Weekly Update: Universal Music, Burford Capital, Cogent, Wayfair CastleGate, & ODFL

In Practise Weekly Update

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  1. Universal Music, Warner, Spotify, & Artist Bargaining Power
  2. Burford H1 22 Results: Duration and Cash Income Reconciliation
  3. Wayfair, CastleGate, & Damages: A Supplier's Perspective
  4. Cogent Communications & Global ISP Competition
  5. Old Dominion Freight Lines vs Fedex Freight: Competitor Angle

Universal Music & Major Record Labels

We could snip and discuss many parts of this interview with a Former Sony Music CEO but we will try and keep it brief. The interview is worth reading in its entirety for anyone following the space.

The investment thesis for major record labels is that with the growth in streaming, the royalty earnings streams from both recorded and music publishing are more predictable, higher margin, higher growth, and becoming a larger proportion of UMG's business.

There is also an opportunity to consolidate sub-labels to reduce the fixed cost base and drive higher operational leverage. With the growth in digital distribution, multiple sub-labels with duplicated cost structures isn't necessary:

A lot of that is due to the vast amounts of duplication within that organization. Today, a hit is driven by social media – I hate to admit it – and old media radio and TV are no longer proactive. Hits are appearing out of nowhere in many cases. You no longer need four or five full blown, fully staffed, front line labels with four radio staff. That will only create a disgruntled shareholding. - Former Sony Music CEO

Recorded music is ~80% of UMG's business. The catalog business drives ~80% of the profit because new, front-line music requires far more A&R (music R&D) spend to launch new artists.

Universal is a 50/50 split between catalog and front line, but profit wise it's a 70/30 split in favor of catalog. 80% of the overhead of a recording music company is dedicated to front line new release, versus 20% dedicated to catalog marketing and other support sides. The profit is reversed; 80% of the profit is with catalog and 20% is front line. - Former Sony Music CEO

The labels are attractive because most music consumption is of the higher-margin, catalog of which the major labels own the copyright. UMG is effectively a royalty on the global consumption of music. On top of this, the streaming platforms act as lead generators for the labels. Spotify and Amazon are effectively subsidising the growth in music consumption which drives more hours listened of UMG's catalog IP. On the surface, labels are enjoying a declining CAC, a larger market, and greater consumption of higher-margin IP.

However, the long run economics of the recorded music business is questionable.

Over the last decade, there has been a clear shift in bargaining power from labels to artists.

All deals used to be life of copyright but very few deals are life of copyright today. Artists used to sign six or even seven albums on an option basis; that is now down to three or four. The number of album commitments an artist has signed to has been reduced, and digital royalties are going up to the mid to high twenties, which is high royalty unless you're a superstar like Drake or Beyonce. - Former Sony Music CEO

Historically, labels would own the copyright of recorded music for life. Today, artists are taking back more control and share of the economics. This is gradually pushing UMG and the labels into a service-type model and further away from rights ownership.

Their deals with the likes of Beyonce are becoming distribution deals. Their business is no longer rights ownership and they are moving towards a service-based model. The Orchard label generates significant income for them by working with thousands of artists, without having to heavily invest in content creation. It also provides a pipeline for them to have conversations with artists showing them their proven model, level of profitability and audience growth. They can now make it a proper investment on a joint venture basis, but they have de-risked their A&R strategy. - Former Sony Music CEO

To become a global artist you may still need a major label to get the service and distribution required but artists can 'go-to-market' independently online and build an audience. Artists can start with indie labels and then sign with labels with a bigger following, for fewer albums, and ultimately demand greater share of the economics.

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