Why UMG’s slowdown in streaming revenue growth is (partly) an illusion… and 4 other things we learned from UMG’s latest earnings call

The news about Universal Music Group following its latest earnings report yesterday (July 24) has been dramatic, to say the least: A double-digit stock price drop. A run of analyst downgrades. Speculation that the music streaming boom may be hitting the skids.

All of this was based on a single metric: UMG’s streaming revenues in Q2.

To be clear, streaming revenues are still very much growing at Universal. Most notably, subscription streaming revenues were up 6.9% YoY in Q2 – yet that fell short of analysts’ estimates, which was for around 11% growth.

The picture was worse for ad-supported streaming revenue, which actually fell 3.9% YoY in the quarter.

Other measures of financial success, however, remained thoroughly impressive at UMG in Q2:

• Overall revenues leaped up 9.6%YoY (at constant currency), beating analyst expectations;
• Adjusted EBITDA grew 11.3% YoY, up to EUR €649 million (USD $699m). This was also ahead of analyst projections, according to Visible Alpha consensus;
• Net profit soared 46% YoY in the first half of 2024, to EUR €914 million (USD $991 million), or €0.50 per share, compared to €0.34 in the first half of 2023.

The markets were spooked nonetheless. UMG’s stock price fell just over 23% today (July 25) on the Amsterdam Euronext.

UMG also saw a string of analyst downgrades, most of them from “buy” to “hold,” including from Citi, Barclays, and Guggenheim.

It’s not a stretch to say that UMG’s leadership team appeared to have seen this coming.

On Wednesday’s earnings call, unruffled UMG executives implicitly acknowledged that the streaming revenue miss would be on investors’ minds, offering a number of comments and explanations.

Perhaps the most important of those comments: UMG isn’t particularly worried about this one quarter of slower-than-expected streaming revenue growth; it’s playing a longer game.

“Internally, we do not manage the business on a quarterly basis and are, therefore, not overly concerned when we see variation in our quarterly results,” CFO and President of Operations Boyd Muir told analysts on the call.

“We have a diversified business model, which accommodates quarterly variations, while still delivering solid growth at the group level.”

Another point UMG’s execs stressed: the occasional illusion of performance weakness caused by price hikes at streaming services over the past few years.

Of particular note this time around: Muir explained that price hikes at Apple Music and Amazon Music that occurred more than a year ago have now been “fully annualized” into UMG’s numbers, meaning they no longer boost Universal’s YoY growth.

(The same thing will happen in the coming quarters with the most significant 2023 price hike of all – the one at Spotify, which was executed in Q3 of last year. For this reason, Guggenheim Partners analyst Michael Morris expects no pick-up in subscriber revenue at UMG in Q3 2024, coming in at the same 6.9% rate as in the latest earnings report. He sees a further softening of YoY growth, to 5.3%, in Q4.)

“Our second quarter results reflect the varied performances of our diverse portfolio of DSP partners.”

Sir Lucian Grainge, Universal Music Group

Of course, not all of the shrinkage in UMG’s streaming revenue growth in Q2 was an illusion.

Some of it was very real, and UMG pointed to disappointing subscriber uptake among certain digital service providers (DSPs) – though the leadership team didn’t name names.

“Our second quarter results reflect the varied performances of our diverse portfolio of DSP partners,” UMG Chairman and CEO Sir Lucian Grainge said, choosing his words carefully.

CFO Muir elaborated: “While Spotify, YouTube and many regional and local platforms have continued to exhibit healthy growth in subscribers, other large partners who have been less successful in driving global adoption have seen a slowdown in new subscriber additions.”

(You’ll notice, there, that Spotify and YouTube are off the hook; UMG is pinning the blame on softer subscriber growth at certain other “large partners” in the digital space.)

Muir added that UMG is “engaged with all our key partners in an in-depth dialogue regarding product innovation to target high-value customers and drive future revenue growth.”

Overall, Grainge stressed that UMG’s strategy isn’t to chase after quarterly numbers, but to build a strong business in the long run.

“Throughout this journey of long-term growth, we know that quarterly fluctuations in one source of revenue or another are to be expected,” he told analysts in his opening comments.

“So while we report results quarterly, we manage the business for long-term success. We think in multiyear cycles and anticipate and embrace variations in certain business lines.”

Here are four other things we learned on UMG’s earnings call – including about the potential for Spotify’s new “super-premium” subscription tier, and a tantalizing hint that UMG’s catalog may soon be available in other languages…

1) Had it not been for Meta and TikTok, ad-supported revenue would have grown

That wince-inducing 3.9% YoY decline in UMG’s ad-supported streaming revenue in Q2 would actually have been a positive number (i.e., above zero), had it not been for two of UMG’s partners: TikTok and Meta Platforms.

