Universal Music Group Inc. was written off in 2013 as the industry leader of a dying industry.
French entertainment conglomerate Vivendi had just rejected Tokyo-based SoftBank Corp.’s $8 billion bid to buy the Vivendi-owned UMG record label, and music industry observers voiced surprise at Vivendi’s decision, saying SoftBank had overvalued UMG.
Fast-forward to the present, and there’s a distinctly different melody in the air. Vivendi recently put 50 percent of Santa Monica’s UMG up for sale – with a JPMorgan Cazenove Ltd. investment note last week valuing the company at $50 billion.
The swift turnaround in perception for UMG – along with the heady valuation – rests on the music industry’s life raft: consumers paying to stream music.
“For the music industry, subscription streaming is what is paying the bills now,” said Gigi Johnson, a music business professor at UCLA.
The payoff is already significant for Universal.
Fourteen of the top 20 most played Apple Music artists of 2018 were Universal talent, including Drake, Ariana Grande and Taylor Swift.
That dominance in streaming had helped UMG to a 29.8 percent share of the global recorded music market in 2017, according to the most recent numbers from the London-headquartered International Federation of the Phonographic Industry trade group, compared to 22.6 percent for Sony Music Entertainment Inc., and Warner Music Inc.’s 18.1 percent.
UMG streaming revenues increased 37.3 percent in 2018 to $2.6 billion, according to Vivendi’s annual report, released in February.
The streaming money more than offset revenue declines from downloads and physical sales. UMG’s total revenue spiked to $6.8 billion, a 10 percent gain from 2017. UMG also posted $1.07 billion in operating income, up 22.1 percent from the year before.
Those figures represented nearly half of Vivendi’s entire 2018 revenue and approximately three-quarters of the conglomerate’s profits.
The annual report coincided with Vivendi Chief Executive Arnaud de Puyfontaine stating the company is advancing a plan, announced in July, to offer up to 50 percent of UMG to “one or several strategic partners” by the end of 2019.
De Puyfontaine has not identified potential buyers, and Vivendi and UMG declined comment.
The “rumored buyers” parlor game has been replete with international investors, plus U.S. tech and entertainment conglomerates.
De Puyfontaine added during the February earnings call that, “Universal Music Group’s 2018 annual results will serve as the basis for the discussions with potential partners.”
The streaming wave
UMG’s corporate campus sprawls across a block of Colorado Boulevard in Santa Monica.
The company has been under Vivendi’s control since 2004, an acquisition that caused UMG to be separated from its namesake, Universal Studios Inc.
Vivendi’s purchase came amid an industrywide drop in recorded music sales that started in 1999 and was not reversed until 2015, according to the Phonographic Industry.
The turnaround began, however, with Sir Lucian Grainge, who, in 2011, took over as UMG’s chief executive and moved to Santa Monica from UMG’s London division.
Grange’s tenure has been marked by his penchant to buy competing record labels – including the $1.9 billion purchase of EMI in 2011 – a dealmaking streak some observers deem visionary.
“Grainge made a big, big bet on the future of the music business in 2011, snapping up most of EMI when many investors wouldn’t touch it,” said Bill Werde, director of Syracuse University’s Bandier Program for the music and entertainment industries. “He spent nearly $2 billion at a time when it wasn’t necessarily clear there would even be a music business a few years down the road.”
The investment, Werde said, “handed UMG the market share it needed to dictate terms with partners, and outbid others for top artist and executive talent.”
Others doubt UMG had an exceptional strategy, considering Sony and Warner saw comparable revenue jumps in 2018.
“It’s a matter of riding the streaming wave,” said William Hochberg, a music lawyer at Greenberg Glusker Fields Claman & Machtinger. “I don’t see any label surfing out in front of the others.”
The streaming wave gathered momentum, observers noted, due to better music piracy law enforcement, the ease of smartphone streaming apps and conversion of mobile devices to a cloud platform that allows vast song storage.
Streaming platforms − the most lucrative are Spotify and Apple Inc.’s Apple Music − have persuaded listeners that streaming is worth a monthly cost, usually $9.99.
About 55 percent of this $9.99 goes to record labels, according to a Deutsche Bank report, with each label paid based on how frequently their licensed songs are streamed.
Other reasons for streaming adoption are perhaps tied to proactive steps by UMG, Sony and Warner.
The labels have introduced songs and albums to Spotify analogous to the way motion picture studios introduce new content to Netflix Inc., and also revamped personnel at international subsidiaries.
“The labels are largely doing a wonderful job,” Johnson said.
Finding a partner
But instead of Vivendi basking in the recent glory of its new golden goose, UMG is being partly spun off.
In a July earnings call, Thomas Singlehurst, an analyst at Citigroup Inc. asked de Puyfontaine the reason for the sale.
“Is it because there is a strategic element to the business that needs fixing?” Singlehurst asked. “Or is it just about maximizing the sale value?”
De Puyfontaine didn’t give much away with his answer, saying simply that there is “growing interest” and “favorable momentum” in the music industry, and Vivendi hopes to “find a right partner or partners to be able to accelerate this trend.”
All of which could be true.
“The sale announcement did surprise me,” said Vickie Nauman, founder of CrossBorderWorks, a consultancy for record labels and streaming platforms. “There is a bullish view of a music industry continuing to grow.”
Vivendi, though, could be smart to sell now, said Zach Fuller, analyst at Midia Research.
“Not to say revenues will decline,” Fuller said. “But streaming growth is likely to slow from 2019 onwards.”
Whether streaming growth continues, both observers stated, hinges on how it succeeds in new markets in China, Japan, Nigeria and elsewhere.
As for Universal’s price tag, the $50 billion – 50 times the company’s 2018 operating income – could be a bit much, said Lloyd Greif, chief executive of downtown investment bank Greif & Co.
Greif posited JPMorgan wants to get selected as Vivendi’s investment banker to lead the sale: De Puyfontaine noted on the February earnings call Vivendi had not selected banks to work with.
Regarding potential partners, observers more readily gave reasons for why companies wouldn’t, rather than would, want a UMG stake.
Tech giants with streaming platforms including Apple or YouTube, a subsidiary of Alphabet Inc.-owned Google, would likely not make a serious bid for fear of alienating other labels, Johnson said.
The same reason could make live entertainment industry leader Live Nation Entertainment Inc. wary, the music professor said, though Live Nation investor Liberty Media Corp. could throw its hat into the ring.
One possibility is Access Industries Inc., which already owns Warner Music.
Access Industries said it would not comment on any potential investments.
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