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Investing in the Music Industry with MUSQ’s David Schulhof

7investing CEO Simon Erickson interview's MUSQ's David Schulhof about his pure-play global music industry ETF.

August 15, 2023 – By Simon Erickson

The music industry is innovating, and it’s making billionaires out of those who grace the global stage. Larger-than-life personalities — from Jay-Z and Kayne to Beyonce and T-Swift — are not only selling out shows, but are now reaching their fans in entirely new ways. Digital streaming, generative AI, and NFTs are all helping to turn the music industry’s amps up to “11.”

Behind the scenes is an extremely profitable and thriving supporting cast of businesses. Music labels, streaming platforms, and live events promoters are all generating billions of dollars for artists and are receiving a standing ovation from their investors.

So how should investors best plug-in to the music industry?

To answer that question, we’ve brought in an expert. 7investing CEO Simon Erickson recently spoke with David Schulhof, the founder and CEO of MUSQ, LLC. MUSQ is the world’s first pure-play global music industry ETF, giving investors a way to align their portfolios with the best opportunities of the music industry.

In the first part of their conversation, Simon asks David to describe his background and why he created the thematic ETF. David describes how the music industry is growing, and why he’s structured it into streaming services, music labels, and live events.

The two then discuss how artificial intelligence and generative AI is driving more of a need for labels and curators. With more than 120,000 new songs being uploaded every day due to generative AI and digitization tools, there’s more of a need than ever for sorting and finding the highest-quality new music. Labels are becoming more important as ways to create playlists or to offer legal protections against piracy or copyright infringements.

David then explains that streaming platforms like Spotify, Apple Music, Amazon, and YouTube are surging in popularity, with tens or hundreds of millions of users. They make distribution seamless between artists and listeners, and modest price increases this year are falling extremely quickly to their bottom line.

In the second part of the program, Simon and David discuss the continued demand for live events and why companies like Live Nation will continue to profit handsomely. New digital approaches using cryptocurrencies or NFTs could be opportunities for progressive artists or marketers to make the pie even larger with the world’s most passionate music fans.

Publicly-traded companies mentioned in this podcast include Alphabet, Amazon, Apple, Live Nation, Sony, Spotify, Universal Music Group, and Warner Music Group. 7investing’s advisors and/or its guests may have positions in the companies that are mentioned.

Don’t miss out on future conversations like this! 7investing will be publishing upcoming interviews with the CEOs of PubMatic, Rocket Lab, and more. Join 7investing’s free email list to get our podcasts and investing insights delivered directly to your Inbox.


Simon Erickson  00:00

Hello, everyone and welcome to this edition of our seven investing podcast where it’s our mission to empower you to invest in your future. You learn more about our long term investing approach and see our seven favorite stock market recommendations each and every month at seven My name is Simon Erickson. I’m very excited to welcome our guest. Today we’re going to be talking about the music industry. David Schulhof is the CEO of music LLC, also the founder of that this is the first pure play global music ETF where as an investor, you can participate in the trends that are taking place in the music industry. David, thanks for joining the seventh investing podcasts with me here this morning.


David Schulhof  00:38

Great, Simon. Thanks very much for having me. On your show today.


Simon Erickson  00:42

David, we’re going to chat a little bit about AI in the music industry an interesting topic. We’re going to talk about streaming and what that means for the business of music. And we’re also going to talk about live events, and also your ETF. But just to have some fun with it. You’ve spent your career looking at the music industry, how does one make it in the music industry? It seems like such a competitive gig. What are some keys to success if you want to be a successful musician?


