Increasing Consumer Uptake of Streaming Services Can Help Drive Warner Music

Senior Equity Analyst

Matthew Dolgin

Warner Music Group is the third largest of the three major global record labels, with Vivendi’s Universal Music first and Sony Music second. Like its peers, Warner increasingly depends on streaming. Streaming services delivered 65% of total recording segment revenue in fiscal 2023, up from 30% in fiscal 2016. This percentage actually understates the overall impact of streaming, as Warner Music does not break out the streaming portion of publishing revenue separately.

We project that overall streaming revenue for the recorded music industry will grow 9% annually from 2024 until 2028, driven by a number of factors, including our forecast that the number of paid streaming music subscribers will double to over 800 million. The increase will be powered by the continued adoption of mobile data plans, smartphones, and slightly increased penetration against the growing base of LTE/5G subscribers. Other drivers include price increases for streaming services, growing ad revenue as advertisers continue to shift their ad spending toward digital, and revenue growth at ad-supported services in emerging markets based on both the number of impressions but also pricing per impression as listener density increases.

While Warner will benefit from the growth of streaming, we think that revenue from both digital downloads and physical media will continue to decline, albeit at a slower pace for physical. We think the growing adoption of streaming will continue to hit digital downloads harder than physical sales, where a core, though shrinking, base of loyal listeners remains. We believe that streaming will continue to replace the purchase of digital singles for most consumers, as the newest songs can be listened to on the major streaming services at the same time or even before they’re available for download.

Despite strong projected growth in overall recorded music, we expect that A&R, or artists and repertoire, will only decline slightly as a percentage of revenue. A&R cost will to continue to grow in absolute terms as Warner will continue to invest in finding and developing new artists even as it sees more competition from its larger peers.

Business Strategy & Outlook

We assign Warner Music a narrow moat rating derived from intangible assets. The firm is the third largest and only pure play of the three major global record labels. Modern music generally contains two copyrights: The first covers the sound recording itself (known as the master), and the second covers the underlying composition, which includes the lyrics and the musical composition. At Warner, the recorded music segment deals with the sound recording, and the publishing arm monetizes the composition and lyrics copyrights. 

The music industry has been massively affected by the increasingly ubiquitous reach of the internet over the past 25 years. Recorded music was one of the first industries to be hit by the growth in internet penetration and the almost concurrent rise of digital piracy. As a result, the industry shrank from revenue of $23.4 billion in 2001 to $14.8 billion in 2010, according to the International Federation of the Phonographic Industry, as the slow growth in digital download sales was nowhere close to enough to offset the rapid drop in physical media sales. The industry continued to decline over the next four years, bottoming at $14 billion of revenue in 2014.

Thanks to consumers of all ages adopting streaming via both general media sites like YouTube and music-specific platforms like Spotify, the recorded music industry began growing again in 2014 and hit global revenue of $26.2 billion by 2022, according to the IFPI. While the internet has also democratized the ability to directly record, distribute, and market music for artists, the vast majority of money in the recorded music ecosystem still flows through record labels. 

The growth of streaming platforms like Spotify benefits the major labels like Warner Music for both its recorded music and publishing segments. In the US, Spotify and its peers pay royalties for both the recording (master) and the composition (digital performance when not selected and mechanical when user selected) unlike terrestrial radio, which only pays a performance royalty to the composition copyright-holder. This means the recording artist, songwriter, composer, and of course, the holders of the master (record label) and composition (publisher) all share in the royalty revenue from one song. While the actual royalty calculations for streaming revenue are complicated, the major labels generally have global payout rates with the largest music-specific platforms of 60% of 70% of revenue. The split is done on a market share basis between labels and then by individual songs to determine the royalty split at the master/composition level. 

Given this variable nature of streaming-related revenue, major labels like Warner are well positioned to benefit from increased streaming penetration and revenue from increased ad and subscription pricing. The deals between the labels and streaming platforms are relatively short at three years on average and the last signed deals between Warner and most platforms didn’t see significant changes to royalty rates. The growth of nonmusic listening, like podcasts, could decrease the importance of music and thus payout ratio, but we believe that most users will listen to both podcast and music, much like time has always been split between music, news, and talk radio historically. Additionally, if Spotify could increase stickiness via podcasts, the firm would also likely be able to increase subscription costs, which offset some or most of the market share/mindshare losses on Spotify.

