Global Music Investing

Home , KKBox, Merlin Network, NetEase Music, QQ Music, X5 Music Group

GLOBAL Global music investing Top picks to ride the next music wave Our deep dive on the entire music ecosystem, including content owners and retailers, highlights key factors that support an acceleration in recorded music revenue growth. We also look at the impact on the terms of trade from technology and regulation and predict some value shift in favour of the record labels. Our top picks for music investing are Vivendi, Sony, Amazon and LOEN Entertainment. Converting listeners to customers

Consumers’ willingness (especially younger demographics) to pay for streaming services benefits all industry players. The proliferation of successful platforms, a Inside record high free-to-pay conversion rate and an ARPU generally higher than Our top picks 2 previous technology cycles, all support our view that the global music market will Converting listeners to customers 4 double in the next ten years (8% CAGR 2015-25E). We argue that music is about to start the journey that has led the video entertainment industry to Raising n/t forecasts for music revenues 10 quadruple over the past 40 years. Changing terms of trade 15 Universal Music Group (Vivendi) 21 Raising forecasts for music revenues Sony Music Group 23 With Apple Music we have entered the steeper part of the adoption curve for Warner Music Group 25 music revenue growth. We believe consensus erroneously focuses on the five Spotify 27 largest countries, while our new proprietary model shows that smaller countries Apple Music/ iTunes (Apple) 29 have a much greater contribution to growth. We raise our near-term forecasts for recorded music sales growth by 100bps per annum (4% in 2016 rising to 11% by Amazon Prime Music 31 2020), at the top of consensus range. YouTube (Alphabet) 33 SoundCloud 35 Changes in the terms of trade favour the content owners Sirius XM 37 A relatively higher concentration of record labels compared to fragmented Pandora 39 distribution across different models and regions means that bargaining power is MelOn (LOEN Entertainment) 41 moving up the value chain in favour of content owners, just as has occurred in QQ Music (Tencent) 43 video entertainment. Still, we think increased segmentation of consumers and new value-added functionalities (e.g. VR concert video) leaves plenty of room for KKBOX (KDDI Corp) 45 retailers to grow revenues ahead of premium content cost inflation. Other music distributors 46 Top picks are Vivendi, Sony, Amazon and LOEN Analyst(s) Macquarie Capital (Europe) Limited Among the content owners our preferred stocks are Vivendi (nearly 60% of its Giasone Salati operating profit from music in 2015) and Sony (20% of OP from music in 2015). +44 203 037 2670 [email protected] Together they account for 56% of recorded music and 51% of music publishing Macquarie Capital (USA) Inc. Ben Schachter global markets (2015), which gives both strong bargaining power in the +1 212 231 0644 [email protected] upcoming renegotiations of retail licence agreements. Amy Yong +1 212 231 2624 [email protected] Among the tech/internet giants, Amazon has the most sophisticated pricing Macquarie Capital Securities (Japan) Limited Damian Thong, CFA strategy and a good hardware integration (Echo). Apple competes more directly +81 3 3512 7877 [email protected] with a strong Spotify, and YouTube is facing potential regulatory headwind and Nathan Ramler, CFA new competition from SoundCloud. +81 3 3512 7875 [email protected] Macquarie Capital Limited Of the local distributors we pick LOEN for its undisputed market position and Wendy Huang, CFA +852 3922 3378 [email protected] demonstrated pricing power. We believe Sirius XM’s execution is impeccable but Joe Yu its business model is most at risk from growth in streaming. Pandora is a +852 3922 1160 [email protected] Macquarie Securities Korea Limited credible takeover target as widely reported in the press, while QQ Music and Kwang Cho KKBOX are relatively small within Tencent and KDDI, respectively. +822 3705 4953 [email protected]

9 June 2016

Please refer to page 48 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

9 June 2016 June 9 Research Macquarie Our top picks We argue that the music industry is on the verge of a structural multi-decade growth period, which will likely benefit all industry players, at this early stage. Still, our stock

selection is relatively narrow (4 out of 13 companies discussed in this report – Fig 2), based on a sustainable competitive advantage derived from relative size in a given segment of the value chain, differentiated strategy and potential synergies with other assets within the same company. Our top picks are also quite diverse, ranging from European media company Vivendi to Japanese conglomerate Sony, and from US internet mega cap Amazon, to Korean small cap pure-play LOEN Entertainment. The first two of these are content owners, the latter two operate primarily as distributors, though the line is blurring with labels owning stakes in many distributors now and local distributors often operating also as record labels. This diversity makes a comparison of the stocks based on our Macquarie Alpha Quant Model less relevant, while we present standard valuation metrics in Fig 1 here below.

Fig 1 Global music players valuation metrics – Vivendi, Sony, Amazon and LOEN are top picks

Current Target Upside/ % of music Music Top Market Cap EV/ EBITDA Company Analyst Ticker Rating Currency price Price downside revenues Pick ($m) 16E P/E 16E

Alphabet Ben Schachter GOOGL US Outperform USD 730 890 21.9% 3% 496,587 12.4x 21.7x Amazon.com Ben Schachter AMZN US Outperform USD 727 760 4.6% 1% y 342,892 20.8x 121.3x Apple Ben Schachter AAPL US Outperform USD 99 112 13.6% 1% 540,238 8.3x 11.8x KDDI Corporation Nathan Ramler 9433 JP Outperform JPY 3,147 3,200 1.7% 0.2% 73,780 6.2x 16.1x Loen Entertainment Kwang Cho 016170 KS Outperform KRW 74,600 111,000 48.8% 100% y 1,594 17.5x 29.7x Pandora Media Amy Yong P US Outperform USD 12 15 23.3% 100% 2,784 -44.9x nmf Sirius XM Radio Amy Yong SIRI US Outperform USD 4 4.40 10.3% 47% 22,264 13.7x 27.4x Sony Damian Thong 6758 JP Outperform JPY 3,102 3,200 3.2% 8% y 29,162 5.4x 25.8x SoundCloud n.a. n.a. n.a. n.a. n.a. n.a. n.a. 100% 700^ n.a. n.a. Spotify n.a. n.a. n.a. n.a. n.a. n.a. n.a. 100% 8,500* n.a. n.a. Tencent Wendy Huang 700 HK Outperform HKD 173 204 17.4% 1% 212,210 20.2x 31.4x Vivendi Giasone Salati VIV FP Outperform EUR 17 24.50 43.0% 47% y 25,030 9.3x 25.6x Warner Music Group n.a. n.a. n.a. n.a. n.a. n.a. n.a. 100% 3,300~ n.a. n.a. ^ SoundCloud latest valuation is $700m in 2014, * Spotify $8.5bn valuation is from 2015 raising, ~Warner $3.3bn valuation is based on Access Industries acquisition in 2011 Source: Company data, Factset, Macquarie Research, June 2016; based on prices as of 6th June; estimates for not rated companies are based on consensus

Vivendi. With about 60% of its revenues and profit derived from the music segment in 2015, Vivendi is the most direct way to invest in music content. Universal Music’s (UMG) relatively large size in both recorded music and publishing gives it a better bargaining position to negotiate licensing deals with retailers and to improve margins in the medium term. UMG accounts for 44% of Vivendi SoTP and about two thirds of the upside to our fair value. (Please see separate note published today). Sony. Music accounted for only 8% of Sony’s revenues, but it represented 20% of its operating profit, and it is clearly central to the company’s strategy (e.g. recent $750m investments to buy 50% stake in Sony/ATV, plus £90m multiyear agreement with Adele). Sony is one of our key picks for music investing adding to strong growth prospects in its Game & Network Services (40m PS4s sold, a year quicker than PS3) and Image Sensor businesses (Please see for separate note published today).

Global music investingGlobal Amazon. Music is a small part of Amazon’s revenues, but Amazon is a big player in music (largest physical retailer, second largest in downloads and growing in streaming). From a competitive stand-point, Amazon has the most sophisticated pricing strategy, including the best value offering part of Prime subscriptions and a fuller catalogue available as downloads. The Amazon Echo wireless speaker has been well received, opening the door for the smart home segment. LOEN Entertainment. LOEN is Korea’s largest digital music retailer (MelOn) and the only profitable pure play among global music streaming platforms. LOEN is also vertically integrated (fourth largest label in Korea), a rare hedge against value leakage to content owners. LOEN is also one of our top Buy ideas in the Korean small cap space. Please see our initiation report here (Streaming revives the radio star). (Please see for separate note published today).

9 June 2016 June 9 Research Macquarie Fig 2 Global Music landscape – Content owners and major digital retailers/distributors (2015)

Universal Music (Vivendi) Sony Music Warner Music

$5,150m (including ~US$1.4bn at Sony Music Music revenues: $6,061m $2,966m Entertainment Japan) % of group revenues 47% 8% 100%

Music EBIT margin: 12.3% ~11% (14.1% incl. Orchard Media val. gain) 4.3%

Recorded Music: 69%, Music Publishing: 12%, Rec/pub revs split: 85%/ 15% 84%/ 16% Visual Media & Platform: 19% Global share of Recorded: 33.5% 22.6% 17.1% 28.3% (Sony/ATV with 2.16m songs catalogue Global share of Publishing: 23.1% 12.4% + 2.05m in the EMI catalogue) Private (Len Blavatnik's Access Ind. owns Ownership: Vivendi (VIV FP) owns 100% Sony (6758 JP) owns 100% of SME and SMEJ 100%) Macquarie rating: Outperform (VIV FP) Outperform (6758 JP) n/a

Recordlabels Macquarie analyst: Giasone Salati Damian Thong n/a

Spotify Apple Music/ iTunes Amazon Prime Music/ Fire YouTube (Alphabet) SoundCloud

Music revenues: $2,289m $3,212m $1,542m $1,875m $30m

% of group revenues 100% 1% 1% 3% 100.0% Geography: Global Global Global Global Global Free streaming users: 75m none none 800m 175m Pay streaming subs: 30m 13m 20m users out of 46m+ Prime subs n/a service just launched Premium tier price: $9.99 $9.99 ($14.99 Family pack) $99/ year (Amazon Prime) $9.99 $9.99 Other products: Podcasts, TV programme clips Downloads, Online radio, Music videos Free delivery, Prime Video, etc. User generated content, Music videos remixes, users uploads Private (Vivendi owns 5%, Sony 6%, Private (Vivendi owns 3%, Warner 1.5%, Sony Ownership: Apple (AAPL US) owns 100% Amazon (AMZN US) owns 100% Alphabet (GOOGL US) owns 100% Warner 2.5%, Merlin 1%) 1.5% - estimate) Macquarie rating: n/a (planning IPO as early as 2017 - WSJ) Outperform (AAPL US) Outperform (AMZN US) Outperform (GOOGL US) n/a

Global distribution Global Macquarie analyst: n/a Ben Schachter Ben Schachter Ben Schachter n/a

Sirius XM Pandora MelOn (LOEN) KKBOX (KDDI) QQ Music (Tencent)

Inc. in "value-added service" division ($12.3bn Music revenues: $4,570m $1,164m $316m $90m in 2015) % of group revenues 47% 100% 100.0% 0.2% 1.0% Taiwan, Hong Kong, Singapore, Malaysia, Geography: US, Canada US South Korea Mainland China and other with restrictions Thailand and Japan Free streaming users none 78m (20m+ IDs only 1min free sample songs) 8m 100m active daily users Pay streaming subs 30m (satellite radio) 4m 4m 2m 3m $15.9/m streaming 0R $10.9-19.9/m sat Premium tier price: $4.99/ month (Pandora One) $6.7/ month $3/ month $3/ month radio Other products: News, Sports channels Ticketfly Paid downloads Downloads, concert ticketing Paid downloads, online radio

Public (John Malone's Liberty Media owns private (76% KDDI, GIC , 11% HTC, music investingGlobal Ownership: Public LOEN (016170-KR) owns 100% Tencent (700 HK) owns 100% 64%) ChungHwa has 30% in Taiwan subsidiary)

Macquarie rating: Outperform (SIRI US) Outperform (P US) Outperform (016170-KR) Outperform (9433 JP) Outperform (700 HK)

Local distribution Local Macquarie analyst: Amy Yong Amy Yong Kwang Cho Nathan Ramler Wendy Huang Source: Macquarie Research, Factset, Company data, June 2016

Macquarie Research Global music investing

Converting listeners to customers We see streaming is to the music industry what the set-top box has been to the video industry – a technology enabler that will grow the entire industry to new highs. The new polished services are so rich in content and easy to use that many consumers have naturally been moving from free pirated services to ad-supported platforms and from these to premium pay tiers. The migration is picking up pace, and it will eventually lead to a fuller monetisation of music consumption. In this report we combine the latest global data with bottom-up analysis of the main players across the US, Europe and Asia. Our conclusion is that current trends benefit all participants, though changes in the terms of trade mean that retailers will leak some of the value to content owners. Free/pay streaming is a better combination than radio/physical For about a century, since the advent of commercial radio, recorded music has been monetised via physical sales and advertising revenues. Radio broadcasting was contributing only a marginal part of the overall revenues, but it played an important role in the promotion of new acts to different audience segments. Physical purchases by music fans accounted for the lion’s share of revenues, supported only by a relatively small number of buyers. One problem with the CD pricing model for CDs is its excessive rigidity that forces all consumers to pay the same price for the same album, regardless of how much they are ready to pay. A uniform price level means that genuine fans pay less than they would and for some people the price is too high. The result is a loss of revenue at both extremes. The download pricing model was in some respects even more rigid: for the first few years all tracks available on the iTunes Store were priced the same, regardless of their popularity. This restriction was imposed by Apple itself and lasted until 2009. But streaming has the potential to merge all the existing complimentary models and create a more continuous price offering that will ultimately maximise revenues. Better segmentation of music listeners means that everybody ends up paying the price they want for the level of access they desire. In economic terms that equals charging each user close to his/her reserve price for music. Four factors that support further recorded music revenue growth The best way to verify the correctness of the framework we have just highlighted is to look for empirical evidence that the number of consumers (as opposed to listeners) is growing and that their average spending on music is and has the potential to remain higher than in previous technology cycles. Here are four factors that we believe support an acceleration in recorded music revenue growth: 1. Proliferation of differentiated distribution platforms (Fig 3-4) – many paid-for subscriptions are offered at a similar price of $9.99, but each of the main platforms is well differentiated from competition and it appeals to different segments of the population. Differences vary from the level of engagement to the repertoire available (by geography or genre), which already offers a good opportunity to segment audience. 2. Streaming ARPU is higher than downloads and physical (Fig 5) – Higher revenues per subscriber can be associated to the repeat nature of purchase (monthly regular spending) compared to the one-off nature of previous models, but also to higher customer satisfaction (consumers would trade down to free ad-supported tier if they saw no value in the premium tier). 3. High and increasing free-to-pay conversion rate (Fig 6-7) – Spotify has a record high conversion rate when compared to other successful freemium consumer apps, again proving the point that customer satisfaction is relatively higher with streaming. 4. Favourable demographics (Fig 8) – the breakdown of free/pay subscribers by age surprisingly shows that younger demographics are equally likely to be on the premium tier and cohorts data analysis from Sweden shows that young subscribers retain the service as they grow older.

9 June 2016 4 Macquarie Research Global music investing

Let’s review each of these points in more detail before presenting our forecasts for streaming revenues and for the whole industry. Streaming platforms are different by functionality and repertoire.... One of the major reasons attracting more users to streaming services is the increasing number of differentiated products on offer. Every new platform launched seems to un-tap a totally new customer segment adding to the underlying industry growth rather than taking away from existing players. For example, the launch of Apple Music in 2015 has clearly been additive to the overall pie (Fig 3).

