Invest Like the Best with Patrick O'Shaughnessy - Universal Music Group: The Gatekeepers of Music - [Business Breakdowns, EP. 32]

Episode Date: October 28, 2021

Today, we are running a special episode of Business Breakdowns on our Invest Like the Best feed. When we launched Breakdowns, we hoped to cover industries and businesses that we were “well known but poorly understood.” This deep-dive on UMG and the music industry is just that - you will walk away with a whole new appreciation for artists, labels, and what streaming technology has done for a historic industry. If you enjoy this episode, please be sure to subscribe on your preferred podcast player and check out our growing catalog of episodes.   Today we’re breaking down Universal Music Group. As one of the largest music businesses in the world, UMG is home to many of the world’s greatest artists, including Taylor Swift, U2, and The Beatles catalog. A discussion on UMG requires a deep dive into the history of music itself, how it was historically monetized, the shift from physical to digital, and what streaming has meant for the various pieces of the ecosystem. Our guest, Arman Gokgol-Kline, a partner and investor at Ruane, Cunniff & Goldfarb, walks us through that evolution of the music industry before we dive in on UMG.   In our discussion, we first break down the industry pre and post Napster, looking at the ways music was sold historically, and how that led to both record profits and a consumer revolution. We then assess streaming’s impact on the industry and how, contrary to what you might think, labels may be more important in a marketplace where it’s easier than ever for creators to record and release music. Finally, we finish with UMG’s place in the ecosystem. The primary drivers of the business, how they’re able to attract the world’s superstars, and how they think about deploying dollars to acquire new artists and timeless catalogs.   Please enjoy this fantastic breakdown of Universal Music Group.   For the full show notes, transcript, and links to the best content to learn more, check out the episode page here.   -----   Business Breakdowns is a property of Colossus, LLC. For more episodes of Business Breakdowns, visit joincolossus.com/episodes.   Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here.   Follow us on Twitter: @JoinColossus | @patrick_oshag | @jspujji | @zbfuss   Show Notes [00:04:01] - [First question] - How technology disrupted the music business and it’s evolving history [00:12:44] - What the industry of music labels looks like from the 90s to today [00:21:19] - How it feels as a high-tier artist to engage with a label directly today [00:28:20] - The revenue and business model of an artist akin to Taylor Swift [00:30:44] - The differences between UMG's main sources of revenue; music publishing and recording [00:35:08] - General margins and trends for music publishing [00:36:22] - Ownership and mechanics of monetizing an artist’s Intellectual Property  [00:40:57] - How streaming revenues are divided among stakeholders [00:46:23] - History of the bargaining power of labels and streaming platforms [00:51:25] - Capital allocation, ROI, and acquiring IP and catalogs [00:57:39] - Thoughts on the growth profile of the industry as an investor [01:02:23] - Potential risks to UMG in emerging technology and new creator trends  [01:08:50] - Reasons why an artist would pick UMG over other major labels [01:12:42] - Diversity and how artists are sometimes treated by labels [01:14:02] - A growing increase in music consumption across the world

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This is business breakdowns. Business breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick? We believe every business has lessons and secrets that investors and operators can learn from. And we are here to bring them to you. To find more episodes of breakdowns, check out join colossus.com. All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts and podcast guests may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Today, we are running a special episode of

business breakdowns on our invest like the best feed. When we launched breakdowns, we hoped to cover industries and businesses that were well-known but poorly understood. This deep dive on Universal Music Group, UMG, and the music industry is just that. You will walk away with a whole new appreciation for artists, labels, and what streaming technology has done for historic industry. If you enjoy this episode, please be sure to subscribe to business breakdowns on your preferred podcast player and check out our growing catalog of episodes. Today, we're breaking down Universal Music Group. As one of the largest music businesses in the world, UMG is home to many. of the world's greatest artists, including Taylor Swift, U2, and the Beatles catalog.

A discussion on UMG requires a deep dive into the history of music itself, how it was historically monetized, the shift from physical to digital, and what streaming has meant for various pieces of the ecosystem. Our guest, Armand Gokal Klein, a partner and investor at Ruein, Kniff, and Goldfarb, walks us through that evolution of the music industry before we dive in on UMG. In our discussion, we first break down the industry pre-and-post Napster, looking at the way's music was sold historically and how that led to both record profits and a consumer revolution. We then assess streaming's impact on the industry and how contrary to what you might think, labels may be more important in a marketplace where it's easier than ever for creators to record

and release music. Finally, we finish with UMG's place in the ecosystem, the primary drivers of the business, how they're able to attract the world superstars, and how they think about deploying dollars to acquire new artists and timeless catalogs. Please enjoy this fantastic breakdown of Universal Music Group. We get to talk today about one of my absolute favorite topics, which is music and the business behind it. I've been obsessed with music since I was right in that sweet spot of Napster, of like cresting into my music fandom right as Napster came out. And so I think that's the place we have to start.

There's this line in the sand in the history of music. Maybe it's late 90s, early 2000s, when the whole business changed. And we have to start there before we talk about UMG. Maybe you can begin by just laying out what you view as the important points. of history in the business of music. Yeah, first of all, thanks for having me. You're right, that was a pivotal point for this industry. Prior to this industry, prior to 2000, when Napster and kind of the ripping services emerged,

it was an interesting model for this business. You had a few dominant, large labels that controlled every aspect of music from the discovery of the talent to the producing of the songs, to the record. of the songs because they own the studios because it was so expensive, to the production of the physical distribution. You know, he was on CDs and records, to the marketing, to the distribution channel controls. I mean, it was just all controlled by these few groups. And as a result, they were effectively the gatekeepers.

And the way they monetized music was interesting. If you want to think about it, it was kind of like an up front perpetual license. You bought an album. It was a bundled product. Back in the day, singles weren't even a big part of the business. So you had to buy 12, 15 songs from an artist in an album format. You had to pay up front for the perpetual use of that. And every incremental piece of music you bought cost you money.

You had to have this high threshold for wanting to consume incremental music beyond just listening passively on the radio station if you want to kind of on-demand access to your product. And for the record labels, that meant, and for the industry, that meant profits were heavily front-end loaded. And so the whole system was set up to not drive consumption through life, but to drive initial sales after launch. That's when almost all the profits for the industry were made. The other thing it did for the industry is basically five markets drove the great, great

majority of the revenues and profits. U.S., UK, Germany, France, Japan were three quarters of the revenues of the entire industry because you had respect for IP rights in those markets, and then you had a willing and able consumer base to pay for those rights. That was the model that was set up by the industry and by the labels of it's called 50, 60, 70, 80, 90 years. I mean, that was basically a way work. If you want to think about it, though, is that really the best consumer proposition, which is, hey, you have to buy a bundled product. I control what comes to market.

Once it comes to market, you have to pay a pretty sizable upfront cost to buy it. Then you can use it forever as long as you keep the physical product with you. But every time you hear something new and you want to listen to it a second time or third time and fourth time on demand, you have to go pay me for it. And that's what the ripping services to me were. It was kind of two things. One is it was trying to solve the consumer problem with the industry. And then two, is technology was enabling this digital consumption of music.

And the industry just was not forward on that. iTunes was a reaction, if you will, to the ripping services. Whereas you could have argued, actually, it should have been what drove the consumer to the digital format. Late 90s, the world kind of says, hey, we don't like this model. We want to be able to listen to individual songs when we want, and we want to not have to pay a whole lot of money every time we want to consume a new piece of music. And so you have the nafters of the world show up and try to break the mold. Now, interestingly, that wasn't actually a great format for consumers either. First of all, it was actually a time-consuming process.

I am also a product. I was in college in the late 90s without incriminating myself. I may have known people that have written music. Torr Insider too. And it would take a fair bit of time to like trying to find the content. Yeah, it was like a job. Try to burn the CD if you wanted access to it on CDRW. Right, exactly.

