MBW Reacts is a series of analytical commentaries from Music Business Worldwide written in response to major recent entertainment events or news stories. Only MBW+ subscribers have unlimited access to these articles.
“Universal Music sales beat expectations in second quarter.”
That was the (perfectly accurate) headline from Reuters minutes after Universal Music Group confirmed its Q2 2024 results on July 24.
A few moments later, Sir Lucian Grainge trumpeted the same theme in his opening address of UMG’s earnings call.
“[This was] our seventh consecutive quarter of double-digit increase in adjusted EBITDA,” noted Grainge, confirming that UMG’s revenues were up ~11% YoYin the quarter, with EBITDA up ~10% YoY.
He added: “Our ability to deliver sustainable growth like this quarter after quarter is a product of how we’ve designed UMG.”
Then the storm began.
As MBW covered last month, one stat in particular within UMG’s Q2 results — despite those record overall revenues — sent investment analysts into meltdown: UMG’s subscription streaming revenues in the quarter were up 6.9% YoY (at constant currency).
Decent growth, but not decent enough growth for some of UMG’s financial observers, who were looking for a number closer to an 11.0% YoY rise.
A flurry of analyst downgrades (Guggenheim, Citi, Barclays, Wells Fargo) followed, as did a shocking ‘correction’ to UMG’s share price, which remains around 25% lower than it did Q2 pre-earnings.
Reuters even updated its headline: Universal Music Group shares drop 30% as streaming growth disappoints.
The biggest puzzle-point for Universal Music Group analysts?
While UMG’s subscription streaming revenues grew by 6.9% YoYin Q2 2024, Spotify‘s equivalent subscription revenues grew by 21% YoY (yes, that’s three times seven percent) in the same quarter.
So does this tell us, as some on Wall Street have postulated, that Universal Music Group is suddenly a more vulnerable bet for shareholders?
Does Spotify’s relatively speedy subscription revenue growth in Q2 suggest that Daniel Ek‘s green machine is the real king of the music business?
Perhaps, rather than obsessing over one quarter’s performance, UMG’s public shareholders should remain as calm and long-sighted as Vivendi, the continuing 10% owner of UMG’s equity.
Reacting to UMG’s subscription growth deceleration on Vivendi’s own Q2 earnings call (July 25), Vivendi CEO, Arnaud de Puyfontaine, remarked: “We are fully aligned with Lucian Grainge’s vision for [UMG’s] significant growth prospects for the medium and long term.”
That’s medium and long-term. Not lose-our-marbles–because-of-one-stodgy-quarter.
With all of this in mind, MBW has been looking closely at Spotify and UMG’s Q2 results, and their intertwined financial relationship more generally.
We’ve unearthed the following three observations…
Credit: Shutterstock/Diego Thomazin1) Spotify contributes around a third of UMG’s streaming revenues – a number that now appears to be growing
Spotify’s 21% YoY growth in Q2 Premium revenues implies it is gaining global market share leadership as a paid-for platform.
Universal’s EVP/CFO, Boyd Muir, and its EVP/Chief Digital Officer, Michael Nash, suggested as much on Universal’s Q2 earnings call.
Both execs celebrated Spotify and YouTube Music for their subscriber growth in the three months to end of June, but Muir warned that “other large [streaming] partners have seen a slowdown in new subscriber additions”.
If this trend — Spotify surging forward as its rivals stall — continues, it will inevitably increase Spotify’s share of UMG’srevenues. But where does that stand already?
The typical stat brought up at this point is that Spotify attracts around a third of all global streaming subscribers.
According to Goldman Sachs‘ latest Music In The Air report, Spotify’s share of global paid subscription users was 35.4% at the close of 2023; according to Midia, Spotify had a 31.7% market share of subscribers in Q3 that year.
These stats don’t tell us, however, what Spotify’s market share of global subscription revenues might be.
They also don’t tell us, most pointedly for this article, what percentage of UMG’s streaming revenuesSpotify contributes to the music company.
