MBW Reacts is a sequence of remark items from the MBW group. They’re our ‘fast take’ reactions – by a music biz lens – to main current leisure information tales.
There are simply 73 days left till Robert Kyncl turns into CEO of one of many world’s largest music rights firms – Warner Music Group.
Following the affirmation of the ex-YouTube exec’s appointment in September, there was the predictable outbreak of music biz chatter concerning:
- Kyncl’s historical past (the person who as soon as butted heads with main labels over YouTube royalties and ‘Article 13’);
- Kyncl’s persona (“the man takes zero sh*t”, as one senior determine bluntly put it to MBW, “he’s going to be an excellent asset for the document enterprise after we’re standing as much as large tech”);
- And, inevitably, Kyncl’s annual compensation at WMG (as much as $15 million a 12 months, all advised, together with share grants. That’s in step with the CEOs of firms with an analogous ≈$12 billion market cap to Warner Music Group’s, like, for instance, MGM Resorts.)
Now, although, the trade jibber-jabbering over Kyncl has died down.
As such, he has a few months away from the hubbub to drag collectively his topline plan for shaping Warner Music Group into an organization destined for future success.
Listed here are three main questions that MBW believes might be excessive on Kyncl’s agenda quickly after he settles into the WMG sizzling seat…
1) The TikTok downside: Upfront checks, or ‘revenue-share’ offers?
Main document firms are rising more and more impatient with ByteDance and the income they’re receiving from its flagship phenomenon – TikTok.
The cornerstone problem: TikTok continues to license music on a ‘buy-out’ foundation, paying an upfront verify to acquire two-year blanket licenses for the majors’ catalogs.
Up to now few years, these ‘buy-out’ offers have been manna from heaven for the majors – “bonus free cash” on high of a rising subscription streaming trade globally.
However now subscription streaming development is beginning to sluggish in key markets just like the US and UK. On the similar time, TikTok’s development goes bananas: It’s anticipated to triple its international income from $4 billion to $12 billion this 12 months.
Extra scary for document labels: the facility that TikTok is beginning to wield with younger music followers. eMarketer concludes that, right this moment, practically two-thirds – 61.3% – of ‘Gen Z’ within the US makes use of TikTok no less than as soon as a month.
There’s a actual sense amongst many senior executives that the music trade must push TikTok in direction of a ‘revenue-share’ deal – i.e. rightsholders getting paid a sure % of the platform’s topline income – and get away from the ‘buy-out’ agreements.
As we reported the opposite day, Sir Lucian Grainge – CEO and Chairman of Common Music Group – has made his first overt nod on this course.
“One other [value] hole is forming quick within the new iterations of short-form video,” stated Grainge final month, stopping brief at naming TikTok instantly, however including: “Let’s work collectively as an trade – majors, indies, and DIY artists alike – to make sure music has each cultural and industrial worth.”
Sources additionally recommend that senior figures at Sony are preventing for a revenue-share settlement of their subsequent TikTok deal (no nice shock when you think about that Sony simply refused to re-license Resso, TikTok’s sister music app).
However what of Warner Music Group?
“I believe we’ve acquired a pair extra turns on the buy-outs earlier than we see the social, health, and different socially-oriented platforms [build] sufficient of a historical past and have completed [enough] experimenting to essentially make [a move to revenue-share deals with these services].”
Steve Cooper, talking in September
At a Goldman Sachs occasion final month, outgoing WMG CEO, Steve Cooper, was requested to foretell when Warner may transfer from a buy-out mannequin to a revenue-share mannequin with sure key platforms.
Cooper answered: “I believe we’ve acquired a pair extra turns on the buy-outs earlier than we see the social, health, and different socially-oriented platforms [build] sufficient of a historical past and have completed [enough] experimenting to essentially make that flip.”
Once more, Cooper didn’t point out TikTok by title. But when he was referring to the ByteDance firm, he was basically saying that Warner can be joyful to take a seat out one other 4 years of licensing agreements with TikTok with out acquiring a revenue-share deal.
Will Kyncl – an exec who pioneered revenue-share agreements with the music trade for user-generated content material at YouTube – observe Cooper’s lead?
Or will he stand with the unofficial alliance – “majors, indies, and DIY artists alike” – that Lucian Grainge simply known as for?
2) What’s to be completed with Warner’s distribution technique? and particularly with BMG?
Query marks cling over just a few components of Warner Music Group’s present distribution technique.
For one factor, Robert Kyncl goes to should take a tough take a look at Stage Music – the possibly-neglected DIY distribution platform (i.e. rival to DistroKid, TuneCore and so forth.) that Warner launched in 2018.
(Proof of stated potential neglect: The Stage web site nonetheless describes itself as a ‘new music distribution platform for unbiased artists’. It’s 4 years outdated.)
