WMG is moving beyond superstars – and that is a good thing

Warner Music Group’s (WMG’s) Steve Cooper recently stated that the major is no longer financially dependent on superstars – which is, of course, quite a different thing from not being culturally dependent on them, but we’ll get to that. For a major’s CEO (exiting or not) to make such a claim is both bold and a reflection of the reality on the ground. In fact, it is a natural milestone in a trend MIDiA identified years ago: fragmented fandom. As streaming audiences and consumption fragment, so does the impact of superstars. As with any transition, the shift is not linear and there will continue to be more Olivia Rodrigos and Billie Eilishes, but they will be fewer and farther between, and crucially, they will be smaller than their pre-fragmentation peers.

Superstars getting smaller is music to the ears of independent labels and artists alike, but it is far from the death knell for big labels. Instead, it simply reflects the new environment in which they will operate. Indeed, Cooper said WMG is pursuing a “portfolio” strategy “across a bigger number of artists” to reduce financial “dependency on superstars”. This comes after BMG’s CEO, Hartwig Masuch, said of their latest results: “The extraordinary thing about our first half result is that we grew revenue 25% with virtually no hits”. Having no superstars does not mean having no hits, instead it means more, smaller hits.

In 2019, MIDiA wrote that “Niche is the new mainstream”, that the water cooler moments of the linear era were being replaced by cultural moments. Audiences are in different places at different times, with algorithms delivering them different personalised content. Concepts, such as ‘song of the summer’, are becoming different for everyone. Each listener has their own song of the summer. In the era of fragmented fandom, water cooler moments across the masses, where everyone heard the song on the radio at the same time, are replaced by smaller groups of people finding pockets of likeminded fans across the world.

The consequence for artist marketing is a progressive shift from ‘carpet bombing’ mass media in order to build artist brand reach, to campaigns that, instead, reach real fans with laser-focused targeting. In the old model, a superstar artist was a household name, with mum and dad just as likely to know them as their kids. But what was the value of mum and dad knowing the artist if they were not the target audience? It might play to the artists’ egos, but it was an inefficient spend of marketing budget. Now, targeted marketing reaches the consumers who care. The result is smaller, but more passionate, fanbases. This is marketing to build fans rather than audiences. It is just a shame that western DSPs are built for passive audiences rather than fandoms. That will need to change. DSPs paradoxically triggered the fragmentation, but they do not provide the mechanisms for artists and labels to benefit. A cynic might argue that that is by design.

Indeed, the fragmentation of listening that streaming is pushing consumption towards the middle, away from the superstars, as Music Business Worldwide’s Luminate chart for streams of the US top-10 tracks shows.

For the superstars who are used to mega-fame from the pre-fragmentation days, a new release’s performance can look like diminishing success when measured by traditional metrics – just ask Beyonce. But, because fragmentation means it is truer fans that engage with the music, the cultural relevance of these smaller hits can actually be bigger – again just ask Beyonce.

There are, however, extra complications. As we are currently in a transition phase, pre-fragmentation hangovers are muddying the streaming waters. Pre-fragmentation hits stick around for longer on streaming because they had the pre-fragmentation brand reach. Since they benefited from the old-world mainstream media exposure, their hits cut through on streaming in a way that newer ones often struggle to. These pre-fragmentation hangovers have the effect of fragmenting new hits even further as they take up so much of streaming’s consumption. The result is that streaming is not so much a level playing field as a field of all levels.This transition phase will play out, and while it does, there is a world of opportunity for artists and labels that can harness the deeply held fandom that fragmentation creates.

The rise of scenes

The most exciting knock-on effect of fragmentation is the rise of scenes and micro scenes. In the old world, consumers had a limited range of things with which they could identify themselves, as everyone was watching the same TV, reading the same magazines, listening to the same radio, and shopping in the same shops. Now, consumers can build their own identity from an ever more diverse set of attributes, across fashion, music, TV / film, games, politics, etc. 

As my colleague Tatiana Cirisano put it:

“The result is that scenes are becoming more complex and splintered. Consider the seemingly endless range of subcultures on TikTok, from #cottagecore to #EGirl, or the Instagram account @starterpacksofnyc, which has garnered more than 64,500 followers by crystallising super-specific, yet eerily-familiar, personality types.”

This rise of scenes is what will shape the future of marketing, with scenes becoming the new territories, transcending borders and cultures. Superstars will get smaller, but they will get better at monetising their superfans (this is why Taylor Swift’s Universal Music Group deal includes a broader range of rights than just recordings, as her sales were only going to go in one direction). Superstars are not dead, they are changing, become smaller and less, well, super. It is an inevitable second-order consequence of streaming splintering listening and the smart labels will harness the trend rather than try to fight it.