And then beyond that, the quality consistency was not there. It was just actually not great quality. By the way, it was illegal. And so there was these kind of three consumer problems with that as well. But it was the kind of first sign to the industry that, hey, this old model that you have, which worked great for you when you controlled all aspects of it. As technology emerged and we were able to try to find ways of pushing back on this not-so-great consumer proposition, consumers were basically like we're going to change the way this works.

Not surprisingly, profits for this industry globally peaked in 1999, and believe it or not, in nominal dollars were still not back to those profit later, 20 years later, much less than real dollars. From the late 90s to mid-teens to make 2010s, the industry was in decline, partly because of this ripping issue coming to the fore, but partly because they weren't offering consumer a product they wanted that was increasingly becoming digital in the consumer's bind, but not so much digital in the industry's mind. The first kind of attempt by the industry to solve that was iTunes, essentially said, hey, we're going to try to get past this issue of you having to buy physical

media. We understand you want digital. And so we're going to offer you consistent quality, a good you acts, and we're going to be able to deliver the product to you. Oh, and we understand you don't like this bundling idea. And so we're going to offer you the ability to buy individual songs as opposed to just buying albums. And so that certainly helped a little bit with demand. But it didn't solve this kind of more monetization issue that consumers seem to have, which was, why do I need to pay every new piece of content I want to consume?

And in fact, if you want to think about the original price minus, I think 99 cents on iTunes, it eventually went up from there. But effectively, if you think of an album as 14, 15 songs, and an album costs $14, $14, $15, All they did is they just divide the number of songs by the price of the album. That was the price point for Apple. The consumer proposition wasn't fully resolved. It was just kind of a step by the industry and the direction. It also wasn't great for the industry because you had essentially one distribution channel

of control the market. And so it was a powerful model for them. And so it helped, but we didn't see a major reaction in terms of return to growth and monetization in the market. That really started to change around 2014, 2015, as streaming came to the market. And streaming, to me, solves not only the first point, which is around the U.X and the digital experience, but it solves a monetization point, too, which is now you have product coming to market, where you're saying, hey, not only do you have digital consumption,

consistent quality of product, and you can digitally carry around your product, listen to it on demand, but I'm going to give you access to almost every song ever recorded. in the Western world for a fixed all-you-can-eat-e platform. And so that solves, to me, the bigger part of the consumer proposition, which, again, potentially led to the initial issues that the industry was having in 1999 with people saying, hey, why are we having to consume the content you were trying to sell us in the way we are, but all top of that, why we having to pay for this in the way that we are? I don't want to listen to the same song 50 times.

I want to be able to listen to different songs, but what about being able to do it on-demand? And so if you want to just think about pricing on a per capita basis back in 1999 in the U.S., the average consumer spent about $80 a year on music, if you look to today and look at the including promotional price plans that the major streaming companies offer today, it's about $8 a year. In the Western world and the big markets, we've come back a little bit full circle to say, hey, we'd like you to consume music at the price points you were comfortable with. This is nominal.

We haven't gotten to real yet. But for that price, we're now going to give you a vastly better experience. The market has reacted. So just to give you an idea, I mean, 2014 was really the year where we started to see Spotify, which is kind of the leader in this industry scale. It was founded in 2006, but its first five, 10 years of existence. It was a much smaller business, just trying to, A, get the access to the content that it needed and then B, just to build it out.

From 2014 to 2021, we've gone from very small percentage. of Americans consuming music to streaming to last year, 60% plus of Americans for now consuming music through streaming. So the market's reacted in a very positive way and good news for the industry in a way that now starts to bring this idea of value and price to music content. Absolutely amazing history that involves something creative that we all consume probably on a daily or weekly basis and also technology disrupting and making. possible a new consumer value proposition. It begs the question, I come at this conversation as a very biased, enormous fan of Spotify, the service and the business and the leadership there. And so it's fun to

talk about sort of the other side of the equation. You mentioned that prior to, let's call it, 1999, that major music labels controlled the entire, they're sort of vertically integrated, controlled the entire value chain end to end. And obviously profits were reflected that back in 1999. We haven't gotten back there, which is kind of wild to consider it because it feels like music has gotten, like, if anything, more ubiquitous as part of our daily life and TikTok and all these different places. There's more and more soundtrack to our lives. And so I'd love to understand what the industry of music labels itself looks like. I promise we'll get to Universal here not too long from now, but was this and is this an oligopoly?

How did those businesses evolve from the heyday of the late 90s through to how they look today as businesses and how they monetize? We are kind of in an oligopoly today. Over two-thirds of the market is controlled by the big three. This is Western music. I'm talking about that part of the market. Just to be clear, 60% of consumption of music in each individual country tends to be local content. So it is important to understand that when we talk about Western music, we're talking about Western markets and excluding some markets that are emerging.

And it's something we should talk about later, which is in the old days, as I mentioned earlier, five markets drove. the entire business, we are seeing that start to break down with the emergence of streaming as well. But it is effectively in allogoply today. And it was an industry that really started to consolidate pre-1999 so that you had some major players emerging because there are real scale benefits to this business. But to your point, they were the gatekeepers, as we just talked about, if you wanted to have the money to record a song before an album before, you needed them in terms of production assistance, you need them in terms of studio time, you needed them to burn your CDs and distribute your CDs and market your products and get access to the retailers, the targets of the Walmart

of the world, put your tower records, if we can all remember that and put your content so it had a prominent place and sell through. To your point, technology fundamentally changed that. And so not only did it change distribution, which we've been talking about, Spotify's of the world, but technology changed other things. Today, with a decent software program on a laptop and a few hundred dollars of equipment like this mic that I'm talking on now from Amazon, I can produce studio quality sound. I don't need a label anymore to go produce a high quality soundtrack. Using social media, I can now market my product and I can actually communicate with my fans globally, forget locally. Technology has not only disrupted the distribution side, which is I can push a button

now and push it out on streaming platforms the world over. And we talk about this, there are services that will do that for you for like 20 bucks a year or something. But I can actually produce the content. I can actually do some basic marketing and all of that. So the model of the major label certainly has changed. But, by the way, after 15 years of decline and pressure, we are now in a world where the major labels continue to be the dominant players in the market. And so a good question is, why is that?

What is their value today to the consumer and to the artist? Democratization of music has done some things that are scary for the labels. It's also done some things that are scary for artists. So in 2000, a report I saw a little while ago talked about roughly one and a half million songs a year came to market. Last year, 22 million songs were uploaded on Spotify. We have 60,000 songs a day and growing being uploaded to Spotify. And Spotify is, like I said, the leading platform, but there are other platforms out there,

certainly outside the U.S. in the Western world in particular. That is a scary proposition for any artist, including the biggest artists, because in the old days, yes, you had these gatekeepers that kind of you had to get access to. But once you got there, you didn't have quite as much competition. And if they featured you, you were kind of what the world listened to. Today, you're like, how do I cut through 22 million soundtracks a year so that I get listened to? And that's a challenge for the industry. And that's a challenge for artists.

And that's a challenge for everyone. Secondly, your strengths of distribution increasingly get fragmented. So in the early days of streaming Spotify as the leader was kind of the dominant platform, but we've seen not only other large leading streaming platforms develop, and we can get into kind of that dynamic because that's a very interesting part of the market as well. But we've now started to see distribution channels beyond just streaming develop. So Spotify's share major label digital revenues has actually dropped over the last few years, not grown. That's because you're starting to see use cases like Peloton, like

TikTok, like Groblocks. All these, to your point that you made earlier, Pat, you're starting to see new use cases emerge for this content. It's becoming more ubiquitous. And the owners of the IP are starting to generate revenues beyond just the pure streaming. Now, string is still the most important digital channel by far, but you're starting to see these new things emerge. So for an artist, There is a lot more complexity to distributing your product now. It's not just about what are my CD sales in the various retail channels. It's that retail is still a not insignificant part of the market. It's streaming.

