Powering The Digital World Is About To Get More Expensive

What impact will Russian aggression against Ukraine have on your digital use? Given the resulting displacement in energy supply, probably a lot. Everything we do on our phones, tablets, and laptops involves a network of fortressed buildings around the globe, called the data center. Inside the data center sits racks of computers called servers, upon which powerful algorithms run, so we can best live our lives in this digital world. Beyond the obvious space capacity limitations, each data center operator has to purchase enough energy to power these mighty operations, to keep the facilities cool, to ensure optimal performance. Who will absorb these increased costs? Will the data center operators pass on these costs to firms who lease space inside the data center? Will they in turn pass these costs on to consumers? Who’s in a stronger position to manage their p&l performance?

In a report issued in December 2020, the global data center power market was forecast to grow from $19.1 billion in 2020 to $26.1 billion by 2025. This on new data center construction globally to meet storage demand, and on the unprecedented rise in power consumption to support new cutting edge technology, which has increased both operational and power costs. Global Dat a Center Power Market

Layer in the actual and projected rise in crude oil and natural gas, brought about by firmly united NATO country sanctions against non-team player Putin’s Russia, you can quickly see we’re going to have an expense problem. Swift NATO response to the February 24, 2022 invasion has resulted in member countries instituting crippling financial sanctions, including shutting down imports of oil and gas from Russia. The battle in Ukraine further disrupts the supply.

Goldman Sachs, who attributes their success to a very intentional team culture, has issued a report by their Commodities Research Team. As Russia and Ukraine supply 17% of oil and 11% of gas to the rest of the world, the energy sanctions hit will be painful. The impact will be greatest in Europe, particularly Germany, but will certainly be felt here in the United States. Russia and Ukraine supply three million barrels of crude oil a day. Goldman predicts the west can offset half of this by releasing strategic oil reserves, and relaxing sanctions in Iran and Venezuela. The remaining 1.5 million daily shortfall in crude oil will result in higher prices to reduce energy consumption, forecasted at a range of $125 – $175 per barrel in 2022. The April 1, 2022 price sits around $100, with the 52 week range at $57.63 to $130.50¹. G oldman Sachs Podcast Impact of Russian Invasion on Global Econ omy

Data centers are primarily powered by electricity, which are impacted by rising natural gas prices. According to the U.S. Energy Information Administration (eia), wholesale electricity prices trended higher in 2021 due to increasing natural gas prices. Our reluctance to date to address the major impacts of climate change have resulted in especially volatile storm and temperature conditions, which in turn puts pressure on prices. More on that here. Since the onset of the war, natural gas has risen from $4.79 on March 1 to about $5.60 on April 1, 2022. The 52 week range is $2.45 to $6.47¹.

The good news is that major data center providers like Equinix, who benefit from veteran and strategic thinking management, have made significant advancements in energy efficiency and sustainability innovation. In December 2021, the Clean Hydrogen Partnership announced EUR 2.5 million in funding, choosing seven companies – Equinix, InfraPrime, Rise, Snam, SOLIDpower, TEC4FUELS, and Vertiv, to develop low-carbon fuel cells to power data centers. The EcoEdge PrimePower (E2P2) project aims to provide economic and resilient prime power solutions for the data center environment. It is hoped this could also reduce carbon emissions from operations by up to 100%. Consortium to Lead Fuel Cell Development fo r Data Centers

In January 2022, Equinix announced its first Co-Innovation Facility (CIF) located at its Ashburn Campus in the Washington, D.C. area. This is part of a broader Data Center of the Future initiative. The CIF is a new capability that enables partners to work with Equinix on trialing and developing innovations to define the future of sustainable digital infrastructure. Equinix Joins Partners in Sustainability Innovation

Broadly speaking, Equinix has been engaged for some time in transforming energy efficiency. Since 2011, they have invested more than $130 million to reduce energy consumption within their data centers. Equinix Energy Efficiency The other major data center provider globally is Digital Realty. For information on their operations and sustainability efforts, read more here.

All that being said, with the clear acknowledgement that I’m a big Equinix fan who follows their financial performance closely, it remains to be seen how this current global energy firestorm will impact p&l performance in 2022.

Keeping it simple, I turn to the latest guidance provided by Equinix CFO Keith Taylor on February 16, 2022, a mere eight days before the invasion. Following Q4 2021 revenues of $1.706 billion and adjusted EBITDA of $788 million, Q1 2022 guidance informs a revenue range of $1.726 – $1.746 billion, and adjusted EBITDA of $781 – 801 million. FY 2022 guidance for revenue is projected to be $7.202 – $7.252 billion, adjusted EBITDA $3.307 – $3.337 billion.

Clearly there are many variables that will determine any forecast variances that may occur. If the energy cost scenario plays out as anticipated, I would expect that adjusted EBITDA will show unfavorable variances to forecast, likely starting in the second quarter. Even if the decision is made to pass on these increased costs, the timing of client contract renewals will affect this decision. I will look to the upcoming quarterly investor calls for guidance, and keep you all updated. Please join in the conversation and let me know your thoughts! Stay safe and be well!

