As controversial as it is to talk about in the music industry, major record labels of the world still own sizable chunks in Spotify. But there’s a case to be made about why they should sell their billions of dollars’ worth in shares — and specifically now.
It started in 2008 when, according to documented evidence, the major record companies plus indie body Merlin each received equity stakes in Spotify as a result of their licensing agreements with the upstart streaming company. Sony BMG (now Sony Music) got the biggest stake of at 6%; Universal Music Group got 5%; Warner Music Group got 4%; EMI Music got 2%; Merlin got 1%.
Prior to Spotify going public on the New York Stock Exchange in April 2018, a couple of things happened to change this ratio: First, Universal acquired EMI Music, including the latter firm’s Spotify holding, taking its stake up to 7%; second, due to years of additional investment and share issues in Spotify, by the time the streaming service went public, the major record companies’ percentage stakes had been slashed by around half — leaving Universal Music on approximately 3.5%, Sony on 3%, Warner on 2%, and Merlin on 0.5%.
However, Sony Music paid its own money to acquire additional equity after 2008, which we know for a fact took its holding in Spotify to 5.7% by 2018. Sources in the investment community have speculated to me that Universal Music — the biggest record company, home to artists like Taylor Swift, Kendrick Lamar, and Lady Gaga — may also have since upped its Spotify holding, and could now sit on 4.2% to 4.8% of the streaming company.
The selloffs — and what they’d have gotten if they waited
Merlin was the first to dispose of its entire Spotify holding, apparently in Spotify’s very first week of public trading in April 2018. At the time, Merlin’s then-CEO, Charles Caldas, said it wasn’t Merlin’s role to speculate on the stock market: “It is outside of Merlin’s remit to hold a long-term equity position in a publicly-listed company… we therefore worked quickly to liquidate our interest in Spotify.”
Merlin sold its full 0.5% stake at a time when Spotify’s market cap was bobbing around $26 billion to $28 billion, meaning Merlin banked approximately $135 million for its members. Had the body speculated and held on to its stake, its position today would have been worth nearly three times more — $319 million. (This is based on Spotify’s latest market cap of $63.86 billion.)
Warner Music Group also cashed out early. Like Merlin, it sold 100% of its Spotify shares in the first half of 2018, for a confirmed price of $504 million. Here’s how we know the math we’re running off in this article is roughly correct: Warner selling a 2% stake for $504 million suggests a Spotify market cap of $25.2 billion, which is very close to where Spotify’s value sat at the end of its second day of trading, on April 4th, 2018. Based on Spotify’s market cap in 2018 and now in 2021, we can be sure of the following calculation: Had Warner speculated and held on to its $504 million stake in Spotify, today this equity would be worth between $1 billion and $1.25 billion.
Sony Music took a different tack: It sold half of its stake in Spotify for a confirmed $768 million, also in the second calendar quarter of 2018. Seeing as we know for sure the size of Sony Music’s equity holding in Spotify at the time — 5.7%, as declared in SEC filings — we can also figure out the market cap of Spotify at the time of Sony’s disposal, which would have been approximately $26.9 billion. Since Sony did hold on to a reduced 2.85% stake in Spotify, it still has about $1.8 billion tied up in Spotify ownership. (Unlike Warner and Merlin, Sony played a double-strategy: it took some risk off the table by cashing in 50% of its shares, while also betting hundreds of millions of dollars, correctly, on Spotify’s future growth.)
And now we come to Universal.
Universal Music Group and that magic $500 million-plus artist payout
In contrast to all of these companies, Universal Music Group (UMG) never sold a single sliver of its stake in Spotify. It continues to own the entirety of the original stake it took in 2008, and, as mentioned, has potentially since inflated this holding. (That said, we know for a fact Universal’s holding in Spotify is lower than 5% because it wasn’t declared as a 5%-plus shareholder in $SPOT’s new annual SEC report for 2020.)
How much is Universal’s stake in Spotify worth today? Well, judging by Spotify’s current market cap, Universal’s equity position would be valued at somewhere between $2.2 billion (for 3.5%) and $3.1 billion (for 4.8%).
UMG has committed to sharing this money with its artists. A spokesperson directly told Music Business Worldwide in March 2018: “Consistent with UMG’s approach to artist compensation, artists would share in the proceeds of a [Spotify] equity sale.” In addition, Universal has confirmed — partly thanks to a Taylor Swift intervention — that it will forgo unrecouped balances for artists when it pays this money out. This might sound like a mere industry technicality, but in truth it’s worth a huge amount of cash to artists: Warner Music didn’t forgo unrecouped balances when it shared its Spotify proceeds with artists, instead “crediting” acts with the money; Sony Music did forgo unrecouped balances, and recently confirmed that this resulted in over $250 million landing in the pockets of its performers.
