Universal Music Group (“UMG”) (XAMS:UMG, Financial)
Universal Music Group is the world’s leading music entertainment company and a high-quality, capital-light business that can be best thought of as a rapidly growing royalty on greater global consumption and monetization of music.
UMG has a decades-long runway for growth driven by increasing streaming penetration combined with the development of new services, platforms, and business models. At its inaugural Capital Markets Day in 2021, the company unveiled mid-term targets of high-single-digit revenue growth and mid-20s% EBITDA margins. Because of the rapid growth of streaming and the resurgence of vinyl (records) and merchandising, the company has vastly outperformed its own guidance with its revenue growth averaging 14% since its public offering in 2021. In 2022, UMG’s organic revenues and Adjusted EBITDA grew 12% as reported margins modestly declined due to lower-margin businesses returning to pre-COVID-19 levels.
We believe that the long-term outlook for UMG is excellent and that the company will continue to outperform its mid-term guidance. Music remains one of the lowest-cost, highest-value forms of entertainment. Since the launch of streaming services more than a decade ago, the monthly cost of a subscription plan had been flat at $10 until last year. In recent months, a number of the DSPs (digital service providers or streaming platforms) including Apple, Amazon and Deezer increased prices for their individual subscription plans in developed markets by 10% to $10.99 and by an even higher percentage for family and student plans. We believe that breaking the $10 barrier is a watershed moment, as other platforms will likely follow suit, and regular price increases will become the norm in the audio streaming industry as they are in the video streaming industry. At $10.99/month today (and less for a family plan on a per-person basis), one can listen to virtually any song ever recorded on any device, anywhere, anytime, at a value price.
While streaming helped revive the industry by convincing consumers to pay for music again, it also has its shortcomings. Many DSPs have become inundated with more than 100,000 tracks per day, many of which are low-quality, fraudulent, and/or 31-second tracks meant to game the system and divert royalties away from artists and songwriters. While more than 9 million artists have uploaded songs to Spotify, based on data shared by Spotify, only 2% of these artists have uploaded more than 10 songs and have more than 10,000 monthly users.
UMG is working directly with the DSPs to improve streaming’s economic model towards an “artist-centric” approach that gives more value to the artists that drive subscriber growth, engagement, and retention. While these changes may take time to be fully implemented, we believe that UMG will benefit from a greater share of streaming royalties due to its enormous breadth and depth in its artist roster. Similarly, while streaming led to broad adoption among consumers, a single price point for all consumers does not allow for customer segmentation. According to the BPI (an industry trade group), 15% of consumers account for 35% of all music spend, implying a significant opportunity for platforms and labels to better segment their customers and monetize superfans through targeted offerings.
At its current valuation, UMG’s attractive business characteristics and its long-term sustainable and robust earnings growth remain substantially undervalued. We believe that UMG also has further opportunities to improve its governance, investor relations and capital allocation as it builds experience as a public company, which should contribute to shareholder value creation.
From Bill Ackman (Trades, Portfolio)'s Pershing Square 2022 annual letter.