Warner launched Stage with a transparent intention: To make use of it to find new expertise that could possibly be upstreamed by the WMG frontline system.
For that to work, Stage wanted to be made engaging to indie artists – which is why, to today, it permits acts to maintain “100% rights and royalties” for a charge of simply $20 per 12 months.
Fascinating factor is, Stage is now out of step with each Common Music Group and Sony Music Group‘s equal methods, as a result of Stage permits all artists who’re prepared to pay that $20 to distribute their music through its companies to Spotify, YouTube Music and so forth.
Sony Music Group runs its personal indie artist distribution and companies platform: AWAL, which it purchased from Kobalt Music Group for $430 million final 12 months.
In distinction to Stage, AWAL is invite-only: To add your tracks by the service and enter the Sony system, an artist must be accepted as adequate by the AWAL group. (Round 1 in 10 artists who apply are understood to be accepted.)
In the meantime, Common Music Group has its personal Stage equal: Spinnup. However, mirroring Sony and AWAL, this summer time, Common switched Spinnup from an ‘all are welcome’ platform to an invite-only platform… basically ending Common’s flirtation with, and funding in, free-for-all DIY distribution.
Not less than a part of Common’s choice, MBW understands, was as a result of limitless distribution for any prepared artist additionally comes with… limitless prices. And when solely a tiny share of acts are being ‘upscaled’ from a service like Spinnup into ‘correct’ labels, the entire DIY distribution-for-all mannequin begins to look unrewarding.
Will Robert Kyncl now observe go well with at Warner and pull up the drawbridge on Stage?
Or, because the final remaining un-gated DIY distributor owned by a serious document firm, can he flip Stage’s USP to Warner’s benefit?
On the different finish of Warner Music Group’s distribution enterprise, there’s something of an iceberg lifeless forward.
When Warner’s ADA struck a world distribution settlement with BMG in 2017 – a transfer sealed by then-ADA President, Eliah Seton – it was a fairly big deal for WMG.
“ADA is immensely proud to symbolize the extraordinary BMG catalog throughout the globe, and it is vitally thrilling to be increasing our assortment with this newest treasure trove of excellent music from so many iconic artists,” stated Seton on the time.
Now, that image has shifted dramatically.
Since 2017, BMG has grown significantly, as giant unbiased labels (Beggars Group, Domino – two examples) have moved vital enterprise away from ADA.
Sources now recommend that BMG makes up someplace round 50% of revenues in Warner’s distributed third-party labels enterprise.
It’s not laborious to see how: BMG generated EUR €371 million within the first half of 2022, up 25% YoY, with round 40% of that determine coming from recorded music.
Certainly, simply the opposite week, in a Bertelsmann presentation, BMG CEO Hartwig Masuch projected that the music firm would turn out to be a €1 billion annual turnover enterprise in 2024.
Making this case further topical for Robert Kyncl: whispers now recommend that BMG will quickly have the contractual freedom to stroll away from ADA and shift its enterprise to a rival – Sony’s The Orchard, maybe, or Common’s newly-launched Virgin Music Group – if it so needs.
It’s price mentioning that, for BMG, being the only largest partner-distribution precedence for a serious music firm – i.e. Warner – won’t be a nasty place to be in.
Nonetheless, there are two methods Robert Kyncl may insure that BMG – and people lots of of hundreds of thousands in income – stick with WMG:
- Renegotiate and agree a brand new multi-year distribution cope with BMG pronto that retains each side joyful;
- Make an acquisition provide for BMG.
It’s troublesome to say what an organization like BMG may fetch within the present market, however its EBITDA in calender 2021 stood at €144 million (USD $170 million).
Even in a high-interest-rate atmosphere, it seems to be extremely unlikely that Bertelsman would contemplate a suggestion in need of $3 billion (18-times 2021’s EBITDA).
BMG’s valuation may very well be a lot increased than that: Don’t overlook that Harmony, with an analogous sized EBITDA to BMG (round USD $200m in Harmony’s case), was turning down acquisition gives of over $5 billion just some months again.
Can Warner afford that sort of price-tag to accumulate BMG?
Relying on whether or not any of WMG’s rivals are occupied with making their very own bids… can it afford to not?
3) What is Warner Music Group? And the place do superstars and catalogs sit inside that?
Beneath Steve Cooper, Warner has prided itself on adopting the mindset of ‘the unbiased main’. Being sincere, that’s partly out of necessity.
No-one can knock Cooper’s unbelievable document working WMG: Revenues on the firm have nearly doubled throughout his 11-year run as CEO.
Nonetheless, the gulf in measurement between Warner Music Group and Sony Music Group (the world’s No.2 largest music firm) is statistically getting greater.