And by the way, there is a handful of streaming companies depending on which country you go to that dominate those markets that you need access to. And now there's all these news channels emerging on top of that. And so you need someone who can help you with that. And beyond that, the traditional roles of I'd love to have my content featured on. video. I'd love to have my content featured in live in these kinds of things. So there's a lot more complexity to it. Third, global reach, as we talked about, it used to be five markets. So if I kind of figured out what U.S., UK, Germany, Japan, what my strategy was, I basically cover the market. That is now starting to break down where we're starting to see other markets. So the top five share has gone

from about 75 percent to the high 60s in just the last five years because we're starting to see monetization of the other channels emerge. And so that's yet more complexity for these artists to deal with. And then finally, even though the top artists as a group drive the majority of streams, over half the streams come from the top 50 artists, which is not surprising if you think about it. No individual artist over multiple rolling years is a significant part of the market. In any one year, the leading driver of streams in a market, market is usually low single digits market share. And it's rare that you see over five years the same person headline every year. And so it's hard for an individual artist to be able to go to

these distribution platforms and say, hey, you really need me because the distribution platforms are like, hey, that's true. It's great. You're awesome. You're 3% of my streams. And that doesn't help me a whole lot. Just step back to the role of the majors today. They still have this traditional VC and production ecosystem role, which they've always had. They fund the production of music. They have a big portfolio of superstars that they can say, hey, why don't you guys do a song together or they can bring in superstar producers to give you a little bit of an edge as you bring to market. On top of that, now they still have all the guts of the physical. They have this marketing promotion organization globally that we just talked about that's being set up to deal with this

complexity. And perhaps most importantly, they have scale in a way that no one individually has. So So UMG is the largest global label, major label, and they have a high 30 share of streaming overall. And when you walk into Spotify with a high 30s share versus a two to three percent share and you're in the high 30s every year, it's a different conversation. Not only for the label, but for the artist who they're putting together and then who they're representing. And then finally is data.

Data is becoming a hugely important aspect of this business. Again, an individual can tie into data. streams from various outlets, be it social media, be it streaming, but the ability to capture a full picture looking at the physical, looking at the global data, looking at every outlet, again, when I have 39, 40 percent market share in a market, I get data in a way that is very hard for even indie labels to get. We talk to indie labels who will tell you the majors have a data edge in this business. I'd love to take this from the perspective of an artist. Let's imagine I'm Billy Eilish or something.

I think she's under the UMG umbrella. How does it feel for her, and maybe even in like the life cycle of an emerging artist that goes from an unknown to a global superstar, how does it feel for me to engage with a label today? You've highlighted the reasons why maybe if it was all Spotify, I could just go directly to them. But the fragmented side of both sides makes it so that it's probably for the five artists that could have big companies just as themselves, really hard to manage all this.

stuff. So just give me the perspective of like the creator here and why what's old is new again, it sounds like. There was this long period in the desert and now we're reemerging where these labels once again have power and are the preferred partners of the artists, which is contra narrative. It's funny. I spoke to a professor at Berkeley's College of Music, which is one of preeminent music schools in the country about various aspects of this business. And one of my favorite stories he told me is every year I ask my students to raise their hand when I say to them, who likes labels, wants to work with a label and nobody raises their hand. And then he says, okay, now imagine one of the major labels comes to you and gives you an

upfront wants to sign you. Who would have signed on with them? And everyone raises that. I think part of this is as an artist, you don't love the idea of being beholden to like profit-driven organization that's going to take a cut of your profits. And that doesn't feel so great. But the reality is we've seen from share that they're necessary. And I mean, to this day, the number of artists that have come to market and succeeded like

of Billy Eilish without the support of a major label. I can certainly count it on one hand. It's just not a very big number. It's a very difficult thing to do. And to the extent it's happened, it's mostly happened in hip hop, which happens to be a genre that allows for that a little bit more than a pop or a rock. For an artist, I think of it as when you're just trying to get yourself noticed. Like I said, you can do that by coming to the market.

You can get access. There are companies like TuneCore and Distrook Kid, which will, for a very small fee, take your product. You can be active and savvy with social media and get the product to market. But at some point, that can only get you so far because you're not getting featured on playlists on the Spotify's of the world. You're certainly not seeing all the data about global. You know, there are examples of someone notices CDs are physical still a big part of the Japanese market.

And all of a sudden, as Billy Elish, you might have a label that comes to you and says, oh, by the way, like your CD sales just starts spiking in Japan. Maybe you should put them on the world tour and let's push some new product there, right? That's not something you can easily do on your own. So there are just parts of the market that are hard to access. A good story here is the early days of streaming and disruption, we started to see some of the megastars go out to the market and try to do exclusives. So if you remember YouTube and Beyonce were doing exclusives with Apple for a while,

and Beyonce and Jay-Z with Title. And when you talk to people in the industry about their experience with that and why we haven't really seen that continue, it's because, yeah, okay, you can capture 30, 40, 50% of the market with great economics for you as an artist. But as an artist, your brand, and thus the economic value of your product is tied to not just streaming and getting the product out. In a way, streaming is marketing for live. Top of funnel. Yeah. Right? It's top of funn. So bring people in, bring my fans in and then let me go try to interact with them and live shows and limiting your distribution to any individual small contract or even big one. So even if Spotify was

70% of a market. It may not make sense to sign it with Spotify because I'm still missing 30% of that market. And I only get a small percentage of my, or maybe not small, but certainly not the majority of my income from streaming royalties. I get it from this ecosystem I build. Really as an artist, my goal is to increase the value of that ecosystem, not just purely the streaming income from it. And so it's an artist. What you're trying to do the whole time is, A, get noticed. And then once you get noticed, get somebody who has heft behind them to get your product to be more featured. So you can get more noticed.

You can go up and scale. And we've actually seen this in the labels and in the disruptors on the label side, where you have individual players that have each developed underneath the major label superstar service offering to try to bring you up the funnel there. But the goal of any artist is to be a superstar. I have talked to, certainly not every art in the world, but I've talked to a number of them in this project over the years. And I have yet to talk to one when you say, hey, what's the goal here? And they're like, I want to be a superstar.

That's the goal. And to be a superstar, it means maximum distribution, maximum marketing, maximum recognition. That's the challenge for any artist. And as they're going through it, yes, they have all these things they don't like about the labels, which is I have to give them some of my economics, arguably, as I'm coming up the superstar curve. But even at the top, I mean, Taylor Swift signed with UMG for a reason. If there was an artist in the world who did not have to sign with a label, in my opinion, it was Taylor Swift. She's incredibly business savvy. She's got unbelievable following. She's a huge global superstar.

And yet she chose to sign with a major label. Now, there's no doubt, as has been the case for many, many, many decades. When you become a superstar, you'd have a different economic proposition than you do if you're a startup artist. But the challenge for every artist is to try to get up that curve and stay at the top of that curve. and coming back to this 22 million songs a year point, whether you're Billy Eilish, Taylor Swift, or a startup, you're just trying to get maximum amount of time in an increasingly crowded world. And that means you just need someone who can access all parts of the world and also has some scale to be able to push your product so that you can attain and then stay on top. Now, one important side note to make here is that on surface, one could argue, the proposition

of the major labels is losing relevance with artists because their share of the, the overall recorded music market has actually declined by a few percentage points over the last handful of years. But if you dig a little deeper, the reason indie labels and direct distribution have gained a bit of share is related to the fact that as we spoke about earlier, we've seen the barrier to creating and distributing music collapse. Pre-call at 2000 was really difficult for a small or even mid-tier artist to get their product to market, right?

