Breaking Down Sony Music's Strong Quarter: 21% Growth in Streaming Revenue Offsets Flat Physical Sales

Tanima Mehrotra
Lil Nas X

Sony Corp.'s music operation continues to enjoy strong profit growth driven by greater efficiencies derived from its streaming-fueled revenue increases. In its fiscal second quarter the company produced operating income of 37.48 billion yen ($349 million) on revenue of 219.3 billion yen ($2.04 billion) for the period ended Sept. 30. 

That represents a 23.5% constant currency increase over the operating profit produced in the prior second quarter when those operations produced 31.5 million yen ($282.5 million) on revenues of 203.9 billion yen ($1.83 billion), which also means that sales grew by 11.7% on a constant currency basis.

As a percentage of income, operating margin improved to 17.1% for the quarter, versus 15.5% in 2018's second quarter. As the music's operation's fixed costs shrink as a percentage of growing revenue, the company's profit picture has improved, and that has been further enhanced by the transformation of the business from physical to streaming as the latter format is more profitable.

Breaking out revenue by segment, the company's recorded music operations, which consists of Sony Music Entertainment and Sony Music Japan, generated 112.2 billion yen ($1.045 billion) in revenue for the third quarter; while publishing produced 38.41 billion yen ($357.6 million); and its visual media/platform segment, which mainly consists of mobile video gaming revenue, garnered 66.13 billion yen ($616 million). 

For recorded music, that represented a 10.5% constant currency increase over the 105.5 billion yen ($946 million) posted in q2 of fiscal 2018, while publishing nearly doubled its revenue thanks to the consolidation of the November 2018 acquisition of EMI Music Publishing revenue into its overall publishing revenue. Finally, the visual media/platform segment saw revenue decline as users interest in the Fate/Grand Order game waned.

Within recorded music, streaming revenue grew 21.4% on a constant currency basis to 66.8 billion yen ($622 million) from the year earlier corresponding period when that format brought in 57.1 billion yen ($512 million). While downloads continued to decline to 8.84 billion yen ($82.3 million) from 9.8 billion yen ($88 million) last year, Sony, like other labels, have stemmed the decline of physical formats by embracing elaborate packing that entices music fans to purchase CDs and vinyl of their favorite artists.

Consequently, physical sales were nearly flat for the quarter at 20.31 billion yen versus 20.35 billion yen but on a constant currency basis were up 3.6% to $189 million from $182.5 million in the second quarter of last year. Meanwhile, other revenue — i.e. synch, licensing, neighboring rights, merch and live—declined to 15.3 billion yen ($151.3 million) from 18.2 billion yen ($163 million). As a percentage of recorded music revenue, streaming comprised 59.5%, physical 18.1%, downloads 7.9% and other 14.5%.

During the quarter, the big revenue generators were Tool's Fear Inoculum, Lil Nas X's Panini, Chris Brown's Indigo, Khalid's Free Spirit, Daniel Kang's Color On Me, Travis Scott's Astroworld, Luke Combs’ This One's For You, Tyler The Creator's Igor, Polo G's Die A Legend, DJ Khaled's Father of Asahd, Masaki Suda's Love, and Nogizaka46's Yoake Made Tsuyogaranakutemoii, according to Sony.

For the first six months of the fiscal year, Sony's music operations produced revenues of 421.5 billion yen ($3.88 billion), up 11.2% on a constant currency basis from the 385.3 billion yen ($3.49 billion) tallied in the second quarter of 2018. Within that, recorded music garnered 224.2 billion yen ($2.06 billion), as compared with 205.2 billion yen ($1.86 billion) in the year earlier corresponding period.

Once again, thanks to operating efficiencies, operating income proved to 75.8 billion yen ($697.3 million) from 63.6 billion yen ($576.8 million), which translates into a 20.9% increase on a constant currency basis. That means operating margin was just shy of 18% of revenue, versus 16.5% in 2018's second quarter. When depreciation, amortization and other charges are added back in Billboard estimates that the overall music segment produced 90.3 billion yen ($831 million) in adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization for the first six months of fiscal 2019.

Breaking out recorded music by format, streaming totaled 133.3 billion yen ($1.23 billion); physical tallied 42.3 billion yen ($389 million) downloads 17.53 billion yen ($161.4 million); and other income streams, 31.1 billion yen ($286.3 million). As a percentage of revenue, that breaks out to 59.5% streaming, 18.9% physical, 7.8% downloads; and 13.9% other.

Meanwhile, publishing, which consists of Sony/ATV and Sony Music Japan's publishing operations, has accumulated 77.7 billion yen ($715 million) in the first six months of the year, while the mobile gaming operations have yielded 115 billion yen  ($1.06 billion).

Looking ahead, Sony has increased its forecast for the overall music operations to 850 billion yen ($7.9 billion), while projecting it will produce 140 billion yen  ($1.3 billion) in operating income. At the end of the last quarter that forecast had been 830 billion yen in revenue and 135 billion yen for operating income. It increased its forecast due to an anticipation in rising streaming revenue.

For the remainder of the year, the company said forthcoming albums from Celine Dion, G-Eazy, French Montana, Leonard Cohen, Pentatonix, Miranda Lambert, Lil Tjay, James Arthur and Lil Peep would help it achieve its revenue and profit projections.

For this story, Billboard used the Sony quoted exchange rate of 107.4 yen per dollar for the second quarter, and an estimated 108.6 yen per dollar for the six month period.


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