On… the fragile energy stability between Spotify and Common Music Group (and why UMG would possibly find yourself turning the screw on Spotify’s free tier).

“Common Music gross sales beat expectations in second quarter.”

That was the (completely correct) headline from Reuters minutes after Common Music Group confirmed its Q2 2024 outcomes on July 24.

A couple of moments later, Sir Lucian Grainge trumpeted the identical theme in his opening tackle of UMG’s earnings name.

“[This was] our seventh consecutive quarter of double-digit enhance in adjusted EBITDA,” famous Grainge, confirming that UMG’s revenues had been up ~11% YoY within the quarter, with EBITDA up ~10% YoY.

He added: “Our skill to ship sustainable development like this quarter after quarter is a product of how we’ve designed UMG.”

Then the storm started.

As MBW coated final month, one stat specifically inside UMG’s Q2 outcomes — regardless of these document total revenues — despatched funding analysts into meltdown: UMG’s subscription streaming revenues within the quarter had been up 6.9% YoY (at fixed forex).

Respectable development, however not first rate sufficient development for a few of UMG’s monetary observers, who had been searching for a quantity nearer to an 11.0% YoY rise.

A flurry of analyst downgrades (Guggenheim, Citi, Barclays, Wells Fargo) adopted, as did a surprising ‘correction’ to UMG’s share value, which stays round 25% decrease than it did Q2 pre-earnings.

Reuters even up to date its headline: Common Music Group shares drop 30% as streaming development disappoints.

The most important puzzle-point for Common Music Group analysts?

Whereas UMG’s subscription streaming revenues grew by 6.9% YoY in Q2 2024, Spotify‘s equal subscription revenues grew by 21% YoY (sure, that’s 3 times seven p.c) in the identical quarter.

So does this inform us, as some on Wall Avenue have postulated, that Common Music Group is instantly a extra weak guess for shareholders?

Does Spotify’s comparatively speedy subscription income development in Q2 counsel that Daniel Ek‘s inexperienced machine is the true king of the music enterprise?

Or, in reality, is UMG’s Q2 streaming letdown a mere momentary disappointment in a world gilded with future potentialities – the place solely round 10% of international web customers are at the moment paying for a music streaming subscription?

Maybe, moderately than obsessing over one quarter’s efficiency, UMG’s public shareholders ought to stay as calm and long-sighted as Vivendi, the persevering with 10% proprietor of UMG’s fairness.

Reacting to UMG’s subscription development deceleration on Vivendi’s personal Q2 earnings name (July 25), Vivendi CEO, Arnaud de Puyfontaine, remarked: “We’re absolutely aligned with Lucian Grainge’s imaginative and prescient for [UMG’s] vital development prospects for the medium and long run.”

That’s medium and long-term. Not lose-our-marbles–because-of-one-stodgy-quarter.

With all of this in thoughts, MBW has been trying intently at Spotify and UMG’s Q2 outcomes, and their intertwined monetary relationship extra usually.

We’ve unearthed the next three observations…

1) Spotify contributes round a 3rd of UMG’s streaming revenues – a quantity that now seems to be rising

Spotify’s 21% YoY development in Q2 Premium revenues implies it’s gaining international market share management as a paid-for platform.

Common’s EVP/CFO, Boyd Muir, and its EVP/Chief Digital Officer, Michael Nash, steered as a lot on Common’s Q2 earnings name.

Each execs celebrated Spotify and YouTube Music for his or her subscriber development within the three months to finish of June, however Muir warned that “different giant [streaming] companions have seen a slowdown in new subscriber additions”.

Right here’s you, Apple and Amazon Music.

If this development — Spotify surging ahead as its rivals stall — continues, it is going to inevitably enhance Spotify’s share of UMG’s revenues. However the place does that stand already?

The everyday stat introduced up at this level is that Spotify attracts round a 3rd of all international streaming subscribers.

In accordance with Goldman Sachs‘ newest Music In The Air report, Spotify’s share of world paid subscription customers was 35.4% on the shut of 2023; in response to Midia, Spotify had a 31.7% market share of subscribers in Q3 that yr.

These stats don’t inform us, nevertheless, what Spotify’s market share of world subscription revenues is perhaps.

Additionally they don’t inform us, most pointedly for this text, what proportion of UMG’s streaming revenues Spotify contributes to the music firm.

