MBW Explains is a collection of analytical options by which we discover the context behind main music business speaking factors – and counsel what may occur subsequent.
From one perspective, it’s been an unsteady month for Universal Music Group buyers.
First, on April 5, a monetary analyst who’s lengthy been a champion of UMG’s potential worth – William Packer of Exane BNP Paribas – double-downgraded his rating for Common’s inventory, citing, as a main purpose, a priority over the risk posed to main document firm market share by AI-created music.
Then, with immaculate timing, got here final week’s commotion: A monitor that includes an AI voice replication of Drake and The Weeknd (each UMG artists) precipitated a stir on TikTok, Spotify, YouTube and different companies, earlier than a UMG copyright complaint noticed the ‘official’ model of the offending recording deleted throughout DSPs.
Common shareholders observing Wall Road a bit of nearer over the previous month, although, would have observed some extra constructive information – with a number of heavyweights of the monetary group reiterating optimistic scores of UMG’s inventory:
- Final Wednesday (April 19), JPMorgan, by way of analyst Daniel Kerven, reasserted its constructive rating of Common’s inventory as ‘Chubby’, whereas upping its worth goal for UMG’s share worth to EUR €30.00 from €28.30.
- 5 days earlier than (April 14), Omar Sheikh of Morgan Stanley plumped for an even higher price target for UMG’s inventory (€32.00). That was lowered barely from Sheikh’s earlier goal (€33.00), however contemplating that Common’s share worth on the Amsterdam Euronext stood at €21.02 in the present day (April 25), Morgan Stanley’s perception in Common’s potential for dramatic future development is evident.
- One other monetary large, UBS, additionally gave the thumbs-up to UMG’s prospects this month. On April 5, UBS analyst Richard Eary reiterated his ‘purchase’ ranking for Common’s inventory, with a worth goal of €29.00.
It’s not all euphoria on the market; HSBC’s Joseph Thomas caught with a adverse ‘Scale back’ ranking for Common on April 11. However even amid a number of doomsday narratives (soundtracked by Robotic Drake) a few of Wall Road’s largest names stay adamant that UMG’s future is beaming vivid.
This positivity ought to please Invoice Ackman, the billionaire who – by way of Pershing Sq. Holdings Ltd (PSH) – controls around 10% of Universal Music Group’s ownership.
It could even have been influenced by his predictions.
WHAT’S the context?
On March 29, Pershing Square Holdings Ltd introduced its annual outcomes to shareholders for FY 2022.
Alongside these outcomes, the agency issued it annual report, that includes a direct message from Invoice Ackman himself… in addition to a particular replace on PSH’s view on Common Music Group.
Based on the report, as of the top of 2022, PSH owned 105,325,592 shares in Common Music Group N.V. That holding carried a good worth, in accordance with PSH, of USD $2.538 billion (see under).
PSH’s particular replace on UMG talks of Common having a “high-quality, capital-light enterprise that may be finest considered a quickly rising royalty on higher international consumption and monetization of music”.
It continues: “UMG has a decades-long runway for development pushed by rising streaming penetration mixed with the event of recent companies, platforms, and enterprise fashions.”
PSH cites an announcement from UMG’s inaugural Capital Markets Day in summer season 2021, at which the music agency unveiled “mid-term targets of high-single-digit income development and mid-20s% EBITDA margins“.
The Pershing annual report then speaks of Ackman’s confidence that “the long-term outlook for UMG is great and that the corporate will proceed to outperform its mid-term steering”.
“We consider that breaking the $10 barrier [on music streaming services] is a watershed second, as different platforms will doubtless comply with go well with, and common worth will increase will grow to be the norm within the audio streaming business as they’re within the video streaming business.”
Pershing Sq. letter, March 2023
“Music stays one of many lowest-cost, highest-value types of leisure,” says the PSH report, constructing on an argument we’ve heard from Ackman before.
It goes on: “Because the launch of streaming companies greater than a decade in the past, the month-to-month value of a subscription plan had been flat at $10 till final 12 months.
“In latest months, various the DSPs (digital service suppliers or streaming platforms) together with Apple, Amazon and Deezer elevated costs for his or her particular person subscription plans in developed markets by 10% to $10.99 and by a good larger share for household and scholar plans.
“We consider that breaking the $10 barrier is a watershed second, as different platforms will doubtless comply with go well with, and common worth will increase will grow to be the norm within the audio streaming business as they’re within the video streaming business.
“At $10.99/month in the present day (and fewer for a household plan on a per-person foundation), one can take heed to nearly any music ever recorded on any machine, wherever, anytime, at a price worth.”
WHAT occurs subsequent?
PSH’s annual report additionally seems to be additional ahead to each alternatives and threats on the horizon for Common.
