Coronavirus

Sony's Music Operations Post Nearly 40% Gain in Operating Income as Streaming Revenue Surges

Harry Styles
Kevin Mazur/Getty Images for iHeartRadio

Harry Styles performs live on stage at iHeartRadio Secret Session with Harry Styles at the Bowery Ballroom on February 29, 2020.

Though COVID-19 had little impact on its latest earnings, Sony’s filing includes a note that appears to estimate music operating income this year will be off about 25%-40% due to the downturn.

Sony Corp.'s music segment saw a strong rebound in operating income to ¥30.34 billion yen ($278.3 million) for its fiscal fourth quarter ended March 31, which represented a 39.3% gain from the ¥21.79 billion yen ($197.52 million) posted in the corresponding period in the company's fiscal 2018 year.

With the COVID-19 pandemic beginning in most countries in March, it appears to have had little impact on the fourth quarter performance of Sony's music operations. For the full year, the company estimated that music operations might have lost 1% in revenue due to the pandemic.

But looking ahead, the company says that physical titles and merchandising have been weakened in its second quarter by the pandemic, while also saying new releases had been delayed; and that music licensing revenue would probably be off due to a reduction in advertising spends and curtailed production of film, TV and commercials.

"The release of new music is being delayed primarily because some artists are unable to record songs and music videos," Sony Corp. CFO Hiroki Totoki said, according to a transcript posted on the company's website of its conference call with Wall Street analysts. "The impact of the delays in new music is limited at this time in countries like the U.S. where the proportion of music that is streamed is high. But in countries like Japan and Germany where the proportion of music that is streamed is relatively low, sales of CDs and other packaged media sales are decreasing due to restrictions on going outside."

Inching Towards $2 Billion

Music revenue was down slightly (0.6%) to ¥208 billion yen ($1.94 billion) from ¥212.8 billion yen ($1.93 billion), but that was due to weak performance in the visual medium/platform segment, which is mainly mobile gaming revenue and some tertiary music income. The latter segment experienced lower sales in its Fate/Grand Order gaming application.

Without the visual medium/platform piece, music operations actually grew 12.4% to ¥157.12 billion yen ($1.441 billion) versus ¥139.8 billion yen ($1.27 billion), largely on the strength of a 26% surge in streaming revenue.

Sony's music segment consists of Sony Music Entertainment, Sony Music Japan, Sony/ATV Music Publishing and the aforementioned visual medium/platform.

During the fourth quarter, the company cited strong activity from Harry Styles' Fine Line, Future's Future Releases, Doja Cat's Hot Pink, Jackboys' self-titled release, Ozzy Osbourne's Ordinary Man, Lil Nas X's 7 EP, Travis Scott's ASTROWORLD, Luke Combs' What You See Is What You Get, Camila Cabello's Romance, Khalid's Free Spirit, and in Japan King Gnu's Ceremony and a few titles from Nogizaka46.

Getting back to its operating income, that performance means that the segment's operating margin improved more than four percentage points to 14.6% of revenue, as compared with the 10.3% the segment tallied in 2018's fourth quarter. Moreover, 2019's performance brings the music unit back to 2017 levels when it had 30.91 billion ($285.13 billion) in operating income, or a 15% operating margin.

A Stormy Forecast

Looking ahead, Sony didn't forecast its fiscal guidance for music's sales and operating income for 2020, as it usually does at year-end. Instead, it will probably do so at the end of the fiscal second quarter after its operations have had more experience in dealing with the economic recession caused by the pandemic.

But even through it didn't forecast 2020's music revenue, its filings included a paragraph that appeared to estimate that music operating income this year will be off about 25% to 40% from its 2019 results due to the downturn.

Breaking out the music operations, the company said recorded music garnered revenue of ¥117.05 billion yen ($1.44 billion), a 12.1% increase over the ¥104.4 billion yen ($946.3 million) the company tallied in the fourth quarter of 2018; while music publishing posted revenue of ¥40.07 billion yen ($367.6 million), a 13.2% increase over the ¥35.4 billion ($320.9 million) accumulated in the year-earlier period.

