Sir Lucian Grainge on Universal’s new deal with Meta – and his belief that investment banks don’t ‘have the skill-sets or ability to exploit music rights’

Universal Music Group signed a new licensing deal with Meta in Q2, has concerns about a user-centric streaming payment model (‘Fan Powered’) – and thinks it’s “inevitable” that interest increase will decrease the value of the music catalog.

Those are some of the key lessons learned from the UMG boss, Sir Lucian Graingeand his senior management team’s discussion with analysts on Universal Music Group’s Q2 earnings call last Wednesday (July 27).

Here’s MBW’s summary of the five most important things we learned from that conversation…

1) Unlicensed Kobalt FacebookNew revenue-sharing payment model of – but Universal Music Group has

In his opening remarks to analysts last week, Sir Lucian Grainge (UMG President & CEO) confirmed that his company has signed a new licensing agreement with Meta, the parent company of Facebook and Instagram – that “expand revenue sharing and enhance [the] Meta community engagement with our catalog”.

Apparently enough, that deal included the use of UMG’s music in Meta’s new UGC video payment model for the music business.

Meta announced last week that, starting with Facebook in the US, music copyright holders now – for the first time – earn a direct share of advertising revenue generated by certain types of UGC videos containing music on the platform.

“During the second quarter, we completed a new deal with Meta that expands revenue sharing and enhances the Meta community engagement with our portfolio.”

Sir Lucian Grainge, UMG

The structure of that payment model will see ‘creators’ upload videos longer than 60 seconds to Facebook – and it’s not just static images set to music – get 20% advertising revenue generated by these videos.

The rest 80% that money will be split between Facebook/Meta and the music copyright holders (though Meta has yet to clarify what that split will be).

A company might not be happy with that split – or maybe with the prospect of video uploaders 20% of advertising revenue? – To be Kobalt music groupwhich confirmed last week it refused to come up with a new license agreement with Meta.

Contrast with UMG.

“[We’re] happy to innovate with Meta, the ways in which Meta deepens our partnership, [and] new opportunities around revenue sharing,” said Michael Nash, UMG EVP, Digital Strategy. Nash later added: “[This] is an exciting opportunity for us to enter the creator economy and allow creators to do really creative things with our video content. “

Nash also confirmed that the ad revenue stream from Facebook video ‘creators’ will gradually increase to the income Universal has received from Meta under the structure of the previous license agreement, first signed on 2017.

2) Universal’s subscription streaming revenue in Q2 was better than it first appeared

Speaking on Q2 analyst call, UMG CFO Boyd Muir provided important clarification on UMG’s subscription streaming revenue for the second quarter (covering the three months through the end of June).

Last week, UMG announced that their streaming revenue from their recorded music subscriptions increased in the past quarter 7.0% by year in constant currency (see below).

Consider that Goldman Sachs Recent predictions one 14.2% Annual (gross) global music subscription revenue up year-on-year in 2022 – and that SpotifyPremium streaming revenue of get a raise 14% by year at flat prices in Q2 – UMG’s numbers seem a bit low to some observers.

During the Q2 call, Boyd Muir referenced 41 million euros The one-time “catch-up payment” was paid to UMG by an unnamed music streaming subscription platform in Q2 2021.

Neglecting that one-time sum, Muir confirmed, will indeed see UMG’s constant monetary growth in subscription streaming in Q2 2022 increase double digits – 12.1% YoY – than 7.0% by year numbers have been reported.

(Sony recorded music streaming revenue – including subscriptions and sponsored by combined advertising – boosted by 7.9% YoY in the second quarter with the currency unchanged at the US dollar, according to Calculating MBW. Above Sony CorpLast week’s Q2 call, the company’s chief financial officer, Hiroki Totoki“We are monitoring the impact of the global economic slowdown on [music] streaming services. But we have not changed our view that the global music market, including recorded music and music publishing, will grow steadily over the next few years at a single-digit growth rate. high. “)

3) Universal believes that portfolio value will begin to decline as interest rates rise

It’s impossible to escape the impact of macroeconomic trends – both in our business and in our personal lives – right now.

One of those trends is rising interest rates (partially being pushed up to curb spiraling inflation). Last week, the Federal Reserve announced it pushed up US interest rates for the second time this year, by 0.75% – move its benchmark borrowing rate upwards 2.25%.

