Thursday, June 4, 2020

Music News | Lefsetz Letter


The crime here goes back to 2004, when Time Warner blew out its record division for $2.6 billion.

Today Warner Music is valued at $15 billion.

Assuming you’d taken that $2.6 billion, invested it an annual rate of return of 10%, after fourteen years, i.e. today, you’d have $11.95 billion.

10% is a pretty good rate of return. Look at all the hedge funds in a negative position, that have gone out of business.

The sale of Warner Music back in 2004 was an ignorant one based on emotion.

Let’s look at the company, comprised of Warner/Atlantic/Elektra and many associated labels.

There was the thought that the value of recorded music would go down to zero. And that no one would make music anymore because of the lack of remuneration. Well, one thing’s for sure, today we’ve got too much music, furthermore, income is now going up after being halved, because of streaming. Proving that the music business itself is run by hustlers with no familiarity with tech or trends, and that Time Warner was a boondoggle from day one, after Steve Ross died the enterprise was run off the rails.

Let’s start with the flawed merger with Time (which Ross was in favor of). A conglomerate with a future, based on its cable system, HBO and music companies, merges with a dead tree enterprise on its way down. Talk about not seeing the future, Time declined to nearly nothing and was then blown out. As for AOL…anybody who actually was online knew AOL was a walled garden and that the future was the worldwide web, with access to all via broadband. Once again, AOL went down in value and was blown out.

And they blew out the record division too. Even though it was the record division that generated all the profits that built the cable system.

You see music scales. If you have a hit, it costs very little to continue to sell that hit. In other words, costs are amortized quickly and then the rest is almost pure profit, especially in the era of digital, without production costs, never mind shipping and returns, and the era of streaming, where music lives forever and pays forever.

None of this was hidden when Warner Music was sold by Time Warner. It’s just that the majordomos had no respect for music, they were building a TV empire that ended up being sold to AT&T, as if a conglomerate is the best place to put content. At least NBC, Universal and Comcast are essentially in the same business, i.e. visual programming. Furthermore, Comcast had the pipes to distribute said content. The synergy with AT&T and Warner is hard to figure out. The wireless business was not built on paid-for visual content. But, AT&T bought DirectTV, which anybody savvy would know was going down, because people would cut the cord, and the satellite service, no matter how good for the distribution of television, lacks a high speed internet component. But AT&T needs growth for Wall Street. Same deal with Verizon, which purchased AOL, supposedly for its ad tech, but that didn’t play out, certainly not for the cost…proving that the history of the past three decades is technologists making marks out of traditional media empires, the truth being they just want to lay off their duds.

So, Warner Music has assets that will never go down to zero. Call it the history of recorded music, Warner has one of the best catalogs extant. People are gonna want to listen to “Suite: Judy Blue Eyes” and “Stairway To Heaven” and “Little Red Corvette”…until the copyright runs out, which it never seems to, these tracks are gonna rain revenue for decades! It’s even a better investment than real estate! You never have to refurbish the buildings, the tracks are evergreen forever!

But Richard Parsons and Jeffrey Bewkes seemed to be ignorant to this fact. Hell, Parsons came from Amex. As for Bewkes, he was enamored of TV. Proving, once again, even though there’s no qualification to work in the music business, it does require expertise, it is a skill, and decisions should be made by those having said skills, with a clear vision of the future.

This IPO was just about Blavatnik getting his investment back, Warner Music doesn’t need the money.

Then again, HBO, or Netflix, an independent company, needs to do a documentary on Len Blavatnik. Exactly how did he acquire this wealth? And now Blavatnik has laundered his reputation, by donating to cultural institutions, to seemingly every museum in London and $75 million to the University of Oxford for a new school of government.

What happened when Communism fell, when Yeltsin was in power, before the kleptocratic Putin took power? Maybe Blavatnik’s billions are totally legit, but maybe not. But just like with Jeffrey Epstein, when a billionaire gives you money…you take it and shut up.

Then again, the people dancing to Ed Sheeran have no idea about all of this.

Then again, Warner could completely shut down the cost heavy investment in new music and still be worth many billions.