David Schulhof  01:06

Well, look, I have been in the industry for 25 years, and I’ve seen a lot. But I think today there are more tools available to a musician than there’s ever been before. Remember, back in the day, you only had sort of one carrier of sales, which was basically a hard format, right. And today with the digitization of music, and all the social media channels, you really have enormous opportunity in front of you. But I’ve been an investor Simon for the last 25 years and investor owner, entrepreneur and operator have run a number of different public and private companies. From record labels to music publishers, I spent four years recently as president music publishing it live one which owns podcast one and Slacker Radio that powers all the different Tesla vehicles with music. So a very popular streaming service. So and I’ve watched a lot of transformations over the last 25 years to from a track to cassette to CD to MIDI disk to Napster, then to streaming and then you bring in AI. So you know enormous technological innovation in this industry. The industry has really been transformed many times over. And whenever it’s been transformed, it’s always come back bigger and better. It’s interesting how it is one of the industries that is manages to turn around and really grow from wherever it previously was. And you can look back on every iteration of the industry. And you can see that so exciting times to be in the music industry today. Let me tell you a little bit about our index and what we do. So I’m the founder and CEO of M USQ. I’ve designed the first pure play music ETF to give investors global exposure to the entire global music industry ecosystem. So M USQ currently has 47 holdings on the index 45% of those holdings are domestic 55 percenter foreign, their companies across five different categories, streaming content, live music and ticketing, satellite radio and equipment and technology. In order for companies to be deemed eligible for the index, companies have to generate more than 50% of their revenues from music or they have to be a top five player in any one of those categories. So streaming companies we have, you know, obviously Spotify, we also have Apple, Google Amazon. We have companies like cacao and Genie Corp, which are big Kpop streaming companies. We have cloud music and Tencent music, big China companies. We have live one we have click digital in Great Britain. We have you know, 11 streaming companies. We have 19 content companies. So we’ve got big companies like Universal Music Group, Warner Music Group, then we have eight or nine Kpop companies. So we have high which has become a very big business which owns a lot of us management companies JYP SM Entertainment, why g plus got companies in Japan like a Vax and amuse and we have smaller royalty trusts, like reservoir music, hypnosis music, Round Hill music group. So we have loads small mid cap and large cap companies and then you know we’ve got interesting live music ticketing companies we have Live Nation, Madison Square Garden, sphere entertainment, vivid seats, CTS event them all very big live music ticketing companies. We’ve got tons of interesting technology companies that all are part of the music industry ecosystem like Sonos, Dolby avid core, you know, important focus, right important companies that manufacture consoles, guitars, Yamaha and then lastly, we’ve got radio company so I Heart Radio, Sirius Radio Townsquare media, you know, interesting radio stations to so this index is really designed for the it’s a thematic play, it’s for the investor who thinks music is growing, which it is, and wants exposure to the global music industry that the ETF tracks the performance of all those companies on the index


Simon Erickson  05:36

in USQ, for anyone who wants to follow along with that ETF, a lot that you just mentioned there, David, but to double click on one of those things, which was the digitization of music, I know that you’re a musician, I’m a musician as well, you’ve got some guitars behind you, there. But music has changed a lot. And the way that it’s produced is last several decades. In fact, you pointed out that there’s 120,000 new songs uploaded daily because of generative AI, you think this is actually very important for the music labels themselves. Tell me a little bit about how you see AI playing out in the industry?


David Schulhof  06:09

Well, certainly, I think that the stats are right, you have 100 to 120,000 songs being uploaded every single day, artists have more tools than ever before, to create new music, to become their own venue to stream music. It’s amazing what they have at their disposal today. What that also means is that the labels become even more important, right? Because now you actually need individuals and entities to curate it to come up with the playlist to package it. Otherwise, there’s just too much, you know, you got to get you got to find out where the quality is. And then they need to get behind the artists and put them on tour it because fans want to identify with the music that they’re airing. So tools are amazing today, you’ve got, you know, just so many ways that artists can create music. You know, Paul McCartney just used AI to create a beautiful John Lennon track, you’ve got, you know, tons of ways that artists can Can, can access these tools. And, but look, but there are the the flip side of that is you have a flood of new music that gets uploaded every single day to all these streaming services. So, you know, playlists are becoming more important for artists discovery and labels are becoming, you know, even more important to curate a lot of the noise that’s out there.