The major labels were, and to some extent still are geared to creating and marketing superstars. So scaled artists, given their kind of high. service costs have always worked with the major labels, whereas the small and mid-tier artist, it wasn't the right offering for them. As the barriers for small and mid-tier artists fell, their share of the market increased from kind of a very small number to a slightly larger number, which means superstars and the major labels that represent them have effectively lost a bit of share. But this is really mostly occurring on the periphery. I mean, as a group, we're talking about a few percentage points of share loss for the majors over the last handful of years.

And that's because this is still an industry where superstars dominate. And by the way, as it relates to UMG for what it's worth, they've lost kind of the least share among the big three over the last five years or so. Before we come back to the specific business breakdown aspect for UMG specifically, there's just so many cool aspects of this business. So if I am a superstar, if I'm Taylor Swift, what does that average business look like? So if I've achieved that upper status, where's my revenue coming from, like on average? And how high is the variance of that artist to artists?

Like, is it pretty consistent? Very high variance, extremely high variance. Certainly within genres. So every genre has a very different dynamic. Certain genres have very strong live income streams. Other genres have less live income. Very strong streaming, less strong streaming. Rock has been a slower adopter of streaming than hip hop,

which has been a leading adopter of streaming than pop, which is almost as strong as hip hop. And so for every artist in a different genre, changes certainly artists by age demographic change because we can talk about this, but streaming, as with most technologies, is first adopted by the youngest, then matures and we're seeing that happening. Most people's soundtrack of their lives as the industry talks it is created from the late teens to the mid to late 20s. That's kind of what you listen to your whole life for the most part, and your discovery goes down pretty quickly after that. And so depending on where you fit as an artist and your fan demographic, you will have a different mix as well. But once you're a superstar, for most superstars,

concerts are a very significant driver of revenue. And as we just talked about, streaming is really top of funnel. How do I bring fans in to that funnel, then monetize them not only through the streaming, but really then through these live shows where I have merch involved, I have smoking high on prior points. And just to be clear, live is a small driver of the major labels business. That's really a separate company that handful of companies around the world, frankly, that tend to lead in that business.

It's not so much that even though streaming might for a major, major artist be a minority of income compared to live, it's still the enabler of the live revenue. And so that's the challenge for them really is. And this is what the Beyonce's of the world, what they realize is why we've seen the breakdown in this exclusive streaming model that developed and didn't really go that far is because for them, it's all about maximum reach, fill the funnel. So when I go live, I can get as many people as I can to my shows, buying my merch, buying my products. It's more interrelated than just to say, hey, I should just maximize for live

and streaming is a small driver of my income because one tends to drive the other. So we've got streaming merch live, maybe this new category of more fragmented distribution. So maybe I start making running in Roblox or TikTok or whatever. And that's kind of in the streaming-ish category. Like I'm getting paid, the more my IP is being used in various different platforms. It's a great excuse to bring the conversation back to UMG. And here's some, like, I think there's some inside baseball that we just need to walk through to really understand their business, including something like the difference between recorded music and music publishing. I don't think people would intuitively know what that difference is. You can now start to level set for UMG specifically,

like, what is their business today, what drives it? What are the key terms or ideas to understand in terms of how they drive revenue? The two major categories are recorded music and music publishing. recorded music is over 80% of revenues and profits. So that is by far the biggest driver. And what recorded music is, it's frankly what probably most people think about when they think about a label. It's the discovery and development of recording artists, related marketing, promotion, sponsor, distribution, and licensing of the recorded sound. So what they're talking about is the actual recorded music element developing and monetizing that part of it. So if U2 sings a song, you choose production and sound and product from that recording studio is the recorded music element

of it. The publishing element of it ties more to the written music and the written lyrics, but that can then be performed by various people in slightly different styles. And so that is a second separate and frankly a smaller driver of the industry and certainly for UMG. For UMG, not only is record music big because record music, generates the majority of the revenue for the industry. But UMG's share of recorded music is also much higher than it is its share of publishing. It's number one in recorded music. It's number two in publishing. And we can talk about this is also regulated. Each country has some regulations around how much value goes to publishers versus not. There's some regulations, which are also actually

always in discussion. There's some talk about potentially that percentage going up for publishing. There's other talk that it won't. But long story short, just think of one as the recorded music, the recorded song itself by the artist versus the written song and the written lyrics. And then if you look at UMG within recorded music, they just really break it down by the different distribution channel. So you have streaming, which is the streaming revenue, which is now over 50% of all of UMGs revenues, by the way. And then you have physical, which is the old model of CDs and vinyl, which has had a resurgence. You have digital download, which is the old iTunes model, which is declining pretty rapidly as streaming is coming up. And then you have a licensing category. And you can think of that as

video games, robots, things like that, where licensing revenues tend to come in. And that kind of makes up your recorded music part of the business. Within publishing, it's mostly publishing rights. And so a publishing label will either acquire those rights through catalog or represent an artist's rights. And their sole really raison d'être in publishing is to ensure, that the writer of the song and the lyrics is compensated every time someone utilizes that asset. And so it's a much simpler business. There's certainly a little bit of a promotion element to it, but nothing like it is in recorded music where you're trying to find artists to create music. It's a little bit less of that element and more of a fee collection business, if you will,

which we can talk about. But technology is probably a little bit more concerning on that side of the business that it is on the recorded music side. We can certainly get into that. But those are kind of the two big drivers. Merch is a small single-digit driver of the business, low margin compared to the other two. Margins within publishing and recorded music for UMG and for the industry are actually just starting to cross over. Recorded music is a very fixed cost business, if you will. It costs me X to find an artist and produce a song. The more I can sell that song, the higher the margin I don't see because the incremental margin is really high. And so what we're seeing with the growth that's happening in the industry right now is recorded music margins are really improving quickly,

as both mix shift towards streaming, which is a high margin channel, plus just general fixed cost leverage is happening. That's been less of an element in the publishing business. What are the general margins of the business, just like in the trends in them? So UMG's overall margins have expanded from the low teens to kind of the high teens over the last five years or so. That's mostly been driven by significant margin improvement in the recorded music business, where margins have expanded from the low teens to call it now the low 20s. that's primarily due to mixed shift towards high margin streaming revenues, but also fixed cost leverage from higher revenues.

So if you want to think about that as there's a more or less fixed cost of discovering an artist, producing music, marketing the music, distributing the content. And so as you generate more revenues off that same content, you have pretty high incremental margins. There's also an aspect of lumpity digital royalty streams, but reported figures are generally a pretty fair representation of the trends in underlying profitability of the business. The publishing business has earned a low 20s operating margin for a number of years now. Again, those lumpy royalty claims kind of move things around a little bit, but that's a more stable margin business historically.

Looking forward, management's guiding to a mid-20s EBITDA margin, which you can call kind of a low 20s operating margin. And that's, again, being driven by this mix shift towards digital revenues towards streaming revenues and this fixed cost leverage. I love to talk about just like ownership of IP a little bit here. I think one of the things that people will think about, I can't remember who the feud was with, but Taylor Swift, there was a famous feud over ownership of back catalog. How does this work? Like, is it perpetual? Does if I buy an album from someone, do I own that music forever?

How does the artist figure in here? Is there any sort of model where the artist owns some of it directly? How does the IP rights thing here work? Because it just seems like a critical piece of how monetization can happen in the future. So the thing about the IP and two silos. One is catalog, which is effectively someone owns a bunch of IP. Sometimes the artist, sometimes another studio, music that was produced historically, and you can buy that. Two is called an upfront, an artist, upfront of artist payment, where you are paying an artist to go create IP.

So just think of that because the two big buckets in IP, and there are slightly different nuances around both. But in the U.S., generally speaking, and this is constantly being litigated, in general, you have a 90-plus year right to content. What the labels have historically said is for content that we are paying an upfront for, it's actually a work-for-hire arrangement. We are hiring someone to create content for us that we will own. The old model, certainly, and this is slightly changing, we should talk about that, has been it's work for hire, we own the IP, period. You go create it, we pay you a fee for it.

