Universal Music, Spotify, & The Music Industry

Former Chairman and CEO, Sony Music, UK

Why is this interview interesting?

  • UMG Valuation
  • Valuing a record label business
  • Spotify bargaining power
  • Artist power over masters and sync license
  • Outlook for music industry
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Executive Bio

Nick Gatfield

Former Chairman and CEO, Sony Music, UK

Nick is a British music industry executive with over 34 years of experience scouting, signing, and working with global artists such as Amy Winehouse. Nick started his career as a musician in the band ‘Dexys Midnight Runners’ before moving into recorded music. At the age of 26, he was made Director at EMI Records, the youngest in the company’s history. Over the next 20 years, he went on to lead global labels such as PolyGram and Island Records and has worked at three of the four major record labels. More recently, as the Former Chairman of Sony Music, he was leading negotiations with Spotify and both new and old artists in the repertoire. Nick currently runs Twin Music, an incubator for new talent, which funds and services new artists coming to market.Read more

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Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Nick, I appreciate you hopping on and I am really excited. We run a concentrated value and special situations fund. I have been interested in Spotify for years and been in and out of them but never got fully competent in the negotiating dynamics versus labels. They also have a big competitor in Apple Music, but that is probably outside this. Now UMG is coming public and I have Spotify and the largest label out there, so I am trying to get sharper on the space because I am curious, and for potential investments. Does that all make sense?

Yes, it is all clear. I find it fascinating because I have been in the music business for more years than I care to remember. The dynamic and level of interest changed as music as an asset class. You have players in the market like Spotify and UMG and it is interesting to discuss the changing dynamics of the business actually because there are many moving parts. There is a general consensus of opinion, particularly around the UMG flotation, certainly if you go on Sachs as well, that this is a $50 billion plus company and streaming is at a tip of the iceberg. There is an element of that which is true but there are plenty of risks to face coming down the line as well, not least is the power of streaming services and, most particularly, Spotify.

Maybe I am reading into your voice too much but it sounds like you might be a little bearish on the labels. Most of the people I talk to, including me, thought that Spotify would kill them because they had the negotiating leverage, but as I have come to look at it, I almost view them as a tax on entertainment online. I look at the Peloton and TikTok revenue streams and they have all the music; you cannot get around them.

What I am bearish about is the current model as it stands right now, which is almost a legacy model which has not radically changed in terms of the relationship with talent and the royalty share for 40 years. That is where the pressure comes to bear because there is no barrier to entry to put music in the marketplace, which creates a huge opportunity for emerging artists. In fact, the fastest growing segment of the music business is independent and self-released artists by a considerable margin. More important is the leverage which successful or even middle tier artists have when it comes to renegotiation, extension of terms and resigning those artists. That is where there will be real pressure on margins.

I ran the front line labels for Terra Firma and EMI, and after the Terra Firma acquisition, Terra Firma took a view of EMI as having three distinct entities: a catalog, a front line and a services business, and catalog should be valued the same way you value a publishing asset. It is relatively stable; the margins are high and it doesn't require heavy lifting to maintain the catalog. With streaming being the dominant format today, there is no inventory issue as everything is available in the marketplace, and that is where the lion's share of the revenues are coming from. Very high margin at very little marketing cost. The older catalog offered low pay away to the artist. That is the bedrock of the business and is staying intact, albeit Sony recently announced they were writing off the debit balances of any artist signed pre 2000s. That is a good headline in the great scheme of things but not a big giveaway.

I am super interested in this. It seems all emerging artists who make a break out, eventually sign with a major label. Could you walk me through the life cycle of an artist and what the leverage points and negotiations look like?

Yes, let’s talk about emerging talent as the dynamics are interesting. It stems from the arrival of Napster on the scene and the downturn of the business. Most major labels are more risk averse about investing in unproven talent. Then measurable data became a thing in the last 10 years. In many cases, the labels are waiting to make that investment until the artist has proven traction within streaming services or press circles or an actual audience. It becomes more about check book A&R and putting the money down. There are no secrets in the music business, particularly with the three majors; everybody knows what everybody else is doing.

Universal is the most aggressive with the biggest check book and muscle. The dynamic has changed over the past decade where the royalty pay away those artists achieve is higher than it has been and is growing. This is largely due to competition and that they have proven themselves with traction and an audience. Their lawyers are getting smarter and demanding a minimum 25% royalty from Sony, Warner or UMG. That sounds low but it was 15% 10 years ago. You will also no longer get life of copyright, which is an unusual phenomenon. 10 years ago, life of copyright was sacrosanct in deals and you had to have it.

Equally, you had to sign worldwide deals. Many emerging artists simply develop traction by themselves because the labels do not pay attention unless they have done that. The level they reach through their own ability affects the type of deal they can command. This has made new artist deals more expensive. The royalty pay away is higher, the term is reduced and so is the album commitment. 10 years ago, it was normal to sign a five or six album commitment, meaning you had one album and five options to continue. Now it is four or even three, making the term labels have to exploit these copyrights much shorter. The royalties are higher and that pressure will continue to grow as more participants enter the market.

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