its peak in 2001. The following decade was challenging for the industry, hurt initially by piracy and it never fully recovered in the shift to downloads, which saw consumers shifting to the purchase of single tracks over more lucrative album sales.

The decline in recorded music was, however, a blessing in disguise for live music fans. To make up for the collapse in recorded music revenue, artists hit the road, growing the live music industry into a US$30b market by 2019.

From about 2013 though, subscription services like Spotify and Apple Music started becoming large enough to make up for the decline in physical music sales returning the recording industry to growth. And the brutal impact covid has had on live performances has only just emphasised the value of the stable income streaming services bring to labels and artists.

VC-like characteristics

Talent discovery and development is a bit like venture capital, where labels lose money on most for the handful of hit artists, but unlike video content, where a blockbuster movie can cost hundreds of millions to produce, albums are relatively cheap to produce and hit albums can have cultural impacts that can last decades. For example, Mariah Carey’s 1994 Christmas hit ‘All I Want For Christmas is You’ has become legendary (1), reportedly generating US$60m in royalties by 2016 and thanks to hundreds of millions of streams, hitting #1 on the Billboard charts in 2019.

Streaming unlocks value

While Mariah is an extreme example, streaming platforms are unlocking value in many older catalogues, opening up music discovery to many younger generations. There are early signs that in music the industry is following a similar path to book publishing, where without the need to fight for limited shelf space in bookstores, it has enabled an explosion in publishing of books on niche topics. Essentially, music streaming is enabling a democratisation of music and frictionless discovery is unlocking value across the spectrum. For example, streaming platforms today make as many new songs available every day as were released in an entire year in 1984 (2).

Anecdotally, reports from Universal and Warner also show catalogue streams (i.e. music more than three years old) accounting for an increasing share of streaming revenue, as well as top 40 hits’ share of total streams shrinking through time.

Streaming has resulted in both an explosion in new music, as well as the rediscovery of older music, though it does also mean that the revenue has to be spread across a larger pool of artists.

Implications for investors

The owners of these catalogues and copyrights are increasingly crystalising the value of these assets. Warner Music listed in 2020 and currently trades on 34x NTM EBIT. Tencent Music took a 10% stake in Universal in 2019 that valued the company at US$33b, or 27x 2019 EBITA and this week Vivendi announced plans to IPO Universal in 2022, which saw Vivendi’s share price jump 20%, adding €6b in value to the company in one day. Sony Music remains a subsidiary of Sony.

There seems to plenty of room for growth in streaming services too, especially outside of Europe and the US, where penetration levels and pricing are still very low.

Our investment case for Sony was based on a view that Sony had multiple businesses that were underappreciated by the market, including a gaming business that was less cyclical thanks to subscription services, movie and TV production that was benefitting from growing online services like Netflix, a semiconductor business that had tailwinds from increasing cameras in smartphones as well as growing use in automotive and other applications, and a music business with many years of steady growth ahead of it. We value Sony using a sum-of-the-parts, assuming a much lower multiple than current market multiples for the music business, the application of which would result in significant further upside.

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Sources

1. As an aside, it’s also a legendary burn – “I don’t want a lot for Christmas…all I want for Christmas is you”

2. See: (VIEW LINK)


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Curtis Cifuentes
Investment Director
Avenir Capital

Curtis Cifuentes is an Investment Director at Avenir Capital and is responsible for the portfolio management of the Avenir Global Fund. Prior to joining Avenir, Curtis worked at Platinum Asset Management, where he spent 15 years as an investment...

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