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David Kimberley
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Updated 22 Sep 2023
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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

Readers who have watched The Sopranos are unlikely to have forgotten the TV series’ controversial ending. We won’t give any spoilers away but one of the notable features of the finale was the use of Journey’s cheesy 1980s hit ‘Don’t Stop Believin’.

The episode aired in 2007, a time when the iTunes store or pirating sites like LimeWire were the most common ways for people to access music.

After it aired, the New York Times published an article noting that the song had seen remarkable spikes in sales numbers over the prior few years. When the song featured in the comedy drama Scrubs in 2003, physical sales increased by 50%.

Two years later, the song saw two big bumps in iTunes downloads after being featured in Laguna Beach and Family Guy. The Sopranos episode provided the biggest lift though as downloads on iTunes rose more than six-fold to a massive…6,531.

That illustrates a couple of points. One is how much streaming has grown in the past two decades. When that New York Times article was published, Spotify was only a year old and Apple, as you can infer from the above, was still getting people to pay for and download songs. This was mainly because the technology needed to facilitate streaming, basically 4G and smartphones, was also in its infancy.

Today streaming accounts for by far the largest proportion of global spending on recorded music. In the year that The Sopranos finale aired, total revenues were only $290m according to Goldman Sachs. The investment bank estimates that spending will total close to $20bn this year. Streaming also remains the only meaningful growth area for recorded music sales, with Goldman expecting a CAGR of 11% through to 2030.

The impact of this can be seen in streaming numbers. When Kate Bush’s ‘Running Up That Hill’ featured in the Netflix show Stranger Things last year, streams of the song rose by 9,000% - taking total plays to almost 500m. Journey’s post-Sopranos boom looks microscopic in comparison.

What this also shows is the difficulty faced by investors attempting to put a value on music catalogues. This applies across the alternatives space, where assets are often illiquid and thus subject to more opaque pricing.

However, the valuation process is easier in some alternatives compared to others. If you look at BBGI Global Infrastructure (BBGI), the company invests in projects that have a fixed lifespan. Loans used to fund investments are overwhelmingly fixed rate and amortised over the lifespan of a project. The risk that there are fluctuations in those cash flows is further mitigated by the managers’ hedging strategy and contracts they take out with sub-contractors.

The result of this is that you have a process whereby you have a clear idea of an investment’s lifespan and a high level of certainty as to what the cash flows from that investment will be.

As Journey’s sales spikes show, this is not the case if you buy rights to an artist or a song. Although there are some nuances, the rights to catalogues in the US and the UK typically last until 70 years after an artist’s death. This gives you a rough approximation of the lifespan of the investment, as well as the knowledge that its value at that point will be zero.

But how do you try to determine what future cash flows will be? On the upside, you may have spikes in streams or licencing, but these are very difficult to predict – beyond perhaps the media coverage an artist’s death attracts. As one of my colleagues tells me, Leonard Cohen’s ‘Hallelujah’ was rejected by almost all major labels and received barely any attention after it was released but became hugely popular after being covered by Jeff Buckley and then featured in the film Shrek. Buying rights to the song would have thus been a bit like getting into a start-up at the seed funding round.

Moreover, the streaming industry is itself evolving. Goldman note that targeting ‘superfans’ and changing fee structures could substantially boost revenues for the sector. Advertising is a component of this and is arguably an area that has not been fully tapped into, either to the benefit of streaming providers or the rights owners they ultimately pay out to.

On the downside, it is hard to forecast exactly how an artist will perform. Sales data from physical buys, like CDs and vinyl, can give some indication as to the longevity of an artist but it is far from certain.

For example, when this author was in his early teens, Dizzee Rascal was an extremely popular artist. However, if you look at Google search data, interest in the artist has gone from high spikes in the 2000s, through to lower spikes in the early 2010s, to being at extremely low levels for almost the whole of the past decade.

Compare that to Spotify plays and you see that Dizzee has a respectable number of streams but has not had any breakout increases in streaming levels since 2017, when he released a song with a French artist that appears to have performed well in the latter’s home country. The second big breakout date was on New Year’s Eve 2017, suggesting many people feeling a little worse for wear wanted to put on a ‘classic’.

Finally, and as can be inferred from the above, this is still a comparatively new sector. Streaming on a large scale has only really taken effect in the past five years. Historical data is thus hard to come by.

In some ways the events of the past couple of weeks mirror these problems. Putting a price tag on the sector has become a controversial topic, one which my colleagues have also addressed in a much more comprehensive way.

However, much of the discussion has, completely understandably, been focused on rate changes. There is often a sense that the sector evolved in an era of low rates, purely to cater to demands for income among investors.

That may partly explain the sector’s popularity, but it overlooks the technological component. Streaming is a phenomenon that exists primarily because of smartphones and omnipresent access to the internet. As those things have developed, it shouldn’t be surprising that there were investors there to attempt to benefit from what was a novel business model.

It’s always plausible that something may come to supplant the sector. This author can remember thinking a Walkman was about the most convenient way to listen to music imaginable.

But for now, the sector’s current teething problems and the passage of time, which may mean more growth opportunities and larger historical data sets, may ultimately lead to the valuation process becoming more straightforward than it is today.

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