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spk04: Good evening and welcome to Universal Music Group's first quarter earnings call for the period ended March 31st, 2024. My name is Nadia and I'll be your conference operator today. Your speakers for today's call will be Solution Grange, Chairman and CEO of Universal Music Group and Boyd Muir, Executive Vice President, CFO and President of Operations. They will be joined during Q&A by Michael Nash, Executive Vice President and Chief Digital Officer. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw a question, please press star followed by 2. As a reminder, this call is being recorded. Please also let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which by their nature are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results, please see the risk factors section of UMG's 2023 annual report which is available on the Investor Relations page of UMG's website at UniversalMusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconciliation are available in the press release on the Investor Relations page of UMG's website. Thank you. Solution, you may begin your conference.
spk08: Hello everyone and thank you for joining us. Today I'm pleased to announce that the board of directors of the Universal Music Group has had a strong start to 2024. The three months have brought us yet another quarter of solid growth. Revenue was up 8% in constant currency and adjusted EBITDA increased by 16% driving healthy margin expansion. And these are the results before we begin seeing the benefits that will flow from our recently announced strategic organizational redesign. In a few minutes, Void will walk you through the numbers in detail. But for now, I want to make clear that UMG's continued success is in large measure attributable to the broad-based and strategically integrated portfolio of businesses that we've created and assembled. By diversifying our revenue streams in this way, we're better positioned to mitigate the inevitable ups and downs in the revenue of any one particular business. Today, though, I want to focus my remarks on three areas of which we are especially proud and from which we expect even more impressive results going forward. They are, first, the continued extraordinary success of our artists. Second, how we further develop, extend, and broaden mutually beneficial partnership relationships. And third, the resolution of our dispute with TikTok, its significance with respect to artificial intelligence and the global progress we've been making around the world around our entire responsible use of AI and its related public policy. First, let me relate to you just a handful of first quarter achievements by our incredible artists. I'll start with Ariana. In the US, her new album, Eternal Sunshine, became her fourth consecutive album to hit number one on the Billboard 200 chart. All 12 songs landed on the Hot 100 with the first two singles each becoming number one. The album reached more than a billion streams on Spotify in 20 days and was released in 12 physical configurations, six vinyl and six CD with four vinyl configurations sold exclusively through Ariana's official web store, which we operate, and one exclusively through Target. In the US, the K-pop group Twice saw its debut album reach number one on the Billboard 200. This marked the third number one album in three years by an all-female group released by UMG, the predecessors being New Genes and Blackpink. In the UK this past quarter, a wide spectrum of UMG artists, including The Weeknd, Taylor Swift, Olivia Rodrigo, Eminem, Alton John, ABBA, and Ariana Grande again held nine of the top 10 album spots with Noah Khan who has already seen enormous success in the US, having both the best-selling album and the best-selling single. At Japan's 38th annual Gold Disc Awards in March, a diverse array of UMG artists led the way in many categories. King and Prince won both single and album of the year, Best Asian Artist went to 17, and Travis Japan was New Artist of the Year. The international album of the year was the Rolling Stones' Hackney X Diamond and The Beatles, yes, The Beatles won International Artist of the Year for the nine consecutive year. Unbelievable. In music publishing, Universal Music publishing group songwriters had seven of the eight different songs that hit number one in the quarter on the Billboard Global 200. In addition, UMPG won Latin Publisher of the Year at the ASCAP Awards, with Faye winning Artist Songwriter of the Year. Then, of course, there's Taylor. Her newest album, The Tortured Poets Department, has shattered records around the world. It's the biggest album of the decade and the biggest debut of her career. In the U.S., the album debuted with the second largest sales week in the modern era since Luminate began tracking sales in 1991. In its first six days of release, it broke the single-week streaming record in the U.S. Further, Taylor became the only artist to ever hold the entire top 14 on the Billboard Hot 100, with all 31 songs from the album debuting in the top 55. In the U.K., the album debuted at number one, outselling the rest of the top 10 combined with the biggest opening week for an album in the U.K. in seven years. The debut helped Taylor overtake the Beatles for the record of the fastest artist to achieve 12 U.K. number one albums. And in Australia, Taylor became the first artist to hold the entire top 10 on the singles chart and established a new chart for the most singles in the top 50 with 29. And these are just highlights from a few countries. The album also debuted at number one in at least a dozen more countries around the world. We're of course thrilled with the success of all of these artists. And what drives us at UNG is not only working on behalf of the world's biggest artists, but also breaking the next generation. I'm particularly excited about what we're seeing around the world from our developing talent, including Sabrina Carpenter, who's just had the top global song on Spotify, Chappell Rome, David, I Spice, Noah Khan, and Gracie Abrams, and then really just a few. These artists, all from different labels, different parts of the world, from different genres, underscores the importance of our multi-label structure, our creative executive talent, and