Tuesday, January 10, 2017

How Megabucks-backed SESAC Plans to Simplify the Music Business

Written by Tim Ingham — SESAC, one of the most ambitious companies in music, is now officially backed by Blackstone – one of the most powerful private equity companies in the world.

SESAC hasn’t put an official figure on Blackstone’s buyout, which will take the for-profit collection/licensing society out of the hands of Rizvi Traverse Management.

But it’s pretty easy to estimate the pricetag: somewhere between massive-bucks and megabucks.

Blackstone’s average investment in portfolio companies totals hundreds of millions of dollars. Rizvi reportedly bought its 75% stake in SESAC for approximately $600m in 2013.

SESAC CEO John Josephson says that Blackstone’s money will, over the next decade, help fuel SESAC’s aspirations to become a truly global rights management powerhouse across performance, mechanicals, sync – and even master rights.

You can’t imagine the presence of $35bn-valued Blackstone will do much harm to SESAC’s mission to increase songwriter payouts from the likes of Google, Facebook and the US radio industry.

(Like BMI and Irving Azoff’s GMR, SESAC is currently preparing to fight the US Radio Music License Committee to shell out higher composer royalties. SESAC, though, will have do so through an arbitration proceeding – an agreed result of the settlement of prior litigation.)

Yet according to Josephson, the biggest immediate advantage of Blackstone’s takeover will be stability.

SESAC is Blackstone’s first investment under its new core private equity strategy.

This is ‘specifically designed to hold private equity investments for much longer periods of time than traditional private equity funds’ – expected to amount to a duration in excess of 10 years.

That suits Josephson, who says SESAC has much more to get done worldwide.

SESAC’s global game plan is two-fold: (i) expand its active presence as a multi-rights licensing group across Europe and the rest of the world; and (ii) pull together mechanicals, sync and performance rights in a manner beyond that of its US competitors.

Part (i) got a big boost last year when SESAC joined forced with Swiss collecting society SUISA to create Mint – a JV to administer and license rights across Europe.

Its EU ambitions were also boosted when SESAC hired SOLAR’s Alexander Wolf (pictured inset) to head up its International team.

Part (ii) became a reality with one of the most significant deals in recent music publishing history: when SESAC acquired US mechanical rights clearing house The Harry Fox Agency from the NMPA in 2015.

Impressive moves like these have helped attract 30,000 clients (‘affiliates’) to SESAC’s books, including Bob Dylan, Randy Newman, Green Day, Kings Of Leon, Zac Brown and Neil Diamond.

MBW caught up with Josephson to ask him all about what Blackstone’s investment – which is expected to close in Q1 this year – will mean for SESAC and the future of music rights.

We also inquired about SESAC’s rivalry with ASCAP and BMI, the current state of global licensing – and how Josephson believes Facebook and YouTube should evolve their treatment of songwriters.

In a way, I see the acquisition by Blackstone as a coming of age moment for SESAC.

The first thing it does is create stable ownership: we now have an owner with a clearly stated intent to hold its investment in SESAC for an extended period of time.

Secondarily, Blackstone has both extensive financial resources as well as the desire to provide additional capital as we execute on our plan.

Obviously, we will need to reach a consensus with the team at Blackstone regarding any prospective investments we want to make but once we’ve reached that consensus, we know the capital is available.

We also believe that having a sophisticated investor like Blackstone aligned with the music rights community as we articulate our legislative agenda could be valuable not just for SESAC, but hopefully the entire music community.

For example, in the U.S., we’re in an ongoing dialogue with the legislative community about how to best achieve fair compensation for songwriters.

Our message is simple: music licensing should take place in a free and fair market.

It can’t be a bad thing to have a company with the resources and sophistication of Blackstone aligned with us as we pursue that dialogue.

It might not solve anything immediately, but it has the potential to level the playing field somewhat when you have the tech industry giants devoting enormous resources to pursue their own agenda in Washington.

There are two approaches: in the first case, you can try to issue “global” licenses today. I don’t disrespect the intent, but I think the reality is that we as an industry are still quite a way off being able to truly license seamlessly on a global basis.

In the alternative, you can take the checkerboard approach we’re pursuing by expanding, initially, on a territory-by-territory basis; focusing on the regions where the real bulk of the dollars are, and expanding from there.

Our goal is to be able to actively monetize musical works on behalf of our affiliated writers and publishers across multiple geographic territories, and we are building that capability.

Our SUISA JV represents a first step towards a new focus on Europe. And we’re also thinking over the long term about Asia, as well as other regions.

There is still an incredible amount of fragmentation which exists in the industry—both across geographic territories and, especially in the US, across different rights types.

I would hope that increasingly over the next five years you’ll see more and more of SESAC’s growth coming from outside the States.

In net terms I actually think they’re a hindrance to us.

