MBW Explains is a series of analytical features in which we explore the context behind major music industry talking points – and suggest what might happen next. Only MBW+ subscribers have unlimited access to these articles. MBW Explains is supported by Reservoir.
Universal Music Group’s latest (and strong) earnings results, published last week, came flanked by two groundbreaking announcements that look certain to reshape the music business in the age of AI.
One was that the world’s largest music rights company had settled its copyright infringement lawsuit against Udio, one of two generative AI music-making platforms (along with Suno) that UMG and the other two major recording companies (Sony Music and Warner Music Group) sued last year.
But the deal between UMG and Udio goes a lot further than just a resolution of their legal conflict. Starting next year, Udio will be completely transformed into a new AI music platform, one that “will be ethically trained on authorized and licensed music and will provide further revenue opportunities for artists and songwriters and UMG,” UMG Chairman and CEO Sir Lucian Grainge said on the company’s earnings call on Thursday (October 30).
The new Udio platform will reportedly include an opt-in option for artists, and musical creations will exist within a “walled garden”: Udio-created music will exist within the Udio platform and will no longer be downloadable. That is, it will no longer contribute to the cluttering-up of streaming services with tidal waves of AI slop.
(As MBW readers may recall, Deezer recently reported that nearly a third of music uploaded to its streaming service these days is AI-generated.)
“The new subscription service will transform the user engagement experience, creating a licensed and protected environment to customize stream, share and share music responsibly on the Udio platform,” Grainge said.
UMG’s second AI-related deal is a partnership with Stability AI to develop “next-generation professional music creation tools.” Under the deal, Stability AI will work with UMG and its artists to research artists’ needs and develop AI-powered tools “to support the creative process of artists, producers and songwriters globally.”
On the earnings call, Grainge and other members of the company’s C-suite elaborated on UMG’s strategy around AI, amongst other topics. Here are three things you might have missed:
1. Music fans aren’t interested in fake AI artists
During the call, one of the more interesting tidbits came from Executive VP and Chief Digital Officer Michael Nash, who revealed some results from market research UMG carried out on US music fans and their attitudes towards AI.
“In that research, the readout was 50% of music consumers are very interested in AI in relationship to the music,” Nash told analysts on the call.
“But that’s in relationship to their music experience. The thing that ranks the lowest is artist simulation, what we would call fake artists. And you’re seeing there’s a lack of traction around that other than the occasional novelty phenomenon that may capture some headlines. That’s not what fans are interested in.”
In other words, fans want to know the music they’re listening to was created by an actual human being, expressing authentic thoughts and feelings. That must certainly come as a relief to the musical artists (and creators in other fields) who worry their life’s work will be drowned out by cheaply-made AI mimicry.
“What fans say that they’re interested in is AI application that makes their music service better, that improves discovery, that enables them to better organize playlist[s], to have a better recommendation system against their express preference,” Nash continued.
And indeed we are seeing music streaming platforms responding to that consumer demand, most notably Spotify, which announced in October that it’s developing “responsible” AI music products, in partnership with UMG and the other two major recording companies, along with indie licensing organization Merlin and France-headquartered music company Believe.
Spotify said it has already started work on a “state-of-the-art” generative AI research lab and product team. The company vowed that all the products it creates will “will put artists and songwriters first,” will give artists a choice to participate or stay out, will compensate artists fairly, and “will not replace human artistry.”
“They will give artists new ways to be creative and connect with fans,” Spotify said.
“The thing that ranks the lowest is artist simulation, what we would call fake artists… That’s not what fans are interested in.”
Michael Nash, Universal Music Group
“Imagine interacting with your favorite music through a sophisticated, highly personalized chatbot,” Grainge mused. “We envisage that exciting possibility on the horizon.”
Yet there are indeed some “novelty phenomena,” as Nash put it, where AI-generated tracks behind the guise of fake artists are racking up millions of streams on Spotify, as MBW reported earlier this year.
Yet UMG’s research – or at least that part of it the company shared on the earnings call – suggests that the market for this sort of thing is limited. (There’s also the question of just how many of those Spotify listeners even realize they’re listening to AI-generated tracks masked by a fictional “artist” persona.)
So the music industry has reason to hope that authentic, human-made music is an actual selling point that will ensure human artistry will still be alive and well on the other side of the AI revolution.
Or, as Grainge put it in what could be called UMG’s thesis statement on AI: “Our foundational belief is that artists, songwriters, music companies and technology companies, all working together, will create a healthy and thriving commercial AI ecosystem in which all of us, including fans, can flourish.”
2. TWO-THIRDS TO 75% OF VINYL SALES COME THROUGH UMG’S OWN D2C STORES
One of the more impressive (and surprising) numbers in UMG’s Q3 earnings was a 23.1% YoY jump in revenue from physical music sales, growing to €341 million (USD $398.31 million) in the quarter.
