The MBW Review is where we aim our microscope towards some of the music biz’s biggest recent goings-on. This time, we listen through – and cogitate over – comments made by Warner Music Group CEO, Steve Cooper, today (May 7). The MBW Review is supported by Instrumental.
The first calendar quarter of this year isn’t likely to be remembered as a vintage one for Warner Music Group.
Although streaming was up 11% on the same three months of 2019, the company’s overall recorded music revenues fell slightly year-on-year (-2.8%, or -1.5% at constant currency). This decline was largely due to a 28% fall in physical music sales (-$36m).
Following the announcement of Warner’s results today (May 7), the company’s CEO, Steve Cooper, appeared on an earnings call to discuss WMG’s calendar Q1 (fiscal Q2) performance.
Cooper didn’t come out and say so explicitly, but reading between the lines, it appears pretty clear that (a) yes, in his mind, the IPO is still very much on, but (b) there’s no telling when that might be.
Discussing the planned flotation, Cooper said: “The current market conditions are obvious, so our board and management will continue to monitor the situation.”
Unsurprisingly, there was no mention from Cooper of Warner’s new Nasdaq-approved status, nor the unsubstantiated rumour that a Saudi Arabia-controlled fund is currently making a play to buy WMG privately.
(The eagle-eyed amongst you might have spotted in MBW’s story earlier that Access Industries – Warner’s owner, led by Len Blavatnik – just took a $37.5m dividend from WMG, paid out last month, which suggests the underlying economics of the major music company remain strong. This in turn may hint at Blavatnik’s confidence over an IPO grinding back into gear soon enough.)
Steve Cooper had a fair bit to say about non-IPO-related aspects of Warner’s business today, too. And considering he’s running, as Cooper puts it, “the planet’s only pure play global music entertainment company”, it’s probably worth taking heed of his comments.
Here’s three things that stood out to MBW…
Warner remains bullish on streaming
Some music industry factions (particularly those looking for government aid handouts, to be honest) have painted doomsday predictions for the business due to Coronavirus – including concerns that streaming subscription growth will slow or even go into decline as a result of the pandemic.
“Initially at least, we have not seen fundamental changes in the dynamic of the streaming subscription business, which remains strong and healthy.”
Steve Cooper, WMG
Now, we have some more sunny news on this score, courtesy of Cooper.
“Initially at least, we have not seen fundamental changes in the dynamic of the streaming subscription business, which remains strong and healthy,” the Warner boss told investors today – indicating that the kind of positive subs pattern witnessed by Spotify in Q1 is likely being experienced, to some degree, by SPOT’s main streaming rivals too.
Cooper added: “Having gone through two decades of industry transformation, we’re now in a position where almost 70% of [WMG’s] revenue is digital, and that percentage continues to grow. This makes us more resilient in a crisis such as this.”
2) A&R spend is down, and more releases might slip – but don’t expect a major drop-off in signings
Cooper pointed out that, during the COVID-hit month of March, Warner and its labels had released major record from the likes of Dua Lipa (pictured, main), PartyNextDoor and Lil Uzi Vert.
He said these records were “all released… just as the pandemic was impacting major markets [and yet are] enjoying global success, supported by massive streaming and social media awareness”.
However, Cooper also noted (in a quote we’ll come back to) that, looking ahead to WMG’s fiscal Q3 (calendar Q2) “there may be some shifts in our release plans due to changes in recording and songwriting schedules”.
“The decrease [in Warner’s calendar Q1 A&R expenditure] is primarily attributable to lower artists related costs, including a decrease in spending resulting from the impact of COVID-19.”
Warner SEC filing
What, though, of Warner’s A&R activity? What’s happening to the volume of signings at the major during the uncertainty of COVID?
The first indication here came in WMG’s calendar Q1 / fiscal Q2 results filing under its ‘Artist & Repertoire’ expenditure – a figure which includes the money used by the company to sign and develop acts, as well as the royalties it pays out.
WMG’s recorded music A&R costs in the quarter stood at $264m, down by $16m, or 6%, on the same period of 2019.
Warner noted: “The decrease [in A&R expenditure] is primarily attributable to lower artists related costs, including a decrease in spending resulting from the impact of COVID-19.”
Regardless, Steve Cooper remained bullish on Warner’s lockdown A&R activity today, citing recordings during the pandemic made and released by artists such as Atlantic signings Alec Benjamin (Six Feet Apart, about social distancing) and Twenty One Pilots – the duo who recently collaborated remotely on new song (and video), Level of Concern.
Said Cooper: “[Our] A&R teams are demonstrating their ability to find new and imaginative ways to help and support our artists’ and songwriters’ creative processes, even in the most challenging circumstances.”
He added: “We’re also not missing a beat when it comes to attracting the next generation of talent. We’re already adept at negotiating and signing deals remotely, and we’re accelerating the adoption and use of our proprietary A&R tool, Sodatone, to identify emerging artists across the globe.”
Sodatone, if you needed a reminder, is the A&R-by-algorithm platform that Warner acquired in 2018.
3) The worst impact of COVID-19 on the record (and publishing) business is probably yet to come – and it won’t stop at physical music
It’s worth remembering throughout all this talk of Coronavirus damaging Warner’s commercial endeavours in calendar Q1 that it only did so, materially, during a minority of the period’s 90 days.
It took President Donald Trump until March 13, for example, to call a state of emergency in the United States. In the UK, meanwhile, Prime Minister Boris Johnson didn’t put the country in official ‘lockdown’ until March 23. Even in Italy, one of the first countries outside China to implement strict measures, a government-mandated quarantine didn’t arrive until March 9.
For this reason, Steve Cooper wisely nodded to the future today, when he said: “During the pandemic, we expect our physical, artist services, and synchronization revenue streams to be somewhat affected. We won’t really know the exact impact of COVID until we see our Q3 [calendar Q2] results, but there may also be some shifts in our release plans due to changes in recording and songwriting schedules.”
The impact of COVID-19 lockdown on artists services at Warner – including income from live music, plus merch – won’t be insignificant. In the firm’s FY2019, ‘Artist Services & Expanded Rights’ contributed 16.4% of its $3.84bn annual recorded music revenues.
“During the pandemic, we expect our physical, artist services, and synchronization revenue streams to be somewhat affected. We won’t really know the exact impact of COVID until we see our Q3 [calendar Q2] results.”
Steve Cooper, WMG
A fall in live music performance licensing income in calendar Q2 will hurt both Warner (and the wider industry’s) recorded music and publishing companies… as will a drop in sync revenue… as will the lack of public performance of music in retail shops/malls, sports games, bars/pubs etc.
The good news, though – especially for that potential Warner IPO – is that these revenue streams (perhaps with the exception of physical music sales) should eventually recover to somewhere close to where they were before.
Said Cooper: “Right now, our priorities are to protect the health of our people and our company, sustain our artists’ and songwriters’ livelihoods, and support the wider music ecosystem. Ultimately, we will come out of this awful situation having absorbed some valuable lessons, while evolving into a company that’s even stronger and more efficient.”
He then addressed what Warner had already learned during this global crisis.
Said Cooper: “First and foremost, we’re seeing how vital and important music is to people’s daily lives. In difficult times like these, music can lift people’s spirits, transport them, and make them feel connected and safe. The global appetite for great music is higher than ever, and will continue to expand.”
