Robert Kyncl talks Believe, M&A, India, superfans and more on WMG’s latest earnings call

For several weeks earlier this spring, it looked like Warner Music Group (WMG) might acquire France-headquartered digital music company Believe.

The move would have significantly expanded WMG’s revenue and global footprint, while giving it a stronger foothold in the world of independent, so-called “middle class” artists – a priority area for expansion for WMG CEO, Robert Kyncl.

But it was not to be. After a tussle between WMG and the only other bidder for Believe – a consortium led by Believe’s founder and CEO, Denis Ladegaillerie – WMG eventually decided not to pursue a bid, leaving the way clear for Ladegaillerie and co. to take control of the company.

Why did Warner retract its interest in Believe?

“This was a very unique situation because the timing [of the Believe acquisition process] was out of our control, the public nature of it was out of our control, and the extremely short time frame for due diligence was out of our control,” Kyncl said on WMG’s fiscal Q2 earnings call on Thursday (May 9).

“We decided… not to pursue it for a variety of reasons that I really can’t go into, but our strategy is to continue to look for opportunities that can augment our build strategy, and we continue to do that.”

The bid for Believe was indeed very public, and the timeline was indeed quite short.

Believe let it be known in early March that an unnamed “interested party” had made inquiries into making a USD $1.8-billion bid for the company, a somewhat higher number than the $1.6 billion bid that Ladegaillerie and a consortium including investment companies TCV and EQT had made earlier. It was soon revealed that the “interested party” was WMG.

“This was a very unique situation because the timing was out of our control, the public nature of it was out of our control, and the extremely short time frame for due diligence was out of our control.”

Robert Kyncl, Warner Music Group

Talks between Believe’s board and WMG then got rocky: the Believe board resisted giving WMG access to confidential financial information about Believe, and it was only a ruling from France’s securities regulator that ensured WMG’s access to it.

Still, Believe’s board set a short timeline for the process, giving WMG just a few weeks following its peek into Believe’s data to decide whether to pursue a bid. Shortly before the deadline, WMG declined.

On the earnings call, WMG’s leadership team stressed that, despite the Believe deal falling through, the company continues to look for further M&A opportunities.

“It’s our job to survey the market. And if there [are] opportunities that will accelerate our initiatives, we’ll take those,” said WMG’s CFO, Bryan Castellani.

In his introductory remarks, Kyncl said that, while WMG is “staying vigilant” on M&A opportunities, it’s also building “in-house solutions” to expand its services for artists.

“As part of our mission to be a destination for artists and songwriters at every stage of development, we’re expanding our lower-touch services that many independent artists, labels and songwriters rely on,” Kyncl said.

“As just one recent example – last month, Warner Chappell partnered with BandLab, the social music creation platform. We’ll work together to identify and sign emerging songwriters, providing them with access to our comprehensive suite of offerings,” Kyncl added.

Later on in the call, Kyncl elaborated on why he sees “lower-touch” services (i.e. not heavy-investment major label deals) as important to WMG’s strategy.

“I think it’s important to realize that there are artists who are getting started, [or] at many different stages of their careers – somebody has no following, and [others who have] a big one. And it’s important for us to effectively widen the net in which we can work with artists and find great talent. So… it’s basically about [expanding] the deal flow, [to] put it in business terms.”

The comments came as WMG reported $1.49 billion in total revenue for its fiscal Q2, ending March 31, 2024, marking a 6.9% YoY increase on a constant currency basis.

Recorded music revenue rose 4.3% YoY at constant currency, to $1.189 billion. Recorded streaming revenue rose 11.1% YoY, to $828 million, on the strength of growing subscriptions and price hikes at streaming services.

Warner’s publishing division, Warner Chappell Music, recorded an 18.6% YoY jump in revenue, to $306 million, driven by growth in digital, performance and synch revenue.

The company’s adjusted OIBDA came in at $312 million for the quarter, versus $286 million in the prior-year quarter, up 9% YoY at constant currency.

Here are four other things we learned on WMG’s latest earnings call…

1) Spotify’s dispute with music publishers over US mechanical royalties won’t last long, predicts Kyncl, because these things don’t ‘play out well’

Spotify recently raised the ire of music publishers in the US with an announcement that it’s changing the way it pays out mechanical royalties, a move that means rightsholders will see lower payments from the streaming platform.

Because of the rules set by the US Copyright Royalty Board (CRB), DSPs are able to pay out less in mechanical royalties that come from “bundled” services. Spotify last year added 15 hours of audiobook time to its Premium paid tiers, and now the company says it will be counting those Premium subscriptions as bundles.

According to David Israelite, President and CEO of the National Music Publishers’ Association, the issue is likely to end in a legal conflict.

But on WMG’s earnings call, Kyncl didn’t raise much of a fuss about the issue, saying, in fact, that bundled consumer-facing services will play a major role in the future of the music biz.

However, Kyncl did make it clear it’s part of his job to defend the income of his music publishing division.

“I would say is that bundling is generally good for [a] subscription business because… it tends to lower subscriber acquisition costs and it tends to lower churn rate,” he said. “So for platforms, it becomes a strong growth driver. And we’ve obviously had 50 years of a very healthy [cable and satellite] television market through bundling, and if you look at many different sectors, you can see [the same thing].”

“I would say is that bundling is generally good for [a] subscription business because… it tends to lower subscriber acquisition costs and it tends to lower churn rate. So for platforms, it becomes a strong growth driver.”

Robert Kyncl, Warner Music Group

But Kyncl made clear that he wants to see the rates paid out from bundled subscription services to match those from standalone music subscription services.