Simon Erickson  07:24

How do you feel about deep fakes and copyright infringement? And you know, all of the AI that’s been used to mimic other artists work right now? Is this just unleashing Pandora’s box of legal action? Or is this something that are going to be controlled over a couple of years?


David Schulhof  07:37

Yeah, look, piracy has always been a problem in music, and in a lot of other intellectual property companies to you saw what happened with the fake weekend and the fake Drake that got uploaded, I think you’ll probably see more of that. But look, when that happened, there was a takedown notice that was sent right away to Spotify, and those tracks were down. So there’s always, you know, the ability of is always fraud. That could happen when you have new technology. But I think the benefits of of technology and innovation is going to create more excitement and more more new music. You know, kids can create music today, they can upload those songs to Tik Tok. Those songs can become viral. Kids can create music on their phones right now. There’s just so many ways that kids can express themselves with music. It’s really exciting to see. But yeah, you have the ability, there’s always the potential for fraud. Whenever you have technology like that.


Simon Erickson  08:34

Let’s also talk about distribution. You said that you’ve seen this over several decades of changing, excuse me, ways that music can get in the hands of the people don’t want to listen to it. And you don’t just always have to cut an album with 12 tracks. And then if you want to listen, you find and fast forward to your favorite one of the CD player, we’ve now got streaming that can go direct to consumers. There’s certainly some large streaming services out there. There’s 4 trillion streams you pointed out, that have taken place in the first half of 2023. Alone. Certainly Spotify and Apple Music are the most popular names in that space. But what do you think about the streaming industry? Is it just a collection of the largest and uncaring distribute everything?


David Schulhof  09:14

So first of all, you talked about distribution, it used to be next to impossible to distribute your album you had to know somebody at a label, you had to go in and take a meeting, they had to sign a deal. They had to manufacture recordings, whether it was cassette or vinyl or CDs, and that’s how you distributed today, you can own your own music and at the click of a button you can upload your song to one of those services that you said there’s you know, a dozen distribution companies out there the big names that you mentioned, but also smaller names, like the orchard like distro kid, like artists without a label. So a lot of ways that artists can now distribute their music and the one you find but that one distributor can then power all of those right your music at the click of a button can then be distributed to Spotify to Apple to Amazon to YouTube, it can be put, it can be put everywhere, the trick will be to promote it, and how do you elevate that. And that’s, you know, playlists have become really important playlists like rap caviar on Spotify, there are different ways to get elevated there, but you need marketing, you need promotion. So the services are, you know, it’s amazing how much capacity they have, they have tons of music, but you know, independent artists still need, you know, an entity behind them to handle marketing promotion to create video and social content. But artists can do a lot of that themselves today, right? They on their phone, they can create five seconds of viral content, they can upload that, you know, they can go to Mr. Beast, and they can distribute music. You know, there’s a lot of ways that artists can get above the noise today. They just have to be more innovative, but a lot the whole industry has grown. They used to be three music players, right? You had like universal, you had Warner’s, you had Sony. And now you just have all of these streaming services that basically become these massive music companies now distributing and curating tons of content, and people are willing to pay for it.


Simon Erickson  11:10

If you chat a little bit more about the business of those streaming services, you know, Spotify is a publicly traded company, I believe you mentioned it was one that was in your ETF. Many of them certainly are a subscription base, you know, all you can eat, or you can listen to service for us for a fixed amount per month. But of course, as I understand it, they’re on the hook for paying a royalty for every time a song is played by an artist out there, as maybe perhaps one of the challenges of scaling up as they’re serving more and more. Can you maybe talk a little bit for investors about what the challenge is that the streaming services are facing, but then also how the long term thesis would play out for them to be very profitable?