UMG attributed this particularly to initial shipments of Taylor Swift’s The Life of a Showgirl and “strength in new releases, particularly in Japan.”
That makes it sound like a one-off; after all, Japan is known for music fans that have steadfastly hung on to physical music through the digital revolution, and Taylor Swift is, well, Taylor Swift.
But on the earnings call, UMG CFO Matthew Ellis suggested that this is more than a one-off – physical sales might actually be a source of growth going forward.
“While physical revenue performance may be less predictable and have more seasonality than subscription revenue, it’s important to note that over a longer time horizon, this is a growing business that reflects increasing demand by fans to own physical products, connecting them with the artists they love,” he said.
Pressed on the issue by an apparently surprised analyst, Chief Operating Officer Boyd Muir made it clear that UMG doesn’t see music fans ditching their streaming subscriptions to build a CD collection.
Rather, physical music is becoming something new: It’s joining the merch side of the business, where buying a vinyl record is something akin to buying a T-shirt at a concert or hanging a poster of your favorite artist on your bedroom wall – a way for fans to gain something tangible that symbolizes their appreciation for and loyalty to artists.
“While physical revenue performance may be less predictable and have more seasonality than subscription revenue, it’s important to note that over a longer time horizon, this is a growing business…”
Matthew Ellis, Universal Music Group
“The reality is the CD in most of the markets in the world is very much a declining format, but we’re talking about something really quite different here,” Muir said.
“This business is morphing into how we connect the fan together with the artists through a physical product, the two most significant examples of that so far is the growth in vinyl and the collectible aspect of that.”
Muir noted that 50% of vinyl is sold to people who don’t even own record players – and he said that a growing share of physical music is coming through UMG’s direct-to-consumer channels, rather than through conventional record stores.
“We are seeing somewhere in the region of two-thirds to 75% of the total volume actually coming through our own managed stores in relation to this product. So we’re having a direct relationship with the fan,” Muir said.
Photo credit: Piotr Swat / Shutterstock.com
3. UMG is still OPTIMISTIC about the opportunity around super premium tiers and is engaged in discussions about it
Of course, UMG isn’t betting the farm on physical being the breakthrough connection to superfans that the music industry has been chasing after in recent years.
The focus remains on better monetization of music streaming, and on that front, the company is looking to China’s top streamer Tencent Music for inspiration – or, maybe more accurately, it’s hoping that streamers like Spotify and Apple Music find it an inspiration.
That’s because Tencent’s ‘Super-VIP’ subscription tier costs five times as much as a regular paid subscription, and has become a major driver of revenue growth.
In Q2, TME saw its music services revenue grow 26.4% YoY to RMB 6.85 billion ($957 million), driven by growth in Super-VIP subscribers, which hit 15 million in the quarter, up by 50% in just three quarters.
“Research clearly demonstrates that at least 20% of the subscriber base is the target market for a super-premium offer…”
Michael Nash, Universal Music Group
That helped drive average revenue per paying user (ARPPU) up 9.3% YoY to RMB 11.7 (around $1.63). In all, 12% of paying users were on the Super-VIP tier, compared to 8% a year earlier.
UMG’s leadership team was asked about the opportunity around super-premium tiers during last week’s call.
TME has “empirically demonstrated” the feasibility of a super-premium tier, Nash said on the earnings call – and in “a market regarded as challenging… to monetize music consumption.”
Nash continued: “There’s [a] clear demonstration of the opportunity. We believe industrial logic prevails here, where research clearly demonstrates that at least 20% of the subscriber base is the target market for a superpremium offer and [where] you see a focus on innovation.”
Nash also mentioned that “AI will be a significant component of the focus on innovation in terms of new digital products in the future,” connecting the super-premium opportunity to AI-enhanced experiences.
“There is a component of it that is simply about the opportunity to monetize more valuable fans,” said Nash. “And as we’ve stated before, if you look at the digital download era, the top quartile of consumers were spending three times the average. So the propensity to spend is there. And we think about this in terms of direct-to-consumer, and Matt and Boyd talked about vinyl and what that means in terms of monetizing super fandom.
He added: “There are different components to the equation, but we have a strong conviction about what we have invested directly in. With respect to superpremium tiers, we’re engaged with all of our partners, talking about the opportunity. There is a technology change that’s going to promote opportunities around innovation to introduce more sophisticated, higher value offers to consumers over time, and we’re engaged in those discussions.”
MBW Explains is a series of analytical features in which we explore the context behind major music industry talking points – and suggest what might happen next. Only MBW+ subscribers have unlimited access to these articles. MBW Explains is supported by Reservoir.Music Business Worldwide
