Sir Lucian Grainge on Common’s new take care of Meta – and his perception that funding banks don’t ‘have the skill-sets or potential to take advantage of music rights’

Universal 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 have been a number of the key takeaways from UMG boss, Sir Lucian Grainge, and his senior administration staff’s dialogue with analysts on Common Music Group Q2 earnings name final Wednesday (July 27).

Right here’s MBW’s rundown of 5 of an important issues we realized from that dialog…

1) Kobalt hasn’t licensed Facebook‘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 – mother or father of Fb and Instagram – that “expands income sharing and enhances [the] Meta neighborhood’s engagement with our catalog”.

Clearly sufficient, that settlement covers the usage of UMG’s music inside Meta’s new UGC video payout mannequin for the music enterprise.

Meta announced last 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 varieties 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 likely be cut up between Fb/Meta and music rightsholders (though Meta hasn’t but clarified what that cut up will seem like).

One firm that will not have been proud of that cut up – or maybe with the prospect of video-uploaders taking 20% of the promoting income? – is Kobalt Music Group, which last 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,” stated 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 artistic stuff with our video content material.”

Nash additionally confirmed that the advert income stream from Fb video ‘creators’ can be incremental to earnings that Common already receives from Meta below the construction of its earlier licensing deal, first signed in 2017.

2) Common’s subscription streaming revenues in Q2 have 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 (overlaying the three months to finish of June).

Final week, UMG announced 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 recently predicted a 14.2% YoY enhance in annual (gross) international music subscription revenues in 2022 – and that Spotify‘s Premium streaming revenues were 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 cost” that was paid to UMG by an unnamed music streaming subscription platform in Q2 2021.

Omitting that one-time sum, Muir confirmed, would have really seen UMG’s constant-currency development in subscription streaming in Q2 2022 rise by double-digits – 12.1% YoY – slightly than the 7.0% YoY determine that was reported.

(Sony’s recorded music streaming revenues – together with subscription and ad-funded mixed – have been up by 7.9% YoY in Q2 at fixed forex on the US greenback degree, in accordance with MBW calculations. Confirming that determine on Sony Corp‘s Q2 name final week, the agency’s CFO, Hiroki Totoki, stated: “We’re monitoring the impression of the worldwide financial slowdown on [music] streaming companies. However we’ve got 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 development price 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, partially, to attempt to mood spiraling inflation). Final week, the Federal Reserve announced it was to push up US rates of interest for the second time this yr, by 0.75% – shifting its benchmark borrowing price above 2.25%.

UMG’s leaders have been requested on the Q2 name final week by Exane BNP analyst, William Packer, in the event that they anticipated to see downward stress on music catalog costs/multiples consequently.

Boyd Muir responded in phrases that Wall Road music traders 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 really notice that they haven’t acquired the skill-sets or the flexibility 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] really can’t be justified financially”. Nonetheless, as a potential purchaser, he prompt UMG was “inspired” by the concept 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 really notice that they haven’t acquired the skill-sets or the flexibility to take advantage of [music rights]”.

UMG’s filings present that it spent €264 million on catalog music investments through the first half of 2022 – the vast majority of which was spent on buying a bundle of copyrights spanning the profession of Sting (pictured inset).

4) UMG doesn’t appear to be an enormous fan of user-centric royalties

One of many summer season’s most intriguing music enterprise tales has been the adoption of user-centric (or “fan-powered”) royalty payouts by Warner Music Group on SoundCloud.

MBW pondered in the wake of that deal announcement whether or not Common Music Group is perhaps slightly 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 can be hesitant to take action on account of worry of shedding market share, with fan-powered fashions sometimes benefitting massive 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 might be deprived below a user-centric mannequin.”

Michael Nash, UMG

Final week, UMG’s execs have been requested by Guggenheim analyst Michael Morris concerning the “professionals and cons” of the user-centric mannequin from their perspective.

Michael Nash stated: “It’s clear from the research which have lately been executed, the findings [that] have been introduced, [that] a big share of artists and necessary genres of music might be deprived below a user-centric mannequin.

“The French examine, [from] the Centre nationwide de la musique, issued what was one of the detailed evaluation of user-centric so far final yr. And a few of that report’s findings bolstered 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 when it comes to 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 needs to be positioned on rising revenues total and advancing the curiosity of all artists. [That means] trying 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 fascinating 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 more cash from lower-margin companies than it was within the prior yr. And so it proves once you dig into the agency’s Q2 figures.

“The vast majority of UMG’s higher-than-anticipated income development [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: “The vast majority of UMG’s higher-than-anticipated income development [this year] is coming from publishing and merchandising, which have decrease margins than our recorded music enterprise. The revenues from these companies do deliver incremental earnings however they’re really not accretive to UMG’s whole margin.”

If development 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. more cash on the underside line) however “whole UMG margins will stay pretty flat”.

UMG’s quarterly publishing revenues in Q2 2022 have been up 50.6% YoY to €476 million ($507m) – though this dramatic rise was partly pushed by UMG now recognizing assortment society income in another 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