JP Morgan says Universal’s ‘artist-centric’ model will bring a 9% revenue increase to major labels. No wonder it’s just increased its price target for UMG.

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Sir Lucian Grainge first floated the idea of an ‘artist-centric’ streaming model back in January.

Now, we know exactly what that means. Deezer this week revealed it has struck an agreement to start paying UMG’s artists via an ‘artist centric’ model – with key details of how it works confirmed.

According to a press release issued by Deezer, following “in-depth data analysis”, the new system will be characterized by the following elements:

  • Focusing on artists – Deezer says it will attribute a double boost [i.e double the stream weighting] to what they define as “professional artists” – those who have a minimum of 1,000 streams per month by a minimum of 500 unique listeners.
  • Rewarding engaging content – Deezer will additionally assign a double boost [in addition to the double weighting for professional artists, so a 4x weighting] for songs that fans actively engage with, reducing the economic influence of algorithmic programming.
  • Demonetizing non-artist noise audio – Deezer is planning to replace non-artist noise content with its own content in the functional music space. This music won’t be included in the royalty pool.
  • Tackling fraud – Deezer says it will continue to drive an “updated, and stricter, proprietary fraud detection system, removing incentives for bad actors, and protecting streaming royalties for artists”.

Deezer plans to roll the model out in France next month (October 2023) with additional markets to follow in the new year.

The initial reaction to the announcement from analysts has been… positive.

Daniel Kerven at JP Morgan, who has long followed UMG’s stock, was impressed enough with the ‘artist-centric’ announcement to increase his price target for UMG’s share price – up from EUR €31 to EUR €33. That’s a roughly 40% rise on UMG’s current stock price (see below).

In a research note issued on Thursday (September 7), J.P. Morgan states that, “this initial agreement comes sooner than many expected” and that “we would expect it to be followed by further DSP deals (if DSPs want to maintain equal access to UMG’s must-have content) in the coming months”.

The note added: “Our model already assumed a partial offset of stream share erosion in developed markets and the Deezer template would suggest significant further upside if adopted more broadly.”

Crucially, J.P Morgan says that “if broadly adopted”, the new artist-centric model “could drive a 9% uplift to majors’ subscription revenues today”.

The note adds: “In recognition of the increased visibility on an artist-centric model & its mechanics,” J.P Morgan has decided to upgrade its PT [purchase target] for UMG by 7% to €33, and predicts “further upside from [the artist-centric model’s] broader adoption in the coming months.”

J.P. Morgan breaks down how it arrived at that 9% revenue boost figure.

It says that it estimates the major record companies’ share of streams to be around 65% (based on distribution) and that “under the stream share [pro-rata] model this would result in the majors taking 65% of the royalty pool”.

It adds, however, that given its view that the major record companies “account for a disproportionate share of the most valuable, engaged content – the hits of today and the best music from the past – they have a 71% share of the royalty pool under the artist-centric model”.

The note adds that “If broadly adopted, this would represent a 9% uplift in the royalties to the majors”.

That 9% estimate is not far off the 10% lift to artists’ payouts cited by the Financial Times yesterday, a point that J.P Morgan also makes, stating in its research note that, it is “interesting to note that this is consistent with a 10% uplift referenced by UMG / Deezer in an FT article today”.

What’s also interesting to note is that Kerven at J.P. Morgan suggests that this ‘artist-centric’ payout model “reduces the risk of an exponentially growing AI tail”.

According to the note, “the adoption of an artist-centric model – and a shift from volume to value-based pricing – is helpful today but is even more important in the longer term”.

That’s because, according to J.P. Morgan, “in a dystopian AI world we could very easily move from 100-150m songs on DSPs today (vs just 30m in 2015) to a billion + songs in a few years time”.

Of those potential 1 billion-plus songs, J.P. Morgan. estimates that “over 95% of them would be AI-generated”.

The note adds: “Most of the songs would have zero listens, but say 1 in 100 might generate a few streams – and in aggregate the exponentially growing long tail of content that no one values would, under the current stream share model, erode the royalty share of the music that matters.”

In summing up its Investment Thesis around UMG, the J.P. Morgan note states: “We see UMG as an extraordinary, must-own asset”.

The note adds: “Music has been transformed by the shift to streaming, which is driving better monetization of music in developed markets and first-time monetization in emerging markets.

It’s not only JP Morgan analysts who were impressed with Deezer and Universal‘s artist-centric announcement.

In a research note issued by Barclays on Wednesday, it states that “UMG needs to sign similar deals with the major DSP for the impact to be felt but this is a very positive first step”.

Barclays’ note adds: “While our analysis is preliminary and based on very broad brush assumptions, it shows that the benefits of such a deal are significant for UMG”.

“We acknowledge that the impact could be lower if Deezer managed to get better economics against higher market share for UMG. That said, Deezer’s market share is less than 2% globally (9m vs. 2022’s 589m global subscribers according to the IFPI) and therefore the benefits to UMG will only matter if they sign similar deals with the major DSPs.

“Out of the four characteristics highlighted by Deezer, the double listen for active listening as opposed to algorithmic recommendation is the most contentious one. This particular story therefore needs to continue to unfold but the first chapter is arguably extremely positive.”Music Business Worldwide

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