In fact, it has already prompted Warner Music Group to reconsider its own market value as it prepares to make an initial public offering, although the current macro-economics of the overall stock market -- sliding downwards due to uncertainty of the coronavirus on the global economy -- may also have say in how a potential WMG stock offering is priced. Meanwhile, if Billboard applied the same 30 times multiple to Billboard’s estimated $31 million in EBITDA for the Swift catalog, it would be worth $930 million. But that’s likely not a realistic valuation as industry financial sources point out that Universal is the dominant music industry company with a complex suite of synergistic assets so its trading at a premium over what almost any other music asset could get. EBITDA multiples are not the only financial modeling tools that music assets trade on.
Using multiple barometers employed by music industry investors, Billboard estimates that the Swift catalog now has about a $400 million-$450 million price, which suggests that Braun scored quite a deal in buying Big Machine. Ithaca Holdings and Swift’s team both declined to comment for this article, and sources have said that two sides are not in negotiations on such a deal. Here’s how we modeled our analysis, without knowing the specifics of Swift’s recording contracts.
Billboard constructed a four-year revenue model using sales and streaming data for both Big Machine’s and Taylor Swift’s catalogs to come up with U.S. estimated revenue for both, and then extrapolated global revenue. From 2015 to 2018, Billboard estimated that Big Machine averaged about $98 million in revenue annually, its lowest point, in 2016 at $68 million, was the sole year without a new Swift album. Its high point was the following year, 2017 at $121 million, when Swift released Reputation. During those four years, Swift’s catalog raked in an average of $53 million per year for Big Machine, accounting for more than half of the company’s total annual revenue. Sources familiar with Big Machine’s financials confirm that Billboard’s estimates are in the ballpark.
With Swift’s catalog as its crown jewel, Big Machine’s earnings before EBITDA amounted to about 40% of revenue, according to informed sources. While major record labels financial sources are skeptical of that claim, pointing out that their labels typically average EBITDA closer to 14% to 19% of revenue, indie-label financial executives say that without major-label infrastructure, it’s not unusual for successful indie labels to yield an EBITDA that amounts to 30% of revenue. Given that, Big Machine’s 40% rate of EBITDA may have been possible thanks to outsized sales and streaming activity from one of the industry’s biggest stars -- Swift.
Applying the 40% rate to Big Machine’s average revenue of $98 million means the label’s average EBITDA was about $39 million, which means that Braun bought the label for about 8 times EBITDA. That looks like an incredible bargain now, compared with the 30-times-EBITDA multiple UMG traded at. UMG’s just-announced financials for 2019 show EBITDA at 1.247 billion euros ($1.41 billion) in EBITDA, which translates into a 24 times multiple valuation for UMG. But a three-year UMG EBITDA average -- one of the formula’s used in pricing music assets -- brings the valuation multiple back to a nearly 30 times multiple.
Borchetta fared well in the Ithaca deal, too. First, even before he struck the Ithaca deal, he had walked away from offers that sources said ranged from $185 million to $200 million back in 2015 when Big Machine first went up for sale. Consequently, he managed to raise Big Machine’s pricing by about $100 million, but the Ithaca deal also gives Borchetta some of Ithaca’s equity, which gives the Big Machine founder an opportunity at another big payday that probably helped Braun seal the deal. Swift, though, whose hits built Big Machine into one of the strongest independent labels, remains the only major player involved in the deal publicly unhappy with it. When she was openly complaining about not getting a chance to buy back her albums, sources then suggested she wanted the opportunity for a deal on par with what Braun paid in buying Big Machine.
Based on the purchase price of Big Machine, and the fact that her catalog generated an average of 54% of Big Machine’s revenue, she might feel $162 million is a fairer starting offer for her work. But that number doesn’t take into consideration that Swift’s catalog is undoubtedly more profitable than the rest of the Big Machine catalog, and thus more valuable. That’s because the other artists, especially newer artists, on the label require a much bigger marketing spend to make them hits.
To be sure, Swift gets a superstar marketing budget, which means Big Machine probably spent more on marketing her music on a dollar basis than anybody else. But as the label’s top artist and biggest revenue generator, that means her marketing costs, as a percentage of revenue, are likely much smaller than the rest of the label. Because of that, the Swift catalog probably provides a much greater percentage of profit than the rest of the catalog. If, as estimated, Swift’s catalog brought in an average of $53 million annually from 2015 to 2018, and if we estimate her royalties at a blended 30% rate after packaging recoupments to reflect a low 22% rate for physical sales and maybe a 40% to 50% mega superstar royalty rate for streaming, that would leave her with about $16 million in royalties. After the label recoups its studio costs, that probably leaves Swift with about $14.5 million in royalties on average per year. Now let’s look at Big Machine’s costs for marketing Swift.
In a year when Swift is releasing an album, industry sources suggest -- based on their own costs for marketing superstar artists -- that Big Machine spends another $7.5 million on marketing and the elaborate packaging her physical albums receive. That would put the label’s overall cost for Swift at about $22 million. When those costs are subtracted from the $53 million in revenue that her catalog generates, that leaves Swift’s catalog contributing $31 million of Big Machine’s $39 million in EBITDA and the rest of the catalog generating just $8 million in profit.
This analysis doesn’t account for her share of the label’s overhead -- but while overhead is important when valuing a label, it’s a moot point when looking at a single artist catalog acquisition. Braun’s Ithaca and minority partner the Carlyle Group, meanwhile, would likely seek a profit if a deal were struck to sell Swift back her catalog. And as sellers, they would be much more likely to value her catalog on profitability instead of revenue. Prior to the UMG deal, recorded music assets were typically trading at a 15 to 20 times EBITDA multiple, says one savvy buyer of music assets, who considers that UMG deal an outlier and suggests that at most music assets should now trade at a 20-25 times EBITDA multiple. At a 25 times EBITDA multiple, that would value Big Machine at $975 million and Swift’s portion at $775 million. Were the two camps to meet in the middle on pricing Swift’s Big Machine catalog -- between yesterday’s pricing of $162 million and today’s pie in the sky valuation of $775 million -- $450 million might be a reasonable starting point for negotiations.
One fly in the ointment for whomever owns Swift’s master recordings is that the superstar has a strategic card to play: Swift owns, and therefore controls, the publishing of all of her songs. She could ostensibly stymie Ithaca/Big Machine when they pursue synchronization deals for her master recordings. With her plans to re-record her catalog, she could withhold publishing permission for synch deals unless the licensee agreed to use her re-records. Moreover, another way she could divert revenue her way -- a good chunk of whatever physical sales occur going forward would likely happen at her concerts; and there once again, she would likely only offer her re-records for sale, not the original recordings.
One observer notes that re-records of albums made when she was still a teenager could have their own commercial appeal now that those songs will be performed by a woman with a more mature vocal sound. But in a world where streaming is growing and CD sales are shrinking, new releases of old Swift recordings might at the same time also actually boost streaming of the original catalog: new releases are already juicing catalog streams for many acts today.
Yet, Swift could still play one more card, putting together a marketing deal with digital services to entice them to highlight her re-records over the original recordings. Given the possible commercial viability of the re-records, Billboard discounts the Swift catalog to about a $400 million price tag. That is probably short of Ithaca’s expectations and probably way more than Swift would want to pay. Braun said in mid-November on Instagram that he is open to all possibilities. It remains to be seen whether Swift will start the bidding -- before prices go any higher.