Wednesday, June 12, 2024

Universal Music Group sees a future where 1 in 5 streamers pays for a ‘super-premium’ tier (and 3 other things we learned from UMG’s Q1 earnings call)

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MBW Reacts is a series of analytical commentaries from Music Business Worldwide written in response to major recent entertainment events or news stories. Only MBW+ subscribers have unlimited access to these articles.


It’s no surprise that TikTok was a key topic of discussion on Universal Music Group‘s Q1 earnings call on Thursday (May 2).

Just hours ahead of UMG revealing that its revenues grew 7.9% YoY at constant currency to USD $2.8 billion in Q1, the companies ended a three-month-long licensing dispute with a shiny new deal.

The agreement means that Universal’s catalog of songs and recordings will be returning to TikTok over the next two weeks and UMG Chairman/CEO, Sir Lucian Grainge confirmed in an internal memo to Universal employees that “greater compensation” is coming from TikTok for UMG artists and songwriters via the new deal.

On the company’s call with analysts on Thursday, Grainge explained in his opening remarks that TikTok “agreed to key changes in several critical areas, which have been very important to us, including addressing our concerns about generative AI on their platform as well as better aligning with the value of other comparable partnerships”.

He added: “As a result, we have resumed licensing our music to them.”

As you’ll read below, UMG’s leadership team, including Grainge, Michael Nash, (Executive Vice President and Chief Digital Officer), and Boyd Muir, (UMG’s Executive Vice President, CFO) were upbeat about the companies’ new deal, but that’s not all they discussed on the call.

They also shed light on UMG’s Q1 financial results, strategies for partnerships with emerging music companies, plans to monetize superfans, and more.

Here are a few things that stood out…


1. AS UMG looks to monetize superfans, it says that 1 in 5 paid music subscribers would be willing to pay for a super premium subscription tier.

Monetizing superfans continues to be a big priority for the music industry.

That’s particularly true at UMG, whose Chairman and CEO explained in his new year note to the company’s employees in January that UMG’s strategy this year will be centered on “strengthening the artist-fan relationship”, specifically through “superfan experiences and products”.

MBW asked, in this widely shared ‘MBW Reacts’ piece in February, what these superfan experiences might look like.

We got a first glimpse of what UMG’s plans could entail when it invested in HYBE’s ‘superfan’ platform Weverse in March.

But traditional DSPs like Spotify also have a potentially lucrative role to play in the superfan category.

As we asked in February, could a ‘superfan’, of say, Taylor Swift, or Billie Eilish, subscribe to a ‘limited tier’ of the artist’s content (think: bonus tracks, commentary, artist Q&As etc.) via a platform like Spotify for a couple of extra dollars (or more) added to their monthly bill?

“We know that we could better monetize higher-value customers, the research suggests that 1 in 5 paid music subscribers would be willing to pay for a premium tier. That’s enticing.”

Sir Lucian Grainge

In response to a question about superfan monetization by Wells Fargo’s Omar J. Mejias on Thursday, Michael Nash, said: “We’re very encouraged by [the] positive reaction that we’re getting around the prospects of [a] super-premium tier at a higher price point that would involve an even more advanced value proposition for customers”.

Nash also said that UMG’s “research suggests that [it] could be in the range of 10% to 20% of the subscriber base [that] could be the target market for a higher-value, higher-priced subscription tier.”

Commenting further on the superfan opportunity, Sir Lucian Grainge added: “The DNA of the company is product, product, product. Artists, talent rights. That’s where our investment is, in rights and products that will accelerate what our research is with the DSPs as partners.

“We know that we could better monetize higher-value customers, the research suggests that 1 in 5 paid music subscribers would be willing to pay for a premium tier. That’s enticing.”

Goldman Sachs, in its latest Music in the Air Report, published just last week, highlighted the role that so-called ‘super premium’ plans will play in the monetization of superfans in 2024 and beyond.

According to the report: “We would expect the industry (record labels, artist managers, DSPs) to work on this opportunity, experiment and roll out either new superfan apps or new super premium tiers on existing streaming services over the next 12-24 months”.

Goldman Sachs forecast that super-premium plans might be rolled out in “future rounds of price increases” which it added “may take the form of headline price increases across all plans or more nuanced product or feature-led price increases (e.g. charging for audiobooks or Hi-Fi audio, or the launch of new super premium plans catering to superfans)”.


2. UMG still sees the entire social media category ‘as a work in progress’.

As we noted in the introduction to this article, Universal Music Group’s leadership team was super positive about the company’s new deal with TikTok.

A key question on the lips of analysts, however, was, how much better is the deal financially for UMG?

