A risky bet on streaming fueled Universal Music's resurgence

Universal Music Group corporate offices in Santa Monica

Sept. 21, 2021 Updated 1:38 PM PT

When Lucian Grainge became chairman of Universal Music Group in 2011, the industry was in a free fall.

Music sales were collapsing, as consumers illegally downloaded songs instead of paying for CDs.

Rather than fighting the internet, Grainge pushed UMG to partner with YouTube and other tech companies that could promote its artists and their music. The business made a key early investment in Swedish streaming service Spotify.

His gamble paid off.

On Tuesday, Santa Monica-based UMG successfully launched its publicly traded stock in Europe, signaling to investors just how much streaming has rejuvenated the music business after years of decline.

When it went public on the Euronext Amsterdam exchange, UMG was valued at 45.4 billion euros ($53.2 billion) — up dramatically from the $8.5 billion that Softbank had offered for the company in 2013 in a bid that was rejected.

Investors snapped up shares in the company, which represents a bevy of current hitmakers such as Taylor Swift, Drake and Billie Eilish and is the largest of the three major record companies, controlling about 40% of the industry. The stock opened at 25.25 Euros, or $29.61, and rose 36% on Tuesday.

Although the COVID-19 pandemic devastated the concert business, streaming and subscription revenue from platforms such as Spotify and Apple surged last year, accounting for 59% of UMG’s revenue.

And the company believes there’s still even more runway to grow globally and by licensing music to popular apps, smart speakers and fitness machines.

“As a freestanding, independent company with greater operational flexibility and access to the capital markets I believe we can create even more opportunities for artists and new experiences for music fans while strengthening our role in promoting a thriving music and entertainment ecosystem,” Grainge said in a statement.

For UMG’s parent company French media conglomerate Vivendi, the Tuesday public listing of its prized asset is the culmination of its two-decade investment in the music industry. Paris-based Vivendi, which has owned UMG since 2000, suffered through the industry slump that came after the rise of Napster.

The market debut of UMG stock reflects the growth of all-you-can-eat streaming services, including Spotify, Apple Music and YouTube, which have become the dominant way that people consume new hits and oldies.

“Universal Music continues to be in a sweet spot when it comes to content,” said Daniel Ives, an analyst at Wedbush Securities. “A decade ago, if you told investors they’d be in a situation where music would be a very attractive sector, they would’ve said, ‘You’re crazy.’ It shows it’s a major comeback for the music industry, with streaming leading the way, and this is just another feather in the cap for the broader industry.”

Global record industry revenues grew 7.4% to $21.6 billion last year, their highest point since 2002, according to the annual report released by the International Federation of the Phonographic Industry. Streaming, including ad-supported apps and subscriptions, accounted for 62% of the total.

In the U.S., recorded music revenues grew 27% in the first half of this year to $7.1 billion, according to a report this month from the Recording Industry Assn. of America. Streaming contributed 84% of the total.

Those buying UMG’s stock are betting that the surge will continue. The company’s IPO on the Euronext Amsterdam Exchange, follows Warner Media Group going public on the Nasdaq in June 2020 at $25 a share. Since Warner filed its IPO, its stock price has risen 61%, closing at $40.26 on Monday.

Many credit UMG’s success to Grainge, UMG’s CEO and chairman, who led the company through the industry’s transition to a model based not on consumers buying albums or songs, but accessing them through subscriptions.

A former A&R (artists and repertoire) man, Grainge rose up UMG’s ranks and led the company’s acquisition of classic label EMI’s assets. He also invested money to revitalize storied labels such as Capitol Records and Blue Note Records. The company also owns Interscope Records and Republic Records.

“When I joined UMG 35 years ago, I never would have dreamed someday this company would be the world leader in music-based entertainment and that we’d have the ability to determine our own destiny,” Grainge said in a statement. “I can’t tell you how many times people told me the music business was dead, but I knew they were wrong.”

Under his leadership, UMG moved its headquarters from New York to the Los Angeles area a decade ago to be closer to the offices of tech and media companies it wanted to collaborate with.

“Relationships with tech are essential so we can understand each other’s goals and create win-win partnerships for our artists and the platforms,” Grainge said. “Through our early support of digital streaming and subscription services, we demonstrated our capability for innovation and the ability to lead a transformation of the music industry.”

Beyond Spotify, record companies have found new ways to grow their businesses in the digital sphere. Music is essential to the viral appeal of social media companies such as Snap and Chinese-owned video sharing app TikTok, as well as connected fitness company Peloton. Universal Music in February announced a new global licensing deal with TikTok, allowing users greater access to clips from Universal Music’s catalog. Video games are also a source of licensing revenue.

The music business is always obsessed with finding the next big act, but the streaming revolution has also boosted the value of catalogs composed of old hits. Last year, 54% of UMG’s recorded music revenue came from catalog product, including recordings by the Beatles and U2.

In addition to its recording business, UMG makes money through music publishing and artist-related merchandise, which took a hit from live tours canceled or postponed due to the COVID-19 pandemic.

Total UMG revenue rose about 4% to 7.4 billion Euros or $8.7 billion last year, according to the company’s prospectus. Net income was 1.4 billion Euros or $1.6 billion last year, the company reported.

Vivendi, which bought UMG through its acquisition of beverage giant Seagram, owned 70% of the music giant before the listing. Vivendi spun off 60% of its stake, leaving it with 10% ownership. The stock sale had long been expected by investors.

Other prominent investors wanted a piece of UMG. Its biggest shareholders include a consortium led by Chinese tech giant Tencent, which acquired a 10% stake last year and now owns 20%. Hedge funder William Ackman this year tried and failed to invest in UMG through a special purpose acquisition company, but instead took a 10% stake through his Los Angeles firm Pershing Square Capital Management.

The stock sale resulted in 18% of UMG’s shares going to Vincent Bolloré, Vivendi’s former chairman. Bolloré’s son Yannick succeeded him as chairman of Vivendi’s supervisory board in 2018.

The public stock sale will be boon to Grainge, who could gain more than $150 million.

Bloomberg contributed to this report.