David Schulhof  11:46

Yeah, so let these these services are growing like a weed, Spotify as you know, they just released their earnings or grew 19% year over year, they have 182 million subscribers, Apple music grew 16% year over year, they have 82 million subscribers, Amazon grew 25% year over year, they have 55 million subscribers in YouTube, you know, grew 20% year over year, and they have 50 million subscribers, so there’s no slowing them down. And they just started price hikes. By the way, they never even scratched the surface on price, like so just shows you. Like if Spotify, you know, goes up an extra dollar that’s like 180, called 200 million paid subscribers a month, right? It’s another two and a half billion dollars just by raising it $1. Right. And think about that with all the streaming services, you could have an incremental multiply that by four or five services, you could have, you know, $10 billion of incremental revenue across all of them just by increasing it by $1. Right. So big opportunity there in the streaming space. To your question about licensing and content, the way these businesses are built, they have to license the content from the major labels, right. So the universal is a most market share, followed by Sony then Warner Music Group and some others and they enter into licensed contracts. And then they pay a percentage of that revenue back to the label in the in the label distributes that back to the artist or if it’s a publisher, they distribute that back to the publisher, the publisher that distributes to the writer. Right, but but they these are the total content costs, and they have agreements and every three or four years, they renegotiate those contracts in the publishing world. It’s called the CRB the Copyright Board they just renegotiated CRP for and that pays the publishers a percentage of the total content costs. And the same thing happens on the label side. And so every couple years, they renegotiate those rates. And you know, and the way things are going, it’s more money. If you look at the the labels just reported earnings in the last week, every single label was up nine to 22% revenue. That’s because they recently renegotiated rates with the paid streaming services, paid streaming services had price hikes, and all that money flowed down to the label. Same thing happened on the publishing side. Same thing happened on the label side. It’s not because they there were a couple of big artists, obviously, Taylor Swift and Elton John had an impact. But at the paid streaming service level, it’s really because of the money that’s being generated through paid subscriptions. And that money is trickling down to the labels. That’s why this is going on. And, and the industry is, you know, it’s continuing to grow in the in the paid streaming side. And then obviously, in the live music side is having enormous impact on the industry as well. In the live music business, you know, was that $20 billion in 2019. It went to 2 billion in 2020 and COVID. And now it’s up to 32 billion for this year. And it’s go up and it’s going to go up another 5 billion over the next three years I think Live Nation in their, in their report the other day, predicted that twice as many artists will go on tour and the net Next 12 months, so obviously a huge summer for live music with Taylor Swift Harry Styles, you know, Ed Sheeran Springsteen, Red Hot Chili Peppers, massive numbers for live music. And, you know, just that’s a big chunk of the index right there. 35% of the companies are streaming companies, 35% of the companies are content companies, right? That 70% plus another 10% from live music. It’s amazing 80% of the of the business really is paid streaming content and live music. And the balance is equipment and technology and radio.


Simon Erickson  15:37

And how about for the artists? David? Where are the artists making their money used to be you know, you cut the album, and then you make all the money on the tour? Is that still the case of they’re making the majority of their money from live events that that they’re going out there and getting on the road? Or is it more from the distribution, the streaming and things like that these days? Yeah,


David Schulhof  15:53

yeah, artists get 50% basically have the money. That’s basically the way their contracts are with the labels. So they if you’re an artist signed to universal universal licenses, this catalog of Spotify, the revenue comes into the universe with a kickback after revenue that comes in. So it’s basically about 50% of the net licensing receipts. And then obviously, you know, big companies like Live Nation pay big guarantees to artists to go on tour. So live music is obviously a you know, an incremental revenue stream for the artists and the merch and, and the live tickets. And, you know, between all that, I mean, they’re making they’re doing really well artists are artists who are touring artists right, are doing extremely well.


Simon Erickson  16:36

I must say back in high school, I spent every dollar that I see for live music concerts, and I didn’t regret any one of them. They were always the highlight to go see things live. David, quick question for you. There’s been some wonky things that have happened in the industry a couple of years ago, we saw NF T’s kind of catching on and Jay Z started a company called Title got acquired by Jack Dorsey and COVID @7investing block and it seemed like everything was cryptocurrencies was going to enter all of a sudden this music world haven’t heard as much about that this year as it as it did a couple of years ago. But Is any of that on your radar? Is any of that impacting the business of music today?


