What does inflation mean for the music industry? Part Two.
We wrote a few weeks ago about the impact that high inflation may have on the music industry. Particularly with promoter Live Nation and their ability to service their rising debt levels. In an update to this series on rising inflation and its impact on the music industry, we examine the impact of inflation on streaming through an examination of the hedge fund “Hipgnosis”.
Hipgnosis designates itself as a “songs fund”. Their much touted and publicised launch on the Main Market of the London Stock Exchange in July 2018 accompanied the sell to investors that music rights were more valuable than “oil or gold” according to their founder and music mogul Merck Mercuriadis. The justification being that “hit songs are a stable investment because their revenue is unaffected by fluctuations in the economy”. Since then, Hipgnosis bought rights from the likes of Neil Young, Mark Ronson, and Chic. Specifically, they said that they would act as an artistic haven for these songs and not let them be, in Neil Young’s case, turned into a “Burger of Gold” fast food commercial (a reference to Neil Young revealing that his “Heart of Gold” was requested by a well-known fast food company to accompany a commercial). However, changing macroeconomic conditions have impacted song royalties and led to falling revenues and rising debt levels.
In October 2022, Hipgnosis reported disappointing earnings in their last quarter. Royalties on songs have now fallen for the past two years and a year has now gone since they last made purchase of a song. Moreover, Hipgnosis have a complex corporate structure that has seen asset manager Blackstone exert a majority stakeholder control on the organisation. Blackstone were brought on in part to help inject cash into the company. This was through a debt-laden structure that have exposed Hipgnosis to rising debt levels since the rising of inflation. The cost of this rising debt is now estimated at more than $600m. These rising debt levels impact Hipgnosis in similar ways to Live Nation and just like any large corporation with too much debt on the balance sheet. Namely, the cost of servicing debt in rising inflation becomes too much and they are forced to cut costs or seek help. Aside from rising debt and falling revenues, there are allegations that Hipgnosis are now trying to back out of pre-existing arrangement. Since Blackstone came on board in 2021, they have been dragged into negotiations with artists that claim Hipgnosis has failed to honour negotiations on new material, with the Financial Times discovering that “aborted deal expenses” had reached $1.6m.
Rising debt levels and disappointing earnings may force Hipgnosis to do two things. Firstly, to improve revenue they might be forced to be less artistically protective of the rights they own. This is especially the case as their majority shareholder Blackstone will apply pressure on the company to make as much money as possible. Therefore, despite them protecting songs from fast food commercials, precisely the opposite will be true. Secondly, they may demand greater rights payments from the major streaming companies. In so doing, they will be increasing the costs of the streaming companies who will have no choice but to raise subscription payments for the consumers.
Therefore, a disappointing quarterly report from hedge fund Hipgnosis will impact consumers. Either through rising subscription prices on popular platforms, or, more likely, through best loved songs become more commonplace in commercials around the globe.