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$3.7B in Digital Sales? That’s Entertainment!

Shawn Baldwin from CMG discusses how private equity is investing in the media and entertainment industry.

Last week we saw the posthumous release of Michael Jackson’s “This is it” as a digital download. The song is the precursor for a movie on the late singers last concert tour preparation that is expected to make over $250 million dollars. Releasing the song as part of a marketing strategy for the upcoming movie might be one of the most ingenious strategies yet. Individual music sales have been effective marketing and sales strategy going back to my elementary days as a child in the 70’s when I went to the record store with my Mother to buy the Jackson’s latest single 45 rpm record. This single strategy was still effective through my high school days in the 80’s when we waited for a “cassingle” cassette which was comprised of a sole song on one side and the instrumental version on the other. These individual sales helped establish the patterns for a single song appetite that would extend from digital song downloads to ring tones in the future.

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The industry stayed steadfast in the single sales methods until my college years and the advent of the CD which forced the music industry to actually come up with more content to make CD’s a higher value since the album cover as wall art was substantially reduced with the advent of the new, smaller packaging. Due to pervasivesness of the digital downloading sales medium, the pendulum has swung back to individual sales. 

Digital music sales on an international basis are in the billions and now comprise over 20% of all recorded sales and they have had expansive growth from last year to $3.7B (that number represents the current value of FaceBook), increasing over 25% from 2008.This number was up over 15% from 2007 on a global basis. The single sales track downloads comprise the largest percentage of the market with over $1.4B units sold throughout the planet. Digital single track sales are clearly the driving the market, however digital album sales are up over 30% collectively as well. Those facts alone are enough to get the attention of private equity firms looking to gain market share and accrue efficiency in an industry in flux–they see an opportunity.

This is probably what Guy Hands thought as he and his contrarian private equity firm,Terra Firma, acquired venerable EMI. Terra Firma is a U.K. private equity firm that has deployed over $11B in it’s existence through several funds. Hands is a former Goldman Sachs bond trader and Oxford alum. Guy was well aware of these figures and trends when he made the decision to acquire EMI for over $3.7b. Timing may have gotten the better of him because this was done at a turbulent period for private equity and subsequently investors thought that he may have bitten off more than he could chew and called for his ouster as CEO–but his investment could prove him right in the end run if these trends continue and digital sales continue to expand.

Another notable private equity firm has turned it’s attention and assets on the media and entertainment space as well. Elevation Partners has focused squarely on digital strategies and has industry legend Roger McNamee, one of the founders of silicon valley private equity leviathan Silver Lake Partners joining forces with rock star icon Bono and Brett Pearlman of Blackstone  to deploy over $1.9B in funds over the next 6 years. One of the more notable investments of Elevation Partners was its’ investment in the Forbes organization, magazine and it’s digital media in particular.

Trends show CD sales rapidly decreasing and according to Forrester research, digital download sales are growing at a compound rate of over 23% and are expected to exceed over $5 billion within the next 5 years. Furthermore, digital music sales are expected to surpass CD recorded sales in 2012–just in time for the end of the earth as proposed by the Mayan calendar and prophesies by Nostradamus. Let’s hope not for Guy’s sake.

 

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Shawn Baldwin from CMG discusses the impact of the media and entertainment business on GDP with L. Londell McMillan esq. a Senior Partner with Dewey & Leboeuf, the Executive Publisher of The Source and the attorney for Mrs. Katherine Jackson (the mother of Michael Jackson) in Dewey & Leboeuf’s offices in New York.

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About the author

Shawn D. Baldwin is Chairman of the AIA Group (AIA), an alternative investment and advisory firm based in Chicago

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