Universal Music Group N.V. (UMG) Earnings Call Transcript & Summary

Good morning, and welcome to this session. My name is Lisa Yang, and I cover European media Internet at Goldman Sachs. It's a real pleasure to have with me today Lucian Grainge, Chairman and CEO of Universal Music, the world's #1 music company. So Lucian spent of his entire career in the industry and has signed and worked with a number of worldwide stars, including ABBA, J.D., Elton John, Queen, Rihanna, and The Rolling Stones just to name a few. And his leadership has retransformed UMG into the most successful company in the music industry, culminating the company's listing on the Euronext Amsterdam last year.

So Lucian, thanks again for being with us today. And maybe to start off thinking about your listing, UMG has been a public company for almost a year now. So how does it feel being the CEO of a public company? And does it make you miss your early days of being a talent scout?

Very, very similar. I'm joking. Being a talent scout is about products. And I -- talent scouting for product for ideas, for people, events, genres, et cetera, et cetera. And that has left me in extremely good step for what my job is now. Obviously, I'm not anywhere nearly as involved in the product, the sourcing of talent and artists. Although I am involved in closing deals and supporting the various CEOs around the world, certainly in competitive situations. The business is now about new ideas, new markets, different products and how our products fit within other people's products. So in some ways -- 40 years later, in some ways, it's fairly similar.

Right. So maybe we can talk about the growth outlook for investment, I think, for the music industry in general. And first and foremost, streaming. So subscription has been the main driver of growth for the music industry for the past decade. Last year, we crossed the 0.5 billion paid user market in the world already, but there's still only around 11% penetration, if you think about global smart phone population. So curious to hear your thoughts in terms of what's the runway for group here? Where do you think is the subscriber growth opportunity?

Look, I think in 2019, the penetration in subscription was about 1 in 5 in the major markets. It's now -- a couple of years later, at the end of '21, it was down to about 1 in 4. Music in the cloud is completely and totally readily available. So I still see very strong potential for growth. There are various ways in which we can work with the DSPs on all the platforms. That's, obviously, premium subscription. There's ad-funded subscription. The major DSPs that we work with, Apple, Amazon, Spotify, for example, they've all -- they all got different business models, and they've all got different strengths within their own markets and within the regions in which they operate. So I'm confident, I'm bullish about the opportunity. And we must remember that music in the cloud means that music can, in fact, go everywhere. And it's not a transactional model anymore. Transactional model that I was born into. As you release something, you had a hit and then it just disappeared. And now it doesn't disappear, and we're constantly reenergizing, revisiting, remarketing, renarrating so that this -- these strip wires between new release, new hits, new genres have got a constant relationship with the party. So yes, obviously, I'm confident, and I'm bullish.

And obviously, beyond the opportunity in streaming, which, as you say -- as you mentioned, people talk a lot more about these emerging deals, but not necessarily with new platforms. How do you see the opportunity to monetize these emerging platforms, just social media, gaming, connected business? How does the monetization actually differ versus the traditional services? And how do you see your role in terms of driving this growth opportunity for the industry?

Look, we -- I see our role as the market leader as a sort of experimenter in chief. When people came to me 17 or 18 years ago with an all-you-can-eat model, we made a deal with -- I think it was at that time, Nokia, where you could download a device, which had 3,000 songs on. And the finance people who were in the business at the time came to me and said, "Well, why are we getting access to $3,000, $4,000 worth of songs for a small amount." And our ability to monetize our IP in these vast catalogs as well as all the new hits, which is the catalog of tomorrow has really been proved over this period, not only with streaming, but with fitness, with health. Our relationship with Peloton, our relationship with Apple Fitness, it's really quite extraordinary how we've been able to monetize social. There was no social monetization in the industry, and we made our groundbreaking deal with Facebook, Meta now. Who would have thought that we would have made money with this huge amount of IP, with these millions of copyrights from fitness? So we've now got fitness as a category and social in our top 10 categories into the revenue and partners. So I see this applying to, as I keep saying music in the cloud and what the metaverse becomes any application where music can be used, games, et cetera, et cetera. I just see this phenomenal opportunity. And do I see sectors or businesses that didn't exist and names of companies that didn't exist in 2 or 3 years' time, also nudging into the top 10, top 5 categories? Yes, I do, because we've shown it. When I took the company over, whatever it was 11 years or so ago, 95% of our digital business was with one customer. And now it's with a complete plethora of businesses and partners. I'm very bullish on a new category on mind, for example. We've partnered with companies that have got FDA approval to use music to help stroke victims. We partnered -- we're partnering with companies with FDA approval on not just fitness but in terms of anxiety and replacing music with medication for anxiety and pain and stress, and I'm very confident about that.

