ValuePickr Forum

Music Labels - The Most Profitable Internet Business and an Emerging Asset Class

This seems to be a rumour. Microsoft website does not have any disclosures right now.

UMG reported a 22.6% growth in Subscription and Streaming Revenues for qtr ending September 30, 2020. For the 9 months, Subscriptions and Streaming revenues grew 15.8%.

Also, Tencent chose to exercise its option to acquire an additional 10% in UMG. Last year the first tranche was acquired at approximately 33x FY19 EBITDA, on post money basis.

Distribution platforms continue investing in content. Best example : Netflix and Amazon creating their own content.

In music; Its difficult to create a repertoire. Perhaps, that’s driving Tencent to exercise its option.

These industry segments will look very appealing so long as one keeps looking at the P&L.

Asking some basic questions on the balance sheet -

  1. What is the nature of the fixed assets needed to run the business?
  2. Does this gross block have a tendency to depreciate/lose value with time compared to other businesses?
  3. Is accounting simple or complicated? How exactly does one value the content/right paid for the content? Is this valuation mechanism consistent?
  4. What other aspects of the business can be subject to fuzzy accounting? What exactly is the inventory in such a business?
  5. Can one take the management’s assessment at face value when it comes to valuing content and music rights?
  6. Can an investor really take a long term view on the content monetization approach? Music industry is subject to so many fads that one cannot predict what will be in vogue 5 years down the line

The list is really endless if one keeps staring at the balance sheet.

Detailed answers to these would help highlight the risks in the industry.

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Hi @zygo23554

Questions 1,2,3,4 are self evident from reading the annual reports and accounting policies of the listed companies.

Regarding Q5 : Kicking the tyres with industry people and journalists generally gives you a fair idea of prices paid for content. As long as reported acquisition prices are within the ball park, there’s no point splitting hairs as this is a creative industry and there has always been some element of subjectivity around this, as dealing with artistes requires some flexibility.

Having said that, allow me also clarify that the companies are driven by return of and return on capital. So the element of subjectivity is quite small.

Q6 : Saregama is more than 100 year old company. It continues to be a relevant player in the music industry today. Similarly, Universal, Sony and Warner are also very old companies with huge catalogues and are the global leaders today.

A poignant example is Bob Marley. He recorded his last album in 1977. Died in 1981. BlackRock backed Primary Wave acquired 80% of Bob Marley’s songbook as part of a USD 50mn deal in 2018.

Hope these examples answer questions on longevity of music.

I’ll be happy to read your conclusions on the topics mentioned in your post and offer my views. An exchange of thoughtful views will make for a richer discussion.

I re-iterate; conviction can only be self generated.

Happy Investing and Happy New Year to all ValuePickrs

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This post provides a detailed discussion of risk. Definitely worth reading

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Tips Industries Ltd. is considering demerger of Films business.

If the demerger goes through, there will be a pure play music business providing exposure to growing annuities from music streaming.

Private Equity is pumping money into music rights. Two related links to a new deal announced today :

Shakira sells catalog of 145 songs to Hipgnosis Songs Fund

https://www.bloomberg.com/news/articles/2021-01-13/shakira-s-145-song-catalog-latest-deal-for-hipgnosis-fund#:~:text=Hipgnosis%20Songs%20Fund%20Ltd.%20snapped,become%20an%20attractive%20asset%20class.

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Saregama reported terrific results and raised guidance on music business for FY21

Super Results from Tips Industries. Even if Q4 PAT is just Rs 10 cr, FY21 PAT will be Rs 35 cr, compared to Rs 11.3 cr in FY20.

The ROE and ROCE for this company are going to be stratospheric.

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Survey conducted showed how users are willing to pay a lower subscription fee to use ad free music on OTT platforms. (~ a year old article, however very informative).
99% Ad based free subscription users contributes 60% of revenues whereas 1% paid subscription users contribute to 40% of revenues. This is expected to increase to 6% paid subscription users contributing 80% of revenues. Huge runway for OTT players which in turn will reflect in Music Licensing revenues for Music Label owners.

https://redseer.com/newsletters/ott-audio-platforms-tuning-into-profitability/

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Tips Industries Ltd. has announced demerger of its film business. It is now a pure play music company and the best way to play the global digital advertising wave.

Hopefully, subscription model takes off in India soon.

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Music Streaming is going to be Big and there is a lot of value discovery waiting to happen in the Indian Music Companies.

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Effective Date for Demerger April 01, 2021

@sahil_vi

Could you please explain what happened with Shemaroo?

Just asking the same question as asked on TIPS thread.

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@sahil_vi

Do you see concentration risk in TIPS given its small library size( small in relative terms) as compared to Saregama and Saregama being the bigger player might have the upper hand in purchasing new music rights. Management pointed out in concall of Saregama that every business has to fund themselves. I am assuming Carvaan would just breakeven for them Overall if I ask your opinion, how would you ride this story for the next decade? We have two players - One with better margins but less diversification and one with comparatively less margin but much better diversification?

I will put @Advait_6270 query posted here.

"the triggers mentioned wrt excellent content availability and streaming platforms opportunity were also there in case of Shemaroo. But it started faltering somewhere and as you know, the share price dived from 400+ levels to current 70-90 levels. Could you pls explain what happened in Shemaroo and if there a possibility of such things happening with Tips and Saregama? "

This was the first thing that came to my mind too, when I looked into Saregama. If someone can answer it, that will be wonderful. I didn’t dig up much further, but the industry looks really interesting to let go

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The immediate analogy that comes to mind is Shree Cement vs Ultratech or any other Top Cement Player over the last 20 years.

In this case, efficiency trumped size and regional concentration did not limit valuation upside.

Efficiency enables scale and inefficiency limits growth. So philosophically, I would buy the more efficient player.

Should also add that I do not see any concentration / diversification angle in music catalogues.

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I have not been able to understand Shemaroo’s financial statements and hence avoided. My limited understanding tells me :

  1. If a Company buys content for an hypothetical amount of X and resells it for 2x or 3x over a few years. Subsequently, if it has to pay 2x or 3x to lease the same rights again for the next period, has it earned any ROE ?

  2. If there’s a boom in iron ore prices, are we better off buying iron ore mine owners or iron ore traders ?

Opaque accounts, leverage and the above questions kept me away from Shemaroo.

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