On the recorded music side, labels discover, develop, and market artists and their music, which generally includes marketing, distributing, licensing, and selling the recordings created by the signed artists. Many recording artists fail to gain traction in a competitive marketplace with or without the help of a major label. This high level of failure and the required upfront investment by labels means that artists generally get a low percentage of royalties, 10%-15%, with more-established artists garnering high rates in their later contracts. 

Record contracts with artists can take on many different forms, but the two of the most common are the standard record deal and the 360 deal. The standard record deal was most common before the rise of digital music and was structured based on a number of albums, generally five, with only the first one guaranteed for new artists. The label provides advances on royalties and a production and promotion budget. 

With the rise of digital downloads and streaming, 360 deals are now signed more often. In a 360 deal, the label can receive a percentage of multiple revenue sources, including digital, physical media, artist rights like touring, sponsorships, ticketing, and merchandising, and licensing of music. The majors view these new sources like artist rights and licensing as growth drivers to offset the ongoing decline in physical media. At Warner, for example, artist rights increased by nearly 150% to $744 million in fiscal 2023 from $301 million in fiscal 2015, while physical media dropped to $507 million from $767 million over the same period.

The three majors are better capitalized than independent labels and thus can invest more resources into the scouting and development of A&R. Part of this advantage is the financial ability to take more risks on new talent. But other resources, like development teams and coaches, production facilities, other talent with cross-promotion potential, and marketing teams are stronger at the labels than elsewhere. Amplification of an artists and their works is an important piece of standing out in the massive flood of content that is put on the market daily. In the current always-on world, the ability to have a large number people and resources devoted to a wide range of artists helps the major labels attract new talent. 

The majors also benefit from a diversified portfolio of artists versus minor labels, which not only have much smaller rosters but also tend to focus on a genre or subgenre of music. In contrast, the three majors have talent from across the world and can relatively easily pivot into a new genre when it becomes popular or even beforehand.

While independent labels have beaten the majors to finding and developing high-profile artists over the last 30 years, many of the most famous labels have either closed or been subsumed by the majors, like Sub Pop (Nirvana) by Warner or Def Jam (Run-DMC) by Universal. Additionally, the long track record of the majors in helping to develop and maintain massive superstars is highly appealing to many artists at the beginning of their careers. This intangible asset also helps the majors sign artists away from healthy independent labels even if the artist is on the cusp of stardom or already there. 

The internet, along with cheap and widely available digital tools, has made it much easier for artists to directly record/produce, distribute, and market music to consumers. However, this benefit has produced a deluge of songs, making it more difficult for any single artist to stand out. While minor labels could help these artists, the majors provide amplification along with larger budgets, access to other talent, and development tools. Even some of the independent artists who made it out of the morass via a massive viral hit have signed with major labels, including Lil Nas X of “Old Country Road” fame, who signed with Columbia Records (Sony), and Danny Ocean, the singer-songwriter behind “Me Rehuso,” who joined Atlantic Record (Warner).

The publishing arm focuses on the underlying compositions instead of the artists. For example, Warner Chappell, one of the largest music publishers, does not necessarily hold the rights to every composition recorded and released by Warner Music. However, the publishing arm owns the rights to numerous songs and entire catalogs written and composed by artists on other labels. Warner Chappell generates revenue via royalties paid for five usage categories: performance of live or broadcast versions of a song; digital for streaming or downloads; mechanical for physical media; synchronization for use in filmed media, video games, or merchandising; and other for sheet music and other publishing. Given the smaller investment in scouting and development, and lower overall risk, music publishers generally take a much smaller cut of the royalties than their recorded music siblings, spanning from as high as 50% for newer songwriters to 25% for major established ones to 5% for simple copyright registration and administration.

Music copyrights have generally been upheld and even strengthened by regulatory and judiciary bodies in most of the largest music markets, including the US, Japan, and Europe. In the US, the Copyright Royalty Board in 2018 significantly raised the royalty rates paid to publishers through 2022. The same body decided that the royalty rates will be raised again gradually from 2023 through 2027. The European Union passed a directive in 2019 that safeguards the right of copyright-holders and artists to be fairly compensated for the use of their recording and compositions when uploaded to user-generated content sites like YouTube. Given the relative unpopularity of large technology firms like Google and Apple, we expect that copyright law with respect to music will continue to rule in favor rightsholders and artists.

