MBW Explains is a sequence of analytical options wherein we discover the context behind main music trade speaking factors – and counsel what may 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 ranking for Common’s inventory, citing, as a main purpose, a priority over the menace posed to main document 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) precipitated 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 Road 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 rankings 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 value goal for UMG’s share value to EUR €30.00 from €28.30.
5 days earlier than (April 14), Omar Sheikh of Morgan Stanley plumped for an even greater value goal for UMG’s inventory (€32.00). That was lowered barely from Sheikh’s earlier goal (€33.00), however contemplating that Common’s share value on the Amsterdam Euronext stood at €21.02 as we speak (April 25), Morgan Stanley’s perception in Common’s potential for dramatic future progress is obvious.
One other monetary big, UBS, additionally gave the thumbs-up to UMG’s prospects this month. On April 5, UBS analyst Richard Earyreiterated his ‘purchase’ ranking for Common’s inventory, with a value goal of €29.00.
It’s not all euphoria on the market; HSBC’s Joseph Thomas caught with a damaging ‘Cut back’ ranking for Common on April 11. However even amid a number of doomsday narratives (soundtracked by Robotic Drake) a few of Wall Road’s largest names stay adamant that UMG’s future is beaming brilliant.
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 keeping with PSH, of USD $2.538 billion (see under).
PSH’s particular replace on UMG talks of Common having a “high-quality, capital-light enterprise that may be greatest considered a quickly rising royalty on higher world consumption and monetization of music”.
It continues: “UMG has a decades-long runway for progress pushed by rising streaming penetration mixed with the event of recent 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 progress and mid-20s% EBITDA margins“.
The Pershing annual report then speaks of Ackman’s confidence that “the long-term outlook for UMG is great and that the corporate will proceed to outperform its mid-term steerage”.
“We consider that breaking the $10 barrier [on music streaming services] is a watershed second, as different platforms will probably comply with swimsuit, and common value will increase will change into 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: “Because the launch of streaming companies greater than a decade in the past, the month-to-month price of a subscription plan had been flat at $10 till final 12 months.
“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 fair greater share for household and scholar plans.
“We consider that breaking the $10 barrier is a watershed second, as different platforms will probably comply with swimsuit, and common value will increase will change into the norm within the audio streaming trade as they’re within the video streaming trade.
“At $10.99/month as we speak (and fewer for a household plan on a per-person foundation), one can hearken to just about any tune ever recorded on any gadget, wherever, anytime, at a price value.”
WHAT occurs subsequent?
PSH’s annual report additionally appears additional ahead to each alternatives and threats on the horizon for Common.
The agency addresses the deluge of tracks now touchdown on streaming companies every single day, and the priority (as expressed by Exane BNP Paribas) that an AI-driven improve on this deluge may influence on main document 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 change into inundated with greater than 100,000 tracks per day, lots 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 most important document firms, and Common Music Group specifically.
It does so whereas nodding to Sir Lucian Grainge‘s willpower 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 probably tip the business 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 via focused choices.”
“Whereas greater than 9 million artists have uploaded songs to Spotify, based mostly 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 the direction of an ‘artist-centric’ strategy that offers extra worth to the artists that drive subscriber progress, engagement, and retention.
“Whereas these modifications could take time to be totally carried out, we consider that UMG will profit from a higher share of streaming royalties on account 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 value level for all shoppers doesn’t enable 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 via focused choices.”
It provides: “At its present valuation, UMG’s enticing enterprise traits and its long-term sustainable and sturdy earnings progress 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 remaining thought…
Common Music Group’s Q1 2023 monetary outcomes are on account of be introduced tomorrow (April 26).
These figures will give us a superb indication, amid a tough maco-economic backdrop, of how UMG is faring proper now – after Invoice Ackman and PSH acknowledged their ambition for the music firm to put up 10%-plus YoY positive factors in annual income.
Common, after all, can 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 components of present, copyrighted recordings to gasoline new music – and the outcome being uploaded to Spotify, Apple Music and many others.
This mission appears to have received some early assist from DSPs.
“I’m supportive of being stricter when it comes to what [music] we enable to get uploaded to the platform, and the standard of the catalog… We clearly must take care of the problem of AI as a supply of an enormous quantity of recent music.”
Jeronimo Folgueira, Deezer
On March 1, talking on Deezer’s FY earnings name, the corporate’s CEO, Jeronimo Folgueira, stated in response to a query about AI-generated music: “I’m supportive of being stricter when it comes to what we enable to get uploaded to the platform, and the standard of the catalog.”
He added: “There’s loads of content material now getting uploaded to our platform each week, and that quantity retains rising and rising and rising.
“There’s loads of duplicated content material, there’s loads of content material that’s not even music… and at a sure level you get manner an excessive amount of content material that’s ineffective for the customers. And it begins creating a foul consumer expertise.”
Talking on Deezer’s newest earnings name on Tuesday this week (April 25), Folgueira commented: “We clearly must take care of the problem of AI as a supply of an enormous quantity of recent music.
“We need to give our clients a high-quality expertise and related content material, so clearly getting AI to flood our catalog is just not 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 as we speak (April 25), noting: “[O]bviously… [Spotify is] working with our companions on in making an attempt to ascertain a place [on AI music] the place we each enable innovation, however on the identical time, shield all the creators that we now have on our platform.”Music Enterprise Worldwide
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