Q3 2024 Earnings Summary
- WMG's subscription streaming revenue showed strong growth, accelerating sequentially, underpinned by subscriber growth and price increases, while maintaining a diversified revenue mix and not experiencing the slowdown seen by peers. The company sees significant headroom for growth, with global music subscription penetration at only about 15%, and expects subscriptions to grow from 700-800 million today to over 1 billion in the next 5 years. This optimism is based on factors like price optimization, evolution of royalty models, and audience segmentation.
- WMG's strategic reorganization enhances its ability to promote local artists to global prominence through its unique global infrastructure, simplifies its organization to compound strength in the U.S. market, and centralizes functions for operating leverage. This reorganization is intended to make the company more effective and efficient in serving artists, positioning it well for future market growth.
- WMG has an incredibly strong upcoming release slate, with new music from major artists like Coldplay, David Guetta, Benson Boone, and Mike Towers. Combined with strong performance across all catalog cohorts—new releases, shallow catalog, and deep catalog—this is expected to drive continued growth and market share gains.
- Potential shifts in market share among digital service providers (DSPs), with some competitors highlighting industry growth headwinds and a possible move towards platforms like Spotify, could negatively impact WMG's revenue if other DSPs underperform.
- Concerns over the ad-supported tier at DSPs not sufficiently monetizing the value of music may limit WMG's revenue growth, especially as the company has no immediate plans to adjust strategies such as windowing to enhance monetization.
- Risks associated with AI-generated content and ongoing legal disputes, such as lawsuits against technologies like Suno and Udo, may result in increased legal expenses and uncertainties that could impact WMG's financial performance.
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Subscription Streaming Trends
Q: What are the current trends in subscription streaming and outlook?
A: Robert Kyncl stated that the demand side of the streaming business is very resilient and strong. They are not seeing any change in their revenue mix and cautioned against using one company, like Spotify, as a proxy for the entire industry. He is very bullish on streaming and highlighted four growth drivers: growth in emerging and established markets, price optimization including family plans and pricing increases, evolution of royalty models, and audience segmentation by adding non-music content to improve subscriber acquisition and retention metrics. They continue to see consistent growth across top DSPs, led by subscriber growth and price increases.
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Divergence Among DSPs
Q: How does divergence in DSP monetization strategies impact your approach?
A: Robert Kyncl views diversity in approaches among DSPs as positive, stating that experimentation allows companies to learn what works and adjust accordingly. He is not worried about divergence and believes it will drive growth as long as there is strong demand in the industry.
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Subscription Streaming Growth Drivers
Q: What drove the sequential acceleration in subscription streaming growth?
A: Bryan Castellani explained that the strength in subscription streaming was underpinned by consistent subscriber growth across top DSPs, with some impact from price increases. The carryover slate from the previous quarter and new releases also supported growth.
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Industry Growth and Addressable Market
Q: How do you view the total addressable market for the industry long term?
A: Bryan Castellani noted that penetration of music subscriptions is still low at about 15%, indicating significant headroom to grow from 700–800 million subscriptions today to well over 1 billion over the next 5 years. There is still more optimization to be done on price and product innovation.
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Impact of Price Increases
Q: Did you lap any price increases, and how will upcoming roll-offs affect you?
A: Bryan Castellani confirmed they are at the end of lapping the YouTube price increases and still have some lapping of Spotify. Geographic and tier mixes around the world can influence these impacts as well.
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Participation in DSP Price Increases
Q: Will you participate in recent Spotify price increases for bundled services?
A: Robert Kyncl stated that while they have never disclosed how they participate in different SKUs, any assumption that key partners like them would not participate is not the best assumption.
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Impact of Reorganization
Q: How will the recorded music reorganization impact financials over the years?
A: Robert Kyncl explained that the reorganization aims to create a flatter structure, elevate local creative leadership, simplify the organization, and centralize functions for operating leverage. He emphasized that it is a strategic decision, not a cost-saving exercise, and it is too early to speak to any financial impact.
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Generative AI Risks and Opportunities
Q: How do you view risks and opportunities around generative AI technologies?
A: Robert Kyncl outlined their prioritization: focusing first on platforms where content is consumed, then on generative AI engines, and finally on government regulation. They are making progress with regulation and are very focused on defending their intellectual property and artists. Lawsuits have been filed, and they will religiously defend their IP.
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Emerging Streaming Platforms
Q: What are the growth opportunities across emerging streaming platforms?
A: Robert Kyncl expressed excitement about music's relevance across all generations and platforms, including long-form, short-form, and bite-sized content. They are working hard to grow with these platforms and experiment with innovative ways to drive the business forward.
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Ad-Supported Tiers and Windowing
Q: What role should ad-supported tiers play, and should windowing apply?
A: Robert Kyncl does not have an opinion on windowing today but believes that having a healthy funnel through ad-supported tiers is important for growing subscriptions. He emphasized that they are in the right advertising market and that any experimentation must be done together with DSP partners.
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Bundling Strategies
Q: How do you view bundling strategies by DSPs and their implications?
A: Robert Kyncl welcomed diversity in approaches, stating that companies should play to their strengths. Reflecting on his past experience at YouTube, he noted that unique offerings can drive growth. He is most willing to experiment and drive the business forward with any partners.
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Upcoming Release Slate
Q: Can you elaborate on your expectations for the upcoming release slate?
A: Robert Kyncl highlighted that they have an incredibly strong release slate for Q4 and going forward, including music from Coldplay, David Guetta, Benson Boone, Mike Towers, and many others. He also emphasized the strong performance of their catalog across new releases, shallow catalog, and deep catalog.
Research analysts covering Warner Music Group.