That, too, according to MBW’s calculations, is around one-third. Here’s why:
According to UMG’s annual report for 2023 (as combed by MBW back in April), Spotify was responsible for 19% of UMG’s total revenues in 2023. (That’s total revenues covering UMG’s recorded music, publishing, and other income streams.). That 19% would have therefore meant that Spotify paid UMG around USD $2.28 billion last year (vs. UMG’s USD $12.0 billion in total 2023 revenues);
In 2023, UMG’s recorded music division generated EUR €5.70 billion ($6.17bn) from streaming revenues (across ad-funded and subscription). UMG doesn’t explicitly break out what its music publishing operation earns from streaming, but this is covered under ‘Digital Revenue’ in the publishing division’s financial numbers. (‘Digital Revenue’ encompasses all revenues UMPG generates from digital platforms, which, for obvious reasons, is mainly streaming.) UMG’s publishing division earned €1.128 billion (USD $1.22bn) from ‘Digital Revenue’ in 2023;
Conclusion: In FY 2023, UMG generated approximately USD $7.39 billion ($6.17bn + $1.22bn) from streaming across recorded music and publishing. Spotify contributed USD $2.28 billion of this figure… implying SPOT supplied around 31% of Universal’s (wholesale) streaming revenues in the year.
If we then propose that a third of UMG’s ‘Digital Revenues’ in publishing might be non-streaming income, this would push Spotify’s share of UMG’s total streaming revenues up to 33%.
The section in UMG’s annual report in which it confirms that it categorizes streaming income for its publishing division under ‘Digital Revenues’
Alexander Lallemand via Unsplash2) Europe is still driving a surprising amount of Spotify’s growth. Could UMG respond by buying something in the EU?
The disparity between SPOT and UMG’s subscriber growth in Q2 (+21.0% YoY vs. +6.9% YoY) led some analysts to suggest that Spotify may have seen an acceleration in parts of the world where UMG’s recorded music market share dominance isn’t what it is in North America (i.e. so-called ’emerging markets’) – thus reducing UMG’s market share on the platform.
This idea was quickly quashed on UMG’s Q2 earnings call by Boyd Muir, who stated that Universal had not lost any significant global market share on Spotify in the period.
“[UMG’s] Spotify growth rates are consistent or broadly consistent with what Spotify reported,” clarified Muir.
Still, it’s interesting to see exactly whereSpotify has been growing in recent months. Not least because the answer flies in the face of the maxim that all the subscriber growth in the business these days is to be found in ’emerging markets’.
Each quarter, Spotify provides its investors with a territorial breakdown of its global subscribers – confirming which percentage of its total subs reside in each of North America, Europe (including the UK), Latin America, and the Rest Of The World.
Using that data, which is approximate and rounded to the nearest percentage point, MBW has created the following tables.
These are informed estimates of where Spotify has accelerated its paid subscriber base around the world over two time periods: (a) The 12 months to the end of June 2024; and (b) The six months to end of June 2024 (i.e. the first six months of this calendar year).
As you can see, Latin America and Europe (including the UK) were the star performers in the 12 months to end of June 2024 (+7.9 million and +7.7 million net subscribers, respectively), leaving in their wake both ‘Rest Of The World’ (+5.6m) and, the runt of the litter, North America (+4.8m).
However, in the first six months of 2024, it was a different story. The two most supposedly ‘mature’ streaming markets here — Europe and North America — led the pack, up 3.8 millionand 2.7 million, respectively.
In other words, Spotify gained 10 million net subscribers in the first six months of 2024. Nearly two-thirds of those new subscribers were located in Europe or North America.
And that’s despite Spotify raising its prices for the second time in a year in territories such as the UK in April.
With Spotify contributing an increasing amount of UMG’s own global revenues (see earlier point above), it makes sense that UMG might now respond accordingly – executing small shifts in its business model to better take advantage of Spotify’s growing global market position.
Looking at UMG’s figures for 2023, some 51.1% of the firm’s recorded music revenues were derived in North America, a continuation of Universal’s huge growth in the world’s largest market over the past decade-plus.
When it comes to Europe, however, a different story has played out: as UMG has increased sales more quickly elsewhere – most notably in North America and Latin America – Europe (including the UK) as a percentage of Universal’s revenues has steadily shrunk.
Yet with Europe now proving itself as the standout territory in terms of subscriber growth for Spotify in 2024 – and Spotify, in turn, appearing to increase its market share of the global subscription streaming market in Q2 – might Universal now look to accelerate its own business in the EU?
