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

Okay. Welcome to the Pershing Square Holdings annual event. We're going to have a little different run of show today. We wanted to be very respectful of Sir Lucian's time. So we're going to start with a Q&A or a fireside chat pollution, then our chair is going to speak. And then when she thinks it's appropriate, she'll let me talk. Then you'll hear from Ryan Israel, from Manning, another member of the investment team then will open Q&A, which for me, the most fun part, other than the opportunity to interview Lucian. So i am not going to waste time with the introduction evolution other than say one thing. There are very few executives that take on the status of what I would call an icon of an industry. You think of people like Walt Disney or Steve Jobs at Apple. And really, Lucian is maybe one of only 2 icons I've had the opportunity to work with as an investor in the company. And what I mean by that is he's not only built an amazing business and taking a lot of profits for the owners of the company over the last 30-odd years, but he's really led a transformation buisness industry that's gone through a lot of volatility, cyclicality, technological change, and managed to always stay on top and actually keep the [indiscernible] as dominant company as Universal, the success of the industry is highly correlated with your success, and he's done a really amazing job for the music industry for artists a business that was sort of written off is dying as recently is a little more than a decade ago. So with that, I invite sir Lucian to the stage. We're going to have a free wheeling discussion. And I'll say, we're not going to talk about Wall Street stuff. We're not going to talk about next quarter, et cetera. Of course, we're in the quiet period. We needed a special exemption to have this conversation, but we're going to live stream this in the spirit of transparency. But we're going to stick to really about the music business and the history and Lucian. So please come up. So let's start shortly after birth. And it wasn't that much after birth that you got interested in music. So how did that start?

My father had owned a record store and -- sorry, that's my americanism, a record shop, as I'm in England now. And he used to bring home -- for my older brother, He bring home 78, but for me, it was out singles basically. And he had an incredibly always educated and bought up with an incredibly diverse sense of music, melody, and we would play -- he would play me everything from Ray Charles and Count Basie to Mozart to Neil Diamond, he blast these Wake Us All Up, lasting us with Neil Diamond. And I remember I had my tonsils out when I was 5, he bought me Beatles record. He bought me a Paul McCartney nylon-string plastic guitar. I think we all know all of us who've got relatives or children when they -- when you see -- as an adult now, when you see family members and children who are fascinated in something, whatever it is, taxidermy, motorcars, aviation, coding. My parents encouraged it. And I suppose the most -- the biggest moment that I remember was they bought me a Bose record player, which I just put the speakers on the floor. And this is for us both. I think i was about 12. So now I have my own record player and my older brother, for that birth, he bought me -- maybe I was 13, he bought me, Don't Shoot Me. I'm on the piano player, the Elton John album. And I just remember sitting across logging on my floor obsessed with it playing. I studied everything from the music publisher through the musicians, the cutting engineer and I was obsessed and that album, that music, Daniel rocked -- crocodile rocks on that album. I just changed my life. And then I was in a from around 13 to 16 completely just in obsessed with music and genres and styles and completely open, and I go from -- I love Marches the Radetzky March to Elvis. And I suppose, looking back on it, 3 years later, the punk scene arrive. So I've gone from 14 to 16, and we lived in Central London. We lived in Swiss cottage. And I was 2 bus stops, 10p whatever it was, right away from Oxford Street and the Marquee and the 100 Club, and I fell into it, and I was obsessed with it. I saw all of the famous bands of that era. And where I was geographically, demographically, it all -- I was looking back on it, it all conspired to actually work for me. So I'm now 16, 17 completely engrossed in the scene. I started to meet musicians. I started to help them load their gear into the transit bands. I knew how to tune a guitar. And I was amongst -- that part of my life and my development, I was amongst my people. I could always connect with inventors and creative people, and I loved ideas, and I love listening to them. And I've always been conscious of the significance of scenes and genres. And looking back on my career, it's how they've merged and morphed into technology. So my first main proper job, I was as a talent scout on sort of -- in fact, my first job, I used to go and get the assistance the sandwiches, which I hated so much. I realized if I screwed up the order, then they wouldn't ask me again. So I used to stand in line and put a peanut butter when they want to be on or whatever. And I'm still a talent scout now fundamentally looking for ideas, looking for people, looking for sounds, looking for technologies and that you have to -- as a talent scout, you have to be incredibly open-minded because it's about -- whenever there's been any disruption in music or sound or even technology, somewhere or something in the incumbency is petrified about it. And I've never been scared of changed. Long simple question, long answer.

Sure. So I think in every career, there's sort of a few key moments. What was your first, if you will, break where you saw actually you can make a living in the business?