“The job of wholesalers like the music companies, like ourselves, is to ensure that the sanctity of our pricing across the different services [to ensure that] individual subscriptions, stand-alone subscriptions or bundled offerings are in line with each other. So you can expect us to pursue that strategy.”

He added that he doesn’t see the conflict between Spotify and publishers “as something that will persist in the long term,” because these sorts of “individual carve-outs, in any market [don’t] play out well amongst parties that are tied at the hip and partners for the future.”

Kyncl stressed later on in the call that, so long as music is “priced correctly,” the move to bundled services is “good news” for music companies. And he noted that last year’s price hikes at the major streaming services show things are moving in the “right direction”.

2) WMG says it was the only major music company to grow market share in India and Sub-Saharan Africa last year

With music culture becoming increasingly local, the major music companies are racing to get in on the action in burgeoning regional music markets. Warner Music Group is, of course, no exception.

On the earnings call, Kyncl made a point of stressing WMG’s success in that regard.

“We’re expanding our presence in dynamic recorded music markets. We’ve seen impressive results this past year,” he said.

“In Argentina, the fastest-growing market in 2023, we doubled our year-over-year revenue organically. In Sub-Saharan Africa, the fastest-growing region in 2022 and 2023, we were the only major music company to grow share last year, and in India – already the 14th-largest market and climbing fast – we were again the only major to grow share in 2023.”

That’s certainly a bold claim, but WMG has certainly done the legwork to make its claims on India and Sub-Saharan Africa credible.

The company has expanded its presence fairly aggressively in India in recent years, notably with the signing of a distribution deal with Tips Music, a popular Bollywood music company, in 2020. Earlier this year, it expanded that deal to include commercial and distribution responsibilities for all of Tips Music’s repertoire of more than 30,000 songs.

In 2021, WMG struck a strategic partnership with JetSynthesys, a digital entertainment and technology company with operations in India, the Middle East, North Africa, South East Asia and the US. Earlier this year, WMG made a strategic investment into the company, securing a seat for Warner Music India on its board.

“We’re expanding our presence in dynamic recorded music markets. We’ve seen impressive results this past year.”

Robert Kyncl, Warner Music Group

Through 2023, WMG made a series of acquisitions in India, including artist management and live events company E-Positive, and a majority stake in digital media and music company Divo. It also formed a joint venture with Sky Digital, and aggregator of Punjabi musical content.

The company has been no less active in Sub-Saharan Africa, where it invested in Africori, the region’s largest digital music distributor, in 2020, before taking a majority stake in the company in 2022.

WMG also struck a deal with East African artist Diamond Platnumz and his label WCB-Wasafi, which included, but wasn’t limited to, distribution. WMG’s South African division acquired local indie label Coleske in 2021. Late last year, WMG formed a partnership with Small World Records, the label and publisher founded by Ghanaian artist and entrepreneur SmallGod.

On the earnings call, Kyncl noted that WMG isn’t done yet with its global expansion, mentioning by name last month’s launch of Warner Music South Asia, serving Bangladesh, Nepal, Pakistan and Sri Lanka.

“We continue to find ways to turbocharge our growth, and strengthen our global platform for local talent,” he said.

3) WMG’s superfan app might be integrated in some way with music streaming apps

During a conference appearance Doha, Qatar, in February, Kyncl revealed that Warner Music Group is working on its own superfan app.

That came as a surprise to many observers, who had assumed that music streaming platforms, and not recording companies, are the right medium to monetize superfans. But Kyncl insists that WMG is indeed the right vehicle for the race to better monetize the most committed music fans out there.

During Thursday’s earnings call, he elaborated on the rationale behind this, and dropped a small hint that WMG’s superfan app might in some way be integrated with music streaming apps.

For artists, “it’s very hard to optimize for any individual platform, and to try to anchor a superfan’s relationship in one place, because your superfans are across many, many different platforms,” Kyncl said.

“Which means, I think, we’re naturally set up to be the right place to do this and do it cross-platform. And then we can always partner with the DSPs [digital service providers], but through the offering that we have.”

4) The majority of Warner’s 2024 restructure – including 600 layoffs – is now complete

In its previous earnings release in February, WMG announced it would be reducing headcount by 600, or about 10% of its workforce.

The lion’s share of those layoffs was to take place within Warner’s owned-and-operated media properties, including news/entertainment websites Uproxx and HipHopDX, social media publisher IMGN, and podcast platform Interval Presents.

The company also announced it was looking for buyers for Uproxx and HipHopDX, and would be shutting down IMGN and Interval.

WMG said it expected to realize annual cost savings of $200 million from the moves by the fall of 2025, and the savings would go to “putting more money behind the music.”

“Although the full savings will not be realized until the end of fiscal 2025, the majority of changes have already been implemented.”

Robert Kyncl, Warner Music Group

Three months later, Kyncl says those changes have largely been implemented.

“Although the full savings will not be realized until the end of fiscal 2025, the majority of changes have already been implemented,” Kyncl said in his opening remarks, indicating that over half of the process is now complete.

“This includes centralizing certain functions, and exiting our owned-and-operated media business. Since we last spoke, we have sold the entertainment websites Uproxx and HipHopDX.”

Uproxx and HipHopDX were sold to Uproxx Studios, a new company formed by Uproxx founder and CEO Jarret Myer, media veteran Rich Antoniello, and artist/entrepreneur will.i.am.

The new company says its properties, which include Dime Magazine, also bought from WMG, reach a combined 170 million-plus monthly US visitors and generate more than 12 billion monthly video views in the US.

The company also has an exclusive license to represent WMG’s YouTube inventory for all media sales in the US.Music Business Worldwide