MBW Explains is a series of analytical features in which we explore the context behind major music industry talking points – and suggest what might happen next. Only MBW+ subscribers have unlimited access to these articles.
WHAT’S HAPPENED?
From one perspective, it’s been an unsteady month for Universal Music Group investors.
First, on April 5, a financial analyst who’s long been a champion of UMG’s potential value – William Packer of Exane BNP Paribas – double-downgraded his rating for Universal’s stock, citing, as a primary reason, a concern over the threat posed to major record company market share by AI-created music.
Then, with immaculate timing, came last week’s commotion: A track featuring an AI voice replication of Drake and The Weeknd (both UMG artists) caused a stir on TikTok, Spotify, YouTube and other services, before a UMG copyright complaint saw the ‘official’ version of the offending recording deleted across DSPs.
Universal shareholders observing Wall Street a little closer over the past month, though, would have noticed some more positive news – with a few heavyweights of the financial community reiterating optimistic ratings of UMG’s stock:
Last Wednesday (April 19), JPMorgan, via analyst Daniel Kerven, reasserted its positive ranking of Universal’s stock as ‘Overweight’, while upping its price target for UMG’s share price to EUR €30.00 from €28.30.
Five days before (April 14), Omar Sheikh of Morgan Stanley plumped for an even higher price target for UMG’s stock (€32.00). That was lowered slightly from Sheikh’s previous target (€33.00), but considering that Universal’s share price on the Amsterdam Euronext stood at €21.02 today (April 25), Morgan Stanley’s belief in Universal’s potential for dramatic future growth is clear.
Another financial giant, UBS, also gave the thumbs-up to UMG’s prospects this month. On April 5, UBS analyst Richard Earyreiterated his ‘buy’ rating for Universal’s stock, with a price target of €29.00.
It’s not all euphoria out there; HSBC’s Joseph Thomas stuck with a negative ‘Reduce’ rating for Universal on April 11. But even amid a few doomsday narratives (soundtracked by Robot Drake) some of Wall Street’s biggest names remain adamant that UMG’s future is beaming bright.
Alongside these results, the firm issued it annual report, featuring a direct message from Bill Ackman himself… as well as a specific update on PSH’s view on Universal Music Group.
According to the report, as of the end of 2022, PSH owned 105,325,592 shares in Universal Music Group N.V. That holding carried a fair value, according to PSH, of USD $2.538 billion (see below).
PSH’s specific update on UMG talks of Universal having a “high-quality, capital-light business that can be best thought of as a rapidly growing royalty on greater global consumption and monetization of music”.
It continues: “UMG has a decades-long runway for growth driven by increasing streaming penetration combined with the development of new services, platforms, and business models.”
PSH cites an announcement from UMG’s inaugural Capital Markets Day in summer 2021, at which the music firm unveiled “mid-term targets of high-single-digit revenue growth and mid-20s% EBITDA margins“.
The Pershing annual report then speaks of Ackman’s confidence that “the long-term outlook for UMG is excellent and that the company will continue to outperform its mid-term guidance”.
“We believe that breaking the $10 barrier [on music streaming services] is a watershed moment, as other platforms will likely follow suit, and regular price increases will become the norm in the audio streaming industry as they are in the video streaming industry.”
Pershing Square letter, March 2023
“Music remains one of the lowest-cost, highest-value forms of entertainment,” says the PSH report, building on an argument we’ve heard from Ackman before.
It goes on: “Since the launch of streaming services more than a decade ago, the monthly cost of a subscription plan had been flat at $10 until last year.
“In recent months, a number of the DSPs (digital service providers or streaming platforms) including Apple, Amazon and Deezer increased prices for their individual subscription plans in developed markets by 10% to $10.99 and by an even higher percentage for family and student plans.
“We believe that breaking the $10 barrier is a watershed moment, as other platforms will likely follow suit, and regular price increases will become the norm in the audio streaming industry as they are in the video streaming industry.
“At $10.99/month today (and less for a family plan on a per-person basis), one can listen to virtually any song ever recorded on any device, anywhere, anytime, at a value price.”
WHAT happens next?
PSH’s annual report also looks further forward to both opportunities and threats on the horizon for Universal.
The firm addresses the deluge of tracks now landing on streaming services every day, and the concern (as expressed by Exane BNP Paribas) that an AI-driven increase in this deluge could impact on major record company market share on Spotify et al.
