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Universal Music Group

Music Is Universal
Universal Music Group (UMG) is the world’s leading music label and production company. UMG own more than 50 labels that identify and develop recording artists assisting in the production, distribution, and promotion of their music. The business owns the rights to ~1/3rd of recorded music in the world and currently represent 8 of the top 10 artists.

Investment Thesis
The rise of streaming has returned the Music Industry from decline to a growth.
Streaming remains in its infancy with low penetration rates globally. There is a 20 year+ runway of growth in the streaming category.
Universal Music is the largest and most successful record label in the world with more than 50 labels under its umbrella. UMG own the rights to irreplaceable content and have a consistent track record of signing the world’s best stars. UMG currently represent 8 out of the top 10 artists.
Labels benefit from economies of scale and UMG is a significant market leader with ~50% more market share than the number 2 competitor.
Music is an irreplaceable, recession proof industry. 83% of people regard entertainment as a vital necessity (Vivendi, 2019). Music industry revenue has a low correlation to the macro environment.
The business model is extremely predictable, capital light, scalable and defensive.
The Business

UMG’s record labels identify and develop recording artists and songwriters. UMG assist in the production, distribution, and promotion of their artists music. In return for their services, UMG receive a percentage of the royalty revenues over the life of the asset. 80% of UMG’s revenues are derived from recorded music royalties across streaming and physical sales. The remaining 20% of revenues are from publishing royalties and merchandising.

The diagram to the right shows the distribution of the average $10 customer monthly spend on a streaming service. The label takes the largest share of revenue (~38%) followed by the streaming platform (33%) and then the artists (17%).

Our investment thesis relies upon the growth of streaming services. We use the total number of streaming subscribers globally as our KPI.

Over the past 3 years subscribers have grown at 36% CAGR and revenue per subscriber at -9% CAGR. Revenue per subscriber has declined as developing market growth has outstripped developed market growth where the price point for streaming services is higher.

Over the next 5 years we expect the streaming industry to grow at low double digits and revenue per sub to remain relatively flat.

Between 2000 and 2010 the US recorded music industry declined by more than 50% due to the shift from physical music sales (CD’s) to illegal downloading. Since 2010 streaming services have gained traction, offering consumers a high-quality product at a low price point, negating the use of illegal downloads.

The industry in the US is now estimated to generate in excess of $23bn per annum having grown at 9% CAGR over the past 5 years. Streaming accounts for more than 54% of industry revenue, meaning that moving forward the market growth will start to trend in line with streaming growth.

Streaming revenue in the US has grown at 37% CAGR since 2015, from $3bn to $13bn. Goldman Sachs expect global music revenue to more than double between 2019 to 2030 to $142bn with almost all growth driven by streaming (8% CAGR).

Competitive Advantages
UMG has the most powerful content in the industry. Universal own the rights to almost a 3rd of all music. This is significant and irreplaceable IP that a competitor cannot replicate. These assets have a long useful life as songs from 50+ years ago are still listened to today. More than half of industry revenue is derived from back catalog music.
UMG has a scale advantage over main competitors Sony and Warner. UMG has 2x the market share of Warner but operates with a similar operating margin as UMG has decided to invest in building a global footprint where Warner hasn’t invested to the same extent, for long-term growth. UMG cover 180 markets compared to Warner’s 71. This investment is discovering artists in regions outside of the US that are becoming global superstars. The number 1 and 3 most streamed artists on Spotify are from Latin America and signed to Universal.

UMG has the best brand image in the industry. Their track record in delivering top talent has created a flywheel where other talent would rather be signed by Universal than other labels, as they are most likely to be successful under UMG. 8 out of the top 10 artists in the world are signed under UMG’s label.
UMG has strong supplier power. The label has more power than the streaming service and set the royalty share. UMG can distribute its music without a single platform and still generate revenue whereas Spotify’s product becomes redundant without the labels.
Penetration Analysis

In 2021 there was an estimated 563m paying streaming subscribers worldwide, representing less than 7% of the population. Subscribers are forecast to increase at 14% CAGR to 1.6bn by 2030 representing ~3x growth over the period. At this point this would represent ~20% of the global population, far lower than comparable consumer services, such as social media which have >30% global penetration.

Streaming penetration in developed markets is already >30% but remains low in China at ~6% and even lower in other emerging markets at ~5%. The most penetrated region in the world is the Nordics with a penetration rate of 41%, and still growing.

If we assume that over the long term developed markets (NA, Europe, Australasia) can reach the current penetration of the Nordics and that developing markets can achieve just half the penetration, then this could suggest 1.8bn paying users more than 3.3x the current level of paying users.

Going forward we expect the business to achieve the following growth targets:

Revenue Growth – 8-10%
Operating Margin 15%+
Earnings growth 13-17%
The balance sheet is relatively clean with $12bn of total assets and $5bn of liabilities. The business has a low level of leverage at just 1.2x EBITDA.

UMG are uniquely positioned to take advantage with the global move towards streaming, a market expected to more than triple paying users over the next 10 years.

UMG are the leading company in the industry with irreplaceable IP and a market leading brand reputation giving them a defensible competitive edge. The business is predictable, has recurring revenue and is capital light. Middleton Enterprises see UMG has a quality long term compounder.

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