our consistency in breaking the industry's best new artists year after year. I'd like to talk a bit now about the strategic and financial importance of our relationships with emerging and established music companies and entrepreneurs. These relationships are available to us because we've designed and built UNG so that we're able to leverage our scale and global infrastructure to provide third parties with a wide range of distribution, marketing, promotion, and other services. While these relationships may begin as lower margin deals, we view them as having great potential. The connections we make with some of the most exciting entrepreneurs and artists often, over time, expand into broader, sweeter services, as well as grow into opportunities for multifaceted partnerships, which in return, they result in greater strategic benefits and margins. I'll give you a few examples from the quarter. In 2017, UNG teamed up with Hive in South Korea by way of a label services agreement for BTS, the superstar boy band. Four successful years later in 2021, the companies expanded the relationship with a global strategic agreement providing for collaborations across a number of artists and projects. Then last year, Gethin Records and Hive announced a new joint venture to launch the debut, Dream Academy, aimed at implementing Hive's K-pop methodology to launch a new group in the US. The group will debut through a Netflix series later this year. With Thrill the In Q1, we entered a new partnership with Hive. As part of our new partnership, UNG will also work closely with Hive to help enhance the growth of the superfan platform Weverse in North America. Then there's China. Last month, Universal Music Greater China announced the new global digital label services deal with TF Entertainment's roster of talent. Since its inception in 2009, TF Entertainment has been a pioneer in China's pop culture landscape, introducing the trainee system to cultivate idol groups. Their unique approach led to the establishment of the TF Family, under which various groups have flourished, with TF Boys and Teens in Times in particular seeing massive success in China. Now targeting markets outside of mainland China, TF Entertainment will leverage UNG's global capabilities and marketing network. Our alliance underscores our dedication to elevating Chinese pop music to a global acclaim, both culturally and commercially, and also advances our superfan strategy, offering fans around the world access to distinctive cultural experiences. The final part of the deal I mentioned is Virgin Music's agreement with 3AM Entertainment, a new label founded by Jay Sean, who has nearly 10 million monthly listeners on Spotify and 1.5 million subscribers on his YouTube channel. Our new partnership will focus on supporting artists from the South Asian disparate and breaking them as global stars. The third area I'll discuss concerns TikTok and the many issues surrounding AI and its impact on music. As you're likely aware, we've just announced that we've reached a new agreement with TikTok. They agreed to key changes in several critical areas, which have been very important to us, including addressing our concerns about generative AI on their platform, as well as better aligning with the value of other comparable partnerships. As a result, we have resumed licensing our music to them. We're an organization committed to breaking new ground and driving the industry forward, but we're also fundamentally rooted in protecting artists and songwriters from the negative effects of disruptive technology. So we expect and even embrace the inevitable conflicts that will result from fulfilling our commitments. But ultimately, the point of engaging in such conflicts is to find a higher common ground from which new and greater progress can be made. I'm enormously proud of what our teams and our artists have been able to achieve with TikTok in finding common ground on which we will build a foundation for a brighter future. It's important to note that this new agreement has ramifications beyond this single platform. It's another significant step we've taken to guide the industry's evolution to a future where human artistry must be respected. Artists and songwriters must be treated fairly and fans are provided with platforms that better prioritize safety as well as integrity. Further, during the last few months, we've worked to accelerate engagement with music on Snapchat. We've been on Instagram and YouTube shorts and in a recent agreement with Spotify, which makes available a range of new features that were previously found only on social media platforms, we've even broadened the very definition of the social music category. In short, the income from social media is increasingly important income to artists, songwriters, labels and publishers, which is why we've pushed so hard and we will continue to push hard to protect and to develop it. As our partnerships in the tech space expand and evolve, it remains paramount that we continue to focus our attention with partners and in public policy on an artist-centric and even more productive approach to AI. To that end, we're encouraged that the European Parliament resoundingly passed the EU's Artificial Intelligence Act. The first of its kind legislation establishes obligations for AI systems based on the potential risks and level of impact. It's a strong first step that includes important provisions such as transparency with respect to the materials used to train AI platforms. In the US, even as support continues to build for a federal right of publicity, several states are taking action. The state of Tennessee recently enacted the Ensuring Likeness, Voice and Image Security Act, known as the Office Act. It provides strong protections against generative AI voice cloning. We expect further action on these issues as there are ongoing legislatures' debates in jurisdictions around the world, but we are not waiting for these processes to complete. While public policy guardrails, like the legislation I mentioned, are crucial, we believe that this rapid technological transformation is best addressed by the private sector. So we are working now to shape a healthy, responsible and ethical AI with an ever-growing roster of partners. For example, we recently partnered