21 - 003 Digital Music Consolidators

 From the moment that music was standardised into the MP3 file format a revolution in its distribution and those businesses associated with the sale of music was inevitable. In terms of the direct distribution to consumers then streaming was to become the key technical innovation whilst Spotify was to define the new business paradigm. This has been called freemium combining the words “free” and “premium”.

https://en.wikipedia.org/wiki/Freemium

But the purpose of this post is to not look at the front end but to examine a knock on effect of this change in music listening. Suddenly the ownership of the rights to music has become profitable and is likely to only get more profitable. Some have said it is like investing in gold.

So enter Hipgnosis buying up the back catalogues and music rights of Shakira, Beyonce, Blondie and Neil Young along with many others. The Hipgnosis Songs Fund are London’s biggest music fund only established in 2018 on the back of the sudden commercial relevance of owning digital music.

https://en.wikipedia.org/wiki/Hipgnosis_Songs_Fund

There are many other small back catalogue funds now attracting investment to invest in back catalogues. The investment industry seeing this as a new way to invest in a relatively low risk business model with long term growth potential as the digitisation of music proceeds to become a global activity.

So BMG owned by the German media conglomerate Bertelsmann is buying the back catalogue of Mick Fleetwood. Whilst Primary Wave an American fund brought Ms Nicks songbook.

What it has highlighted is the fine detail in terms of types of music ownership. For example the ownership of the song itself verse the recording rights of a song. It is the recording rights that entitles the owner to a share of the royalties when a song is streamed. The song being sung is the digital artifact being sold to the consumer. The words of the song itself is a different type of copyright ownership.

The song writer may claim part of these royalties as a copyright licence covering the use of the song. The logic being it’s the ownership of words similar to a book copyright. Not the ownership of a performance. Song writer royalties have often been very poor although the owner of the song can collect royalties off other artists when it is performed by them. Often this finer legal detail was not established as thoroughly as it needed to be particularly when performers were struggling in their early careers. But the differences can now make a potential major difference in the size of your income.

Now for the biggest deal so far. Bob Dylan sold his entire catalogue of 600 songs including Blowing in the Wind and Knocking on Heaven’s Door to Universal Music in 2020. It is suggested that it was sold for more than £225m.

https://www.theguardian.com/business/2020/dec/07/bob-dylan-sells-publishing-universal-music

Although this whole back catalogue industry is now booming because of the internet as a distribution channel it is not a new industry. Michael Jackson purchased 250 Lennon-McCartney songs as part of a $47.5 deal in 1985.

Now this trend in music is likely to be followed by film and video. Photographs and paintings have consolidated but under different digital business models. In fact multimedia digital files (eg music, video, photo, image ) and compilations of these (education, learning, lifestyle ) because they are so reproducible will become the valuable digital revenue streams of the future. With digital eBooks, particularly those using the EPUB standard, becoming the go to container for much of this multimedia content.

So as a Digital Disrupter where does it leave you? If you are a specialist in any particular hobby or interest from stamps to die cast models to historical artefacts to artwork then consider how others interested may want ownership of a digital entity relating to the subject. Can you create a back catalogue of these digital entities? So will consumers pay to see or hear them? You can always adopt the freemium model which is the best way to start.

The Podcast as a medium has made things like church bells and steam train and aeroplane sounds and bird sounds saleable products. The same applies to specialist videos. Or you could just record some music creating your own music library to complete the cycle.

21 - 002 Direct to Consumer Platforms

 Whilst Amazon is the international leader in this marketplace it is inevitable that other businesses will focus upon this segment. Just like Amazon started selling books only then broadening out to sell everything initially focussing on “digital” products (music, video) but then moving into “atom” products new businesses are looking to adopt the same strategy. Plus early on Amazon appreciated the importance of investing in the technical side of the underlying ecommerce platform so it developed Amazon Web Services (AWS). This platform was setup to be a business in its own right offering its “retail utility” capability to anyone prepared to pay for their services. Inevitably this hosting of a variety of other businesses on AWS gave Amazon the intelligence gathering capability to see what works and what did not for these new customers. This allowed Amazon based upon this intelligence the opportunity to formulate its own growth strategy. Needless to say investing in the successful market segments and avoiding those that failed.

In the Britain the Ocado Group founded in April 2000 was an online food retailer making use of its own “Ocado” brand. The name draws its inspiration from the “avocado” green fruit with an odd comparison between the fruit’s outer green peel, protecting the inner fruit, being like an Ocado van safely protecting a customer’s order. A confusing analogy to say the least possibly not the most memorable new brand name for a food retailer. But certainly a good one for a technology company into which it has transformed.

