Common Music Group signed a recent licensing settlement with Meta in Q2, has considerations over the user-centric (‘Fan Powered’) streaming payout mannequin – and thinks it “inevitable” that rising rates of interest are going to drive down valuations of music catalogs.
These had been a few of the key takeaways from UMG boss, Sir Lucian Grainge, and his senior administration crew’s dialogue with analysts on Common Music Group’s Q2 earnings name final Wednesday (July 27).
Right here’s MBW’s rundown of 5 of an important issues we discovered from that dialog…
1) Kobalt hasn’t licensed Fb‘s new revenue-sharing payout mannequin – however Common Music Group has
In his opening remarks to analysts final week, Sir Lucian Grainge (UMG Chairman & CEO) confirmed that his firm had inked a brand new licensing settlement with Meta – guardian of Fb and Instagram – that “expands income sharing and enhances [the] Meta neighborhood’s engagement with our catalog”.
Clearly sufficient, that settlement covers using UMG’s music inside Meta’s new UGC video payout mannequin for the music enterprise.
Meta introduced final week that, beginning on Fb within the US, music rightsholders will now – for the primary time – earn a direct share of advert income generated by sure kinds of UGC video that include music on the platform.
“Within the second quarter, we accomplished a brand new settlement with Meta that expands income sharing and enhances Meta communities engagement with our catalog.”
Sir Lucian Grainge, UMG
The construction of that payout mannequin will see ‘creators’ who add movies over 60 seconds to Fb – and which aren’t simply static photos set to music – obtain 20% of the promoting income generated by these movies.
The remaining 80% of that cash will probably be break up between Fb/Meta and music rightsholders (though Meta hasn’t but clarified what that break up will appear like).
One firm that won’t have been proud of that break up – or maybe with the prospect of video-uploaders taking 20% of the promoting income? – is Kobalt Music Group, which final week confirmed it had refused to ink a brand new licensing settlement with Meta.
Distinction that to UMG.
“[We’re] very joyful within the renewal with Meta, the ways in which it deepens our partnership, [and] new alternatives round revenue-sharing,” mentioned Michael Nash, UMG’s EVP, Digital Technique. Nash later added: “[This] is an thrilling alternative for us to take part within the creator financial system and to allow creators to do actually inventive stuff with our video content material.”
Nash additionally confirmed that the advert income stream from Fb video ‘creators’ could be incremental to earnings that Common already receives from Meta beneath the construction of its earlier licensing deal, first signed in 2017.
2) Common’s subscription streaming revenues in Q2 had been higher than they first appeared
Talking on the Q2 analyst name, UMG CFO Boyd Muir made an necessary clarification relating to UMG’s subscription streaming revenues within the second quarter (masking the three months to finish of June).
Final week, UMG introduced that its recorded music subscription streaming income within the quarter was up by simply 7.0% YoY at fixed forex (see beneath).
Contemplating that Goldman Sachs just lately predicted a 14.2% YoY enhance in annual (gross) world music subscription revenues in 2022 – and that Spotify‘s Premium streaming revenues had been up 14% YoY at fixed forex in Q2 – UMG’s determine could have appeared a bit low to some observers.
On the Q2 name, Boyd Muir referenced a €41 million one-time “catch-up fee” that was paid to UMG by an unnamed music streaming subscription platform in Q2 2021.
Omitting that one-time sum, Muir confirmed, would have truly seen UMG’s constant-currency progress in subscription streaming in Q2 2022 rise by double-digits – 12.1% YoY – somewhat than the 7.0% YoY determine that was reported.
(Sony’s recorded music streaming revenues – together with subscription and ad-funded mixed – had been up by 7.9% YoY in Q2 at fixed forex on the US greenback stage, in response to MBW calculations. On Sony Corp‘s Q2 name final week, the agency’s CFO, Hiroki Totoki, mentioned: “We’re monitoring the impression of the worldwide financial slowdown on [music] streaming companies. However we now have not modified our view that the worldwide music market, together with each recorded music and music publishing, will develop steadily over the subsequent a number of years at a progress fee within the excessive single-digits.”)
3) Common believes catalog values will begin to fall on account of rate of interest rises
There’s no escaping the impression of macro-economic tendencies – each in enterprise and in our personal particular person lives – proper now.
A type of tendencies is rising rates of interest (that are being pushed up, partly, to attempt to mood spiraling inflation). Final week, the Federal Reserve introduced it was to push up US rates of interest for the second time this yr, by 0.75% – shifting its benchmark borrowing fee above 2.25%.
UMG’s leaders had been requested on the Q2 name final week by Exane BNP analyst, William Packer, in the event that they anticipated to see downward strain on music catalog costs/multiples because of this.
