Universal Music Group’s Capital Markets Day Hit the Right Notes, Analysts Say

Universal Music Group hit enough right notes during its first Capital Markets Day (CMD) presentation since before going public in 2021, judging from Billboard’s review of a handful of equity analysts’ comments on Tuesday’s event.

Reviews of the presentation from London’s Abbey Road Studio, which featured talks by CEO Lucian Grainge and other top executives, varied from zealous to merely positive. JP Morgan analysts called UMG’s presentation “one of the best capital markets days we have attended in the past 30 years, and it further increased our already high conviction in the UMG story.” Barclays analysts didn’t believe there was enough new information to change investors’ minds about the company. Still, they wrote, “We viewed UMG’s arguments as convincing and their financial targets as achievable.”  

As for the targets, UMG said revenue will grow at more than a 7% cumulative annual growth rate (CAGR) through 2028 — not including the impact of any mergers and acquisitions. As JP Morgan noted, UMG stuck with the “high single digit growth” it gave in its last CMD presentation before going public in September 2021. In other words, UMG believes it can achieve the same high single-digit growth rate that initially lured streaming-hungry investors when the company broke off from Vivendi three years ago. Had UMG downgraded to a lower revenue CAGR — say, in the mid-single digits — the post-presentation commentary wouldn’t have been as kind.   

Subscription music streaming’s role is so vital to UMG’s future that it crafted a narrative to explain how it can achieve CAGR of 8% to 10% in subscription revenue. It’s called Streaming 2.0 and it took center stage in the CMD presentation. In the initial Streaming 1.0 phase, services such as Spotify and Apple Music kept prices steady while prioritizing acquiring subscribers over maximizing revenue per user (ARPU). They paid the same royalty regardless of creator and quality of music. They built global presences but got most of their revenue from a relatively small number of Western markets.  

Streaming 2.0 is about monetization and getting more from existing subscribers while signing up customers in developing markets. Not every stream will be worth the same and generic “functional music” will get paid less. Streaming platforms will use customer segmentation to offer premium experiences for customers willing to pay more. To that end, CFO Boyd Muir revealed that UMG is in “advanced talks” with Spotify about its planned “superfan” tier, which Spotify CEO Daniel Ek has said could be priced at $17 or $18 per month. Tencent Music Entertainment already offers such a product, Super VIP, that costs five times as much as a normal subscription.

With streaming growth slowing, it was important for UMG to prove it has a plan for the future of streaming. After all, subscription growth has an outsized impact on investors’ outlook. In July, UMG’s stock dropped 24% in a single day after UMG’s second-quarter earnings revealed a sudden, sharper-than-expected slowdown in streaming revenue. Streaming 2.0 neatly packages UMG’s various tactics into a simple, understandable concept.  

UMG also leaned heavily into direct-to-consumer (D2C) sales of merch, vinyl and other items, and Muir gave a new data point: the company’s D2C sales are growing at a 33% CAGR and totaled 548 million euros ($612 million), or roughly 5% of total revenue, from about 1,300 online stores. That gives UMG a massive amount of data on its artists’ biggest fans. “The superfan/D2C opportunity is not just a complementary high growth revenue opportunity,” Muir said. “It’s also an important competitive advantage that is increasing our appeal to artists and giving us the capability to do more for them than our competitors.” 

The music business has changed dramatically since UMG’s last CMD presentation in 2021. TikTok became the de facto way to break new artists. Vinyl sales exploded. Labels got better at selling directly to fans. Subscription services finally raised their prices. Artificial intelligence quickly became both public enemy No. 1 and the next big opportunity. Companies made a staggering number of investments in developing markets.   

UMG’s task was to show it had a believable vision for the future. Given everything the company laid out, Grainge was able to do that when he told investors that “we are nowhere close to achieving the full potential of our business.”

Investors will want to see results first, though. In a week when stock markets rallied after the U.S. Federal Reserve chopped interest rates, UMG’s share price dropped 3.6%.