Universal Music Group published its Q3 financial results on Thursday (October 31), reporting total revenues of EUR €2.870 billion (USD $3.15bn) for the quarter ended September 30, up 4.9% YoY at constant currency.
Amongst the quarter’s highlights was an 8.2% YoY jump in the company’s subscription streaming revenues to €1.137 billion ($1.248bn), driven, according to UMG, “primarily by the growth in global subscribers, as well as price increases at certain platforms”.
UMG Chairman and CEO Sir Lucian Grainge, plus Boyd Muir, UMG’s EVP, CFO and President of Operations (recently promoted to COO), and Michael Nash, Executive Vice President and Chief Digital Officer, were grilled on the company’s earnings call on Thursday.
In his opening remarks, Grainge reiterated comments made in September at UMG’s Capital Markets Day at Abbey Road in London, about UMG’s view that the music industry is entering the ‘Streaming 2.0‘ era.
“Our work to usher in Streaming 2.0 is underway, and I look forward to providing you further updates in the weeks and months ahead.”
Sir Lucian Grainge
Speaking with analysts on Thursday, Grainge explained that “Streaming 2.0 will build on the enormous scale we’ve achieved in the first stage of streaming and create a sustainable and growing artist-centric ecosystem that improves monetization and delivers great experiences for fans”.
He added that a key factor in the evolution of the streaming business “will be improving customer acquisition strategies to drive greater conversion from free to paid and then from paid onto the superfan tier”.
Grainge continued: “This will enable us to segment and capture customer value at higher than ever levels. Achieving this requires a highly nuanced approach, adapting to the specific nature of each platform, taking into account the platform’s individual product roadmap, its distinct subscriber bases and regional variations, particularly in fast-growing developing regions.
“Our work to usher in Streaming 2.0 is underway, and I look forward to providing you further updates in the weeks and months ahead.”
Here are four other things that were said on the company’s Q3 earnings call…
1. YouTube Music commits to ‘artist-centric’-related enhancements
In his opening remarks on Thursday’s call, Sir Lucian Grainge explained that UMG’s ‘artist-centric’ strategy is “crucially important for the streaming business to grow and flourish”.
He added that artist-centric is “a key pillar” of the music company’s work to “evolve the underlying business model for streaming” to what UMG refers to as ‘Streaming 2.0.’
He then explained how YouTube Music fits into this strategy, referring to the platform as “one of the fastest-growing players in subscription”.
The platform has previously said that it wants to be the music rights industry’s biggest partner by 2025. YouTube surpassed the milestone of 100 million paid YouTube Music and Premium subscribers worldwide in March.
“Artist-centric is a key pillar of our work to evolve the underlying business model for streaming. — what we call streaming 2.0.”
Sir Lucian Grainge
Grainge said that “on the strength” of its “successful” existing partnership with YouTube, the platform has committed to UMG that it “will elevate” the priority it gives to “servicing premium artist content”.
It will also, according to Grainge, “enhance[e] content categorization measures to provide users with an improved experience and a more mutually rewarding connection between artists and fans”.
Added Sir Lucian Grainge: “YouTube is also making the platform more attractive in numerous other ways. For example, offering user-friendly ways for fans to create and share collaborative playlists and their own artwork, including AI-generated images and elements of this game of gamification in the form of badges for super fans are being introduced to create specialized entities for fans.
“We’ve been advocating such approaches with all of our platform partners because social enhancements like gamification lead to higher fan engagement and greater consumption of our artists’ music. YouTube Music is now the first DSP to offer these features.”
2. UMG has ‘extended the application of [its] artist-centric philosophy to the AI arena’
Universal Music Group has played a prominent role in the development of the AI music space over the past couple of years.
According to Sir Lucian Grainge, UMG has done so by “extend[ing] the application of [its] artist-centric philosophy to the AI arena in several important ways as [it] seek[s] to drive innovation while future-proofing the music ecosystem”.
Grainge highlighted UMG’s recent strategic partnership with AI company KLAY, which, he explained, “is developing a new ethical model for AI-generated music that works with the music industry and its creators to grow musical creativity and human artistry.”
UMG’s CEO noted that the collaboration with KLAY “adds to [UMG’s] ever-expanding portfolio of tech entrepreneurs who are working with us to set Generative AI on a course that is deeply aligned with the rights and interests of the entire creative community”.
“We’ve also extended the application of our artist-centric philosophy to the AI arena in several important ways as we seek to drive innovation while future-proofing the music ecosystem.”
Sir Lucian Grainge
Grainge added that UMG has “elevated [its] advocacy of artists interests” through initiatives like its partnership with Roland on the principles of music creation with AI.
He added: “More than 90 companies and organizations have signed on to the principles, and we’ve lent our support to the recently published statement of AI training, which has now been signed by over 25,000 people”.
Grainge also pointed to UMG’s recent collaboration with voice AI company SoundLabs, which resulted in a Spanish-language version of Brenda Lee’s holiday hit, Rockin’ Around the Christmas Tree, via what Grainge said last week was a “very inventive use of responsible and responsibly trained AI technology”.
He added: “This will be, we anticipate, just the first of many, many developments. It’s another example of the many ways that AI can be employed to serve the creative community as long as we steadfastly adhere to artist-centric tenets.”