Like all major music companies, UMG’s performance in Europe has been particularly disrupted in recent years by the ‘glocalization’ trend.
Music fans in individual EU countries are increasingly streaming local artists, often in local languages.
This has diluted the major music companies’ ability to dominate streaming charts across Europe, while feeding the market share growth of independently distributed artists via platforms such as France’s Believe and Sweden’s Amuse.
Yet with Europe still offering far bulkier premium streaming ARPU returns than other territories – including China and Latin America – could UMG soon be tempted to boost its market share in the EU via a local acquisition, or multiple acquisitions, in the indie distribution space?
Of course, UMG has already made one material recent move in this direction: in 2022, the company acquired 49% of the Belgium-born global independent label/artist distribution network, [PIAS].
With those regulatory handcuffs now removed, and with Europe leading Spotify’s net subscriber additions over the past year, might UMG become tempted by acquisitive opportunities in the region?
Credit: Shutterstock/Diego Thomazin3) Could Universal (and its competitors) turn the screw on Spotify’s free tier?
You’ve just heard Universal as-good-as publicly blame you for disappointing subscriber growth in Q2, while praising Spotify’s and YouTube Music’s concomitant performances.
What’s your response? I know what mine would be.
“Hmmmmmmm. I wonder how the only two global services for which the major music companies FULLY LICENSE A FREE TIER could be outpacing our global subscriber growth. Do you have any ideas?”
(Yes, I know YouTube Music technically doesn’t have a free tier, but obviously YouTube is something of a free, ad-funded funnel for YouTube Music subscriptions, so the point carries.)
On Universal’s Q2 earnings call last month, Michael Nash cited UMG-commissioned consumer research which suggests there is “an addressable market of over 180 million consumers that will form the next wave of [music streaming] subscription adoption”.
A key question for UMG, then: How much of these 180 million prospective new streaming subscribers is Universal comfortable with Spotify claiming vs. other digital services?
Especially when you consider that major music company market share on Spotify has faced slow erosion in recent years from two key factors:
(i) The masses of uploads from independent artists onto services like Spotify, and the atomization of listening that has happened as a result;
(ii) DSPs like Spotify are growing in territories, especially emerging markets, where UMG doesn’t (yet) enjoy a presiding level of market share.
The major music companies plus Merlin members have seen their cumulative market share of music streams on Spotify decline from 87% in 2017 to 74% in 2023
In short, Spotify is seemingly gaining ‘market share’ of UMG’s revenues (i.e. growing faster than its streaming rivals)… just as major music companies’ dominant global market share on Spotify is being (gradually) sandpapered down.
This dynamic may not provide the sunniest long-term conditions for UMG’s power balance withSpotify in future deal negotiations.
So how might UMG be able to clip Spotify’s wings before Daniel Ek’s company runs away with the streaming market?
How can UMG ensure a fairer fight between Spotify and its biggest competitors for those 180 million new music streaming subscribers mentioned by Michael Nash?
One idea: UMG could attempt to eradicate SPOT’s unique advantage vs. the likes of Apple Music in the two territories that grew fastest at the firm in H1 2024 (Europe and North America).
Aka: Universal could refuse to license Spotify’s free tier, or at least the fullest extent of that free tier, when the two companies’ licensing negotiations next swing around.
Universal Music Group acting alone to neuter Spotify’s free tier may not hit hard enough. According to Music & Copyright, Universal had a 32.4% global digital market share in 2023.
But UMG likely wouldn’t be acting alone: Universal’s closest competitor, Sony Music Group, has already signaled that it is, unilaterally, thinking much the same thing.
Stringer explained that this was Sony‘s primary reason for starting to consider whether ‘free’ users of Spotify et al. in mature streaming markets should soon be charged a “modest fee” for their listening experience.
Universal Music Group may have other motivations for such a suggestion. Namely, keeping a healthy competitive balance between music streaming’s ‘Big 5’ (Spotify, YouTube Music, Apple Music, Amazon Music, Tencent Music) – and preventing one particular service, the green one, from extending, and exerting, market dominance.Music Business Worldwide