Narrow

Economic Moat

Warner Music Group

Warner Music Group Corp. engages in the publishing and recording of music. It operates through the Recorded Music and Music Publishing segments. The Recorded Music segment is involved in the sale, marketing, distribution, and licensing of recorded music produced by the company's recording artists. The Music Publishing segment acts as a copyright owner and/or administrator of the musical compositions and generates revenues related to the exploitation of musical compositions. The company was founded on November 21, 2003 and is headquartered in New York, NY.

Earnings data Q3 2021

Earnings data Q4 2021

Earnings data Q1 2022

Earnings data Q2 2022

Earnings data Q3 2022

Earnings data Q4 2022

Earnings data Q1 2023

Earnings data Q2 2023

Earnings data Q3 2023

Earnings data Q4 2023

Earnings data Q1 2024

Earnings data Q2 2024

Warner Music Group reports Q2 growth, focuses on tech and emerging markets

Warner Music Group's Q2 results reflect mixed performance across segments, with a strong focus on technology, expansion into emerging markets, and addressing industry challenges. The company is cautiously optimistic about advertising performance in Q3 and is open to evolving revenue models.

Warner Music Group reports strong Q3 earnings and focuses on AI-driven growth strategies and TikTok partnership

Warner Music Group reported strong Q3 results, with solid growth in total revenue and adjusted OIBDA. The company is raising its guidance for full-year margin expansion and expects continued improvement in results. WMG's focus on innovation, partnerships, and AI-driven growth strategies positions it well for future success in the music industry.

Warner Music Group achieves record Q3 revenue, focuses on industry innovation

Warner Music Group's Q3 performance reflects robust growth and a strategic focus on technology, industry engagement, and catalog acquisitions. While facing challenges in deal updates and capital deployment, the company is well-positioned to capitalize on opportunities in technology, industry partnerships, and the ad market environment.

Warner Music Group reports robust Q4 results and outlines growth initiatives

Warner Music Group delivered strong financial performance, announced a cost-saving plan, and expressed confidence in technology deployment and growth initiatives. However, challenges include potential impact on investments, disputes with platforms, and the impact of Spotify's policy change. Opportunities lie in ongoing growth initiatives and stabilization of ad-supported revenue.

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Dynatrace Inc

Shift4 Payments

Medallia Inc

Ping Identity Holding Corp

Reynolds Consumer Products

SelectQuote

Although the market remains bubbly, some of the newest stocks present great opportunities here. Dive into these recent IPOs now.

7 of the Newest Stocks That Made Good on Their IPOs

DocuSign

Royalty Pharma

Spotify

Uber

Vroom

ZoomInfo Technologies

The market for initial public offerings has come roaring back, coinciding with the recovery of stock markets, hope for a V-shape economic recovery and a strong IPO market in June.
The post IPO Market Returns To Growth Mode As Booming Biotechs Lead The Charge appeared first on Investor's Business Daily.

IPO Market Returns To Growth Mode As Booming Biotechs Lead The Charge

NEW YORK, June  17, 2020  (GLOBE NEWSWIRE) -- Warner Music Group Corp. (“Warner Music Group” or “WMG”) announced today that its wholly-owned subsidiary, WMG Acquisition Corp. (the “Company”), has priced €325 million aggregate principal amount of 2.750% senior secured notes due 2028 (the “Notes”). The offering is expected to close on June 29, 2020, subject to customary closing conditions.

WMG Acquisition Corp. Announces Pricing of €325 Million Offering of Senior Secured Notes

NEW YORK, June  16, 2020  (GLOBE NEWSWIRE) -- Warner Music Group Corp. (“Warner Music Group” or “WMG”) announced today that its wholly-owned subsidiary, WMG Acquisition Corp. (the “Company”), has priced $535,000,000 aggregate principal amount of 3.875% senior secured notes due 2030 (the “Notes”). The offering is expected to close on June 29, 2020, subject to customary closing conditions.

WMG Acquisition Corp. Announces Pricing of  $535 Million Offering of Senior Secured Notes

NEW YORK, June  16, 2020  (GLOBE NEWSWIRE) -- Warner Music Group Corp. (“Warner Music Group” or “WMG”) today announced that through its wholly owned subsidiary WMG Acquisition Corp. (the “Company”) it has commenced a private offering (the “Secured Notes Offering”) of senior secured notes (the “New Notes”). 

