UMG’s buoyant stock debut is a new chapter for the music business

Universal Music Group (UMG) had an extremely positive first day of trading as a standalone entity, with shares at one stage trading 35% up from their reference point and making the market cap leap to $55 billion, while former-parent, Vivendi, saw a drop of two thirds in its value. Prior to the first day of trading, there were questions over whether Vivendi had pushed the indicative value of UMG shares too high, due to, in part, a series of UMG equity sell offs – but day one suggests that pent-up demand was sufficiently high to negate those concerns. Meanwhile, Warner Music Group’s (WMG) stock also surged, showing that investors see this as a market dynamic rather than a pure company dynamic. So, what is going on? Why is there so much investor enthusiasm in the music industry? The answers lie in the two-tier narrative that is building around today’s music business.

If the UMG listing had happened as recently as two years ago, we probably would not be talking about such a stellar trading debut. The fact that we are doing so now is because the music market has moved on a lot since then – and I mean a lot. This is what the music market looked like in September 2019:

• Spotify had only just closed down its direct artists platform – the first to blink in its contest against the labels to decide who would be the future of the music business
• Hipgnosis had not yet moved to the premium segment of the London Stock Exchange (it did so in November). 2019 was the year in which catalogue M+A first truly lifted off, with $4.2 billion of deals compared to $2.6 billion in 2018
• Article 13 had only just been put into the legislative process in April
• Downtown Music Holdings had only recently acquired AVL (CD Baby etc) in March 2019
• Marshmello had kicked off the music / games cross over boom with his Fortnite event in February 2019
• TikTok passed 500 million global users and had just 4% US penetration in Q2 19, compared to 44% in Q2 21

For those deep in the music business, it is sometimes hard to appreciate just how much change has happened in such a short period of time. As CS Lewis once wrote: Isn’t it funny how day by day nothing changes, but when you look back everything is different? Crucially for UMG’s listing, these changes have contributed to a major shift in the music industry’s metanarrative for investors:

• 2019: The Spotify vs the labels narrative was in full swing. Investors viewed the market through the lens of ‘rights vs distribution’. They were backing Spotify against UMG, vice versa or simply backing both horses in the race as a sector hedge. Record labels looked vulnerable in a market which was dominated by digital service provider (DSP) growth, which, in turn, was dominated by Spotify. Streaming’s future was bright, but there was a risk that as streaming got bigger, the labels would get weaker.
  
• 2020: Streaming revenues continue to grow strongly, up 18.3% in 2020 with 467 million subscribers, and up a further 25.9% in H1 21 in the US. But, crucially, the market is diversifying beyond DSPs. New growth drivers (social, short-form video, games, fitness, and mindfulness) are now making a truly meaningful contribution to label revenues (around $1.5bn in 2020). Music is becoming the soundtrack to the new digital entertainment universe. Vitally, unlike the traditional approach of sync (an ad hoc model that struggles to be agile and to scale), the labels are applying scalable licenses, born out of the DSP model, to ensure music rights can be agile enough to grow with the fast-changing digital entertainment marketplace. On top of this, a) the catalogue M+A boom has established music as an investor asset class, b) recorded music grew during the pandemic while live declined, thus demonstrating it to be the most resilient component of the wider music industry. The outlook for music is now a multi-layered narrative, with DSPs still centre stage but no longer the only game in town.

What this all means is that music rights are a compelling investment proposition for bigger institutional investors. However, the thing about bigger institutional investors is that they typically like to invest in big established companies. So, looking at the marketplace, unless an investor wants to build a catalogue investment fund (which is a highly specialised approach), there are not many big companies to invest in. WMG is the smallest major, Sony Music is just one smallish part of the Sony Corporation, and Believe is an indie label. So, while those are still interesting options for investors, the opportunity to invest into the world’s largest music company was previously the exclusive domain of a few large investors. Now, finally, everyone can have a part of UMG. 

So, what we have is the confluence of two factors:

• Pent-up investor demand
• A compelling and diversified industry narrative

The timing for UMG is perfect, but, of course, it has not been a neutral player simply watching the sands shift. It has actively driven this narrative, not just through what Sir Lucian Grainge and other executives have been telling the market, but also through its succession of equity transactions which helped build demand and value recognition. Part of the reason UMG is the world’s biggest music group is because it is the world’s biggest music group. It uses its scale and influence to help shape the market and its future trajectory. This is arguably one of UMG’s most valuable assets: it exercises control over its own destiny.Whether UMG’s share price falls or whether it grows in the coming weeks, the listing represents a high water mark for the music business as an asset class and may well be reflected upon as a useful bookend for one phase of the music business as another emerges.