Right. Could you maybe talk about like how do you see the monetization model evolving from here? I think you mentioned earlier the Meta deal, and I think that included a greater variable component. So where are you in terms of shifting towards like this fixed payment model into more sort of variable form of compensation?

Sorry, I'm not sure I understand the question.

So with these new emerging deals that you mentioned with Meta, so I think that it includes a greater variable component in terms of how you're getting paid. So I'm just wondering how you think about the evolution of the monetization model in general with the [ variable component ]?

Yes. I think broadly to answer that, it's my job, my responsibility to make sure that our contracts, our artists and their IP are fairly compensated. And we've been doing that for decades. And now there's always a balance in terms of trust and verify and making sure that the business is when you're working with a new category to make sure that we're with -- the artists are rewarded appropriately. But we've also got to give those businesses a start as well. We can't strangle them in the early days. So there's absolutely no upside for them. So it's a balance. And we like it when they start and when they grow.

Exactly. I'll be keen to hear your thoughts now on what could derail your sort of strong growth and particularly how the cost of living crisis is affecting music subscription in particular. So obviously, you have witnessed several macroeconomic downturns over the course of your career. So what would give you the confidence based on what you're seeing today that music and music streaming will be resilient in a recession?

When you've been around as long as I have, you've seen so many downturns, both in terms of macroeconomic, but also, obviously, in terms of what we call -- what we refer to as the crisis with piracy and file sharing. I think that as a management team, we've been very adept over this period in terms of managing headwinds. And I think that music is incredibly robust. It was robust in the recessions of '81, in the early '90s. It's always been a relatively low cost, but yet very, very high-quality entertainment category. And once again, I'm confident and I'm bullish that whatever headwinds there are, as a combination, as an amalgamation of shopkeepers, which every decentralized global company is with our structure, our CEOs, managing directors and the various P&Ls, they're responsible for managing and cutting their cost accordingly, overheads, investment, revenue, et cetera, et cetera. But do I think that intrinsically, the ubiquity of music, the ways in which genres are expanding enormously, let's say like the Latin genre? You look at some of the statistics, I think it's 1 in 4, under 18 from the U.S. are Spanish-speaking. Not only did that not exist 20 or 30 years ago, we couldn't supply music from all around the world to that audience. So whatever is thrown at us, we'll cut our cloth accordingly. And we will invest accordingly to hopefully what will continue to be the growth.

I mean it seems like a lot of the indicators show that subscription is still resilient based on what your peers and customers are saying. Are you worried a bit about advertising? Do you think that could potentially be more under pressure in this environment? Are you seeing any signs of weakness yet?

Yes, I worry about everything. I'm paid to worry. And yes, I mean, there could be some headwinds. I don't think we're seeing that much at the moment. We may see a few wobbles. We may see a wobble from one month to another, and then there's a rebound and then we get confused. And -- but I don't see things in terms of month-to-month, I don't see them. I see what the opportunities are, and how we orchestrate all the complexities with everything that we have over a 3-, 4-, 5-year period. So if we have a bad month, a bad quarter, I've been through so much change. But frankly, we just -- we plow through it because we know the quality of what we have.

Right. Speaking about quality, I'd love to talk about what is the lifeblood of your business, what makes you so unique? And obviously, that's your -- obviously, your repertoire. What does it take to become a super star artist today, compared to 10 years ago, for instance? And actually, why do artists still need a label? And why would they come to Universal?