Feature Image: Please enjoy my favorite digital photo of my amazing brother Geoffrey and I at Lady Gaga’s performance at the L.A. Forum in December 2017! Yes we are a very musical family! #DigitalMemoriesToLastALifetime

¹Data sourced from the Wall Street Journal.

April 1, 2022 By Cynthia Drew In Technology /

The Musical Artist P&L in Today’s Digital Streaming World – 2021 Update

The Rock&Roll gymnast is pleased to pen this year’s update of “The Musical Artist P&L in Today’s Digital Streaming World”. 2021 global recorded revenue totaled $25.9 billion¹, surging 18.5% to last year’s results of $21.9 billion, and exceeding my forecast of $24 billion. This is nearly double the average annual growth rate of 9.6% between 2015 and 2020.

In the United States, 2021 U.S. record industry sales revenue totaled $15 billion²on 418 million units sold, at a total average unit price of $25.87³. In comparison to 2020, sales revenue grew 23%, a new annual growth record. The average unit price increased 25% on robust growth in digital streaming subscriptions and the first annual increase (+56%) in physical sales since 1999. Wow! Further, since 2015, the average physical unit price has risen from $14.04 to $18.72. The volume is still a far cry from the height of the market, but it’s very encouraging to see positive growth!

Ironically, the digital music format that sent the global recorded music industry plummeting by more than half between 1999 and 2014, is now leading the revival. 84 million U.S. consumers paid for interactive digital streaming subscriptions in 2021, more than double the 35 million who paid in 2017, and nearly 14 times higher than the 6 million who did so in 2013. Associated revenues hit $8.6 billion in 2021, while also maintaining an annual average paid subscription rate just above $100 since 2013. To see annual streaming growth rates in the U.S. of 20-60% without price erosion is most encouraging.

Streaming growth is expected to continue with projected 2030 revenues to reach $38 billion globally, but at a slower annual rate of 10-15% as the market matures, according to Goldman Sachs Analyst Lisa Yang’s team. Of the forecasted $38 billion, expect $27 billion in paid subscription and $11 billion in ad supported. Also to note, China, whose streaming service Tencent reports 71 million paying subscribers and 636 active monthly users, is forecasted to surpass the United States in streaming revenues before 2030. Goldman 2020 Music In The Air Report

This leads us into the important discussion of “On Demand Ad Supported Streaming”, which is primarily YouTube, and new entrant TikTok . In 2020, Lisa Yang reports that the average royalty rate per video stream was 3x lower than the rate per audio stream in the U.S. I should note that the gap is about 6x lower when comparing pure on demand add supported video. Said another way, the YouTube “Value Gap” is still significant. While some see evidence of an improved relationship between music content owners and YouTube, I can tell you first hand, we have a long way to go. Currently, there are about 1.9 billion active monthly users on YouTube versus 406 million Spotify, 80 million Apple, and 60 million Pandora. To be clear, this monetization gap is not sustainable for the music creative community. The entry of TikTok and future renegotiations with the record labels might just provide some leverage, given the success of this new platform. I’ll stay on this.

The final and most important point we need to discuss is songwriter compensation. There is a major disparity in today’s digital streaming era, between royalties paid to the recording artist and record label for the sound recording copyright, versus the royalty paid to the songwriter and music publisher for the “song” copyright.

For every $10 monthly streaming music subscription, here’s where it goes:

Platform $3.30
Record Label $3.80
Recording Artist $1.70
Music Publisher $0.60
Songwriter $0.60

While the recording artist is able to negotiate in an open market, the songwriter’s royalty is regulated by the U.S. Copyright Act of 1976, and more recently by the passage of the groundbreaking Music Modernization Act (MMA) in 2018. While the passage of the MMA resulted in the U.S. Copyright Rate Board (CRB) declaring a much needed royalty increase to songwriters for the 2018-2022 term, the powerful digital service providers (DSPs), led by Spotify, appealed this rate increase in a most disingenuous fashion! To date, the matter has not yet been settled in the courts. Moreover, the DSPs are requesting a further rate reduction for the 2023-2027 pricing term. This is not a sustainable model for the songwriter! Just remember, without the songwriter there is no song, and without the song there is no music!

Please ask me about a leaning forward, badass organization doing something about this, Songwriters of North America (SONA). Look for future updates in 2022 as I stay on all of this!

I guess it’s only fitting to take you out with some live photos from the rail for Guns N’ Roses August 2021 LA Stadium performance. Enjoy!