But new music is sexy, which brings us to…


It’s Still Rock ‘N’ Roll To Me

Bottom line, most of the money is in rock, not hip-hop.

That’s what the stats say.

But whenever you employ Nielsen stats there’s a question of reality. Like physical and tracks…do they really matter anymore?

But one thing is for sure, hip-hop is nowhere near as dominant as the major players and the major media say it is. This narrative is similar to the one that got Time Warner to blow out its music division sixteen years ago. The sky is falling, no one will pay! People only want to hear hip-hop music, the rest is irrelevant!

Only it’s not. The other genres combined surpass hip-hop, and the same is true even if you throw in pop.

But now we’ve got a different metric, streaming and it is skewing perception.

Look at concert grosses. Rock overwhelmingly dominates. And there’s a huge component of today’s country, which is really just the rock of the seventies, albeit with bogus lyrics about church and trucks and family.

And not only in ticket sales is rock king, but merch too.

And if you’ve gone to any of these classic rock shows, it’s definitely not all oldsters. As for kids not being able to pay these high ticket prices…the prices are only that high because the demand is so great!

Now in the old days a sale was a sale, whether you listened to a record or not was irrelevant. Records were promoted via radio and print, and only those promoted had a huge number of sales.

Print is nearly worthless. The eighties and nineties paradigm of TV is a joke and radio still promotes, but mostly the promotion of music is about internet word of mouth. But the truth is the youngsters have more time to waste online, and they’ve got more time to listen to music, so they stream their favorites ad infinitum and then the media anoints the Spotify Top 50 and says THIS IS THE MUSIC OF AMERICA!

But it’s not.

Now what you hear on today’s Active Rock radio does not resemble anything close to classic rock, it’s noisy and discordant and oftentimes has poor vocals. As for Adult Alternative…a lot of those acts are inherently niche. However, both of these formats have a significant number of fans. But imagine if they were promoting acts that could write songs who had good voices…

Look at the classic acts. Not only could the Beatles write, they could sing! Same deal with the Eagles. Only on Active Rock and AAA is it believed you need no skills to survive. Sure, Bob Dylan’s voice is questionable/an acquired taste, but he is the best rock lyricist of all time!

In other words, the niches are driving today’s new rock off the cliff. And those who make it are playing to these niches, for these formats. Whereas if there was a push behind acts that covered the basics…

As our country grows more diverse, only in the music business do offerings and promotion get narrower. It’d be like Netflix only producing teen dramas. They might be successful, but most people would not tune in. They might even make money, but imagine how much more could be made if other genres were produced too!

That’s today’s major music business.

But music is so far ahead of movies and TV. For ten bucks a month, or a near equivalent around the world, you get the history of recorded music at your fingertips. And it is about subscriptions. Adobe went to subscription, Microsoft too. You charge less and charge forever. Stop paying and you’ve got nothing. People will pay. But we still have Nielsen factoring in sales. This would be like Apple factoring in how many people install their software via CD-ROM. Oh, that’s right, it’s all downloaded, the computers don’t even come with CD drives!

But Nielsen is so backward because that’s how the labels like it.

Proving, once again, all the innovation has been made by youngsters and outsiders.

Proving, once again, the conventional wisdom is wrong.

There’s a story in today’s WSJ comparing the value of Warner to Spotify. They’re both in the music business, but their models are totally different. Music is the ultimate in scale. Spotify doesn’t scale at all, it always has to pay sixty something percent in royalties, which is why Spotify is pivoting into podcasts, which is why its stock jumped after it acquired Joe Rogan’s show.

But Spotify is looking to the future, the music business is always stuck in the past.

You’re pissed Daniel Ek is a billionaire? Without Daniel Ek, Warner Music would be worth less than half.

But streaming was inevitable, because it’s on demand distribution, which now rules the world. Apple and HBO dribble out episodes, Netflix delivers them all at once. On Spotify, you get it all and you get it now. Which is the way people want it.

I don’t agree with all of Russ Crupnick’s conclusions here. But he’s the first person other than myself railing against the unending focus on hip-hop.

I’ve got no argument with the power of hip-hop, or its impact upon the market, but to believe it’s the only sound people want to listen to is…



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