with Roland Corporation, the maker of electronic musical instruments, to establish a set of principles that two companies will advocate for adoption across the music industry and the creative community relating to the responsible use of AI. These principles highlight the opportunities for AI innovation in music production, composition and songwriting, whilst also emphasizing the need for transparency, equity, as well as community involvement. As you can see, we remain at the forefront of industry innovation. We continue to broaden our relationships with artists, entrepreneurs and technology partners alike. We remain laser-focused on driving positive AI developments, putting the appropriate protections in place to secure a productive future for human artistry. All of the actions I've spoken about today align with the artist-centric initiatives that we've been speaking about for some time now, putting artists at the center of every conversation. Our focus on the future has always served us well, and we will continue to do just that, operating to drive long-term health and success for our company, our artists and the broader industry. So thank you. With that, let me turn it over to Boyd for a closer look at our financial results. Thanks,
spk03: Lucien. As Lucien indicated, 2024 is off to a healthy start. The figures laid out in the press release, they are laid out in the press release, but let me give some additional color. I'd remind you that any growth rates we discuss today will be in cost of currency. Total revenue in the quarter grew 8% -over-year to 2.59 billion euros, with growth across all three business segments. This broad-based growth continues to underpin our confidence about the longer-term health of our business. In looking at the segments, recorded music revenue grew 6%, with subscription and support to streaming revenue both exhibiting strong growth. Subscription revenue grew just under 13% to 1.1 billion euros, driven primarily by growth in subscribers, but also helped by price increases. While we saw the full benefit of the Spotify price increases in the quarter compared to last year, we began to anniversary the positive 2023 impact on price increases at Apple and Amazon. While our growth from Spotify very closely aligns with their performance in the quarter, several other platforms did not grow as quickly. Subscriber growth is the biggest driver of the -over-year growth rates we see at UFG. Our market share is stable and healthy, and we remain encouraged by the total subscriber growth throughout the market. Ad support to streaming growth accelerated to 10% in Q1, with some of our largest partners seeing strong growth. We were encouraged that our growth this quarter was more broad-based, across many partners and geographies. That being said, this is still only one quarter, so we will continue to monitor our advertising revenues very closely. As anticipated, physical revenue faced a particularly difficult comparison this quarter, declining 14%. If you recall, our physical revenue grew 33% in the first quarter of 2023, driven by an unusually strong performance in Japan, and it was this which was the primary reason for this quarter's decline. As we said, physical results are more release schedule-driven than streaming and subscription, and skew towards certain genres, artists, and geographies. While our 2024 release slate is strong, we continue to expect a difficult 2023 comp impact physical sales performance throughout the year. License and other revenues declined slightly in the quarter, due largely to the timing of synchronization deals and other revenue, but our positive view on the overall trend for licensing has not changed. Turning to music publishing, revenue grew 18% over the prior year quarter. This strength was driven by 25% growth in digital revenue, thanks to continued growth in streaming and subscription activity, as well as 28% growth in performance revenue, due in part to higher society payments in the US, as well as greater than anticipated live activity in Europe. Moving on to merchandising, merchandising revenue grew 8%, fueled by growth in touring revenue, particularly in the US. Now turning to adjusted EBITDA. Adjusted EBITDA grew 16% in the quarter, to 591 million euros, driven primarily by revenue growth. Adjusted EBITDA margin expanded 1.5 percentage points to 22.8%, compared with .3% in the prior year quarter. The margin expansion came from a combination of operating leverage, as well as strong growth in higher margin subscription and streaming revenue, relative to the declines in lower margin physical revenue. In addition, we had an incremental 12 million euros of cash compensation savings from last year's implementation of our equity plan, as in the first quarter of 2023, we were not yet at run rate. We don't expect the cash compensation savings for the remainder of 2024 to have any further incremental benefit over 2023. Every quarter has a slightly different margin profile, depending on revenue mix, segment mix, repertoire mix, and many other factors. It's hence why we encourage you to look at our business over the course of at least a year, rather than any individual quarter. Adjusted EBITDA and margin did not materially benefit from the cost savings initiatives we discussed on our last call, as those savings began to roll out in April. As anticipated, we expect to begin to see the positive impact of the cost savings in the second quarter, and we remain on track for the 75 million euros in cost savings we previously guided to for 2024. Restructuring charges of 92 million euros in the first quarter were in line with our guidance and are excluded from both EBITDA and adjusted EBITDA. Adjusted EBITDA also excludes non-cash share-based compensation expenses of 101 million euros during the first quarter of 2024, compared to the 261 million euros in the first quarter of 2023. We remain on track for our previously disclosed estimate of about 260 million euros of non-cash share-based compensation expense this year. Overall, 2024 is off to a healthy start. We remain encouraged by the growth trajectory of the business and excited by all of the opportunities that lie ahead of us. Lucy and Michael and I would now be happy to take your questions, so operator, please open the line for Q&A.