Fig 3 New platforms are incremental to overall streaming growth

70.0 66

60.0 Apple Music launch is totally incremental to overall streaming subs 50.0 41 40.0 28 30.0 20 20.0 13 8 10.0 3

0.0 2009 2010 2011 2012 2013 2014 2015

Spotify pay Apple Deezer Pandora Other

Source: Company data, Macquarie Research, June 2016

Apple music is focused on curation to appeal to the broader masses of “lean-back listeners”, like a sort of music-only radio station. YouTube is mostly about viral distribution and as such can serve as a promotional channel. Pandora offers a highly customised playlist based on previous selection. Spotify is tilted towards discovery, including a weekly discovery playlist depending on users habits. SoundCloud is the most interactive and targets the more active “lean-forward” listeners typically grouped in communities and genre-specific. For most of this report we assimilate “passive” listening to Sirius XM (satellite radio) to the streaming pure-players, though its service is more akin to traditional radio with a focus on making the in-car experience as seamless as possible (receiver is often pre-installed in new cars). Sustainable differentiation may also come from focus on local content and cross-selling with telecoms or internet services: MelOn is a leader in digital music distribution in South Korea (also #4 label in the region), Tencent’s QQ Music in China (Tencent is the dominant social network in China) and KKBOX in Taiwan, Hong Kong and Malaysia. Another form of differentiation is on value for money where Amazon actually ranks highest. Free access to a small repertoire of 1m songs is included into Amazon Prime subscription alongside some video content and free delivery for the majority of purchases on the site. ... while price differentiation is still limited, for now Somewhat surprisingly, differentiation is still very embryonic in terms of pricing with most services offered at a $9.99/ month equivalent (Fig 4). One reason for the concentration around this level comes from the majors that have moved onto a revenue sharing agreement with distributors and as such have a direct saying in what the actual retail price will be.

9 June 2016 5 Macquarie Research Global music investing

Fig 4 Pricing strategy still concentrated around $9.99/ month in most countries Free tier Premium tier Top tier

Apple Music no $9.99/m Spotify yes $9.99/m YouTube Red yes $9.99/m Tidal no $9.99/m $19.99 for HD Amazon Prime Music no $99/y Deezer y $9.99/m $14.99 Sonos LOEN no $6.7/m QQ Music (Tencent) y $3/m Pandora y $4.99/m SiriusXM no $15.9/m Source: Company data, Macquarie Research, June 2016

Discounting is available by adding more users to one subscription or for students, but in general, there is a sense that much growth can still be achieved at this level, before adding a lower entry price and offer more niche pricing options. Looking forward we expect more experimentation with higher price points (above $9.99/ month), beyond the higher quality offer by Tidal for $19.99/ month. To imagine what could come next, we can take inspiration from the video industry. At the higher end we could have live concert streaming, special editions and exclusive preview of new albums ahead of the general public. At the lower end we can imagine single music genre being sold separately (rap, rock, electronic, etc.) or pure library services (no new releases). Higher streaming ARPU means greater customer satisfaction Pay streaming subscriptions exhibit a higher ARPU than previous technology: 9% higher than physical and nearly 50% higher than downloads (Fig 5). Please notice that we have taken the peak year in sales of each technology cycle (e.g. 1999 for physical, 2012 for downloads) to avoid distortions from the collapse of music revenues in the past ten years. A higher spending per user is easily justifiable to us with the remarkably higher ease of use and vast catalogue available on most streaming services. The all-you-can-listen bundle allows consumers to discover new music at zero incremental cost, so there is a higher perceived value for money, which also reduces churn.

Fig 5 ARPU is greater for Streaming services than it was for downloads and physical (global)

Average spending per music buyer ($, yearly) 7.0 5.8 6.0 5.3 5.0 4.0 4.0

3.0

2.0

1.0

0.0 Pay Streaming (2016) Physical (1999) Downloads (2012)

Source: Company data, Macquarie Research, June 2016

Our calculated industry ARPU of $5.8 is nearly half the advertised price of $9.99 for Spotify and Apple Music partly because of the Family discounts but also because of the common 3-m free promotions: in 2015 we calculate that acquisition costs reduced revenues by over 10%.

9 June 2016 6 Macquarie Research Global music investing

Another factor which artificially depresses the calculated ARPU is the high number of so- called streaming zombies. Midia Consulting estimates that there are in excess of ten million inactive pay subscribers globally, typically from telecom bundles. Deezer, the highest offender in this field, last reported 3.3m of “inactive bundle subs”, out of a total of 6.3m. Some of these inactive subscriptions may have zero associated revenues, depending on the agreement with the telecom operator. With 60% growth in pay subscribers, retailers are in no rush to raise the cost of subscriptions, but in Korea MelOn has already proven that consumers are remarkably inelastic to price increase. The standard price for MelOn, the retail name for LOEN’s successful streaming service (#1 market share with 2.6m subs) increased from 3,000 won ($3) in 2004 to 8,000 won ($7) in 2015, excluding the additional cost for downloads. In other words, there is room to see ARPU improving across the industry. Record free-to-pay conversion and increasing Free-to-pay conversion typically ranges between 2%-4% (number of paying subscribers / total number of users). Some very successful apps like Mailchimp and Evernote passed the 10% mark, but this remains the exception more than the rule. In this context, Spotify’s current 28% conversion rate (Fig 6) is striking and serves as additional proof of how strongly consumers enjoy music streaming.

Fig 6 Spotify’s free-to-pay conversion rate stands out Fig 7 Spotify’s conversion rates keeps growing

28.0%

30.0% 28.0% 30.0% Free-to-pay conversion rate 25.0% 25.0% 25.0%

20.0% 18.9%

20.0% 13.3% 15.0% 13.0% 14.3% 12.0% 15.0%

10.0% 7.0%

10.0%

4.0% 4.0% 5.0% 3.8%

0.5% 3.4% 5.0% 0.0%

Hulu 0.0% Skype

Spotify 2009 2010 2011 2012 2013 2014 2015

Dropbox Pandora

Logmein

Evernote Mailchimp

free/pay conversion Google Drive

Source: Company Data, Factset, Macquarie Research, June 2016 Source: Company Data, Factset, Macquarie Research, June 2016

Spotify’s conversion rate also looks very strong from a dynamic standpoint with continued improvements over time, from as low as 3% in 2010 to the record level of 28% in 2015 (Fig 7). Perversely, one could argue that conversion is so high because consumers are very happy to pay for music and there should be no free tier, or at least nothing as rich as the plan Spotify offers. Apple Music, the closest competitor to Spotify, has indeed launched without a free tier and an entry point of $9.99 in line with Spotify. Music majors are very keen to make the free tier plan less appealing to encourage an even higher conversion to the most profitable premium service. Spotify’s free-tier certainly served the company well in the early land-grabbing phase of expansion and it also served the majors well to migrate users out of illegitimate services on legal ones. But looking forward it is likely we will see some content and functionalities removed from the free tier. Pay subscribers are from younger demographics The demographics of streaming free users are highly skewed towards the youngest with over 70% of total subscribers below 34y. The breakdown by age of paying subscribers is also similar with a higher share of users in the 25-36y range, but overall again >70% are less than 35y (Fig 8). In Sweden, one of the countries with the longest history in streaming, cohorts’ analysis reassuringly shows that young subscribers remain on Spotify as they grow older.

9 June 2016 7 Macquarie Research Global music investing

Fig 8 The majority of Spotify free/pay subs are from young demographics (2015)

50% 46% pay/free demographics are 45% very similar: >70% below 34y 40% 35% 36% 35% 30% 25% 25% 20% 18% 14% 15% 9% 10% 7% 4% 4% 2% 5% 0% 0% 13-24 25-34 35-44 45-54 55-64 65+

Pay subs Total subs

Source: Company data, Macquarie Research, June 2016

The concentration of pay subscribers in the younger demographics seems in contrast with the common perception that young people will prefer piracy to legal sites and free options to pay subscriptions. On the contrary we argue that streaming facilitates discovery and as such it is more appreciated by younger listeners. Added functionalities, like the ease to share playlists and accessing premium content, will likely continue to push users across all ages to upgrade to pay subscriptions. We forecast streaming revenues to grow 9x in ten years... Historically, the share of streaming revenues derived from paid-for subscription has steadily increased (Fig 9), and we think this trend is going to continue based on new added value services (e.g. live streams for concerts, like for sport on TV) on one side, and a wider price differentiation with lower price points at the entry level (i.e. access only to few genres, equivalent to the entry level bundle on pay TV) on the other side. Overall we forecast streaming revenues to grow nine-fold between 2015-2025 (Fig 9), with a decreasing contribution from ad-supported services (from 22% to 10%).

Fig 9 The contribution from paid-for subscriptions will continue to increase

45,000 100% 40,000 90% 35,000 80% 30,000 70% 60% 25,000 50% 20,000 paid subscriptions increased 40% from 60% of streaming revs 15,000 30% to nearly 80% in 2015 10,000 20% 5,000 10%

0 0%

2009 2012 2013 2015 2010 2011 2014

2016E 2017E 2019E 2020E 2023E 2024E 2018E 2021E 2022E 2025E

Pay subscription revs Advertising revs Series3

Source: Company data, Macquarie Research, June 2016

Including an estimated $80bn contribution from global commercial radio, advertising still accounts for a disproportionate 60% of total music entertainment revenues. Consumer’s direct spending on music is just above 10% and live performance just below 30%. By comparison, advertising on free/pay TV accounts for only about a quarter of the overall video entertainment revenues in the US, with over 60% from pay TV subscription and the remainder from physical/cinema.

9 June 2016 8 Macquarie Research Global music investing

We strongly argue that the streaming model is superior to previous physical/radio model and that over time it can grow the size of the overall industry to new highs with a prevalent share of revenues from consumer’s direct spending on music as opposed to advertising. ... implying a slowdown in volume growth Our forecasts for streaming revenues are significantly above consensus (i.e. 3x higher for 2020, based on Midia Consulting). Still, they imply a sharp deceleration in pay subscribers growth, following the short-term boost of Apple Music in 2015-2016 (Fig 10) – through our forecast horizon, we maintain the overall industry ARPU stable at 2015 levels.

Fig 10 Our forecasts imply a sharp deceleration in pay subscribers growth after the 2016 peak caused by Apple Music launch

700 180.0%

600 Growth boost in 2015-16 thanks to 160.0% launch of Apple Music 140.0% 500 120.0% 400 100.0% 300 80.0% 60.0% 200 40.0%

100 20.0%

2010 2011 2012 2015 2013 2014

0 2009 0.0%

2016E 2019E 2020E 2021E 2024E 2025E 2017E 2018E 2022E 2023E

Global pay subs (m) growth %

Source: Company data, Macquarie Research, May 2016

In terms of penetration, global pay subs increased from 0.1% of global population in 2010 to 0.9% in 2015. We see a further increase to nearly 5% in 2020 and just over 7% in 2025, which appears reasonable given the increasing free-to-pay conversion. At the end of 2015, across the main platforms (i.e. YouTube, SoundCloud QQ Music, Spotify, Pandora, MelOn, etc.) there were nearly 1.4bn users (cumulative), or 20x the c70m subscribers to streaming services (ex. Sirius XM’s 30m subs at the end of 2015).

9 June 2016 9 Macquarie Research Global music investing

Raising n/t forecasts for music revenues A number of positive quantitative and qualitative factors lead us to increase our forecasts for global recorded music revenue growth in the near years. We are now firmly at the inflection point after tentative steps in this direction and we believe the recovery is guaranteed by the proliferation of new distribution platforms (all legitimate) coupled with the consumer’s increasing adoption rate. Our new forecasts increase by c100bps per annum in the next five years, peaking at double digits in 2018-20 and reverting to mid-single digits by 2025 (Fig 11).

Fig 11 Faster near-term growth thanks to proliferation Fig 12 Recorded music revenues to double in the of streaming platforms next 10 years (‘000 US$)

Global recorded music sales growth 45,000 90% 12.0% 40,000 80% 10.0% 35,000 70% 30,000 60% 8.0% 25,000 50% 6.0% 20,000 40% 15,000 30% 4.0% 10,000 20%

2.0% 5,000 10%

0 0%

1997 1999 2000 2002 2003 2004 2005 2006 2007 2008 2010 2011 2013 2014 1998 2001 2009 2012 2015

2016E 2017E 2019E 2020E 2022E 2023E 2025E 2018E 2021E 2024E

0.0%

2018E 2019E 2020E 2021E 2022E 2023E 2024E 2016E 2017E 2025E

Streaming Download and other Current estimates Previous estimates Physical streaming as % of total

Source: IFPI, Macquarie Research, June 2016 Source: IFPI, Macquarie Research, June 2016

Longer term we reaffirm our forecast of the 8% CAGR 2015-2025E (Fig 12). Such growth is comparable to video content revenue growth as a result of ever increasing pay TV revenues, even in the US is still defying concerns about cord-cutting. Indeed, we believe that music has the same growth potential as video entertainment, especially now that devices, software and mobile network enable a seamless streaming experience. Moreover, the music industry suffered over a decade of continuous decline, which makes the current base a depressed starting point, leaving greater scope for further growth beyond 2025 too. The industry growth has sound foundations The latest IFPI data confirmed that the music market has returned to growth (global recorded music revenues grew 3% in 2015, in constant currency), shifting the debate on the shape of a future recovery rather than the timing. The mix of revenues is also becoming increasingly favourable with streaming accounting for nearly 20% of total in 2015 (Fig 13). The most recent indications for 2016 trends show streaming revenues growth accelerating back to c. 50%, with physical/downloads’ decline stable around mid-single digits.

9 June 2016 10 Macquarie Research Global music investing

Fig 13 Global recorded Music bounced back to Fig 14 Streaming increased to 19% of total in 2015 positive growth in 2015 (constant currency, 2015) and it overtook download in Q4 2015

16,000 4.0% Synch. revs single track 2% downloads 14,000 3.1% 3.0% 11% 12,000 Performance full album 2.0% rights downloads 10,000 14% 9% 1.0% other 8,000 0.5% downloads 0.0% mobile 0% 6,000 -0.4% personalis. -1.0% 1% 4,000

-1.8% -2.0% other digital 2,000 5% paid 0 -3.0% subscription 2011 2012 2013 2014 2015 streams 15% Physical Downloads Streaming Physical Perf. rights Synch. revs Total growth 39% ad-supported streams 4% Source: Company Data, Factset, Macquarie Research, June 2016 Source: Company Data, Factset, Macquarie Research, June 2016

The launch of Apple Music certainly had a negative impact on download revenues, but it also appears to have acted as a catalyst to attract new consumers to streaming services and to convert free users to paid subscribers. Spotify also reported a positive halo effect on subscribers growth so that overall streaming subscribers are growing faster since the launch of Apple Music (Fig 14). Crucially, the contribution from streaming more than offset the loss of iTunes revenues.

Fig 15 Streaming paid subscribers’ growth has accelerated since the launch of Apple Music

40.0

35.0 Paid streaming subs growth accelerated 30.0 since the launch of Apple Music 25.0

20.0

15.0 10.0

5.0

0.0 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15

Spotify Apple Music

Source: Company data, Macquarie Research, June 2016

Qualitative and quantitative arguments presented in the first section of this report strongly suggest that we are at the beginning of the steepening in the adoption curve. One could read the accelerated growth in pay subscribers associated with Apple’s launch as a contribution to consumer education for streaming. All the data points suggest an acceleration in growth near term, and in the next section we develop a proprietary quantitative model to help us finetune our previous forecasts.