I've heard that question 10,000 times over the decades. Team work. I don't think anyone should miss -- or underestimate the complexity of moving genres as well as geographies into a global market. So now with all the data that we see and that we have, music, IP, content is around micro -- we can see micro markets. We can see 5 years ago, I might have referred to it as hip hop or rap. Now it's probably got about 10 micro markets within it. Trap, Southern, this one, et cetera, et cetera. But the complexity about taking something from a small market and actually spreading it geography by geography as well as genre by genre needs, in my view, hundreds, if not thousands of people that need to team. Anyone can be a label. What is a label? The label is technically a rapper. If I was going to do a new rendition to send to the U.K. of God Save the King, I could record it now, we could ingest it and go up on to Spotify or Apple and all of a sudden, Goldman Sachs is in the record business because it has a label, but it's not a label, is it? So we might get by the time all of us have told our family that we're singing something together, and it's been recorded, maybe there will be 500 people will listen to it. That's not a hit. That's not something that's in a small market that could be crossed over worldwide. So you take an office like Amy Winehouse, I always say to all of our product people everywhere, and she's just one example. Amy Winehouse -- the first person to ever listen to Amy Winehouse would have been someone who was 15 or 16, 17 missing from school that day. And that journey of marketing, how we market, how we use our capital, how we take risk to bring things to the world in different genres in different markets and different regions throughout the world, means that the last person to listen to an Amy Winehouse song, for example, was probably someone who was 80 and who would like Mahalia Jackson or Tony Bennett. That's what a label is about. That's what teams of people are about. That's what focus is and that's how we ride in the complexities. With all the complexities of marketing and focus and sequence and priority, country by country and timing of decisions and a choice of what we do and when we do it, how we do it and the networks that we have and how we persuade people to do things that they might not want to do, that's what a label is.

And I'm just curious like how does the risk versus return profile might have changed compared to 10 years. You mentioned now you're using -- you have access to data, you're using it more and more. So can you maybe talk a little bit about that, like how those investments work in the return profile?

Well, on our capital allocation is what we say -- we're not a financial player. We're not an instrument. We've actually done very, very few deals, but they are what I consider to be the best of the best of the best, where something is defined history or a culture. They've been so far mostly Anglo-speaking. I like watching sport all around the world and listening to Sweet Caroline by Neil Diamond, as every single team in every sport comes out through the tunnel. We're monetizing that day in, day out. We leave income streams, royalty streams to other, no sweat. Control is critical, and we control it. Can we really exploit it the way that we want to? I'm -- we've been doing this for years. As a company, we bought Decca. We bought Motown. I made the deal to buy EMI 10 years ago from what was effectively bankruptcy. In '86, we made the deal to buy Dick James music, everybody thought we were nuts. We bought a deal to buy euphony, funny, odd European pop band in 1988 publishing and record called ABBA. No one has -- no one even remembers what the prices of what they were when we made these deals. I do because I always remember. But in terms of the value, in terms of the growth of the market, how we've used them to drive the market, the best of the best and we leave, what I call, stuff to others.

You speak about control. What does control give you?

No approvals, okay? When you look -- when we bought the Bob Dylan catalog, he managed his business in the United States. And I think he had 4, 5 administrators and the answer was normally no. So we built into our view and our -- with our networks and our people that we could do things with the Bob Dylan catalog where we didn't have to ask anybody other than ourselves is, was it appropriate and was it profitable. He gave us that right to do that. So that's not just about the check, it's actually about trust. Trusting the right people. People who it's assumed that will own these assets as long as the company exists not something to be bought and sold, et cetera.

And what are the trends you're seeing actually today in the catalog market? Obviously, in the last few years, we've seen a big step up after COVID, obviously, environment of low interest rates. But given what's happening in the public market, rates rising, have you seen major change in terms of the supply and demand in the capital...

Really, I think so many deals have been done in the last few last 12 or 18 months, and there's always a delay or a lag. I suspect there's a lot of undeployed capital. And I think that -- will the analysis on the economics change for those people who don't have the data, who are outside of the networks that don't have control and don't sit at a big table when negotiating digital deals or all deals and know what the future can look like. I think that we have a different vantage point. But do I think that the deals will continue to be made? Yes, yes, sure. I do. And we look at most things.

So why would you think, putting emphasis on this, why do you think it's a good use of your capital today compared to other options?

Because there's growth in the market. Every time I've ever bought anything, it looks like why are we doing this and when we made the EMI ideal, the market was pretty much at the bottom. But when historic assets become available and you think you can control them and you think you need to remove costs and exploit them and grow them because you sit at the epicenter of what the marketplace, and we're market makers as a company. Always been involved in making the market every single digital deal, have we moved the company from physical and from what was 95% with the download store, you look at how we've pushed everything into the cloud and even just down to, as I said, fitness, mind, these things were completely unimaginable, and we still see that for the future.

Right. And how do you...