spk04: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to remove your question, please press star followed by two. When preparing to ask your question, please enter your phone as unmuted locally. We ask you please introduce yourselves to two questions. Our first question goes to William Packer of BMP Paribas. William, please, your headline is open.
spk09: Hi there. Many thanks for taking my question. I'll just keep it to one as it's slightly long-winded. I was asked regarding the economics of the most recent DSP price rises and the implications for UMG's operating outlook. As background, when the DSPs put through the first price increases in 2022 to 2023, you were asked on the Q2-23 call regarding the impact on your operating outlook, and you said we weren't moving towards any change in the split of economics between UMG and its DSP partners from that incremental dollar of revenue. You've delivered strong premium revenue growth, which certainly underpins that. This time around, things are a bit more complicated. Spotify introducing a new tier, which will include audiobooks at a new price, and have announced plans to have a basic music tier at the old price. In the UK, for example, at this stage, complicating things further. Everyone's being moved to the new tier, but we'll have the option to spin down. In this context, are the economics of the incremental dollar different for UMG? We already have reports that publishing will be impacted by this bundle. Should we expect DSPs to keep a greater event of that revenue from the new premium bundle? Thank you.
spk06: William, thank you for your question. Let me unpack it a bit, because as you previewed, you put together a couple of different components, which I think kind of go to what is the nature of our relationship around margin with the DSPs around the price increases. So to the general question about the increased prices that we've previously discussed, as we've indicated, that doesn't reflect some special agreement associated with those price increases. We do have in place, as we have discussed before, incentive structures around hitting KPIs that might relate to margin, but as I've heard you frame your question, there's no change in what we've previously said in terms of those impacts. Now, specifically, you've raised the question regarding the discussion of Spotify's plans around a new tier, including audiobooks. Let me go into that with a little bit of detail. Obviously, we're not going to disclose the specific terms of our agreements with any of our partners, but of course, we're always negotiating licensing models in terms to ensure that we're fully and fairly participating in the value that our content brings to all product configurations, including bundle products. You can take that as a premise in terms of our position and the deals that we negotiate. Now, in terms of the specific question you've raised, our understanding is that Spotify is still finalizing their implementation plans, so we expect to remain in close communication with them as they provide further details as those details become available. On their recent earnings call, Spotify did confirm that there will be a music-only tier as part of a broader offering of subscription options. Beyond that, we're not really in a position to comment. I do want to emphasize, because I think that there was an implication in the setup of the question, our subscriber economics, what we get paid, not impacted by any of the scenarios that have been discussed. There's been some speculation, does that mean that there's some pressure on your margins for your music economics, and that's not the case. I would note that we think it's encouraging that Spotify is experimenting with different pricing tiers. They're looking to maximize the optimization of customer value. We think ultimately attracting more subscribers into the ecosystem and retaining the subscribers and increasing the customer lifetime value. Those are all things that we participate in as a strategic matter. Now, you also raised a specific issue with respect to publishing and bundles, but we're still looking into whether the offering as described in the U.S., whether it qualifies for lower mechanical rates dictated by the CRB. Our understanding is that there are ongoing discussions between Spotify and U.S. publishers, so we'll look to the resolution of those conversations to be addressed. We're of course going to stay vigilant looking after the songwriters as we stay in close dialogue with all parties and all constituencies. I hope that I have unpacked your question and then address the different components so that I'm being responsive here to the different issues that you laid out in your question. I'd just like
spk08: to add that we're obviously focused on ensuring we, our artists, songwriters are getting all the compensation for the value that we deliver. Our products, our charts, our artist performance is exceptional. The issues that you raised, they're not new to us. We've constantly demonstrated that we're pretty good at coming up with solutions that benefit all of us, everybody. Our entire mantra is win, win. I think we should add that Spotify has been an incredibly good partner on everything that we try to do to grow the entire pie, to grow the business. The way they came with us along the artist-centric initiatives, just not in terms of cleaning up the noise on the platform, but working with us on the strategies to provide super fans with all the compelling offers that we think that we have. They're the types of things that we have the potential to meaningfully grow the pie for all of us. It's long-term, keep going, grow the pie. We wake up pretty much every morning, our view is there's nothing that over a long period of time we can't fix. We are completely, absolutely aligned with all our partners.
spk04: Thank you. The next question goes to Adrian de Saint-Hilaire of Bank of America, Merrill Lynch. Adrian, please go ahead, your line is open.
