Mark Krais comments on the importance of the revenue stream of CDs in S&P Global Market Intelligence

Music labels battle for longevity as streaming gains momentum

August 15, 2016

By Vinjeru Mkandawire

Music labels have been hit hard by the digital wave of unlimited streaming. A recent tie-up between Sony’s U.K. unit of Sony Music Entertainment Inc. and Ministry of Sound demonstrates a determination to win back the dance floor and establish longevity in the music industry.

The British arm of Sony Music announced its acquisition of the U.K. electronic dance music label in an Aug. 10 deal that gives it ownership of a roster of EDM artists, back catalog and compilations business.

Sony’s key strategy is to bolster their electronic dance music artist roster, which is a rapidly growing music segment, particularly in the U.S. and predominantly for live acts, according to Nicholas Zarb, London-based media consultant and director at Simon-Kucher & Partners. He pointed out that Calvin Harris, who is signed to Sony Music, is currently the world’s highest paid DJ.

For Ministry of Sound, the deal is an opportunity to offset declines in compilation, which is a core part of its business.Launched in 1993 as an extension of the South London nightclub of the same name, Ministry of Sound serves a small number of artists including DJ Fresh and Sigala, although it is best known for its dance music compilations business. Compilations have been suffering due to the rising use of playlists on streaming services that provide consumers with a wider range of music at lower cost.

Ministry’s concerns are legitimate given audio streaming grew by 82% in Britain in the previous year, with digital formats accounting for 54% of all U.K. music consumption, according to data from industry body BPI. The average number of weekly streams was up 78%, to 506 million, during the same period, compared to 284 million per week in 2014.

“In the era of streaming, it is all about playlists; consumers increasingly make their own playlists on YouTube or Spotify,” explained London-based Alex DeGroote, media analyst at Peel Hunt.

The underlying streaming economics mean Ministry of Sound faces a twofold blow in the form of increased competition for its curation efforts as well as the inability to monetize compilations on streaming platforms, which only pay royalties to the copyright owners.

In fact, in 2013, Ministry filed a copyright lawsuit against Spotify Ltd following claims of playlists based on Ministry compilations being made available on the streaming service. The two parties reached a settlement the following year.

By teaming up with Sony, Ministry of Sound de-risks its business by becoming part of a larger label at a time when streaming services like Spotify are challenging its core model.

The market for compilations and their curated selection of music is likely to decline over time as streaming becomes increasingly the de facto method of audio consumption, according to Zarb. He therefore believes a deal with Sony will direct Ministry toward alternate revenue streams.

However, for now, the compilations market continues to shrug off narrowing revenue margins and is proving resilient. In fact, compilation album sales are on the rise, despite their content being widely available on freemium streaming services. For instance, Now That’s What I Call Music 92 was the fifth most purchased album last year with over 800,000 copies sold, outselling previous volumes.

As a catalog product, CD compilations form a crucial element of the underlying earnings in the recorded music world, according to Mark Krais, joint founding partner at media law firm Bray & Krais.

“CDs should not be overlooked,” Krais said in an interview. “Their pricing point compared to streams continues to make them a very important revenue stream for the major record companies,” he added.

Last year, CD sales in Britain fell a milder-than-expected 3.9%. Meanwhile, at 2.1 million unit sales, vinyl hit a 21-year high in 2015, according to BPI.

For this reason, Mark Mulligan, managing director of MIDiA Research, argued that a Sony-Ministry tie-up could make the “economics of compilations work in the streaming environment,” given that 25% of streaming subscribers still buy compilation albums.

“Curated playlists will continue to gain importance but compilations are going to live alongside them for a good long time to come,” Mulligan concluded.

 

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