The agency addresses the deluge of tracks now touchdown on streaming companies on daily basis, and the priority (as expressed by Exane BNP Paribas) that an AI-driven enhance on this deluge may impression on main document firm market share on Spotify et al.
“Whereas streaming helped revive the business by convincing shoppers to pay for music once more, it additionally has its shortcomings,” acknowledges the PSH report. “Many DSPs have grow to be inundated with greater than 100,000 tracks per day, a lot of that are low-quality, fraudulent, and/or 31-second tracks meant to recreation the system and divert royalties away from artists and songwriters.”
PSH cites information that it says guarantees a constructive future end result for the key document firms, and Common Music Group specifically.
It does so whereas nodding to Sir Lucian Grainge‘s willpower to sculpt a brand new “artist-centric” royalty model at main DSPs, and a transfer away from the present dominance of the so-called ‘professional rata’ payout mannequin.
PSH believes this “artist-centric” mannequin, when it launches, will doubtless tip the industrial scales in UMG’s favor.
“15% of shoppers account for 35% of all music spend, implying a major alternative for platforms and labels to higher section their prospects and monetize superfans by way of focused choices.”
“Whereas greater than 9 million artists have uploaded songs to Spotify, primarily based on information shared by Spotify, solely 2% of those artists have [both] uploaded greater than 10 songs and have greater than 10,000 month-to-month customers,” notes the PSH report.
“UMG is working immediately with the DSPs to enhance streaming’s financial mannequin in direction of an ‘artist-centric’ strategy that provides extra worth to the artists that drive subscriber development, engagement, and retention.
“Whereas these adjustments could take time to be absolutely carried out, we consider that UMG will profit from a higher share of streaming royalties as a result of its huge breadth and depth in its artist roster.”
One other subject on PSH’s thoughts (which, once more, tessellates with Lucian Grainge’s “artist-centric” ambitions) is the improved monetization of hardcore music followers on digital companies.
Continues PSH’s report: “[W]hile streaming led to broad adoption amongst shoppers, a single worth level for all shoppers doesn’t permit for buyer segmentation.
“Based on the BPI (an business commerce group), 15% of shoppers account for 35% of all music spend, implying a major alternative for platforms and labels to higher section their prospects and monetize superfans by way of focused choices.”
It provides: “At its present valuation, UMG’s engaging enterprise traits and its long-term sustainable and sturdy earnings development stay considerably undervalued.
“We consider that UMG additionally has additional alternatives to enhance its governance, investor relations and capital allocation because it builds expertise as a public firm, which ought to contribute to shareholder worth creation.”
A remaining thought…
Common Music Group’s Q1 2023 monetary outcomes are as a result of be introduced tomorrow (April 26).
These figures will give us indication, amid a tough maco-economic backdrop, of how UMG is faring proper now – after Invoice Ackman and PSH stated their ambition for the music firm to publish 10%-plus YoY positive factors in annual income.
Common, after all, can also be busy battling the early indicators of generative AI’s impression on copyright, having successfully issued takedown notices to streaming companies final week over a monitor that was fronted by an AI-cloned model of Drake’s voice.
Concurrently, UMG has issued requests to its main streaming companions for assist in stopping AI instruments from cloning components of present, copyrighted recordings to gas new music – and the end result being uploaded to Spotify, Apple Music and so forth.
This mission appears to have received some early assist from DSPs.
“I’m supportive of being stricter by way of what [music] we permit to get uploaded to the platform, and the standard of the catalog… We clearly must cope with the difficulty of AI as a supply of a large quantity of recent music.”
Jeronimo Folgueira, Deezer
On March 1, talking on Deezer’s FY earnings name, the corporate’s CEO, Jeronimo Folgueira, said in response to a question about AI-generated music: “I’m supportive of being stricter by way of what we permit to get uploaded to the platform, and the standard of the catalog.”
He added: “There’s plenty of content material now getting uploaded to our platform each week, and that quantity retains rising and rising and rising.
“There’s plenty of duplicated content material, there’s plenty of content material that isn’t even music… and at a sure level you get manner an excessive amount of content material that’s ineffective for the customers. And it begins creating a foul consumer expertise.”
Talking on Deezer’s newest earnings name on Tuesday this week (April 25), Folgueira commented: “We clearly must cope with the difficulty of AI as a supply of a large quantity of recent music.
“We wish to give our prospects a high-quality expertise and related content material, so clearly getting AI to flood our catalog just isn’t one thing we’re tremendous eager on, and we’re engaged on that.”
And Spotify CEO, Daniel Ek, appeared to echo some of these thoughts on SPOT’s personal Q1 2023 earnings name in the present day (April 25), noting: “[O]bviously… [Spotify is] working with our companions on in attempting to determine a place [on AI music] the place we each permit innovation, however on the similar time, defend the entire creators that we have now on our platform.”Music Enterprise Worldwide