3. UMG is ‘constantly looking for entrepreneurs with unique visions with whom [it] can partner’ As part of its M&A strategy…
Elsewhere in his opening remarks, Sir Lucian Grainge offered a bit of insight into UMG’s global acquisition and partnership strategy and pointed to recent “recent moves [the company has] made in Belgium, the UK, India, Thailand, Latin America as well as China”.
Grainge explained that “when you look at [UMG’s] history, it’s clear that Universal Music Group is an organization that was built over time by entrepreneurial visionaries”.
“When we see a company that’s a strong strategic and cultural fit, we summon our resources, expertise and nimbleness and our networks relationships to acquire it.”
Sir Lucian Grainge
He added: “We are constantly looking for entrepreneurs with unique visions with whom we can partner. And when we see a company that’s a strong strategic and cultural fit, we summon our resources, expertise and nimbleness and our networks relationships to acquire it.
“When we bring the acquired company into the fold, we don’t make it disappear. We allow it to retain its identity, keeping itself unique and thriving within the UMG family”.
Grainge pointed to its recent acquisition of [PIAS] as an example of this strategy. UMG announced it had acquired 49% of [PIAS] in 2022, following a “strategic alliance” inked between the companies the prior year.
UMG completed the acquisition of the remaining 51% of shares from [PIAS] co-founders Kenny Gates and Michel Lambot, for an undisclosed fee, last month.
As we reported last month, Universal is acquiring two core business divisions within the [PIAS] Group including the [PIAS] Label Group, home to the company’s own and associated record labels, including Play It Again Sam, harmonia mundi, Demain, Spinefarm, Source and partner labels such ATO, Heavenly, Mute, and Transgressive.
UMG has acquired the company’s label services division [Integral], which Grainge noted is “joining forces with our Virgin Music Group”.
Grainge said that the latter “aspect of the acquisition enhances [UMG]’s ability to support the independent artist and label community globally, while dramatically increasing our presence in this growing segment of the industry”.
Other recent M&A deals noted by Sir Lucian Grainge highlighted what he said is the company’s “commitment to grow in high potential markets”.
One of those deals was Virgin Music Group’s recent acquisition of Outdustry, which Grainge described as “a leading artist and label services business used by many of the world’s premier independent labels and artists to market their releases into China and India”.
He added: “As we previewed at the Capital Markets Day, our strategy includes expanding our reach into high-potential markets. Our acquisition of Outdustry provides another instance of that strategy in action”.
He also highlighted Universal’s deal for Thailand’s RS Group, which owns the second-largest recorded music catalog in the market.
Last year, UMG acquired a 70% stake in the recorded music catalog of RS Group for around USD $45 million (plus a potential ~$5m in bonus payments). In September, at the company’s Capital Markets Day, UMG confirmed that it had recently completed the acquisition of the remaining 30% of RS Group’s catalog, taking full ownership of the recordings portfolio.
4. the ad-supported revenue growth in Q3 was ‘largely thanks to [UMG’s] new Meta deal’.
UMG’s leadership team were asked by Adam Berlin of UBS Investment Bank for “a bit more detailed explanation on why ad streaming isn’t growing”.
Universal’s ad-supported recorded music streaming revenue was up 0.3% YoY at constant currency to €354 million ($388.8m) in Q3, due, according to UMG, “to mixed performance at advertising-based platform partners as the digital advertising market remains volatile”.
In his opening remarks prior to the analyst Q&A, Boyd Muir noted that “revenue was largely flat against the prior year quarter” and explained that performance was “mixed across partners [because] the digital ad market is reacting to an evolving consumer preferences around short form and social content as consumption and engagement has shifted faster than the monetization”.
He added that the growth seen in ad-supported revenue in Q3 was “largely thanks to [UMG’s] new Meta deal“.
In response to Adam Berlin’s question about ad-supported growth, Michael Nash noted that UMG has “cautioned for several quarters now that we need to see broad-based improvements across multiple partners and geographies over a longer time frame” before the company can “adopt a less cautious view” on ad-supported.
Nash added: “Our [ad-supported] streaming revenue includes income from a wide variety of global regional partners. It’s important to keep that in mind. The composition of this category is much more varied than the subscription category in terms of the revenue capture models, in terms of the business models of the partners in terms of the geographic mix.”
Commenting further on Universal’s broader platform strategy, Sir Lucian Grainge noted: “If you look back over the last decade or so – what we now describe as Streaming 1.0 – we’ve been stimulating new businesses and new business models with a variety of partners in different segments.
“And part of that has been to help them scale the business and inject health into the entire music ecosystem. So here we are today with an ad-funded model with new segments like social, which didn’t exist five years ago, with well over 600 million, 650 million people paying for subscription[s].
“This has been intentional and by design, and here we are now at the advent of [Streaming] 2.0. Everything that you’re asking and we’re talking about, whether it’s ad-funded or premium subscription or superfans will all come from the development of our business relationships with the platforms.”
He added: “With regard to ARPU, it’s all part of our innovation, product segment[s], how we work with the platforms and how we work with our artists to actually develop and have them believe in what we’re doing to create these new segments. So it’s one of the reasons why we continue over the long term to be as positive and optimistic about everybody’s future in the same way that I hope that we reflected at Capital Markets Day.”
Music Business Worldwide
