Warner Music Group and Universal Music Group's IPO plans
Entertainment IPOs (and direct listings) galore!
: On March 2nd, 2020, Warner Music Group announced that they were
postponing their IPO
in the face of market shifts due to the COVID-19 crisis. However, they ended up
going ahead with the IPO
in June 2020. My original article from the first IPO announcement is below, unedited:
(I may earn money from links in this post to books on Amazon.com.)
When Warner Music Group IPOs, it will not be for the first time. In 2005, a group of investors purchased Warner Music Group from Time Warner and took it public on the New York Stock Exchange. In 2011, WMG was taken private by Access Industries—the investment vehicle of multibillionaire Sir Len Blavatnik—at a valuation of $3.3 billion.
Just the basics
To me, the S-1 was a lot less controversial than I thought it would be. WMG is a business that is both profitable and growing. It’s hard to find a lot of evidence to pitch the record labels are dead schtick. Maybe they aren’t.
I made the below chart, which shows WMG’s revenues from the past three fiscal years, divided by category. The data comes from page 68 of the S-1. Categories belonging to recorded music are annotated with [R] and are shades of blue on the bar graph. Categories belonging to music publishing are annotated with [P] and are varying shades of orange or yellow.
Some basic things this tells us, many of which are already well-known:
Recorded music is a lot bigger than music publishing.
Digital music is growing. Physical music is shrinking.
WMG is presumably making big moves in artist services, but I’d want to dig deeper into how they do that accounting before saying for sure.
Important partnerships and M&A
The obvious partnerships for WMG are, of course, Apple, Spotify, and YouTube, but I think it is important to highlight some of WMG’s lesser-known but deeply strategic partnerships as per the S-1.
Warner Music Group is a founding member of the Techstars Music accelerator. It’s not clear to me whether that makes them an LP in the Techstars Music fund, or whether they’ve done follow-on investments sourced from Techstars Music.
Sodatone is an A&R insights tool that helps track the rise of indie artists. In March 2018, WMG announced they acquired Sodatone, adding a dash of data science and machine learning to their own A&R operation.
Last March, TechCrunch reported that WMG led the seed round for Artiphon, a company building a new type of digital musical instrument through their new seed-stage investment fund WMG Boost. WMG Boost has also invested in Dapper Labs, the maker of CryptoKitties.
In August 2019, WMG announced a licensing deal with Audiomack. Audiomack is a streaming site focused on giving an audience to emerging artists in rap, R&B, electronica, reggae, pop, Afrobeats, Latin, and instrumental music, as well as podcasts. This is Audiomack’s first licensing deal with a major label.
The press gives a glowing treatment of Audiomack, with one piece daring to say that Audiomack just solved music streaming. Additionally, one of my favorite music industry people to follow on Twitter is Brian “Z” Zisook [DJBooth, Twitter, LinkedIn], currently Vice President of Content Operations & Artist Services at Audiomack.
In August 2018, Warner Music Group announced they were acquiring Uproxx Media Group (stylized as UPROXX) and its portfolio of websites (with the exception of BroBible). UPROXX is an important investment because record labels generally don’t own the direct customer relationship—instead many other businesses, from vinyl record stores to radio stations to social media sites to music streaming sites have the direct attention of the customer.
Tempo Music Investments
As far as I can read, this one is not in the WMG S-1, but I think it ought to be. It might be that the partnership was announced in December 2019—fairly recently. Tempo Music Investments is a $650 million fund created as a partnership between WMG and Providence Equity Partners. Tempo is playing in a very hot space. I recommend that everyone read this piece about Merck Mercuriadis and his Hipgnosis Songs Fund Ltd—it comes with the very dramatic title The Man Who’s Spending $1 Billion to Own Every Pop Song.
In late 2018, WMG bought the European company EMP Merchandising for $180 million. EMP is one of the biggest music merchandise companies in Europe.
In July 2017, WMG announced a deal to purchase Songkick’s content discovery platform, but not Songkick’s ticketing business to avoid getting involved with litigation against Live Nation Entertainment.
UPDATE: I wrote a piece about the federal criminal and civil cases involving Live Nation Entertainment and Songkick.
Parlophone Music Group
Parlophone Music Group was previously a subsidiary of Universal Music Group (itself a subsidiary of Vivendi) until Warner Music Group acquired Parlophone in 2013. The WMG S-1 says that the Parlophone acquisition significantly strengthened WMG’s footprint in Europe.
