It’s an exciting time for the owners of Universal Music Group.
Paris-based Vivendi, parent to the world’s biggest recorded music company, updated its shareholders this month with the news that a $3 billion–plus deal with China’s Tencent — the latter company is set to acquire 10%–20% in UMG – should move to the final stages within the next few weeks.
Not only that, but more bidders are apparently now showing their interest in UMG, as Vivendi reiterates its willingness to sell up to 50% of its most lucrative asset. “[There is a] continuing process for the potential sale of an additional minority stake in UMG to other partners,” said Vivendi in a statement dated October 17th. “Some have already expressed an interest in investing at a similar price level [as Tencent].”
You don’t have to be an economics wonk to see why such would-be bidders, over and above any strategic “synergies,” might be tempted to own a piece of Universal right now.
In the first nine months of this year, according to Vivendi filings, UMG’s total revenues (across recorded music, publishing and other activities) hit €5.06 billion ($5.71 billion). At a U.S. dollar level that was up over $770 million year-on-year; compared to the same nine month period just five years before, in 2014, it was up by a massive $1.5 billion.
Despite all of this positive news for UMG, there was one wrinkle in its Q3 results, revealing a definite trend that warrants industry scrutiny: In the first nine months of 2019, Universal’s recorded music revenue growth from streaming fell significantly.
In simple percentage terms, year-on-year streaming revenue growth at Universal was up, organically, by 23.4% in the nine months to end of September 2019. In the prior year period, that figure stood at 35.8%; in the year before that, it was 40.8%.
I’ve dug further into Vivendi’s results, which are reported in Euros, by converting them into U.S. dollars at the prevailing rate in each relevant quarter over the past three years. This gives a more accurate picture of UMG’s true performance, not least because the firm’s biggest territory today, where nearly 50% of its recorded music money is generated, is North America.
These calculations show that, in the first nine months of this year, UMG’s growth in recorded music streaming revenues was over $100 million smaller than that same YoY growth in the equivalent period of 2018 (see below): +$611 million (9M 2018) vs. +$497 million (9M 2019).
This is, by no means, a big problem. At the end of the day, UMG’s nine-month recorded music streaming revenues in 2019 have still grown by nearly half a billion dollars YoY — and the company remains on course to smash its record FY global revenues tally.
Plus, Universal is still the inarguable number-one most dominant force in mainstream music: Vivendi proudly trumpeted on its call with investors earlier this month that UMG-signed artists claimed eight of the top 10 tracks on Spotify’s Global chart in the first half of 2019 — including the entire top six. (“Señorita,” by Shawn Mendes & Camila Cabello, likely led these rankings; it was officially Spotify’s biggest track of the summer worldwide.)
Yet what is also true is that the onset of a streaming revenue growth slowdown (which also applied at UMG’s biggest rival, Sony Music, in the first half of this year) raises challenges that the major music companies will have to meet in the years ahead. Namely: if global streaming growth on the likes of Spotify, Apple Music, and TIDAL is going to decelerate as key markets (USA, U.K. and Europe) mature, are there any key factors which could inspire a re-acceleration of this income in the future?
In an investor update issued on October 17th, Morgan Stanley remained upbeat on UMG’s prospects for growth. It noted that, in a bull-market scenario, Universal could currently command a whopping $45 billion valuation. However, Morgan Stanley has also noticed the slowing revenue growth UMG’s labels are seeing from streaming in 2019: It noted that YoY growth from streaming at Universal weighed in at 28% in Q1 this year, down to 23% in Q2 and just 20% in Q3.
Morgan Stanley’s update forecast that “streaming growth will slow materially” at UMG across 2019 — but additionally suggested that the format could pick up speed again in future via “the opening up” of large emerging markets, including China and India, by existing paid on-demand services.
The investment bank also pointed to another, more intriguing factor that could heat up streaming income for UMG in years to come: “[Growth] from emerging users of music licences including TikTok, Calm, Facebook and Instagram.”
TikTok is a particularly noteworthy idea: the platform’s owner, Bytedance, is currently believed to be undertaking licensing negotiations with the major record companies covering future additions to its service. In particular, TikTok/Bytedance is expected to launch a new, Spotify-like audio on-demand service soon — some say before the end of 2019 — which industry whisperers suggest will initially focus on emerging, non-mature global markets.
For Universal Music Group, this will surely be a welcome arrival. UMG is currently locked in negotiations with Spotify over the renewal of a global license to its catalog — and, not unrelated, has publicly espoused the belief that the more competitors there are in the paid-for streaming music marketplace, the better. That’s especially true if said competitors, like TikTok, can give a boost to streaming revenue growth which — 11 years after the launch of Spotify out of Stockholm — is now showing its very first signs of sagging.