In response to Bank of America’s Adrien de Saint Hilaire, who wanted to know about the financial “upside” to the new deal vs the old one,  Michael Nash, UMG’s Executive Vice President and Chief Digital Officer, confirmed: “On compensation specifically, revenue under this new deal does mark an improvement from our last deal”.

He stopped short of providing monetary specifics, however, adding that “there are, of course, other aspects, the economic value of any deal that don’t necessarily show up in the revenue line, including things like e-commerce, ad credits, data, marketing programs, other important facets of the platform relationship that we have with TikTok”.

Nash also highlighted “the strategic significance” of TikTok’s commitment to responsible AI, which forms a key part of the deal.

Commenting further on UMG’s new relationship with TikTok in the context of the wider social media category, Nash explained that UMG sees “all” its “partnerships as a work in progress” and that, in fact, the company still sees “the entire social media category as a work in progress”.

He explained: “[Social media] remains a relatively new monetization category”.

He noted that the deal UMG did with then-Facebook in 2017 “was the first time that social platforms were paying for the use of music”.

Added Nash: “We’re still at a point right now where we need to focus on continuing our efforts across the sector to maximize artist and songwriter participation in the value that they’re creating on these platforms. So this is an important step forward. It’s a journey here. We’re thinking long-term.”


3. Sir Lucian Grainge says that TikTok’s CEO ‘should be given credit for his leadership’ around the renegotiation of UMg’s TikTok deal…

Agreeing with Nash’s comments about the benefits of the TikTok deal for UMG and the growth of the wider social category, the company’s Chairman and CEO Sir Lucian Grainge told analysts that “everything in our DNA is about long-term behavior and long-term growth”.

He added: “What we’ve achieved with respect to responsible AI and our position and what we’ve been able to agree with [TikTok] on [attribution] and stream manipulation has really, I think, advantaged the entire social program”.

Sir Lucian Grainge also made specific mention of Shou Chew, the CEO of TikTok, telling analysts that the exec “should be given credit for his leadership [around the negotiation of the deal] and grabbing this with me, with us, in terms of what the opportunities and the possibilities are for both companies as well as obviously all the writers and the artists”.

If we zoom out for a second, we should note that UMG and TikTok have agreed a new deal against a backdrop of the ByteDance app’s continued political scrutiny in the world’s largest recorded music, the United States.

TikTok, as we’ve reported in recent weeks, is under fire from lawmakers in the US, where President Joe Biden recently signed into law a bill that requires TikTok’s China-headquartered owner to divest the app’s business in the US, or face a ban in the market, where it counts around 170 million users.

The company has just today (May 7) sued the US government over the law.

A shout-out from the head of a Los Angeles-headquartered music giant that saw 51.1% of its total recorded music turnover in 2023 (EUR €8.46bn/USD $9.16bn) take place in the US and Canada is not a bad look for TikTok’s CEO.


4. Some of UMG’s partnerships “may begin as lower-margin deals” but they have “great potential”…

In Sir Lucian Grainge’s prepared remarks at the start of the call, he highlighted the “strategic and financial importance” of UMG’s partnerships with “emerging and established music companies and entrepreneurs”.

Grainge explained that “these relationships are available to us because we’ve designed and built UMG so that we are able to leverage our scale and global infrastructure to provide third parties with a wide range of distribution, marketing, promotion and other services”.

He explained further that “while these relationships may begin as lower-margin deals”, UMG views them “as having great potential”.

That’s because “the connections” UMG makes with what he says are some of “the most exciting entrepreneurs and artists” in the business, “often, over time, expand into a broader suite of services as well as grow into opportunities for multifaceted partnerships”.

These partnerships, in return, “result in greater strategic benefits and higher margins” he said. A key example cited by Grainge is UMG’s long-term relationship with South Korean-headquartered entertainment giant HYBE.

In 2017, UMG teamed up with HYBE in South Korea on a label services agreement for its flagship group BTS.

Grainge added that “four successful years later in 2021, the company has expanded the relationship with a global strategic agreement providing for collaborations across a number of artists and projects.”

Last year, as Grainge noted on the call last week, Universal’s Geffen Records and HYBE inked JV to last year to launch The Debut: Dream Academy “aimed at implementing HYBE’S K-Pop methodology to launch a new group in the US”.

UMG also entered into a new partnership with HYBE in Q1. The deal provides UMG with exclusive distribution rights for HYBE’s music for the next 10 years and will also see UMG invest in – and further collaborate with – HYBE’s global superfan platform, Weverse. (Sources told MBW at the time that UMG made a minority investment in Weverse as part of the new partnership.)Music Business Worldwide

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