Access Industries, WMG’s parent company, holds a controlling stake in the French music streaming site Deezer. Deezer might be one of the most talked-about companies in the WMG S-1—a quick Ctrl-F search finds 45 mentions of Deezer.
Tencent Music Entertainment (TME)
Back in October 2018, WMG’s Chinese affiliate WMG China LLC invested in $100 million into Tencent Music Entertainment.
The regulatory climate of the music industry is changing. The WMG S-1 identified the following bits of legal good news and bad news.
The Music Modernization Act
The WMG S-1 remarks on the Music Modernization Act as a positive regulatory trend for the business. The Act was signed into law during October 2018. It is the merger of three bills mixing various policies like:
creating a new non-profit governing body to track the owners of mechanical licenses
giving federal copyright protection to sound recordings made before February 15, 1972
designating that SoundExchange will also distribute royalties for producers and engineers
and a whole lot more.
The US Copyright Act
One risk mentioned in the WMG S-1 is the risk that they lose elements of their catalog if the US Copyright Act allows the artist (or their heirs) to recapture their work. The Act gives artists (or their heirs) a right to recapture the copyright during a five year period starting 35 years from the release of the recording for recordings licensed or assigned after 1977 (or 56 years for recordings before 1978).
State laws cannot conflict with this right, and artists cannot waive it. However, this right does not apply to “works-made-for-hire.” In the S-1, WMG states that “virtually all of [their] agreements” are work-made-for-hire, so they may not turn out to be particularly vulnerable to recapture.
Privacy laws (GDPR, CCPA, COPPA)
The European Union’s General Data Protection Regulation (GDPR), the California Consumer Privacy Act (CCPA), and recent FTC revisions to the Children’s Online Privacy Protection Act (COPPA) Rule represent additional compliance requirements for data collection from WMG’s digital properties, which will become increasingly important as WMG invests in consumer-facing properties.
California AB 5
California AB 5 is a wide-ranging California state law introduced by California Assemblywoman Lorena Gonzalez in an attempt to harm technology companies like Uber, Lyft, and DoorDash. The bill is built on top of the precedent set by the 2018 California Supreme Court ruling Dynamex Operations West, Inc. vs. Superior Court of Los Angeles. The Dynamex case set a standard of how to determine whether a worker for a business should be classified as an employee or a contractor. AB 5 implements this standard, but sets over 50 exemptions for various professions and fields, like attorneys and real estate agents.
Assemblywoman Gonzalez refused to add exemptions for ride-sharing and food delivery businesses, and she also refused to add exemptions for the music industry. Independent musician Ari Herstand has covered in great detail about the projected impact of AB 5 on the music industry on his website, including posts where he meets with Assemblywoman Gonazalez and then California Senate Majority Leader Robert Hertzberg.
In short, the danger that AB 5 poses to WMG and every other California business that hires musicians is that these businesses will have to classify musicians as employees instead of contractors, putting these businesses on the hook for withholding or paying income taxes, Social Security taxes, Medicare, and so forth. WMG is profitable and can likely survive the damage caused by AB 5, but as Ari Herstand explains, all sorts of small music businesses may not be able to afford the tax burden. As a result, AB 5 is likely to weaken independent musicians relative to major labels like WMG.
Notably, California AB 5 also affects independent journalists, requiring that they must receive employee status if they write more than 35 pieces for a publication in a given year. Some independent journalists have pointed out that they can reach that limit within a few months, and this has resulted in publications laying off journalists rather than giving them employee status. However, there is some recent news that this limit may be amended.
The seven-year limit to personal services contracts
California Labor Code Section 2855 sets that personal services contracts cannot span a duration longer than seven years. It is also known as the De Havilland Law, named after actress Olivia de Havilland, who won a lawsuit against her studio Warner Bros. in 1943. Section 2855 limits recording contracts (and other contracts too) to a maximum length of seven calendar years. However, in 1987 the RIAA successfully lobbied for Section 2855(b), which allows record labels to sue artists for damages if an artist leaves their label as per Section 2855, but without delivering the number of albums promised in their record deal. As of March 2018, Warner Bros. Records was suing Avenged Sevenfold for moving to Capitol Records but with one unfulfilled album still left on their Warner Bros. deal.
Section 2855 is going to become a lot more important to record labels in the face of the growing movement behind artists—and not labels—owning their master recordings, especially after Taylor Swift’s fight to control her masters. After seven years, artists might be able to take their revenue with them too.