“While streaming helped revive the industry by convincing consumers to pay for music again, it also has its shortcomings,” acknowledges the PSH report. “Many DSPs have become inundated with more than 100,000 tracks per day, many of which are low-quality, fraudulent, and/or 31-second tracks meant to game the system and divert royalties away from artists and songwriters.”
PSH cites data that it says promises a positive future outcome for the major record companies, and Universal Music Group in particular.
It does so while nodding to Sir Lucian Grainge‘s determination to sculpt a new “artist-centric” royalty model at leading DSPs, and a move away from the current dominance of the so-called ‘pro rata’ payout model.
PSH believes this “artist-centric” model, when it launches, will likely tip the commercial scales in UMG’s favor.
“15% of consumers account for 35% of all music spend, implying a significant opportunity for platforms and labels to better segment their customers and monetize superfans through targeted offerings.”
“While more than 9 million artists have uploaded songs to Spotify, based on data shared by Spotify, only 2% of these artists have [both] uploaded more than 10 songs and have more than 10,000 monthly users,” notes the PSH report.
“UMG is working directly with the DSPs to improve streaming’s economic model towards an ‘artist-centric’ approach that gives more value to the artists that drive subscriber growth, engagement, and retention.
“While these changes may take time to be fully implemented, we believe that UMG will benefit from a greater share of streaming royalties due to its enormous breadth and depth in its artist roster.”
Another topic on PSH’s mind (which, again, tessellates with Lucian Grainge’s “artist-centric” ambitions) is the improved monetization of hardcore music fans on digital services.
Continues PSH’s report: “[W]hile streaming led to broad adoption among consumers, a single price point for all consumers does not allow for customer segmentation.
“According to the BPI (an industry trade group), 15% of consumers account for 35% of all music spend, implying a significant opportunity for platforms and labels to better segment their customers and monetize superfans through targeted offerings.”
It adds: “At its current valuation, UMG’s attractive business characteristics and its long-term sustainable and robust earnings growth remain substantially undervalued.
“We believe that UMG also has further opportunities to improve its governance, investor relations and capital allocation as it builds experience as a public company, which should contribute to shareholder value creation.”
A final thought…
Universal Music Group’s Q1 2023 financial results are due to be announced tomorrow (April 26).
Those figures will give us a good indication, amid a difficult maco-economic backdrop, of how UMG is faring right now – after Bill Ackman and PSH stated their ambition for the music company to post 10%-plus YoY gains in annual revenue.
Universal, of course, is also busy battling the early signs of generative AI’s impact on copyright, having successfully issued takedown notices to streaming services last week over a track that was fronted by an AI-cloned version of Drake’s voice.
Simultaneously, UMG has issued requests to its major streaming partners for help in preventing AI tools from cloning elements of existing, copyrighted recordings to fuel new music – and the result being uploaded to Spotify, Apple Music etc.
This mission seems to have won some early support from DSPs.
“I am supportive of being stricter in terms of what [music] we allow to get uploaded to the platform, and the quality of the catalog… We obviously need to deal with the issue of AI as a source of a massive amount of new music.”
Jeronimo Folgueira, Deezer
On March 1, speaking on Deezer’s FY earnings call, the company’s CEO, Jeronimo Folgueira, said in response to a question about AI-generated music: “I am supportive of being stricter in terms of what we allow to get uploaded to the platform, and the quality of the catalog.”
He added: “There’s a lot of content now getting uploaded to our platform every week, and that number keeps growing and growing and growing.
“There’s a lot of duplicated content, there’s a lot of content that is not even music… and at a certain point you get way too much content that is useless for the users. And it starts creating a bad user experience.”
Speaking on Deezer’s latest earnings call on Tuesday this week (April 25), Folgueira commented: “We obviously need to deal with the issue of AI as a source of a massive amount of new music.
“We want to give our customers a high-quality experience and relevant content, so obviously getting AI to flood our catalog is not something we’re super keen on, and we’re working on that.”
And Spotify CEO, Daniel Ek, appeared to echo some of these thoughts on SPOT’s own Q1 2023 earnings call today (April 25), noting: “[O]bviously… [Spotify is] working with our partners on in trying to establish a position [on AI music] where we both allow innovation, but at the same time, protect all of the creators that we have on our platform.”Music Business Worldwide
