Universal Music Group Stock: Value And Safety In Owning (UMGNF)

The following segment was excerpted from this fund letter.

Universal Music Group (OTCPK:UMGNF)

Shares in Universal Music Group returned 21% last year. Financial results were solid. We expect both the company’s revenues and operating income to be up high-single digits in 2023.

Growth in paid streaming revenues, which drive close to half of Universal’s total revenues and more than half of its total profits, likely accelerated into the low teens in 2023. This growth was driven by an increase in the number of paid subscribers across various streaming platforms as well as like-for-like price increases put through by these streaming platforms. These are the first broad-based, like-for-like price increases we have seen since paid streaming took off over a decade ago. Universal is merely a supplier to the streaming platforms, but its contracts with them effectively give the company a percentage share in whatever consumers pay for these streaming services. Put simply, Universal gets paid more by the streaming platforms when they charge their subscribers more. While we do not expect to see significant like-for-like price increases every year, we do believe that like-for-like pricing will increase over time.

Last year, leading steaming platforms, including Spotify and Deezer, adopted “Artist-Centric” monetization models of the sort championed by Universal. In all monetization models, the pool of streaming revenues that the platforms remit to the labels and/or independent content creators is divvied up based on share of total listening time. Under the artist-centric monetization models, the most-listened-to content gets, in effect, a bonus that goes beyond its calculated share of listening time. The rationale for artist-centric monetization models is that while consumers might spend some time listening to lesser-known artists or even soundtracks featuring rain and ocean sounds, it is access to songs from better-known artists that bring them to the streaming platforms and that keep them shelling out month after month.

We tend to agree with Universal’s framing of the situation, and the recent moves by Spotify and Deezer suggest they do as well. We expect various flavors of the artist-centric model to proliferate among streaming platforms in the years ahead. We view this as a noteworthy, even if not massive, positive for Universal and the other major labels. The artists represented by the major labels make up a disproportionate share of the most-listened-to content. As a mechanical matter, then, the major labels will get a bit more money from the streaming platforms under an artist-centric model.

Last year also saw the emergence of a robust debate over the potential impact of generative AI on the music industry generally and the streaming market specifically. It is still early days, and we continue to monitor the situation, but based on our research we feel it is highly unlikely that the major labels and the superstars they represent will be disrupted by generative AI. There are various legal and commercial angles to this issue, but what we think ultimately matters most is the very nature of popular music. What makes a piece of recorded music popular is more than the song itself. It is also who sings it, and, to get even deeper, it is the personal feeling of connection listeners feel to the performer. We would note that last year it was a living, breathing human, namely Taylor Swift, that captured the world’s attention, rather than some catchy generative AI song. We continue to see value and safety in owning, through UMG, roughly a third of all the commercially relevant music ever recorded in the western world.

In 2022, we took advantage of weakness in Universal’s shares and added modestly to our position. As we approached the end of 2023, they had appreciated by 40% or so. At that point, we trimmed our position modestly. All the while, we have remained optimistic about Universal’s prospects and happy with our investment.