Universal Music Group signed a fresh licensing agreement with Meta in Q2, has concerns over the user-centric (‘Fan Powered’) streaming payout model – and thinks it “inevitable” that rising interest rates are going to drive down valuations of music catalogs.
Those were some of the key takeaways from UMG boss, Sir Lucian Grainge, and his senior management team’s discussion with analysts on Universal Music Group’s Q2 earnings call last Wednesday (July 27).
Here’s MBW’s rundown of five of the most important things we learned from that conversation…
1) Kobalt hasn’t licensed Facebook‘s new revenue-sharing payout model – but Universal Music Group has
In his opening remarks to analysts last week, Sir Lucian Grainge (UMG Chairman & CEO) confirmed that his company had inked a new licensing agreement with Meta – parent of Facebook and Instagram – that “expands revenue sharing and enhances [the] Meta community’s engagement with our catalog”.
Obviously enough, that agreement covers the use of UMG’s music within Meta’s new UGC video payout model for the music business.
Meta announced last week that, starting on Facebook in the US, music rightsholders will now – for the first time – earn a direct share of ad revenue generated by certain types of UGC video that contain music on the platform.
“In the second quarter, we completed a new agreement with Meta that expands revenue sharing and enhances Meta communities engagement with our catalog.”
Sir Lucian Grainge, UMG
The structure of that payout model will see ‘creators’ who upload videos over 60 seconds to Facebook – and which aren’t just static images set to music – receive 20% of the advertising revenue generated by these videos.
The remaining 80% of that money will be split between Facebook/Meta and music rightsholders (although Meta hasn’t yet clarified what that split will look like).
One company that may not have been happy with that split – or perhaps with the prospect of video-uploaders taking 20% of the advertising revenue? – is Kobalt Music Group, which last week confirmed it had refused to ink a new licensing agreement with Meta.
Contrast that to UMG.
“[We’re] very happy in the renewal with Meta, the ways that it deepens our partnership, [and] new opportunities around revenue-sharing,” said Michael Nash, UMG’s EVP, Digital Strategy. Nash later added: “[This] is an exciting opportunity for us to participate in the creator economy and to enable creators to do really creative stuff with our video content.”
Nash also confirmed that the ad revenue stream from Facebook video ‘creators’ would be incremental to income that Universal already receives from Meta under the structure of its previous licensing deal, first signed in 2017.
2) Universal’s subscription streaming revenues in Q2 were better than they first appeared
Speaking on the Q2 analyst call, UMG CFO Boyd Muir made an important clarification regarding UMG’s subscription streaming revenues in the second quarter (covering the three months to end of June).
Last week, UMG announced that its recorded music subscription streaming revenue in the quarter was up by just 7.0% YoY at constant currency (see below).
Considering that Goldman Sachs recently predicted a 14.2% YoY increase in annual (gross) global music subscription revenues in 2022 – and that Spotify‘s Premium streaming revenues were up 14% YoY at constant currency in Q2 – UMG’s figure may have seemed a little low to some observers.
On the Q2 call, Boyd Muir referenced a €41 million one-time “catch-up payment” that was paid to UMG by an unnamed music streaming subscription platform in Q2 2021.
Omitting that one-time sum, Muir confirmed, would have actually seen UMG’s constant-currency growth in subscription streaming in Q2 2022 rise by double-digits – 12.1% YoY – rather than the 7.0% YoY figure that was reported.
(Sony’s recorded music streaming revenues – including subscription and ad-funded combined – were up by 7.9% YoY in Q2 at constant currency at the US dollar level, according to MBW calculations. On Sony Corp‘s Q2 call last week, the firm’s CFO, Hiroki Totoki, said: “We are monitoring the impact of the global economic slowdown on [music] streaming services. But we have not changed our view that the global music market, including both recorded music and music publishing, will grow steadily over the next several years at a growth rate in the high single-digits.”)
3) Universal believes catalog values will start to fall due to interest rate rises
There’s no escaping the impact of macro-economic trends – both in business and in our own individual lives – right now.
One of those trends is rising interest rates (which are being pushed up, in part, to try and temper spiraling inflation). Last week, the Federal Reserve announced it was to push up US interest rates for the second time this year, by 0.75% – moving its benchmark borrowing rate above 2.25%.
UMG’s leaders were asked on the Q2 call last week by Exane BNP analyst, William Packer, if they expected to see downward pressure on music catalog prices/multiples as a result.