That's what the upfront is in return for you to go create IP for us. But it's our IP, and we get that right to the IP until, until IP laws allow it to revert either to an artist or to become essentially a non-IP. For Catalog, it originally starts there, but then you can sell your IP rights to someone for some sum of money and then you get the rights to what's remaining in that IP. Not surprisingly, new artists who are early in their careers who are just looking to get a break will sign over, even to this day, the great majority of them will sign over those IP rights. Because you just think of it as like, would you rather have 100% of a small,

or less of a much bigger pie. And that's kind of what every artist is struggling with, certainly in the early days. The other thing is nine out of 10 artists do not become long-term superstars. It's a very hard business to break out in, much less stay on top in. It's a struggle for them to go do that. And so there's a challenge for artists to try to put themselves in a position where they have the maximum opportunity for success,

and they are willing to hand over their IP rights for that early in their career. As you move forward in your career to a Taylor Swift scenario, and by the way, Taylor's early IP was owned by this other label for this exact reason. Taylor eventually got to the point where when she was renegotiating her contract, she was able to say, hey, I'm Taylor Swift. By the way, we're pretty sure my IP is going to get. This is going to work, yeah.

This is going to work. I want some of my IP. It's like I don't want whether it's a percentage or it's a, a 10-year reversion or whatever it might be, I want access to my IP. This, again, is actually not super new. This has been happening for years and years and years, like a Bruce Springsteen or a U-2. Every time they were renewing their contract, they were probably getting more rights or

certainly more economics to their IP. So as you move up that purity curve as an artist, you get more access to your IP, either in economic terms or in reversions. And I think what's becoming more common now is reversions of IP back to the artist after X number of years. that's not necessarily a big deal for the labels. The vast, vast majority of the economic value of IP is the first 10 years of life, actually the first three years of life, but certainly the first 10.

And so if you have IP reverting in years 5 through 10, you're giving something up, but not to the point where it's truly pressuring your business. And again, to the point I was making earlier, this is not completely new. But that IP is a very high topic. It is this work-to-hire arrangement is something that's constantly being pushed and pressured. And again, that's just the U.S. There are different IP rules in almost every country you go to about when rights are revert to an artist. There's currently a report that came out from a investigation in the UK parliament that said IP rights should be reverting much earlier

to artists because it's not fair to them. And so there is now talk about whether the UK could legislate something where IP rights revert to artists more. I think labels fairly basically said, you can do that, but then upfront payments are going to collapse because to simply of risk-adjusted ROI for us. We have to take more risk for less payback. We're just going to underwrite less artists. When I was doing the research for this, one of the stats that most popped out allows us to talk about now, since streaming is such a key aspect of recorded music revenues for the major labels in UMG, understanding the contractual arrangements for how much they earn per stream with the Spotify's of the world is really, I think, key and important. And I'm just fascinated

by this dynamic. And I want to talk about the differences between a variable cost structure like Spotify has versus maybe something more fixed like a Netflix has created. But the eye-popping stat was in a dollar of streaming revenue. We'll get to how that comes to be a dollar. That labels get like 75%. Artists get like 11. The publishers and songwriters actually get more than the artist, 16% or something like that. It really makes your point earlier about the streaming is top of funnel. Yes, they're getting paid, but maybe live is way more part of their business. This is a is almost like they're getting paid to market to their end consumer, which is a cool concept. Is that equilibrium interesting to you in any way that it's roughly the pie for a dollar

of streaming revenue looks like that? And then I want to get into the balance of power between the record labels in music and the streamers versus other platforms like video. That's a slightly misleading stat because of catalog. Over half of music consumers catalog that's owned by the labels, the artist doesn't get payment on those because the label owns the IP and in many cases doesn't share it. They bought a catalog like Bob Dylan sold his catalog to UMG for hundreds of millions of dollars last year. Essentially, he cashed out. He went up front versus ongoing. Yeah. And we can talk about ROIs, which are absolutely

something that is a hot topic in this industry about those sums that are being paid. But all I would say is it's not quite as extreme as that makes it sound, which is these labels just capture all this value for no real economic benefit on the back. And it should be the artist capturing more of it. Also, very frequently, the artist is also the publisher, at least in some way, whether it was lyrics or things. So there's sharing that happens there as well. But yeah, that's right. I mean, basically the way it tends to work is recorded music label revenue streams. Over half go to the label, what they call A and R costs, then revert back to the artist, whether that's in the form of an upfront, which again would be slightly different than the way that statistic you gave was broken down.

or in the way in the form of revenue share. So just in terms of how an upfront works is a label signs on an artist pays them $100,000 or $1,000 or $3 to go produce a one, two, or three albums. The artists, once the product launches, all of the revenue and profit reverts back to the label until that initial investment is recouped, after which you see the profit stream happen. Not surprisingly, nine out of 10 products that come to market do not recoup their initial investment. So again, yes, the label is capturing a lot of the revenue, but actually they're just trying to get kind of initial investment bank before that split happens. And so much capital goes into that

upfront that's part of it. Now, those percentages of those hit rates, by the way, are increasing, and this is an interesting element to talk about, partly because data and social media and all that's our predictive ability on this IP is improving. And so dollars going to the artists are actually inflating as a result of that because they can say, hey, I'm a more proven product today than I would have been 20 years ago. I want more economics. Also, the value of IPs going up to streaming. And so labels are paying more. But at the same time, the hit rates on those portfolios are starting to improve, too, because everything is becoming a little bit more knowable. I already have 20,000 fans on Facebook and Instagram and Snap. And so, hey, I'm a more known product. That's kind of how

I think about it, which is as long as the label and the major label in particular is crucial to success and global reach and cutting through the noise. and this aspect of an upfront remains, which, by the way, it's a good deal for an artist. If nine out of ten up fronts don't get recouped, you're getting a shot on goal. On average, it's a great idea. Yeah, right? You're getting a shot on goal. Now, the problem is for the one out of ten that hits it big or hits it.

It feels like a bad deal. But for as a portfolio, it's actually a, it's like a VC fund. It literally is a power law driven outcome thing. Exactly. And there are other players out there who can try to play in that less so on the upfronts, more so on the catalog, the hypnosis of the world. But it really is like a VC in some ways, right? Which is you pay for the upfront and then you have the tools in place to maximize the success rate of that upfront.

It's a major label. And as long as that dynamic remains, I think they are in good shape. Plus, what really gives them to have, and I should have touched on this earlier, is that catalog. When more than half of music consumed is catalog. Catalog is more than 18 months deep catalog, kind of think of as a few years old. But over half is catalog. and over 40% is decadologue, and that tends to be much more tightly owned by the major labels, it's hard for anyone to try to scale up and get that heft, because even if I'm Spotify,

I can't have a service without access to that content. And there's no way for me to compete, say, UMG wanted too much money for that back catalog. They pulled their catalog and a bunch of their artists from me. So I Spotify offer 40 million songs. Yeah, Amazon and Apple offer 70 million, but hey, most of what you want is here. The consumer's going to say, thanks, but I'd rather go for the exact same price point. Yeah, like, I want to have all the music. I think that economic model where the labels earn what they do is sound.

And there's pressure, so that we can talk about that. But for now, it's sound. So if we keep reducing the dimensions of what matter here, you come pretty quickly to the bargaining position and power of the labels with the streamers. I'd love to understand the history of this. and maybe again, like I said before, contrasted against other media examples where there's like a dominant Netflix or whatever it is, like a distribution streaming platform with the IP creation side of the business and why it's shaken out differently in different spaces. So just give us sort of a lesson on the history of this bargaining relationship, which is so critical. There's such a symbiosis between the labels and the streamers.

and yeah, just kind of explain the bargaining power of both sides and how you see that playing out. Sure. So let's use Vizio because I just think it's a great example. If you think about music and how you consume music, you actually consume catalog product a lot. I certainly do, and I think most consumers do. Songs that I've listened to once I will listen to again and again and again at some point. With video, that's less the case. Once I watch season X of what Y show, I probably am not going to go back and watch it. Same with the movie.

