Warner Music Profits and the Future of the Industry

“Tens of thousands of songs are uploaded to streaming services around the world every day,” Cooper said. A label like Warner, he said, helps artists “separate their music and their careers from all the noise.”

As for Warner’s finances, looking at revenue for the past 12 months, which removes the one-quarter effect, Warner improved 13.2%. Physical sales returned to normal, dropping from $ 51 million in a pandemic-stricken quarter a year earlier to $ 130 million; the quarter included Record Store Day on June 12, which saw one-week vinyl sales in the United States, according to MRC Data (earnings for the next quarter will benefit from Record Store Day on July 22, the second highest ever recorded). Streaming revenue growth was adequate at 22.5% for recorded music, close to Universal Music Group’s 23.8% improvement – but well behind Sony Music’s 60.3% streaming gain ( recorded music and publishing) which boosted its total revenue by 54% (although you have to factor in that Sony’s previous year’s quarter was weak).

Warner Music’s stock price rose 1% to $ 37.35 on Tuesday, but fell 2.7% to $ 36.36 on Wednesday, giving it an enterprise value of $ 22.3 billion. dollars.

Here are five key takeaways from the data and the discussion:

ARPU and the subscription pricing saga

With the possible exception of Apple’s unbundling of the album format, streaming royalties have been the most controversial topic in the music world for the past two decades. Thus, Spotify’s decision to pass small price increases on to customers in 42 markets has been met with muffled applause from rights holders and creators and with interest from the financial community. Specifically, Spotify claimed that the price increases had no noticeable negative effect on customer churn rate.

“We have no reason to believe that’s anything but completely true,” Levin said.

In fact, Warner has the same conversation with Spotify’s competitors.

“Over the years, we’ve said there is a real opportunity for price hikes,” Levin said, adding that he would “strongly support” other subscription services that are considering “similar steps tailored to their needs. platforms ”.

This would be good news for Warner Music’s adjusted net income OIBDA, which gained 52% in the quarter and 30% in the previous nine months. The adjusted OIBDA margin improved from 19.4% to 22% in the quarter and from 20.9% to 22.9% in the nine-month period; Cooper attributed the improved margins to a combination of growth and cost containment, as well as a decrease in low-margin products and concert promotion revenue – a trend that will reverse as touring picks up. . Nonetheless, subscription price increases are significant when average revenue per user (ARPU) weakens and streaming accounts for 58% of total revenue and increases.

Real money from emerging digital platforms

Warner receives $ 235 million on an annualized basis in recorded music royalties from developing sources such as social platforms like Facebook and TikTok; Roblox and other games; and fitness platforms such as Peloton. That was a big jump from the annualized $ 200 million execution rate the company revealed just three months ago.

It is difficult to predict which social platform will become a source of significant royalties, but it can be assumed that social media will play an influential role in the future. Facebook and TikTok are such large platforms that labels and publishers can expect them to become the primary payers. Warner Music wouldn’t say how much its publishers receive from these developing sources, but Levin said the ratio of publishing royalties to royalties on recorded music would follow the one-to-five ratio common in music streaming.

Surviving an M&A Arms Race

In the 1970s and 1980s, spending on military technology during the Cold War helped bring down the Soviet Union. In 2021, a music company can naturally feel an impulse to increase its spending on music rights and other assets. But quarter after quarter, Warner Music executives have said they will not get caught up in an arms race.

It’s not that Warner won’t spend the money: On Tuesday, Levin noted that Warner had invested $ 338 million in recorded music and publishing assets with an OIBDA run rate of $ 37 million. (A sale of $ 250 million bonds to help fund two undisclosed acquisitions was announced in October 2020.) And Warner has invested in Roblox, Wave, and Dapper Labs, among other tech companies. But Cooper reiterated his disinterest in becoming asset managers and playing interest rate arbitrage. Instead, Warner takes a traditional approach of being a “proactive music entertainment company” that signs and develops artists and songwriters.

In addition to music rights, Warner invests to “perpetuate” the business internally and externally, as Cooper put it, a nod to its technology investments. Even as its debt-to-EBITDA ratio declines, Warner intends to invest in his business and pay dividends rather than pay off debt, Cooper said.

Are virtual artists here to stay?

Which song best describes a new generation of computer-generated artists? “Ain’t Nothing Like the Real Thing” by Marvin Gaye and Tammi Terrell or “More Human Than Human” by White Zombie (a reference to the realistic androids from the movie Blade Runner)?

We might find out sooner than you think, because the big labels are among the investors who provide virtual artists with an opportunity for mainstream success. Warner Music’s bet is Spirit Bomb, a real label with a roster of virtual artists recorded by real musicians. Cooper called virtual artists “not an illogical next step” and said Warner was “determined to lead the crosses of these virtual beings in the world of music.”

There are precedents – even prehistoric ones – that suggest virtual artists will find welcoming fans. Gorillaz, created by Damon Albarn of British group Blur and comedian artist Jamie Hewlett, has sold 24 million albums worldwide, according to his label, Parlophone, and amassed 7.3 million album sales (with track equivalents) and 3.5 billion on-demand streams in the United States, according to MRC Data. And Crazy Frog, a CGI character created in 2003, topped the charts across Europe with “Axel F” (he only reached 50th place on the Billboard Hot 100). But these examples have little in common with the high-definition animation and music created by the artificial intelligence of today’s virtual artists. Now people are comfortably living in a virtual world. Expect other labels to invest in this space as well.

Can the majors remain relevant?

Any investor or analyst should ask themselves how Warner – or any other major music company – can attract and retain artists as artists have a growing number of options to remain independent. From capital raising to digital marketing, a large infrastructure provides artists with the basic functions of a record label. Can these artists remain independent rather than signing with a major? Absolutely, and anyone who models a company’s valuation and stock prices needs to consider this dynamic.

With Vivendi soon to separate from Universal Music Group, more and more people are pushing and pushing the big label model. During the call for results, Cooper took the opportunity to advocate for the value of major labels to artists.

“When you look at some well-established and formidable global superstars, who have all had the opportunity to step away from labels, use the digital tools available and go solo, so to speak, to advance their careers, hardly any of them made the decision to move away from labels.

This may be true, but an investor or analyst should consider that new tools and services help give artists a career with intellectual property, more freedom and agency in their careers – and some artists will choose this instead. than a global powerhouse.


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