Backing Both Horses: The Thinking Behind Tencent’s UMG Stake

As long expected, Tencent is poised to take a stake in Vivendi, reported to be 10%. While the news might not be surprising, there are a number of important factors at play:

• Tencent fast-tracked? Given that various entities stated their interest in investing in UMG, Vivendi appears to have fast-tracked Tencent. This might well be because Tencent showed the most appetite for paying a premium, and therefore Vivendi wanted to close the deal so as to create a price that subsequent bidders would have to work with.
• Betting on both horses: The investment community is increasingly viewing music as a battle between rights and distribution, with Spotify versus UMG as the publicly traded vehicles through which the contest can be backed. Tencent already secured around 5% of Spotify via its Tencent Music Entertainment subsidiary back in 2017, and it is now securing 10% in UMG. Tencent is backing both horses in the race.
• Investing within constraints: Back in 2016, concerned about capital flowing out of the country,Chinese authorities implemented restrictions on Chinese companies investing in overseas entities. This has compelled Tencent to focus on minority stakes rather than outright acquisitions. The UMG stake fits this investment framework.
• Outgrowing China: Tencent had a 74% market share of the Chinese music subscriptions market in Q2 2018. While growth in the market is solid, it is slowing. Tencent will recognize that there is only so much remaining near-term opportunity at home. Being a part of the global market is a way of ensuring it is not constrained by its domestic marketplace.
• Proxy wars: Back in 2018 I argued that Spotifyshould be wary of Tencent setting itself up as a competitor in markets where Spotify is not yet established (Russia, sub-Saharan Africa, some Asian markets etc). Tencent may still do this, and this may be part of the preparations, but for now ByteDance looks the most likely candidateto pursue this strategy.
• Look east:While streaming is giving an old industry new legs in the west, China’s music industry is effectively being built from scratch. As a consequence, it doesn’t have decades of irrelevant baggage. This is seen in China’s music apps. Western streaming is all about monetising consumption; China’s isabout monetising fandom. If the Western music industry was born today, it too would be putting social at its core. Many argue that apps like WeSing can only really work in China – but I remember people saying the same about mobile picture messaging when i-mode was getting going in Japan nearly 20 years ago. Just look at TikTok’s global success if you need any further convincing.

What the 2018 Success of the Beatles for UMG Tells Us About Where Streaming is Heading

Universal Music Group recorded an impressive €6 billion in revenue in 2018, bolstering a JP Morgan valuation of $50 billion. No doubt, UMG is enjoying a purple patch, riding and driving the wave of recorded music industry growth. But as with an any industry transition, progress is not linear and the past can have a lingering embrace. In UMG’s earnings report lies a small but crucial detail that point to the fact that the music industry’s path ahead may not be quite as straight as it first appears: the continued success of the Beatles.

The Beatles were UMG’s fourth best seller in 2018 

On page 13 of Vivendi’s year-end financial report, the Beatles’ ‘White Album’ is listed as UMG’s fourth best seller in 2018. It finished ahead of frontline artists including XXXTentacion, Migos and Ariane Grande. Above it were Drake’s ubiquitous ‘Scorpion’, Post Malone’s ‘Beerbongs & Bentleys’ and the soundtrack to ‘A Star is Born’. On the one hand this reflects the continued importance of the Beatles as a revenue driver for UMG. The Beatles, along with Abbey Road, were among the ‘crown jewels’ that UMG gained when it acquired EMI in 2012, so it is encouraging for UMG that the Beatles continue to deliver top tier revenue. However, Beatles revenue is not only a very different thing from Drake revenue, it also highlights the earnings divide between physical sales and streaming.

Streaming’s twin promise

The long-term promise of streaming is the combination of:

1. Delivering larger audiences
2. Replacing near-term, large volume revenue for a longer-term, annuity-like income model

Item number two happened very quickly; item number one is still in progress, but moving sufficiently enough to ensure many artists are now able to earn meaningful streaming income. However, we are not yet at our streaming destination, which is illustrated by the prominence of the Beatles in UMG’s 2018 sales. A ranking that owes little to streaming.

The Beatles are not a streaming powerhouse

According to the BPI, music from the 1960s accounted for just 3.6% of catalogue streams in the UK, which represents about 2% of all streams. Let’s assume the Beatles account for 40% of those streams – which is probably a generous assumption, this would mean the Beatles represented 0.8% of the $9.6 billion of streaming revenue in 2018, which translates as $79 million, which in turn equates to 2.7% of UMG’s 2018 streaming revenue. A meaningful amount for sure for a single artist, but not that significant in the greater streaming scheme of things. Therefore, the Beatles did not get to be UMG’s fourth biggest seller through streams. Instead, it did so through physical sales.

The main release in 2018 was the 50th Anniversary edition of the White Album. This premium physical release includes a $25 edition, right through to a $145 deluxe box set. With such high-unit prices, only small numbers need be sold to generate meaningful revenue.

