Company description: Entertaining content
Edel was founded in 1986 by Michael Haentjes as a mail order catalogue business, initially selling film soundtracks then broadening to selling vinyl albums, predominantly imported from the US and the UK. It has since expanded to become a major European independent provider of services to the music and entertainment industries. Encompassing both physical and digital product, it handles both its own content and manufactures and distributes content for third parties. The combination of the marketing and distribution operations with the physical manufacture and logistics operations is unusual in the industry, where the two functions are increasingly separated. While music remains the largest element of content, Edel also produces and distribute books and films.
As the company grew through its early years and built up its catalogue of recordings and artists, there was a growing frustration over supply chain issues (Edel’s small and independent status tended to push it down the queue), which led to the company looking at its options. This process culminated in the decision in 1990 to set up its own CD manufacturing facility north of Berlin, now Optimal Media. Vinyl presses were added in 1995.
As the 1990s progressed, the group’s ambitions towards becoming a global music industry major developed. The group listed in September 1998, raising around DM60m, and embarked on an ambitious phase of acquisitions. However, the crisis of the Neuer Markt and the lack of further funding opportunities on the capital markets led to a reorganisation in 2001/02. This had two elements: refocusing on Europe and then particularly on German-speaking countries for the group’s own subsidiaries; and a restructuring of the German operations, widening the product portfolio and adding and/or expanding Edel:Kids, Edel:Motion, the digital business via Kontor New Media and the book publishing activities. The number of subsidiaries was reduced from over 100 to about seven key operating companies. This repositioning of the business took a number of years, during which time digital became a significant factor in the development of the market.
Having right-sized, closed or disposed of businesses that no longer fitted with the strategy, management then looked to broaden the stable of content with complementary acquisitions. These brought it into adjacent fields such as book publishing, DVD, video and family entertainment. Published figures do not separate revenues from these activities, simply the split between manufacturing and logistics and marketing and distribution, as shown below. Germany continues to represent the largest proportion of revenues by some way.
Exhibit 1: Revenues by segment
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Exhibit 2: Revenues by geography
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Source: Edison Investment Research
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Source: Edison Investment Research
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Exhibit 3: Edel Group AG key brands and operations
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Source: Edel. Note: Kontor Records is 66.8%-owned.
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Marriage of content and production
Edel’s key brands are shown above, split across its fields of activity. The current structure of the group represents a broad base of consumer content, with an emphasis on evergreen artists and properties.
The largest single element of the group is Optimal Media, which comprises the bulk of the manufacturing and logistics. From the original CD manufacturing, it added DVD and Blu-Ray, vinyl pressing and book printing. Optimal is one of the leading independent service providers to the European entertainment and media industry. Less than 15% of Optimal’s production output is on behalf of other group companies. Financially, the group has gained good advantage from the resurgence in the popularity of vinyl, where it acts as a partner to both large and independent record labels. Over recent years, the achievable price of producing CDs had been drifting, although volumes had held up surprisingly strongly. The rediscovery of vinyl, which has grown from the dance music segment, has led to an unprecedented increase in demand across back and front lists. Optimal has production capacity for 120m CDs and is known for the high quality of its output, with modern, efficient equipment. It has over 700 employees. Its printing capability, originally for the purpose of printing CD/DVD inserts, is again geared up to produce top-end illustrated books as well as more standard stock.
The group has invested over the years in efficient platforms and systems for both production and for post-production: warehousing, pick and pack, delivery and logistics, a complex operation given the high number of SKUs often in relatively modest runs.
Edel Germany is the umbrella for a number of different operations, encompassing the group’s content, IP and service capabilities. Edel Germany GmbH covers music, crime, children’s content/ family entertainment and books, under the brands as shown in Exhibit 3 above. Kontor Records (67%-owned) is a major label in dance music, with a high-ranking YouTube channel (currently number four in Germany in terms of subscribers at 4.2 million and with the top ranking for number of video views at 3.9 million (according to SocialBlade monitoring, as at 19 May 2017). Other group-owned music labels cover a range of genres, including classical and rock. ZS is one of Germany’s largest publishers of cookery books, while the family entertainment activities, under the brand Edel:Kids, work with global majors such as DreamWorks and Mattel, which prefer to use independent external partners. Its best-known property is Pettersson und Findus, which has become an evergreen and for which Edel Germany holds a wide range of rights.
Both Edel and Kontor had digital assets, which were combined to form Kontor New Media (KNM). KNM generates €32m of revenues, on which it earns a 10% EBIT margin. It is a dominant independent digital service provider in European markets and globally across all the key routes to market, including iTunes, Spotify, Napster, YouTube, Amazon and Musicload. It does not have its own end-user channel. In addition to music tracks, it also distributes music video, films and TV shows and audio books, which are an important category in the German market. KNM holds the rights to more than 1.5m titles for thousands of label customers. It has a sophisticated rights management system (DMB) providing state-of-the-art content and sales information to customers.
Edel Germany typically looks to assemble and exploit the rights of evergreen/heritage acts such as Deep Purple and Status Quo, where – although the likelihood of a major chart breakout hit is low – revenues will continue to roll in. It also holds an extensive classical catalogue.