Warner Music Group – Growth Outlook & Strategic Initiatives – 17 December 2021

What is your 2-3-year outlook on the premium music subscription side of the Warner business that’s feeding a lot of the revenue generation for the labels? It’s been double-digit of late, but with emerging markets increasingly driving the net-new subscriber growth, and that might come at lower ARPUs than had been garnered in the developed world. What are your thoughts there, and what are some other alternative growth areas that lead you to believe that double-digit growth remains sustainable for streaming, or is this getting to a saturation point?

How do you think about achievable penetration in emerging markets relative to developed markets? Will it be much lower as well, regardless of how many subscriber opportunities there are out there, that it’s going to be more difficult to penetrate in some of these more emerging market economies?

In the sense that Warner is dealing with different DSPs [demand-side platforms] than Spotify or Apple that probably drive a predominant amount of the streaming business right now, is that a net positive or a negative regarding the negotiating leverage that the majors have with these net-new distributors? Will headline rates or publishing licence rates need to be better or worse? Is that too early to tell?

You brought up wellness as one of the examples of these non-traditional streaming revenue opportunities. I also think of gaming, such as Travis Scott’s Fortnite concert, TikTok and social media more generally and virtual streaming. I know there have been partnerships placed with Twitch for artists. So how are you force ranking the potential of the non-streaming opportunities? What are the greatest ones and ones that will be more difficult to really scale up meaningfully?

How do you compare engagement in these platforms to engagement in actual music in these platforms in so far? My hunch would be that the monetisation per subscriber on non-streaming is still de minimis relative to what they can garner through core streaming on Spotify. What are the methods and timeline in which it would require to get to Spotify-like monetisation per subscriber or even eclipsing that, given your points around the engagement dwarfing what exists on Spotify?

It seems like there’s a nuance in how the contracts are structured. With Spotify they get you paid on headline rates based on consumption, whereas you assess the revenues coming in from the non-streaming side and it came in flat at one quarter because it’s fixed-fee in nature and it’ll only get upticked upon renewal if you’re not adding any new platforms. Do you expect, over the next 3-5 years, for that to change and become more consumption-based or is it very early innings regarding music becoming more ingrained and these platforms being an active revenue opportunity?

In the sense that we should think about it more as an A&R spend line so much as a revenue spend line, do you think that given how engaged these platforms are, this drives some efficiency in that A&R spend on a percentage of revenue? I think it’s been, historically, 34-35% for years here, so do you think that given how highly engaged the users are on these new platforms, that this will be a more efficient way for majors to promote the artists and get them streamed on a platform such as Spotify?

If we take Universal Music Group vs Warner and their equivalent margins, with Warner having lesser scale and subsequently lesser operating leverage, is that somewhat of a sign that Warner has a better success rate at making bets on new artists than Universal and other labels in general? If so, what is driving that?

It seems like the competitive dynamics that you’re mentioning are occurring both on a lot of the publishing deals, as well as the frontline where there are more advanced royalty payouts, the attractiveness of how those frontline deals are structured is getting less and less, and the multiples for some of the catalogue content are going up. Do you think that is table stakes and that the IRRs are just the new normal to maintain that market share? Then, in turn, Warner is a bit overly conservative and might have risks to market share over time, or is this not very sustainable and there’s money chasing market share and that’s fleeting in nature and Warner is making the right call in sticking to its capital thresholds?

How do you think about the rise of these independents and do-it-yourself artists, just distribution-only artists? Do you think the majors are set to lose market share in aggregate because of that, or is there just an inherent consolidation story that will play out? Even just yesterday, 300 Entertainment and Megan Thee Stallion are going to Warner, so do you think that there’s a value proposition of music publishers having scale to be the best promoters of your talent and that it’s best to work under them, or will independent and do-it yourself take some meaningful share?

How do you find the balance between wanting to be under an independent or a do-it-yourself mechanism so much as being rolled into the major impacts the extent to which some of that consolidation is likely to occur? Do you expect the independent and DIY piece of the consumption pie to get to a level that could cause Spotify to have to roll back the master licence royalty rates it charges?

The royalty rates are set up with a relationship based on a share of any of these revenues, so much as share of artist consumption. Do you think the world will ever shift to where attribution gets to a point where Spotify will pay out if you’re listening 100% of your time to Drake, but then the owner of the Drake rightsholders gets 100% of that USD 9.99 per month? What would that market do to market share, if that’s even likely?

How do we think about any increased artist payouts offsetting any of the positive impacts to the revenue model, from getting more demonstrable payouts from Spotify because you’re just catering to a fan that is an avid fan of your specific music artist? Do you think payouts go up to completely offset any increase that they would get because of the consumption dynamic, or is there enough positive tailwind to make this a net positive no matter what for the majors?

Could you give your 3-5-year outlook for Warner Music as it relates to recorded music and the labels? What do you think will be most different for Warner relative to Universal or Sony?