MBW Reacts is a sequence of analytical commentaries from Music Business Worldwide written in response to main latest leisure occasions or information tales. MBW Reacts is supported by JKBX, a know-how platform that provides shoppers entry to music royalties as an asset class.
For the previous five-plus years, all of the blockbuster report {industry} has identified, thanks primarily to the explosion of music streaming revenues, is bountiful development.
That doesn’t solely check with development in earnings (though, as MBW readers will know, that’s actually been spectacular). It additionally refers to development in headcount.
But now a few of music’s largest rightsholders look like transferring into a brand new period – one encompassing considered hiring insurance policies, tweaked allocation of assets, and, a minimum of within the short-term, trimming prices.
This has been seen just lately with layoffs (within the single proportion digits vs. whole workers) at each Warner Music Group and BMG.
And it may be seen by Common Music Group’s affirmation, on its newest earnings name, that it will likely be “reducing to develop” in 2024.
UMG’s upcoming cost-savings plan was launched by Boyd Muir, the corporate’s EVP and CFO, on Common’s Q3 2023 name with analysts on October 27.
Mentioned Muir: “[We] are presently conducting a cautious overview of our price base, which we are going to full over the approaching months, and we are going to replace you when applicable about an anticipated price financial savings program to start in 2024.”
Added Muir: “We stay targeted and optimistic as we proceed to execute on the expansion prospects that lie forward for UMG We see monumental alternative for worth creation, each for our artists and for the corporate, as we advance our artist-centric initiatives and work to additional seize the worth of the engagement being pushed by our unparalleled roster of artists and songwriters.”
“What we have to have a look at now could be… these assets which might be extra targeted on the legacy enterprise to ensure that us to make sure that we even have the proper stage of assets to execute and profit from the entire alternatives that we see forward.”
Boyd Muir, Common Music Group, talking October 27
Afterward that earnings name, UMG execs have been quizzed by analysts together with Lisa Yang of Goldman Sachs and Julien Roch of Barclays about how this deliberate cost-cutting may have an effect on margins, and notably the way it may play into UMG’s purpose of hitting a mid-20-percent EBITDA margin within the subsequent few years.
Muir confirmed that the deliberate 2024 price cuts have been anticipated to enhance UMG’s EBITDA margin as soon as accomplished. But he additionally famous that the 2024 program will purpose to raised “seize alternatives we see within the market”.
Muir stated that UMG meant to dedicate “the proper stage of assets to execute and profit from the entire alternatives that we see forward”, whereas concurrently reviewing assets presently devoted to Common’s “legacy enterprise”.
Common Music Group Chairman and CEO, Sir Lucian Grainge, had a quick phrase to sum up this balancing act: “Lower to develop.”
The important thing goal of 2024’s program, Grainge reiterated, was to “reduce overheads with the intention to develop elsewhere”.
Common, which employed some 9,992 individuals globally on the shut of 2022, just isn’t alone in making this sort of strategic determination.
In March, Warner Music Groupannounced it was shedding round 4% of its international workforce – roughly 270 international workers.
On the time, WMG CEO, Robert Kyncl, famous that the choice lay in WMG wanting to raised “benefit from the alternatives forward of us”.
WMG would do that, famous Kyncl, by “reallocating assets in the direction of new expertise for artist and songwriter growth and new tech initiatives“.
“We’re continuously difficult ourselves to function extra effectively and successfully.”
Robert Kyncl, Warner Music Group talking final week
In different phrases, WMG would reduce headcount/expenditure from areas of its enterprise that, in Kyncl’s view, didn’t finest serve fashionable artist and songwriter growth and/or gas tech packages that might “benefit from the alternatives forward of us”.
Reminding traders of his dedication to fiscal prudency, Kyncl acknowledged on WMG’s newest earnings name final Thursday (November 16) that his firm’s operations at this time are “all the time underpinned by a concentrate on monetary self-discipline, as we’re continuously difficult ourselves to function extra effectively and successfully”.
A better have a look at ‘reducing to develop’
So what does Common actually imply when it talks of “reducing to develop”? And what’s Robert Kyncl referring to when he talks of higher “making the most of the alternatives forward of us”?
Neither Kyncl, Boyd Muir, or Sir Lucian Grainge – as you’d in all probability count on on this matter – have to this point provided analysts commentary wealthy with element. However there are examples, each hypothetical and tangible, that inform their very own story.
First, the hypothetical instance.
The ability of conventional broadcast radio as a promotional platform within the US music {industry} continues to say no – inevitably, within the streaming age – yr over yr. But the biggest corporations within the US report {industry} proceed to apportion giant annual investments into terrestrial radio promo.