You can read more about Section 2855 in this 38-page report titled Restoring the Seven-Year Rule in the Music Industry.
Other notable IPO case studies
Universal Music Group (UMG) [IPO upcoming]
Music Business Worldwide recently broke that Vivendi—the French media conglomerate that owns UMG—is planning for an IPO by 2023. This follows the news in December 2019 that Vivendi sold 10% of Universal Music Group for $3.4 billion to Chinese music streaming site Tencent Music Entertainment (TME). The TME deal sent shockwaves around the music industry, especially since it presumably “sets” Universal Music Group’s valuation to be at $34 billion.
UMG’s overall revenues in 2019 were $8.04 billion—a little less than double the 2019 revenue number from Warner Music Group.
Endeavor Group [IPO cancelled]
Endeavor Group filed for an IPO, only to withdraw it. Supposedly the withdrawal was because of the poorly-performing Peloton IPO. It’s easy to imagine that the Peloton IPO provided a convenient scapegoat for scrapping the Endeavor IPO around concerns over Endeavor’s business, but I wouldn’t know enough to say for sure.
The previous issue of Click Track covers more about how the major Hollywood talent agencies are cashing out—it usually involves private equity more than the public markets.
Peloton [IPO in 2019]
Speaking of Peloton, I find them to be an interesting case study because in many ways they are more of an entertainment company than a fitness company. The Peloton exercise bike experience heavily features music. Peloton’s Head of Music, Paul DeGooyer, sat down with Billboard to talk about the $300 million lawsuit Peloton is facing from the National Music Publisher’s Association as well as how Peloton chooses to include music in their exercise experiences. Peloton’s stock has been down, then up, and then down since the IPO.
Spotify [IPO in 2018]
Spotify, these days, feels like it is supposed to be the poster child for the tech industry and music industry working together, whether or not it is true. Spotify IPO’d in April 2018 (ticker symbol: NYSE: SPOT), sparking all sorts of takes celebrating Spotify’s success or forecasting Spotify’s fall.
The Harvard Law School Forum on Corporate Governance has a great case study focusing on Spotify and the direct listing process. Legendary venture capitalist Bill Gurley has been promoting the idea of direct listings as an alternative to the traditional IPO process. Spotify CFO Barry McCarthy wrote a blog post on the Spotify website titled IPOs Are Too Expensive and Cumbersome. But because Spotify doesn’t issue new shares in this process, the direct listing did not raise money for them.
Tencent Music Entertainment (TME) [IPO in 2018]
Tencent Music Entertainment (TME) is a joint venture created by Tencent and Spotify after Tencent purchased China Music Corporation to merge with Tencent’s QQ Music. TME raised almost $1.1 billion in an IPO on the New York Stock Exchange (ticker symbol: NYSE: TME) in December 2018.
STX Entertainment [IPO cancelled]
STX Entertainment, a media company and film studio, called off a planned IPO on the Hong Kong Stock Exchange. STX was designed as a US-based entertainment company that hoped to make deep inroads into the Chinese market.
Hipgnosis Songs Fund Ltd [IPO in 2018]
As mentioned above, Hipgnosis Songs Fund is a heavily capitalized investment vehicle led by former music manager Merck Mercuriadis. It is worth reading this piece about Hipgnosis titled The Man Who’s Spending $1 Billion to Own Every Pop Song.
Hipgnosis Songs Fund went public on the London Stock Exchange in July 2018 (ticker symbol: LON: SONG). The stock has generally hung close to the IPO price since then.
Cherie Hu is one of the best journalists covering this space. This post about the WMG IPO is behind her Patreon paywall, but it is an excellent read.
FAS 50 by the Financial Accounting Standards Board (FASB)
This is the Financial Accounting Standards Board (FASB) Statement of Final Accounting Standards (FAS) for Financial Reporting in the Record and Music Industry, released in November 1981. The Warner Music Group S1 uses the FAS 50 standard to account for advances paid to recording artists and songwriters.
Investing In Music: How music companies discover, nurture and promote talent by the International Federation of the Phonographic Industry (IFPI)
This is a classic music industry report from 2014(!) that describes the financial investment that major labels make when developing their roster. The IFPI website has some more recent reports. Their report covering the calendar year 2019 is dropping on March 24th, 2020.
More Click Track articles
January 11, 2021: Minor formatting and editing changes.
January 15, 2021: Added link to the new Songkick piece.