New ways of consuming music and the impact on music rights valuations

New platforms and licensing opportunities

With an audience of around one billion monthly users, TikTok has become a hugely influential platform. In 2021, more than 175 songs entered the Billboard Hot 100 after trending on TikTok - twice as many as the previous year and cementing the platform as a means of song discovery. Licensing agreements between TikTok, other social media platforms and several major labels have created an important revenue pipeline for new music and back catalogues.

Home fitness has grown in popularity in recent years, boosted by lockdowns during the pandemic, and we have seen a range of tech-focused players enter this space with connected fitness offerings. Connected fitness platforms are striking licensing agreements with record labels and historically have paid higher royalties than other streaming platforms.

Video games also saw pandemic-related growth. There is a longstanding relationship between the music and video game industries due to the popularity of music-centric games. But almost every game is supported by a soundtrack and, for popular games, these soundtracks can reach huge global audiences. Over the last 18 months, the relationship between music and video games has become more active and direct, with innovation in concerts and song releases targeting video game audiences.

Not only do these emerging platforms provide consumers with new ways to consume and connect with music, they may also extend a song's traditional lifecycle and delay royalty decay, as it allows songs to be discovered long after their release. In recent years, royalties from emerging platforms have often been considered as blue sky or potential upside in music rights valuations, but going forward there is likely to be more granular forecasting and valuation of these royalty streams to music rights holders as the market further understands the potential of these platforms and channels.

Given the ever evolving nature of technology, we are already seeing new tech enter the music market, specifically Artificial Intelligence (AI). AI is already shaking up music the industry through cloning artists and producing music, which the industry is navigating how to manage and potentially monetise for artists.

The future of live music

Live music consumption was the most negatively impacted segment of the music industry by COVID-19. But we saw a range of live performance streaming platforms thrive, such as WaveXR and Veeps, which was acquired by LiveNation in January 2021. As the live music industry recovers, these platforms are exploring how to retain viewership and are looking at creative ways to bring virtual viewing experiences to consumers.

The video game metaverse is evolving and the music industry has shown its appetite to evolve with it. In-game concerts are some of the most engaging metaverse events, drawing in well-known artists and collaborators. For example, we saw Fortnite host the likes of Travis Scott and Roblox host Lil Nas X, supporting Roblox’s strategy of reaching a slightly older audience.

It is unlikely the video game metaverse will be a substitute for live concerts and events. Instead it will likely prove a supplementary consumption channel. For music rights holders, this provides another consumption channel and royalty stream. Based on the market's expectations of the future potential of the video games metaverse, there is significant potential upside for music rights holders and valuations.

From pricing to deals: The economic impact on rights valuations

During 2022 and into 2023, interest rates increased in the UK, US and Eurozone and all organisations are currently weighing up how best to engage and retain customers at a time when individual and household finances are under greater pressure.

Pricing is therefore a sensitive area, although the pricing of music streaming subscriptions has lagged behind equivalent on-demand video services such as Netflix. A careful hike in music streaming subscription fees could therefore present another area of potential upside for music rights assets. Recently there has also been discussion as to whether smarter pricing could be introduced to better reflect fan engagement.

Despite the favourable impact of streaming, emerging platforms and virtual live music on future royalties, we have recently observed significant volatility in equity and debt markets in addition to the broader global macro economy, which is likely to impact music rights valuations. Music rights are often quite highly leveraged assets, and as such this period of high interest rates could pose a funding and pricing challenge to investors. However, due to the attractiveness of music assets, equity investors may absorb some of the impact.

In 2020 and 2021, we observed a high volume of music rights transactions, including some large and iconic catalogues. Although music rights transactions in 2022 did not reach the high levels that we observed in recent years, there has continued to be strong interest in this non-cyclical and consistent cash flow generating asset class. We expect the underlying cash flows supporting valuations and investor appetite to remain strong; greater diligence may be applied on the buy side and quality assets will inevitably win out.

In conclusion, we expect the growth of digital platforms and emerging ways to consume music to maintain the momentum developed over the past decade, boosting pricing and returns on publishing and recorded music rights assets.