The only questions these investors face are, how long will the industry’s current growth phase last? And are they coming in too late to make a killing, as pricing multiples in the last 18 months already hit what many considered unreasonable stratospheres, as compared to the levels during the peak for music-asset trading back at the end of the first decade of the new millennium?
Nowadays, plenty of Wall Street investors are seeing streaming growth as far as the eye can see. Others are less optimistic, but still project robust growth for at least the next 5 to 10 years.
But at what price? Music publishing trades on multiples of net publisher share (NPS, also known as gross profit), while record labels generally trade on EBITDA multiples. (Some deal-makers are also starting to look at net label share, too, particularly when the buyer is strategic and can rely on economies of scale that significantly reduce or eliminate overhead costs associated with acquisitions.)
As such, music-publishing assets with iconic catalogs are currently trading at multiples anywhere between 15- and 22-times NPS, while a prime record label like Big Machine was expected to attract a more than 10-times NLS. Until recently, 8-times NLS multiples had been more the norm.
In looking at label pricing from an EBITDA viewpoint, the music industry has come a long way from the 1990s, when labels used to trade on a combination of looking at 3- to 4-times EBITDA or double the label's annual revenue. Nowadays, 12-times EBITDA is considered the minimum going price for most catalogs, while one industry dealmaker says Big Machine could easily have commanded a 15-times EBITDA multiple.
On the other hand, points out Lisa Alter of Alter Kendrick & Baron, who often engages in deal making regarding asset acquisitions and sales, corporate assets usually trade at lower EBITDA multiples than deals looking at specific catalog assets.
Coming into the music industry while multiples are as high as they are now adds a dangerous element to investments, say more conservative music-asset traders.
“I would ask, is Wall Street late to the party?" says one music-asset trader. “Some of the companies that are already here are buying stuff with multiples in the high teens and even 20-times NPS, thinking that streaming growth will bake itself into their economic models.”
But not every song or record in a catalog will grow at, for example, 5% every year just because of the pace of industry growth, that executive explains. Investors have to scrutinize every song or record in an acquisition and analyze each one’s growth potential against the historic performance of songs with similar commercial characteristics, he adds -- otherwise, investors might come up short in meeting their expectations.
EBITDA isn’t the only multiple assets are trading on, Alter adds: Investors also have to be familiar with other financial barometers, including decay rates, while others point out that many industry experts are still on a learning curve regarding that barometer since there isn’t even five years' worth of historical streaming data to analyze yet.
The other problem with growth expectations is exploding music inventory: currently, 1 million songs are added to streaming services every month. That translates into 1 million albums’ worth of songs each year, as compared with the 27,000 or so albums that came out each year in the mid-1990s.
While streaming may produce growth and a steady income stream, payouts per stream could still decline if each month produces more plays spread across more inventory. “That’s why you have to worry about fragmentation,” says the head of one of the companies vying to one day be considered a major. “Fragmentation is not as linear as we thought. Because of that, if the industry grows 5% ever year, you can’t expect the Pink Floyd catalog to attain 5% growth every year, because that ignores the 40-million-songs-and-growing inventory already available at digital services.
“The dynamics have many dimensions here,” that executive says, recommending caution. “You can’t just say, ‘I will buy this asset and market growth will take care of my investment.’ That would be a big mistake now.”