The music industry’s centre of gravity is shifting

Regular readers will know that MIDiA has been analysing the creator tool space for some time now and building the case for why the changes that are taking place will be transformational not just for the creator tools space itself but for the music business as a whole. In fact, we believe that the coming creator tools revolution could be at least as impactful on the wider music business as streaming was. Firstly, it establishes a new top-of-funnel that sits above distribution companies, meaning that creator tools companies are now able to fish upstream of labels for the best new talent. Secondly, audio will become the next tool with which consumers identify themselves, following the lead of images (Instagram) and video (TikTok). But there is another factor too: the fast-growing volume of institutional investment is changing where the centrifugal forces of the music industry reside.

Outside of the currently crippled live business, the record labels used to be the undisputed central force of the music business. Then streaming services grew in scale and attracted the first wave of inward investment into the industry. Alongside labels, streaming services became the joint central force of the music business, around which all else orbited. Big investors started to make bets on either side of a binary equation: rights or distribution.

The publishing renaissance

Then music publishers and publishing catalogues started to attract investment. At the time, the only real place big institutional investors could place their bets on the rights side of the equation was Vivendi – and even then, it was an indirect bet as UMG was just one part of Vivendi. SME is just too small a part of Sony Corporation for the parent company to be a viable music industry bet. Since then, UMG divested 20% of its equity and is on path towards an IPO; WMG went public and Believe is on track to an IPO also. 

When growth isn’t growth

Investors may be given pause for thought by the way in which leading music industry trade associations such as ARIA in Australia and Promusicae in Spain have restated their 2019 figures, having the effect of making what would otherwise be declines in 2020 instead look like growth. Take a look at Australia (2019 total revenues AUD 555 million here versus 2019 total revenues AUD 505 million here) and Spain (2019 subscriptions €159 million here versus 2019 subscriptions €138 million here).

Publishing catalogues by contrast look more predictable, with performance still largely shaped by non-recorded music market trends, including radio and public performance – though COVID-19 threw a lot of that stability down the toilet. Music publishers used the inward investment to diversify their businesses. Kobalt pushed into artist distribution (recently sold to Sony), neighbouring rights and a PRO; Downtown pushed hard into the independent creator sector (CD Baby, Songtrust); while Reservoir is going public with a Spac merger; and then of course there is Hipgnosis.

The creator tools gold rush

With music publishing catalogue valuations over-heating, big investors started looking for places where they could still play in the music market but get better value for money. Enter stage left creator tools. Key moves include Francisco Partners’ moves for Native Instruments and Izotope; Summit Partners’ investment in Output; and Goldman Sachs’ investment in Splice. 

What this means is that the music industry now has an additional gravitational force at its core. Just as music publishers and streaming services used their newfound investment to push into other parts of the music and audio businesses, expect creator tools companies to do the same. With hundreds of millions of dollars pouring into creator tools (and lots more set to follow), investors are making big bets on audio in a broader sense, with bold ambitions that will not be sated by staying in the creator tools lane as it is currently defined. Avid’s recent move into distribution follows on from LANDR’s similar move, and of course Bandlab has 30 million ‘users’. Adding label-like services (e.g. marketing, debt financing) and streaming functionality are logical next steps for creator tools companies.

Streaming may be the change agent that has enabled all of these shifts – but streaming is the start of the story, not the end point. The process of music business diversification is only just beginning and the next chapter may be the most exciting yet.

What UMG’s IPO Means for the Business of Music

Finishing 2019 on $6.4 billion, Universal Music is to go to IPO hot on the heels of Warner Music’s announcement to do the same. This of course also follows the Tencent-led agreement to acquire 10% of UMG for $3 billion with an option to acquire another 10%. Added into the context of a total of $10 billion in music rights mergers and acquisitions (M&A) in the last decade, we have a clear case of capital flowing into the booming recorded and music publishing businesses. The global recorded music market looks set to have reached a little under $21 billion in 2019, up 10% on 2018 (MIDiA’s definitive market estimate will be ready within the next few weeks). That 10% growth was up on the 8% seen in 2018. Investors of all sizes are either already invested in the music business or are looking for a route in, and UMG just gave them a new, very attractive option. But where is all this heading? How far can it go? And what are the implications for the business of music itself?