UMG leaders were asked on a Q2 call last week by analyst Exane BNP, William Packer, if they expect to see downward pressure on music catalog prices/multiples.

Boyd Muir responded with words that Wall Street music investors might not love: “I think one thing is for sure, interest rates will drive down valuations.”

Muir qualifies that he hasn’t seen that trend play out, in part because there are so many committed funds in the music merger and acquisition market that have yet to be deployed in deals.

“We don’t know the market impact [will be] when non-core outside funds really realize they don’t have the skill set or the mining ability [music rights]. “

Sir Lucian Grainge, UMG

As a result, Muir notes, Universal is “continuing to stay ahead of deals [which] actually financially unjustifiable”. However, as a potential buyer, he thinks UMG is “encouraged” by the idea that prices will fall “in the medium term”.

Sir Lucian Grainge made a small dig of his own at Wall Street financiers to buy the music rights.

“We don’t know the market impact,” Grainge said [will be] when non-core outside funds really realize they don’t have the skill set or the mining ability [music rights]”.

UMG records show it spent 264 million euros investments in the music portfolio in the first half of 2022 – most of which is spent on buy a license pack extended Sting’s career (pictured).

4) UMG doesn’t seem to be a big fan of user-centric royalties

One of the hottest music business stories of the summer was the adoption of user-centric (or “fan-driven”) royalty payments. Warner Music Group above SoundCloud.

MBW consider after announcing such agreement whether Universal Music Group is less likely to adopt a ‘fan-supported’ model compared to today’s predominantly streaming payment system pro-rata or ‘Streamshare’.

We think UMG would be hesitant to do so for fear of losing market share, with fan-supported models often benefiting large numbers of indie artists and reducing royalties for top superstars. market.

“Clear [that] a large percentage of important artists and musical genres may be marginalized under a user-centric model. “

Michael Nash, UMG

Last week, UMG executives were asked by analyst Guggenheim Michael Morris about the “pros and cons” of the user-centric model from their point of view.

Michael Nash said: “It is clear from the studies that have been done recently that the findings [that] was announced, [that] a large portion of important artists and musical genres may be marginalized under a user-centric model.

“French research, [from] the Center National de la musique, released one of the most detailed user-centric analyzes to date to date last year. And some of that report’s findings reinforce concerns about whether the majority of artists benefited materially. [from user-centric] – and also raises concerns about artists and genres of music that could be harmed. “

Nash added: “Back to our point of view, there is no reason to think that efforts to optimize the streaming model should only consider an alternative to the status quo.

“We think that the priority for any model adjustments should be placed on growing sales in general and spurring the interest of all artists. [That means] look beyond paradigm shifts to give one group of artists an advantage over another that loses. It shouldn’t be a zero-sum situation. “

5) Why did UMG’s revenue grow in Q2 when margins fell?

An interesting oddity in UMG’s Q2 numbers: Total revenue at UMG – across the music, publishing and other divisions – increased 17.3% YoY in the quarter. However, the company’s overall EBITDA margin fell during the same period to 20.0% (down from 21.1% in the quarter of the previous year).

Obviously, this means that UMG is making more money from businesses with lower margins compared to the previous year. And so it’s proven when you dig into the company’s Q2 numbers.

“Much of UMG’s higher-than-expected revenue growth [this year] comes from publishing and merchandising, which is less profitable than our recorded music business. “

Boyd Muir, UMG (pictured)

Boyd Muir explains: “Much of UMG’s higher-than-expected revenue growth [this year] came from publishing and merchandising, which had lower margins than our recorded music business. Revenue from these businesses provides incremental profits, but they don’t actually accrue UMG’s total profit margin. “

If growth from publishing and merchandise continues to outpace recorded music, says Muir, UMG will see absolute random profitability for the rest of 2022 (i.e. more money) bottom line) but “UMG’s total profit margin will remain fairly flat.”

UMG’s quarterly publishing revenue in Q2 2022 increased 50.6% YoY arrive 476 million euros ($507 million) – although this dramatic increase is partly due to the fact that UMG now recognizes toll revenue differently than in the past.

Quarterly revenue from UMG ‘Commodities and Other’ increased 65.9% YoY in the second quarter, up to 141 million euros.

UMG, trading on Amsterdam Euronext, created EUR 2,535 billion euros ($2.70 billion) in the second quarter, increased 17.3% YoY with constant currency.Worldwide music business