But I'm not interested in small stuff. And we understand the geographies. The marketplace can look at something which is incredibly famous, a household name, but the entire market may be aging out. It may not -- it may be music but in our view and our data not played at weddings, funerals, vomitories, et cetera, et cetera. That's what I'm interested in.

Great. And what's pulling up on this again, like what's the right balance you think of investments between front line and capital? Like how you'd balance the two? What do you think is the...

I think they're 2 sides of the same coin. I think that the vast amount of our IP is owned in perpetuity, as I've said many times. But new investments in new artists is the catalog of the future, and we have to keep current, and we have to keep sitting at the big table, right? It's our penetration on new music, on hit, genres, both in terms of -- as I keep saying, in terms of geographies, whether or not it's hip hop or Latin or K-pop, we need that in order to fit and actually make sure that we can protect the value of our assets and the value of our company by eating out and squeezing the most value. And I talked about ABBA earlier, we did that deal in 1988. If you'd have told me that we would have got an album from ABBA 40 years later, and the album would have sold 3 million pieces of CD and vinyl and that it would have acted as a complete trip wire for the previous 45 years' worth of IPM work. So we have an ABBAtar show in London that will come to America. There's, obviously, the musical which were one of the early -- the earlier stage investor. We've done two sound tracks to MAMMA MIA! movies. This is just the key -- the gift that keeps on giving. And that's the relationship between new and catalog. With ABBA, I've been trying to get them to write songs for other artists for 15, 20 years. And I know for well that they had a couple of songs, but they didn't complete on albums 20 -- 30, 40 years ago, didn't want to do it at the time. So then they came up with, I think it was -- whatever it was the Anniversary of the Eurovision Song Contest and they miraculously found a song. So I'll spend 2 years saying, right, you've done one, do three. Then it was three, then it was five. Then it was eight. So I said I don't need eight, you can do 8, do 10, do 12, it's an album. And that took the process. So there are two sides of the same coin. They drive each other. We've got a global organization where the trip wires between new and old are everywhere. And in terms of our digital marketing, in terms of social, how we can see that the marketplace and consumers want to hear and need here from audience. It doesn't need to be an actress in the early '70s, it can be Trippie Redd. It can be an actress 17, 18, 19 that's putting out 100 songs every year. Future is the future capital. Everything -- all means that we all love and we all talk about. We're new once.

That's right. Obviously, the resurgence of the music industry led by trading wouldn't have been possible without you all this without the DSPs. And a recurring theme, I think what we've been hearing is where the balance of power is shifting between the labels and DSPs. So how would you describe your relationship with the DSPs today? And obviously, conscious there with negotiations going on every 2 to 3 years. So what are the puts and takes in this...

I wish it was that infrequent. The relationship with DSPs is inevitably very constructive.

Has that always been the case though?

Yes, of course. We encourage -- we brought Spotify to a global market. It was an idea that was working in Sweden. And it was -- at the time, it was an anti-file sharing, antipiracy advertising rapper and here we are, what have they got 185 million premium subscribers. So all of the DSPs are entirely different. Spotify's, obviously, a pure play. Apple has a completely different relationship with our music and our content with fitness, with speakers, with headphones, et cetera, et cetera. And yes, they're still different to, obviously, YouTube Music or to obviously, Amazon, which is around the speaker and voice activated and therefore, has different genres within itself. So I don't see this as a thing of a zero-sum game or balance of power. We're in business with each other. We're critically important to each other. We know that we are at least 80% to 85% of the acquisition tools of all the DSPs. We're 80% to 85% of their retention. Consumers, me, you, us, don't want subscription, which gives you either white noise or is something to go to sleep to or an act that you've never heard of, which is why we're seeing the impact and the importance of catalog and how it sits alongside new music and new relief, so critical to them. So I enjoy working with them. There's always skirmishes. We have skirmishes with everyone, part of life.

Right. So coming back to Aura Noir. I mean you spoke a bit about repertoire. Like what part of the world should we see greatest opportunity for music? Like where is Universal focusing on the moment?

