| Earlier this year, Warner Music Group explored an acquisition of Believe, one of the largest independent music companies. Based in Paris, Believe helps thousands of artists release their songs on digital services like iTunes, Spotify and YouTube. Warner CEO Robert Kyncl thought Believe would boost his business in territories where it was weak. Kyncl ultimately walked away after looking at Believe’s financials, worried they would be a drag on his company. In February, the private equity giant EQT and venture capital firm TCV partnered with Believe’s founder to take the company private at a valuation of about $1.6 billion. The Believe talks prompted a flurry of other deal activity. Downtown Music, which owns assets across distribution and technology, is exploring a sale. Stem Disintermedia, ONErpm and Too Lost are all in negotiations to raise money or sell. The music service SoundCloud is expected to complete a sale in the next couple months. The music industry is entering a cycle of consolidation, driven by a slowdown at the major labels and the rapacity of private equity. Private equity firms are investing more in music after placing big bets on catalogs. Record labels, meanwhile, are confronting a slowdown in the most mature markets, such as the US. Just this week, Warner Music shares tumbled after the company reported disappointing quarterly results. Most of the growth in the recorded music over the last few years has occurred in Asia, the Middle East, Latin America and Africa, areas where major labels control little, if any, repertoire. While record labels are pushing streaming services to raise prices and exploring businesses around super fans, those tactics don’t address the geographic puzzle. “They need to buy things to grow,” said Matt Pincus, a prominent music investor. Record labels are losing shareWhen Kyncl took over Warner Music at the top of 2023, one of his top priorities was building out the company’s distribution business. Major record labels perform many functions. They are banks, providing capital to artists to make their work. They are creative liaisons, making connections between writers, producers and musicians to improve the art. They are distributors, releasing works to the world and collecting royalties from thousands of different platforms. And they are promoters. The proliferation of paid streaming has been great for major labels, reviving sales and boosting the value of their catalogs. Yet in recent years, the major labels’ share of total sales has declined as the internet has made it easier for acts to create and distribute music on their own. Dozens of companies have come along to offer smaller suites of services, often backed by superior technology, in exchange for a smaller cut of an artists’ pay. These distributors and new breeds of labels seldom demand ownership of master recordings, the big labels do. Major labels still dominate when it comes to the biggest artists in the world and legacy catalog. But artists are breaking out all over the world, often without a major label. These new distributors have been particularly strong outside the anglophone world. Streaming has offered a path to stardom for artists from countries that labels long ignored. The explosion of streaming in far-flung parts of the world and competition from new indies has forced the major companies to get into the distribution business, often signing acts — even major ones like Taylor Swift — to deals where they get little more than a fee. Sony Group addressed these trends years ago by buying the Orchard and later Awal. Universal Music Group has built up a distribution business under the banner of Virgin Records. It’s still not satisfied. Earlier this year, it acquired PIAS, an independent music company based in Belgium. Warner Music, the smallest of the three, is also the farthest behind on distribution. Kyncl has explored deals for Believe, Stem and Downtown Music, though he has yet to pull the trigger on any of them. He has gone back and forth over whether Warner can build its own distribution or needs to buy. He has also balked at the prices these sellers demand. Kyncl has said he is now more likely to buy a smaller distribution company — a “bolt-on” acquisition he can fold into his existing business. He is also looking to partner with someone to buy catalog, setting up a fund akin to Universal Music’s arrangement with Chord Music. That would let Warner buy more assets without dragging down its earnings. Indies still need helpStem wasn’t looking to sell when Warner first inquired about a potential deal. The company, which handles payments and distribution for independent artists, has a good track record of partnering with musicians on the precipice of stardom. It has worked with Puerto Rican superstar Bad Bunny, country musician Morgan Wallen and Chappell Roan. When artists explode, they need more resources. Stem raised $250 million via a credit facility to advance artists capital, but it hasn’t been enough to hold onto some of the biggest names. While musicians like the idea of being independent, they also like the money and resources of a major label. It’s why Taylor Swift, who has the money and savvy to do everything on her own, still works with Universal Music. So when Stem was approached by Warner, its leadership engaged the investment bank Raine to help run a process. Stem has received several offers from potential investors and acquirers and