the great divide

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Hey! Big, big changes at Warner Music Group. 10K Projects CEO Elliot Grainge, the 30-year-old son of Universal CEO Lucian Grainge, will be the new CEO of Atlantic Music Group, replacing Julie Greenwald who will become chair. Max Lousada, WMG’s CEO of Recorded Music, will also step down from the company.

A lot to unpack, especially given Atlantic’s dip in market share, but we’ll save that for another day.

Today’s memo is about Spotify, Universal Music Group, their recent earnings, and why their performance won’t be aligned as much in the future. Let’s dive in.

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The price is usually $9,000 but they gave us Trapital readers a discount. You can attend for $5,900 (33% discount). If you're interested in joining, apply here or reply to this email and I'll put you in touch with Alts!

Spotify and UMG

In 2021, shortly after Universal Music Group went public, I posted a poll on LinkedIn and Twitter: “Which stock would you rather hold for the next ten years, Spotify or UMG?”

The two companies both relied heavily on superstar artists to drive revenue. When one stock went up or down, the other often did too, especially since UMG owned a stake in Spotify. Despite the tense negotiations, they both need each other. It was streaming’s version of Intel and Dell, Foxconn and Apple, Max Martin, and every millennial pop star.

Many people answered the “Spotify or UMG?” poll based on their fundamental preference: Would they rather be the primary supplier or distributor?

But a lot has changed in three years. First, streaming growth has slowed down. Spotify has captured the remaining market better than other DSPs. The “herbivores and carnivores” concept that Will Page and I discussed two years ago has come alive. Second, the music that gets listened to most is less concentrated on the major labels.

In Q2’24, Spotify’s subscription revenue growth was three times higher than Universal Music Group’s (21% compared to 6.9%). Spotify’s ad-supported revenue grew 13% while Universal Music Group’s declined 3.9% in the same time span.

The public markets responded with a 12% bump for the now-profitable DSP. Meanwhile, Universal’s market cap dropped 30% and left several analysts concerned with its ability to keep pace with the future of streaming.

Spotify may be Universal Music Group’s largest customer but it accounts for 19% of its total revenue. It’s less than the combined number from YouTube (11%) and Apple Music (10%). And while YouTube revenue has grown, UMG execs implied that Apple Music and Amazon Music have slowed down. Plus, other factors have led to UMG’s streaming revenue decline in ad-supported revenue, such as UMG’s dispute with TikTok during April in Q2, and Meta pulling music videos.

In UMG’s defense, the recent streaming price hikes from DSPs are annualized, so the revenue bump associated with them is not attributed to quarterly growth. It’s a factor that shouldn’t be ignored. Plus, the strong stances that UMG has taken recently may have short-term setbacks but should help the company long term.

It’s all a reminder that music streaming is much bigger than Spotify. The streaming service is often referred to ubiquitously with streaming itself, but the disputes, changes, and slowdown among DSPs and social platforms have made them all more distinct than ever before.

Similarly, audio streaming revenue is much bigger than the major record labels. That difference continues to grow, and Spotify captures that opportunity.

On the music side, recorded music revenue from non-major labels is up to 31.5% according to MIDiA. It’s growing faster than major label revenue (13% compared to 9%) and accounts for a larger share of recorded music revenue than any major record label does. In 2023, half of Spotify’s payouts went to independent artists and label

From people I’ve spoken to, that percentage will surpass 50% in 2024. Some of this year’s biggest hits, like Tommy Richmann's “Million Dollar Baby,” or Shaboozey, “A Bar Song (Tipsy), are from non-major labels, ISO Supremacy and EMPIRE, respectively.

On the non-music side, Spotify’s continued expansion in audiobooks and podcasting further separates its performance from the major labels. The audio bundle has caused warranted issues over royalties for both artists and authors, but will likely reflect a boost in Spotify’s bottom line more than the music rightsholders.

The two companies, Spotify and UMG, still rely on each other considerably. They are each other’s biggest partners. UMG still has the biggest names, and the overall rise in value in music will likely benefit it more in the future than Spotify. But this is a trend that will likely continue for some time.

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