I might watch a movie a couple of times. You know, my favorites, I might watch a handful of times. But I'm not consuming that catalog like I am. So if you want to think about a streaming platform like a Netflix, their power is in using scale to develop new IP. Because the way you keep people in your ecosystem is new IP. You want them continuously coming back to watch the new thing and to engage with the new product. With music, it's different. With music, not only is new IP important, but old catalog IP is important. So on Spotify, some new stats that came out, about 37% of their

playlists are heavily weighted towards new music. 39% are heavily weighted towards catalog. So catalog is just a huge part of the experience for the consumer, which gives power to people who own IP historically as opposed to just creating new IP. It's a slightly different dynamic, which is important. So if the world of music was like video where it was all about who's creating the new artist and the new song, and that's all that matters in terms of your product. As a Spotify, Spotify, go out and say, hey, I don't care what the labels own or used to own. I'm going to pay up for new artists up front.

I'm going to create new music and I'm going to bring everyone in because I'm going to have the hottest new songs. The problem is the consumer wants more than that. they want the old stuff to. So all of a sudden, the power in that relationship moved from the distributor who can create new content and also has the consumer relationship to who owns the IP that the consumer wants. The IP that the consumer wants, a lot of it is owned by these labels.

The other thing is we want access, as we talked about the consumer proposition of the old model versus the new, what we didn't like about the old model was we were restricted in the content we could consume, whether it was new music or old music. And so anytime you start constricting the amount of access I have to the world's catalog, you know, tens of millions of songs, that becomes a tough consumer proposition. And so what you've ended up with, not surprisingly, is a few key players that happen to own the majority of the IP that is kind of a must have in this industry to have a product offering.

And a handful of distributors that have gotten scale on distribution of great user or experience. like a Spotify, Amazon, a YouTube, whoever you might want to think about in that bucket, but they are dependent on the IP of the labels. And as a result, the labels are advantaged also in the new IP because they can say, hey, I can bundle all this together as an offering. And I'm a really important aspect of reaching different artists, of reaching different distribution channels, of reaching different countries and all this stuff. And so that small difference in how we consume music versus video has led to this

position where the distributor has really, in one instance, the distributor becomes the powerful creator to the historic owner of IP continues to be the powerful creator of new content. And the distributor is really a pure distributor of content and needs access to the old stuff to be able to offer something. I would argue that pure music offering is a semi-comodotized product at this point between Apple, Spotify, Amazon, YouTube, Dizer, you know, we can kind of go through title. What you're seeing from some of these players is their attempts to differentiate are less so about music and more so about other categories where they can at least own the IP.

It's a more emerging category where there isn't a whole lot of old IP. And so how do I podcasting, for example, how do I create new IP and try to get that type of a position? It's a difficult one for the distributors. And they're absolutely important aspects of this distribution channel. But they don't have a product without access to that core IP that's majority owned by three companies. It's a brilliant description.

of the difference. It's kind of so simple when you hear you lay it out like that. And it also then leads us to the next obvious category, which is building that IP catalog. The Dillon example is maybe a fun one to explore. And it also explains, obviously, I think this is where we can get into scale economies, why more and more power might start to accrue

with more and more buying power to the top couple of players. And I think we need for Universal specifically, like, it's fun just to hear the stuff that's in their portfolio. Like when I looked at it, you probably don't appreciate it if you don't know it intimately, but it's so many of the interesting labels, whether it's Depp Jam or Interscope on the hip hop side or others elsewhere. But talk to me a little bit about, I'll call it the investing or capital allocation side of these businesses, building up these IP catalogs, and how they think about things like return on investment, how dollars are deployed and what the napkin math is for making a purchase like however much it was for Dylan's back catalog. Because if that's the thing that drives their power, again, as we continue to focus on what matters here, skill at this and competition,

in this area is a key competitive frontier. Yeah, I agree 100% with that. Now, to some extent, they already own so much of the IP that even if they started losing a lot of the IP that's coming to market, they'd have power for a long time. For a long time. That's a slow. Now, it doesn't mean that they don't need to continue to acquire IP. That is an absolutely important aspect of the business, both through these upfront as well

as through purchase of catalog in the case of Dylan. It's probably worth starting with the idea that competition for this is increasing materially over the last handful of years, hypnosis is probably the most well-known competitor who's essentially created a fund to go purchase catalog. Blackstone recently announced a partnership with them on that. By the way, if we just step way, way back, that's a pretty good indication that people think the value of these assets are growing over time, not shrinking. And so increased interest in- Mortgage supply of capital, yeah. Yeah, I do think to the extent capital is flowing anywhere today, the fact that this happens to be a category we're seeing enormous interest is

probably a sign that people at least think this is an interesting category to be looking at. In terms of the ROI calculation, by the way, we should just touch on content investment at UMG particularly, but as we just talked about, the industry overall, has increased substantially over the last handful of years. A net IP spend, net content acquisition costs at UMG were near zero, six, seven years ago to maybe a couple hundred million, three, four years ago, to like 500 million, two years ago to like one and a half billion last year. Of the one and a half billion, half billion was Dylan. And also we had Taylor in there. So some of the inflation is Prince sold part of, you know,

his estate sold part of that catalog to UMG. And so part of that inflation is we've seen this dynamic forming where artists later in their careers or their estates have a, either a differentiated view or just cashing out now because we've seen after 15 years in the desert, we've come back to real values starting to accrue against these assets. And some people are saying, great for you labels that you think it's going to keep going up into the right, but we're happy to just take our cash today and walk away. So you've seen more assets kind of really start to change hands in substantial ways than historically. But the core proposition is for our catalog purchase is, I think streaming and all these other ancillary things we talked about, whether it's Pelton or

Roblox or social media is going to continue to drive increased monetization of this content. I think this has a X decade life left to it. I think that we are moving from a model where 90% of the income for a song was generating the first 24 months after release to one where as the average age of the streamer continues to mature, catalog content becomes more valuable because my consumption of older music goes up as a streaming platform. and that monetization goes up as a result, that maybe as the streaming services stop competing with each other as that growth rate matures, do we start to see just their average realized

prices approach, headline prices as opposed to their current significant discounts to headline prices because they're just in a market share war right now. The labels in the hypnosis of the world belief is all of those drivers are going to continue to improve the monetization of this content. We think we can put a number around what we think that's going to be. We can discount it at X rate, and we think that this is what we should pay for that content today. And by the way, if you come into our ecosystem as opposed to going to hypnosis, we have it a whole marketing operation for artists.

We can actually market catalog just like we can market artist product. Look at the scale advantages we have. We can generate more revenue and more profit from every piece of IP that we acquire than just a pure financial investor. From our catalog perspective, that's the calculus. For the upfront perspective, it's slightly different, which is what do I think that hit rate on this portfolio of artists is going to be. And that's what I was talking about a little bit earlier,

where they are making the decision that say, we are going to pay higher up front because we think the hit rate in our portfolio is going to go up because instead of signing an artist who played a bunch of songs out of a van, a bunch of local bars in Boston, I'm going to try to take him or her national. Now you're saying, you're picking up an artist where the artist says, I've already released three albums. I have 100,000 followers on Facebook,

of which 10,000 are in Germany. And here's my demographics and here's the new product. That is a sure bet for a label to make. And so we are seeing them willing to pay more up front for that content, partly because they should. I mean, the artist has something that they can show in the form of a track record. But if the hit rate on that portfolio goes up as a result of that, even though the denominator is going up a lot, hopefully the numerator is too.