hopes to conclude a deal in the next few months. “We’ve had a lot of really exciting label ventures and artists come off our platform,” co-founder and CEO Milana Rabkin told me. “The No. 1 reason we can’t hold onto them is that we don’t have the capital to compete, despite the fact that we’ve raised hundreds of millions of dollars in credit facilities.” Stem’s cost of capital is much higher than that of major labels. Rabkin believes major companies are advancing artists so much money that they won’t get paid back for years, if ever. Stem’s story is familiar to many music startups. They undercut the major record labels by offering artists better deals or new technology. But they only get so big before the majors poach their top acts. Private equity keeps knockingKyncl may have dodged a bullet with Believe, which was sued earlier month by Universal Music for copyright infringement. Some distributors process millions of songs with little oversight, and major streaming services are cracking down on fraud. They are also tired of wasting resources distributing and selling ads for music that almost no one hears. Some of these sellers also expect a payday that exceeds market expectations. SoundCloud has floated a price of $1 billion, a big markup from the last time it was sold. Downtown’s sale process has started and stopped a few times over the years because some buyers are more interested in individual assets than the whole company. Yet there’s still a lot of capital looking to get into the music business. Having done well investing in catalogs, private equity firms, sovereign wealth funds and pension funds are keen to find other ways to invest. They are now looking at the independent sector. Too Lost is in the final stages of talks to raise $20 million to $60 million from private equity firms, according to co-founder Gregory Hirschhorn. He started the company five years ago; it now generates more than $50 million in sales and is profitable. “We’ve been getting inbounds for five years,” Hirschhorn told me. “Private equity firms have been aggressive.” Hirschhorn is still in the earlier stages of his company’s journey and isn’t ready to sell. He is under less pressure to do so since he has never raised outside capital. With private equity on board, that clock will start ticking in five to seven years. Warner Bros. and Disney are trying to catch up to Netflix in Asia, but they don’t want to spend a fortune doing so. Rather than invest in local programming, Warner Bros. is going to rely on Hollywood favorites like Harry Potter and Friends for Max, which debuted in several new markets in the region this past week. Netflix and Amazon have “spent a lot of money and arguably maybe wasted a lot of money trying to compete with great local players that are producing great local stories,” JB Perrette, Warner Bros.’ streaming chief, told my colleague Sohee Kim. Disney is taking an approach that sits between Netflix and Max. It is funding original series, including a second season of its hit superhero drama Moving. But Luke Kang, Disney’s head of Asia-Pacific, said the company is “not a volume player,” he told Sohee. (Read her full report here.) Perrette is right that Netflix and Amazon have invested a lot of money in local programming. But that’s because they realized the audience for Hollywood programs is relatively small in these markets. While Amazon has pulled back in several territories, Netflix hasn’t. The company is spending billions of dollars a year in Asia, where it has more than 50 million customers. The simple explanation may be that Warner Bros. and Disney have less ambitious subscriber targets. The NBA talent merry-go-roundNow that ESPN has licensed the rights to Inside the NBA, its producer Warner Bros. Discovery has some work to do in securing the talent. Charles Barkley and Ernie Johnson will continue as hosts of the long-running fan favorite, but they need to lock in Shaquille O'Neal (among others). NBC and Amazon, which acquired NBA rights in the league's new contract, will also need to line up their talent for the '25-'26 season, when the new deal starts. Former stars Blake Griffin, Reggie Miller and Dwyane Wade are all at the top of people’s lists. NBC had also explored deals with talent on Inside the NBA. The No. 1 movie in the world is… Wicked. The adaptation of the hit musical grossed $114 million domestically and $164 million worldwide. Gladiator II grossed $56 million domestically and has now surpassed $200 million worldwide. (It opened abroad a week earlier.) This is shaping to be one of the biggest holiday weeks at the box office ever, thanks to those two titles and Moana 2. Yet these big openings come at a cost, as Brooks Barnes noted. Gladiator II cost $250 million to produce (and at least $100 million more to market) while Wicked has benefited from one of the most robust, expensive marketing campaigns in recent memory. The Trade Desk is coming for Amazon and RokuWe don’t spend a lot of time talking about advertising technology here, but The Trade Desk is a $64 billion company that helps sell advertising for many of the biggest media companies on earth. It’s now creating its own operating system for TVs — the software you use on your smart TV. That means it’s trying to compete with companies like Amazon, Roku and Google. That’s a tall task. Deals, deals, dealsNew Kendrick Lamar! New Kendrick Lamar! FX’s new show Say Nothing is a thing of beauty. | 
