MBW Explains is a collection of analytical options wherein we discover the context behind main music trade speaking factors – and recommend what would possibly occur subsequent.
WHAT’S HAPPENED?
From one perspective, it’s been an unsteady month for Common Music Group traders.
First, on April 5, a monetary analyst who’s lengthy been a champion of UMG’s potential worth – William Packer of Exane BNP Paribas – double-downgraded his score for Common’s inventory, citing, as a major motive, a priority over the menace posed to main file firm market share by AI-created music.
Then, with immaculate timing, got here final week’s commotion: A observe that includes an AI voice replication of Drake and The Weeknd (each UMG artists) triggered a stir on TikTok, Spotify, YouTube and different companies, earlier than a UMG copyright grievance noticed the ‘official’ model of the offending recording deleted throughout DSPs.
Common shareholders observing Wall Avenue a bit of nearer over the previous month, although, would have seen some extra constructive information – with a number of heavyweights of the monetary neighborhood reiterating optimistic scores of UMG’s inventory:
Final Wednesday (April 19), JPMorgan, through analyst Daniel Kerven, reasserted its constructive rating of Common’s inventory as ‘Chubby’, whereas upping its worth goal for UMG’s share worth to EUR €30.00 from €28.30.
5 days earlier than (April 14), Omar Sheikh of Morgan Stanley plumped for an even greater worth goal for UMG’s inventory (€32.00). That was lowered barely from Sheikh’s earlier goal (€33.00), however contemplating that Common’s share worth on the Amsterdam Euronext stood at €21.02 right this moment (April 25), Morgan Stanley’s perception in Common’s potential for dramatic future development is obvious.
One other monetary large, UBS, additionally gave the thumbs-up to UMG’s prospects this month. On April 5, UBS analyst Richard Earyreiterated his ‘purchase’ score for Common’s inventory, with a worth goal of €29.00.
It’s not all euphoria on the market; HSBC’s Joseph Thomas caught with a damaging ‘Cut back’ score for Common on April 11. However even amid a number of doomsday narratives (soundtracked by Robotic Drake) a few of Wall Avenue’s greatest names stay adamant that UMG’s future is beaming shiny.
Alongside these outcomes, the agency issued it annual report, that includes a direct message from Invoice Ackman himself… in addition to a particular replace on PSH’s view on Common Music Group.
In keeping with the report, as of the top of 2022, PSH owned 105,325,592 shares in Common Music Group N.V. That holding carried a good worth, in response to PSH, of USD $2.538 billion (see beneath).
PSH’s particular replace on UMG talks of Common having a “high-quality, capital-light enterprise that may be finest regarded as a quickly rising royalty on better world consumption and monetization of music”.
It continues: “UMG has a decades-long runway for development pushed by growing streaming penetration mixed with the event of latest companies, platforms, and enterprise fashions.”
PSH cites an announcement from UMG’s inaugural Capital Markets Day in summer time 2021, at which the music agency unveiled “mid-term targets of high-single-digit income development and mid-20s% EBITDA margins“.
The Pershing annual report then speaks of Ackman’s confidence that “the long-term outlook for UMG is superb and that the corporate will proceed to outperform its mid-term steering”.
“We consider that breaking the $10 barrier [on music streaming services] is a watershed second, as different platforms will seemingly comply with swimsuit, and common worth will increase will grow to be the norm within the audio streaming trade as they’re within the video streaming trade.”
Pershing Sq. letter, March 2023
“Music stays one of many lowest-cost, highest-value types of leisure,” says the PSH report, constructing on an argument we’ve heard from Ackman earlier than.
It goes on: “For the reason that launch of streaming companies greater than a decade in the past, the month-to-month value of a subscription plan had been flat at $10 till final yr.
“In current months, numerous the DSPs (digital service suppliers or streaming platforms) together with Apple, Amazon and Deezer elevated costs for his or her particular person subscription plans in developed markets by 10% to $10.99 and by a good greater share for household and pupil plans.
“We consider that breaking the $10 barrier is a watershed second, as different platforms will seemingly comply with swimsuit, and common worth will increase will grow to be the norm within the audio streaming trade as they’re within the video streaming trade.
“At $10.99/month right this moment (and fewer for a household plan on a per-person foundation), one can take heed to nearly any music ever recorded on any system, wherever, anytime, at a price worth.”
WHAT occurs subsequent?
PSH’s annual report additionally seems additional ahead to each alternatives and threats on the horizon for Common.
The agency addresses the deluge of tracks now touchdown on streaming companies each day, and the priority (as expressed by Exane BNP Paribas) that an AI-driven improve on this deluge may influence on main file firm market share on Spotify et al.