And so your ROI on that investment isn't collapsing to the rate that some people, I think, they're worried about in this industry. Yes, it's becoming more capital intensive in some ways. First of all, the majority of capital content acquisition at UMG, and most of the industry goes towards catalog, not towards the upfronts. And then within the upfront element of it, I do think there's this argument to be made that hit rates are going to improve because data analytics is improving. Then, yeah, okay, you pay a little bit more for the rights, but the rights are, A, worth more because the value of IP is going up. And B, my hit rate in the portfolio is going to go off, too. And so I'm not saying the ROI is going to go up, but I don't think it's collapsing.

to the rate many people in the industry fear. You got this fascinating dynamic of the catalog driving so much of this discussion, the value inherent in that thing, potentially growing, like more and more leverage on IP assets historically that have a cultural cachet or Dylan songs that everyone recognizes or whatever. It feels like the position of the businesses themselves is like fairly steady, which is good in the sense that, like you said, even if they stopped all activities, like they're going to have a lot of value for a long time.

But it also makes me think that like achieving crazy high growth rates is also really hard because there's only so much IP to go around and if that's driving everything, it's equally hard to imagine 100% year-over-year growth as it is 50% decline or something. So how do you think about that, like the growth profile of these businesses going forward as an investor? What's driven the growth of this industry for the last five to 10 years is this emergence of streaming. We just talked about how it's more than half the business today.

It was single digits seven years ago. And so that's just been rapid. All of the growth of the value of streaming has basically come from a few developed markets, the historic markets that already monetized that have quickly adopted to this model. So to me, the idea that those are maturing and slowing is obvious. I mean, they talk about how over 70% of households in Sweden, Spotify's home market, pay for streaming. In the UK, it's kind of in the 60s in the U.S.

it's in the upper 50s. So these are somewhat mature and maturing markets. But that part of the growth story to some aspect is going to slow. Now, as I said, I don't think it's just a subscriber growth story. I do think there is going to be a conversation as this market matures around once the market share war has kind of done what it's going to do, are we going to see streaming platforms start to discount less, which alone would improve monetization notably? And we're not having a 5% or 10% discount. It's pretty significant discounting that occurs right now in this industry. So that pricing would certainly improve. But the real opportunity on streaming is this concept of, are we going to finally see this become a more normal content market where it's not just five markets that drive all

the revenue and all the profit? Are we going to start to see the Chinas of the world, the Indias of the world, and China's an exception for the labels? But are we going to see the Eastern Europe? Are we going to see Australia? We see some of these markets start to monetize in a way that the 75% of revenue that came from the top five, five years ago to the 60, you know, high 60s today is going to go to 60, 55, 50, 45, and all of a sudden you're going to start to see real monetization occur. If you talk to most people in the industry, I think you would hear that is what they are most excited about. And that's why they believe you're going to continue to see significant growth in this category.

Beyond that is the question of these new channels that are emerging. And I think that's a harder one to handicap. It's easy to look at that and say, you've already signed up Roeblocks, you've already signed up Peloton, What more is there left? It kind of, to me, that analysis misses a nuance, which is we're getting to the point where music is becoming more ubiquitous. People are consuming more music. So just as an interesting stat, in the U.S., the average person five years ago is consuming

about 25 hours of music a week. That's up to 32 hours now with streaming because the incremental cost to consume is just gone to zero. So like, I'll just consume more music. And by the way, things like smart speakers are showing up. Well, 50% of people who have bought a smart speaker say they listen to more music than they did prior to buying the smart speaker. So we are seeing music show up everywhere in our lives, and we're now having a model

where we can monetize that music. And we can even talk about blockchain and NFDs and all these other ways that we can potentially monetize it even more and in different ways. And so that's where I think you start to see some upside to the growth rates of this maturing core streaming that we've seen. I know the industry certainly is focused on those and thinks that there's opportunity there as well. While I certainly agree that it's hard to see how these things grow 50 or 100% a year,

I think the idea that the high single digit to load teens growth that they're talking about, I think the duration of that growth may be longer than people appreciate because you can look at the core streaming and say, well, it was like 40% growth a handful of years ago. It's more like 15 to 20% now. That's just going to 5 to 10 at some point. And then that's it misses those other nuances about these other markets that potentially develop and you see that high single digit low teams maybe persist for quite a long period of time. Growth is also going to persist at recent rates for a bit longer for the majors because the percentage

of their business coming from growing channels like streaming is now significant versus over the last five years growth from streaming was to a large extent being offset by declining businesses, particularly digital direct that iTunes business we talked about and to a lesser extent physical. So if you think about the market expansion and the modality of, expansion in the growth equation, kind of the two things that matter the most. What counterbalances that on the risk side? So if you had to assess the things that if you're the CEO of UMG or Sony or whatever are most terrifying to you, is it NFTs? Is it new ways that allow power to shift more towards the artists because the top of funnel becomes less interesting and the superfan becomes

more important to the monetization of IP for artists? Yeah, I think this industry certainly has challenges, it's dynamic, things are changing. Now, I will say the major labels, and I happen to think UMG is the best that this have reacted pretty well, just before I get into some of the other risks. One risk was, over the last five years, you saw technology players, tech forward, skinny labels, as they called themselves, emerged to try to disrupt the major labels, whether that was a distropted or a tune core at the low end or an orchard or in grooves in the kind of mid-segment or believe digital. They were trying to say, hey, we can use technology to do like 80%, 70%, 50%, 50%, 50% of what the label can, you can keep your IP rights. And that's a way better consumer proposition

for you. I think not only has the fact that everybody wants to be a superstar and the fact that that's actually where all the economics and the industry tend to go. I'm trying to remember the stat here, but I think it's that of the top 57,000 artists in the market, 47,000 make less than 100,000 a year. The economics vastly favor the top end of this thing. Everyone has become a superstar, not just for ego reasons, but for monetary reasons as well. You've seen companies like Sony and UMG do is they said we can create a competitor to the tomb cores and the distro kids and we can go purchase the ingrues and the orchards and the AWOLs from Cobalt. And we can basically say, hey, we can do all that too.

Oh, and by the way, if you're in our ecosystem, the chance of you coming up to our superstar label is higher as well. So it come to us. So they've done a really nice job with that. I agree NFTs and blockchains. I think of them as both a risk and an opportunity. Maybe I'll start with NFTs. So on the opportunity side, NFTs could unlock like.

special album incentives. You can get access to like certain live streams. You get limited edition albums. That's an interesting kind of idea of like incremental revenue for these players. But a key role for, as we've talked about, for these labels is also this VC element to it. And imagine if I was a mid-tier artist and I said, well, I can either go sign on with a major label and get my million dollars and get my shot at Sardom. Or I can actually get close to a million by creating content and selling it as an NFT to my fans and saying, okay, I'm not going to give the rights. I'm going to still give away the rights, but I'm going to give it to my fans, not to these labels who I'd rather not work with. Now, there are still elements of, that's great,

but you're now a small fish in a very, very big increasingly crowded ocean and some of these challenges. But there's no doubt that that NFT model could allow artists to generate upfront revenue from content in a way that was near impossible for them to do before. Or blockchain similarly, like on the one hand, like the ability to track content around the world is it's consumed, the ability to track data around the garner data from that around the world. That's certainly an exciting proposition for these labels. As we talked about briefly earlier, the publishing part of this business, which is still a team's part of revenue and profits, their core function is to go track down usage of the content and get paid for it. Well, a blockchain kind of does that for you just using good old fashioned cheap technology. I think there is a challenge to the industry, the publishing side of the business around technology.

I would say the labels because of their catalog and their relationships are very well placed to drive that adoption of blockchain in the industry. But this old world of just having these high fixed costs to go try to track down every time someone uses something turning into a simple thing where every time someone consumes a piece of digital music, you know exactly who did it and when and how often. and certainly changes the dynamic there on the publishing side of the business, at least on the margin side, probably, if not on the revenue side. I think of the technology in general as being a risk that they need to navigate.