Looking for a return

The power behind UMG parent Vivendi is Vincent Bolloré. Although he stepped down from the board last year, he helped instigate a share buyback programme that will leave his family the majority shareholder and could even trigger a mandatory takeover. Additionally, Vincent Bolloré remains as a ‘censor and special advisor’ to Vivendi’s chairman, his son Yannick. This all matters because the motivations of Vivendi’s prime mover are, according to investors we’ve spoken to, focused on maximisation of value for Bolloré Group and for investors. This is not inherently a bad thing. The Bolloré Group has invested billions in Vivendi, so it is only natural that it will be seeking a return on that investment. And the likelihood is that Vivendi will only list a minority of UMG stock, otherwise Vivendi – Bolloré Group’s key financial interest here – would most likely lose value.

Why an IPO?

The IPO announcement follows a previous statement from Vivendi that it would look for other equity buyers for UMG. The IPO may well reflect that this course of action has not delivered fruit. But this does not mean the IPO would struggle. Equity buyers may have balked at the valuation and the lack of company control they would acquire. Stock investors, however, have a different perspective. For example, asset managers will be looking to add a profile of asset class that slots into a particular segment of their portfolios. Meanwhile, hedge funds would see UMG stock as a way to directly bet for (and against) rights in the emerging ‘rights versus distribution’ investment thesis. Finally, publicly-traded stock inherently reflects what the market values a company at, not what the company values itself at.

Investing back into the music business

Sales and IPOs during the peak of markets are usually a good way of maximising return. The question is how much of the income from the equity sales and IPO will flow back into the UMG business, compared to profit taking by investors. The same question of course applies to Len Blavatnik’s Access Industries’ proposed WMG IPO.

In its earnings release Vivendi stated that the income from the various UMG transactions “could be used for substantial share buyback operations and acquisitions”. Share buyback suggests further potential consolidation of the Bolloré Group’s relative dominance of Vivendi shareholding, while acquisitions could refer to activity at both Vivendi and UMG levels. There is a strong case for IPO proceeds being reinvested in the businesses of both UMG and WMG. The music market is growing and both companies outperformed total market growth in 2019 – but a slowdown is coming. Both UMG and WMG added less new streaming revenue in 2019 than they did in 2018. Not by much, but the early signs are there.

Time for plan B, C and D

Emerging and mid-tier markets will drive much of the growth over the next half decade, but the lower average revenue per user (ARPU) rates mean that subscribers will grow faster than revenue. So, the record labels need a new revenue driver. UMG actually saw physical sales grow a little in 2019 (due in part to deluxe editions of Beatles classic releases). But physical is not going to be the long-term revenue driver. Innovating in new revenue streams (e.g. creator tools) and new business models (e.g. streaming services that monetise fandom rather than consumption) is more promising. There is an opportunity here for UMG and WMG to supercharge growth beyond the coming streaming slowdown. In fact, MIDiA would go further and say there is an imperative to do so. Larger independents such as Downtown Music Holdings, Kobalt, BMG and Concord are collectively taking billions worth of capital and investing it in growing their businesses. If the majors do not follow suit, then they will lose ground to this emerging generation of innovative music companies.

This is looking to be the time to capitalise on the music industry’s revenue renaissance. Which begs the question: if/when will Sony spin off some of Sony Music via an IPO?

Just Who Would Buy Universal Music?

Vivendi continues to look for a buyer for a portion of Universal Music. Though the process has been running officially since May 2018, the transaction (or transactions) may not close until 2020. In many instances, dragging out a sale could reflect badly, suggesting that the seller is struggling to find suitable buyers. But in the case of UMG it probably helps the case. A seller will always seek to maximise the sale price of a company, which means selling as close to the peak as possible. It is a delicate balance, sell too early and you reduce your potential earnings, sell too late and the price can go down as most buyers want a booming business, not a slowing business. In the case of UMG, with institutional investors looking for a way into the booming recorded music business, UMG is pretty much the only game in town for large scale, global institutional investors.

In this sellers’ market, banks have been falling over themselves to say just how valuable UMG could be, with valuations ranging from $22 billion to $33 billionand Vivendi even suggesting $40 billion. Meanwhile, recorded music revenues continue to grow — up 9.0% in 2017, and up 8.2% in 2018 according to MIDiA’s estimates. 2019 will likely be up a further 6%, all driven by streaming. With UMG’s market share (on a distribution base) relatively stable, the market growth thus increases UMG’s valuation. This in turn increases Vivendi’s perceived value, and that is the crux of the matter.