David Schulhof  17:12

Yeah, so look at you know, the superfan is isn’t is an important area of the industry, right. artists want to tap into superfans to to sell and upsell more goods. So you know, Snoop Dogg is a good example of somebody who tapped into his super fans with NF T’s I think he made like $22 million on his last NFT. You’ve got a revival of vinyl. Right? That’s happening right now. Ironically, Taylor Swift has a number one vinyl album this year to all of their to all her Swifty fans, so the super fan is willing to pay more, you know, NF T’s are a way for the artists to get closer to the superfan. You know, we’ve seen a number of those businesses, nothing is really a pure play NFT company yet, they’re all kind of, you know, part of this ecosystem. But you know, to the extent that there’s a company that’s engaged in AI, or or NF T’s and they qualify to be eligible on the index, we’ll look at them. But you know, suffice to say, those are exciting ways for artists to connect directly with their fans to make more money. And we’re going to see a lot more that you have artist services to out there. Companies like LELO companies like audience, you know, you these connect the fans with the artists and and and the artists can connect directly with them sell goods directly to them. You know, a lot of a lot of different ways artists for the artists to be in touch with the superfan.


Simon Erickson  18:39

I’m looking through the the index and the ETF that you are managing out there that the top holdings are familiar names for most of our audience alphabet the top waiting in the ETF Amazon number two, Apple number three, within Sony and Universal Music Group, following closely thereafter, can you talk a little bit about how you’ve got this index constructed? And maybe some of the lesser known companies that you’re you’re pretty much a big fan of?


David Schulhof  19:01

Yeah, so look, as I designed the index, I had to give exposure to the whole ecosystem. Obviously, Spotify is the big pure play paid streaming service that comes to mind. But for then I gave you the subscriber numbers, but you can’t ignore all the other music streaming services like Apple, Amazon, and Google. So the way we constructed the index is that greater than 50% of the revenues have to come from music service have to come from music, or they have to be a top five player in any of those kinds of categories, streaming content, live music, and so on. So those top companies easily satisfy that hurdle of top five and top 10%. They’re each individually capped at 7%. Okay, so the way the index is set up, no company can be smaller than 100 million market cap has to have daily liquidity of 500,000 a day. No single company can be greater than 7% because the whole thing’s market weighted. So that gives a lot of excitement to the big companies to be on there. And we also have to tons of smaller companies. So you know on the like on the streaming side we have companies like click digital we have companies like live one you know on the content side we’ve got the big companies like Apple sorry like, you know Warner Music Group and Sony but we’ve got smaller royalty trusts like reservoir media roundtable, neat roundhill Music Group, hypnosis, hypnosis, these are smaller companies. We’ve got small Kpop companies. So we really come we have small mid cap and large cap companies we really want to give exposure to you know, small names as well as big names, domestic and foreign.


Simon Erickson  20:39

Last question for you. Dave is a fun one. What is your favorite style of music? And how do you see music as a whole evolving in the world today outside of the business side of it?


David Schulhof  20:48

Yeah, no, look, I’m a big, pop r&b fan. I listen to you know, I’ve always enjoyed r&b, hip hop and r&b and my daughter is discovering a lot of that music on Tik Tok today. So that’s how I kind of learned learn about it. And I think you’re gonna see more of that you’re gonna see a lot more you know, pop r&b is driving a lot of the a lot of the mainstream hits today, when you see kind of the Top Billboard 100. That’s where it’s coming from.


Simon Erickson  21:14

Well, once again, David show off is a 25 year industry executive. He has spent a career in the music industry. He’s now the founder and CEO of music LLC that is in U. S. Q. Anyone wants to follow along with his index and ETF data is a real pleasure. Thanks for being on the seven investing podcasts are today.


David Schulhof  21:31

Great. Thank you, Simon. Thanks for having me on your show today.


Simon Erickson  21:35

And thank you everyone for tuning into this edition of our seven investing podcast. It’s our mission to empower you to invest in your future. We hope you have a great week.

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