That, too, in response to MBW’s calculations, is round one-third. Right here’s why:

• In accordance with UMG’s annual report for 2023 (as combed by MBW again in April), Spotify was chargeable for 19% of UMG’s complete revenues in 2023. (That’s complete revenues overlaying UMG’s recorded music, publishing, and different earnings streams.). That 19% would have subsequently meant that Spotify paid UMG round USD $2.28 billion final yr (vs. UMG’s USD $12.0 billion in complete 2023 revenues);
• In 2023, UMG’s recorded music division generated EUR €5.70 billion ($6.17bn) from streaming revenues (throughout ad-funded and subscription). UMG doesn’t explicitly escape what its music publishing operation earns from streaming, however this is coated below ‘Digital Income’ within the publishing division’s monetary numbers. (‘Digital Income’ encompasses all revenues UMPG generates from digital platforms, which, for apparent causes, is principally streaming.) UMG’s publishing division earned €1.128 billion (USD $1.22bn) from ‘Digital Income’ in 2023;

Conclusion: In FY 2023, UMG generated roughly USD $7.39 billion ($6.17bn + $1.22bn) from streaming throughout recorded music and publishing. Spotify contributed USD $2.28 billion of this determine… implying SPOT provided round 31% of Common’s (wholesale) streaming revenues within the yr.

If we then suggest {that a} third of UMG’s ‘Digital Revenues’ in publishing is perhaps non-streaming earnings, this might push Spotify’s share of UMG’s complete streaming revenues as much as 33%.

2) Europe remains to be driving a shocking quantity of Spotify’s development. Might UMG reply by shopping for one thing within the EU?

The disparity between SPOT and UMG’s subscriber development in Q2 (+21.0% YoY vs. +6.9% YoY) led some analysts to counsel that Spotify might have seen an acceleration in elements of the world the place UMG’s recorded music market share dominance isn’t what it’s in North America (i.e. so-called ’rising markets’) – thus lowering UMG’s market share on the platform.

This concept was shortly quashed on UMG’s Q2 earnings name by Boyd Muir, who said that Common had not misplaced any vital international market share on Spotify within the interval.

“[UMG’s] Spotify development charges are constant or broadly in line with what Spotify reported,” clarified Muir.

Nonetheless, it’s fascinating to see precisely the place Spotify has been rising in current months. Not least as a result of the reply flies within the face of the maxim that every one the subscriber development within the enterprise lately is to be present in ’rising markets’.

Every quarter, Spotify gives its traders with a territorial breakdown of its international subscribers – confirming which proportion of its complete subs reside in every of North America, Europe (together with the UK), Latin America, and the Relaxation Of The World.

Utilizing that information, which is approximate and rounded to the closest proportion level, MBW has created the next tables.

These are knowledgeable estimates of the place Spotify has accelerated its paid subscriber base around the globe over two time durations: (a) The 12 months to the top of June 2024; and (b) The six months to finish of June 2024 (i.e. the primary six months of this calendar yr).

As you’ll be able to see, Latin America and Europe (together with the UK) had been the star performers within the 12 months to finish of June 2024 (+7.9 million and +7.7 million internet subscribers, respectively), leaving of their wake each ‘Relaxation Of The World’ (+5.6m) and, the runt of the litter, North America (+4.8m).

Nonetheless, within the first six months of 2024, it was a unique story. The 2 most supposedly ‘mature’ streaming markets right here — Europe and North America — led the pack, up 3.8 million and 2.7 million, respectively.

In different phrases, Spotify gained 10 million internet subscribers within the first six months of 2024. Almost two-thirds of these new subscribers had been situated in Europe or North America.

And that’s regardless of Spotify elevating its costs for the second time in a yr in territories such because the UK in April.

With Spotify contributing an growing quantity of UMG’s personal international revenues (see earlier level above), it is smart that UMG would possibly now reply accordingly – executing small shifts in its enterprise mannequin to higher make the most of Spotify’s rising international market place.

UMG’s figures for 2023, some 51.1% of the agency’s recorded music revenues had been derived in North America, a continuation of Common’s enormous development on the earth’s largest market over the previous decade-plus.

In the case of Europe, nevertheless, a unique story has performed out: as UMG has elevated gross sales extra shortly elsewhere – most notably in North America and Latin America – Europe (together with the UK) as a proportion of Common’s revenues has steadily shrunk.

But with Europe now proving itself because the standout territory when it comes to subscriber development for Spotify in 2024 – and Spotify, in flip, showing to extend its market share of the international subscription streaming market in Q2 – would possibly Common now look to speed up its personal enterprise within the EU?

Like all main music corporations, UMG’s efficiency in Europe has been notably disrupted lately by the ‘glocalization’ development.

