Coronavirus

Enter the Metrics: Data for May and June to Shed Light on How COVID-19 Will Impact the Music Biz

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With the country caught in an unprecedented pandemic, music industry trend-watchers can look to a few metrics to cut through the noise of constant coronavirus coverage, improve their forecasts and make tactical decisions.

Music is often said to be recession-proof; in the next couple years we may find out if music is also depression-proof; but over the past month, music has proved not to be pandemic-proof: live events, the prime revenue source for many musicians, abruptly stopped in March. As for recorded music, the next two months will shed light on how joblessness will affect subscriptions and what to expect from ad-supported streaming services while brands pull back ad spending.


Key Takeaways 

1. Look to Spotify's earnings report for clues about how streaming and subscription revenue hold up in 2020 and continue to grow the market.

2. Music companies' earnings reports for last quarter will be rare opportunities to hear executives' comments on the music marketplace. Will their thriving businesses continue to grow or stall?

3. GDP growth and the unemployment rate sum up the U.S. economy: the value of goods and services produced is down, unemployment is up and companies are going out of business. 


Upcoming earnings releases will have insights into specific companies' performance in the United States. Spotify, Live Nation, The Madison Square Garden Company, SiriusXM, Vivendi and Warner Music Group will issue earnings in late April or May and answer analysts' questions during an earnings call. Two companies have announced dates for their earnings releases: SiriusXM on April 28 and Spotify on April 29.

Macroeconomic metrics such as the unemployment rate and gross domestic product are worth watching because they reflect the direction of the U.S. economy. They're in the news frequently and easy to understand: a change in one direction is good, a move in the other is bad. The unemployment rate is one of the basic metrics to watch. Because of the coronavirus and the need for social distancing, never in U.S. history have so many people become jobless in such a short period. Gross domestic product is the cornerstone of the U.S. economy. There is no shortage of news reports on GDP forecasts for the first quarter, second quarter and the full year.

Modern history offers little guidance for the music business. The financial crisis in 2008 caught the record business in a transitional period with falling sales -- download revenues were less than lost CD sales -- and inflicted little damage on live business. The dot com bust of 2000-2001 arrived at the peak of CD sales and recorded music revenues' all-time high. Recessions in 1982 and 1992 were small by comparison to the upheaval caused by the coronavirus. Aside from occasional news items -- acquisitions, bankruptcies, layoffs, etc. -- follow these metrics to better understand what's happening and how the pandemic could affect your business.   

Spotify subscriptions and free listeners

Spotify's first-quarter earnings, to be released on April 29, will give a glimpse of the coronavirus pandemic's impact on subscription revenue. The two other major players, Apple and Amazon, don't give quarter-to-quarter metrics for their subscription services, leaving Spotify to signal which way the winds are blowing.

Unfortunately, little will be gleaned from a subscriber count on March 31, only one month after economies started to falter in many of Spotify's most important countries: the U.S., the U.K., France and Germany. And because of a natural lag time between unemployment and personal budget changes, subscriber count on March 31 could reveal little change in consumers' reaction to governments' shelter-in-place orders.

But Spotify will probably update investors on listener metrics for April -- analysts are sure to ask about them. With one in 10 Americans now out of work, some consumers may have started to scrutinize their budgets and decide which expenses to keep and cancel. They might have started pruning their video subscriptions: last year, in the pre-coronavirus U.S., the average consumer was content with about three video-on-demand subscription services, according to Deloitte. Of course, consumers need only one subscription service to access an nearly unlimited amount of recordings, giving services some insulation from lost customers. But free, ad-supported services from Spotify, YouTube or Pandora may gain some listeners who cancel subscriptions.

Music subscription companies should pay attention to the perceptions of their most valuable users. According to MusicWatch, more educated people — the least likely to be unemployed during a recession —  are the most likely to feel like COVID-19 has changed their lives in a major way: 61% for postgrad, 54% for bachelor's degree, 43% some college and 35% high school degree or less.   

Streaming and subscription revenues

Music is said to be countercyclical, meaning its rises and falls do not correlate with larger economic swings; publishing assets are particularly prized for their stability. Some upcoming earnings reports will provide clues about music's ability to withstand the most severe economic downturn since the Great Depression.

Three music companies will provide numbers for U.S. recorded music and publishing revenues, Vivendi, the owner of Universal Music Group: Warner Music Group; and Bertelsmann, owner of BMG. Vivendi usually provides UMG's revenue and earnings (before interest, taxes and amortization) and streaming numbers. Bertelsmann provides little financial information on BMG but should comment on market conditions. WMG's financial statements provide greater detail into streaming and subscription revenues by region (North America, rest of the world) and division (recorded music, publishing). Executives of both companies are sure to address some concerns about the coronavirus during their earnings calls.    