“Whereas streaming helped revive the trade by convincing shoppers to pay for music once more, it additionally has its shortcomings,” acknowledges the PSH report. “Many DSPs have grow to be inundated with greater than 100,000 tracks per day, a lot of that are low-quality, fraudulent, and/or 31-second tracks meant to recreation the system and divert royalties away from artists and songwriters.”
PSH cites information that it says guarantees a constructive future consequence for the key file corporations, and Common Music Group specifically.
It does so whereas nodding to Sir Lucian Grainge‘s dedication to sculpt a brand new “artist-centric” royalty mannequin at main DSPs, and a transfer away from the present dominance of the so-called ‘professional rata’ payout mannequin.
PSH believes this “artist-centric” mannequin, when it launches, will seemingly tip the industrial scales in UMG’s favor.
“15% of shoppers account for 35% of all music spend, implying a major alternative for platforms and labels to raised section their clients and monetize superfans by focused choices.”
“Whereas greater than 9 million artists have uploaded songs to Spotify, primarily based on information shared by Spotify, solely 2% of those artists have [both] uploaded greater than 10 songs and have greater than 10,000 month-to-month customers,” notes the PSH report.
“UMG is working straight with the DSPs to enhance streaming’s financial mannequin in direction of an ‘artist-centric’ strategy that provides extra worth to the artists that drive subscriber development, engagement, and retention.
“Whereas these adjustments could take time to be totally carried out, we consider that UMG will profit from a better share of streaming royalties as a consequence of its huge breadth and depth in its artist roster.”
One other matter on PSH’s thoughts (which, once more, tessellates with Lucian Grainge’s “artist-centric” ambitions) is the improved monetization of hardcore music followers on digital companies.
Continues PSH’s report: “[W]hile streaming led to broad adoption amongst shoppers, a single worth level for all shoppers doesn’t permit for buyer segmentation.
“In keeping with the BPI (an trade commerce group), 15% of shoppers account for 35% of all music spend, implying a major alternative for platforms and labels to raised section their clients and monetize superfans by focused choices.”
It provides: “At its present valuation, UMG’s engaging enterprise traits and its long-term sustainable and sturdy earnings development stay considerably undervalued.
“We consider that UMG additionally has additional alternatives to enhance its governance, investor relations and capital allocation because it builds expertise as a public firm, which ought to contribute to shareholder worth creation.”
A closing thought…
Common Music Group’s Q1 2023 monetary outcomes are as a consequence of be introduced tomorrow (April 26).
These figures will give us a superb indication, amid a troublesome maco-economic backdrop, of how UMG is faring proper now – after Invoice Ackman and PSH said their ambition for the music firm to publish 10%-plus YoY positive aspects in annual income.
Common, after all, can also be busy battling the early indicators of generative AI’s influence on copyright, having efficiently issued takedown notices to streaming companies final week over a observe that was fronted by an AI-cloned model of Drake’s voice.
Concurrently, UMG has issued requests to its main streaming companions for assist in stopping AI instruments from cloning parts of current, copyrighted recordings to gas new music – and the end result being uploaded to Spotify, Apple Music and so on.
This mission appears to have gained some early help from DSPs.
“I’m supportive of being stricter by way of what [music] we permit to get uploaded to the platform, and the standard of the catalog… We clearly have to take care of the difficulty of AI as a supply of an enormous quantity of latest music.”
Jeronimo Folgueira, Deezer
On March 1, talking on Deezer’s FY earnings name, the corporate’s CEO, Jeronimo Folgueira, mentioned in response to a query about AI-generated music: “I’m supportive of being stricter by way of what we permit to get uploaded to the platform, and the standard of the catalog.”
He added: “There’s lots of content material now getting uploaded to our platform each week, and that quantity retains rising and rising and rising.
“There’s lots of duplicated content material, there’s lots of content material that’s not even music… and at a sure level you get means an excessive amount of content material that’s ineffective for the customers. And it begins creating a nasty person expertise.”
Talking on Deezer’s newest earnings name on Tuesday this week (April 25), Folgueira commented: “We clearly have to take care of the difficulty of AI as a supply of an enormous quantity of latest music.
“We wish to give our clients a high-quality expertise and related content material, so clearly getting AI to flood our catalog shouldn’t be one thing we’re tremendous eager on, and we’re engaged on that.”
And Spotify CEO, Daniel Ek, appeared to echo a few of these ideas on SPOT’s personal Q1 2023 earnings name right this moment (April 25), noting: “[O]bviously… [Spotify is] working with our companions on in attempting to determine a place [on AI music] the place we each permit innovation, however on the similar time, defend the entire creators that we have now on our platform.”Music Enterprise Worldwide