Music followers in particular person EU international locations are more and more streaming native artists, typically in native languages.

This has diluted the main music corporations’ skill to dominate streaming charts throughout Europe, whereas feeding the market share development of independently distributed artists by way of platforms reminiscent of France’s Imagine and Sweden’s Amuse.

But with Europe nonetheless providing far bulkier premium streaming ARPU returns than different territories – together with China and Latin America – might UMG quickly be tempted to spice up its market share within the EU by way of an area acquisition, or a number of acquisitions, within the indie distribution area?

In fact, UMG has already made one materials current transfer on this path: in 2022, the corporate acquired 49% of the Belgium-born international unbiased label/artist distribution community, [PIAS].

That minority acquisition arrvied simply as a 10-year restriction on Common, stopping it from buying vital music corporations throughout the EU, was lifted. (Stated restriction was a hangover from UMG’s industry-changing buyout of EMI Music in 2012.)

With these regulatory handcuffs now eliminated, and with Europe main Spotify’s internet subscriber additions over the previous yr, would possibly UMG turn out to be tempted by acquisitive alternatives within the area?

3) Might Common (and its rivals) flip the screw on Spotify’s free tier?

Think about you’re Oliver Schusser at Apple Music or Steve Increase at Amazon Music.

You’ve simply heard Common as-good-as publicly blame you for disappointing subscriber development in Q2, whereas praising Spotify’s and YouTube Music’s concomitant performances.

What’s your response? I do know what mine could be.

“Hmmmmmmm. I’m wondering how the one two international providers for which the main music corporations FULLY LICENSE A FREE TIER could possibly be outpacing our international subscriber development. Do you have got any concepts?”

(Sure, I do know YouTube Music technically doesn’t have a free tier, however clearly YouTube is one thing of a free, ad-funded funnel for YouTube Music subscriptions, so the purpose carries.)

On Common’s Q2 earnings name final month, Michael Nash cited UMG-commissioned shopper analysis which suggests there may be “an addressable market of over 180 million shoppers that can kind the subsequent wave of [music streaming] subscription adoption”.

A key query for UMG, then: How a lot of those 180 million potential new streaming subscribers is Common snug with Spotify claiming vs. different digital providers?

Particularly when you think about that main music firm market share on Spotify has confronted sluggish erosion lately from two key elements:

• (i) The lots of uploads from unbiased artists onto providers like Spotify, and the atomization of listening that has occurred in consequence;
• (ii) DSPs like Spotify are rising in territories, particularly rising markets, the place UMG doesn’t (but) get pleasure from a presiding stage of market share.

Briefly, Spotify is seemingly gaining ‘market share’ of UMG’s revenues (i.e. rising quicker than its streaming rivals)… simply as main music corporations’ dominant international market share on Spotify is being (step by step) sandpapered down.

This dynamic might not present the sunniest long-term situations for UMG’s energy stability with Spotify in future deal negotiations.

So how would possibly UMG be capable to clip Spotify’s wings earlier than Daniel Ek’s firm runs away with the streaming market?

How can UMG guarantee a fairer struggle between Spotify and its largest rivals for these 180 million new music streaming subscribers talked about by Michael Nash?

One thought: UMG might try to eradicate SPOT’s distinctive benefit vs. the likes of Apple Music within the two territories that grew quickest on the agency in H1 2024 (Europe and North America).

Aka: Common might refuse to license Spotify’s free tier, or a minimum of the fullest extent of that free tier, when the 2 corporations’ licensing negotiations subsequent swing round.

Common Music Group appearing alone to neuter Spotify’s free tier might not hit onerous sufficient. In accordance with Music & Copyright, Common had a 32.4% international digital market share in 2023.

However UMG likely wouldn’t be appearing alone: Common’s closest competitor, Sony Music Group, has already signaled that it’s, unilaterally, pondering a lot the identical factor.

In Could, Sony Music Group Chairman, Rob Stringer, hit out at a “poor contribution to streaming monetization” from ‘free’ music streaming tiers like Spotify’s.

Stringer defined that this was Sony‘s major purpose for beginning to take into account whether or not ‘free’ customers of Spotify et al. in mature streaming markets ought to quickly be charged a “modest charge” for his or her listening expertise.

Common Music Group might produce other motivations for such a suggestion. Specifically, maintaining a wholesome aggressive stability between music streaming’s ‘Huge 5’ (Spotify, YouTube Music, Apple Music, Amazon Music, Tencent Music) – and stopping one specific service, the inexperienced one, from extending, and exerting, market dominance.Music Enterprise Worldwide