If you happen to ran a significant music firm at this time (and have been searching for improved EBITDA margins), would you maybe take into consideration lowering expenditure on this declining a part of the market?
If you happen to did, may you then reallocate a few of the consequent financial savings in the direction of, say, the creation of social media content material… whereas nonetheless making general financial savings vs. your earlier expenditure?
In some circumstances, for some labels, this may signify the smart truncation of “legacy assets” whereas nonetheless enabling the expansion of “alternatives forward”.
Now, the tangible instance.
The numbers don’t lie: ‘catalog’ music (particularly ‘shallow’ catalog music) has eaten into the market share of ‘frontline’ (i.e. new launch) music up to now few years, as client listening habits proceed to remodel.
This was doubtless an element within the main report corporations trying to scale back back-office spending of their frontline label operations over the previous 12 months.
You possibly can see such a discount within the following three examples, which all befell this yr:
Common Music Group ‘folding down’ Motown from being a fully-fledged frontline label (with its personal promo workforce and so forth.) into being an imprint of Capitol Music Group (i.e. Motown sustaining a definite A&R operation, however counting on CMG for different features);
Warner Music Group working a similar play in the UK: ‘folding down’ Parlophone – beforehand a fully-fledged frontline label – into being an imprint of Warner Records (UK). (Once more, Parlophone maintains its personal A&R useful resource throughout the wider Warner Data setup);
Sony MusicdissolvingArista Nashville, transferring the shuttered label’s artists into the bigger Sony Music Nashville operation, or different frontline entities like RCA or Columbia.
Apparently, within the case of Common, the ‘fold down’ of Motown got here in the identical yr that UMG devoted new funding into its global independent artist/label services division, now generally known as Virgin Music Group (run by JT Myers and Nat Pastor).
As anybody keeping track of international market share charts is aware of, the unbiased sector (a) continues to develop at a quicker fee than the remainder of the worldwide enterprise, and (b) is usually the place the largest rising hits from ‘non-Anglo’ markets – together with Korea, LatAm, India, Nigeria and elsewhere – reside.
With UMG folding down Motown whereas investing in VMG, Common might be argued to be displaying an early indication of the form of transfer we will count on from “reduce to develop” within the months forward.
The broader backdrop… and BMG’s latest transfer
It’s additionally price noting that Warner and UMG’s cost-cutting bulletins arrive amid a backdrop of widespread redundancies throughout the media and leisure areas.
Additional giant numbers of layoffs have taken place at tech/media corporations like DreamWorks, Activision Blizzard, Microsoft, and others.
So far, Common Music Group (a publicly traded firm) and sure different giant music rightsholders have resisted following swimsuit with a public announcement of redundancies.
UMG it needs to be stated, stays closely worthwhile; the corporate is anticipated to submit an adjusted annual EBITDA comfortably in extra of USD $2 billion in 2023.
The load of macroeconomics in media, nevertheless, plus the chance to shift assets in the direction of future-facing investments, will inevitably land on the agenda in some unspecified time in the future.
We must also point out right here BMG – the Bertelsmann-owned music firm – which recently executed its personal spherical of layoffs.
BMG is a extremely related case examine on this narrative as a result of, though considerably smaller than Common Music Group, it too is considerably worthwhile (BMG’s EBITDA margin sat at 21.7% in H1 2023.)
There’s some proof of ‘reducing to develop’ in BMG’s latest layoffs, as introduced in an inside word by CEO Thomas Coesfeld earlier this month.
After asserting that BMG would reduce 40 workers – round 3% of its international headcount – Coesfeld famous that the enterprise he runs was changing into “extra environment friendly and more practical”.
The crux of that new effectivity: following sustained funding into native repertoire advertising and marketing groups, BMG’s layoffs represented a reducing again on staffing prices inside centralized worldwide advertising and marketing – to keep away from ‘doubling up’ on assets.
“Clearly these are robust choices to make, however there’s higher methods to speculate this cash to enhance our service to shoppers.”
BMG spokesperson on latest layoffs of three% of firm’s international workers
A BMG spokesperson defined to MBW: “A centralized worldwide division made sense when our native repertoire groups weren’t as sturdy as we at the moment are. We’ve addressed that and a centralized perform is not wanted. As the one international participant outdoors the three majors, worldwide continues to lie on the coronary heart of what we do. We’ll simply do it in a different way.”
Tellingly, the BMG spokesperson added: “It’s much better to make adjustments like these from a place of energy once you’re performing effectively, slightly than leaving it too late.
“Clearly these are robust choices to make, however there’s higher methods to speculate this cash to enhance our service to shoppers and you may count on additional bulletins on enhancements to our service providing imminently.”