WMG Acquisition Corp. Announces Launch of Senior Secured Notes Offering and Cash Tender Offer and Consent Solicitation for Any and All Outstanding 5.000% Senior Secured Notes due 2023

Tencent Music Entertainment Group 

China’s Tencent Music Entertainment Group on Friday reported a 5.2 percent passive stake in Warner Music Group Corp., about a week after the world’s third-largest recording label’s debut on the Nasdaq.

China’s Tencent reveals 5 percent stake in Warner Music

Tencent Music Entertainment Group said Friday it now owns a 5.2% stake in newly public Warner Music Group.                                                              , In a SEC filing, the Chinese

China’s Tencent Music Entertainment Takes 5.2% Stake In Warner Music Group

China's Tencent Music Entertainment Group  on Friday reported a 5.2% passive stake in Warner Music Group Corp , about a week after the world's third-largest recording label's debut on the Nasdaq.

China's Tencent Music reports passive stake in Warner Music

The IPO market needed a hero and Warner Music Group stock temporarily filled that role. However, in the nearer term, WMG is risky due to poor music streaming fundamentals.

Warner Music Group Is Done Playing the IPO Hero Role

Warner Music: I Do Not Like The Sound Of This

Warner Music Group Corp. shares WMG, +5.91% rose another 5% Thursday on their second day of trading, after gaining more than 20% in their debut on Wednesday.

Warner Music Group climbs another 5% on second day of trade

Investors can easily tap the IPO resurgence with the two domestic-focused ETFs.

Warner Music Debut, New Offerings to Boost IPO ETFs

Genius Brands

The stock market kept moving higher on Wednesday.

Stock Market Wrap-Up: Warner Music Stock Pops on IPO; Why Genius Brands Might Not Be a Smart Pick

Warner Music Group Corp. priced its 77-million-share IPO at $25 per share, and the stock opened higher Wednesday at $27.

Warner Music CEO On IPO: Music Is The 'Only Global Language'

The stock sale immediately follows Blackout Tuesday. “We concluded that there was sufficient market momentum,” the group’s CEO said.

Warner Music Group pops after Nasdaq debut as the pandemic and protests rage on

Warner Music Group Corp.'s WMG, +14.84% life as a public company got off to a positive start Wednesday, as the stock opened for trading 8% above its initial public offering price of $25.

Warner Music stock opens 8% above IPO price, and keeps gaining

Warner Music Group Corp's  stock popped 8% on its Nasdaq debut on Wednesday, after the world's third-largest recording label sold shares in its $1.9-billion initial public offering towards the higher end of its target.

Warner Music strikes a chord as shares pop on Nasdaq debut

The deal, which is the biggest IPO of the year to date, values the music giant at $12.75 billion.
The post The Biggest IPO Of The Year Is About To Start Trading appeared first on Investor's Business Daily.

The Biggest IPO Of The Year Is About To Start Trading

Warner Music Group priced its initial public offering at $25 per share, valuing the record label, which represents the likes of Ed Sheeran, Bruno Mars and Cardi B., at an eye-popping $12.75 billion.

Warner Music prices IPO at $25 a share, values company at $12.75 billion

Superfans of Lizzo, Ed Sheeran and Cardi B can now cash in on their idols’ latest hits by investing in this newly public company.

Warner Music IPO: What You Need To Know

Warner Music Group Corp.  priced its initial public offering on Wednesday at $25 a share, the higher end of its $23 to $26 price range, and increased the size of the deal to 77 million shares from an original 70 million shares.

Warner Music Group prices IPO at $25 a share to raise $1.925 billion

Warner Music Group Corp. delayed the pricing of its planned initial public offering on Tuesday, as the music industry took a pause from regulator activity to express solidarity with the protesters taking a stand after the death of George Floyd in Minnesota last week, according to media reports on Wednesday.

Warner Music Group delays pricing of IPO: Media reports

Warner Music is set to list at the Nasdaq Stock Market on Wednesday. Warner Music Could Kickstart A String Of IPOs This Year The record label giant is expected to price the initial public offering between $23 to $26 per share, and raise between $11.7 billion and $13.3 billion.

News for Warner Music Group Stock (WMG)