spk11: Thank you very much. I've got a couple of questions if you don't mind. First of all, on the TikTok deal that was announced, it might be difficult to answer, but can you say anything about how much of an upside is that deal compared to the old one financially? Then second topic, great margin progression in the first quarter, you highlighted that mix benefited the margin in Q1, but then you have the cost savings kicking in in Q2. How much of uplift for Q1 will flow through to the full year in terms of margin expansion? Thank you.
spk03: Maybe I can tackle the margin progression question first of all, Adrian. As I said a little bit earlier, be very careful about any individual quarter. Our margin expansion in Q1 came from operating leverage for sure given the revenue growth, but it was also impacted by the revenue mix where we saw a decline in the physical sales and an increase in the higher margin streaming and subscription revenues. Again, that's at a higher margin and those factors combined contributed to the margin expansion as well as obviously the 12 million savings that we got from cash compensation from the equity plan. We continue to progress towards what was the original midterm guidance that we would see adjusted EBITDA margins in the mid-20s, in the midterm term. I think you are seeing and have seen our progression towards that original guidance. In terms of the realignment program that we announced on our last call, again nothing really specific to update you on in that regard. We're still guiding that we will deliver 75 million of cost savings in 2024. Clearly that will have a positive impact on our margins. Again, a bit of caution around about reading too much into any one quarter, but looking at this over the coming future, we continue to make progress towards that mid-20s adjusted
spk06: EBITDA margin guidance that we originally gave. Adrian, with respect to your first question regarding the TikTok deal and the upside that we're expecting, we obviously can't disclose specific terms of the new deal, but we can say we've seen substantial improvements in total value that we derived from the relationship through the combined components of what we have described as a multi-faster deal. On compensation specifically, the revenue line of this new deal does market improvement for our last deal. There are of course other aspects of economic value of any deal that don't necessarily show up in the revenue line, including things like e-commerce, ad credits, data, marketing programs, other important facets of the platform relationship that we have with TikTok. I do want to just step back for a second and in context emphasize the discussion with TikTok, as Lucy has said in his opening comments, always about more than financial compensation. The three areas of focus that we identified in our letter to the artist community in January, AI, compensation, platform safety. I can't emphasize enough the strategic significance in the area of AI. Lucy very cogently took you through the considerations there. I just want to emphasize that when we're looking at the total deal value. I guess the last thing that I want to say is we look at all our partnerships as work in progress and we look at the entire social media category as a work in progress. It remains a relatively new monetization category, um, beginning with the deal that we did with then Facebook in 2017. That was the first time the social platforms were paying for the use of music. So we're still at a point right now where we need to focus on continuing our efforts across the sector to maximize our artists' own participation in the value that they're creating on these platforms. So this is an important step forward. It's a journey here. We're thinking long term. Yeah, I think that's very important.
spk08: What we've achieved with respect to responsible AI and our position and what we've been able to agree with them on attrition and stream manipulation is really, I think, advantage the entire social program. Everything in our DNA is about long term behavior and long term growth. So the aspect you might mention, e-commerce, it's the invisible stuff. We know what's visible, but in terms of what we can disclose and what we can explain, it's the invisible stuff on the commitments that we both made to one another that are once again win-win and show Dictoxio should be given credit for his leadership and grabbing this with me, with us, in terms of what the opportunities and the possibilities are for both companies as well as obviously all the writers and the artists.
spk04: Thank you. The next question goes to Thomas Singlehurst of Citi Group. Thomas, please go ahead. Your line is open.
spk07: Thank you for taking the question, Tom here from Citi. Actually, just one question. On the subscription and streaming element, the streaming bit, obviously, really quite strong relative to expectations and relative to the more recent trend. I'm just wondering whether that's a fundamental turn in ad funded revenue streams and likely to sustain or whether there's anything else that's impacting that in the quarter. Thank you very much.
spk03: Thomas, if I could. Luke, I think we'd say that we're really encouraged by the improvement we saw in our ad supported streaming growth. Particularly, two of our partners demonstrated significant growth across a very broad geography. So I think in that regard, that's why we're encouraged. But I am still cautious at the moment, given particularly what we've seen over the last number of quarters with regard to the entire marketplace for advertising funded businesses. I think we need to just be a bit cautious until we see a consistent, broad-based improvement across all partners and across all geographies and probably over a more consistent longer term time frame. So again, one quarter, very, very encouraging. But let's just not get ahead of ourselves too far too quickly.
spk04: Thank you. The next question goes to Omar Jaius of Wells Fargo. Omar, please go ahead. Your line is open.
spk10: Thank you guys for taking the questions today. Maybe Lucien first, as it relates to better monetizing super fans, can you update us on any developments on this front and what are your key internal priorities or next steps? And subsequently, when should we expect that your efforts to be in the future? I think Michael, on subscription revenue, can you parse out the impact of sort of recent price increases and any incremental benefits from the early implementations of the artist-centric models from underlying consumption growth? Thank you.