9 June 2016 11 Macquarie Research Global music investing

Insights from the quant music model The five largest countries in terms of recorded music (US, Japan, UK, Germany and France) accounted for three quarters of global revenues in 2015 (Fig 16), and they typically extrapolate trends in the global market.

Fig 16 The five largest countries account for 3/4 of global recorded music revenues (2015)

Other Netherlands Sweden 1% 13% 1% USA South Korea 30% 1% Brazil 2% Italy 2% Canada Australia 3% 3%

France 6% UK 9% Japan Germany 20% 9% Source: Company data, Macquarie Research, June 2016

In 2015 however, they only contributed one quarter of the overall growth. Conversely, ten relatively small countries (less than a quarter of global revenues, in aggregate) accounted for two thirds of the global growth (Fig 17). A more granular approach is needed to understand and forecast music revenues, so we tried close to 50 different regression models using the latest IFPI data with the breakdown by format over 60 countries for the last five years.

Fig 17 Smaller countries contribution to growth is higher than the large five (2015)

10 smaller2015 countries % contribution contribute two thrids of global growth

20.0% 15.8%

15.0% 14.6%

11.8% 10.9%

10.0% 8.1%

6.9%

5.7%

4.7%

4.4%

3.6% 3.5%

5.0% 2.8%

1.8%

1.7%

1.6%

1.4%

1.3%

1.1%

0.9%

0.8%

0.7%

0.6%

0.5%

0.4%

0.3%

0.2%

0.1%

0.0% 0.0%

0.0%

0.1%

0.2% 0.2% 0.2%

-5.0% 0.3%

0.5%

0.7% 0.7% 0.7%

- -

1.0%

- - -

1.5%

- 4.0%

-10.0% -

Italy

USA

Peru

India

Chile

Brazil

Spain

China

Japan

Russia Turkey

Austria

Ireland

France

Poland

Mexico

Croatia Taiwan

Greece

Finland

Norway

Canada

Belgium Sweden

Bulgaria

Ecuador

Slovakia Hungary Uruguay

Thailand

Australia

Malaysia

Denmark

Germany

Colombia

Argentina

Indonesia

Singapore

Venezuela

Philippines

HongKong

Switzerland

Netherlands

SouthAfrica

SouthKorea

New Zealand New

Czech RepublicCzech CentralAmerica

Source: Company data, Macquarie Research, June 2016

9 June 2016 12 Macquarie Research Global music investing

The first model we tested included as a prominent explanatory variable the growth/ share from streaming services that are generally accepted as the main responsibility for a general increase in revenues, but correlation was poor and the statistical significance low. GDP per capita and GDP growth also returned poor results. The inherent volatility of music revenues (hit and miss nature) and a number of structural changes (launch of Spotify shuffler on mobile in 2013 and Apple Music in June 2015) limit the R-squared to 0.3, but the model is robust (Fig 18) shows the details regression statistics), and it helps understand the dynamics of growth: . Growth in physical sales in previous years – 100bps decline in CD sales results in 32bps lower growth for the whole music. This result per se is not surprising remembering that physical revenues represent on average 39% of the total, but it is surprising that a meaningful relationship is found only with this variable rather than with growth in streaming. . Recorded music revenues per capita (log) – the coefficient is negative so that a 10% increase in music spending would reduce music revenue growth by 40bps in a given country. In other words, the more developed music markets, the ones in which spending per capita is already relatively high, will see slower growth. One more reason not to focus on the largest countries as leading indicators for the whole market. . Smartphone penetration – 1 percentage point higher penetration increases growth by 17 bps. Global smartphone user penetration is expected to increase from 25% in 2015 to 35% in 2019. Technology, including a robust mobile network, is a necessary enabler for music streaming.

Fig 18 Regression statistics

Regression Statistics R Square 0.300 Adjusted R Square 0.245 Standard Error 0.086 Observations 42

Coefficients Standard Error t Stat P-value Intercept 0.026 0.050 0.523 0.604 Recorded music per capita (2013, log, US$) -0.042 0.012 -3.575 0.001 Smartphone penetration 0.167 0.087 1.932 0.061 Physical growth ('11-'13 avg, loc. Curr.) 0.330 0.180 1.834 0.074 Source: Company data, Macquarie Research, June 2016

According to the model presented above, the global recorded music revenues will grow 4.4% in 2016 (constant currency), broadly in line with our top-of-consensus-range forecasts. We reaffirm our forecasts of recorded music to double by 2025 Related to the speed of growth of consumers’ spending on music, is also the question on the new equilibrium level for aggregated total spending. Our long-term view, as presented in previous research, is that recorded music revenues will double over the next 10 years, still well below the previous peak achieved in 1999 ($39bn), in nominal terms. And we see even further growth beyond 2025, in analogy to the continued increase in spending on video entertainment: we argue that streaming is to music what the set-top box has been to video.

9 June 2016 13 Macquarie Research Global music investing

Fig 19 Our forecasts for the recorded music industry revenues to double in ten years imply spending per capita still 40% lower than previous peak in 1999

spending per capita on music remains 50,000 7.0 45,000 40% below peak, in nominal terms 6.0 40,000 35,000 5.0 30,000 4.0 25,000 20,000 3.0 15,000 2.0 10,000 1.0 5,000

0 0.0

1997 1999 2001 2002 2004 2006 2008 2009 2011 2013 2015 1998 2000 2003 2005 2007 2010 2012 2014

2016E 2018E 2020E 2022E 2023E 2025E 2017E 2019E 2021E 2024E

Global recorded music sales ($m) Music sales per capita (nominal $/ annum)

Source: IFPI, Macquarie Research, June 2016

As a final point to show that our above-consensus forecasts are not particularly ambitious we present the long-term trend in music spending per capita in nominal terms, which has been decreasing in line with the aggregated reported revenues ever since 1999. Interestingly, our forecasts for the industry to double in ten years only imply spending per capita increase to 40% below the previous peak, in nominal terms, which seems very reasonable to us.

9 June 2016 14 Macquarie Research Global music investing

Changing terms of trade Growing recorded music revenues benefit all industry players, and economies of scale should lead to margin expansion for all involved. Still, there are some changes to the terms of trade that will cause value shifts across the value chain, from consumers to retailers and from retailers to the majors. These are the main topics we will review in details in this section: 1. Proliferation of retailers/ distributors 2. Regulation (Safe Harbour) 3. Renewal of existing licensing deals (YouTube and Spotify) 4. Windowing (Spotify, YouTube). Relative concentration favours the labels Over the past two decades, during the most difficult years for the music industry, the number of majors reduced from five (six including Universal before the merger with Polygram) to three controlling nearly three quarters of the global market (Fig 20 and 21). Universal played the most active part in consolidating the market with the acquisition of EMI (2012) which followed Sony’s acquisition on BMG (2008).

Fig 20 In 1998 five majors controlled just over 75% of Fig 21 In 2015 the top 3 labels controlled nearly 75% the global market for recorded music and of the market, 83% including independents association independents were not grouped under Merlin Merlin

Polygram Indies 17% 16% Independents 17% Universal (UMG) 33%

Universal 6% Merlin 10% Sony SMG) 17%

Bertelsmann (BMG) 14%

Warner (WMG) 17% Warner EMI (WMG) Sony (SME) 15% 23% 15% Source: Company Data, Factset, Macquarie Research, June 2016 Source: Company Data, Factset, Macquarie Research, June2016

As of 2007, Merlin Network emerged as the global digital rights agency representing over 20,000 independent labels with the aim of negotiating collective deals for them. Including Merlin, which effectively acts as one major when it comes to licensing agreements with the likes of SoundCloud, YouTube, and Spotify, the four largest record entities accounted for 83% of the recorded music market. Music majors have also been growing their presence in the publishing segment, with the top three players now accounting for 64% of the global market (Sony/ ATV 28%, UMPG 23% and Warner Chappell 12%). The combined strong position in both recorded and publishing gives Universal, Sony and Warner the most complete view on the overall market, ideal diversification and a strong bargaining position with retailers. Fragmented music distribution Digital music distribution saw a peak in terms of concentration following the launch of the iTunes Store in 2003, with Apple quickly establishing itself as the absolute leader and around 75% share of global downloads. Apple’s close ecosystem was in truth the only viable legitimate platform, which gave the company the ability to impose radical changes like album unbundling and a $0.79 fixed-price policy for all songs, a restriction which lasted until 2009. As a result of three competing retail models of similar size, including physical and downloads still accounting for 68% of the total in 2015 (Fig 22), the landscape for distribution appears now much more fragmented. 9 June 2016 15 Macquarie Research Global music investing

Apple’s leadership in paid downloads has been significantly weakened by Amazon MP3, Google Play and local online distributors (e.g. FNAC in France). Amazon Prime also emerged as a strong physical retailer with a 15%-20% market share in some countries (e.g. UK). And within streaming, there is the juxtaposition of paid-for subscribers with nearly 80% of revenues and ad-supported with just over 20%.

Fig 22 Global recorded music distribution fragmented Fig 23 Proliferation of platform in streaming in three similar-size retail models (2016E) distribution means higher fragmentation (2016E)

KKBOX MelOn (LOEN) Rhapsody/ SoundCloud 3% 2% 0% Guvera Napster 0% 4% Streaming 32% Tidal 4% Physical Spotify 41% MelOn (LOEN) (free&pay) 4% 35% QQ Music (Tencent) 5% Pandora (free&pay) 6%

Deezer Download and 7% Apple Music other YouTube 15% 27% 15%

Source: IFPI, Factset, Macquarie Research, June 2016 Source: Company Data, Factset, Macquarie Research, June 2016

Revenue figures are not available for each of the streaming distributors, but we can build a complete picture by combining share of users in the paid/free models with the proportions just highlighted (Fig 23). The breakdown shows Spotify as the largest player, followed by Google/YouTube and Apple with about half the market share in 2015 (c.15% each). Including downloads, Apple would still be the dominant player across all digital, but we should also include Amazon, which is also a strong and growing physical retailer. Both of these adjustments would actually be backwards looking though because of the fast rate of decline in both physical and downloads. By way of example, if we roll over our estimates by one year to 2017, Apple’s overall share of digital music would decrease by about one percentage point, just because of the change in revenue mix. Overall, the proliferation of distribution platforms and the direct competition between Spotify and Apple on one side plus the emergence of Soundcloud as an alternative to YouTube on the other side, leaves the majors in a stronger bargaining position compared to ten years ago. Regulation - safe-harbour review should increase value of ad- supported users Much of the legal framework regulating the relationship between music content owners and streaming distributors revolves around the safe-harbour regime established in the early days of the internet to protect online platforms against users uploading illegal content. So if an un- licensed track is uploaded by a user on, say, YouTube, the latter has no liabilities for the subsequent illegal streams/downloads. Online platforms effectively only have the obligation to take down the track in question upon request, leaving the music labels with the difficult task to scan the web for illegal tracks and request each one of these to be taken down. The problem is that as soon as a track is removed, the same one is uploaded by another user, making it an infinite loop. To help music majors and artists, YouTube has set up a system to proactively identify un- licensed tracks and offer majors the opportunity to keep them up and monetise them according to the specific licensing agreement in place or to take them down. Still, content owners feel that the terms of these agreements poorly reflect the value Google/YouTube extracts from the traffic generated by music consumption and that they would be able to negotiate better terms if the platform was legally responsible for illegal content posted on its website.

9 June 2016 16 Macquarie Research Global music investing

European Commission and US Copyright Office are considering a “fairer” framework for content owners In 2015, the European Commission acknowledged the issue and the need for a more effective regulation. The US Copyright Office has also started a review of the safe-harbour regime last year. The regulatory offensive appears directly addressed to Google’s YouTube, which allegedly hides behind safe-harbour protection to allow a wider range of content being available on its website. In an early draft of the EC’s ongoing Digital Single Market project recently leaked in Politico, The Commission defends the current E-Commerce Directive, including safe-harbour, but identifies the need for a “fairer allocation of revenues for the use of copyright-protected content”, which seems fitting for the music industry. More precisely, “while [user-upload] services are attracting a growing audience and gaining economic benefits from the content distribution, there is a growing concern as to whether the value generated by some of these new forms of online content distribution is shared in a fair manner between distributors and the right holders. In their replies to the public consultation, right holders across several content sectors reported that their content is increasingly used without authorisation or through licensing agreements which, in their view, contain unfair terms”. And later: “In the next copyright package, to be adopted in the autumn of 2016, the Commission will aim at ensuring fair allocation of the value generated by the online distribution of copyright-protected content by online platforms”. Google and other websites in the same position will still not be held liable for copyright infringements, but it is a step in the right direction. Another important issue is the ambiguous status of services like Pandora and Sirius XM that operate half way between a radio broadcast and a passive streamer, with the ability to skip songs or play track on demand. Renegotiation of licensing agreements creates opportunities for content owners Legitimate digital music retailers must operate within the boundaries of the licensing agreements in place with the music majors that “own” the recorded music content. The model has changed significantly from the time in which majors were essentially selling goods (i.e. CDs) to high street retailers at a given price and sales were mostly driven by hits. Incidentally, we notice that the relationship between majors and distributors was similar for downloads. In paid-for streaming, majors and retailers operate according to what is effectively a revenue- sharing agreement depending on the number of paying subscribers. The aggregated payment received from consumers is distributed to different majors, and ultimately artists, depending on how many times a given track was played relative to the total number of streams.1 This model offers the majors more direct upside from streaming revenue growth and reduces volatility attached to hits. Revenue streams become more predictable as the number of subscribers is less volatile compared to the number of CDs purchased in a given period and the back list is continuously monetised over time. A side effect of this model though is that the value of the front list is sort of delayed and spread more evenly over the life cycle of the track. In the new paradigm, record companies and artists have a direct interest in setting retail prices and in negotiating the most granular details of how digital tracks are streamed (active/passive), downloaded for off-line use, shared and played across different devices. So the renewal of licensing agreements becomes an increasingly long and difficult process, not to mention the fact that each major has separate negotiations with each retailer.

1 Interactive subscription services that allow the users to personalize or select specific recordings, such as Rhapsody or Pandora, pay a fee to the record label every time a song is played. If they are webcast and not interactive, such as satellite radio, a performance fee is paid but at a lower rate, or ~10% of gross revenue in the case of Sirius XM. 9 June 2016 17 Macquarie Research Global music investing

Streaming offers labels worse economics compared to downloads, for now The latest agreements negotiated were Apple Music (mid-2015) and more recently SoundCloud (early 2016), both of them with important consequences for the whole industry, respectively on the pay and free subscription fronts. The next ones up for renewal are Spotify (already expired) and YouTube, both of which could be signed before the end of 2016. Before looking at each of these in details, let’s review the status quo by comparing the breakdown of download and streaming revenues, starting from the price paid by the consumer (Fig 24).