They force ASCAP and BMI into a situation – and this isn’t knocking either of them – where they’re under enormous pressure to agree to rates in their negotiations with licensees that don’t necessarily represent the fair market value of the compositions in their respective repertories.

Notwithstanding the fact that we’re not a regulated entity and they are, we suffer from that because these rates become the benchmarks many licensees use when they’re negotiating with us.

We’re able to make decisions more quickly and on a more dynamic basis. That is because we’re smaller, nimbler and for-profit.

We settled our litigation with the Radio Music License Committee about a year ago.

Part of the settlement involved an agreement on the part of both parties to use binding arbitration to set rates in the event we are unable to reach a negotiated settlement.

Our first arbitration with the RMLC is coming up, and we’re investing a lot of management time as well as financial resources in that process.

We believe in making this investment because it’s part of the broader agenda of achieving fair compensation for writers.

I don’t see us as a threat. We’re trying to take steps to achieve greater efficiency in the marketplace and fair outcomes for rights holders. I think all industry participants stand to benefit as a result.

We come at it from two perspectives. First, we think the fragmentation of rights categories in the States has created inefficiencies in the marketplace – and that by re-aggregating mechanical and performance rights, you can achieve better outcomes for licensees as well as rights-holders.

Secondly, the major digital platforms operate their businesses on a global basis, yet the rights they need to secure are enormously fragmented across various territories.

We believe [there are] economic efficiencies that can be shared by both end users and rights-owners from having data about compositions across multiple markets.

I’m not so focused on who might think we’re a threat as I am on creating an outcome that serves both the interests of our clients and users of music worldwide. This takes time and focus, which Blackstone’s investment will support.

That’s not our objective, and it’s not one we focus on. We have a long runway of growth in our business before we begin to approach either of them in size or scale.

When you look at our market share across different categories of music today – we’re a very meaningful player, just as GMR is.

Our objective isn’t to be the biggest. It’s to achieve the best outcomes for our affiliates, provide the highest level of service in the marketplace and to operate in a highly efficient manner.

To do that, part of our strategy is to focus on the copyrights we believe have the highest value. That approach isn’t consistent with trying to be the market share leader.

I don’t think there’s any immediate opportunity. It’s a logical aspiration, but a long-term one.

I imagine we’re not alone and that some of the larger players in the market may also be thinking about this, and trying to figure out how over time they can position themselves to administer, if not license and clear, both masters and compositions.

But I think it’s still some way off, for a variety of reasons.

It’s a different answer for each of them.

For YouTube, it’s an issue of working with them to think more constructively about the value that music brings to their business.

YouTube’s effective revenue share with the music industry is much lower than other digital platforms. In addition, they often like to talk about how much of what’s happening on their platform doesn’t involve music. But the reality is that even if, in the first instance, something is not ‘music consumption’ per se, they’re using music to get people to their platform, before monetizing that in a hundred different ways.

I would hope over time they take a more collaborative, constructive view and recognise how valuable music is as a driver of their business.

For Facebook, it’s a question of the degree to which they integrate active monetization of music into their product offering.

Music is so elemental to what drives activity on social platforms. Facebook has so many opportunities to optimize the user experience and enhance engagement with product innovations that also involve active monetization of music. My hope would be that they begin to move more aggressively in this direction, and that they secure the licenses required to do so.

Ultimately, premium user experiences require premium music. We believe digital services will recognize this as their businesses evolve.

It’s had a de minimis impact on our business thus far. On a go-forward basis it will have some impact – that’s a reality of the marketplace: publishers who control rights should have the freedom to do what they want with them.

For us, it will be more a factor that reduces the growth we see from the digital platforms rather than something that leads to a decline in our digital revenue.

If you talk to digital platforms, many of them don’t want to do direct licensing with publishers – they would prefer to clear music through the PROs.

Our view is actually not to fight direct licensing, but rather to get on board with it – to innovate and embrace it.

Since we acquired HFA, we’ve been speaking with many independent publishers about how we can work with them to facilitate direct licenses for digital platforms that integrate their performance and mechanical rights, with HFA/Rumblefish acting as the administrator of these licenses.

This will also benefit licensees whose distribution models require rights that are not available through the PROs or traditional mechanical licenses.

Our focus is 100% on providing value added licensing and administration services to writers and publishers, at the highest level of service we can achieve. We don’t have any plans at present to own rights ourselves.

I’m optimistic because it can’t possibly get worse!

If you’ve studied the history of music, when you go back to the origins of copyright in music; it was all about the writers. The composers were the stars. The artists performing them were struggling to make a living.

The industry has subsequently evolved to a place where the artist, not the writer, is the one the consumer thinks about when he or she listens to a song. That’s created its own economic reality in terms of the split between writers and performers.

That shift, however, has been exacerbated by the fact that two-thirds of music publishing income is subject to governmental price controls.

I’m speaking from my own book here: I feel that the current allocation of value is often unfair to writers.

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