The top 10 markets, U.S., Japan, France, Germany, U.K., et cetera. China has now come into that. But do I see -- are we opening labels? Are we exporting and structuring so that what assets and IP we do have in? I don't -- I can't call India, China and Africa an emerging market anymore, it may have been 10 years ago. But there's genres. Do I think that the African music -- this is my old talent scout in me, beat rhythms. So I think that they are important for the future. Do I think that they will have -- they will be part of music style over this next period? Yes, I do. And then you just look at the data, you look at the demographics, 300 million middle class in Africa by 2000 -- et cetera, et cetera. So we're opening labels. We're backing people. We're market makers instinctively and intuitively, that's in our heart. So India has moved away substantially from what we think -- the pandemic probably accelerated that as well. We signed the biggest rapper or effectively the Drake of India, Badshah a year or so ago. He's -- we've done features with him. He's now on artist with us where he features duetting in the old fashion sense with Latin artists. And we're bringing his music to the rest of the world. Do you look at the Indian diaspora around the world in terms of -- I just think that there's a tremendous opportunity to make the market as well as to react to it and be at the epicenter of how it grows. So China, obviously, we've got a very strong committed shareholder with Tencent with regard to China. So we're excited about that.

How has that benefited your relationship with Tencent?

They give us -- they are very, very good -- very big brands. And we were able to stress test with them, and they've also, obviously, got insights, not only into China, but all the other investments that they have in games in India and so on and so on.

Great. I'd love to get your thoughts on the Web3. Obviously, some people view as a threat as all this can go direct to the fans or that's [indiscernible] (00:30:48) where do you stand here on Web3? Would you think it's a firsthand opportunity?

I think everything is an opportunity. I've been around too long to have driven through all the threats and turns in to our advantage. I think that the ubiquitous nature of music is something which is -- this is completely unique -- music has been around for 1,000 years. And it will be around for another 1,000 years. And once again, genres as well as demographics because it's in the cloud, and we sit at the epicenter of all this deal making where there's an opportunity and where there's something which is sustainable, is something where we think that the value for our work and our artists' work is fair. And we push, push, push. So can I tell you what it's going to look like in 2 or 3 years? I've got -- I could kind of come up with a few theories. I just know that we'll be there and as we go along the journey, we'll be there modifying it and building it.

Great. So we talked about streaming, about emerging platforms, what's real, but it seems like what has been a solid performer has actually been your physical sales. So which obviously seems to be counterintuitive. Do you think that's still a future for CD sales?

I think physical sales serve the superfan. And if you want to take up ARPU and if you want -- from a platform point of view, it's one of the reasons why we're so committed to e-commerce. I mean, we have the world's largest music merchandise business. I see that sits alongside the superfan and bringing physical products and design into what the offer is. You've got to remember, you look at some of the vinyl sales, and they're in multicolored. So fans. I said many, many years ago, the CD, vinyl would probably be out survivors something physical. So I do see that -- I do see a -- I'm not saying we're going to have the same growth that we've had because it's about specific moments and events. If you have Elton John movie, if you have a Queen movie. If you have -- I mentioned ABBA. If you have a marketing event, then you can't just look at that as -- you look at the spike doesn't mean to say it's constant, but we try and make it constant.

And speaking about basically the position of superfans, like how important is merchandising to UMG? And can you also talk about the opportunities you see in for instance, seeing film, TV. I think you have a number of like successful documentary. What are the multiple ways now to monetize sort of catalog beyond obviously the...

Well, with film and TV, and it's the first foray we went into, so we made the Amy Winehouse movie, which got the Oscar. And we've made many, many dozens of documentaries whether or not it's Pavarotti or whether or not it's a Shania Twain one, Billie Eilish, Olivia Rodrigo, Elton John one being right now, The Beatles. We've been involved with all of those. They are moneymakers. With shopkeeping in our DNA, don't like to do things that don't make a profit. And all the evidence that we have is that they drive views and subscription and streams on every time we've ever put anything out. So we're very, very positive about it. It may appear later in the P&L as a lot of things do when you're developing. You look at the Shania Twain, is there this huge uptick? No, it's not like having a new hit from a new app. But what it does do is it increases, we believe, streams probably by 90% to 100%, slowly, generally across the world over an 18- to 24-month period.

Great. We have a couple of minutes. Maybe to conclude, I mean we talked about your capital allocation, focus on capital investments, also keep investing inorganically in frontline, where does like buyback fit into the equation, share buyback?

I have to discuss that with the Board.

When is the next Board meeting? Great. Fantastic. Thank you very much, Lucian, for being with us today. Thank you very much for listening.

Thank you. Thank you.