Fig 24 Streaming retailers originally enjoyed better conditions granted as a “subsidy” to support the new distribution model (2015)

Retail Downloads 20% 10% 25% 5% 10% 7% 5% 18% Publishing Artist royalties Manufacturing Dyssinergies Marketing Streaming 30% 10% 25% 5% 7% 5% 5% 13% G&A Profit

0% 20% 40% 60% 80% 100%

Majors' original "subsidy" to stremaing retailers unlikely to be withdrawn soon

Source: Company data, Macquarie Research, June 2016

The single most important difference between digital formats is that streaming platforms originally negotiated a significantly better cut of retail revenues - 30%, VS only 20% for iTunes, which was in line with the physical retail standard. The more advantageous conditions granted to Spotify and the likes are not necessarily a sign of weakened position of the majors, but should be seen more like a “subsidy” to support a new promising distribution model. The licensing agreements in question typically last only 1-2 years and as such the favourable treatment can be adjusted downwards once the retailers have achieved a certain scale and have become profitable. Apart from better terms offered to distributiors, artists’ royalties remain around 25% of retail sales. There are some savings from manufacturing and distribution costs which accounted for c15% of the physical music cost base. In comparison, server, transcoding, DRM and other costs associated with digital music don’t typically add up to the same amount, though majors have suffered from substantial diseconomies of scale as sales collapsed and physical sales decreased in importance. Over the long run, as streaming becomes the dominant distribution model, we envisage record companeis will be able to realise savings in the move from the current dual cost structure to more focused digital operations. But this is unlikely to happen in the near term, and we typically do not include this upside in our estimates. So all in all, music content owners realise a significantly lower gross margin from streaming revenues, compared to the downloads. But strategically it was important for the majors to break the uncomfortable situation of declining revenues and highly concentrated distribution (i.e. Apple). The actual reported EBIT margins are not directly reconcilable with these gross margins levels due to central costs and different accounting practices across regions (e.g. publishing revenues, etc.), but the comparative anlaysis stands. Apple puts pressure on Spotify by demanding less Apple is the one that has most to lose from the success of streaming model, due to its dominant position in paid-for downloads, where we estimate the company still has a c.50% market share (was c.75% at peak). But Apple also recognised that cannibalisation is a better option than being marginalised and as such it acquired Beats ($3bn in 2014) ahead of launching its proprietary streaming product Apple Music in July 2015. 9 June 2016 18 Macquarie Research Global music investing

The streaming licensing agreement signed with Apple is less favorable for the retailer compared to the industry standard. Apple reportedly offered to keep only 25% of the subscription revenues, compared to the standard 30%. At the same time we understand that Apple has increased the publishing share of retail sales to c. 15% (from 10%), effectively leaving the labels with the same share of total as Spotify. The new agreement has two main strategic advantages for Apple. First it corroborates Apple’s reputation as a champion of artists rights, which reflects positively on its brand with consumers. Second, Apple is also increasing pressure on its main competitor Spotify, which is still loss making and that will find it difficult to match the same conditions offered by the cash-rich tech company. Historically, Apple has tended to run its music business as a loss-leader to drive hardware sales, putting downward pressure on retail music pricing. The strategy is not dissimilar from what Amazon has done in the book industry, depressing book prices and accepting wafer-thin or negative margins on those sales, in exchange for benefit across the rest of the platform. For this reason labels are wary of letting large technology companies become a dominant retailer. Spotify is now renegotiating its agreement with the music majors, ahead of its expected IPO in the first half of 2017. We understand that music majors will not demand the same terms negotiated with Apple, but will focus instead on reducing the appeal of the free tier so to further increase the conversion to pay subscribtions. The main change being discussed is some sort of windowing, so that the latest albums are only available on the pay service. A legitimate SoundCloud should make negotiations with YouTube more balanced Google’s YouTube is currently as precious to music promotion as Viacom’s MTV music video channel once was. Its dominance forces artists and record labels to leave previously un- licensed material on the platform without being able to negotiate commercial rates. By way of example, in 2014 Universal sent over 140k notices to take down Taylor Swift’s album 1989, but it had to keep the single “Shake It Off” on YouTube, not to “upset” the fans. With 175m active users, SoundCloud was the largest illegitimate music platform still standing. Following a new licensing agreement with all the majors (inc. Merlin Network) SoundCloud recently re-launched as a fully legal service. The shift is particularly important in the path to improve music monetization partly because it reduces the scope for illegal music available online, and partly because it counter balances YouTube’s dominant position in the ad- supported segment, most useful for the promotion of new artists. SoundCloud attracts a relatively younger audience of lean-forward listeners, including a number of powerful influencers. Many musicians directly upload content to their personal profile and fans use SoundCloud’s following system as a sort of social network, more than a streaming site. The move to legitimate service will slightly reduce SoundCloud’s appeal because content on the platform will inevitably be restricted compared to the previous freedom, but on the other side it is also making the loss-making company potentially viable in the long run. Its users are widely expected to remain on the free tier putting it in direct competition with You Tube in the ad-supported segment. As part of the latest licensing agreement, music labels reportedly negotiated an undisclosed equity stake in SoundCloud as part of a media for equity swap, which will also resolve any prior copyright dispute. Record companies, including Merlin network, also have similar equity stakes in Spotify and Deezer (Universal has a 5% stake in Spotify). With a viable alternative for music promotion and ad-supported distribution, music majors are now busy trying to renegotiate their contract with YouTube to address what the IFPI calls the value gap. Based on IFPI estimates, Spotify generated $18/ user in 2014, compared to less than $1/ user for YouTube. We estimate that this gap is even larger when comparing paid-for subscribers and free users in 2015 (Fig 25).

9 June 2016 19 Macquarie Research Global music investing

Fig 25 The “value gap” case as presented by the IFPI suggests free-users should contribute higher revenues to majors and artists (2015)

pay subs generate 45x reveneus 40.0 36.7 compared to ad-supported free-users 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.8 0.0 paid-for ad-supported

revs per sub ($, year)

Source: Company data, Macquarie Research, June 2016

Alongside commercial negotiations with Google, there has been a sizeable increase in the amount of political lobbying for a change in copyright regulation (i.e. internet “safe harbor” provision, as previously highlighted), which is directly addressed to create a more even negotiation with YouTube. Apple’s Jimmy Iovine has estimated that YouTube accounts for ~40% of music consumption but just ~4% of music industry revenues. Music windowing should increase the free-to-pay conversion Last year Taylor Swift cunningly earned exponential media exposure by withdrawing her music from Spotify in protest for the latter’s standard practice of making all content available on both the free and pay tier, at the same time. For an artist, the difference is little on library content, but it may be very high on new releases where paid-for streams generate a significantly higher amount of revenues compared to ad-supported. The point was reiterated by Adele with her new album “25”. And more recently, Radiohead also decided not to make their new beautiful album available on Spotify and YouTube for the same reason. “A Moon Shaped Pool” is available on pretty much all other download/ paid-for services, bar Google Play from which the album was withdrawn after the site reportedly released tracks and details ahead of the embargo. Windowing has successfully been used for decades in video entertainment simply as another price point, and we strongly believe the music industry will eventually conform to it as well. Until now, Spotify was the main player in streaming and the very rich free tier could be justified with the need of converting pirated content users to a legitimate platform and land grab. The next step is to increase the conversion from free to pay and to do that there should be a bigger incentive to join the pay service. Notice that Apple Music launched only as a pay service and that the catalogue available on SoundCloud free tier is reduced compared to the one currently available on Spotify free tier. The simpler way to make the transition for Spotify is to start posting new releases exclusively on the pay-tier for a set period of time, say six months so that users most interested in those artists will gradually start paying to access content sooner, while existing users of the free service may have little to complain given they still have access for free to the whole catalogue.

9 June 2016 20 Macquarie Research Global music investing

Universal Music Group (Vivendi) Vivendi is one of our top picks for exposure to recorded music growth. UMG’s relative size also gives us confidence in its ability to negotiate better licensing deals with retailers and to improve margins in the medium to long term. Please see separate note published today on Vivendi for more details.

Fig 26 UMG is the largest major in recorded music, 34% share of global market 2015

Music revenues: $6,061m % of group revenues 47% Music EBIT margin: 12.3% Rec/pub revs split: 85%/ 15% Global share of Recorded: 33.5% Global share of Publishing: 23.1% Ownership: Vivendi (VIV FP) owns 100% Macquarie rating: Outperform (VIV FP) Current price: €17.1 Macquarie tp/ upside: €24.5 Macquarie analyst: Giasone Salati Source: Company data, Macquarie Research, June 2016; based on prices as of 6th June

Strategy UMG is one of only two assets retained by Vivendi following the major reorganisation of its portfolio by Vincent Bolloré, controlling shareholder since 2012. As such UMG is core to Vivendi’s content strategy. Universal represents 59% of group revenues and 44% of its SoTP, based on our estimates. The management team has remained broadly unchanged, since the arrival of Mr Bolloré, a strong sign of support for what is in fact one of the best run majors, globally. Since 2011 Lucian Grange is the Chairman and CEO of UMG. He championed Universal progress in digital music and is widely regarded as one of the most powerful people in the music business. Following the acquisition of EMI in 2012, Universal has consolidated its position as the largest of the majors with a 34% market share of recorded music and 23% share of the music publishing segment in 2015. Over the last few years, UMG has expanded in many adjacencies of recorded music from ticketing websites (Digitick and See Tickets) to performance venues (L’Olympia in France plus 10 CanalOlympia concert halls planned in Africa). More recently emphasis has been put on the potential to monetise data collected via streaming and to use them as effective tools to fine tune marketing and A&R spending. Stricter cooperation with Havas (60% controlled by Mr Bollore’) is also intended to combine these proprietary data with consumer profiling used to target digital ads. Latest trends As of Q2 2015, Universal started losing market share which reflected in underperforming physical and download sales. Overall we estimate that the 50bps of share lost cost UMG nearly 200bps in organic revenue growth, or c.100bps for the group (UMG accounts for c.59% of group revenues) in 2015.

9 June 2016 21 Macquarie Research Global music investing

Fig 27 Universal music benefited from the acquisition of EMI in 2013, but the company has been losing market share more recently (“Adele’s effect”)

6,000 16.0%

14.0% 5,000 12.0% 4,000 10.0%

3,000 8.0%

6.0% 2,000 4.0% 1,000 2.0%

0 0.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015

Recorded Music publishing EBITA %

Source: Company data, Macquarie Research, June 2016

With >10% EBITA margin it is the most profitable of the majors, a level achieved via continuous restructuring, pruning and expansion to acquire the most profitable artists. We forecast EBITA% to expand to 13% by 2018, and we see further scope for improvement once the streaming model becomes more dominant and the company is able to reduce some of the inefficiencies related to multiple cost structures (i.e. physical, download, streaming). Catalysts We believe the main catalyst for Universal in 2016 is a reversal of recent market share losses thanks to the anticipated strong release schedule this summer, which could project the company to mid-single-digit growth by the end of the year. UMG is also negotiating a deal with Amazon to make its catalogue available on Prime Music. We expect a relatively small amount of revenues to flow from this deal, as Amazon is chiefly interested in a cheaper back-catalogue as opposed to new releases and hits.

9 June 2016 22 Macquarie Research Global music investing

Sony Music Group Music accounted for only 8% of Sony’s revenues in 2015, but it represented 20% of its operating profit, and it is clearly central to the company’s strategy (e.g. recent $750m investments to buy 50% stake in Sony/ATV, plus £90 multiyear agreement with Adele). Sony is one of our key picks for music investing adding to strong growth prospects in its Game & Network Services and Image Sensor businesses.

Fig 28 SMG is the second largest major 2015

Music revenues: $5,150m (including ~US$1.4bn at Sony Music Entertainment Japan) % of group revenues 8% Music EBIT margin: ~11% (14.1% incl. Orchard Media val. gain) Rec/pub revs split: Recorded Music: 69%, Music Publishing: 12%, Visual Media & Platform: 19% Global share of Recorded: 22.6% Global share of Publishing: 28.3% (Sony/ATV with 2.16m songs catalogue + 2.05m in the EMI catalogue) Ownership: Sony (6758 JP) owns 100% of SME and SMEJ Macquarie rating: Outperform (6758 JP) Current price: ¥3102.0 Macquarie tp: ¥3200.0 Macquarie analyst: Damian Thong Source: Company data, Macquarie Research, June 2016; based on prices as of 6th June

Strategy Sony’s Music business is an increasingly important part of Sony’s portfolio, in light of the priority placed by Sony’s CEO Kazuo Hirai and CFO Kenichiro Yoshida on businesses with durable, recurring revenue streams. Apart from clear support for digital streaming growth, Sony’s commitment can be seen in continuing investments in the Music business outside Japan including the acquisition of the Michael Jackson estate’s 50% stake in Sony/ATV for US$750m (deal closure expected in late 2016/ early 2017). We also see efforts by Sony to take advantage of cross-selling opportunities (e.g. the recent unveiling in the US and Canada of a new Vevo app for the PS4). Sony once had bigger ambitions in building a digital music streaming service of its own, but in 2015 terminated its Music Unlimited service and entered into a partnership with Spotify. Sony’s Music segment comprises two distinct groups – the US-based Sony Music Entertainment (SME) and the Japan-based Sony Music Entertainment Japan (SMEJ). Sony/ATV, the music publishing arm, is a subsidiary of SME. Sony also owns a 29% stake in EMI Music Publishing, and administers its catalogue, making it the largest player in Music publishing. In addition, Sony jointly owns (with Universal Music Group) VEVO – the leading music video streaming service. SMEJ, which accounted for ~30% of Music revenues, and ranked second by market share in Japan in 2015 (13.1% share behind Avex with 16.7% and ahead of Universal with 12.2%) has developed into a broad-based entertainment company, with businesses in recorded music, live entertainment, anime and mobile games. One of SMEJ’s recent successes has been the mobile game Fate/Grand Order, which at the time of writing remains a Top 10 game on the Japan App Store (monthly gross of ¥2-3bn/m). In this respect, Sony’s strategy predates Vivendi’s expansion into video games, notably with the recently launched tender offer for Gameloft (€0.7bn market cap as of 23/05/2016). Looking for alternative strategies, SMEJ formed a streaming music service JV with text-messaging service Line. Latest trends As a sign of Sony’s commitment to the music segment, the company reportedly signed Adele with a record minimum guarantee of £90m for 3 albums. The success of Adele’s 25 (US distribution) provided a boost to Sony’s physical and download revenues in the December and March quarters. However, the most important challenge facing SMEJ is the relative overexposure to the Japanese market, which is still heavily dominated by the highly profitable physical format.

9 June 2016 23 Macquarie Research Global music investing

Fig 29 Sony Music segment revenue and operating profit margin steadily improved over time

900 16%

800 14%

700 12% 600 10% 500 8%

¥ bn ¥ 400 6% 300 4% 200

100 2%

0 0%

FY3/09 FY3/10 FY3/12 FY3/15 FY3/11 FY3/13 FY3/14 FY3/16

FY3/18E FY3/21E FY3/17E FY3/19E FY3/20E FY3/22E FY3/23E

Music segment revenues (LHS) OPM (RHS)

Source: Company data, Macquarie Research, June 2016

Sales of CD albums declined again in 2015 by 3% to ¥138.4bn, while sales of CD singles dipped slightly to ¥41.7bn. While still healthy compared to the rest of the world, it is clear that the boost to CD sales provided by idol groups like AKB48 is being offset by digital displacement especially amongst younger consumers. Catalysts Sony should continue to enjoy some market share expansion near term thanks to the flowthrough of Adele’s album, but comps may become more difficult starting from October 2016.

9 June 2016 24 Macquarie Research Global music investing

Warner Music Group Debt-laden Warner Music Group plays somewhat a marginal role, being the smallest of the majors. WMG’s market share performance is generally strong, but that comes at the cost of the lowest margins compared to peers.

