Barclays | Internet & Media26 June 2018 2CONTENTSEXECUTIVE SUMMARY3The boys are back in town (again)3The story so far ........... 3Focus on streaming ... 4Focus on disintermediation . 8Focus on margins ....... 9Other interesting analyses11Worldwide forecasts ........... 13FOCUS ON STREAMING ........ 15The story so far ........ 15Always worth remembering:ARPU is NOT 10 a month, it’s 3....... 16What happened in countries where streaming dominates17Analysing streaming penetration in more details....... 20FOCUS ON DISINTERMEDIATION THREAT .......... 26Conclusion ..... 26How a traditional record deal works ...... 26How can an unsigned artist can make money on streaming ........ 27You can be successful without a label ... 29Spotify becoming a label . 29Distribution deals ..... 30Merlin (pinpin) .......... 31Deals for major artists are already different ..... 32FOCUS ON MARGINS . 34In theory, margins should improve considerably ....... 34In reality, they did not ......... 34FOCUS ON THE UK: INTERESTING DATA POINTS FROM THE BPI ..... 38Music penetration no longer declining in the UK ....... 38Spend per music buyer is increasing...... 38Catalogue but not old songs dominate streaming ..... 39Retail environment supportive ..... 40Focus on demographics .... 40Playlists:Not as big as you think41OTHER ISSUES .. 43Can subscription prices increase ........... 43Smart speakers ......... 44Revisiting the value gap ..... 48Focus on South Korea ........ 53GLOBAL RECORD MUSIC FORECASTS ...... 55Mixed historical record ...... 55Method 1:Streaming penetration + physical cannibalisation ........ 55Method 2: Five main countries and China ........ 57Method 3 - Physical / digital split ........... 65Method 4: Using past growth of most advanced markets .. 67The more the merrier:Let’s take the average . 68Market share - Recorded ... 68MUSIC PUBLISHING .... 70What is music publishing70Industry trends ......... 70Our forecasts71Market share - Publishing . 72Barclays | Internet & Media26 June 2018 3EXECUTIVE SUMMARYThe boys are back in town (again)This is our fifth annual in-depth on the music industry after: Streaming killed the download star, 12 June 2014. Swimming upstream, 2 July 2015. Dancing days are here again, 6 October 2016. Higher than the sun, 4 October 2017We compare our new music report with our previous reports in the Figure below:FIGURE 1 Ch-ch-ch-ch-changesSource:Barclays ResearchThe story so farThe worldwide recorded music market increased 8.1% in 2017 to US$17.3bn after 5.9%growth in 2016.This is on a wholesale basis (ie money flowing to the music companies). The recorded music market now stands at 57% of the 1996 peak on a retail basis (ie moneyspent by consumers).2016 and 2017 growth was the industry’s best performance since theglory days of 1987-1995 and is therefore notable.By type of distribution, the growth wasboosted by paid streaming (+41% to 38% of total), while downloads fell 21% to 11% of totaland physical decreased 5% to 30% of total.FIGURE 2 Music market still far from peak ($bn)…FIGURE 3 …but is showing signs of life ($bn)Sources:IFPI, Barclays Research.Sources:IFPI, Barclays Research.New AnalysesUpdated analyses More detailed streaming forecasts, country by countryDetailed Chinese forecasts Deeper analysis of disintermediation threatGrowth of mature streaming markets Potential impact of smart speakersLatest trends in music publishing Why South Korea is not a template for the worldMargins Why we are sceptical on price increases in the medium termRevisiting the value gap Worldwide forecasts Where our thinking has changedWhere our thinking has not changed More bearish on gross margins (Potentially declining)because of disintermediation threat Music is not a double digit growth industry on a sustainable basis (8.5% CAGR next five years vs. 8.3% last year). 0 5 10 15 20 25 30 35 40 45 6972757881848790939699020508111417 Albumunbundling CD format introduced Audio cassette growth Emergence of online piracy Streaming 19.118.918.0 17.015.5 15.115.214.614.515.016.0 17.3 -0 .9% -5 .1% -5 .6% -8 .4% -2 .6% +0 .2% -4 .0% -0 .4% +3 .5% +6 .5% +8 .1% 200620072008200920102011201220132014201520162017 “Time is tight and money'sshortRiver's up and the weathermanHe's calling for another stormPressure's on, the margins thinGot to figure out a fix for thisawful fix I'm in”Luke Bryan, ‘Pray abouteverything’Barclays | Internet & Media26 June 2018 4Fig 3 shows that 71% of the market comes from five countries, while Fig 5 shows thesources of revenues, with paid streaming and physical the largest categories at an even30%. Performance rights are generated from broadcast, internet radio services and venues. Synchronisation rights come from placing music in advertisements, films or televisionprogrammes.FIGURE 4 Major countries in 2017FIGURE 5 Sources of revenues in 2017Sources:IFPI, Barclays Research.Sources:IFPI, Barclays Research.Focus on streamingThe story so farStreaming has been the growth engine of the recorded music market in the last six yearswith growth staying more or less above 40%.While this could seem surprising, this iscoming from new markets jumping on the streaming revolution.The more mature marketslike Scandinavia have slowed (10% growth in 2017 for streaming across Denmark, Finland,Norway and Sweden).This growth should continue in 2018, with the three major labelsreporting 38% year-on-year growth in US$ in 1Q18 (Sony, Universal and Warner).Thisgrowth has taken streaming from 4% of worldwide revenues in 2011 to 38% in 2016.FIGURE 6 Streaming year-on-year growthFIGURE 7 Streaming as a percentage of totalSources:IFPI, Barclays Research.Sources:IFPI, Barclays Research.:Extra!Extra!Read all about it:ARPU is NOT $10 a month, it’s $3At the risk of sounding like a broken record, paid streaming monthly ARPU is nowhere near10 in any currency.It is actually around 3. We detail why later in the note, but the IFPIUS 34% Japan 16% Germany 8% UK 8% France 5% Others 29%Physical30% Download 11% Streaming(Sub) 30% Streaming(Adv) 8% OtherDigital 5% 14% 2% Performance Synchronisation 56% 60% 42% 36% 48% 65% 41 % 52 % 38 %38% FY11FY12FY13FY14FY15FY16FY171Q18 World Streaming (IPFI, organic) UMG+WMG+SMG Streaming (US$) 4%7% 10% 13% 19% 29 % 38 % 24 % 35 % 51 % FY11FY12FY13FY14FY15FY16FY171Q18 Total Market (IPFI, organic) UMG+WMG+SMG (US$) 。。。。。。