Under, you may see MBW’s currency-converted calculations for what the recorded music and music publishing operations of Common Music Group, Sony Music Group, and Warner Music Group generated over the previous two calendar years.
(That is primarily based on quarterly investor information, and prevailing foreign money charges in every interval.)
The vital factor to have a look at is the second graph (in orange): it reveals the distinction in whole annual international revenues (recorded music divisions plus publishing divisions) between Warner Music Group and Sony Music Group.
That distinction grew by practically $500 million in calendar 2021, as much as $1.911 billion.
These are numbers that, on Sony’s facet, would have been boosted by its $430 million acquisition of AWAL in 2021.
Nonetheless, the upshot for Warner (and its id as a ‘main’) is obvious: The No.3 firm available in the market (WMG) is now practically a full $2 billion in annual revenues smaller than the No.2 firm available in the market (Sony Music Group).
To actually drill dwelling the purpose of Warner’s comparative scale vs. its main rivals, let’s now flip to WMG vs. Common.
In calendar 2021, Common generated simply over $10 billion in general revenues; Warner Music Group generated $5.58 billion.
Sure: Common is now practically double the dimensions of WMG.
Then once more, Warner’s place on the trade’s No.3 firm is very safe: Its largest smaller rival nowadays might be Korean agency HYBE – which this week misplaced the lively participation of its largest asset, BTS, till 2025.
HYBE’s enterprise throughout all divisions generated simply over USD $1 billion in calendar 2021 – lower than a fifth of the dimensions of WMG.
All of this begs a basic query for which Robert Kyncl should, ultimately, discover a solution: What truly differentiates Warner from its main music firm competitors in 2022?
MBW isn’t the one one asking this query.
Billionaire UMG investor, Invoice Ackman, has railed on Warner a lot of instances, portraying the corporate as a much less highly effective model of Common, with much less hitmaking may.
Ackman’s Pershing Sq. taunted WMG on this subject in an investor word final month, which learn: “When seen on a multi-year foundation, UMG’s income development has each been increased and extra constant than Warner Music Group, its most intently adopted peer.”
So how does Warner now transfer in a course that its two largest opponents can’t?
How can it use its distinctive measurement within the market, and the strategy-resetting arrival of Robert Kyncl, to reply sooner and smarter to market dynamics than every other firm round it?
Maybe the reply lies in controversial feedback made by Steve Cooper final month, wherein he revealed that previously few years, Warner had been following a “portfolio” technique that had “scale back[d] our dependency on superstars”.
Added Cooper: “Decreasing that dependency has allowed us to proceed to bolster our method to A&R, which is long-term artist improvement.”
Basically, Cooper was saying that Warner is spending a smaller proportion of its general A&R price range on ‘famous person’ artists, and spreading the rest amongst a wider unfold of non-superstar artists.
Extra bets, however smaller bets. A rise in partnerships with artists who’ve wholesome, rising companies and dependable audiences – however who lack any life like hope of enjoying two nights at Wembley Stadium.
This portfolio technique, stated Cooper, is now leading to “mid to excessive teen [percentage] returns” for Warner on its A&R funding.
There’s strong information underpinning this technique: In response to MBW’s calculations of Luminate figures, the High 10 audio streaming tracks within the US in H1 2022 had been cumulatively performed over 1 billion instances lower than they had been in H1 2019 (2.74bn vs. 3.81bn).
Making mega-hits, with famous person artists, is getting empirically tougher.
Will Robert Kyncl try and speed up WMG’s “portfolio” technique – leaving extra of the ‘famous person economic system’ for Common Music and Sony Music, however probably widening Warner’s relationship with worthwhile artists who courtroom smaller audiences than Taylor Swift, Harry Types, Drake and so forth?
If that’s the case, what may this imply for Warner’s frontline label technique within the States, the place WMG-owned firms akin to Atlantic Information, 300 Elektra Leisure, and Warner Information proceed to duke it out towards each other (and UMG and Sony’s frontline labels) to attempt to discover music’s subsequent megastar?
Can Warner Music Group culturally practice itself – to not point out its labels – to be much less motivated by discovering and creating famous person acts?
Additionally, may this technique – extra bets, however smaller bets – encourage a corollary within the catalog world?
Moderately than throwing down lots of of hundreds of thousands on famous person artist and author catalogs – and preventing with Sony and Common within the course of – may a extra frequent catalog acquisition technique, for smaller per-deal charges, find yourself as Warner’s ‘Moneyball’?
Robert Kyncl might not stroll into WMG with solutions to those questions on day one.
However he’ll arrive at Warner armed with a recent viewpoint on this enterprise – one unburdened by ever working at a music firm, and “the way in which issues have all the time been completed”.Music Enterprise Worldwide