Fig 30 Warner is the smallest of the majors, which may weaken its bargaining power with large retailers 2015

Music revenues: $2,966m % of group revenues 100% Music EBIT margin: 4.3% Rec/pub revs split: 84%/ 16% Global share of Recorded: 17.1% Global share of Publishing: 12.4% Ownership: Private (Len Blavatnik's Access Ind. owns 100%) Macquarie rating: n/a Current price: n/a Macquarie tp: n/a Macquarie analyst: n/a Source: Company data, Macquarie Research, June 2016

Strategy In 2011, Warner Music Group was taken private by Access Industries, a conglomerate holding ultimately controlled by Len Blavatnik, for $3.3bn (1.14x trailing sales). Mr Blavatnik had already served on the board of WMG between 2004-08. Ukraine-born, U.S.-educated Len Blavatnik was the richest man in Great Britain in 2014 with an estimated net worth of $20bn. WMG has had and still suffers from relatively high financial leverage with net debt to EBITDA just over 6x in 2015 down from over 8x in 2013-14 (has been between 4x-9x for the past ten years). As such, WMG took minimal part in the consolidating process over the past two decades with the exception of the Parlophone acquisition, after Universal was forced to divest it as part of the conditions for the EMI acquisition in 2013. Even with that, WMG remains the smallest of the labels both in recorded and publishing music. Like Universal and Sony, Warner Music is also shifting its focus onto expanded-rights deals to capitalize on ancillary revenues, from merchandising, fan clubs, sponsorship, concert promotion, and artist management. Warner Music boss Stephen Cooper first announced that the company would share any of the potential proceeds from the sale of its 2% stake in Spotify (same would apply for SoundCloud) with artists on the same basis as actual usage and digital breakage. Latest trends Reported revenues, included small acquisitions (e.g. Parlophone in 2013), remained stable at just below $3bn since 2010 (Fig 31). Net income has been negative since 2007, mostly due to the high interest charges. The most distinctive point on Warner Music compared to its peers is its relatively low EBIT margin, which has been around the mid-single digits for nearly a decade. Profitability could be an additional surprise to our above-consensus estimates for the whole industry.

9 June 2016 25 Macquarie Research Global music investing

Fig 31 Warner Music revenues (inc. Acquisition of Parlophone in 2013) remained broadly stable since 2010, but mid-single-digit margins are the lowest among peers

4,000 8.0% 3,516 3,383 3,491 3,500 3,176 3,027 7.0% 2,988 2,886 2,871 2,966 3,000 2,780 6.0% 2,500 5.0% 2,000 4.0% 1,500 3.0% 1,000 2.0% 500 60 1.0% 0 0.0% -500 -21 -56 -100 -143 -112 -91 -1.0% -205 -198 -308 -1,000 -2.0% 2006 2007 2008 2009 2010 2011PF 2012 2013 2014 2015

Revenues net income EBITA margin

Source: Company data, May 2016

Catalysts Warner has been particularly active in its portfolio, first with the acquisition of Indonesian label ISS, then with the disposals of Chrysalis records, part of the post-Parlophone planned divestments. More recently it has acquired X5 Music group, a company specialised in licensing deep catalogue and specific music genre.

9 June 2016 26 Macquarie Research Global music investing

Spotify Spotify is reportedly preparing for an IPO, which could happen as early as H1 2017 (latest valuation was $8.5bn, 4.0x EV/sales 2015 - 70% sales CAGR 2012-15). A recent twist in the strategy sees the company expanding into video content (inc. up to $1bn firepower for acquisitions), whilst its leadership in music streaming is arguably undisputed.

Fig 32 Spotify is the largest retailer for pay subscriptions 2015

Music revenues: $2,289m % of group revenues 100% Geography: Global Free streaming users: 75m Pay streaming subs: 30m Premium tier price: $9.99 Other products: Podcasts, TV programme clips Ownership: Private (Vivendi owns 5%, Sony 6%, Warner 2.5%, Merlin 1%) Macquarie rating: n/a (planning IPO as early as 2017 - WSJ) Current price: n/a Macquarie tp: n/a Macquarie analyst: n/a Source: Company data, Macquarie Research, June 2016

Strategy As the largest of the streaming retailers, Spotify has a particularly balanced approach combining both ad-supported and paid-for subscribers with a record-high 28% free-to-pay conversion rate. Management openly aims at disrupting the traditional commercial radio segment (including news and sport), which represents an $80bn opportunity compared to the recorded music industry, worth only $39bn at its peak in 1999. Spotify’s focus has broadened over the past two years to include adjacencies to pure streaming. The acquisition of start-ups Genius (music lyrics), Cord Project (social/messaging, ex voice) and Soundwave (messaging) are a few examples of how the company hopes to increase music engagement and become more of a platform instead of a background application. Spotify is going even further adding attractive video clips from sources conspicuously not about music (in the UK short clips from Vice, Ted, Sky Sports, Comedy Central, BBC and FT). Spotify is reportedly looking to deploy nearly $1bn to add more proprietary/ premium content in an attempt to compete more evenly with the likes of YouTube, Apple and Amazon. Daniel Ek, CEO of Spotify, co-founded Spotify in 2006 together with Martin Lorentzon (Chairman of the Board). Notably, Ek comes with an advertising background having previously founded Advertigo, the online advertising company acquired by TradeDoubler. Daniel was also CTO at Stardoll, the fashion & entertainment community for tweens, adding a social media angle to his profile. Latest trends Subscribers growth accelerated again in 2015 (Fig 33), for both the ad-supported and the paid-for tiers with Spotify reaching 30m paying subs in March 2016 (over 100m free users). What is most impressive in the latest KPI disclosed by the company is the record-high conversion rate, which increased again to 28% in 2015. For comparison, the most successful freemium apps typically achieve a peak of 10-15% (please see Fig 6 above in this report for more details). Revenue growth was also much stronger than in the previous year, relative to subscriber growth, as ARPU seems now stable ~$7.5/month for paying subscribers. The difference between the headline price of $9.99 and our calculated ARPU is due to promotions for new joiners (first three months for $0.99), student discounts and multi-user promotions.

9 June 2016 27 Macquarie Research Global music investing

Fig 33 Spotify subscriber growth continues to Fig 34 Spotify revenues passed $2bn in 2015, with accelerate with increasing free-to-pay conversion ratio losses broadly stabilising at less than $200m

80.0 28.0% 30.0% 2,500.0 2,120.0 70.0 25.0% 25.0% 2,000.0 60.0 18.9% 20.0% 1,500.0 50.0 16.6% 1,082.0 14.3% 40.0 15.0% 1,000.0 747.0

30.0 8.9% 430.3 10.0% 500.0 187.8 20.0 0.4 12.8 73.9 3.4% 5.0% 0.0 10.0 -0.3 -18.8 -28.5 -45.5 -83.6 -55.9 -162.0 -188.7 0.0 0.0% -500.0 2008 2009 2010 2011 2012 2013 2014 2015E 2008 2009 2010 2011 2012 2013 2014 2015E

free/pay conversion Paying subs Free subs Revenues net income

Source: Company Data, Factset, Macquarie Research, June 2016 Source: Company Data, Factset, Macquarie Research, June 2016

In 2015 Spotify reported a loss slightly wider than in the previous year (Fig 34), but proportionally smaller compared to the growth in revenue, suggesting the company is on track to break even soon. How soon will depend on the cost of its expansion into video content, which may be very costly. Catalysts Potential IPO as early as first half 2017. In March 2016 Spotify raised $1bn in convertible bonds giving the company a strong incentive to list soon: the bond in question is convertible at a 20% discount to IPO pricing, with the discount increasing by 2.5% every six months from March 2017. Also, the 5% coupon increases by 1% every six months up to a max of 10% or until the company lists. Spotify was valued at over $8.5bn in June 2015, on the back of a $526 million round of fundraising. On this basis, the company would be valued at 4.0x EV/sales 2015 - 70% sales CAGR 2012-15, before considering any potential upside from new initiative or a stronger music market. The company has, to date, raised over $1 billion in funding, with financial investors in the company including Swedish carrier Telia, Accel, DST, Creandum, Fidelity, Founders Fund, KPCB and Northzone, among several others. The majors also received a stake as part of a media-for-equity deal (in lieu of royalty payments). The undergoing renegotiation of its licensing agreement with the majors may have a material impact on growth and margins for the company which point to its rich free tier as a an important tool to enroll new customers on the premium tier (Spotify has a record-high free-to- pay conversion rate of 28%). Major changes are unlikely to happen in isolation of significant changes in the current licensing agreement with YouTube, which are unlikely at this point.

9 June 2016 28 Macquarie Research Global music investing

Apple Music/ iTunes (Apple) Music is central to Apple’s consumer strategy, but only as a way to maximise hardware sales. Music revenues per-se are insignificant at the group level, making Apple less interesting as a play on music growth, though its moves in the space will have direct repercussions on all industry players (e.g. new licensing agreement for Spotify).

Fig 35 Apple is the second largest retailer in paid-for streaming plus largest player in downloads 2015

Music revenues: $3,212m % of group revenues 1% Geography: Global Free streaming users: none Pay streaming subs: 13m Premium tier price: $9.99 ($14.99 Family pack) Other products: Downloads, Online radio, Music videos Ownership: Apple (AAPL US) owns 100% Macquarie rating: Outperform (AAPL US) Current price: $98.6 Macquarie tp: $112.0 Macquarie analyst: Ben Schachter Source: Company data, Macquarie Research, June 2016; based on prices as of 6th June

Strategy Music is core to defend Apple’s strong position in the handset market so we expect continued marketing focus in this direction and tighter integration of music streaming in its software and hardware. Apple’s traditional focus on direct consumer spending compared to advertising is reflected in the iTunes Store and Apple Music model, none of which offers a free/ ad- supported option. In this respect, Apple competes directly with Spotify for premium tier subs, and Amazon at the lower end of the spectrum; not with YouTube, SoundCloud and Pandora. The acquisition of Beats ($3bn in 2014) was expensive, but it helped the company transition from downloads to streaming – Apple is now the second largest player in paid-for streaming from zero less than a year ago. Apple Music differentiates itself from other global competitors by focusing on playlists curated by humans as opposed to Pandora and Spotify’s that are compiled by algorithms. Overall, Apple Music has positioned itself closer to the AM-FM space and we can’t exclude that more non-music content will be added pushing it closer to Sirius XM proposition. Beats1 does not require an Apple Music subscription and it is effectively a 24-7 global radio station with real DJs in Los Angeles, New York and London. Apple has already agreed with the majors the option of launching up to five radio-like channels. Apple is keen to portray itself as the best ally of artists as reflected in the long-standing co- marketing agreement with U2 and in the increase of music publishing royalty rate negotiated in the latest licensing agreement with the majors. We notice that most artists who refused to make their music available on Spotify or other services are actually available on iTunes/Apple Music (e.g. Radiohead, Taylor Swift). Latest trends Apple Music launched in July 2015 and has already achieved 13m paying customers (Fig 36) across 113 countries. But growth in streaming subs contributed to accelerate the decline of download revenues where we estimate that iTunes still has a 50% global market share. Overall, we expect Apple share of the total market, including download and streaming to decline, mostly in favour of Spotify and local players like MelOn and KKBOX in Asia. Overall, Apple’s software and user interface have been widely criticised for its lack of focus on music, which may represent a weakness long term. At the time of writing, Spotify ranks best in terms of ease-of-use, though this could change as the company adds more non-music video content, effectively getting closer to iTunes’ offering.

9 June 2016 29 Macquarie Research Global music investing

Fig 36 Apple Music subscribers jumped to 13m within nine months of launch (it took Spotify five years to achieve the same level)

14.0 13.0

12.0 10.0 10.0

8.0 6.5 6.0

4.0

2.0 0.0 0.0 June 2015 Septermber 2015 December 2015 March 2016

Apple Music subscribers

Source: Company data, Macquarie Research, June 2016

Catalysts The launch of the new iPhone 7 (September 2016) could see an increased integration of music, but an even more interesting development would be a dedicated effort to tackle home integration with new IoT hardware in direct competition with Amazon Echo. Indeed Apple was among the first one to facilitate playing music in multiple rooms via wireless at home (i.e. Airport Express). Lastly, we have to consider the potential for Apple to complete its end-to-end integration including a predisposed Apple car, on which the company has been working on for years. For reference we notice that next-generation car manufacturer Tesla does not offer the option to install a satellite receiver on the majority of its models. In any case, new cars are generally “connected” and designed for smartphone compatibility making streaming apps easy to play.

9 June 2016 30 Macquarie Research Global music investing

Amazon Prime Music Music is a very small part of Amazon revenues, but Amazon is a big player in music (largest physical retailer, second largest in downloads and growing in streaming) and we argue it has the most sophisticated pricing strategy, including the best value offer as part of Prime subscriptions. The Amazon Echo wireless speaker has been well received, opening the door for the smart home segment.

Fig 37 Amazon only offers 1m songs as part of Prime subscription, but could grow 2015

Music revenues: $1,542m % of group revenues 1% Geography: Global Free streaming users: none Pay streaming subs: 20m users out of 46m+ Prime subs Premium tier price: $99/ year (Amazon Prime) Other products: Free delivery, Prime Video, etc. Ownership: Amazon (AMZN US) owns 100% Macquarie rating: Outperform (AMZN US) Current price: $726.7 Macquarie tp: $760.0 Macquarie analyst: Ben Schachter Source: Company data, Macquarie Research, June 2016; based on prices as of 6th June

Strategy Selling music was the second thing Amazon ever did after selling books. The company is currently the largest physical music retailer (CD, vinyl) and it is still growing in this segment. Via its Kindle Fire, Amazon is also the second-largest retailer after Apple for music downloads with an estimated 20%+ market share in the segment (up from 8% in 2008). Excluding streaming, Amazon was the largest music retailer in the UK in 2015 (Fig 38).

Fig 38 Amazon is the largest music retailer in physical/ downloads in the UK (2014)

Other 14% Amazon Sainsburys 27% 4%

Tesco 6%

Asda 7%

HMV 15% Apple 27%

Source: BPI/ Kantar, Macquarie Research, June 2016

When it comes to content, Amazon’s strategy seems to be evolving from a value proposition (lowest prices on books and DVDs) to a more balanced tiered offer made up by a relatively generous basic bundle (Amazon Prime) fully integrated with a more expensive on-demand service for the wider catalogue.

9 June 2016 31 Macquarie Research Global music investing

Specifically in music, Amazon Prime subscribers can only access ~1m tracks, a remarkably smaller catalogue compared to the c.30m on available on dedicated services like Spotify or Apple Music. Negotiations with the majors, notably Universal, are still ongoing to increase the amount of songs available, but the company will likely aim for a relatively cheaper back-list catalogue to be included in the Prime subscription making big acts and new releases available on-demand as downloads. Right now, Amazon has the best strategy in terms of customer segmentation and price differentiation while streaming retailers are mostly concentrated around the $9.99 mark. Completing a well organised offer across different types of content and a cleverly segmented pricing strategy, Amazon also extends into hardware. The Amazon Fire Phone was a fiasco, but Amazon (Kindle) Fire continues to fare well in the competitive tablet segment and it works well with music downloads. Late in 2014 Amazon launched Echo, a $180 WiFi-connected always-on voice-controlled speaker, which seems set to become a success. Apple is reportedly working on a similar product integrated with Siri. Latest trends Amazon Prime’s main target are young families, where much of the consumption is around the pop, rock and country genres, making its negotiations with labels also narrower compared to Spotify and Apple Music targeting wider demographics. Children’s music consumption on the platform is relatively small at less than 5%, but much larger than the industry average. According to Steve Bloom, who heads Amazon Prime Music, the service already counts several million monthly users (10m+ in the US alone, according to some estimates) growing faster than the overall Amazon Prime subscriber base, that we estimate is at least 46m. Catalysts Amazon is still in negotiations with the record companies to enlarge the music catalogue included in the Prime bundle beyond the current 1m tracks. In this case, we believe looks more for volumes than quality, so the impact for labels is likely to be relatively small in terms of incremental revenues, while it could increase the usage of Amazon Prime Music by current subscribers, if not attract new customers.

