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Straight Talk: Consumer and Entertainment Services

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As we move towards the time that companies in the music industry start reporting results for 1Q20, all eyes and ears will be on the assessment by executives of how 2Q20 is likely to turn out. The spread of COVID-19 has brought the live sector to an abrupt halt and only the most optimistic could envision the gathering of several thousand people crammed together in front of a stage any time soon. Some of the biggest artists in the world have already written off this year and although livestreaming is booming, it’s only a stopgap and can’t replace the thrill of watching an artist in the flesh.

On the other hand, recorded music is not expected to fare in any way as badly as live. Universal Music Group’s (UMG) results for the first three months of this year were business as usual with healthy growth in streaming revenue boosting the overall company performance. Interestingly, UMG’s parent company Vivendi highlighted in its results presentation that some of its business units (Havas Group, Editis, and Vivendi Village) were affected in March by the virus crisis, but not UMG. Vivendi execs did say in the subsequent analysts briefing that it expected sales of physical formats to take a hit going forward and revenue from merchandizing to suffer from the lack of live performance. But the majority of income for UMG and the rest of the recorded music industry comes from access services such as Apple Music, Deezer, and Spotify and so confining consumers to home will have only a limited effect on streaming. Initially, the number of music streams served in some of the worst affected countries fell. For example, Deezer said engagement with the service in Italy dropped after lockdown was introduced but levelled off after 10 days or so. The initial dip was caused by a number of factors, such as a drop in the number of subscribers commuting to work, which is a popular time for listening to music. Understandably, news and information became the top listening priority for consumers, but engagement with music streaming quickly returned.

First quarter results from the other major labels are likely to replicate the performance of UMG with streaming gains continuing to offset declines elsewhere. Where the real interest lies, however, is in the performance of the labels from April onwards. To varying degrees, all of the five leading major music markets (US, Japan, UK, Germany, and France) have engaged in some form of population lockdown and so some impact on the physical sector is expected. Japan, whose record industry remains dominated by sales of physical formats has been the most lenient in terms of population control. But in February (the most recent month where data is available) the production value of physical formats (audio and video) was down 18% year-on-year, compared with a rise of 18% in January. If monthly falls continue, then Japan’s recorded music sector could suffer quite a sizable downturn for the year. But a similar result in the other four countries would not be so disastrous as physical accounts for a lower share of the overall total. In the US, for example, physical sales generated just 10.3% of the music retail total last year and so any hit on CD sales will be more than compensated for by higher streaming revenue. Vivendi execs were right when they said in the results briefing that it was impossible at this stage to determine with certainty how long the pandemic will last and how it will impact on UMG’s results. But the recorded music sector is certainly going to weather this storm much better than live and could emerge with only modest scratches.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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