To illustrate the point, let’s assume UMG collects around $15 of the $25 retail price and $100 of the $145 edition. To generate $7.5 million of label revenue, UMG would need to sell just half a million copies of the $25 edition and only 75,000 of the Boxsets. To generate the same $7.5 million from streaming UMG would need to have 62.5 million people each streaming 15 tracks from the album. $7.5 million is incidentally also roughly the amount a label would earn from selling a million copies of a standard priced album.

Streaming cannot yet match CD-era album revenue metrics

This gets to the heart of the matter of why streaming is creating, alongside a welcome growing body of middle-tier artists, a small handful of megastars. To replicate physical sales success, an artist must have exceptional streaming success. To replicate standout physical success requires as yet ungraspable streaming success.

For example, the number one album in the US in 2000 – NYSNC’s ‘No Strings Attached’ – sold over nine million copies, which would require 600 million people each streaming it all once — roughly 8.5 billion streams — to generate the same income. That is more streams than the entirety of Drake’s 2018 Spotify streams across the entire planet – Drake was Spotify’s most streamed artist. In short, streaming is currently large enough to make record labels grow, but not yet vast enough to create artist-level revenue on the same scale that that the CD peak once did.

Longer-term revenue may, or may not, add up.

The counter argument is that over a number of years the revenue will add up to the equal. But even with that assumption, an album would need to generate around a billion streams a year over eight years to replicate the success of NSYNC’s ‘No Strings Attached’. No easy task when you factor in the dynamics of streaming consumption i.e. playlists replacing albums, new music being pushed over catalogue etc.

None of this is to suggest that streaming is failing, nor that UMG’s revenues are in question. Both are doing well. Instead, it is evidence that we still have much distance to go with streaming before we can start seeing artist-level successes on a par with the peak of the industry. Though of course streaming-level success needs measuring differently than CD-era success, so these comparisons provide context rather than performance targets.

Will there ever be another Beatles’ greatest hits?

One intriguing post-script to all of this is that with download revenue falling by 15% in 2018, and physical by 7%, the days of large-scale album sales are long gone. When this is considered alongside the Beatles’ under-representation on streaming, the elephant in the room is whether UMG would ever risk releasing a Beatles greatest hits album for fear of underwhelming sales numbers damaging the Fab Four’s legacy. The last greatest hits was ‘1’ back in 2000 during the EMI years. Might it just be that UMG bought the Beatles too late ever to release their last ever greatest hits?

Taylor Swift, Label Services and What Comes Next

Taylor Swift has done it again, striking a deal with UMG that includes a commitment from the world’s largest label group to share proceeds from Spotify stock sales with artists, even if they are not recouped (ie haven’t generated enough revenue to have paid off the balance on their advance so not yet eligible to earn royalty income). This follows Swift’s 2015 move to persuade Apple to pay artists for Apple Music trials. That Swift has influence is clear, though whether she has that much influence is a different question. Let’s just say it served both Apple and Universal well to be seen to be listening to the voice of artists. But it is what appears to be a label services part of the deal that has the most profound long-term implications, with Swift stating that she is retaining ownership of her master recordings.

The rise of label services

The traditional label model of building large banks of copyrights and exploiting them is slowly being replaced, or at the very least complemented, by the rise of label services deals. In the former model the label retains ownership of the master recordings for the life time of the artist plus a period eg 70 years. In label services deals the label has an exclusive period for exploiting the rights, after which they revert to full ownership of the artist. Artist normally cede something in return, such as sharing costs. Companies like Kobalt’s AWAL and BMG Music Rights have led the charge of the label services movement. However, Cooking Vinyl can lay claim to being the ‘ice breaker’ with its pioneering 1993 label services deal with Billy Bragg, negotiated between his manager Pete Jenner and Cooking Vinyl boss Martin Goldschmidt. It may have taken a couple of decades, but the recording industry has finally caught up.

Major labels in on the act

The major labels remain the powerhouses of the recorded music business in part because they have learned to embrace and then supercharge innovation that comes out of the independent sector. Label services is no exception. Each of the major labels has their own label services division, including buying up independent ones. Label services are proving to be a crucial asset for major labels. The likes of AWAL and BMG have been mopping up established artists in the latter stages of their careers, with enough learned knowledge to want more control over their careers. By adding label services divisions the majors now have another set of options to present to artists. This enables them to not only hold onto more artists but also to win new ones – which if of course technically what UMG did with Swift, even though it had previously been Swift’s distributor. As with all new movements, examples are often few and far between but they are there. The UK’s Stormzy is a case in point, signing a label services deal with WMG before upgrading it to a JV deal between WMG’s Atlantic Records and his label #MERKY. For an interesting, if lengthy, take on why Stormzy and WMG took this approach – including the concept of secret ‘Mindie Deals’ that allow more underground artists maintain some major label distance for appearances’ sake, see this piece.