So, knowing what we know, we can make a decent guesstimate at what all this means for Universal’s artist roster should the label sell up its Spotify stake.
Warner chose to “credit” its artists with 25% of the money ($126 million) it banked from the sale of its Spotify stake. That one-quarter portion is understood to be reflective of the average digital royalty rate amongst Warner’s artists at the time.
Sony Music’s formula was a touch more complicated, but was also ultimately determined by artists’ royalty rate. Remember, Sony banked $768 million by selling half its shares and paid out over $250 million, which means it shared roughly a third of the proceeds with its artist and indie label partners. (Sony’s artist money payout included net proceeds from the approximately 2.7% of Spotify equity it purchased with its own money, additional to the shares it was handed back in 2008.)
In the interest of conservatism, let’s take the lower number here — Warner’s plain 25% figure — and assume Universal follows suit, but forgoes those unrecouped balances as promised.
In this scenario, if Universal sold its whole Spotify stake today, UMG would pay out between between $550 million and $775 million to its artists.
Why Universal should sell now
Evidently, Universal Music Group Chairman & CEO Sir Lucian Grainge has proven to be been super-smart so far in his decision to hold on to Spotify stock: Not only has Spotify’s share price nearly tripled since the company floated, but Universal’s stake is no doubt a useful lubricant for the tempestuous process of negotiating a new deal with Daniel Ek and co every few years.
That said, there is an increasingly strong case to be made for Universal finally selling up. First, and most important, are its artists: In a year where touring has been decimated by the pandemic, and where other income streams — merch, public performance — have also been hit hard, delivering a one-time windfall of $550 million-plus to performers everywhere would no doubt buy Universal valuable goodwill amongst the artist community for years to come.
Then, there’s the collywobbles around Spotify itself. The streaming company has just issued annual guidance to investors predicting that its global subscriber base will grow more slowly across 2021 (+17 to +29 million) than it did in 2020 (+31 million).
Meanwhile, Spotify’s share price has primarily been driven to unprecedented heights in recent months by one factor: its flashy $1 billion-ish expenditure on podcasts. Yet analysts now doubt whether whether Spotify’s podcast strategy will ever actually meaningfully contribute to the company’s growth or profitability. Citi analyst Jason Bazinet observed in January that he’d not seen “a material positive inflection in app downloads or Premium subscriptions” from nearly two years of Spotify’s podcast investment. As a result, Citi downgraded Spotify’s stock to Sell.
Universal might also want to question quite how aligned it wishes to be with Spotify long-term. Even if Spotify’s podcast strategy does pay off, the dream scenario for Daniel Ek appears to involve the gradual eradication of market power of the major music companies. Predicting a quintuple rise in Spotify’s value by the end of 2030, the Amsterdam-based Guardian Fund recently suggested that Spotify’s relentless investment in exclusive podcast content would eventually see “the market share of the big labels… declining.” Once Spotify has destabilized the market strength of Universal, Sony, and Warner, suggested the Guardian Fund, “Spotify will be able to adjust its business model and create enormous operational leverage meaning that profitability will grow faster than expenses”.
Furthermore, Universal Music Group has its own imminent IPO to consider — with all the intensified financial scrutiny it will bring. Does Universal really want the complication of owning a stake in its biggest retail partner when both firms become public property? With Chinese media giant Tencent owning minority stakes in both Universal and Spotify — not to mention Warner — might Universal at least want to rid itself of potential accusations of fiscal incest ahead of listing on the stock exchange? Also, there is a simpler point to make: current Universal parent Vivendi might obviously be keen on banking a $2 billion-high stack of cash from Spotify before Universal is spun-out into its own listed entity.
These are all things for Sir Lucian Grainge to consider carefully in the weeks and months ahead. Judging by his stellar track record on Universal’s Spotify equity strategy to date, one assumes he will once again make the right decision for his company. Universal’s artists will no doubt be hoping it’s the same decision that results in half a billion dollars raining down into their bank accounts.
Tim Ingham is the founder and publisher of Music Business Worldwide, which has serviced the global industry with news, analysis, and jobs since 2015. He writes a weekly column for Rolling Stone.