Boyd Muir responded in words that Wall Street music investors may not love: “I think there’s an inevitability that interest rates are going to drive down valuations.”
Muir qualified that he’s not seeing that trend play out just yet, partly because there are plenty of committed funds in the music M&A market yet to be deployed in deals.
“We don’t know what the impact of the market [will be] when non-core outside funds actually realize that they haven’t got the skill-sets or the ability to exploit [music rights].”
Sir Lucian Grainge, UMG
As a result, Muir noted, Universal is “continuing to walk away from deals [which] actually cannot be justified financially”. However, as a prospective buyer, he suggested UMG was “encouraged” by the idea of prices coming down “in the medium term”.
Sir Lucian Grainge made his own mini-dig at Wall Street financiers buying into music rights.
Said Grainge: “We don’t know what the impact of the market [will be] when non-core outside funds actually realize that they haven’t got the skill-sets or the ability to exploit [music rights]”.
UMG’s filings show that it spent €264 million on catalog music investments during the first half of 2022 – the majority of which was spent on buying a bundle of copyrights spanning the career of Sting (pictured inset).
4) UMG doesn’t seem to be a big fan of user-centric royalties
MBW pondered in the wake of that deal announcement whether Universal Music Group might be rather less likely to embrace the ‘fan-powered’ model, versus the current predominant streaming payout system of pro-rata or ‘Streamshare’.
We thought UMG would be hesitant to do so due to fear of losing market share, with fan-powered models typically benefitting large numbers of indie artists, and reducing royalties for superstars at the top of the market.
“It’s clear [that] a large percentage of artists and important genres of music could be disadvantaged under a user-centric model.”
Michael Nash, UMG
Last week, UMG’s execs were asked by Guggenheim analyst Michael Morris about the “pros and cons” of the user-centric model from their perspective.
Michael Nash said: “It’s clear from the studies that have recently been done, the findings [that] have been announced, [that] a large percentage of artists and important genres of music could be disadvantaged under a user-centric model.
“The French study, [from] the Centre national de la musique, issued what was one of the most detailed analysis of user-centric to date last year. And some of that report’s findings reinforced concerns about whether or not the bulk of artists would benefit materially [from user-centric] – and also raised concerns about artists and musical genres that could potentially be harmed.”
Nash added: “Stepping back in terms of our perspective, there’s no reason to think that efforts to optimize the streaming model should come down to considering just one alternative to the status quo.
“We think priority for any model adjustments should be placed on growing revenues overall and advancing the interest of all artists. [That means] looking beyond model changes to pit one group of artists that benefit against another group of artists that lose out. It shouldn’t be a zero-sum situation.”
5) Why did UMG’s revenue grow in Q2 as its margins contracted?
One interesting quirk in UMG’s Q2 numbers: Overall revenues at UMG – across recorded music, publishing and other divisions – rose by 17.3% YoY in the quarter. Yet the firm’s overall EBITDA margin fell in the same period to 20.0% (down from 21.1% in the prior-year quarter).
Obviously, this must mean that UMG is making more money from lower-margin businesses than it was in the prior year. And so it proves when you dig into the firm’s Q2 figures.
“The majority of UMG’s higher-than-anticipated revenue growth [this year] is coming from publishing and merchandising, which have lower margins than our recorded music business.”
Boyd Muir, UMG (pictured inset)
Explained Boyd Muir: “The majority of UMG’s higher-than-anticipated revenue growth [this year] is coming from publishing and merchandising, which have lower margins than our recorded music business. The revenues from these businesses do bring incremental profits but they’re actually not accretive to UMG’s total margin.”
If growth from publishing and merch continues to outpace recorded music, says Muir, then UMG will see improvise profitability in absolute terms in the rest of 2022 (i.e. more money on the bottom line) but “total UMG margins will remain fairly flat”.
UMG’s quarterly publishing revenues in Q2 2022 were up 50.6% YoY to €476 million ($507m) – although this dramatic rise was partly driven by UMG now recognizing collection society revenue differently than it did previously.
UMG’s ‘Merchandise and other’ quarterly revenue grew 65.9% YoY in Q2, up to €141 million.
UMG, which trades on the Amsterdam Euronext, generated EUR €2.535 billion (USD $2.70bn) in Q2, up 17.3% YoY at constant currency.Music Business Worldwide