spk06: Omar, thank you for your questions. Let me address first questions regarding the price increases and artist-centric. I think in terms of the detail there, refer back to Boyd's comments about the Spotify growth rate enjoying the quarter over quarter benefit, so first quarter 2024 versus first quarter 2023, of the price increase impacting fully the first quarter. So when you look at other platforms like Amazon or Apple that raise prices sooner, you see the anniversary, excuse me, and we put it that way, it's anniversary in the word of the benefit, and so you don't see the same growth impact for the in terms of artist-centric, regarding updates there. Let me hit on a couple things. With respect to Spotify and artist-centric implementation, we're very pleased that they've now rolled out the monetization threshold, functional noise restrictions, new mechanisms to combat fraud, artificial streaming. Obviously, very important that the world's leading subscription platform has embraced these key components of our artist-centric model vision that we've been advocating since the start of last year. In terms of the financial implications, they provided guidance around a $1 billion benefit in terms of incremental revenue for the industry over five years, which gives you a perspective on both the timeframes associated with realizing the benefit, but also gives you some sense of the impact that they forecast associated with those changes. In terms of an update on other discussions, our conversations with other DSPs are going very well. We don't have specific updates for you at this time, but we can say, and perhaps this then transitions into the discussion around the super ban, that we're very encouraged by positive reaction that we're getting around the prospects of a super premium tier at a higher price point that would involve an even more advanced value proposition for customers to take advantage of the potential that our research suggests that could be the range of 10 to 20 percent of the price subscription tier. So that's part of the outlook, and I think we previewed that on our last earnings call. That's a focus of the conversations that we have right now with the DSPs in the artist-centric area. The DNA of the company is product,
spk08: product, product, artists, talent, rights, and we continue to invest in, that's where our investment is, in rights and products that will accelerate what our research is with the DSPs, for example as partners, but what the opportunity is, and we know that we could better monetize high value customers, the research suggests that one in five paid music subscribers would be willing to pay for a premium tier. That's enticing. We're supporting all the products and all the offer, all the product innovations from our partners, and our strategy, sorry to elegist, our strategy is to drive the market. I think Taylor and our BTC fulfilment and those products are one example of the super fan opportunity. We've talked to you about the health category, we think that's an opportunity as part of driving the marketplace within a bundle, and exciting products provide access and early access to things that delight and excite fans and the super fans. So we know they're out there, all of us who've been in music and who love music, we all became super fans, and the feedback and partnerships that we have, whether or not it's with this new arrangement with TikTok, in terms of their homepages, and as Mike said, how we deliver products with them, in terms of their stores and our homepages, we're developing this and we're investing in it, and we believe in it, and so do our artists and so do our partners.
spk04: Thank you. The next question, Yaja of Goldman Sachs. Lisa, please go ahead, your line is open.
spk01: Hi, I have two questions. Firstly, just to come back on TikTok, I know the monetisation is not the main consideration, but you did say that last year they were paying 1% of revenue, that's significantly undervalued your content, so could you maybe just confirm without revealing the exact number, that we are above that 1%, like maybe 2 or 3 or more, but we're not still at around 1% of overall revenue, and if you could maybe just elaborate what it really means in practice when you talk about new promotional engagement opportunities, production, it was expected to be AI, like anything a bit more concrete I think could be quite helpful for us, and the second question is on subscription revenue growth, I'm still a bit surprised why it's so much, from 15% in Q4 to .5% in Q1, I think the lapping of Amazon and Apple should be at least less than 1% of impact, so could you maybe share a bit more colour, and how should we think about the coming quarters, do we expect basically subscription to further slow from Q2, or you expect maybe better market share to help accelerate that growth rate? Thank you.
spk03: Yes, I think maybe I'll start Lisa on TikTok, we can't obviously disclose the specific terms of our deal, but we have substantially approved the total value we'll derive from this relationship, there's various components involved of what is a multi-faceted deal, on compensation specifically, revenue under this new deal marks an improvement from our last deal, I think Lucy actually alluded to this, is that there are many other impacts of this deal which wouldn't necessarily show up on the ad funded revenue line, we talked about the opportunity that lies ahead of us together with TikTok and the areas of e-commerce, maybe Michael can talk a little bit about the campaigning and the terms of marketing and promotion that will benefit us in terms of other revenue lines and just narrowly the ad funded lines, really how we'll work together in areas of data and artist insights and the intelligence that that brings will enable us to
spk09: help
spk03: our artists develop their own careers, it's what we'll do together with them in the area of just technology and advancement and how we can solve for issues like attribution, control of fraud, all of those areas where we get very very active involvement committed to us by TikTok won't necessarily show up on the ad funded revenue line, but across the totality of our P&L we really do see that the economics will ultimately substantially improve our position.