9 June 2016 32 Macquarie Research Global music investing

YouTube (Alphabet) With its estimated reach of 800m monthly music video viewers, YouTube is the largest music promotion channel. Music is only a small part of group revenues, but the traffic and data generated by music fans is valuable for advertising across all of Alphabet’s assets. YouTube is under increasing pressure to pay out a bigger share of royalties to artists and labels, with a pending potential review of safe harbour regime.

Fig 39 YouTube is the largest distributor for the ad-supported model 2015

Music revenues: $1,875m % of group revenues 3% Geography: Global Free streaming users: 800m Pay streaming subs: n/a Premium tier price: $9.99 Other products: User generated content, Music videos Ownership: Alphabet (GOOGL US) owns 100% Macquarie rating: Outperform (GOOGL US) Current price: $730.1 Macquarie tp: $890.0 Macquarie analyst: Ben Schachter Source: Company data, Macquarie Research, June 2016; based on prices as of 6th June

Strategy YouTube was acquired by Alphabet in 2006 and it has grown to be the most widely used platform globally for content, including user-generated content. In keeping with its parent company’s core strategy, YouTube has chiefly focused on its ad-supported model. Google Music Play, Key and more recently YouTube Red offer a paid-for subscription, but thus far the company has not been particularly aggressive in pushing these packages. From Alphabet’s stand-point, the reach and traffic are the most valuable assets to perfect the advertising collection. Compared to other music retailers/distributors, YouTube currently has one of the most supportive regulatory frameworks. The safe harbour regime protects online platforms against any liability for illegal content uploaded by their users. Majors are effectively forced to monitor closely millions of tracks to identify the illicit uploads and require they are taken down. YouTube claims that its Content ID technology is 99% accurate and it offers majors and artists the option to remove the content or monetise it. But record companies complain the system effectively protects YouTube forcing them to accept unfavourable terms. According to data from the IFPI, ad-supported users represent 93% of total music listeners, but they only contribute 24% of the recorded music industry (Fig 40-41).

9 June 2016 33 Macquarie Research Global music investing

Fig 40 Ad-supported “free” users are 93% of total (2015)... Fig 41 ... but contribute only 24% of revenues (2015)

Paid-for 7% Ad-supported 24%

Paid-for 76% Ad-supported 93% Source: IFPI, Company data, Macquarie Research, June 2016 Source: IFPI, Company data, Macquarie Research, June 2016

In 2015, songs streamed through video platforms (effectively YouTube) almost doubled to 27bn but revenue rose less than 1%. In the same year, YouTube paid less than $1 per user to rights holders, compared to $18 from Spotify, on average, across its free and pay tiers. Latest trends The number of YouTube users continues to increase (4% growth in the already mature US in 2015), plus the amount of videos consumed per user is also increasing. Given its wide reach (1bn+ monthly users in total of which 800 for music videos), YouTube acts as a very important promotion channel for new and established artists. In this respect it is in direct competition with SoundCloud (175m monthly users). Catalysts The European Commission and US Copyright Office are both re-considering the safe harbour provision and its impact on copyright with a view that larger platforms may have to put in place the effective systems for a “fairer” framework for content owners. A change in the licensing agreement is likely to have only a minimal impact on Alphabet accounts, but it could have a significant impact on the majors.

9 June 2016 34 Macquarie Research Global music investing

SoundCloud SoundCloud represents the biggest competitor to YouTube for music promotion. The platform is now fully focused on the monetisation of its large fan base, having signed a licensing agreement with all majors, inc. Merlin Network.

Fig 42 SoundCloud is the second largest ad-supported player after YouTube and it has recently signed licensing agreements with all the majors and Merlin 2015

Music revenues: $30m % of group revenues 100.0% Geography: Global Free streaming users: 175m Pay streaming subs: service just launched Premium tier price: $9.99 Other products: remixes, users uploads Ownership: Private (Vivendi owns 3%, Warner 1.5%, Sony 1.5% - estimate) Macquarie rating: n/a Current price: n/a Macquarie tp: n/a Macquarie analyst: n/a Source: Company data, Macquarie Research, June 2016

Strategy and management SoundCloud launched in 2008 to become the second-largest streaming service after YouTube, by number of monthly users (175m). It is focused on music discovery and it works as a two-way platform making it the default online service for new artists to share tracks with potential audience. It currently hosts the most active music community and it is regarded as the purest site for music discovery and interaction with established and emerging artists alike. One important differentiating characteristic of SoundCloud is its focus on user-generated content (UGC) in the form of remixes uploaded by DJs and music fans, though the copyright nuances of these tracks have not been fully ironed out yet. Reportedly, SoundCloud’s premium standard offering is smaller (c15m songs) compared to the likes of Spotify/Apple Music (30m+), but SoundCloud counts 110m tracks generated directly by subscribers. Upload, repost, comments on portions of tracks and follow are also functionalities that effectively make SoundCloud more akin to a music social network than a pure streaming service. SoundCloud only finalised its licensing agreement with content owners in early 2016 and followed shortly with the launch of its pay service SoundCloud Go ($9.99/month) in the US and UK. We estimate that the main source of revenues until recently was renting out server space for users to upload music – up to three hours of content free, six hours is £35/year, and unlimited space for £75/year. In the future we expect advertising and direct subscription payments to become the major driver of growth. The company was founded by two university classmates, Alexander Ljung (CEO) and Eric Wahlforss (CTO). Alex has a background as a sound engineer and studied human-computer interaction. SoundCloud was originally focused on creators and its success is largely attributable to this differentiating point, alongside the fact that it is effectively the only music API available. Latest trends and forecasts The latest figures available for SoundCloud are from 2014 when revenue was $17m, while losses increased exponentially to nearly $40m. This trend is expected to improve with increasing contribution from advertising revenues (introduced only in 2014 in the US) and paid-for subscriptions (SoundCloud Go only launched in Q2 2016).

9 June 2016 35 Macquarie Research Global music investing

Fig 43 SoundCloud revenue progression should accelerate now that it is a legitimate service

40.0 30 30.0 17.4 20.0 11.3 8.0 4.3 10.0 1.4 0.0 -1.6 -10.0 -4.5 -20.0 -12.4 -30.0 -23.1 -40.0 -39.1 -50.0 2010 2011 2012 2013 2014 2015

Revenues Net income/loss

Source: Company data, Macquarie Research, June 2016

Catalysts SoundCloud has a strong community that could be appealing to any major tech player willing to grow their exposure to music. Twitter had been widely reported as an interested buyer in 2014, but the deal reportedly fell through on valuation grounds – SoundCloud allegedly set the bar at $1bn, compared to previous valuation at $700m in 2014.

9 June 2016 36 Macquarie Research Global music investing

Sirius XM Sirius XM is executing extremely well at the increasingly busy cross-road between AM- FM broadcasting and pure music streaming. But the borders are blurring with Spotify diversifying into non-music video content and Sirius XM offering a streaming-only subscription. Lack of exposure to growth outside the US is also a limitation compared to global competitors.

Fig 44 Sirius XM dominates the North American market for satellite radio subscription and targets nearly 5% growth in subscriber base in 2016 2015

Music revenues: $4,570m % of group revenues 47% Geography: US, Canada Free streaming users none Pay streaming subs 30m (satellite radio) Premium tier price: $15.9/m streaming 0R $10.9-19.9/m sat radio Other products: Sports channels (NFL, MLP, NBA, NHL, PGA) Ownership: Public (John Malone's Liberty Media owns 64%) Macquarie rating: Outperform (SIRI US) Current price: $4.0 Macquarie tp: $4.4 Macquarie analyst: Amy Yong Source: Company data, Macquarie Research, June 2016; based on prices as of 6th June

Strategy Liberty Media, ultimately controlled by Malone, owns 64% of Sirius XM, which resulted from the acquisition of XM Satellite Radio by Sirius Satellite Radio in 2008. Sirius XM is narrowly focused on satellite radio including its listed subsidiary Sirius XM Canada. Sirius XM's differentiates itself from pure music streaming services thanks to a wide portfolio of programming including music, news, talk and sports. Historically, one of the biggest draws has been Howard Stern who signed a new deal last December believed to be worth $90m a year. As a subscription service it has the advantage of being (mostly) commercial free in a market saturated with advertising brakes. The service is highly popular in North America, where it is consumed primarily in cars during the long commutes and it would not be easy to replicate internationally. We also view its direct marketing capabilities as a core strength. Distribution has diversified tremendously with 50/25/25 now coming from new/used/other channels. Penetration rates have hit 75% in new cars while Sirius XM has marketing relationships with ~16k used car dealers. This leaves room for Sirius XM to monetize its presence in ~100m cars, growing to 185m by '25 (estimate of Macquarie’s analyst Amy Yong). Latest trends Against a deceleration in the Seasonally Adjusted Annual Rate (SAAR) for car sales, Sirius XM ended 1Q 2016 with 30.1m subs, 465k net adds (348k self-pay net adds above our estimate of 308k). This sets a healthy trend for management to 'beat and raise' its ‘16 net add guidance of ~1.4m, although we expect the magnitude of the beat to be slightly smaller. 2016 is a year of opex/capex investment. We forecast ‘16 programming expense growth of ~16% YoY mainly resulting from Howard Stern’s 12-year contract renewal and a five-year deal with the NFL. Engineering costs could also increase as investments in IT and chipsets continue. We expect ‘16/’17 capex of ~US$200m/~US$250m to fund two satellites by ‘20.

9 June 2016 37 Macquarie Research Global music investing

Fig 45 Sirius XM underwent a miraculous turnaround since the merger of the two satellite radio platforms in 2008, with operating margins now stable at c.25%

5,000 4,570 45.0% 4,181 3,799 40.0% 4,000 3,402 35.0% 3,015 2,817 30.0% 3,000 2,473 2,388 25.0% 2,000 1,664 20.0% 922 15.0% 637 1,000 427 373 493 510 10.0% 43 5.0% 0 0.0% -343 -5.0% -1,000 -565 -1,105 -10.0% -2,000 -15.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Revenues Net Income EBIT %

Source: Company data, Macquarie Research, June 2016

There are c.80m out of a total of 250m cars in the U.S. with Sirius or XM receivers and the company sees its installed base more than doubling to 180 million in 10 years. At the current pace of 1.5-2m net adds/ year, the sub count could increase to 40m+ within 5-7 years. Interestingly, though next generation auto producers such as Tesla do not offer the option to install a satellite receiver on the majority of the models (streaming option still available). Catalysts Near term, we are optimistic on the deployment of SXM17, which will boost ease of use for consumers to the benefit of net adds, ARPU, and churn. Other launches in the pipeline include a video service with Howard Stern and increased streaming functionalities which may put the company in more direct competition with Spotify and Apple Music. In 2012 the Copyright Royalty Board set new statutory royalty rates for satellite radio with the percentage of gross revenue paid to artists and labels increasing to 11% by 2017 (was 8%). At the time labels demand a streaming-like threshold of 20%, which means we may have more lobbying and regulatory uncertainty in the medium term. In the long run, we see connected cars as an important opportunity. Telematics is a US$6bn+ market; we estimate that a 10% share would generate US$600m in incremental revenue that's not yet in our/consensus estimates. Sirius XM has been aggressively signing deals with OEMs like GMC, Audi and Lexus and recently Honda and Toyota. This is just the beginning and as more IP-enabled cars hit the fleet, we see Sirius XM evolving with technology.

9 June 2016 38 Macquarie Research Global music investing

Pandora Pandora’s biggest asset is its technology, which makes a takeover scenario credible in our view. We see management’s ambitious target to nearly quadruple revenues in five years as feasible, if demanding. But Pandora’s ad-supported model cannot easily be exported outside the US, putting it at a disadvantage compared to global players.

Fig 46 Pandora is dominant in the US ad-supported market, but its strategy to quadruple revenues by 2020 needs to be proven 2015

Music revenues: $1,164m % of group revenues 100% Geography: US Free streaming users: 78m Pay streaming subs: 4m Premium tier price: $4.99/ month (Pandora One) Other products: Ticketfly Ownership: Public Macquarie rating: Outperform (P US) Current price: $12.2 Macquarie tp: $15.0 Macquarie analyst: Amy Yong Source: Company data, Macquarie Research, June 2016; based on prices as of 6th June

Strategy and management With nearly 80m free users, Pandora is still the dominant Internet player in the US, though streaming competitors are growing much faster both in the paid-for and ad-supported segments. Its business model has historically focused on advertising revenues, but the acquisition of Rdio in 2015 ($75m) signals a shift to a Spotify-like freemium model. Under founder Tim Westergren, who recently returned as CEO, Pandora aims to become a one-stop shop for music, including ticket sales following the acquisition of Ticketfly for $450m in 2015. The new management team’s stated target is to quadruple revenues in five years, without breaking down the associated costs. Pandora historically relied on the particularly low royalty rates in the US, where its service is treated as radio broadcasting rather than active/on-demand streaming. This treatment is highly contested by the labels and effectively prevents the company from exporting the same model outside the US, New Zealand and Australia. Renegotiations of licensing deals for Rdio, which operated in 100 countries prior to the acquisition, may also suffer from this unsettled issue. Latest trends and forecasts Subscriber’s growth has been somewhat disappointing since 2013, and much will depend on the evolution of recent trends. Active users grew only 0.3% to 79.4m in 1Q 2016, but listening hours of ~5.5bn represented 4.2% growth YoY. Monetization improved with ad revenue up ~23% in 1Q 2016 including local up ~42% as sales force ramps up. 1Q total RPMs (revenue earned per 1,000 listening hours) jumped 14% to ~US$49.84. We expect this to increase to US$70+ in 2H16, particularly as Pandora bites into local ad where incumbents AM-FM broadcasters come under pressure from cost cutting/leverage. Incremental royalty rates of ~US$500m in the past nine months reflect current cost trends, and we forecast operating margin to dive deeper into negative territory, implying a ~20% higher CRB rate/track in ’16, as well as increased content costs from major labels. Our total content costs and LPM (licensing costs per 1,000 listening hours) in 1Q increase 50%+/40%+ YoY.

9 June 2016 39 Macquarie Research Global music investing

Fig 47 Pandora’s operating margin remained negative in spite of continued revenue growth

1,500 60.0% 1,164 921 1,000 40.0% 638 410 500 267 20.0% 138 14 19 55 0 0.0% -22 -28 -11 -9 -36 -41 -30 -58 -500 -20.0%

-1,000 -40.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015

Revenues Net Income EBIT %

Source: Company data, Macquarie Research, June 2016

The company has set an ambitious revenue target of $4bn by 2020 (from $1.1bn in 2015): 1) US$2.4bn from the core Internet radio service with 60% gross margins; 2) US$1.3bn from subscription revenue including Rdio; and 3) US$300m from live events sponsorship. We also expect Ticketfly to hit ~US$93m in revenue in ’18, given early signs of success including establishing venue relationships and boosting mobile. In direct competition with Sirius XM, Pandora is now in over 100 new vehicle models, and the company has signed up at least 5 million new users in cars. Catalysts 2016 investments are tied to scaling infrastructure and new lines of business including Rdio assets where unit-economics are greater. ’16 incremental costs include: 1) ~US$95m in marketing, 2) ~US$38m in product development; and 3) ~US$34m in G&A. Of the costs outlined for ’16, ~US$120m will be for new music services. The impact of increased marketing spending and the launch of new functionalities should act as a catalyst to improve KPIs already in 2016.

