Recorded music revenue dropped 8.5 percent, fueled by a 38 percent dip in physical sales and accounting changes.
In its fiscal third quarter results, Sony music operations saw revenue decline but operating income increase dramatically thanks to the closing of the EMI Music Publishing acquisition.
For the fiscal quarter ended Dec. 31, Sony music operations, which includes Sony Music Entertainment, Sony/ATV, Sony Japan and the mobile-game dominated Visual Media/Platform, reported 147.1 billion yen ($1.3 billion) in operating income on revenue of 209.35 billion yen ($1.854 billion). That's an improvement on the year earlier corresponding quarter when operating profit was 39.34 billion yen ($348.16 million), or an increase of nearly $1 billion thanks to a change in accounting due to the EMI acquisition. Previously, Sony used the equity method, meaning it only took credit for its share of the company but it switched to the acquisition method, taking credit for all of EMI's results in its operating profit numbers.
Without that gain and 5.2 billion yen in related expenses that also occurred due to the acquisition, the music operation would have posted 35.4 billion yen ($313.2 million) in operating profit, or a 10.1 percent decline from the 39.34 billion yen ($348.16 million), Billboard calculates. Consequently, operating margin would have been reduced to 16.9 percent of revenue from 18 percent of revenue in the year earlier corresponding period.
Meanwhile, even though streaming is growing the overall global revenue, Sony showed a decline in revenue with it attributes to a change in how it books sales, with that change only reflected in this year's numbers, while last year's numbers were not adjusted. Consequently, the music operation and the visual media/platform experienced a 4.2 percent revenue decline to 209.35 billion yen ($1.854 billion) from 218.43 billion yen ($1.933 billion) for the quarter due to a change in how it books sales. Sources within the company say that while U.S. recorded music revenue is down due an off cycle release schedule, they say that is offset by a gain in international recorded music revenue and overall increase in publishing revenue; and they claim that the overall decline is due solely to the accounting change, something that CFO Hiroki Totoki acknowledged in his presentation to Wall Street analysts, according to a transcription of that presentation available on the Sony Corp. website.
"This decrease [4.2 percent for the overall music segment] was due to a decrease in recorded music sales, primarily resulting from the impact of a new accounting standard, and a decrease in sales from a mobile game application, partially offset by an increase in music publishing sales, primarily resulting from the positive impact of the consolidation of EMI," Totoki said, according to the transcript.
Breaking out revenue by segment, recorded music generated 117.35 billion yen ($1.039 billion), which is 8.5 percent down from 128.24 billion yen ($1.135 billion); music publishing totaled 30.374 billion yen ($269.03 million), a 65.7 percent increase over the 18.344 billion yen ($162.3 million); while the visual media/platform suffered a 15 percent decline to 57.56 billion yen ($509.86 billion) from 67.69 billion yen ($599.06 million).
Looking solely at music, publishing gained about $106 million in revenue, due to recognizing all EMI Music Publishing revenue since the acquisition was completed. Moving over to recorded music, streaming grew 12.8 percent to 62.67 billion yen ($555.1 million) from 55.54 billion yen ($491.5 million). Overall, that means streaming now comprised more than half of recorded music revenue, 53.4 percent to be exact; and that's up from 43.3 percent last year. Looking at the other configurations, downloading continues its decline, falling 23 percent to 9.816 billion yen ($86.8 million) from 12.75 billion yen ($112.85 million).
While physical sales have been declining in the U.S. for awhile, their decline has been much slower in the rest of the world, but according to Sony's numbers that all changed this year. During the third quarter, physical was down a whopping 37.9 percent to 27.14 billion yen ($240.36 million) from 2017's third quarter revenue total of 43.66 billion yen ($386.4 million). To put that in perspective, 2017's third quarter numbers were only down 2.9 percent from 2016's total revenue of 44.96 billion yen ($387.67 million). Finally, looking at other revenue streams, they produced 17.727 billion yen ($157.1 million), an 8.8 percent increase over the 16.3 billion yen ($144.1 million) garnered in 2017's third quarter.
As a percentage of overall revenue, physical fell to 23.1 percent of revenue from 34 percent in 2017's third quarter revenue, while downloading fell to 8.4 percent from 9.9 percent and other income streams grew to 15.1 percent of revenue from 12.7 percent. When downloading and streaming are combined, digital at 72.5 billion yen ($647.05 million), comprised 61.8 percent of revenue in the third quarter, up from 53.3 percent when it was 55.5 billion yen ($491.5 million) in the third quarter of 2017.