spk06: Let me take the hand off there with the TikTok question and address some of the areas that Boyd suggested I follow up on and then maybe go into the specific question regarding AI and those provisions of the deal. So just to reinforce what Boyd said, it's important to look at the TikTok relationship reset holistically. You know the list of different components from e-commerce to ad credits, data, marketing programs, other elements, there are going to be new programs and new collaboration opportunities and we're excited to take advantage of the power of the platform to provide the best opportunities for our artists and we think there's a lot of value there. So holistically when you look at the TikTok deal, we think that it is definitely delivering a fair level of value relative to other short form social platform partners to kind of get to the premise of your question. I want to just double click on the attribution point that Boyd made. This is really important, it sounds kind of abstract, but when we talk about content management and attribution and some folks have talked about it the sped up, slowed down challenge in terms of modified content, the key is to ensure that when our artists intellectual property is incorporated into UGC they are credited, not some infringing third party but the artist and that that content is better connected to their official presence on the platform. When we talk about platform integrity, that's one of the key components. So as we advance these objectives of our partners, this means things like elevated requirements that text and avoid infringing content, putting leaks, unauthorized remixes, unauthorized AI versions, and also upgraded requirements for improved filtering, stream manipulation detection, and eradication process. All these things are going to greatly benefit our artists and it's the other side of the coin, the marketing and promotion programs, all the ways we can create visibility around the artist and then making sure the platform integrity is there so the attribution is always made with respect to our artist IP. And then in terms of AI specifically, we obviously can't go into confidential details but speaking generally here, under our new agreement, TikTok has made a number of commitments that demonstrate respect for our artists and songwriters work and support our principles on AI which have been well articulated and frequently mentioned by us on these calls. TikTok has now addressed, for example, the primary concern we expressed in our open letter in January that AI-generated content would massively dilute the royalty pool for human artists. That's very important. Under our new agreement, we can say that TikTok will also protect the integrity and value of human artistry by ensuring that fake artist AI content uploaded by third parties that misappropriates the identities of our artists and fringes on the right of publicity can be removed. Collectively, these and other commitments we've secured regarding generative AI represent what we think is a dramatic improvement from where things just a few months ago. And they deliver another major win for all artists and this is really important. I think to emphasize and we appreciate the support of various artist organizations on this topic. This is going to be really significant in terms of win for the artist community as we look to continue to lead with respect to requiring platform partners to protect human artistry from AI's potentially harmful effects.
spk03: I can just round out on the second part of Lisa's question which was regarding subscription to revenue. I mean, it's probably not much to add other than what we've already said, but just to maybe repeat what we said before is that in the quarter, our revenues from Spotify track closely to the revenue growth that Spotify themselves reported. Clearly, that had the benefit year on year of the price increase. The reality is that not all platforms are growing at the same rate as Spotify grew at in the quarter. Part of that is, as Michael used the anniversary. The reality is Amazon and Apple increased pricing earlier so they didn't get the benefit of a year over year growth on those two particular platforms. So again, when we look at the, and again, the biggest single driver of this is subscriber growth. And we're looking at the total subscriber growth across all platforms, across all geographies. We're very encouraged by that subscriber growth.
spk04: Thank you. The next question goes to Connor O'Shea of Kepler Chevrolet. Connor, please go ahead. Your line is open.
spk02: Yes. Thank you for taking my questions. Two questions. Just to follow up on the subscription growth. I mean, from your comments so far, should we imply that as the Spotify price increase from last year is also overlapped, that pending other price increases from the platforms to be announced this year, potentially that subscription growth has sort of peaked in the first quarter? We should expect slightly lower numbers in the coming quarters? Or will the say Taylor Swift effect gain with the new album drive market share gain to compensate for that, potentially? And then the second question, just on the publishing side, a very strong number in the performance royalties, I guess some of that is still, you know, prolonged bounce back of touring, post pandemic and so on. Do you see that number normalizing at some stages here or could we grow double digits throughout the year? Thank you.