¹All Global data is sourced by the IFPI 2022 Global Music Report Summary IFPI 2 022 Global Music Report Summary

²All U.S. data is sourced by the Recording Industry Association of America database, with all $ figures not adjusted for inflation. U.S. RIAA 2021 Year End Music Report

³ 2021 U.S. total units sold of 418 million includes 84 million paid subscription streaming. Please note that certain forms of revenue cannot be quantified in units sold and are therefore excluded in the average price calculations. This includes Limited Tier Paid Subscription, On-Demand Streaming (Ad-Supported), Sound Exchange Distributions, Other Ad-Supported Streaming, and Synchronization revenue.

March 27, 2022 By Cynthia Drew In Music P&L / 1 Comment

The Long Game

Thank you to Slash and Betty White for reminding us to be cool and play the long game!

By now everyone has seen last week’s earnings highlights. The one that really caught my attention read “Goldman Pays Up for Talent, Sending Profits Down”. Huh? In 2021, Goldman reported record net earnings of $21.6 billion, more than double 2020 results of $9.5 billion, and more than double results in recent history, $8.5 billion in 2019, and $10.5 billion in 2018.

JP Morgan was hit with a similar headline, “Wells Fargo Up, JP Morgan Down”. This on 2021 net earnings of $48.3 billion, which soared 66% to 2020 results.

These onerous headlines were referring to quarterly changes. Goldman Q4 net earnings of $3.9 billion fell (27%) to Q3, and (13%) year over year. JP Morgan Q4 results of $10.4 billion fell (11%) to Q3 and (14%) year over year. This is important because long term capital appreciation demands a long term growth strategy. The problem is short-termism. CEO’s are under enormous pressure to deliver strong quarterly earnings reports and to distribute wealth rather than reinvest. Investors responded this time by sending shares of Goldman and JP Morgan down.

In a 2015 article I wrote, McKinsey’s Dominic Barton, BlackRock’s Laurence Fink, and Rodel CEO Bill Budinger intensified the debate on the short term approach, challenging leaders to play the long game.

I think Jamie Dimon got it right in his response to investors, “We will be competitive in pay. If that squeezes margins a little bit for shareholders, so be it.” Further, Mr. Dimon asserted that JP Morgan wouldn’t meet its longer-term target returns this year and maybe next year. I’d say that qualifies as playing the long game, as Laurence Fink’s 2015 letter to Fortune 500 CEOs urged.

While Wells Fargo is cutting costs, other banks with bigger Wall Street operations reported higher expenses, largely because investment banking and trading results have soared, with the demand for talent high. It has taken more than ten years for global markets volume to rebound since the near collapse of the world financial system in 2008 and 2009. This is welcome news not only for an industry forever changed by these events, but for New York City and State tax coffers. This will also help small business in the New York metro area, COVID notwithstanding, in a city metropolis plagued by increasing income disparity.

What else are the big banks investing in? The answer is technology. Advances in artificial intelligence (AI) and machine learning (ML) factor squarely in post trade settlement. Ongoing transformation in cloud operations, interconnection, communication services, payments, and enhanced data security are also garnering noteworthy investment.

Technology spend worldwide is projected to grow 5.5% in 2022 to $4.5 trillion. This follows a robust level of investment in 2021. As one example, investments in European tech firms soared to $93.3 billion last year, a record, and a 142% increase over the year before, according to CB Insights.

U.S. Banks are very focused on this. JP Morgan has instituted a technology in residence program and recruited McKinsey Partner Neha Gargi as their new Head of Global Technology Strategy.

Goldman is leaning forward as well with deep talent search. In Spring 2021, they reached out to me, having identified my trading technology FP&A background. I interviewed with a veteran new hire leading their technology efforts in their Americas Operations group. This person had an engineering and product background outside capital markets, most recently within the APAC region. I didn’t land the role but it really caught my attention, revealing the intensity of their strategic focus.

Where is this all leading? Utilizing the long game, I’m bullish on America and believe we can transform the U.S. economy and regain the top spot from China. But we need to get going on this.

In some related good news, mountains have moved on Capitol Hill with groundbreaking bipartisan support in the U.S. Senate, with passage of the $250 billion U.S. Innovation and Competition Act, also known as the Endless Frontier Act. This week the U.S. House takes up this effort, largely seen as a critical and effective means to counter China’s technological ambitions.

So let’s get moving! What are your thoughts on this? I’d love to hear!

As always I’m reminded that nothing lasts forever, even cold November rain. Hmm, sounds like song lyrics. Enjoy!

Guns N’ Roses November Rain

Feature Photo courtesy of the IMGUR platform and the L.A. Zoo, on whose Board Slash sits, along with Betty White when she was still with us.

Please note Addendum links below to supporting articles.

Goldman Sachs Sees Profits Slips

Wells Fargo Up, JP Morgan Down

Cynthia 201 5 Article Long Term Capital Appreciation

Banks like JP Mo rgan: Inflation Is A Double Edged Sword

Gartner projecting $4.5 trillion Tech Spend

European Tech Scene

JP Morg an Technology In Residence