Tips Industries — Music to the Ears After a Long Dry Lullaby

The music industry is undergoing a seismic shift and it is quite plausible that you are contributing to this change. How do you listen to music? Do you stream music online using apps like Spotify or Apple Music or Gaana? Do you watch music videos of your favourite artists on Youtube? Have you grooved with influencers on Instagram / TikTok reels with old songs reimagined (think about the yesteryear hit song qismat ki hawa kabhi naram kabhi garam)? I would assume that you fall into one or more of the above categories.

Indians listen to 21.5 hours of music every week which is almost 20% greater than the global average of 17.8 hours. The overall number of monthly active audio-streaming users has grown from 165 million in 2019 to 200 million in 2020. Paid subscriptions generated 9.1% of the Indian music industry’s streaming revenues in 2019, and is expected to grow to 31% by 2024. Paid consumers on streaming apps increased by 15% post COVID-19.

Exhibit 1: Usage of Smart Devices

What has changed for the industry?

The industry is one of the few to have benefitted from the disruptions caused by internet technology after being destroyed by it. With the advent and growth of the internet through the late 90’s and early 2000’s, piracy took center stage as consumers worldwide shifted to downloading content for free from internet websites. The launch of Napster in 1999 and other websites led to an explosion of unauthorised content which caused severe impairments to the revenues of the music industry. Consumers quickly shifted to downloading songs instead of buying CD’s and Cassettes. One thing was established — the future of music was to be digital.

A sustained hammering through piracy coupled with the demise of physical distribution channels led to a 14 year long decline in industry revenues. So forceful was the impact that music labels consolidated into 3 large music companies viz, Universal Music Group (UMG), Sony Music Entertainment (Sony) and Warner Music Group (WMG). Today, these 3 companies control approximately 90% of global music content. A similar scenario has played out in the Indian space with 5 companies gobbling up all of the market share. In the listed space, we have two prominent companies; Tips Industries and Saregama — both with their unique strengths and weaknesses. Time will tell who wins the race though I have decided to ride this musical wave with Tips Industries. Before we get into the specifics of the Company, let us understand the favourable economics of the business.

Understanding the Economics

The music labels have three sources of digital revenue:

1. A fixed royalty paid on every stream
2. Share of Ad-revenue on streams
3. Payout on paid subscriptions

Let us take the example of Tips and Spotify. If it is a fixed royalty contract per stream then every time the user plays a song, the record label would get paid 10 paisa per stream. In paid subscriptions, the platform in question i.e. Spotify / Apple Music would have to share a portion of their revenues with the record labels. The landscape of optionalities is big here for record labels since they have a recurring source of income. Music, unlike any other form of entertainment, has the most repeat value.

Exhibit 2: Repeat Value of Music

If one likes a song, then chances of repeat hearing are quite high. This is not true for other sources of entertainment like Films and Web Series. Whatever be the revenue case, as long as people are streaming music, the music companies will benefit.

Other than digital revenues, record labels can make money through royalty on paid performances as well as commission of songs used in popular advertisements. Recently, Saregama issued a fixed fee licence to the giant paint company Berger Paints. Another trend being observed is OTT films and web series using yesteryear songs to enhance their content. Again, the beneficiary of this is the Music Industry and specifically the record labels.

You must be wondering what gives these Indian Companies an edge over the International Giants like Universal Media Group? Let’s dive in.

Indian Companies vs International Players — Advantage India

I feel Indian companies are better placed to make use of this opportunity for the following reasons:

• Legal advantage: Both the recording and publishing rights are owned by the producer in India which is not the case for global companies like Universal Music. This is an advantage handed over by the law to the companies. This means that the record labels can earn a greater source of revenue with the increase in streaming across the board.
• Low Base on Paid Consumers: Out of the ~200 million streamers of music in India, less than 1% are paid subscribers. This number is around 8–10% in the global markets and poised to grow. We have all witnessed how people around us are paying for subscription services like Netflix, Sony Liv, Hotstar etc. This is a positive trend as it indicates that users are willing to pay for great content.
• Demographic Advantage: India has a favourable demographic advantage since more than 65% of the population is less than 35 years old. This is the age group that is most exposed to streaming services. As India grows economically with more connected users, the music industry is poised to benefit as new users are added to the streaming universe.

Tips and Saregama — Winner takes all?

In essence, the fight between these two companies is not a winner takes all fight. The growth of both Labels will add to the cumulative growth of the industry which is still at a very nascent stage. Moreover, as we have witnessed in the past decade with the Chemicals industry — when the tide turns, it lifts all the boats — as all companies were able to benefit from the increased margins. The beneficiary of such a tailwind is always the shareholder. Tips and Saregama both have an extensive repository of songs — both old and new — with new songs being added by both the companies.

Let’s understand why TIPS is in a more favourable position to unlock value for the shareholders.

1. WMG has entered into a deal with Tips for distribution in India
2. Tips has a catalogue of 29,000 songs and will be 100% licensing.
3. Tips is pure play music streaming after demerger. Tips management has confirmed that the Company is demerging the films business from the main business. This means that going forward, all of Tips’ revenues will come from the Music business only which has reported incredible numbers in the recent past
4. For TIPS, the return on capital employed (ROCE) in the music business has been in excess of 100% for the past few years. It is the ROCE from the films business that has been pulling the numbers down for the company.
5. Saregama is still dependent on producing films and selling Caravan which has been a flat source of revenue for the past couple of years with demand being erratic due to Covid. The management is rigid that they can maintain and grow revenues from the two divisions. Hence, TIPS with its pure-play focus on music offers a more lucrative risk to reward ratio as compared to Saregama in the near term post its merger.

Conclusion

Like any other business, it is important to understand the antithesis to our story. The major point of contention is the rise of independent music artists. This is a visible risk but the likelihood of it playing out seems low.

1. Music labels possess the capital and the distribution network to produce music from stage 1 to stage end. They already have a roster of musicians on their payroll which allows them to produce a wide variety of music.
2. In the entertainment industry, distribution plays a huge role. Music in our country is still popularised by Films and they prefer to sign with record labels as opposed to individual artists.
3. New artists are eager to get on the bandwagon of record labels since these labels handle the marketing, distribution and appearances of the artist as well.

It will be interesting to see how this trend plays out. We have already seen companies like Spotify promote their own music just like we have Netflix Originals for films and web series. However, as mentioned above, they do not possess the kind of repository of old and classic music like the existing Labels do. As opposed to Films, people like to revisit old music. The repeat value of great music keeps increasing with time.

With the growth triggers in place and a massive opportunity size, the music industry seems poised to do well in the future. India has a unique advantage in terms of demographics and a low base which allows space for exponential growth. If the India story plays out pushed by the incumbent government’s thrust on digitisation, then the music industry is bound to succeed.

REFERENCES

Deloitte. (n.d.). Audio OTT economy in India — Inflection point.

Ishmohit. (2021, May 29). Saregama and the music Industry analysis| internet BENEFICIARIES? 🎶. YouTube. https://www.youtube.com/watch?v=-6FLHjxzi8o&t=677s.

Mehrotra, S. (2021, May 16). #026: Tips Industries. Beta to Alpha. https://betatoalpha.substack.com/p/026-tips-industries.

Saregama Annual Report — FY21. (n.d.).

TIPS — Annual Report 2020–21. (n.d.).

TIPS AR — 2019–20. (n.d.).

TIPS Concall — Q1FY22. (n.d.).

Tips Concall — Q4 FY21. (n.d.).