Over the past four months, two of the three major labels have seen their stock price penalized for missing expectations for subscription growth — effectively sending the message that in 2024, achieving significant revenue gains isn't enough. In fourth-quarter earnings Thursday (Nov. 21), Warner Music Group ( WMG ) revealed streaming growth of 8.2%, which was below some analysts' estimates — explaining why the company's share price fell 7.4 % on Thursday and erased about $1.29 billion in market value. The same thing happened to Universal Music Group in July—albeit to a much greater extent—when its lower-than-expected second-quarter subscription growth sent its share price down 24%, despite overall revenue rising by 8.7%.
To say that analysts and investors are paying close attention to streaming growth is an understatement. During WMG's earnings call on Thursday, six out of 10 questions from analysts were about subscription revenue, including topics such as drivers of expected growth, wholesale pricing and how streaming rights are calculated and distributed. That's because analysts — and the investors they talk to — know that platforms like Spotify and YouTube are critical to the fortunes of labels and publishers.
Judging from their introductory remarks, WMG and UMG would rather talk about their companies' global expansions. On Thursday, WMG CEO Robert Kyncl He emphasized the company's focus on India, a country of 1.4 billion people that he called “more like a continent than a country.” Currently dominated by ad-supported streaming, India has the fifth largest gross domestic product but ranks just 14th among recorded music markets. However, Kyncl said he believes the country will “become an increasingly influential global force in the music industry”, adding that WMG is “well positioned to continue to take market share” through acquisitions and partnerships. Meanwhile, during UMG's latest earnings call on Oct. 31, CEO Lucian Grainge talked about acquisitions, partnerships and expansions in emerging markets such as China, Thailand and Nigeria.
It keeps coming back to the subject of music subscriptions, Kyncl and WMG CFO Brian Castellani sought to quell any concerns that streaming growth is waning, explaining how WMG plans to achieve high-single-digit growth in subscription revenue even as that growth slows. Relatively few Americans have a music streaming subscription, at least compared to streaming video-on-demand (SVOD) options like Netflix. during the call, Kyncl noted that subscription penetration in the US is at 30% while SVOD services are at 50%. “There's a lot more to grow in the United States for music,” he said.
Lately, however, the success of music streaming platforms has seemed one-sided. Licensees, not licensors, appear to be keeping most of the spoils of price increases and subscriber acquisitions. As one WMG analyst put it, major label content is essential to digital service providers (DSPs) like Spotify, but “instead a lot of value has been concentrated in DSPs” rather than content owners. By one measure at least, Spotify has reaped the benefits of price increases far more than the major labels. Since Spotify announced its first US raise on July 23, 2023, its share price has risen 177%, compared to 3% for UMG and 4% for WMG.
In order to level the playing field and reap more of the benefits of subscription music's popularity, WMG plans to adjust pricing – which it believes companies will benefit from – to help subscriptions continue to grow. For starters, the company expects improvements from the launch of a premium subscription tier for superfans that Spotify CEO Daniel Ek he said in July it could cost $17 or $18 a month. Kyncl and Castellani also pointed to wholesale price changes that would set per-subscriber minimums to reduce discounts given to family plans and other multi-user accounts. “Both with subscriber growth and opportunities to increase wholesale pricing, the formula for streaming growth is strong and there is plenty of room for acceleration,” said Kyncl.
The US and other mature streaming markets will deliver subscription growth more immediately than emerging markets still dominated by ad-supported streaming. But in the long term, WMG said, high-growth, emerging markets like India have significant potential. As Kyncl explained, WMG is betting on countries like India that have growing gross domestic product (GDP) because ad spending will increase as GDP grows—and growing GDP will ultimately translate to more subscribers. Again, Kyncl talked about closing the gap between music and television. in India, it reported the number of music subscribers at 15 million and the number of households with television sets at 100 million.
Streaming has shaped the music industry today. WMG and UMG wouldn't have gone public if they hadn't transformed a once-dead industry. Investors wouldn't have poured money into the Hipgnosis Songs Fund and other investment funds if they weren't building huge royalties on aging catalogs. And prominent institutional investors like Blackstone and Pimco wouldn't be so enthusiastic about music assets if streaming couldn't open up new markets around the world.
However, this strong enthusiasm has created high expectations, and the label's mandate to deliver high, single-digit subscription growth will transform streaming in the coming years. Prices will be higher. Streaming services will launch superfan series at high prices. And if the labels have their way, ad-supported on-demand streaming will no longer be free. As shaky as things are, the big companies seem confident they can pull it off.
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