Sony's Music Operations Post Big Operating Income Gain Following EMI Acquisition

Samir Hussein/Redferns
Camila Cabello performs live at Brixton Academy on June 12, 2018 in London. 

Sony Corp's music operation reported a slight increase of 1.3 percent in revenue to 795.03 billion yen ($7.17 billion) in the year ended March 31, 2019, but its operating income rose 81.9 percent to 232.5 billion yen ($2.01 billion) from 127.8 billion yen (1.15 billion), thanks to the November closing of EMI, which produced an extraordinary gain in that metric for the music division.

The company said its best selling music during the quarter came from Travis Scott's Astroworld, Camila Cabello's Camila, Luke Combs' This One's For You, George Ezra's Staying At Tamara's, Calvin Harris' Releases, Khalid's American Teen and Free Spirits, Kane Brown's self-titled release, A$AP Rocky's Testing, and Chris Brown's Heartbreak On a Full Moon. In the fourth quarter those best selling ranks were joined by the Backstreet Boys' DNA, Future's Future Hndrxx Presents: The Wizrd, 21 Savage's I Am>I Was, and Bring Me The Horizon's Amo. In Japan its big titles included Kenshi Uonezu's Bootleg, as well as Little Glee Monster's Flava, among others. 

Looking ahead to this fiscal year, the company cited just-out or upcoming releases from BTS, DJ Khaled, Pink and Vampire Weekend, as well as new music from Bruce Springsteen, Calvin Harris, Chris Brown, Tyler, the Creator and Mark Ronson.

The music operation's overall results -- which reflect Sony Music Entertainment, Sony Music Japan, and the mobile game business of Visual Media + Platform -- however, continued to be stymied by an accounting change in the way it books sales as well as a precipitous decline in physical (CD) music sales.

In order to measure operating income on an apples-to-apples bases for the two years, without the re-measurement gain from the consolidation of the EMI acquisition, operating income would have been 115.6 billion yen ($1.04 billion) in the just completed year.

On the other hand, the company recored an 11.6 billion yen ($104.6 million) equity loss which has already been deducted from the operating income and if that’s added back in, it puts operating income at 127.2 billion yen ($1.147 billion) which is almost the same as the 127.8 billion yen ($1.152 billion) in operating income recorded last year. But wait, last years operating income also needs to be adjusted downward by 10.5 billion yen ($94.7 million) from 127.8 billion yen ($1.15 billion) to 117.3 billion yen ($1.06 billion) also needs to be adjusted downward by 10.5 billion yen ($94.7 million) from 127.8 billion yen ($1.15 billion) to 117.3 billion yen ($1.06 billion) because it enjoyed a one-time gain from a 2017 fourth quarter sale of a building owned by the Japanese music operation. With those adjustments, operating income had a 8.4 percent increase from the prior year.

Also, on the plus side, the company's recorded music streaming business enjoyed 15.2 percent growth and a 30 billion yen ($271 million) gain in revenue for the recorded music operations, to help it reach total sales of 227.5 billion yen ($2.05 billion) from 197.44 billion yen ($1.78 billion) in the prior year, but that wasn't enough to offset the decline in physical and download sales.

With physical sales losing some 45.5 billion yen ($411 million) to finish the year with 89.6 billion yen ($807.8 million) in revenue, and downloads losing 10.5 billion yen ($95 million) in sales with revenue falling to 39.3 billion yen ($354.1 million) from nearly 50 billion yen ($450 million), overall the sales model suffered a 56 billion yen ($506 million) revenue drop in its recently completed fiscal year.

Consequently, when the streaming gain is offset by the larger sales decline, its recorded music operations experienced a 4.5 percent decline to nearly 427 billion yen ($3.85 billion) from nearly 447 billion yen ($4.03 billion) in the prior year.

Looking just at the music segment’s fourth quarter, Sony reported 211. 8 billion yen ($1.92 billion,) a 2.6% increase over the 206.4 billion yen ($1.9 billion) it reported in the first three months of the prior year. While operating income fell to 21.8 billion yen ($197.5 million) from 30.9 billion yen ($285.13 million), that’s because the prior year’s fourth quarter numbers was inflated by the previously mentioned building sale.

Looking at other revenue, the recorded music operations posted 70.5 billion yen ($636.5 million) from things like licensing, including synchronization, and other activities. That represented a 9.3 percent increase from the 64.6 billion yen ($582 million) tallied in the prior fiscal year. 

As a percentage of revenue, the recorded music operation now derives its income 55.3 percent from streaming, versus 44.2 percent in the prior year; while physical fell to 21 percent of revenue from 30.2 percent; downloads fell to 9.2 percent from 15.3 percent of revenue; and other income streams comprise 16.5 percent, up from 14.9 percent of revenue.

Moving into the publishing operations, Sony/ATV and Sony Music Japan's publishing units posted a combined 106.7 billion yen in revenue ($962 million), a 43.5 percent gain from the prior year total of 74.4 billion yen ($670.5 million), thanks to the company's ability to book all EMI revenue from the November acquisition through the end of the fiscal year. 

Finally, the visual media/platform (mobile games applications based on animation titles) saw sales decline slightly 261.4 billion yen ($2.36 billion) from 263.5 billion ($2.38 billion). During a presentation in Japan for institutional investors, Sony Corp. chief financial officer Hiroki Totoki, referring to that segment, said operating income generated from mobile game applications accounted for a little less than 20% of the operating income of the segment and was essentially flat year-on-year. 

If the latter segment is subtracted, Sony’s overall music operations -- recorded music and music publishing -- had combined revenue of 533.6 billion yen ($4.81 billion). But that total doesn’t include all the revenue from its indie operation, The Orchard. Sony accounts for The Orchard under the agency standard and consequently only reports the fees that division collects from its label clients for its distribution, marketing and reporting services -- not the overall revenue collected from their music sales and streaming activity. Billboard estimates The Orchard had about $700 million in global revenue last year. If it had a blended fee rate of 15% for its various services, that would mean Sony booked about $100 million in revenue from that revenue and -- if all the Orchard’s revenue collections were counted -- would place the company’s music operation total revenue collections at about $5.4 billion last year.

This story uses an exchange rate of 110.9 yen per dollar for both fiscal years. Going forward, the company projects that its music operations will have 830 billion yen and 135 billion yen operating income for its fiscal year ended March 31, 2020.

The Sony Corp. parent reported 707.7 billion yen ($6.28 billion) in net income on total revenues of 8.666 trillion yen ($78.14 billion) as compared with the prior year when net income was a little more than half that at 379.8 billion yen ($8.4 billion) on revenues of 8.544 trillion yen ($3.4 billion).