Boyd Muir responded in phrases that Wall Road music buyers could not love: “I feel there’s an inevitability that rates of interest are going to drive down valuations.”
Muir certified that he’s not seeing that development play out simply but, partly as a result of there are many dedicated funds within the music M&A market but to be deployed in offers.
“We don’t know what the impression of the market [will be] when non-core outdoors funds truly understand that they haven’t bought the skill-sets or the power to take advantage of [music rights].”
Sir Lucian Grainge, UMG
Because of this, Muir famous, Common is “persevering with to stroll away from offers [which] truly can’t be justified financially”. Nonetheless, as a potential purchaser, he advised UMG was “inspired” by the thought of costs coming down “within the medium time period”.
Sir Lucian Grainge made his personal mini-dig at Wall Road financiers shopping for into music rights.
Stated Grainge: “We don’t know what the impression of the market [will be] when non-core outdoors funds truly understand that they haven’t bought the skill-sets or the power to take advantage of [music rights]”.
UMG’s filings present that it spent €264 million on catalog music investments in the course of the first half of 2022 – nearly all of which was spent on shopping for a bundle of copyrights spanning the profession of Sting (pictured inset).
4) UMG doesn’t appear to be a giant fan of user-centric royalties
MBW contemplated within the wake of that deal announcement whether or not Common Music Group may be somewhat much less more likely to embrace the ‘fan-powered’ mannequin, versus the present predominant streaming payout system of pro-rata or ‘Streamshare’.
We thought UMG could be hesitant to take action on account of worry of shedding market share, with fan-powered fashions usually benefitting giant numbers of indie artists, and decreasing royalties for superstars on the high of the market.
“It’s clear [that] a big share of artists and necessary genres of music could possibly be deprived beneath a user-centric mannequin.”
Michael Nash, UMG
Final week, UMG’s execs had been requested by Guggenheim analyst Michael Morris in regards to the “execs and cons” of the user-centric mannequin from their perspective.
Michael Nash mentioned: “It’s clear from the research which have just lately been accomplished, the findings [that] have been introduced, [that] a big share of artists and necessary genres of music could possibly be deprived beneath a user-centric mannequin.
“The French examine, [from] the Centre nationwide de la musique, issued what was one of the vital detailed evaluation of user-centric so far final yr. And a few of that report’s findings strengthened considerations about whether or not or not the majority of artists would profit materially [from user-centric] – and in addition raised considerations about artists and musical genres that might probably be harmed.”
Nash added: “Stepping again by way of our perspective, there’s no motive to assume that efforts to optimize the streaming mannequin ought to come all the way down to contemplating only one different to the established order.
“We predict precedence for any mannequin changes must be positioned on rising revenues total and advancing the curiosity of all artists. [That means] wanting past mannequin adjustments to pit one group of artists that profit towards one other group of artists that lose out. It shouldn’t be a zero-sum scenario.”
5) Why did UMG’s income develop in Q2 as its margins contracted?
One attention-grabbing quirk in UMG’s Q2 numbers: Total revenues at UMG – throughout recorded music, publishing and different divisions – rose by 17.3% YoY within the quarter. But the agency’s total EBITDA margin fell in the identical interval to 20.0% (down from 21.1% within the prior-year quarter).
Clearly, this should imply that UMG is making extra money from lower-margin companies than it was within the prior yr. And so it proves once you dig into the agency’s Q2 figures.
“Nearly all of UMG’s higher-than-anticipated income progress [this year] is coming from publishing and merchandising, which have decrease margins than our recorded music enterprise.”
Boyd Muir, UMG (pictured inset)
Defined Boyd Muir: “Nearly all of UMG’s higher-than-anticipated income progress [this year] is coming from publishing and merchandising, which have decrease margins than our recorded music enterprise. The revenues from these companies do convey incremental earnings however they’re truly not accretive to UMG’s complete margin.”
If progress from publishing and merch continues to outpace recorded music, says Muir, then UMG will see improvise profitability in absolute phrases in the remainder of 2022 (i.e. extra money on the underside line) however “complete UMG margins will stay pretty flat”.
UMG’s quarterly publishing revenues in Q2 2022 had been up 50.6% YoY to €476 million ($507m) – though this dramatic rise was partly pushed by UMG now recognizing assortment society income in a different way than it did beforehand.
UMG’s ‘Merchandise and different’ quarterly income grew 65.9% YoY in Q2, as much as €141 million.
UMG, which trades on the Amsterdam Euronext, generated EUR €2.535 billion (USD $2.70bn) in Q2, up 17.3% YoY at fixed forex.Music Enterprise Worldwide