Execs on the earnings call noted that UMG missed a month’s worth of revenue from TikTok, when the music giant had a high-profile falling-out with the video platform over its payouts, and UMG’s recorded and publishing catalog disappeared from the platform.

On top of that, there was also the fact that Meta Platforms pulled premium music videos off of Facebook earlier this year.

“Meta had previously offered premium music videos on Facebook. This product offering was less popular with Facebook’s user base than other music products.”

Boyd Muir, Universal Music Group

“In terms of platform-specific pressure, we have a change in our licensing agreement with Meta,” Muir explained.

“Meta had previously offered premium music videos on Facebook. This product offering was less popular with Facebook’s user base than other music products. And as a result, Meta is no longer licensing premium music videos from us as of May this year.”

Muir added: “Meta is now focusing instead on other areas involving music content, and we are working together to expand these areas as part of a multifaceted renewal.”

2) 20% of paying Spotify subscribers could sign up for the new ‘super-premium’ tier

On Spotify’s earnings call earlier this week, co-founder and CEO Daniel Ek all but announced that the long-rumored “super-premium” subscription tier is coming to the streaming service.

“The plan here is to offer a much better version of Spotify,” Ek said.

“Something like $5 above the current Premium tier… sort of a deluxe version of Spotify that has all of the benefits that the normal Spotify version has, but a lot more control, a lot higher quality across the board, and some other things that I’m not ready to talk about just yet.”

Though Ek was reluctant to get into details, he floated a possible $17 or $18 per month price point.

It’s widely expected that the super-premium tier will (finally) give Spotify listeners access to high-fidelity audio, and it may also include features such as “superfan clubs.”

We also have some market research on the plan’s potential, courtesy of UMG.

“Our research and analysis indicate that as many as 20% of the current subscriber base could upgrade to a super-premium tier at a meaningfully higher price point for a compelling product configuration, one which offers enhanced features and exclusive access to content,” Muir told analysts.

Given that Spotify reported 246 million paying subscribers in Q2 2024, UMG’s estimate implies that some 49.2 million of them would sign up for super-premium.

And if that plan does, indeed, cost $5 more per month than the standard Premium tier, that translates to $2.952 billion in additional annual revenue for Spotify. (Assuming that the super-premium tier will cost $5 more than Premium in all markets, which is not necessarily a safe bet.)

And assuming that Spotify pays out two-thirds of its revenue to music rights holders, that number would represent additional revenues of $1.966 billion to the music industry.

So the end of the streaming boom may not yet be at hand…

3) UMG sees 180 million potential new streaming sign-ups in top markets

Besides the potential of “super-premium tiers,” UMG is of the opinion that there’s still plenty of room for more sign-ups to music streaming services, including in mature, developed markets.

In UMG’s market research, “we’ve identified an addressable market of over 180 million consumers that will form the next wave of subscription adoption” within the top 19 music markets, UMG Chief Digital Officer Michael Nash said on the call.

“And that research is conducted assuming price increases. About half of that total addressable market will be in the 13 developed markets.”

He said that UMG expects to see “a lot of growth” in emerging markets.

“It’s important to keep in mind that technology innovation, digital infrastructure penetration, emerging consumer trends, all these things have been consistently growing the total addressable market for subscriptions over the last decade,” he added.

Indeed, total paid music streaming accounts hit 503 million worldwide at the end of 2023, up 13.2% YoY, according to data from IFPI shared by label sources. There were 667 million users of subscription streaming accounts in 2023, more than double the amount in 2019, but still only around 8% of the world’s population.

4) Classic songs in UMG’s catalog could soon be appearing in other languages

Not all of UMG’s earnings call was about streaming subscription growth – some of it focused on the other obsession in the music industry these days, namely AI.

UMG recently announced a partnership with SoundLabs, an AI technology company focused on “ethically trained” tools for music creators.

One key product from SoundLabs is MicDrop, a vocal plug-in that enables artists to create high-fidelity vocal models using their own voice data.

One upshot of that, according to UMG’s Grainge, is that we could soon be hearing classic songs from UMG’s catalog – sung in various languages other than the ones they were recorded in.

UMG’s artists “will be able to sing in languages they don’t speak, restore imperfect vocal recordings, and more,” Grainge said on the call.

“The ability to be able to sing in their own voices in languages they don’t speak opens up enormous potential and enormous opportunity for us to sell, market, move culture and create demand for songs and products and back catalog that would have been completely unimaginable,” he added, calling the prospect “very exciting.”

On this front, UMG can benefit from the “proof of concept” carried out by other music companies.

Last year, South Korea’s HYBE released a K-pop track – Masquerade by MIDNATT – in six different languages, thanks to technology developed by Supertone, an AI voice-cloning company that the K-pop giant acquired in 2022.

A few months later, Tencent Music-owned streaming service Kugou Music unveiled KUGOU AIK, which alters singing vocals into 10 languages and 15 Chinese dialects.Music Business Worldwide