In early 2024, the ever-changing music industry is undergoing rapid transformations unlike anything seen in the past decade. The way music companies are organized is changing. The way royalties are calculated and paid is changing. The way companies interact with fans is changing. And investors have different expectations of public companies — more focus on margins, less obsession with growth.
Music companies' earnings results for the fourth quarter of 2023 will provide insight into how companies are performing and, more importantly, what they expect to do going forward. Only one company, SiriusXM, has announced so far. Next week's earnings releases include Spotify (Tuesday, February 6), Reservoir Media (Wednesday, February 7) and Warner Music Group (Thursday, February 8). Universal Music Group (UMG) reports earnings on February 28. Here are some things to look out for in the upcoming earnings calls.
The scope of layoffs
In October, UMG executives urged investors for cost-cutting measures that would improve margins and allow investment in growth opportunities. The result would be hundreds of layoffs, according to a January 12 report Bloomberg report. On Thursday, UMG revealed some details about the restructuring of a bi-coastal group of labels. But what's missing, so far, are details on the number of layoffs and cost savings UMG expects to receive from a restructuring. UMG's fourth-quarter earnings call on Feb. 28 will be an opportunity for analysts to ask the company to update its restructuring plans. As Advertising sign Noted last week, the music industry is seeing widespread layoffs despite continued streaming growth. Warner Music Group (WMG), Downtown Music Holdings and BMG cut jobs in 2023. Digital music companies have also shrunk their headcounts: Spotify, Amazon Music, SoundCloud, Tidal and Bandcamp all fell by varying amounts.
More trouble in TikTok-land?
When UMG failed to renew its licensing deal with TikTok, it made licensing on the social video platform a main topic of discussion on its upcoming earnings call. Analysts and investors should want to know how a company's negotiations with TikTok are progressing and whether they should expect a break if the two sides don't reach an agreement. TikTok and WMG reached a deal in July 2023, but investors may want progress reports from other public companies — Reservoir Media, Believe, Sony Music — on their licensing talks.
UMG's decision is not unprecedented: In 2008 and 2009, WMG pulled its catalog from YouTube for nine months while the two companies' licensing negotiations were at an impasse. In 2011, Google launched an audio music streaming service, Music Beta by Google, without licenses from both Sony Music Entertainment (SME) and WMG. When Google added MP3s to the Google Music service later that year, the SME and WMG catalogs were initially absent.
The immediate financial hit to UMG will be minimal, as TikTok accounts for 1% of the company's revenue, UMG said in an open letter about the licensing talks. But because TikTok is an important promotional medium and a popular place to discover music, the indirect financial success is more important. Investors always want to know about the immediate dollar impact of a company's moves and should want to understand the downsides of leaving a successful social media platform.
How important are price increases?
Music subscription prices didn't budge for over a decade before succumbing to changes in 2022 and 2023. The big fish was Spotify, which finally raised prices in the United States and other major markets in July. A higher price creates a multiplier effect on top of existing subscriber growth and will increase what would otherwise be record quarterly revenue. Profits should come without increasing churn: Spotify CFO Paul Vogel said during an Oct. 27 earnings call that Spotify lost no subscribers in the third quarter due to the price increase.
For labels and publishers, a 10% price increase over year-over-year subscriber growth will accelerate revenue growth. Guggenheim analysts said in a recent note to investors that they expect price increases at Spotify, YouTube and Deezer to lift UMG's subscription revenue growth to 14.8% in the fourth quarter from 13.0% in the third quarter.
The state of the advertising business
While the subscription market was strong, the ad-supported side of the business struggled to keep up. In the first three quarters, Spotify's ad-supported streaming revenue grew 14.9% year over year. That's better than the 11.4% improvement in subscription revenue, but well below the 22.2% and 62.1% gains in ad revenue for the full year 2022 and 2021, respectively.
Broadcast radio fared even worse. Companies like iHeartMedia, Cumulus Media and Audacy have blamed a slowdown in national broadcast advertising for some disappointing earnings in recent quarters.
SiriusXM provided the latest clue about broadcast advertising. “SiriusXM Ad Revenue Remains Challenged,” CFO Tom Barry he said during Thursday's earnings call, “which we believe is a product of a tough broadcast advertising market.” Elsewhere, however, SiriusXM's digital advertising improved compared to 2022: Pandora had “strong growth” in its podcasting and programmatic businesses, Barry added.
Some positive news in recent days suggests that advertising—perhaps not for broadcast businesses—is recovering. US ad spending in November rose 25% year over year, according to MediaRadar, an advertising intelligence firm. The number of advertisers fell by 8%, however, suggesting that existing advertisers were increasing spending.
More good news came from big ad-based tech companies. Google's advertising revenue in the fourth quarter rose 11% from the year-ago period, the company said on Wednesday, up from 3.3% and 9.5% year over year in the second and third quarters, respectively. Meta's revenue rose 25% and its ad impressions rose 28% in the fourth quarter, the company said Thursday.
The mission to reach the superfans
Major music companies are suddenly more interested in serving super fans, the high-spending consumers who drive the concert and merchandise businesses, but have less impact in a world of flat-rate, all-you-can-eat music subscription services. The 80-20 rule says that 80% of a company's business comes from 20% of its consumers. However, with music streaming, a $10.99 per month service doesn't capture a superfan's willingness to pay more for added value. Spotify hinted that “superfan clubs” were in the works in an announcement about the European Union's digital markets law. CEO of UMG Lucian GraingeHis letter to staff in January said the company would focus on “strengthening the artist-fan relationship through superfan experiences and products.”
The problem isn't that consumers won't pay more to engage with their favorite artists. The problem is that the platforms have not found a winning formula. Numerous previous attempts to court superfans have failed. Drip, a platform that allowed artists to provide fans with music and other items for a recurring monthly fee, ran from 2011 to 2016 (it ran a Kickstarter again in 2017, but closed in 2018). PledgeMusic shut down in 2019 amid financial problems and allegations of wrongdoing. More recently, attempts by startups to use Web3 technologies to build superfan communities have run afoul of the public's sudden mistrust of cryptocurrencies and indifference to NFTs. Given Spotify's market size and resources, however, the company could make a real impact.