9 June 2016 40 Macquarie Research Global music investing

MelOn (LOEN Entertainment) LOEN is Korea’s largest digital music retailer (MelOn) and the only profitable pure play among global music streaming platforms. LOEN is also vertically integrated (fourth largest label in Korea), a rare hedge against value leakage to content owners. LOEN is currently one of our top Buy ideas in Korean small cap space. Please see our initiation report here (Streaming revives the radio star).

Fig 48 MelOn is the dominant player in South Korea, only paid-for subscriptions 2015

Music revenues: $316m % of group revenues 100.0% Geography: South Korea Free streaming users (20m+ IDs only 1min free sample songs) Pay streaming subs 4m Premium tier price: $6.7/ month Other products: Paid downloads Ownership: LOEN (016170-KR) owns 100% Macquarie rating: Outperform (016170-KR) Current price: W74,600 Macquarie tp: W111,000 Analyst: Kwang Cho Note: Converted into US dollars based on the USD-KRW rate of 1,184.50, as of 23 May 2016 Source: Company data, Macquarie Research, June 2016; based on prices as of 6th June

Strategy and management LOEN started out as a distributor and producer of music records in 1978, and it launched MelON in 2004. MelOn’s subscriber base began to grow rapidly since the company launched a smart phone app in 2008. We estimate MelOn accounted for 68% of LOEN’s 2015 revenue, while the content business (music production, distribution, and artist management) makes up the rest. MelOn had 3.7 million paying users at the end of 1Q16, making it the biggest player in Korea with over 60% market share. The leading players in Korea such as LOEN, KT Music (043610 KS), and CJ E&M Corp (130960 KS, Won78,400, Outperform, TP: Won100,000, Soyun Shin) are all vertically integrated, as they not only run a digital retail platform but also produce and distribute music. LOEN believes its vertical integration generates a lot of synergies because it’s much easier to promote the in-house content when you run the biggest digital music retail platform in the country. Thus, LOEN plans to acquire music labels and artist management companies to further strengthen its content business. LOEN also believes there are a lot of synergies to be generated with Kakao’s mobile chat app platform. Kakao has over 40 million monthly active users in Korea, much more than LOEN’s 3.6 million paying users, so the company believes a closer integration between the two services would help them to grow its user base much faster. In addition, Kakao runs an easy payment solution called Kakao Pay, and the adoption of Kakao Pay will help LOEN to save on billing commissions it currently pays to telecom companies for carrier billing (5-6% of revenue). Latest trends and forecasts The Korean government has been encouraging the music industry to raise its prices through the MCST (Ministry of Culture, Sports and Tourism) guidelines, so MelOn raised the price of its most popular unlimited streaming plan from 3,000 to 6,000 Won in 2013. The MCST guideline was revised again in early 2016, so LOEN announced it would raise the price of its unlimited streaming plan to 7,900 Won. The new price currently applies to new subscribers, but it will be applied to existing users from September. We think the ARPU will jump 36% by 2Q17 as a result and project 26% and 46% net profit growth in 2016 and 2017.

9 June 2016 41 Macquarie Research Global music investing

Fig 49 LOEN combines double-digit growth with EBITDA margins greater than 20%

(KRW bn)

400 358 30% 350 323 25% 300 253 20% 250 185 15% 200 167 139 10% 150 101 5% 100 50 34 34 46 50 31 31 21 24 0% 1 5 10 0 -5% -1 -50 -6 -10% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Revenue Net income EBITDA margin

Source: Company data, Macquarie Research, June 2016

Catalysts We look chiefly at earnings releases and the potential to extract synergies from closer cooperation with the Kakao mobile chat app platform. Further small acquisitions of music labels are also on the agenda.

9 June 2016 42 Macquarie Research Global music investing

QQ Music (Tencent) With over 100m users and full integration within Tencent, one of the most popular Chinese social network/IM platforms, QQ Music, is set to grow its importance in the global scene. With a natural reach of over 850m users, QQ is narrowly focused on monetisation including the online-to-offline model which will likely expand beyond China. We believe the potential listing of one of the main competitors (i.e. China Music Corp) in the second half on 2016 represents the most important catalyst to crystallise valuation, while the fact that Tencent owns a stake in CMC offers a good hedge.

Fig 50 QQ Music is fully integrated in the largest Chinese social network 2015

Music revenues: QQ Music sales inc. in "value-added service" division ($12.3bn in 2015, up 27% yoy) % of group revenues 1.0% Geography: Mainland China and other with restrictions Free streaming users 100m active daily users Pay streaming subs 3m Premium tier price: $3/ month Other products: Paid downloads, online radio Ownership: Tencent (700 HK) owns 100% Macquarie rating: Outperform (700 HK) Current price: HK$173.8 Macquarie tp: HK$204.0 Analyst: Wendy Huang Source: Company data, Macquarie Research, June 2016; based on prices as of 6th June

Strategy and management Advertising and paid subscription have traditionally been the two pillars of revenue, while paid digital album downloads is quickly emerging as the third pillar. Total number of paid digital album downloads has exceeded 7m since QQ music first launched the service in 2014. The new O2O (online-to-offline) business model, which directs online traffic to offline music- related events, such as concerts and new song release, is a strategic initiative for the company in 2016. Leveraging Tencent QQ, one of China’s most popular IMs and social networking platforms with over 850m monthly unique users, QQ music’s paid subscription package (green diamond membership) has strong social features built into the products. Besides ad-free music streaming and certain music download quotas, QQ music’s green diamond member can also enjoy some exclusive rights on QQ IM. The price for green diamond membership is RMB18 per month (~US$3) or RMB178 a year (~US$28). The price for digital downloads ranges from RMB5-20 per album (US$0.8-3). QQ Music has signed exclusive licensing contracts with over 20 music majors including Sony, Warner Music, YG Entertainment and partnership agreements with over 200 record companies. It owns the largest licensed content library in China with over 15M songs. Latest trends and forecasts QQ music’s daily active users have exceeded 100M as of September 2015 and are still growing healthily. Revenues generated from digital album sales alone reached RMB40M (US$6.3M) in 2015 on the back of merely 10 album releases. As of July 2015 QQ Music ranked first ex-equo with Kugou Music in terms of share of mobile apps active users (Fig 51).

9 June 2016 43 Macquarie Research Global music investing

Fig 51 QQ Music is first ex-equo by number of active suers of music mobile apps (July 2015)

12.0% 10.2% 10.2% 10.0% 8.5% 8.0%

6.0% 4.6% 4.4% 4.0%

2.0%

0.0% Kugou Music QQ Music Miui Music TTPod Kuwo Music

Music apps by active users in China (July 2015)

Source: China Internet Watch, Macquarie Research, June 2016

According to the Wall Street Journal, one of QQ Music’s major competitors, China Music Corp (CMC), is planning to raise US$300-600M through a US IPO in 2H 2016. CMC claims to have a content library with over 20M songs, although much of that comes from sub-licensing. Interestingly, Tencent is also a shareholder in CMC. Catalysts Some of the catalysts include: 1) more sub-licensing deals with other music platforms like the one they did with Netease Music; 2) O2O initiatives such as online concert ticketing sales; 3) continuous growth in paid subscription.

9 June 2016 44 Macquarie Research Global music investing

KKBOX (KDDI Corp) After KKBOX established a strong presence in the Asia-pop space, Japan’s KDDI acquired a stake in 2010 as both a promising investment and a complement to its existing music offerings. The company has partnered with major telecom carriers in most of its markets, and we expect music contents, including live events, will support the ongoing drive for smartphone adoption and mobile data consumption.

Fig 52 KKBOX is a local Asian player headquartered in Taiwan 2015

Music revenues: $90m % of KDDI revenues 0.2% Geography: Taiwan, Hong Kong, Singapore, Malaysia, Thailand and Japan Free streaming users 8m Pay streaming subs 2m Premium tier price: $3/ month Other products: Downloads, concert ticketing Ownership: private (76% KDDI, GIC , 11% HTC, ChungHwa has 30% in Taiwan subsidiary) Macquarie rating: Outperform (9433 JP) Current price: ¥3147 Macquarie tp: ¥3200 Analyst: Nathan Ramler Source: Company data, Macquarie Research, June 2016; based on prices as of 6th June

Strategy & management KKBox (KK stands for King of Kings) launched in late 2005 as a PC application in Taiwan, where it is now the market leader in music streaming. It has a slightly smaller catalogue than global peers (c. 25m tracks), though rich in local artists that represent 70%+ of music listened to in the country. The company also focuses on localized features like rolling karaoke-style lyrics, in-app chats and events with artists. In 2009, KKBOX began expanding internationally, inc. Hong Kong, Singapore, Malaysia, Thailand and Japan. Founder/CEO Chris Lin wants to build an Asian-focused 360 degree music business. KDDI owns 76% of music company KKBOX and rebranded its previous “Lismo” service under that name. KDDI views music as a core part of its content line up. The “Uta pass” service costs ¥300 per month. KDDI’s music network is also available to subscribers on other mobile networks, both inside and outside Japan. KDDI is an active participant in the music and contents space in Japan, and was the first in the industry to launch full song downloads for mobile phones in 2004. KDDI’s “au Smart Pass” service offers a wide range of contents and services and has signed up 14.5m members, about 38% of its retail subscriber base. KDDI’s “Value Services” segment, which includes content revenues, contributes almost 9% of the consolidated KDDI group revenues. The new 3-year business plan from management is focused on maximizing the “au economic zone” (non telecom businesses) under the “Life Design” concept, including contents, financial services, utilities, and shopping, and we expect to the company will continue to invest in and expand the music services offerings. Catalysts KKBOX considered an IPO in 2015 and a sale may still be considered.

9 June 2016 45 Macquarie Research Global music investing

Other music distributors Deezer Deezer competed head to head with Spotify for some time, but its marketing strategy relied more directly on telecom operator’s bundles which proved to be less effective. Orange is reportedly the largest shareholder with a 15% stake. Len Blavatnik’s Access Industry, which also controls Warner Music, is also a direct investor in Deezer. The number of subscribers stalled around 6m (of which only 1.5m paid-for) since 2013 and the planned IPO was withdrawn in October 2015. The valuation range at the time of the IPO was between €884m and €1.088bn. Deezer has been first in terms of geographical expansion, and it is now present in 182/192 countries globally. For reference, Spotify is only present in only 58 countries. For this reason, Deezer’s catalogue is also broader with over 40m tracks available, more than the 30m+ normally available on Apple Music, Spotify, etc. Deezer has an ad-supported tier (streaming at 128kbps), a premium tier at $9.99 (320kbps) and an Elite version at $14.99 (CD-quality 1,411kbps), though the latter is not available in every country – in the US Deezer has a prior distribution agreement with Sonos for high quality streaming). Rhapsody/ Napster Rhapsody launched in 2001, but it’s only in 2001 that it reached 3m paid-for subs in the summer 2015 thanks to product innovation and partnerships. Among its most ambitious functionalities, Rhapsody launched a virtual reality app offering 360-decrees concert videos, something that we see as an interesting development for the whole streaming industry. Earlier in 2016, the company announced a 9% increase in the amount of time subscribers spent streaming content on a weekly basis and an increase of almost 40 percent in streaming hours exclusively on mobile. Tidal Tidal launched relatively late (2014) and was acquired by the American rapper Jay Z ($520m estimated net worth) for $56m in March 2015. The platform emphasises its $19.99 high fidelity plan, though it also has the standard $9.99 entry level. Having struggled to grow its subscribers base, Tidal has more recently started focusing on exclusive releases (e.g. Beyonce’s Lemonade new concept video2), a strategy that proved very successful in attracting new users in the short term (1.2m from Lemonade alone), but still needs to be proven in the long term (free trials may be cancelled). Prince catalogue is also available for streaming only on Tidal. Given Jay Z’s reputation and connection in the music industry, it is not unlikely that Tidal will eventually follow a Netflix-like strategy starting to develop its own content for exclusive distribution. We see room for a well defined catalogue focused on a specific genre and demographics to be successful alongside “generic” global platforms. A long tail of local/ niche players We believe the market growth is strong enough at this early point of the adoption curve to support a plethora of niche and local players that may become acquisition targets over the next few years as economies of scale grow in importance from a technology stand point. Here we list a few more niche and local players: . Guvera (Australia, India) focuses on local content and expert-curated playlists. The site recently announced 10m users (3m+ in India), without disclosing how many of them are paying subscribers. In January 2015, Guvera acquired UK platform Blinkbox for an estimated £4m and it is now present in 20 countries.

2 Beyoncé is also Jay Z’s wife 9 June 2016 46 Macquarie Research Global music investing

. Flipagram – the company claims 36m active users, up from about 10m the previous years, mostly in the US where the app consistently ranks among the top 10 for the photo and video section. The platform allows people to compile their own “Flips” mixing videos, photos, text and 60-second snippets of licensed songs. . Saavn – Only counts 7m tracks, but it’s highly focused on Indian regional music with distribution in over 200 countries. As of March 2015, Saavn has 13m monthly active users. . Pono (developed by Neil Young), SimfyAfrica (32m track, South Africa), Slacker (ad- supported radio service) and Akazoo (social) are some other smaller services.