Well, another bit of bad luck, which we turned into good luck, I did. I was knocked over on my bicycle when I was 13. And the guy who is in the truck ran off, so it was hit and run. And my father tracked him down hired a lawyer and basically, I got GBP 4,000 compensation, which in those days, it was yes. And moving forward to when I was around 18, I used that money -- in fact, half of it I gave to my father to buy a car, and the rest of it, I used to fund sort of fund -- I bought a tiny of little Mini just to run around in so I can go and see more bands. And I fell into a studio scene with recording engineers. Well, they weren't really recording engineers. They were the guys that used to put the 2-inch tape on the multitracks. And really, they were the guys that -- the rest of the musicians would order the pizza with. Really, they were the pizza boys. But they had the keys to the studios. In those days, there are no digital cameras and so on and so on. So it was a sort of a burgler alarm and a big monkey lock. So I got into a scene with these guys, these -- the very, very junior guys, tape operators. And this is -- we source bands, look at fine bands, connections, networks, relationships and they would go into the studios that have the keys. We'd lift the gear into the studio with up this band that we wanted to demo and to record and we were sort of big players now because we had access to studio time. And in those days, if you have access to studio time, you were GOD. Look at where the technology is now 40, 40, 45 years later, it's incomparable. So no one could record, then that was one of the higher barriers to entry that existed. So we used to -- on a recording this, there's -- there's dozens, hundreds of settings and EQ and fades and so on and so on. So we just we tape in crayons, mark where the session had been the night before, and we'd record and get out by 5 in the morning before the cleaners came, and no one knew. So one of the bands got some interest from Ireland records, which is obviously now [indiscernible] group. And I went down and now I was punk bands -- everybody was signing punk, it was like HipHop to a certain extent, 20, 30 years ago. So I was now a manager of a recording producer. I haven't got a clue. So I went -- I was on 10% of nothing. And I went down and initiated the production deal for this guy. I asked for GBP 4,000, and they gave it to me. So now I have GBP 400, and sell into more studios, more people. And I don't know if any of you remember there was a song by Johnny Mathis called Never Too Late. And the 2 guys that wrote that were Australian, and that was #1 in 1978. So I started managing them, and they wanted to be -- they wanted to progress from being songwriters, come to London and be recording artists , inner stars. So we did more demos. And then I use the money, this is the time with the bicycle accident. I use the money to fund myself as their manager, producer, whatever you call it. And I took myself around Europe, and I've made licensing deals for those tracks with individual companies. And it was #1 in Monte Carlo on Polydor Records, which, of course i am in it . 20-year later ended up running whatever. So I would the next phase is there's an industry organization. I don't think it exists anymore. It's called MEDEM, and it's the equivalent of MEDEM or Cannes Film Festival. And I went down, I flew down there, and I slept on someone's floor. And I don't know if you've ever been 18 and been down at a conference like that, the drinks are incredibly expensive, and I don't drink alcohol anyway. So I would -- you'd have to get to the bar early because by midnight, there'd be literally 800 people in the Martinez down on the --in Can. And I would by myself, I think it was CHF 7, a squeeze lemon juice and I'd use tap water from an old Pernod bottle that they had on the bar. Just to make myself look like I permanently had something to drink. I wouldn't move from the bar. And there's dozens and dozens and dozens of people over, let's say, from 6:00 p.m. to midnight coming in. And, "hi, what do you do? What have you got? You got in for sale? Have they got anything to buy?" And I built up a tiny, tiny miniature network. I flogged a couple of these tracks. I was in Italy, in Holland, in France, as I said. And then so now I was in the record business, now is in the music business. I was a big player. But I was also working in my father shop at the weekend. And he had -- which I didn't like really. He had a payphone downstairs. You used to put 2p in it, and will click, click, click, click. And I'd gotten hold of a directory -- and I used to go down during my lunch break or whenever there was no one in the shop just sort of constantly call people trying to find a job. And if any of you or any of your relatives or any in a similar situation, I got very lucky because probably the most stupid person in the world because what you shouldn't be doing on a Friday afternoon at 1:15 is ring the Chairman of CBS because he's not going to be here, he's going to be at lunch. And I was lucky, I got the only Chairman of this record company that was sitting there answering his own phone. He was sitting apparently having a sandwich. I gave him my story. What I've done, the acts I've seen, and that's what I said. And this is all from a pay phone and the money would run up, so I think to put another 10p, and it click, click, click. I felt like such an idiot. And there was something in here in me and his ability, he said ,come basically "come in and see me, kid." So I went in to see him and I assume that this would be -- that was him. That was sorted. So I went in, I talked to him. We talked a lot about Pedigree and instincts and Hunt and so on, and I was still living with my parents then. And I got -- I went home in this Rica car that I bought from the bicycle accident money. And at the end of the meeting, I said to him, "well, where do I -- what do I do? Where do I start? What do you want me to do?" And this was the Chairman of CBS Record, I mean he was like, God. And this is just, obviously, in London. And he said, "Well, I think you're good. I think you're talented." All the good people end up at CBS. I don't really care whether or not you're hearing, I think you said 6 days, 6 months or 6 years, and my heart sank. Went home when there was a note on fridge when I got home, probably 45 minutes later saying, could you call remember the woman's name Phillis Morgan. Could I call her. She was from the HR it was called personnel in those days, the personnel department of CBS Record. And that was the beginning of I joined CBS, and I was a talent scout in the Music Publishing division. I spent the first 7 or 8 years of my career in music publishing.