I think they're well positioned to, but they still need to navigate it. And then two, we've already talked about is content, hyperinflation, arguably, and content we're seeing as more and more money, A, becomes available, and B, goes towards this category. Now, as we talked about, I don't think that necessarily means lower ROIs, but it certainly doesn't mean higher. And it's a challenge. They are making more investments. As gatekeepers, the ROI was a pretty simple proposition. Now it's becoming more about more money's chasing this. So I just have to out-execute other people and be able to generate more revenue from the same piece of IP than the next guy or a girl

can because if I can't, then I will have a return that's probably getting come down over time. Those are the two certainly biggest elements that I worry about. Three is just how much penetration we're likely to see in streaming generally. So, yes, the top markets that have adopted streaming are kind of in the 50, 60, 70% of households range. And by the way, the U.S. going from 60 to 70 is still a nice driver of growth. But on average, developed markets are between 20 and 30 once you take the biggest ones out. And the developing world is single digits.

So that really kind of needs to happen for you to see a more exciting growth trajectory than one where it's maturing and you're a little bit more dependent on the revenue side of the equation. can the Arpos start to improve because a discounting goes down in the core markets. That's certainly another aspect of risk that I think is kind of front and center for the industry and one that they are still struggling with. And then lastly, in this I put as a tail risk that's hard to know is regulatory. As I mentioned, the UK has a parliamentary commission looking into how IP is split between the labels and the artists.

I think it's a pretty nuanced discussion, unfortunately, right? It's about the person who owns the IP because it's such a risked IP in the early days. How much do you pay for that? I actually think laws that would force the IP to revert quickly or from day one in a kind of 50-50 way towards the artists would just lead to less money going into the industry, which I'm not sure is good for artists, actually. It's just going to reduce the number of people can take shots on goal and that's going to not be positive.

That's going to be negative. And I actually think what will happen is you'll see the biggest current artists just start to grab more of the market because they'll have all these machines going after just what they have as opposed to wanting to invest in new. So much of this comes back to that funny thing you said were raise your hand if you think the labels are good and no one raises their hand and raise your hand if you want to work with them and everyone raises their hand. The question then is like, how do I decide between the value prop of a UMG versus a Sony

versus something else? What are the competitive dynamics there in the oligopoly? If I'm a great artist or even an up-and-coming one, like what do you think drives their decisions? And maybe this is the time to talk about how they treat their art. artists. There's been some checkered stories there historically, and the ESG attention on every company is going to probably affect the labels, too, and how they treat their talent and think about things like diversity. So this is sort of the last aspect to bring us home. We've established

these players matter. Like contrary to the narrative, this isn't just a technology story. It's an IP right story and a distribution story and all these other things. How do I pick between labels? And we haven't talked at all about like labels underneath UMG that have their own distinct brands, probably don't even know are part of UMG. Just walk us through this last leg of the process. In terms of the competitive advantage, what UMG, and to your point, no one is going to sign with UMG. They're going to go sign with one of their sub-labels, which are with the labels that

are known in the industry, and they tend to be focused on a specific genre of music or a specific geography of music. But what UMG says, Tandymont walks in is nine of the top 10 songs on Spotify and 14 of the top 20 for my artists. 60% of the top 50 streaming artists on Spotify are my artists. To the extent you want a big major scale player, you're looking at it. You know, looking at the company that can do that for you. And so that is certainly, I think, the headline pitch.

Two, they would say, hey, by the way, we've invested in technology. Lucene Grange, who's the CEO of Universal Music, is, I think, recognized as the best executive in the industry. He just won a bunch of awards. I think Billboard named him their first ever executive of the decade. He came up through both publishing and A&R. He was very forward amongst the majors to understand that technology and streaming was going to change the industry and invested ahead of the others, certainly not as fast as some people would have liked, but invested quickly to adopt the business towards data and towards technology.

He started spin-up, which is a competitor to the student course in the distro kids, he went and bought in groove. So you've seen him look forward. And so I think step two for them is they would say, by the way, we are adapting to the new world. Look at what our capabilities are. We can take you artists that's just going to record his or her for a song in a garage all the way through your journey in a way that no individual disruptor or no individual other major label can. Warner has a nice competitor that they've started up to TuneCorp District kid. It doesn't have that quite strong midsection yet. Sony with Cobalt-A-Wall and The Orchard has a nice midsection, but maybe not as strong on it. And so when you get the scale and you get that forward-looking, hey, I can create services that the disruptors are.

That makes it easier to say, oh, I'm going with someone who's already looking around the corner at all of that. Three, because of your size, I've talked about size is a data advantage in this business. Again, given the size I just told you about in streaming, which is the number one driver of data, They just have a data advantage in many ways that it's hard for others to replicate. They are the number one label in more markets than any other label out there. And so to the extent they are going and having conversations with people in individual markets about data going back to them, they are getting listened to more often and they are getting more out of those negotiations than others are. So when you combine the best ecosystem, the best artist, the best catalog with the most money to then reinvest back into the ecosystem because of their scale,

to the scale advantages around data, you start to see a pretty notable kind of advantage, even amongst the big three, emerge. Any thoughts on this concept of sort of diversity and the treatment of artists and how this plays a role in the world of music? It's sad in a way. I think you had an industry because they were gatekeepers. They didn't care about anything for so long. I don't know that they've necessarily been fully humbled yet.

And so you see these stories come out about both the cultures within these companies as well as how artists feel like they're being treated. Now, I think part of that is they feel it's unfair that they have to give up economics. So the failed artist is never going to complain about how they got a million dollars up front and only earned $400,000 back. And that was really unfair. And the winning artist is going to complain they got a million dollars up front for generating $100 million of revenue for the label. And that's completely unfair. And so I do think there's a little bit of positioning there. Yeah.

So it's not quite as simple a conversation as some people make it out to be. But certainly UMG and the others have talked about this and they should be, which is there is still a lot to do around making labels more appealing to work with. You don't want to give people an excuse for not wanting to work with you. When that professor walks into that classroom at Berkeley College of Music, It should bother executives in this industry that 100% of people raise there and say, I don't really want to ever work with a label if I don't have to. That's a problem.

They need to resolve that. What a completely fascinating industry. I mean, I feel like we've really thoroughly explored the levers and variables that matter, the history, the amazing peak in the late 90s now kind of roaring back, thanks to all the dynamics you've explained. Anything that we've missed that you think is like a, if not key, super interesting aspect of UMG the business, music, the industry more generally? The one aspect that we touched on that's probably just worth underlining here is that

we are seeing the consumption of music increase pretty materially. So today, 90% of Americans, according to a Nielsen report, say that they listen to music at least once a week. 50% say they listen to music at least daily for TV, only about two-thirds, watch TV once a week. It's even less for video games. This is just a widely consumed product that is very important to a lot of people. Another study I read said 50% of Americans would say music is very important in their lives. Like they can't imagine not having it. That's a lot of people. And as I said to you, as we start to see smart cars to smart speakers, the Metaverse that

in Roblox case emerge, you're getting more and more use cases for this very important piece of IP to come up. And we're seeing more and more people consume more and more of it. I mean, that increase in the number of people hours that people are consuming 23 hours or so in 2015 going to 32 hours last week a week, last year and a week, that's a substantial increase. If you think about it for a product that's been around forever in a day. But it turns out when you remove the barriers to incremental consumption and you make it available in more places, people actually want to consume this. And remember, it's coming back to what's the real value? of the IP that we're even talking about here, it's clearly valuable IP.

Well, it's a very perfect spot to end the conversation. I feel like, you know, you could go do one of these dives on, we didn't even talk about title or some of these other interesting things going on in the ecosystem, but just an incredible overview makes me want to go listen to a playlist or two. Thank you, as always, so much for your time. Thanks, Pat. To find more episodes of breakdowns ranging from Costco to Visa to Moderna or to sign up for our weekly summary, check out join colossus.com.

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