Getting back to overall recorded music sales, Sony said that its big sellers this year were Travis Scott's ASTROWORLD, Bob Dylan's More Blood, More Tracks: The Bootleg, Little Mix's LM5, Pentatonix's Christmas Is Here!, Khalid's Khalid Releases, Bruce Springsteen's Springsteen on Broadway, Luke Combs' This One's for You, and Lil Peep's Come Over When You're Sober, Pt. 2. Internationally, it cited Patrick Bruel's Ce soir on sort… and in Japan, Kenshi Yonezu's Flamingo / TEENAGE RIOT, Kana Nishino's Love Collection 2 and Tomohisa Yamashita's UNLEASHED.
Looking at Sony music operations performance year to date, for the nine-month period ended Dec. 31, 2018, Sony posted 594.67 billion yen ($5.345 billion) in revenue, which means that the company had a slight 0.2 percent increase over 2017's nine-month revenue total of 593.57 billion yen ($5.311 billion).
While operating income increased dramatically to 210.7 billion yen ($1.894 billion) from 96.88 billion yen ($896.2 billion), most of that was due to how Sony is treating the closing of the EMI's deal in its third quarter, moving from accounting with the equity method to the acquisition method. That resulted in a gain of 116.94 billion yen ($1.05 billion), but it also incurred some expenses related to the acquisition due to the the payout of warrants and the management stock plan. Overall, Sony's music operation picked up a whopping $1.05 billion in operating profit due to the EMI acquisition, but even without that gain Sony's operating income increased for the nine-month period to about 104.8 billion yen ($941.6 million) from 96.88 billion yen ($866.9 million), an 8.1 percent gain, Billboard estimates. Moreover, for the nine-month period, operating margin improved by over a full percentage point to about 17.6 percent versus 16.3 percent of revenue in 2017, Billboard further estimates.
Looking at earnings before interest, taxes, depreciation and amortization without the gain, that also fell slightly to 108.7 billion yen ($986.84 billion) from 111.53 billion yen ($997.95 billion), Billboard calculates.
Breaking out revenue by segment, recorded music posted a 1.4 percent decline to 332.55 billion yen ($2.99 billion) from 337.24 billion yen ($3.02 billion) due to the accounting change on the way it books revenue. The Visual medium/platform (largely mobile games) almost held steady at 189.5 billion yen, down 0.4 percent from 190.25 billion yen.
Music publishing, which includes Sony/ATV and now all of EMI as well as the publishing operation of Sony Japan shows publishing revenue of 71.72 billion yen ($644.65 million), up 31.1 percent from the 54.69 billion yen ($489.4 million). While that represents an increase of 16.03 billion yen ($144 million), 10.451 billion yen ($93 million) of that is attributed counting all of EMI's revenue for the quarter. Without that accounting change, music publishing still increased by $51 million, about a 10 percent increase.
In another development, the Sony/ATV and the Sony Japan publishing operation portions of the catalog have declined by about 140,000 songs in the past year, with a net loss of 130,000 songs, leaving the combined Sony/EMI catalog now at 4.36 million. Sony didn’t immediately respond to a request for comment.
Breaking out recorded music by revenue, digital grew by 9.3 percent to 202.23 billion yen ($1.82 billion) from 184.96 billion yen ($1.655 billion). Within that, downloads were down 20.3 percent to 30.3 billion yen ($272.16 million) from 38 billion yen ($340 million), while streaming grew 17.6 percent to nearly 172 billion yen ($1.55 billion) from 146.3 billion yen ($1.3 billion). Overall streaming now comprises 53.4 percent of revenue, up from 43.44 last year.
As in the third quarter, physical overall is down 33.2 percent to 70.05 billion yen ($629.6 million) from nearly 105 billion yen ($938 billion) and now comprises 21.7 percent of recorded music volume, down from 31.1 percent. Other revenue totaled 50.3 billion yen ($452 million), up 5.9 percent from 47.4 billion yen ($425 million).
For the full year ending on March 31, 2019, Sony is still forecasting 820 billion yen ($7.37 billion) in total revenue and 230 billion yen ($2.07 billion) in operating profit.