So music publishing, when did you start focusing your energies on the recorded music business? Was that a CBS or was that?

No. I've been offered a job in the A&R department of CBS. And the same guy who introduced me into the -- or found through in the phone books. He wouldn't let me move to the A&R department of CBS because you said you just -- he said that you can't just pillage from department to department. And I was very, very upset by that because in those days, and the cutting edge of the industry was on the recording side. They're 2 very, very separate, incredibly imaginative and creative businesses. But then it was -- so I decided I had to move basically, so I was at CBS for 3 or 4 years. And then I got a bigger, better job elsewhere. And then I was given the opportunity to go into a record company as the Director of A&R, which was sort of the holy grail of creativity that agent I was I think I was the youngest Director of A&R, and probably in the industry I was about 25 by then. Quite old.

So explain the A&R business, circa age 25. Elton John would come in, he'll play a song on the piano?

Yes. When I was -- the first band that I signed when I was at CBS music publishing was the Psychedelic Furs. And then I graduated, and I made deals for -- when I was RCA, I signed the Eurythmics . We made -- I've made a deal for the Pet Shop Boys. They come in. Chris Lowe come and played me West End Girls effectively a demo of West End Girls. I was hit in the tyres by it. I remember driving around -- I think it was less to square in my car, just playing it on repeat. In those days, the cassette would come out and then you press a button and put it back in. Just I was obsessed with this song. And whilst I was actually there, it wasn't a hit, they put it out and it didn't work and the version that you probably all know came out, I think, in 85-ish was a rerecord and then that went on to be #1 worldwide. I mean, there's so many artists I've signed over the years.

It was just your ear. Was it -- was there any data or you would?

No, that wasn't really data then. I remember calling one of it many years later.

Okay. So let's accelerate a bit. Later then was what sneakers you wore.

I mean, it was rudimentary.

So you rose ranks pretty quickly once you, I guess, Polydor and then take us fairly quickly to rising to the top of Universal?

All right. So I set up Polygram Music in the crisis of piracy and the economic crisis of the '80s. Polygram as was in their wisdom, decided to sell Chapel Music, which was the world's largest music publishing company for about GBP 80 million, it's worth several billion now, if not many billion. And they had a hold back where they couldn't rebuild a music publishing business for 12 months after the sale. During that 12 months, the CD really started to take off. And there was a lot of light at the end of the tunnel, bearing in mind that Polygram was owned by Philips. So Philips, it's where, again, I understood the relationship between hardware, the new technology and software So we..

[indiscernible] my first investor ever. He's sitting on a table. You can sit on Sir Lucian's chair. There you go.

So I was -- now I say that polygram music. I thought that was in '86, and I stayed doing that, and I was asked to go in and be the Head of ANR of Polydor in '92 or '93. So I made that jump we're supposed to be doing that for about 9 months or so. And I was supposed to then move up to become Managing Director of Polydor. Unfortunately I had a family tragedy and I delayed that. So then I became Polydor Managing Director about 3 years later, that '96. And then if you really want me to speed it up, I can do -- I went from Polydor MD. Polydor was on its knees when I joined. It was -- it had 2 or 3 brands products. It was Lloyd Webber, who was brilliant and he is brilliant and Van Morrison. And it had no culture, had no scenes, no categories, nothing. So we I put an entirely new team in there. We turned Polydor around. It ended up being the #1 label in the U.K., probably about 4 years later. And then I always asked -- I mean there's lots of nuances in some of these moves, but I was asked to be Deputy Chairman of -- we've now become Universal post Polygram Universal merger. And I was asked to become Deputy Chairman of Universal. So I did that. I had all the record companies, classics and jazz or the completions, all of that reporting to me. And then I can't remember how much longer -- not that much longer after about a year or 18 months, I then became sole Chairman of Universal U.K. and I did that for 4, 5 years, and then I was asked to be Chairman, and this is in around 2004, 2005, of Universal Music Group International, which is running all of the international global operations with the exception of the United States.

So let's jump to 2011. Music industry is in decline, fairly rapid decline from 2000.

Yes, that's right. .

So two Significant events happen. One, you acquired EMI; and two, Spotify is just beginning to seek to launch in the U.S., I think, or it's really early stages for Spotify. Take us there, and then we're going to jump to the present. The obvious question is what gave you the confidence to make the largest acquisition sort of music history at a time.

