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Why Universal Music Group's Q3 Earnings Bode Well for the Rest of the Business

Universal Music Group logo.
Courtesy of UMG

Universal Music Group logo.

People outside of Universal Music Group’s orbit may not look at Vivendi’s earnings releases as windows to the world. After all, UMG is just one of three major labels, albeit the biggest, and not the largest music publisher. Of all the world’s music companies and repertoire, across all recordings and compositions, UMG represents a small share (think of how far “the long tail” stretches). But because Universal is both large -- in terms of market share -- and global, the company’s third-quarter earnings, released Thursday (Oct. 17), reflect the state of things around the world.    

Revenues were $2 billion (€1.8 billion) in the third quarter and $5.6 billion (€5.06 billion) through the first nine months. Rolling 12-month revenue has increased $1.4 billion over the last two years, consistently marching from $6.4 billion to $7.8 billion. But to the rest of the world, the important metrics in Universal’s earnings are year-over-year growth: organic growth of 15.7% in the third quarter and 17.5% through nine months.   

(It’s important to present an accurate, apples-to-apples comparison of one time period to another. To do this, Vivendi calculates organic growth by removing the change in currency valuations and effects from acquisitions. This is particularly important in 2019 because Universal acquired distributor Ingrooves in March; it was previously a minority investor. So, Vivendi’s earnings statement has three growth measures: % change, % change at constant currency, and % change at constant currency and perimeter. The third growth rate best reflects the company’s operations and the health of the global industry.)   


Key Takeaways:

1) Universal Music Group had 15.7% revenue growth in Q3 and 17.5% through three quarters of 2019. 
2) As goes UMG, so goes the global industry. Expect global revenue growth to exceed 10% again over all of 2019.
3) The forces driving UMG are also giving sustained momentum to other companies: digital distribution, ad-supported audio and video streaming, and subscription services. 


Given UMG’s gains, global revenues should rise 10% or more in 2019. Universal and global growth rates can’t be far off. Last year, UMG’s recorded music division grew almost the same as the global record business, 9.8% to 9.7%, respectively, according to global trade body IFPI. This year UMG’s recorded music business is up 15.6% through October, a tenth of a percent lower than the company-wide growth rate. 

UMG’s double-digit growth suggests other labels and publishers are going to have a strong year, too -- in the aggregate, if not individually. The same forces shaping Universal’s expansion are helping the rest of the industry. We know Sony Music and Warner Music Group are having strong years so far (Sony reports quarterly earnings on Oct. 30; Warner has not given its earnings date). We know the U.S. industry had 18% growth in the first half of 2019. Digital distribution enables labels to reach every important market, as well as up-and-coming and previously ignored ones. So we can reasonably expect the independent record label and publisher communities to also perform well in 2019.

In fact, independent labels could outperform the majors. Merlin, composed of 800 members comprising 20,000 labels and imprints, posted 38% revenue growth in 2018, even after removing $130 million in non-royalty income, and 46.7% in 2017.

The playing field is not completely level, however. UMG has a particular strength few labels can match, hip-hop and R&B. Executives on the company’s earnings call Thursday avoided answering a question about the company’s market share. Instead they mentioned how success in this genre benefits the company. “We can say generally Universal Music Group is very well positioned especially with urban music, which is a good way to [achieve] market share on the streaming side of the business,” said de Puyfontaine. 

Indeed, people stream hip-hop and R&B at an especially high rate. The two genres, typically combined into one, accounted for 29.6% of on-demand streams in the U.S. in the first half of 2019, more than twice as much as rock (14%) and pop (13.5%), according to Nielsen Music’s mid-year report. The most popular songs in the U.S., and in many other countries, are hip-hop and R&B. Nielsen Music’s top tracks and artists at mid-year include Drake, Post Malone, Blueface and Dr. Dre, whose 2000 song “Next Episode” had the ninth-most on-demand video streams in the U.S. at the mid-year point. Interscope Records and its many imprints have many of the top songs in the U.S. that have also charted in other markets. 

Competitors can’t match UMG’s financial opportunities, either. Chinese tech giant Tencent is going to buy 10% of Universal for $3.35 billion (€3 billion); Tencent can buy an additional 10% and Vivendi might sell some or all of another 30% of UMG. De Puyfontaine said “a partner like Tencent will help us through opportunity to create value in China first and foremost,” though it’s worth mentioning that Sony Music and Warner Music Group also have partnerships with offshoot streaming company Tencent Music Group. Additional funding is likely to strengthen UMG. The company wants “to get a strategic partner or partners to accelerate the momentum from the last few periods,” de Puyfontaine said. He added that UMG has received interest from potential investors “at a similar price level” as the $33.5 billion valuation in the Tencent deal (the current dollar value of the valuation from a €3 billion purchase for a 10% stake in Universal). 

So, UMG will continue to grow over time. Vivendi could spend part of the Tencent money to make acquisitions, although Vivendi has indicated some of the funds will be returned to investors in the form of share buybacks. Also, there are few multi-billion dollar deals currently available in recorded music or publishing. Particularly in recorded music, where competition is more concentrated than in publishing, a large acquisition would receive pushback from regulators (see the hoops UMG jumped through to win European Union approval of its $1.9-billion pickup of EMI Records in 2012.) Instead, Universal would have to make smaller acquisitions in large independent record labels, distribution, publishing catalogs, production music or merchandise. (See the 2017 purchase of ZZT and Stiff Records.) 

In the absence of music megadeals, Vivendi could easily use investors’ money to bolster Canal+, its premium TV operator which acquired European pay-TV company M7 in September for $1.1 billion. Vivendi could also add to its Havas advertising company, which this year acquired majority states in two creative agencies with combined annual revenues of $60 million, according to reports. Whatever the outcome, having $3.35 billion on hand will provide the means to make major moves. 

A music company might look at UMG’s financial reports and see an impenetrable competitor about to go shopping with a large piggy bank. And make no mistake, UMG is an admirable foe. But the global market is booming. There is enough growth for anybody able to figure out the streaming business. Expect to see anachronisms as some labels and artists (e.g. album-oriented rock) subsist on physical and digital albums purchases. But by and large, streaming and subscription services are providing artists, songwriters, labels and publishers an opportunity to grow.


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