The early follower strategy 

In August 2018UMG’s Sir Lucian Grainge called out the success of UMG’s label services and distribution division Caroline, noting it had doubled its US market share over the previous year. UMG was already not only on the label services deal path but had identified it as a key growth area and wanted the world – including investors – to know. UMG has stayed ahead of the pack by pursuing an early follow strategy of identifying new trends, testing them out and then throwing its weight behind them. Before you think of that as damning with faint praise, the early follower strategy is the one pursued by the world’s most successful companies. Google wasn’t the first search engine, Apple wasn’t the first smartphone maker, Facebook wasn’t the first social network, Amazon wasn’t the first online retailer.

What comes next

The label services component of the UMG deal was actually announced by Taylor Swift herself rather than UMG, writing:

“It’s also incredibly exciting to know that I own all of my master recordings that I make from now on. It’s really important to me to see eye to eye with a label regarding the future of our industry.”

While this might betray which party feels most positive about this component of the deal, the inescapable fact is that other major artists at the peak of their powers will now want similar deals. Label services success stories to date had been older artists such as Rick Astley, Janet Jacksonand Nick Cave as well as upcoming artists like Stormzy. Now we will start to see them becoming far more commonplace in the mainstream.

But perhaps now is the time. Catalogue revenues are going to undergo big change in the coming years, as MIDiA identified in our June 2018 report The Outlook for Music Catalogue: Streaming Changes Everything. Deep catalogue is not where the action is anymore. For example, 1960s tracks accounted for just 6.4% of all UK catalogue streams in the UK in 2017, while catalogue from the 2000s accounted for 60.4%, according to the BPI’s invaluable All About the Music report. So, by striking a long-term label services type deal, UMG secures Swift’s signature and can still benefit from the main catalogue opportunity for the first few releases without actually owning the catalogue.

Label services have come a long way since Billy Bragg’s 1993 deal and Taylor Swift has just announced that they are ready for prime time.

Penny for the thoughts of Bill Bragg having paved the way for the queen of pop’s latest deal….

Global Recorded Music Revenues Grew By $1.4 Billion in 2017

2017 was a stellar year for the recorded music business. Global recorded music revenues reached $17.4 billion in 2017 in trade values, up from $16 billion in 2016, an annual growth rate of 8.5%. That $1.4 billion of growth puts the global total just below 2008 levels ($17.7 billion) meaning that the decline wrought through much of the last 10 years has been expunged. The recorded music business is locked firmly in growth mode, following nearly $1 billion growth in 2016.

Streaming has, unsurprisingly, been the driver of growth, growing revenues by 39% year-on-year, adding $2.1 billion to reach $7.4 billion, representing 43% of all revenues. The growth was comfortably larger than the $783 million / -10% that legacy formats (ie downloads and physical) collectively declined by.

Universal Music retained its market leadership position in 2017 with revenues of $5,162 million, representing 29.7% of all revenues, followed by Sony Music ($3,635 million / 22.1%) while Warner Music enjoyed the biggest revenue growth rate and market share shift, reaching $3,127 million / 18%. Meanwhile independents delivered $4,798 million representing 27.6%. However, much additional independent sector growth was absorbed by revenue that flowed through digital distribution companies owned by major record labels that were thus reported in major label accounts.

But perhaps the biggest story of all is the growth of artists without labels. With 27.2% year-on-year growth this was the fastest growing segment in 2017. This comprises the revenue artists generate by distributing directly via platforms such as Believe Digital’s Tunecore, CD Baby and Bandcamp. All these companies performed strongly in 2017, collectively generating $472 million of revenue in 2017, up from $371 million the year before.  While these numbers neither represent the death of labels nor the return of the long tail, they do reflect the fact that there is a global marketplace for artists, which fall just outside of record label’s remits.

 

Up until now, this section of the market has been left out of measures of the global recorded music market. With nearly half a billion dollars of revenue in 2017 and growing far faster than the traditional companies, this sector is simply too large to ignore anymore. Artists direct are quite simply now an integral component of the recorded music market and their influence will only increase. In fact, independent labels and artists direct together represent 30.3% of global recorded music revenues in 2017.

A Growing and Diversified Market

The big take away from 2017 is that the market is becoming increasingly diversified, with artists direct far outgrowing the rest of the market. Although this does not mean that the labels are about to be usurped, it does signify – especially when major distributed independent label revenue and label services deals are considered – an increasingly diversified market. Add the possibility of streaming services signing artists themselves and doing direct deals with independent labels, and the picture becomes even more interesting.

The outlook for global recorded music business is one of both growth and change.

The report that this post is based upon is immediately available to MIDiA Research subscription clients herealong with a full excel with quarterly revenue from 2015 to 2017 segmented by format and by label. If you are not yet a MIDiA client and would like to learn more then email info@midiaresearch.com