spk03: Connor, I mean, maybe I'll just try and tackle this in parts again. You're going to hear me say again, you know, looking at these revenues and these results on a quarterly basis, you know, can be somewhat misleading. I mean, really got to look at it over a longer kind of period. And I think in particular publishing, you do see variances quarter by quarter. In terms of performance in publishing, you know, there were two factors in that regard. One was the collection here in the US, which from one of the societies that benefited the quarter as well as just, you know, particularly in Europe, you know, still returning activity in relation to live performance and revenues coming in from various venues. So again, just try and look at this on a slightly longer term horizon. You know, we still see very consistent growth from our publishing business, both in terms of the market, but also in relation to our own publishing division, you know, which continues to perform very, very strongly, you know, -a-vis the competition in the marketplace. I'm not sure on subscription whether there's a whole lot more that we can really add other than, you know, if you do want to go for that, you know, longer term, you kind of view in terms of subscription. You know, I think there's two things that, you know, that I look at. You know, we're currently in the kind of realm as an industry of about 650 million, you know, kind of subscribers, you know, consumers consuming music by paying, you know, an amount per month for access to all the music created and some even more than ever created. So, you know, that growth and the subscriber growth is the single most important driver of our forward-looking growth. And I think, you know, there's a second point which Michael and Lucien touched on, which mustn't be underestimated, is, you know, when we look at the product offering from the platforms, you know, it's been broadly, as a product offering, it's been broadly consistent with, you know, for many years now. And the conversation about the Superfan, the conversation, you know, around the, you know, could one in five subscribers be willing to pay, you know, an increased amount, you know, for a, you know, for a premium, from a premium tier. It's a very, very important part of the focus and a very important part of all that we've articulated over the last period about artist-centric. You know, it's one thing, you know, to clear up a lot of noise and clutter on the platforms, which is certainly one part of artist-centric. But the second part is really about how we can focus on the fans and connecting those fans, you know, with the artists that they're... I was just going
spk08: to say, it takes two to tango. And the real world in which we live day to day, the conversations that we have operationally with all of the DSPs, and I mean all of them, they all want to improve, they're all looking at the Superfan, they're all looking at what their products are, their own brands, markets to invest in. We talk about China, India. Each company, each dialogue and conversation is operationally diverse. And we're at the middle of it and the center of it, working with them as partners to grow the entire pie.
spk04: Thank you. The last question goes to Michael Morris of Guggenheim Partners. Michael, please, your headline is open.
spk05: Thank you for taking the questions. Good afternoon. I wanted to ask one on the TikTok dispute, but from the artist angle, can you talk about the effectiveness of taking content down during the period of the dispute? So specifically, did the technology work and you felt like you were able to impact the platform by having your music removed? And also, how do you feel that the artists supported that effort? How do you build that consensus with individual artists when they're making a sacrifice by not having that exposure during what could be a prolonged period? So that's my first question. And then second, you've spoken about accelerating growth in some of these emerging markets, China, South Asia, Africa. You've made some investments. Can you talk about, I don't know, maybe help us size what the impact of growth in those markets could be over time and how far into the investment process you believe you are to get to where you want to be there? Thank you.
spk06: Michael, thank you for your questions. Let me address the first one regarding what I would characterize as the general category of content management. And then there was an additional component that had to do with artist community support. So we feel like we were effective in using the takedown process during the period of time that we were not in a licensed relationship with TikTok to identify content. And I think as we previously indicated, our efforts resulted in hundreds of millions of videos being muted. I think what's more important is to consider the go-forward. We learned a lot during that period of time with respect to identifying content as part of the conversation about attribution and addressing the enhanced components of the partnership that enable us to do a better job of managing all this modified audio, which was a significant part of the effort in terms of the takedowns that we issued. And then in terms of artist community support, as Lucien has underscored, we're incredibly grateful for the artist organization, artist community support, and the support of individual artists. And it was very gratifying to see that our long-term vision about what was really needed in terms of advancing the partnership, particularly around AI, but with respect to the whole set of issues, the level of support that we received was instrumental to us being able to achieve the end result that we did. So there's three partners to the win
spk08: -win, the artists and the writers, TikTok, and UMG, and probably the fourth partner, which is the entire rest of the ecosystem. With regard to your question about emerging markets, look, it's an area I've focused much of my career on, having run the international division when I was back in London 14, 15 years ago. The approach has to be, in situations like this, highly nuanced. We have existing operations in many of these markets and have done for decades, but we scale our presence to the opportunity. We're pragmatic commercial business people, and if there's a market we can see in trends, in data, or we can just sniff out the opportunity, then we will go to where the opportunity either exists currently or is emerging, or
spk09: what we can see.
spk08: Obviously, it's twofold. How much commercial potential is there for recorded music and the music publishing business within that market? Is IP protected there? Can we identify artists, as well as entrepreneurs, in those markets moving forward? We're constantly looking at all of these factors, all of the time, in real time, like we check the weather, hourly, what's the opportunity, what's going on. The next few years, it's not about playing catch-up, it's about being ahead. As I said, we'll continue to scale our presence to take advantage of what we see, and the advantage of the internet, and the advantage of all our BSPs, and the advantage of every single piece of information and data and CRM that we get, is that we can see it in real time. There are lots of things that we continue to uncover and identify that we weren't aware of yesterday or maybe two or three years ago. It's incredibly fortifying and exciting.
spk04: Thank you. That's all the questions we have time for today. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
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