Within recorded music, streaming grew nearly 26% to ¥69.95 billion yen ($641.7 million), but physical also grew to ¥21.4 billion yen ($196.3 million) from ¥19.5 billion yen ($177 million), a 9.6% gain. Meanwhile, downloads were down 4% to ¥8.63 billion yen ($79 million) from almost ¥9 billion yen ($81.5 million) and other income streams like synchronization and merchandising fell nearly 16% to ¥17.1 billion yen ($157 million) from ¥20.3 billion yen ($184 million).

As a percentage of revenue, that breaks out to 59.8% for streaming and 7.4% for downloads, which means digital totals 67.1%; while physical is at 18.3% and other is now 14.6%.

This story uses ¥109 yen to the dollar for the fourth quarter of 2019 and 110.3 yen to the dollar for the fourth quarter of 2018, as denoted in Sony's financial results. For the full year, the exchange rate used is 108.7 yen to the dollar for 2019 and 110.9 yen to the dollar for 2018.

Panning Out to View the Full Year

For the full year, Sony’s music segment produced ¥142.35 billion yen ($1.31 billion) in operating income on revenues of ¥838.35 billion yen ($7.82 billion). While that represents a 5.3% increase in revenue from the prior year’s total of ¥807.5 billion yen ($7.3 billion), operating income was down 38.8% from ¥232.5 billion yen ($2.1 billion) but that was due to an extraordinary gain in fiscal 2018 from the EMI Music Publishing acquisition.

Without the gain from the consolidation of the EMI acquisition, operating income in 2018 would have been ¥127.2 billion yen. So when compared to 2019’s operating income of ¥142.35 billion yen, that produced a 23% gain. So when compared to 2020’s operating income of ¥142.35 billion yen, that produced a 11.9% gain.

As a percentage of income, that means the company's music segment produced an operating margin of 17% for 2018, which is up from 2018's 14.3% operating margin — again not counting the gain from the full EMI acquisition in operating results.

As in its quarterly results, the visual media/platform dragged down the music segment’s performance. Without that operation, music revenue would have totaled 624.63 billion yen $5.75 billion, a 17.1% increase over the prior year’s total of 533.59 billion yen ($4.81 billion).

Breaking out results by operation, recorded music totaled ¥467.15 billion yen ($4.3 billion), a 9.4% increase over the ¥426.93 billion ($3.85 billion) in the prior year; while the music publishing operations produced ¥157.5 billion yen ($1.45 billion). Drawing a comparison to the prior year is meaningless because Sony didn't own 100% of EMI Music Publishing for all of 2018, only part of the year, so the company's publishing operation only booked ¥106.7 billion yen ($962 million) in revenue in fiscal 2018.

Looking at recorded music by channel, physical formats were flat at about ¥89 billion yen ($822 million), while downloads fell 11.8% to ¥34.65 billion yen ($329 million) from ¥70.6 billion yen ($636 million); and other revenue, which includes merchandising and synchronization among other income streams, totaled ¥67.1 billion yen ($617.5 million) down 14.4% from ¥70.6 billion yen ($636.5 million).

That means streaming now comprises 59.1% of recorded music revenue and downloads 7.4%, leaving digital with 66.5% in total; while physical is now 19.1%, and other categories, 14.4%.

Moreover, Sony's total music results only includes part of the revenue from the Orchard, its independent music distribution operation, because Sony uses the agency model when accounting for that operation. That means it only count the fees the Orchard's independent label clients pay to the company, not the total revenue it collects from retail accounts and digital services. Billboard estimates that in 2019 the Orchard's revenue was about $700 million; and after subtracting about $160 million in fees, that leaves another $540 million in revenue. When that is added in, that means Sony's total music operation collected about $6.3 billion in revenue in 2019.

For the full year, in addition to the records cited for the fourth quarter, Sony also cited Chris Brown's Indigo, Tool's Fear Inoculum, P!nk's Hurts 2B Human, and Tyler The Creator's IGOR, as driving revenue for the company.

Meanwhile, the parent Sony Corp. didn't fare as well as the music operation. For the year, the company produced net income of ¥582.2 billion yen ($5.36 billion). That compares with fiscal 2018 when net income totaled ¥916.3 billion yen, ($8.26 billion).

While the company declined to give an outlook for the current fiscal year, Totoki said, "we cannot reasonably predict the impact of the spread of the coronavirus disease, including when it will diminish."

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