2018 Music Earnings Watch: The Rebound Is For Real

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– Bullish:
Earnings were good, stocks were mixed for music businesses in 2018.

Questions are being answered in late January and early February – the most beautiful time of the year – for music industry stock watchers. Income statements. Balance sheets. Statements of cash flows. Dense, almost unreadable annual reports. Interviews on financial network news shows. Gains. Losses. Hits. Misses. There’s something for everyone.

The takeaway from 2018 earnings season is that uncertainty is fading away. Unfortunately, some answers can never be known. How many drummers does it take to screw in a lightbulb? Who can say for sure, but maybe it’s five: one to screw it in, four to argue that Rush’s Neil Peart would have done it better. 

But many questions are being answered in 2019. Can a streaming service build a sustainable business when content costs take at least 70 percent of revenue? Finally, there’s good evidence the streaming business model could work – at a large scale – judging from Spotify’s 2018 earnings announced Feb. 6. Can record labels sustain growth on the back of streaming? Yes, it appears so, looking at Warner Music Group’s fiscal first-quarter results that were released Feb. 5. 

How many subscribers does it take for a global music streaming service to turn a profit? Spotify’s fourth-quarter earnings show 96 million. To maintain a feature- filled, innovative streaming product and stay a step ahead of Apple, a company needs almost 100 million paying subscribers – as many subscribers as the combined populations of the U.K. and Australia – not to lose money. Competing against the big players, known as Apple and Amazon, requires aggression and innovation. (Apple announced last week it has 50 million Apple Music subscribers, by the way.) Sitting still will get you eaten alive. 

In the fourth quarter of 2018, Spotify posted an operating profit of $49 million, a solid improvement from the $6 million loss a year earlier. Full-year operating loss was $89 million, a vast improvement from the $430 million in 2017. The bottom line, net income, was $503 million; nearly all of that came from finance income of $440 million, not reflective of day-to-day operations. 

So what does a leading streaming service do to evolve and improve margins? The themes in Spotify’s earnings release were podcasts, podcasts, and podcasts. Spotify will acquire Gimlet, a podcast producer, and Anchor, a do-it-yourself podcasting platform. Appearing on CNBC Feb. 6, CEO Daniel Ek was like a 17th-century explorer in the New World: podcasts are unclaimed territory that Spotify can take and develop. Music is obviously core to Spotify’s business, but where’s the chance to differentiate? Exclusive music content is rare and, in the grand scheme, not a key revenue driver. Instead, adopt the Netflix model, invest in original podcast content, and increase both engagement and subscriptions. All the while, focus on the size of the audience, not profit. “This is our long-term opportunity,” said Ek. 

How much revenue does it take for a major label to show sustainable growth? This week, Warner Music Group announced a tidy profit of $86 million – on revenue of $1.2 billion – in the fourth quarter of 2018, an improvement from $5 million a year earlier. Companies tend to have a favorite metric they believe best reflects their operations. Warner chooses a wordy metric: adjusted operating income before depreciation and amortization. OIBDA adjusts net income by removing write-downs of hard assets like equipment and intangible assets like ownership of recordings and musical works. OIBDA was $224 million, up from $168 million.

Warner, like Universal Music Group and Sony Music, has been trending upward. Warner has grown revenue from $3.25 billion in 2016 to $4.0 billion in 2018. To 
no surprise, digital revenue represented nearly all growth. Nor has it been surprising that streaming has exploded while digital downloads have nosedived down. While labels’ financial turnaround may be more welcome than surprising, it would have shocked naysayers just a few years ago. Recorded music sales were decimated as the industry fumbled through the early days of online commerce – years later, news organizations are struggling to find business models that work after they’ve conditioned readers to expect free content. It’s no fun, is it, BuzzFeed and Vice? 

Few existential questions exist in live music. Sure, promoters are figuring out new festival models, but fans are showing up for concerts. Consolidation changes the business’s organizational chart, but that’s been the case for decades. Live Nation, buyers of two promoters in the last month – Embrace Presents in Canada and ONE Production in Singapore, and – has not announced the date of its earnings release. But the three-headed juggernaut – promotion, ticketing, and sponsorships – has stated it expects another record year for the full 12-month period. Indeed, nine-month revenue increased 11 percent to $8.19 million as the company’s massive growth over the last decade shows few signs of flagging.
And what about small giants in live music? They look healthy. At the Madison Square Garden Company’s entertainment division, revenue grew 17 percent in the fourth quarter – it’s second fiscal quarter – to $317 million. Ryman’s Entertainment division, which includes the Grand Ole Opry and the Ryman Auditorium in Nashville, also improved revenue 17 percent to $108 million in the first three quarters; Ryman releases fourth-quarter and 2018 earnings Feb. 26. 
More answers will come Feb. 14 when Vivendi, parent company of Universal Music Group, announces its fourth quarter and full-year results. Universal’s revenue improved 9 percent to $4.7 billion in the first three quarters.