Why was I [indiscernible] beacuse I always believed, I know what music is. I know what it does. I know the significance in people's lives. The music has been around 1,000 years, and it will be around for as long as the planet exists and in whatever planet does exist. It's one of the reasons I'm so confident about the business, the company, how we monetize funnels, how we monetize all new technology that comes along, scenes that come along, the relationship between geographics regions, different consumers, different audiences, different styles, taste, speeds, et cetera, et cetera. That's what I learned in that 5- or 6-year period and I ran with the global company. To your point, the marketplace was certainly in decline. And I remember, I think it was EMI and Warners. They've closed down a lot of operations, and I think they did a JV because there was nothing there. But I -- we have the scale and I knew that continuing to invest in those local markets, local culture, local language was important even if we weren't making that much money as long as it wasn't loss-making because we were at the beginning of a telco world. And monotones were at the beginning. And I just felt confident that we could afford to do it and that we should do it and that it would. As the market turned and as consumers were able to listen to music in new ways, but we would be, frankly, ahead of the game because we were still on the ground with people with creative executives and infrastructure. We did a deal, it's probably around -- I can't remember 2005, 2006 with Nokia, and they had a product called Comes with Music. And we've seen from around sort of 2001 with iTunes in the iPod, we've been disruptive enough with file-sharing and piracy. Look piracy is terrible. And we had no way of monetizing anything -- any of the hardware, and this comes back again to my experience where I've seen the relationship between technology and hardware as well as the scenes and the movements. So we made this deal with Nokia, which was at the time, I think the #1 telco in the world, and we went to Holland. And we had a we had a piece of the hardware. So we had a fixed price of the hardware, the phone that's slid like that. And the pioneering thing that there was with this product was that we had a piece of the hardware, but the bargain, so to speak, between us is that we would let them have to their consumer up to 3,000 songs load on this one. So it was a phone for the first time it could store music unencumbered. But there was no iTunes there was no way of -- it was an all that you could eat. It was the first all that you could eat subscription model. And I remember bringing it to at the time, my bosses in the U.S., and I had all the finance people and the bean counters falling all over it and saying, well, what if it sells x number of phones and those people...

Are buying records.

Well, we -- CD was on what we now know was a terminal decline then. But we had about 90%, 95% of our digital business in those days at that time on the download store, which is obviously what -- when the iPod started, it didn't all -- I don't think it did that well. And it was a download store. I remember Being in Paris in for the trade show there every year. And I went over on the train to see him I had lunch with him, and he showed me the download store. We're upstairs in his little room. It's like a scene from Peter Sellers movies, it's this tiny, tiny, lift going up to his room and he's shown me on his laptop.

Steve Jobs?

Yes. And it was a halleluiah moment because it was frictionless. And what we learned from Nokia is that it wasn't frictionless, it was awful because you had to log on to a website and then you had to like basically some kind of code. And if all of us remember the early days of the Internet, where travel agencies would say they were an Internet company, and you send would effectively an e-mail through and there'd be 4 people on the phone trying to book your flight. This was what that product was. It was so clunky. But it was the beginning of the real relationship between the hardware and then all-that-you-can-eat model of a different kind of pricing mechanism where we had to accept, we have to disrupt ourselves, and I have to bring the company with us as well as the industry, frankly. But it didn't matter if one person did -- was able to download 3,000 songs on a phone. It wasn't actually $3,000 worth of revenue because the sum was $0.99 in those days are there, the early green shoots of what we now know is streaming, subscription, the access model, et cetera, et cetera. So to bring it back to Spotify, as we know, Daniel counted it in Sweden. Comes to me, we were being obliterated by file sharing. I've spent my time in meetings at the time with Gordon Brown, Peter Mandelson, Angela Merkel when she was just appointed in Germany, pleading our case we had bad law and the BCMA that wasn't protecting us in terms of usage, safe harbor, et cetera, et cetera. So again, the light bulb went off for me with Spotify because at best, he could gain traction into a funnel in a subscription model because when we started, there was no subscribers. But what I liked about it is it was ad-funded and it was virus-free, legitimate genuine licenses in terms of protecting our copyright and our IP. And at worst, it was going to be anti-file sharing. And we had a completely other game going on in terms of with lot of work with governments to make sure that with what was PirateBay, another European company, ironically, I'm not allowed to talk about this. I just realized . Oh God. But we'll tell it in the past if it's all right. We ended up the illegal file-sharing sites with illegal were all being monetized by the major credit cards, so we did an enormous campaign to work with the credit card companies so that they would stop monetizing so you could charge your illegal files onto a Visa or Mastercard. So it's all part of this sort of journey to...

To the present.