The role of Bolloré Group

Vivendi board member and major shareholder Vincent Bolloré was Vivendi chairman until April 2018, when he handed power to his son Yannick, one month before he was reportedly taken into police custody for questioning as part of an investigation into allegations of corrupt business practices in Africa. Bolloré senior remains the chairman and CEO of Bolloré Group, which retains major shareholdings in Vivendi. Bolloré Group’s Vivendi holdings will inherently be devalued by a sale of prize asset UMG, which is a key reason why only a portion of the music group is up for sale. But, even selling a portion of UMG will have a negative impact on Vivendi’s valuation and thus also on Bolloré Group’s holdings. So, the sale price needs to be high enough to ensure that Bolloré Group makes enough money from the sale to offset any fall in valuation. Hence, dragging out the sale while the streaming market continues to boom. All this also means the sale is of key benefit to Bolloré Group and other Vivendi investors. It is perhaps as welcome as a hole in the head to UMG. Little wonder that some are suggesting UMG is markedly less enthusiastic about this deal than Vivendi is.

All of which brings us onto which company could buy a share of UMG. These can be grouped into the four key segments shown in the chart above. Normally, higher risk buyers (i.e. those that could negatively impact UMG’s business by damaging relationships with partners etc.) would not be serious contenders but as this is a Vivendi / Bolloré Group driven process rather than a UMG driven one, the appetite for risk will be higher. This is because the primary focus is on near-term revenue generation rather than long-term strategic vision. Both are part of the mix, but the former trumps the latter. Nonetheless, the higher-risk strategic buyers are unlikely to be serious contenders. Allowing a tech major to own a share of UMG would create seismic ripples across the music business, as would a sale to Spotify.

Financial investors

So that leaves us with the lower-risk strategic buyers, and both categories of financial buyers. Let’s look at the financial buyers first. Private equity (PE) is one of the more likely segments. We only need to look back at WMG, which was bought by a group of investors including THL and Providence Equity before selling to Len Blavatnik’s Access Industries in 2011 for $3.3 billion. Private equity companies take many different forms these days, with a wider range of investment theses than was the case a decade ago. But the underlying principle remains selling for multiples of what was paid. Put crudely, buy and then flip. The WMG investors put in around half a billion into the company, but a six-fold increase is less likely for UMG, as the transaction is taking place in a bull market while WMG was bought by Providence and co in a bear market. Where the risk comes in for UMG is to whom the PE company/companies would sell to in the future. At that stage, one of the current high-risk strategic companies could become a potential buyer, which would be a future challenge for UMG. The other complication regarding PE companies is that many would want a controlling stake for an investment that could number in the tens of billions.

Institutional investors such as pension funds are the safest option, as they would be looking for long-term stakes in low-risk, high-yield companies to add to their long-term investment portfolios. This would also enable Vivendi to divide and rule, distributing share ownership across a mix of funds, thus not ceding as much block voting power as it would with PE companies.

Strategic investors

The last group of potential buyers is also the most interesting: lower risk strategic. These are mainly holding companies that are building portfolios of related companies. Liberty Media is one of the key options, with holdings in Live Nation, Saavn, SiriusXM, Pandora, Formula 1 Racing and MLB team Atlanta Braves. Not only would UMG fill a gap in that portfolio, Liberty has gone on record stating it would be interested in buying into UMG.

Access Industries is the one that really catches the eye though. Alongside WMG, the Access portfolio includes Perform, Deezer and First Access Entertainment. On the surface Access might appear to be a problematic buyer as it owns WMG. But compared to many other potential investors, it is clearly committed to music and media, and is likely to have a strategic vision that is more aligned with UMG’s than many other potential suitors.

There is of course the possibility of being blocked by regulators on anti-competitive grounds. However, at year end 2017 WMG had an 18% market share, while UMG had 29.7% (both on a distribution basis). If Access acquired 25% of UMG, respective market shares would change to 25.4% for WMG and UMG for 22.2% (still slightly ahead of Sony on 22.1%). It would mean that the market would actually be less consolidated as the market share of the leading label (WMG) would be smaller than UMG’s current market leading share. While the likes of IMPALA would have a lot to say about such a deal, there is nonetheless a glimmer of regulatory hope for Access. Especially when you consider the continued growth of independents and Artists Direct. All of which point to a market that is becoming less, not more, consolidated.

The time is now

Whatever the final outcome, Bolloré Group and Vivendi are currently in the driving seat, but they should not take too much time. 2019 will likely see a streaming growth slowdown in big developed streaming markets such as the US and UK, and it is not yet clear whether later stage major markets Germany and Japan will grow quick enough to offset that slowdown in 2019. So now is the time to act.

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….