9 June 2016 47 Macquarie Research Global music investing Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie – South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards). only Macquarie - USA Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return

Recommendation proportions – For quarter ending 31 March 2016 AU/NZ Asia RSA USA CA EUR Outperform 50.34% 59.09% 46.67% 44.76% 60.66% 46.12% (for global coverage by Macquarie, 3.72% of stocks followed are investment banking clients) Neutral 34.14% 25.66% 32.00% 49.90% 30.33% 35.10% (for global coverage by Macquarie, 4.79% of stocks followed are investment banking clients) Underperform 15.52% 15.26% 21.33% 5.33% 9.02% 18.78% (for global coverage by Macquarie, 2.31% of stocks followed are investment banking clients)

Company-specific disclosures:

Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclaimers: Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North America Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Limited and its Taiwan branch; Macquarie Capital Securities (Singapore) Pte Ltd; Macquarie Securities (NZ) Ltd; Macquarie Equities South Africa (Pty) Ltd; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities (Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the above mentioned entities. MGL provides a guarantee to the Monetary Authority of Singapore in respect of the obligations and liabilities of Macquarie Capital Securities (Singapore) Pte Ltd for up to SGD 35 million. This research has been prepared for the general use of the wholesale clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient you must not use or disclose the information in this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. MGL has established and implemented a conflicts policy at group level (which may be revised and updated from time to time) (the "Conflicts Policy") pursuant to regulatory requirements (including the FCA Rules) which sets out how we must seek to identify and manage all material conflicts of interest. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. In preparing this research, we did not take into account your investment objectives, financial situation or particular needs. Macquarie salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions which are contrary to the opinions expressed in this research. Macquarie Research produces a variety of research products including, but not limited to, fundamental analysis, macro-economic analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise. Before making an investment decision on the basis of this research, you need to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of your particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. This research is based on information obtained from sources believed to be reliable but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Clients should contact analysts at, and execute transactions through, a Macquarie Group entity in their home jurisdiction unless governing law permits otherwise. The date and timestamp for above share price and market cap is the closed price of the price date. #CLOSE is the final price at which the security is traded in the relevant exchange on the date indicated. Country-specific disclaimers: Australia: In Australia, research is issued and distributed by Macquarie Securities (Australia) Ltd (AFSL No. 238947), a participating organisation of the Australian Securities Exchange. New Zealand: In New Zealand, research is issued and distributed by Macquarie Securities (NZ) Ltd, a NZX Firm. Canada: In Canada, research is prepared, approved and distributed by Macquarie Capital Markets Canada Ltd, a participating organisation of the Toronto Stock Exchange, TSX Venture Exchange & Montréal Exchange. Macquarie Capital Markets North America Ltd., which is a registered broker- dealer and member of FINRA, accepts responsibility for the contents of reports issued by Macquarie Capital Markets Canada Ltd in the United States and sent to US persons. Any US person wishing to effect transactions in the securities described in the reports issued by Macquarie Capital Markets Canada Ltd should do so with Macquarie Capital Markets North America Ltd. The Research Distribution Policy of Macquarie Capital Markets Canada 9 June 2016 48 Macquarie Research Global music investing Ltd is to allow all clients that are entitled to have equal access to our research. United Kingdom: In the United Kingdom, research is issued and distributed by Macquarie Capital (Europe) Ltd, which is authorised and regulated by the Financial Conduct Authority (No. 193905). Germany: In Germany, this research is issued and/or distributed by Macquarie Capital (Europe) Limited, Niederlassung Deutschland, which is authorised and regulated by the UK Financial Conduct Authority (No. 193905). and in Germany by BaFin. France: In France, research is issued and distributed by Macquarie Capital (Europe) Ltd, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority (No. 193905). Hong Kong & Mainland China: In Hong Kong, research is issued and distributed by Macquarie Capital Limited, which is licensed and regulated by the Securities and Futures Commission. In Mainland China, Macquarie Securities (Australia) Limited Shanghai Representative Office only engages in non-business operational activities excluding issuing and distributing research. Only non-A share research is distributed into Mainland China by Macquarie Capital Limited. Japan: In Japan, research is Issued and distributed by Macquarie Capital Securities (Japan) Limited, a member of the Tokyo Stock Exchange, Inc. and Osaka Exchange, Inc. (Financial Instruments Firm, Kanto Financial Bureau (kin-sho) No. 231, a member of Japan Securities Dealers Association). India: In India, research is issued and distributed by Macquarie Capital Securities (India) Pvt. Ltd. (CIN: U65920MH1995PTC090696), formerly known as Macquarie Capital (India) Pvt. Ltd., 92, Level 9, 2 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai – 400 051, India, which is a SEBI registered Research Analyst having registration no. INH000000545. Malaysia: In Malaysia, research is issued and distributed by Macquarie Capital Securities (Malaysia) Sdn. Bhd. (Company registration number: 463469-W) which is a Participating Organisation of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission. Taiwan: In Taiwan, research is issued and distributed by Macquarie Capital Securities Ltd, Taiwan Branch, which is licensed and regulated by the Financial Supervisory Commission. No portion of the report may be reproduced or quoted by the press or any other person without authorisation from Macquarie. Nothing in this research shall be construed as a solicitation to buy or sell any security or product. Research Associate(s) in this report who are registered as Clerks only assist in the preparation of research and are not engaged in writing the research. Thailand: In Thailand, research is produced, issued and distributed by Macquarie Securities (Thailand) Ltd. Macquarie Securities (Thailand) Ltd. is a licensed securities company that is authorized by the Ministry of Finance, regulated by the Securities and Exchange Commission of Thailand and is an exchange member of the Stock Exchange of Thailand. The Thai Institute of Directors Association has disclosed the Corporate Governance Report of Thai Listed Companies made pursuant to the policy of the Securities and Exchange Commission of Thailand. Macquarie Securities (Thailand) Ltd does not endorse the result of the Corporate Governance Report of Thai Listed Companies but this Report can be accessed at: http://www.thai-iod.com/en/publications.asp?type=4. South Korea: In South Korea, unless otherwise stated, research is prepared, issued and distributed by Macquarie Securities Korea Limited, which is regulated by the Financial Supervisory Services. Information on analysts in MSKL is disclosed at http://dis.kofia.or.kr/websquare/index.jsp?w2xPath=/wq/fundMgr/DISFundMgrAnalystStut.xml&divisionId=MDIS03002001000000&serviceId=SDIS03002 001000. South Africa: In South Africa, research is issued and distributed by Macquarie Equities South Africa (Pty) Ltd, a member of the JSE Limited. Singapore: In Singapore, research is issued and distributed by Macquarie Capital Securities (Singapore) Pte Ltd (Company Registration Number: 198702912C), a Capital Markets Services license holder under the Securities and Futures Act to deal in securities and provide custodial services in Singapore. Pursuant to the Financial Advisers (Amendment) Regulations 2005, Macquarie Capital Securities (Singapore) Pte Ltd is exempt from complying with sections 25, 27 and 36 of the Financial Advisers Act. All Singapore-based recipients of research produced by Macquarie Capital (Europe) Limited, Macquarie Capital Markets Canada Ltd, Macquarie Equities South Africa (Pty) Ltd and Macquarie Capital (USA) Inc. represent and warrant that they are institutional investors as defined in the Securities and Futures Act. United States: In the United States, research is issued and distributed by Macquarie Capital (USA) Inc., which is a registered broker-dealer and member of FINRA. Macquarie Capital (USA) Inc, accepts responsibility for the content of each research report prepared by one of its non-US affiliates when the research report is distributed in the United States by Macquarie Capital (USA) Inc. Macquarie Capital (USA) Inc.’s affiliate’s analysts are not registered as research analysts with FINRA, may not be associated persons of Macquarie Capital (USA) Inc., and therefore may not be subject to FINRA rule restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. Information regarding futures is provided for reference purposes only and is not a solicitation for purchases or sales of futures. Any persons receiving this report directly from Macquarie Capital (USA) Inc. and wishing to effect a transaction in any security described herein should do so with Macquarie Capital (USA) Inc. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures, or contact your registered representative at 1-888-MAC-STOCK, or write to the Supervisory Analysts, Research Department, Macquarie Securities, 125 W.55th Street, New York, NY 10019. © Macquarie Group

9 June 2016 49

EMEA Research Heads of Equity Research Industrials Commodities & Precious Metals

Peter Redhead (Global – Head) (852) 3922 4836 Capital Goods Colin Hamilton (Global) (44 20) 3037 4061 Shai Hill (Europe) (44 20) 3037 4232 Rowan Goeller (Johannesburg) (27 11) 583 2131 Jim Lennon (London) (44 20) 3037 4271 George Brits (South Africa) (27 11) 583 2223 Christian Breitsprecher (Frankfurt) (49 69) 50957 8014 Matthew Turner (London) (44 20) 3037 4340 Alternative Energy & Utilities Transportation & Infrastructure Stefan Ljubisavljevic (London) (44 20) 3037 4247 Dominic Nash (London) (44 20) 3037 4239 Vivienne Lloyd (London) (44 20) 3037 4530 Shai Hill (London) (44 20) 3037 4232 Douglas McNeil (London) (44 20) 3037 2568 Chen Shao (Shanghai) (86 21) 2412 9041 Gurpreet Gujral (London) (44 20) 3037 2249 Vishesh Khatnani (London) (44 20) 3037 2559 Lynn Zhao (Shanghai) (86 21) 2412 9035 Dominic Nash (London) (44 20) 3037 4239 Rowan Goeller (Johannesburg) (27 11) 583 2131 Ian Roper (Singapore) (65) 6601 0698 Jose Ruiz (London) (44 20) 3037 1912 European Macro Group Peter Crampton (London) (44 20) 3037 4559 Materials Dilip Kejriwal (London) (44 20) 3037 2252 Chemicals/Containers, Packaging/Paper & Economics & Strategy Consumer Forest Products, Construction Materials Peter Eadon-Clarke (Global) (813) 3512 7850 Rowan Goeller (Johannesburg) (27 11) 583 2131 Matthew Turner (London) (44 20) 3037 4340 Sreedhar Mahamkali (London) (44 20) 3037 4016 Danny Moran (New York) (1 212) 231 0698 Elna Moolman (Johannesburg) (27 11) 583 2570 Charlie Storey (London) (44 20) 3037 2327 Cooley May (Houston, US) (1 212) 231 2586 Strategy Andreas Inderst (London) (44 20) 3037 2629 Daniele Gianera (London) (44 20) 3037 2517 Global Metals & Mining George Brits (South Africa) (27 11) 583 2223 Toby McCullagh (London) (44 20) 3037 2649 Alon Olsha (London) (44 20) 3037 2637 Quantitative Natasha Moolman (Johannesburg) (27 21) 813 2774 Patrick Morton (London) (44 20) 3037 2014 Gurvinder Brar (Global) (91 97) 8055 5902 Energy Gerhard Engelbrecht (Johannesburg) (27 11) 583 2407 Giuliano De Rossi (London) (44 20) 3037 1997 James Oberholzer (Johannesburg) (27 11) 583 2367 Jakub Kolodziej (London) (44 20) 3037 2016 Iain Reid (London) (44 20) 3037 2119 Yatish Chowthee (Johannesburg) (27 11) 583 2208 Josiah Rudolph (Johannesburg) (27 11) 583 2210 David Farrell (London) (44 20) 3037 4465 Hayden Bairstow (Perth) (618) 9224 0838 Giacomo Romeo (London) (44 20) 3037 4445 Pharmaceuticals Kate Sloan (London) (44 20) 3037 4453 Find our research at Aditya Suresh (Hong Kong) (852) 3922 1265 Ada Li (Johannesburg) (27 11) 583 2181 Macquarie: www.macquarie.com.au/research Gerhard Engelbrecht (Johannesburg) (27 11) 583 2407 Real Estate Thomson: www.thomson.com/financial Financials Reuters: www.knowledge.reuters.com Property Trusts & Developers Bloomberg: MAC GO Banks Nazeem Samsodien (Cape Town) (27 21) 813 2771 Factset: http://www.factset.com/home.aspx Edward Firth (London) (44 20) 3037 4077 Mahir Hamdulay (Cape Town) (27 21) 813 2705 CapitalIQ www.capitaliq.com Piers Brown (London) (44 20) 3037 4044 TMET Contact [email protected] for access Vardhman Jain (London) (44 20) 3037 2587 requests. Guy Peddy (London) (44 20) 3037 4509 Namita Samtani (London) (44 20) 3037 2197 Thomas Stoegner (Singapore) (65) 6601 0854 Tim Nollen (New York) (1 212) 231 0635 Sven Thordsen (Johannesburg) (27 11) 583 2218 Mark Murphy (London) (44 20) 3037 5498 Email addresses Diversified Financials Giasone Salati (London) (44 20) 3037 2670 [email protected] Bob Liao (London) (44 20) 3037 2868 Neil Welch (London) (44 20) 3037 4272 eg. [email protected] Andrew DeGasperi (New York) (1 212) 231 0649 Arun Melmane (London) (44 20) 3037 4221 George Brits (South Africa) (27 11) 583 2223 Hugh Miller (New York) (1 212) 231 2323 Zintle Gantsho (Johannesburg) (27 11) 583 2107 Insurance Richard Majoor (Johannesburg) (27 11 583 2225 Andy Hughes (London) (44 20) 3037 2256 Philip Kett (London) (44 20) 3037 2505

Equities ETF Trading South Africa Equity Syndication Stevan Vrcelj (Global Head) (612) 8232 5999 Robin Quinnell (London) (44 20) 3023 8885 Franco Lorenzani (Johannesburg) (27 11) 583 2014 Dipesh Patel (London) (44 20) 3037 4978 Cameron Rail (London) (44 22) 3023 8886 South Africa Sales Sarah-Jane Wagg (Johannesburg) (27 11) 583 2000 Asi Ackerman (New York) (1 212) 231 0903 Roland Wood (Cape Town) (27 21) 813 2611 European Execution Services May Ling (Hong Kong) (852) 3922 2038 Jesse Rogers (Hong Kong) (852) 3922 2028 Sven Forssman (Johannesburg) (27 11) 583 2369 Andrew Stancliffe (London) (44 20) 3037 4784 Ed Southey (Johannesburg) (27 11) 583 2026 Robert Tappin (London) (44 20) 3037 4827 US Sales Trading Khensani Mokoena (Johannesburg) (27 11) 583 2016 Wayne Drayton (London) (44 20) 3037 4980 JT Cacciabaudo (New York) (1 212) 231 6381 Atish Jogi (Johannesburg) (27 11) 583 2252 Ryan McSorley (London) (44 20) 3037 8424 Mike Gray (New York) (1 212) 231 2555 Jesse Ushewokunze (New York) (1 212) 231 2504 Matthew Hanley (London) (44 20) 3037 4949 Chris Reale (New York) (1 212) 231 2555 David Dunne (London) (44 20) 3037 4750 South Africa Sales Trading EU Cash Sales Jon Knapman (London) (44 20) 3037 1704 Harry Ioannou (Johannesburg) (27 11) 583 2015 KC O'Rourke (London) (44 20) 3037 4910 Sam Bygott-Webb (London) (44 20) 3037 4767 Welcome Plessie (Johannesburg) (27 11) 583 2058 Danny Want (London) (44 20) 3037 4847 Richard Alderman (London) (44 20) 3037 4875 Martin Hughes (Johannesburg) (27 11) 583 2019 Peter Homan (London) (44 20) 3037 4740 Gaelle Jarrousse (London) (44 20) 3037 4960 Marcello Damilano (Johannesburg) (27 11) 583 2018 Gregorio Esmelian (London) (44 20) 3037 4973 John Gilbert (London) (44 20) 3037 4933 Commodity Hedge Fund Sales Awais Khan (London) (44 20) 3037 4967 Will Rogers (London) (44 20) 3037 1721 Chris Looney (New York) (1 212) 231 0836 Robert Lenihan (London) (44 20) 3037 4908 Daniel Sorger (London) (44 20) 3037 4903 Jonathan Mathews (London) (44 20) 3037 4869 Iain Lindsay (London) (44 20) 3037 4825 Richard Bateson (London) (44 20) 3037 4821 Guy Keller (Singapore) (65) 6601 0303 Iain Whiteley (London) (44 20) 3037 4771 David Hemming (London) (44 20) 3037 4909 Rupert Woolfenden (London) (44 20) 3037 4603 Commodity Corporate Sales Nick Bryan (London) (44 20) 3037 4768 Chris Charbonnier (London) (44 20) 3037 4760 Paras Amlani (London) (44 20) 3037 4846 Nael Noueiri (London) (44 20) 3037 4913 Marc Crome (London) (44 20) 3037 4778 Chris Wilson (London) (44 20) 3037 4925 Rohan Khurana (Singapore) (65) 6601 0308 George Sampson (London) (44 20) 3037 1732 Toby Ingram (London) (44 20) 3037 4957 Commodity Investor Products Katie Ramsey (London) (44 20) 3037 4919 Holger Hoepfner (Geneva) (41 22) 818 7777 Arun Assumall (London) (44 20) 3037 4953 Bahar Ghaffari (London) (44 20) 3037 4969 Christian Schmuck (New York) (1 212) 231 8007 Catherine Littlefield (New York) (1 212) 231 6348 ETF Sales Arjan Dorrestijn (New York) (1 212) 231 8054 Chris Carr (New York) (1 212) 231 6398 Bachir Binebine (London) (44 20) 3037 4680 Doug Stone (New York) (1 212) 231 2606 Jessica Lana (London) (44 20) 3037 4808 Andrea Duguet (New York) (1 212) 231 0977 Chris Johnson (New York) (1 212) 231 0881 Jan Halaska (Boston) (1 617) 598 2503