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How Music Companies Approached Mergers and Acquisitions in 2018

How Music Companies Approached Mergers and Acquisitions in 2018


The music industry in 2018 followed Charles Darwin's theory of evolution: the fittest companies have evolved to survive in their ecosystems. Although there weren't any blockbuster deals like Universal Music Group's purchase of EMI Music in 2012, a handful of companies made wise, prescient acquisitions and investments.

Streaming services need to act creatively to survive dangerous economics. One survival tactic is to work directly with artists. The pitch is simple: sign directly, rather than through a label or distributor, and we'll give you half of the royalties. It's an enticing offer for an artist with enough contractual flexibility, but it's not for everyone. A developing artist won't have leverage. A DIY artist using any number of digital distributors already gets up to 100 percent of royalties. And, of course, labels are prone to protect their interests, so nothing is assured. But the state of streaming services' financial statements suggest something's got to give. Labels aren't just going to give services "an additional pile of gross margin points," as Spotify chief financial officer Barry McCarthy put it. Each point of gross margin will be worth $66 million to Spotify this year -- ample incentive for a company struggling to post an operating profit. The main question is how long the current business model can survive extinction.

For its part, Spotify says it's not becoming a label, a sensible position since its licensing agreements with the major labels reportedly prohibit doing so. But it's fair to say Spotify is becoming a label services provider. In 2018, it invested in DistroKid, a digital distributor with roughly 250,000 independent artists. Spotify acts a bit like a promoter, too: a new DistroKid now gives tracks consideration for placement on Spotify playlists, the radio of the streaming era. And last year, Spotify announced it hired an artificial intelligence expert to build tools that "enable artists to create in different ways." Between DistroKid and AI, Spotify can provide added value to artists while helping find unknown artists for in-house development. Apple has a similar mindset: this year it acquired Platoon, a U.K. firm that -- wait for it -- provides creative services to artists.

Label services -- marketing, promotion, creative, public relations, etc. -- have become necessary to survive the thin-margin distribution business. Distribution companies usually don't acquire competitors simply to expand horizontally; distributors often make acquisitions that build vertically to create a one-stop shop for their clients. Kobalt made a notable deal for in2une Music, a New York-based promotion company In2une Music, that can be bolted onto its label services arm, AWAL. Believe Distribution Services, the French company formerly known as Believe Music, purchased Groove Attack, Germany's largest independent distributor. Groove Attack not only provides digital distribution, it offers the typical array of label services in addition to sales of physical product to brick-and-mortar retailers. Last month, independent distributor INgrooves, owned by Universal Music Group, purchased Sovereign Music Services, a provider of a royalties accounting platform for labels.

In concert promotion, however, horizontal growth has become Darwinian evolution. In 2018, Live Nation was typically methodical in acquiring or investing in promoters. Birmingham, Alabama-based Red Mountain Entertainment, co-owner of the Sloss Music & Arts Festival, provides a broader presence in the Southeast. ScoreMore Shows gives Live Nation a hip-hop promoter in Texas. Emporium Presents, based in Golden, Colorado, improves the footprint in the Western states. And Frank Productions, based in Madison, Wisconsin, gives Live Nation solid footing in Madison and Columbus, Missouri, mainly. Each acquisition changes the promotion ecosystem. The bigger Live Nation gets, the more it squeezes its competitors.

The feather in Live Nation's cap was its purchase of a stake in legendary festival Rock in Rio. Held bi-annually in Rio de Janerio, Brazil since 1985, Rock in Rio had an attendance of 1.4 million over four days in 2017. Rock in Rio has expanded to Portugal, Spain, and the United States, but Brazil and its 212 million population—fifth-most in the world—make it an especially attractive addition. Rock in Rio wasn't fit to survive. Live Nation purchased its share from the group of creditors guiding LiveStyle, formerly named SFX Entertainment, through Chapter 11 bankruptcy. Beginning in 2012, SFX started to buying EDM promoters around the world with the intention to build a global, EDM-focused conglomerate. Attract the fans and brands will follow, the thinking went. But a year after an IPO on the Nasdaq, SFX's debt-heavy business model became infected: a group of credits took over, the company changed its name, and former AEG Live chief executive Randy Goodman took the helm. In dying out, SFX failed to copy Live Nation's model of a unified network of geographically dispersed promoters.

SiriusXM is transforming for the radio business of the future. The satellite radio company will add an Internet presence when it acquires Pandora in early 2019. Pandora, an influential innovator in the 2000s, has since lost momentum to predatory competitors. Sensing an opportunity, SiriusXM first made a minority investment in 2017 and opted for an all-stock purchase. The deal -- 1.44 SiriusXM shares for each Pandora share -- puts Pandora's implied value at about $8.05 as of December 21st, half the $16 IPO price in 2011 and almost a fifth its $40-plus high in 2014. Set aside the fact that SiriusXM will have roughly $1.5 billion of free cash flow from revenue of $5.7 billion this year. The theory of evolution doesn't mean the largest service will survive -- read The Innovator's Dilemma to understand why. Instead, the business model best fit for its environment will survive. SiriusXM's satellite radio is a good fit for a nation of car drivers. Given the growth in high-speed mobile broadband, a satellite radio company is wise to diversify. After all, any company in any ecosystem must evolve or die.

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