Concert promoters' earnings, April update and 2020 guidance

Two U.S.-based publicly traded concert promoters will release first quarter earnings in May: Live Nation and The Madison Square Garden Company. Both earnings releases will provide valuable insights into the financial damage inflicted on the U.S. concert business by the pandemic, shelter-in-place orders and government-mandate business closures.

First-quarter metrics such as revenue, cash flow and attendance won't tell the story of the U.S. live music business. After all, concerts were postponed starting in mid-March and the first quarter is the slowest of the year. The important information for Live Nation will be the company's outlook for its three divisions: concerts, sponsorship & advertising, and Ticketmaster.

Given that 2020 is a chaotic mess of cancellations and postponements, Live Nation executives' answers to analysts' questions could also provide valuable insights. But, again, it depends on what Live Nation is willing to say given market and economic uncertainties.

Finally, Live Nation could -- and typically does -- provide year-to-date metrics through mid-April. Judging from previous quarters, MSG is unlikely to disclose more than its entertainment division's revenue and operating income for the quarter only.

Digital advertising

The direction of the digital advertising business impacts about 10% of U.S. streaming revenues and 9% of digital revenue (based on 2019 figures collected by the RIAA). Looking at multiple data points shows ad revenue is pulling back, about four in five ad buyers are making tactical shifts, and some ad buyers are shifting their focus to more targeted ads.

A new IAB study of about 400 buy-side decision-makers found three in four ad buyers are expecting the coronavirus pandemic to have a greater impact than the 2008 financial crisis. As a result, in the short term, 33% are spending less on digital ads while 39% are spending less on traditional media. Digital ad buyers expect to spend 38% less than budget in March and April. After an increase in May and June, spending will still be 28% below budget.

But advertisers will put a greater share of their spending on services that target ads based on specific consumer data points and characteristics: a greater number of buyers will increase spending on audience targeting, programmatic ads and local geotargeting. Fewer advertisers plan to spend dollars on less-targeting options such as news publishers and national geotargeting.

Opening the economy and social distancing

Two questions arise now that COVID-19 deaths are peaking: when will businesses open and for how long will social distancing be required to ensure the public's safety? Right now, groups of states are coordinating to allow businesses to open simultaneously. But states on the West Coast states and the Northeast won't necessarily open at the same time

Nearly all COVID-19-related deaths will occur by May, according to models by the Institute for Health Metrics and Evaluation. But the IHME's model assumes social distancing will be adequate to prevent a second wave of infections, a trend currently seen in three areas previously rid of the COVID-19 outbreaks, Singapore, Hong Kong and Wuhan, China.

With businesses still closed and social distancing a part of everyday life, venues are in a tenuous position. Billboard's Q&A with Steve Severin, owner of the 650-capacity Neumo's in Seattle, offered a grim outlook: the CARE Act stimulus package will provide a lifeline, he said. "There is no doubt that we need that or we don't survive."

So it could be "a long, long time" until large crowds gather to hear live music, to borrow a Bernie Taupin phrasing from Elton John's "Rocket Man." An official in Santa Clara County in Northern California does not expect sports events before Thanksgiving, implying the NFL and NHL seasons would start late and mass gatherings would not take place at Levi's Stadium and the The SAP Center, home of the San Jose Sharks hockey team, until December The SAP Center has scheduled concerts running through 2020, including Harry Styles on Aug. 25 and Enrique Iglesias & Ricky Martin on Sept. 22.

Unemployment rate, joblessness and gross domestic product

Three common metrics give a wide view of the economy: the unemployment rate, joblessness and gross domestic product.

In the United States, jobless claims rose 22 million in four weeks after stay-at-home orders caused a record-setting surge of layoffs. Moody's economists believe "that the level of unemployment claims is unlikely to recede in the coming weeks."

A record-setting 16 million jobless claims were filed in the United States in the two weeks ending April 4, pushing U.S. unemployment from 3.3% to 4.4%, according to the Bureau of Labor Statistics. But some economists say the unemployment rate is already over 10% when all unemployed and furloughed workers are included.

Some authoritative voices have dismal second-quarter forecasts: Goldman Sachs estimates 15.7% unemployment and 21 million lost jobs. Nobel laureate economist Paul Krugman predicts 20% unemployment. A 45-member panel surveyed by the National Association of Business Economics had a media projection of 12% in the second quarter, according to a report issued Friday.

Not all lost jobs are going to return immediately and bring back consumer spending on music and concerts to their pre-coronavirus levels. NABE economists' median predictions for the unemployment rate are 9.5% by the end of 2020 and 6% at the end of 2021. Obviously, these numbers are wildly different than expectations before the pandemic: at the beginning of the year, the NABE economist panel outlook was GDP growth from 2.1% to 3%.

A country's gross domestic product, a measure of total goods and services produced, is an important indicator of companies' health and consumers' spending. The NABE survey of 45 economists found the media forecast for second quarter GDP was a 26.5% decline followed by growth rates of 2.3%, 5.8% and 6% in the following three quarters. JP Morgan economists now estimate a 40% decline in GDP in the second quarter.

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