These are, Kobalt founder Willard Ahdritz notes, “scary times”.
Thanks to the coronavirus crisis, Ahdritz, now chairman of the company, his new CEO Laurent Hubert and the entire Kobalt/AWAL workforce are now working remotely, having shifted to remote working on March 9, way ahead of the total lockdown that most of the global music business now finds itself in.
Kobalt, of course, is almost as much of a technology company as it is a music one, so it was well-prepared for the new normal. Hubert, calling in from New York City, describes the transition as “remarkably seamless”, while Ahdritz notes that, “despite the crisis, we continue to execute what we need to do for our clients”.
The pair have broken off from managing their burgeoning recording and publishing operations during the crisis to call Music Week and discuss Kobalt’s latest financial figures for the 12 months to June 2019, long before Covid-19 reared its ugly head.
As Music Week revealed yesterday, those figures showed revenue soaring 35.1% year-on-year to $543 million (£439.7m). Within that, publishing revenue rose 28% to $405m and AWAL revenues rose 86% to $110m. Elsewhere in the group, revenues at its collection society AMRA rose 46% to $65.6m, and Kobalt Capital continued to invest large sums in music rights, although revenues at Kobalt Neighbouring Rights actually fell 25%.
But, despite the rosy revenue picture, and a 34.1% rise in gross profit to $17.9m, post-tax losses actually widened to $52.8m, from $42.7m the previous year. Indeed, Kobalt has yet to turn a profit in 20 years of operation, a stat often pointed out by more traditional publishing companies.
But now things are about to change. Because one of the things Ahdritz and Hubert have called Music Week to talk about is their declaration that Kobalt is finally ready to turn a profit. And no, despite the timing of this interview, it isn’t an April Fool. Read on to find out how they plan to do it…
How encouraged are you by the 2019 results?
Willard Ahdritz: “I see this as a result of a combination of factors. Our artists and clients are recommending us and we are delivering for our clients. Our launch of AWAL has been really successful, with revenues up 86%. And for the first six months of [financial year] 2020, it was still up 80%, so it’s continuing to grow and create success stories for our artists. We have a successful business and creative strategy that we have built over the years and that continues to deliver.”
Laurent Hubert: “We put in place a signing strategy about two and a half years ago. We had some areas where we were under-indexing, in Latin music, and around urban/hip-hop music. Those are two areas where we put significant push and we also saw an opportunity in the audio-visual world and that is developing as well. We’ve also seen an opportunity in what I would define as the legacy deal and making sure that we have the opportunity to administer some of the most prestigious catalogues. We administer the Elvis Presley catalogue and there are many others. Putting this together has paid off for us and, over the years, we have become a destination for people who are looking at us, not purely as the most efficient collection platform in the world, but as a party than can make a difference from a creative perspective. On the AWAL side, we developed a strategy focusing on new music and a segment of the market which we define as the mid-tier market, where we see a huge opportunity for growth. We feel very confident that, going forward, that segment will continue to grow. This is again the product of a slight shift in strategy, amplified by an a amazing brand. We are the most trusted brand in the market.”
WA: “Despite significant new investments - we have employed 150 new people per annum in the last two financial years and added a whole new level of investment in our technology platform – we have kept operational costs almost flat. Going forward – and this is very important – with our increased scaling and some more efficiency we shall reach group profitability by the end of [financial year to] June 2021.”
We’ve not heard you pledge profitability before – does that mark a big change in approach?
WA: “You’re right – it is the first time I’ve made that statement in 20 years! But we have reached scale. And this is what I’ve said since 2014 – this is what technology companies do – we now have the infrastructure in all the different lanes we want to be in and now scale can kick in and we can leverage technology so we are executing exactly what we’ve had planned for a long time. I am pleased that people are now starting to see that very clearly in our numbers, and it will be in black and white in two financial years: we are going to grow and deliver to people.”
Your losses actually widened last year. Will you have to do things differently to deliver a profit?
WA: “No. It’s the same mission and growth strategy but we have all the structure we want. We see that technology can improve efficiency for us; with new cloud-based machine learning we can squeeze out a significant volume increase, with lower costs. And we have a great team on a global scale.”
LH: “We’re showing on an operational level we have scaled the business. We are at a point where we have sufficient structure to be able to manage and claim more revenue at a lower marginal cost and we expect that to amplify as we continue into the fiscal year.”
Great copyrights are great copyrights and music is under-valued
Willard Ahdritz
Will there be any changes in deal structures for songwriters and artists?
LH: “We are doing deals that are competitive and we’ll stay within the market to be competitive. In some instances, we’ll be able to increase our margin and, in some instances, we won’t be able to. But the overall offering from Kobalt is multi-faceted. Value isn’t purely about rates, it’s about our ability to service the client. I feel very confident that we can remain competitive and that’s very evident by the growth in our revenue.”
Despite AWAL’s rapid growth, most revenues still come from publishing, rather than recordings. Are you looking to even that up?
LH: “AWAL is growing but to maintain that level of increase will be increasingly difficult. But we expect AWAL to grow at least at two or three times [the rate] of publishing for the foreseeable future. Publishing is a far more mature business. It’s fair to imagine a business where AWAL is equally important as our publishing business.”
Neighbouring rights revenues actually dropped last year – why was that?
LH: “We had a couple of income sources, notably one in Germany, that were paying back royalties all the way back to 2007, so we had an additional payment in the prior year which inflated those numbers. If you normalised those payments, you’d see the neighbouring rights business is essentially flat. We think we can have some growth there in the future.”
How has Kobalt Capital been affected by the feverish atmosphere around acquisitions? And will the coronavirus crisis change that atmosphere?
WA: “All deals are unique. Over the years you’ll maybe lose one deal here or there but, in the last couple of weeks, we have seen a high [level of] activity continue. People might look at the future and feel a little bit more insecure about forecasts and, if that is the case, people usually reflect that in the price. But great copyrights are great copyrights and I believe, in most scenarios going forward, that music is under-valued. Growth will continue on a global scale. We are very confident we are going to see opportunities – and take them.”
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