 In October 2000 Ocado partnered with Waitrose exploiting their more familiar brand alongside their own. In May 2010 the John Lewis Partnership entered into a 10 year branding and supply agreement with Ocado. In 2009 it released its first app for the iPhone and in 2010 it released a similar app for Android devices. In 2017 it launched a voice driven app on the Amazon Alexa device.

In 2014 the Ocado Group contracted to provide the website, warehousing and delivery services for Morrison supermarkets. The success of this move signified a change of strategy to becoming a technology and service provider to other retailers.

In 2015 Ocado launched the Ocado Smart Platform (OSP) its own software package for operating online retail businesses with this marking the change from being a retailer to becoming a technology company. Through 2017 it sold the Ocado Smart Platform (OSP) to many international retailers including major retailers in France, Canada and America. This was the start of the growth of the Ocado Technology division within the Ocado Group.

In 2019 Ocado and Marks and Spencer announced a Joint Venture whereby M&S acquired a 50% share in Ocado’s UK retail business thus terminating Ocado’s long relationship with Waitrose and the John Lewis Partnership. It also formed part of the transition to becoming purely a technology company rather than a food retailer. I suspect that Ocado the food retailer brand will disappear over time.

The scope of the Ocado Technology Division covered the development and operation of the frontend website and apps through to automated warehousing and logistics. This leading into big data, cloud storage, smart optimisation and the use of artificial intelligence (AI) algorithms. Essentially the complete package end to end for the retailer. The warehouses are very advanced using what is sometimes called hive and swarm like capabilities to pick, assemble and dispatch goods. Ocado’s proprietary technologies are protected by over 200 patents.

 

Read more detail

https://en.wikipedia.org/wiki/Ocado_Group

 

Amazon has set a path now followed by Ocado with others looking to join this new digital segment. It is essentially the consolidation of Direct to Consumer business on to digital platforms. They exploit the latest digital technologies whilst offering a complete “end to end” package. The way “brands” choose to engage with these new digital disrupters is very interesting. The ongoing decline in the “bricks and mortar” high street and the even the newer "out of town" retailers has been accelerated by the 2020 Covid-19 pandemic suddenly accelerating the growth opportunities for these digital platforms. But as a “brand” which way do you jump. These digital platforms make a key revenue stream for them taking a percentage of your turnover as payment. This with the initial up front sum to purchase access to the platform alongside development costs and capital expenditure in warehousing and logistics make these deals very complicated. But the success of the “brand” and that of the “digital platform” provider are locked in a deadly embrace. But like all relationships the relative size of the two parties can often define the actual deal and which one ends up with the most profit. (or loss).

So which is the next Direct to Consumer Digital Platform to watch out for in terms of growth. The Hut Group (also known as “THG”) is definitely the next one to watch. The Hut Group is following a similar development pathway to both Amazon and Ocado. Founded in 2004 it focussed upon selling music and gaming products. Not surprisingly early investors included Sir Terry Leahy, the former Tesco chief executive and Lord Rose the chairman of Ocado. Then the technology investments by KKR, Balderton Capital and Blackrock allowed THG to pursue a very acquisitive strategy. The approach is to purchase a variety of websites covering the retail sectors and move these across to their own proprietary technology platform. So they retain the original branding whilst improving the supporting technology structure and lowering the cost of operation. The opportunity to consolidate the warehousing and logistics infrastructure can then be applied to these businesses. The “Myprotein” was one of the major brand purchases.

For more details look at

www.thg.com

https://en.wikipedia.org/wki/The_Hut_Group

 

21 - 001 UK Chipmaker - Graphcore

 

A Bristol based chipmaker, Graphcore, is on a fast growth path having secured to date $710 million in funds. The business was founded in 2016 by two hardware technology entrepreneurs, Simon Knowles, 59, and Nigel Toon, Graphcore’s Chief Executive. The company specialises in making chips for power hungry applications such as machine learning. Mr Toon and Mr Knowles previously sold Icera, a semiconductor company, to Nvidia for $435 million in 2011. They are now back as a direct competitor to both Nvidia and Intel.

 

Graphcore produces a chip called Colossus. Other backers for Graphcore are Bailie Gifford and Draper Esprit along with BMW, Bosch, Microsoft, Samsung, Sequoia Capital and Huawei. Interest in Graphcore has taken off since Google revealed it was building chips for artificial intelligence applications.

 

Look at their website:-

 

www.graphcore.ai